PFS Retirement Planning 2 — Questions and Answers
Question 1: A 72-year-old retiree has a traditional IRA valued at $500,000. What is the primary regulation governing withdrawals from this account?
- Required Minimum Distributions must begin by April 1 of the year following age 73 (Correct answer)
- Withdrawals are penalty-free but no distributions are required
- Required Minimum Distributions must begin at age 70½
- The account must be fully distributed by age 80
Correct answer: Required Minimum Distributions must begin by April 1 of the year following age 73
Under the SECURE 2.0 Act, RMDs must begin by April 1 of the year following the year the owner turns 73.
Question 2: Which retirement plan type allows both employer and employee contributions and is commonly used by self-employed individuals?
- SIMPLE IRA
- SEP-IRA
- Solo 401(k) (Correct answer)
- Defined Benefit Plan
Correct answer: Solo 401(k)
A Solo 401(k) is the only plan that allows both employer and employee elective deferral contributions for self-employed individuals.
Question 3: What is the 'replacement ratio' concept in retirement planning?
- The percentage of pre-retirement income needed to maintain lifestyle in retirement (Correct answer)
- The ratio of Roth to traditional IRA assets
- The rate at which Social Security replaces investment income
- The percentage of portfolio allocated to bonds at retirement
Correct answer: The percentage of pre-retirement income needed to maintain lifestyle in retirement
The replacement ratio is the percentage of pre-retirement income a retiree needs to maintain their standard of living, typically estimated at 70–90%.
Question 4: A client wants to retire at 55. Which of the following allows penalty-free withdrawals from a 401(k) at that age?
- 72(t) SEPP elections
- The Rule of 55 (Correct answer)
- Roth conversion ladder
- Net Unrealized Appreciation
Correct answer: The Rule of 55
The Rule of 55 allows penalty-free 401(k) withdrawals if you separate from service in or after the year you turn 55.
Question 5: In a defined benefit pension plan, which party bears the investment risk?
- The employee
- The employer (Correct answer)
- Both equally
- A third-party insurer
Correct answer: The employer
In a defined benefit plan the employer bears all investment risk and is obligated to pay the promised benefit regardless of plan asset performance.
Question 6: What is the maximum annual contribution limit for a SEP-IRA in 2024?
- $7,000 or 100% of compensation
- $23,000 or 25% of compensation
- $69,000 or 25% of compensation (Correct answer)
- $46,000 or 20% of compensation
Correct answer: $69,000 or 25% of compensation
For 2024, the SEP-IRA limit is the lesser of $69,000 or 25% of compensation (up to the $345,000 compensation cap).
Question 7: A client is evaluating Social Security claiming strategies. What is the monthly benefit increase for each year of delay beyond full retirement age?
- 5% per year
- 6% per year
- 8% per year (Correct answer)
- 10% per year
Correct answer: 8% per year
Delayed retirement credits increase Social Security benefits by 8% per year (2/3% per month) for each year deferred beyond full retirement age up to age 70.
PFS Retirement Planning 2
A 72-year-old retiree has a traditional IRA valued at $500,000.
What is the primary regulation governing withdrawals from this account?