CRPC Retirement Planning Principles 5 — Questions and Answers
Question 1: 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?
- Roth IRA first, since withdrawals are tax-free and reduce tax-deferred balances that require RMDs
- Traditional IRA first to reduce the RMD burden and tax-deferred balance
- Both accounts should be drawn in equal proportions each year
- The taxable brokerage account first, then traditional IRA, then Roth IRA last (Correct answer)
Correct 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.
Question 2: What is the primary goal of Roth conversion planning during the early retirement years before RMDs begin?
- To maximize FICA taxes paid and increase future Social Security benefits
- To convert traditional IRA balances to Roth at lower marginal rates, reducing future RMDs and tax burden (Correct answer)
- To trigger the Social Security earnings test and reduce benefits proportionally
- To create a larger estate by avoiding all distributions until death
Correct 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.
Question 3: Under ERISA, what is the primary fiduciary duty of a retirement plan trustee?
- To maximize employer contributions to reduce corporate taxes
- To act solely in the interest of plan participants and beneficiaries (Correct answer)
- To minimize plan administrative costs regardless of participant outcomes
- To follow employer directives when investing plan assets
Correct 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.
Question 4: 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?
- The funds are automatically rolled into a traditional IRA by the plan administrator
- The full $50,000 is treated as ordinary income and subject to a 10% early withdrawal penalty if she is under 59½ (Correct answer)
- She may request a 90-day extension from the IRS
- Only the investment gains portion is taxable
Correct 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.
Question 5: Which of the following statements about catch-up contributions to a 401(k) plan is correct for individuals age 50 or older?
- Catch-up contributions are only permitted in Roth 401(k) accounts
- Eligible participants may contribute an additional amount above the standard annual limit, as set by the IRS (Correct answer)
- Catch-up contributions are limited to employees whose income exceeds $100,000
- Catch-up contributions are not subject to the annual 415 limit
Correct 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.
Question 6: In the context of a retirement income plan, what does 'flooring' refer to?
- Setting a minimum portfolio allocation to equities to ensure growth
- Establishing guaranteed income sources (Social Security, pension, annuities) to cover essential expenses (Correct answer)
- Maintaining a minimum cash reserve equal to one year of withdrawals
- Setting a floor on annual withdrawal rates to prevent overspending
Correct 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.
Question 7: 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?
- 50%
- 75%
- 85% (Correct answer)
- 100%
Correct 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).
CRPC Retirement Planning Principles 5
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?