RFC Retirement & Estate Planning Fundamentals 3 — Questions and Answers
Question 1: A 401(k) plan participant terminates employment at age 55. Which rule allows penalty-free withdrawals from that plan?
- Rule of 72
- Substantially Equal Periodic Payments (SEPP) Rule 72(t)
- Age 55 Separation from Service Rule (Correct answer)
- Net Unrealized Appreciation (NUA) Rule
Correct answer: Age 55 Separation from Service Rule
The age-55 rule allows employees who separate from service in or after the year they turn 55 to take 401(k) distributions penalty-free from that employer's plan.
Question 2: What is the step-up in cost basis rule and how does it affect inherited assets?
- Inherited assets receive a basis equal to the original purchase price paid by the decedent
- Inherited assets receive a basis equal to the fair market value on the date of the decedent's death (Correct answer)
- Inherited assets receive a basis of zero, maximizing future taxable gains
- Inherited assets are exempt from capital gains tax permanently
Correct answer: Inherited assets receive a basis equal to the fair market value on the date of the decedent's death
Inherited assets generally receive a stepped-up basis equal to the fair market value on the decedent's date of death, eliminating embedded capital gains accumulated during the decedent's lifetime.
Question 3: A Roth IRA conversion is generally most advantageous when the client's:
- Current tax rate is higher than their expected future tax rate
- Current tax rate is lower than their expected future tax rate (Correct answer)
- RMD obligations are already being satisfied by pension income
- Estate is below the federal estate tax exemption
Correct answer: Current tax rate is lower than their expected future tax rate
Converting to a Roth IRA is most beneficial when current tax rates are lower than anticipated future rates, locking in tax savings on future growth.
Question 4: Which of the following defined contribution plan types has the highest total contribution limit for self-employed individuals?
- SEP-IRA
- SIMPLE IRA
- Solo 401(k) (Correct answer)
- Traditional IRA
Correct answer: Solo 401(k)
A Solo 401(k) allows both employee and employer contributions, enabling self-employed individuals to contribute more than a SEP-IRA in many scenarios.
Question 5: What is 'generation-skipping transfer tax' (GSTT) designed to prevent?
- Wealthy families from skipping annual gift exclusions
- Transfers that bypass one or more generations to avoid multiple estate taxes (Correct answer)
- IRA beneficiary designations that skip to grandchildren
- Trusts that distribute income to skip-person beneficiaries before estate settlement
Correct answer: Transfers that bypass one or more generations to avoid multiple estate taxes
The GSTT imposes a tax on transfers (gifts, bequests, or trust distributions) made to skip persons — generally grandchildren or younger — to prevent avoiding estate tax at each generational level.
Question 6: A client aged 72 fails to take their required minimum distribution for the year. What is the IRS excise tax penalty on the amount not withdrawn?
- 10%
- 25% (reduced to 10% if corrected timely)
- 50% (reduced to 25% under SECURE Act 2.0) (Correct answer)
- 35%
Correct answer: 50% (reduced to 25% under SECURE Act 2.0)
SECURE Act 2.0 reduced the RMD failure penalty from 50% to 25%, and further to 10% if corrected within the correction window.
Question 7: Which trust type is irrevocable, provides asset protection, and allows the grantor's spouse to be a discretionary beneficiary?
- Revocable Living Trust
- Qualified Personal Residence Trust (QPRT)
- Spousal Lifetime Access Trust (SLAT) (Correct answer)
- Grantor Retained Unitrust (GRUT)
Correct answer: Spousal Lifetime Access Trust (SLAT)
A SLAT is an irrevocable trust that removes assets from the grantor's estate while allowing the grantor's spouse to access trust assets as a discretionary beneficiary.
RFC Retirement & Estate Planning Fundamentals 3
A 401(k) plan participant terminates employment at age 55.
Which rule allows penalty-free withdrawals from that plan?