FiCEP Investment and Retirement Basics 4 — Questions and Answers
Question 1: A client aged 72 fails to take their Required Minimum Distribution (RMD) from a traditional IRA. What is the IRS penalty on the amount not withdrawn?
- 10% of the RMD amount
- 25% of the RMD amount (Correct answer)
- 50% of the RMD amount
- The full RMD amount is forfeited
Correct answer: 25% of the RMD amount
The SECURE 2.0 Act reduced the RMD penalty from 50% to 25% (further reduced to 10% if corrected timely), effective 2023.
Question 2: Which investment concept describes the risk that an investor will be forced to reinvest proceeds at a lower interest rate than the original investment?
- Inflation risk
- Reinvestment risk (Correct answer)
- Liquidity risk
- Default risk
Correct answer: Reinvestment risk
Reinvestment risk is the possibility that cash flows from an investment will earn less when reinvested in a new security.
Question 3: A 403(b) plan is primarily available to employees of which type of organizations?
- Publicly traded corporations
- Federal government agencies
- Tax-exempt organizations and public schools (Correct answer)
- Small businesses with fewer than 100 employees
Correct answer: Tax-exempt organizations and public schools
403(b) plans are retirement savings plans for employees of tax-exempt organizations (501(c)(3)) and public educational institutions.
Question 4: What does the 'glide path' refer to in a target-date retirement fund?
- The fund's expense ratio over time
- The gradual shift from aggressive to conservative asset allocation as the target date approaches (Correct answer)
- The fund's projected rate of return
- The minimum contribution schedule required by the plan
Correct answer: The gradual shift from aggressive to conservative asset allocation as the target date approaches
A glide path is the formula that defines how a target-date fund's asset allocation shifts—typically from equities toward bonds—as the investor nears retirement.
Question 5: A client wants to withdraw $5,000 from their Roth IRA at age 45. The account was opened 6 years ago and has $8,000 in contributions and $2,000 in earnings. What is the tax and penalty consequence?
- No tax or penalty since the account is over 5 years old (Correct answer)
- Tax and 10% penalty on the $2,000 in earnings only
- Tax and 10% penalty on the full $5,000
- No tax but a 10% penalty on $5,000
Correct answer: No tax or penalty since the account is over 5 years old
Roth IRA contributions (not earnings) can always be withdrawn tax- and penalty-free; since the $5,000 withdrawal is within the $8,000 contribution basis, there is no tax or penalty.
Question 6: Which of the following best describes 'dollar-cost averaging'?
- Investing a lump sum when the market is at its lowest point
- Investing equal dollar amounts at regular intervals regardless of share price (Correct answer)
- Rebalancing a portfolio to maintain target allocations annually
- Buying only investments that cost less than $100 per share
Correct answer: Investing equal dollar amounts at regular intervals regardless of share price
Dollar-cost averaging involves investing a fixed dollar amount at regular intervals, which results in buying more shares when prices are low and fewer when prices are high.
Question 7: What is the primary tax advantage of a Health Savings Account (HSA) when used for retirement planning?
- Contributions are taxed but growth and qualified withdrawals are tax-free
- Contributions, growth, and qualified medical withdrawals are all tax-free (Correct answer)
- Only employer contributions are tax-deductible
- Withdrawals for any purpose after age 59½ are tax-free
Correct answer: Contributions, growth, and qualified medical withdrawals are all tax-free
HSAs offer a triple tax advantage: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses, making them powerful retirement savings vehicles.
FiCEP Investment and Retirement Basics 4
A client aged 72 fails to take their Required Minimum Distribution (RMD) from a traditional IRA.
What is the IRS penalty on the amount not withdrawn?