PFS Retirement Planning 3 — Questions and Answers
Question 1: Which of the following best describes a Qualified Longevity Annuity Contract (QLAC)?
- An immediate annuity purchased inside a Roth IRA
- A deferred income annuity purchased with IRA funds that reduces RMD calculations (Correct answer)
- A variable annuity with a guaranteed minimum withdrawal benefit
- A fixed annuity that replaces Social Security income
Correct answer: A deferred income annuity purchased with IRA funds that reduces RMD calculations
A QLAC is a deferred income annuity purchased with qualified funds; up to $200,000 of IRA assets used to buy a QLAC are excluded from RMD calculations until payments begin (max age 85).
Question 2: Under the SECURE 2.0 Act, what is the catch-up contribution limit for employees ages 60–63 in a 401(k) plan beginning in 2025?
- $7,500
- $10,000
- $11,250 (Correct answer)
- $15,000
Correct answer: $11,250
SECURE 2.0 created a super catch-up for ages 60–63 at the greater of $10,000 or 150% of the regular catch-up limit, which equals $11,250 in 2025.
Question 3: A client is 58, has $800,000 in a 401(k), and wants to access funds without penalty using 72(t) SEPP. Which statement is correct?
- Payments must continue until the later of 5 years or age 59½ (Correct answer)
- Payments must continue for exactly 5 years regardless of age
- Payments must continue until age 65
- The client may modify payments after 2 years
Correct answer: Payments must continue until the later of 5 years or age 59½
SEPP payments must continue for the longer of 5 years or until the account owner reaches age 59½; modifying them before that period ends triggers the 10% penalty retroactively.
Question 4: What is the primary advantage of a Cash Balance Plan over a traditional defined benefit plan for a high-earning business owner?
- Lower administrative costs and no PBGC premiums
- Much higher annual contribution limits than 401(k) alone (Correct answer)
- Ability to make discretionary contributions like a profit-sharing plan
- Investment risk is shifted to the employee
Correct answer: Much higher annual contribution limits than 401(k) alone
Cash balance plans can allow contributions far exceeding 401(k) limits—sometimes $100,000–$300,000+ per year—making them ideal for high-earning owners wanting accelerated retirement savings.
Question 5: When is the 'four percent rule' most appropriate for a retirement income plan?
- For retirees with a 10-year time horizon
- For a 30-year retirement with a balanced portfolio (Correct answer)
- For clients who have guaranteed pension income
- For retirees in their 80s adjusting for longevity
Correct answer: For a 30-year retirement with a balanced portfolio
The 4% rule (Bengen's research) was derived for a 30-year retirement using a balanced stock/bond portfolio and is most applicable in that context.
Question 6: Which Medicare enrollment period allows retirees who delayed enrollment due to employer group coverage to sign up penalty-free?
- Initial Enrollment Period (IEP)
- General Enrollment Period (GEP)
- Special Enrollment Period (SEP) (Correct answer)
- Open Enrollment Period (OEP)
Correct answer: Special Enrollment Period (SEP)
A Special Enrollment Period is available for those who delayed Medicare because of current employer group health coverage and allows penalty-free enrollment within 8 months of coverage ending.
Question 7: A couple has a large estate and wants to maximize Social Security benefits. Which strategy is generally optimal when one spouse has significantly higher lifetime earnings?
- Both spouses claim at 62 to maximize total lifetime payments
- The higher earner delays to 70; lower earner claims earlier (Correct answer)
- Both spouses delay to 70 to maximize survivor benefits
- The lower earner delays to 70; higher earner claims at FRA
Correct answer: The higher earner delays to 70; lower earner claims earlier
Having the higher earner delay to 70 maximizes the survivor benefit (which equals the higher earner's benefit), while the lower earner can claim earlier to provide interim income.
PFS Retirement Planning 3
Which of the following best describes a Qualified Longevity Annuity Contract (QLAC)?