RFC Retirement Planning & Strategies 3 — Questions and Answers
Question 1: A retiree has a traditional IRA with a December 31 prior-year balance of $500,000 and a life expectancy factor of 25.6. What is the required minimum distribution?
- $15,625
- $19,531 (Correct answer)
- $20,000
- $25,000
Correct answer: $19,531
RMD = $500,000 ÷ 25.6 = $19,531.25, using the Uniform Lifetime Table divisor for the applicable age.
Question 2: Which retirement income strategy segments assets into time-based buckets to manage sequence-of-returns risk?
- Total return approach
- Bucket strategy (Correct answer)
- Flooring strategy
- Systematic withdrawal plan
Correct answer: Bucket strategy
The bucket strategy divides assets into short-, medium-, and long-term segments so market downturns don't force liquidation of growth assets to fund near-term expenses.
Question 3: What is the penalty for failing to take a required minimum distribution from a traditional IRA under current law (post-SECURE 2.0)?
- 10% of the amount not withdrawn
- 25% of the amount not withdrawn (Correct answer)
- 50% of the amount not withdrawn
- 35% of the amount not withdrawn
Correct answer: 25% of the amount not withdrawn
SECURE 2.0 reduced the RMD failure penalty from 50% to 25% (further reducible to 10% if corrected timely).
Question 4: A 70-year-old retiree delays claiming Social Security from age 67 to age 70. Approximately how much larger will the monthly benefit be?
- 8% larger
- 16% larger
- 24% larger (Correct answer)
- 32% larger
Correct answer: 24% larger
Delayed retirement credits increase benefits by 8% per year beyond full retirement age, so 3 years of delay (67 to 70) yields approximately 24% larger benefits.
Question 5: Which strategy involves converting a portion of a traditional IRA to a Roth IRA in years when taxable income is unusually low to minimize lifetime taxes?
- Tax-loss harvesting
- Bracket filling (Correct answer)
- Asset location
- Tax-gain harvesting
Correct answer: Bracket filling
Bracket filling (or bracket management) involves converting just enough traditional IRA funds to Roth to 'fill up' a lower tax bracket in low-income years.
Question 6: Under the Employee Retirement Income Security Act (ERISA), what is the maximum percentage of a defined contribution plan that can be invested in employer stock without violating diversification requirements?
- 10%
- 25%
- There is no ERISA cap on employer stock (Correct answer)
- 50%
Correct answer: There is no ERISA cap on employer stock
ERISA does not impose a blanket cap on employer stock in 401(k) plans, though fiduciary duty and prudent investor standards apply; this differs from defined benefit plans.
Question 7: A client wants to generate retirement income while also leaving a legacy. Which annuity structure best balances these goals?
- Straight life annuity
- Deferred income annuity
- Variable annuity with a guaranteed minimum withdrawal benefit (GMWB) (Correct answer)
- Immediate fixed annuity with period certain
Correct answer: Variable annuity with a guaranteed minimum withdrawal benefit (GMWB)
A variable annuity with a GMWB provides lifetime income guarantees while maintaining an account value that can be passed to beneficiaries if not fully drawn down.
RFC Retirement Planning & Strategies 3
A retiree has a traditional IRA with a December 31 prior-year balance of $500,000 and a life expectancy factor of 25.6.
What is the required minimum distribution?