HS 352 Chapter Review Questions
Chapter 1
Review Questions
Review questions are based on the learning objectives in this chapter. Thus,
a [3] at the end of a question means that the question is based on learning
objective 3. If there are multiple objectives, they are all listed.
1. With regard to the key components of the retirement planning process: [1]
a. Identify the variables, lifestyle choices, and contingencies that make
retirement unique for different clients.
b. List three elements common to retirement planning at any stage of the
client's life.
c. List four factors that compose the retirement planning environment as
we know it today.
2. List the six steps in the retirement planning process. [1]
3. Briefly list some of the documents used in the fact-finding process to create a
financial inventory. [2]
4. List and briefly describe the five phases of retirement planning. [3]
5. With regard to the biology of aging [4]
a. Briefly describe the changes and diseases that may occur.
b. Briefly discuss the need for long-term care.
c. Briefly identify the economic implications that apply to physical problems.
6. List and briefly describe five trends in our current pension and Social Security
systems that threaten retirement security. [4]
7. What are some reasons why women will have a more difficult time attaining
retirement security than men? [4]
8. List and briefly describe the bottom three rungs on the retirement ladder
formerly known as the three-legged stool of retirement security. [5]
9. What is the retirement savings contribution credit and how does it work? [5]
10. What is SSI and how does it work? [5]
11. Describe the services available from the Area Agency on Aging (AAA). [6]
12. List the reasons why older Americans might continue working. [6]
13. What are the reasons why inheritances may not always be counted on as a
stable source of retirement income? [5]
14. Briefly describe how satisfactory socio-economic conditions positively affect
health. [7]
15. Describe some factors that influence the choice of a retirement start date. [7]
16. List some modifications that can be made to the home to enable a client to
age in place. [7]
17. Describe some government initiatives that have made it easier for people to
save for retirement. [7]
Chapter 2
1. Which workers are not covered under Social Security? [1]
2. What percentage of seniors have Social Security as their only source of
income? [2]
3. What is the Social Security tax rate for employees, employers, and
self-employed individuals? [3]
4. In 2012, Sally earns $5,000 for employment subject to Social Security taxes
between January 1 and April 1. She does not work for the remainder of the
year. How many quarters of coverage does she earn? [4]
5. What is the earliest age at which a retired worker and his or her spouse are
entitled to receive Social Security benefits? [5]
6. How long must a couple be married before a divorced spouse is eligible
for a spousal retirement benefit? [5]
7. Describe the survivor and disability benefits available under the Social
Security system. [5]
8. Discuss the general rule that applies when a client is eligible for dual benefits
under the Social Security system. [5]
9. How many years of income are generally used to calculate the average
indexed monthly earnings (AIME) for an individual eligible for retirement
benefits? [6]
10. Calculate the primary insurance amount (PIA) for an individual retiring at age
62 in 2012 with an AIME of $4,800. [6]
11. Patty, born in 1964, is planning on taking Social Security benefits at age 62.
Her PIA will be decreased by what percentage? [7]
12. George, born in 1950, is planning to retire and begin receiving Social Security
benefits at age 68. His PIA will be increased by what percentage in order to
reflect his late retirement? [7]
13. How does the earnings test work? [7]
14. What steps must be followed to ensure timely payment of all Social Security
benefits to which a client is entitled? [8]
15. From an economic perspective, when will clients be better off electing Social
Security benefits? [10]
Chapter 3
1. What are the four tax advantages of a qualified retirement plan? [1]
2. What impact could plan disqualification have on the participants in the plan?
[1]
3. Would a profit-sharing plan that covered 50 percent of the highly
compensated and 40 percent of the nonhighly-compensated employees
satisfy the qualified plan coverage requirements? Why or why not? [1]
4. Describe the basic fiduciary obligations of the trustees and the exception that
limits the fiduciary's liability when participants make investment decisions. [1]
5. Answer the following questions concerning qualified plan classifications. [2]
a. What are the three differences between plans in the profit-sharing versus
pension category?
b. What plans are defined-contribution plans?
c. What rules apply to defined-benefit plans?
