Financial Advisor Retirement Planning for Financial Advisors 5 — Questions and Answers
Question 1: A self-employed client earns $120,000 net from her business. What is the maximum deductible SEP-IRA contribution she can make for 2024?
- $22,040 (approximately 20% of net self-employment income after the SE tax deduction) (Correct answer)
- $30,000
- $69,000 flat maximum
- $120,000 × 25% = $30,000 with no adjustments needed
Correct answer: $22,040 (approximately 20% of net self-employment income after the SE tax deduction)
Self-employed individuals contribute 20% of net self-employment income (after subtracting half of self-employment tax), subject to the annual dollar limit.
Question 2: Which of the following best describes the 'bucket strategy' for retirement income distribution?
- Segmenting assets into short-, medium-, and long-term buckets aligned with spending needs over different time horizons (Correct answer)
- Diversifying across asset classes using equal allocations
- Maximizing withdrawals from taxable accounts before tax-deferred accounts
- Purchasing a series of laddered CDs for guaranteed income
Correct answer: Segmenting assets into short-, medium-, and long-term buckets aligned with spending needs over different time horizons
The bucket strategy allocates assets into time-segmented pools so near-term expenses are funded by liquid assets while growth assets work over longer horizons.
Question 3: A retired client withdraws $50,000 from a traditional IRA and rolls $40,000 back within 60 days. What is the tax treatment of the $10,000 not rolled over?
- It is included in gross income and subject to a 10% early withdrawal penalty if under age 59½ (Correct answer)
- It is tax-free because partial rollovers are permitted
- It is treated as a return of basis and excluded from income
- Only 50% is taxable under the general rule
Correct answer: It is included in gross income and subject to a 10% early withdrawal penalty if under age 59½
The portion of an IRA distribution not rolled back within 60 days is taxable as ordinary income, plus the 10% penalty applies if the client is under age 59½.
Question 4: What is the primary purpose of a Qualified Longevity Annuity Contract (QLAC) within a retirement account?
- To defer income and RMDs on a portion of IRA or plan assets until as late as age 85 (Correct answer)
- To eliminate all RMD obligations from a traditional IRA
- To provide tax-free income in retirement by converting IRA funds to Roth
- To guarantee a minimum portfolio return of 3% annually
Correct answer: To defer income and RMDs on a portion of IRA or plan assets until as late as age 85
A QLAC allows up to $200,000 of IRA assets to be used to purchase a deferred income annuity starting no later than age 85, reducing current RMDs.
Question 5: A client is evaluating whether to convert traditional IRA assets to a Roth IRA during a low-income year. Which factor most strongly supports proceeding with the conversion?
- The client expects to be in a higher marginal tax bracket in retirement than currently (Correct answer)
- The client needs the converted funds within 5 years
- The client has significant deductible IRA contributions that have not yet been made
- The client's state has no income tax exclusion for retirement income
Correct answer: The client expects to be in a higher marginal tax bracket in retirement than currently
Roth conversion is most advantageous when current tax rates are lower than anticipated future rates, as taxes are paid now at the cheaper rate.
Question 6: Under the 'pro-rata rule,' how are non-deductible IRA contributions treated when a client takes a distribution from multiple traditional IRAs?
- The taxable portion is calculated based on the ratio of pre-tax dollars to total IRA balances across all IRAs (Correct answer)
- Non-deductible contributions are distributed first on a FIFO basis
- Each IRA is treated independently for tax purposes
- Non-deductible contributions are always tax-free regardless of other IRA balances
Correct answer: The taxable portion is calculated based on the ratio of pre-tax dollars to total IRA balances across all IRAs
The pro-rata rule requires aggregating all traditional IRA balances to determine what fraction of each distribution is non-taxable basis.
Question 7: A 73-year-old client missed taking her required minimum distribution for the current year. What is the excise tax penalty under SECURE Act 2.0 rules?
- 25% of the RMD amount not taken, reduced to 10% if corrected within a 2-year correction window (Correct answer)
- 50% of the RMD amount not taken
- 10% flat penalty with no reduction available
- No penalty if corrected within 60 days
Correct answer: 25% of the RMD amount not taken, reduced to 10% if corrected within a 2-year correction window
SECURE Act 2.0 reduced the RMD failure penalty from 50% to 25%, further reduced to 10% if the shortfall is corrected within the correction window.
Financial Advisor Retirement Planning for Financial Advisors 5
A self-employed client earns $120,000 net from her business.
What is the maximum deductible SEP-IRA contribution she can make for 2024?