FiCEP Investment and Retirement Basics 5

Question 1

A client receives a pension from a former employer. Under the 'General Rule,' how is a portion of each pension payment treated for tax purposes?

Accepted Answer

A pro-rata portion representing after-tax contributions is tax-free; the rest is taxable

Answer

Under the General Rule, the portion of each pension payment that represents the retiree's after-tax investment (cost basis) is tax-free; the remainder is ordinary income.

Question 2

Which retirement account type allows individuals who are self-employed to contribute both as an employer and as an employee?

Accepted Answer

Solo 401(k)

Answer

A Solo 401(k), also called an Individual 401(k), allows self-employed individuals to make both employee elective deferrals and employer profit-sharing contributions, maximizing annual contribution limits.

Question 3

An investor holds a bond paying 5% annually. If market interest rates rise to 7%, what happens to the market price of the existing bond?

Accepted Answer

The bond price decreases

Answer

Bond prices and interest rates move inversely; when rates rise above a bond's coupon rate, the bond's market price falls so its yield becomes competitive.

Question 4

What is 'sequence of returns risk' in retirement planning?

Accepted Answer

The risk that poor investment returns early in retirement can permanently deplete a portfolio

Answer

Sequence of returns risk refers to the danger that negative returns occurring early in retirement, combined with ongoing withdrawals, can severely reduce portfolio longevity even if long-term average returns are adequate.

Question 5

A client's employer matches 50% of 401(k) contributions up to 6% of salary. The client earns $60,000 annually. What is the maximum employer match the client can receive per year?

Accepted Answer

$1,800

Answer

6% of $60,000 = $3,600 in employee contributions; the employer matches 50% of that, which equals $1,800 per year.

FiCEP - Financial Counseling Certification Program Practice Test

FiCEP - Financial Counseling Certification Program Practice Test

FiCEP Investment and Retirement Basics 5