RIA Retirement Planning 2 — Questions and Answers
Question 1: The annual contribution limit for 401(k) plans applies to:
- Only employer contributions
- Only employee elective deferrals
- Employee elective deferrals (with separate limits for total including employer contributions) (Correct answer)
- Combined employee and employer contributions to a maximum of $10,000
Correct answer: Employee elective deferrals (with separate limits for total including employer contributions)
The employee elective deferral limit is separate from the total annual additions limit that includes employer contributions.
401(k) plans have two key limits: (1) Employee elective deferral limit (e.g., $23,000 for 2024, with $7,500 catch-up for age 50+); (2) Total annual additions limit under IRC Section 415 (e.g., $69,000 for 2024), which includes employee deferrals plus employer matching and profit-sharing contributions. Understanding both limits is important for maximizing client retirement savings strategies.
Question 2: A defined benefit pension plan promises participants:
- A specific account balance at retirement
- A specific monthly benefit at retirement based on a formula (Correct answer)
- Returns tied to investment performance
- Contributions equal to a fixed percentage of salary
Correct answer: A specific monthly benefit at retirement based on a formula
Defined benefit plans promise a specific monthly retirement benefit, typically based on years of service and final salary.
In a defined benefit plan, the employer bears investment risk and guarantees a specific benefit (e.g., 1.5% × years of service × final salary). The employer funds the plan actuarially to meet future obligations. In contrast, defined contribution plans (like 401(k)) define the contributions, not the ultimate benefit—investment risk falls on the employee. DB plans have largely been replaced by DC plans in the private sector due to cost and risk concerns.
Question 3: Social Security retirement benefits can be claimed as early as age:
- 60
- 62 (Correct answer)
- 65
- 67
Correct answer: 62
Social Security retirement benefits can be claimed as early as age 62, but with a permanent reduction from the full retirement age benefit.
Social Security retirement benefits can begin as early as age 62, but benefits are permanently reduced (by up to 30%) compared to claiming at full retirement age (FRA, which is 66-67 depending on birth year). Delaying benefits past FRA earns delayed retirement credits of 8% per year up to age 70. Advisers must analyze break-even points and life expectancy when counseling clients on optimal claiming strategies.
Question 4: Which retirement account type allows contributions after age 73 without RMD requirements?
- Traditional IRA
- Roth IRA (Correct answer)
- SEP-IRA
- 403(b) plan
Correct answer: Roth IRA
Roth IRAs have no RMD requirements during the account owner's lifetime, allowing continued contributions and growth.
Roth IRAs are unique among IRAs in having no required minimum distributions during the owner's lifetime. Traditional IRAs and employer plans (401k, SEP-IRA, SIMPLE IRA) all require RMDs starting at age 73. This makes Roth IRAs valuable for estate planning—assets can continue growing tax-free indefinitely. SECURE 2.0 also eliminated RMDs from Roth 401(k) accounts starting in 2024.
Question 5: The 'rule of 55' allows employees to:
- Contribute 55% more to their 401(k) at age 55
- Withdraw from a 401(k) penalty-free at age 55 if they leave employment in or after the year they turn 55 (Correct answer)
- Take RMDs at age 55
- Convert to Roth at age 55 without penalty
Correct answer: Withdraw from a 401(k) penalty-free at age 55 if they leave employment in or after the year they turn 55
The rule of 55 allows penalty-free 401(k) withdrawals for employees who separate from service in or after the year they turn 55.
IRC Section 72(t)(2)(A)(v) allows penalty-free distributions from a 401(k) if the employee separates from service in or after the year they reach age 55 (age 50 for public safety workers). This exception does NOT apply to IRAs. It's particularly useful for early retirees who need income before age 59½. Importantly, the funds must remain in the 401(k)—if rolled to an IRA, the rule of 55 exception no longer applies.
Question 6: ERISA's vesting requirements ensure that:
- All employer contributions are immediately owned by the employee
- Employees earn nonforfeitable rights to employer contributions over time (Correct answer)
- All investments must be in government bonds
- Employees can transfer plans to competitors
Correct answer: Employees earn nonforfeitable rights to employer contributions over time
ERISA vesting schedules specify when employees earn nonforfeitable rights to employer-contributed retirement benefits.
ERISA requires defined contribution plans to use vesting schedules for employer contributions: immediate vesting, cliff vesting (100% after 3 years), or graded vesting (20% per year from years 2-6). Employee contributions are always 100% immediately vested. Vesting ensures employees who stay long-term benefit from employer contributions while giving employers retention incentives. Advisers consider vesting schedules when advising clients on job changes.
RIA Retirement Planning 2
The annual contribution limit for 401(k) plans applies to: