CRPC - Chartered Retirement Planning Counselor Social Security and Pensions Questions and Answers — Questions and Answers
Question 1: A client, age 63, plans to claim Social Security benefits this year. Their full retirement age (FRA) is 67. They will continue to work, earning $50,000 annually. How will the Social Security earnings test impact their benefits for the current year?
- Their benefits will be permanently reduced based on their claiming age, and a temporary reduction will be applied due to earnings, which is later restored. (Correct answer)
- Their benefits will be reduced by $1 for every $2 earned over the annual limit, and this reduction is permanent.
- No earnings test will be applied because they are over age 62.
- Their benefits will be reduced by $1 for every $3 earned over the annual limit, and they can reapply for the withheld amount at FRA.
Correct answer: Their benefits will be permanently reduced based on their claiming age, and a temporary reduction will be applied due to earnings, which is later restored.
When claiming Social Security before Full Retirement Age (FRA), benefits are subject to two potential reductions. First, there is a permanent actuarial reduction for starting benefits early. Second, if the individual continues to work and earns above the annual earnings test limit, a temporary reduction is applied. For those under FRA for the entire year, $1 in benefits is withheld for every $2 earned above the limit. This withheld amount is not lost forever; upon reaching FRA, Social Security recalculates the benefit to give credit for the months benefits were withheld.
Question 2: A married couple, both age 68 and retired, are filing their federal income tax return jointly. Their income consists of $40,000 from a corporate pension and $20,000 in tax-exempt interest. They also received $50,000 in Social Security benefits. What percentage of their Social Security benefits will be subject to federal income tax?
- 50%
- 0%
- 100%
- 85% (Correct answer)
Correct answer: 85%
To determine the taxability of Social Security benefits, one must calculate their 'provisional income' (also known as combined income). The formula is: Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Social Security Benefits. In this case, AGI is $40,000 (pension). Provisional Income = $40,000 + $20,000 + (0.50 * $50,000) = $85,000. For a married couple filing jointly, if provisional income is above $44,000, up to 85% of their Social Security benefits are taxable.
Question 3: Which of the following is a key characteristic that distinguishes a defined benefit pension plan from a defined contribution plan?
- The plan specifies the benefit amount the employee will receive at retirement. (Correct answer)
- The employee bears the primary investment risk.
- The plan consists of individual employee accounts.
- The final benefit amount is dependent on market performance.
Correct answer: The plan specifies the benefit amount the employee will receive at retirement.
A defined benefit plan promises a specific, predetermined benefit to the employee at retirement, often calculated using a formula based on salary and years of service. The employer is responsible for funding the plan and assumes the investment risk. In contrast, a defined contribution plan specifies the contribution amount, but the final benefit depends on the contributions and investment performance within the employee's individual account, placing the investment risk on the employee.
Question 4: A client is going through a divorce. Their spouse is entitled to a portion of their 401(k) plan assets. Which legal instrument is required to properly divide the retirement plan assets without causing a taxable event for the plan participant?
- A prenuptial agreement
- A separation agreement
- A Qualified Domestic Relations Order (QDRO) (Correct answer)
- A letter of instruction to the plan administrator
Correct answer: A Qualified Domestic Relations Order (QDRO)
A Qualified Domestic Relations Order (QDRO) is a legal order, typically issued as part of a divorce or legal separation, that recognizes the right of an 'alternate payee' (like a former spouse) to receive all or a portion of a retirement plan participant's benefits. A QDRO is necessary to allow the plan administrator to make payments to someone other than the participant without violating ERISA and to avoid immediate taxation for the participant on the distributed amount.
Question 5: An individual born in 1960 is planning their retirement. According to current Social Security law, what is their Full Retirement Age (FRA) for claiming unreduced Social Security benefits?
- 66 and 2 months
- 67 (Correct answer)
- 66
- 65
Correct answer: 67
For anyone born in 1960 or later, the Full Retirement Age (FRA) is 67. The FRA gradually increased from age 65 for those born before 1938 to age 67 for those born in 1960 and after. Claiming benefits before FRA results in a permanent reduction, while delaying past FRA results in an increase up to age 70.
Question 6: A CRPC® is advising a client who will reach Full Retirement Age (FRA) of 67 in September of the current year. The client plans to work until the end of the year, earning $80,000. How will the Social Security earnings test apply to this client for the current year?
- The lower earnings limit applies for the entire year, and benefits are reduced by $1 for every $2 earned above it.
- No earnings limit applies because the client reaches FRA during the year.
- A higher earnings limit applies to the months before FRA, with a $1 for $3 reduction for earnings above that limit. (Correct answer)
- The earnings test only applies if the client claims benefits before the month they reach FRA.
Correct answer: A higher earnings limit applies to the months before FRA, with a $1 for $3 reduction for earnings above that limit.
In the year an individual reaches Full Retirement Age (FRA), a higher earnings limit applies to the earnings in the months *before* the month of FRA attainment. For earnings above this higher limit, benefits are reduced by $1 for every $3 earned. Starting in the month the individual reaches FRA, the earnings test no longer applies, and there is no limit on how much they can earn.
CRPC - Chartered Retirement Planning Counselor Social Security and Pensions Questions and Answers
A client, age 63, plans to claim Social Security benefits this year.
Their full retirement age (FRA) is 67.
They will continue to work, earning $50,000 annually.
How will the Social Security earnings test impact their benefits for the current year?