CLU Retirement and Wealth Management 3 — Questions and Answers
Question 1: A 403(b) plan participant at a public school wants to make additional contributions. Which catch-up contribution provision is UNIQUE to 403(b) plans and not available in 401(k) plans?
- Age 50 catch-up contribution of $7,500
- 15-year rule allowing up to $3,000 additional if average contributions were low (Correct answer)
- SIMPLE IRA catch-up for small employers
- Roth catch-up contributions for high earners
Correct answer: 15-year rule allowing up to $3,000 additional if average contributions were low
The 15-year rule is exclusive to 403(b) plans and allows employees with 15+ years of service and low historical contributions to contribute an additional $3,000 per year.
Question 2: Which type of annuity contract feature guarantees that the annuitant will receive payments for a minimum period even if they die shortly after annuitization?
- Life with Period Certain (Correct answer)
- Joint and Survivor Annuity
- Variable Annuity with GMWB
- Deferred Income Annuity
Correct answer: Life with Period Certain
A Life with Period Certain annuity guarantees payments for the annuitant's lifetime but also specifies a minimum payment period (e.g., 10 or 20 years) payable to beneficiaries if death occurs early.
Question 3: Under the 4% withdrawal rule, a retiree with a $1.5 million portfolio should withdraw how much in the first year of retirement?
- $45,000
- $60,000 (Correct answer)
- $75,000
- $90,000
Correct answer: $60,000
The 4% rule prescribes withdrawing 4% of the initial portfolio value: $1,500,000 × 0.04 = $60,000 in year one.
Question 4: A client is evaluating a variable annuity with a Guaranteed Minimum Withdrawal Benefit (GMWB). What is the PRIMARY risk this rider is designed to mitigate?
- Longevity risk — outliving assets (Correct answer)
- Inflation risk — purchasing power erosion
- Liquidity risk — inability to access funds
- Credit risk — insurer insolvency
Correct answer: Longevity risk — outliving assets
A GMWB rider guarantees a minimum level of lifetime withdrawals regardless of investment performance, directly addressing the risk of outliving one's assets.
Question 5: What distinguishes a SIMPLE IRA from a SEP-IRA regarding employee participation?
- SEP-IRA allows employee elective deferrals; SIMPLE IRA does not
- SIMPLE IRA allows employee elective deferrals; SEP-IRA is employer-contribution only (Correct answer)
- Both plans allow identical employee elective deferral amounts
- SIMPLE IRA is only available to self-employed individuals
Correct answer: SIMPLE IRA allows employee elective deferrals; SEP-IRA is employer-contribution only
SIMPLE IRAs allow employees to make elective salary deferrals, while SEP-IRAs are funded exclusively by employer contributions.
Question 6: A married couple with a $4 million estate wants to use portability to maximize their federal estate tax exemption. What must the executor do to utilize the deceased spouse's unused exemption (DSUE)?
- File a gift tax return within 9 months of the spouse's death
- File a timely estate tax return (Form 706) even if no tax is owed (Correct answer)
- Transfer assets into a bypass trust within 6 months of death
- Elect QTIP treatment on all marital assets
Correct answer: File a timely estate tax return (Form 706) even if no tax is owed
To preserve the DSUE, the executor must file a federal estate tax return (Form 706) within 9 months of death (or 15 months with extension) even if no estate tax is due.
Question 7: Which retirement plan design feature automatically re-enrolls existing employees at a higher default deferral rate each year?
- Qualified Default Investment Alternative (QDIA)
- Automatic Escalation (also called Auto-Increase) (Correct answer)
- Safe Harbor Non-Elective Contribution
- Eligible Automatic Contribution Arrangement (EACA)
Correct answer: Automatic Escalation (also called Auto-Increase)
Automatic Escalation features gradually increase an employee's deferral rate — often by 1% per year — until a cap is reached, boosting long-term retirement savings.
CLU Retirement and Wealth Management 3
A 403(b) plan participant at a public school wants to make additional contributions.
Which catch-up contribution provision is UNIQUE to 403(b) plans and not available in 401(k) plans?