Retirement Planning Principles Flashcards

A client in retirement has $800,000 in a traditional IRA and $200,000 in a Roth IRA. Which account should typically be drawn down first to minimize lifetime taxes?

Answer: The taxable brokerage account first, then traditional IRA, then Roth IRA last

The conventional tax-efficient sequencing is taxable first, then tax-deferred, then Roth last—allowing Roth assets the longest period of tax-free compounding.

What is the primary goal of Roth conversion planning during the early retirement years before RMDs begin?

Answer: To convert traditional IRA balances to Roth at lower marginal rates, reducing future RMDs and tax burden

Converting in low-income years between retirement and RMD onset reduces the tax-deferred balance, lowering future RMDs and potentially reducing Medicare IRMAA surcharges.

Under ERISA, what is the primary fiduciary duty of a retirement plan trustee?

Answer: To act solely in the interest of plan participants and beneficiaries

ERISA imposes a fiduciary duty of loyalty, requiring plan trustees to act exclusively in the interest of participants and beneficiaries, not the plan sponsor.

A client receives a $50,000 lump-sum distribution from a former employer's 401(k). She has 60 days to complete an indirect rollover. What happens if she misses the deadline?

Answer: The full $50,000 is treated as ordinary income and subject to a 10% early withdrawal penalty if she is under 59½

Missing the 60-day rollover deadline causes the distribution to be treated as taxable ordinary income, plus a 10% penalty applies if the recipient is under age 59½.

Which of the following statements about catch-up contributions to a 401(k) plan is correct for individuals age 50 or older?

Answer: Eligible participants may contribute an additional amount above the standard annual limit, as set by the IRS

Participants age 50 and older may make catch-up contributions above the standard elective deferral limit; the catch-up amount is indexed by the IRS periodically.

In the context of a retirement income plan, what does 'flooring' refer to?

Answer: Establishing guaranteed income sources (Social Security, pension, annuities) to cover essential expenses

Flooring establishes a guaranteed income base from secure sources to cover non-discretionary expenses, protecting essential needs regardless of market performance.

A client asks about the tax treatment of Social Security benefits. Under current law, what is the maximum percentage of Social Security benefits that may be subject to federal income tax?

Answer: 85%

Up to 85% of Social Security benefits may be included in federal taxable income for recipients with combined income above the upper threshold ($34,000 for single filers).