CRPC - Chartered Retirement Planning Counselor Social Security and Pensions Questions and Answers

Question 1

A client, age 63, plans to claim Social Security benefits this year. Their full retirement age (FRA) is 67. They will continue to work, earning $50,000 annually. How will the Social Security earnings test impact their benefits for the current year?

Accepted Answer

Their benefits will be permanently reduced based on their claiming age, and a temporary reduction will be applied due to earnings, which is later restored.

Answer

When claiming Social Security before Full Retirement Age (FRA), benefits are subject to two potential reductions. First, there is a permanent actuarial reduction for starting benefits early. Second, if the individual continues to work and earns above the annual earnings test limit, a temporary reduction is applied. For those under FRA for the entire year, $1 in benefits is withheld for every $2 earned above the limit. This withheld amount is not lost forever; upon reaching FRA, Social Security recalculates the benefit to give credit for the months benefits were withheld.

Question 2

A married couple, both age 68 and retired, are filing their federal income tax return jointly. Their income consists of $40,000 from a corporate pension and $20,000 in tax-exempt interest. They also received $50,000 in Social Security benefits. What percentage of their Social Security benefits will be subject to federal income tax?

Accepted Answer

85%

Answer

To determine the taxability of Social Security benefits, one must calculate their 'provisional income' (also known as combined income). The formula is: Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Social Security Benefits. In this case, AGI is $40,000 (pension). Provisional Income = $40,000 + $20,000 + (0.50 * $50,000) = $85,000. For a married couple filing jointly, if provisional income is above $44,000, up to 85% of their Social Security benefits are taxable.

Question 3

Which of the following is a key characteristic that distinguishes a defined benefit pension plan from a defined contribution plan?

Accepted Answer

The plan specifies the benefit amount the employee will receive at retirement.

Answer

A defined benefit plan promises a specific, predetermined benefit to the employee at retirement, often calculated using a formula based on salary and years of service. The employer is responsible for funding the plan and assumes the investment risk. In contrast, a defined contribution plan specifies the contribution amount, but the final benefit depends on the contributions and investment performance within the employee's individual account, placing the investment risk on the employee.

Question 4

A client is going through a divorce. Their spouse is entitled to a portion of their 401(k) plan assets. Which legal instrument is required to properly divide the retirement plan assets without causing a taxable event for the plan participant?

Accepted Answer

A Qualified Domestic Relations Order (QDRO)

Answer

A Qualified Domestic Relations Order (QDRO) is a legal order, typically issued as part of a divorce or legal separation, that recognizes the right of an 'alternate payee' (like a former spouse) to receive all or a portion of a retirement plan participant's benefits. A QDRO is necessary to allow the plan administrator to make payments to someone other than the participant without violating ERISA and to avoid immediate taxation for the participant on the distributed amount.

Question 5

An individual born in 1960 is planning their retirement. According to current Social Security law, what is their Full Retirement Age (FRA) for claiming unreduced Social Security benefits?

Accepted Answer

67

Answer

For anyone born in 1960 or later, the Full Retirement Age (FRA) is 67. The FRA gradually increased from age 65 for those born before 1938 to age 67 for those born in 1960 and after. Claiming benefits before FRA results in a permanent reduction, while delaying past FRA results in an increase up to age 70.

CRPC - Chartered Retirement Planning Counselor Practice Test

CRPC - Chartered Retirement Planning Counselor Practice Test

CRPC - Chartered Retirement Planning Counselor Social Security and Pensions Questions and Answers