6. Give an example of a unit-benefit formula in a defined-benefit plan. [3]
7. Why is a defined-benefit plan considered less portable than a
defined-contribution plan? [3]
8. Briefly describe the following:
a. cash-balance plan [3]
b. money-purchase pension plan [3]
9. Why is the profit-sharing plan considered such a versatile plan? [3]
10. Briefly describe what "cross-testing" allows an employer to do in a
profit-sharing allocation plan. [3]
11. Discuss retirement planning concerns in an ESOP with respect to [3]
a. investment diversification
b. put options
12. Describe the maximum salary deferral limits in a 401(k) plan. [3]
13. A doctor is an employee of a hospital and defers the maximum allowable
deferral amount to the 403(b) plan for the year. Can the doctor make salary
deferral contributions to a 401(k) plan sponsored by his medical practice
for the same top year? [3]
14. Describe 403(b) plans with regard to [4]
a. the market they serve
b. the maximum salary reduction contribution permitted
c. the investments allowed
15. Explain the rules that apply to each of the following features in a SEP [4]:
a. the funding instrument used to fund a SEP
b. the coverage requirements that apply to the plan
c. if the plan can provide for deferred vesting
d. the permissible ways to allocate employer contributions among the
participants' accounts
16. Discuss how a SIMPLE is different than a 401(k) plan. [4]
17. Your client, Jane Brown (aged 40 and in poor health), has just informed you
that her employer has terminated her qualified defined-benefit plan. What are
the repercussions for Jane's individual retirement planning strategy? Also,
what generally will happen to Jane's benefit under the terminating plan? [5]
18. List the factors that should be considered with regard to a plan's provision for
early retirement. [5]
19. John is a sole proprietor with a qualified money-purchase Keogh plan that
enables him to contribute 25 percent of net earnings from self-employment.
John's net earnings (not taking into account any deduction for contributions)
are $150,000 and his deduction for self-employment tax is $7,569. What is
the maximum deduction that John is allowed to take under his Keogh plan?
[6]
20. When should a plan sponsor consider a profit-sharing plan instead of a
SEP? [6]
21. Why is a 401(k) plan considered a way that an owner can make a significant
contribution for himself or herself while limiting the contribution for the other
employees? [6]
22. Which employers should consider a SIMPLE instead of the more versatile
401(k) plan? [6]
23. What are the circumstances that would lead a small business owner to
choose a defined-benefit plan? [6]
24. Describe the importance of a client's summary plan description. [7]
25. In addition to the summary plan description, list the other retirement planning
resources that the employer is required to provide. [7]
Chapter 4
1. Describe the retirement planning objectives that are satisfied by the following
nonqualified plans:
a. salary reduction plan [1]
b. supplemental executive retirement plan [1]
2. Under Code Sec. 409A, when can benefits be paid out of a nonqualified
deferred-compensation plan? [1]
3. Under Code Sec. 409A, when do decisions about the form of payment have
to be made? [1]
4. How is the taxation of executive bonus life insurance plans different from the
taxation of most nonqualified plans? [1]
5. What are nonqualified stock options (NQSOs)? [2]
6. What are the rules concerning vesting for NQSOs and what are the types
of vesting provisions that companies choose? [2]
7. In an NQSO, how is duration of the option a factor, and what typically
happens if a participant terminates employment? [2]
8. What are the tax ramifications of exercising an incentive stock option if the
participant does not sell the underlying stock? [2]
9. Explain the steps that should be taken to ensure a thoughtful strategy for
exercising stock options. [2]
10. What is the objective of a phantom stock plan? [2]
11. Explain the tax-timing strategies available to an executive covered by a
restricted stock plan. [2]
12. How is the Roth IRA different from the traditional IRA? [3]
13. Answer these common client questions about contributions to IRAs and
Roth IRAs for 2012:
a. "If I make the maximum contribution to a traditional IRA, can I make
additional contributions to a Roth IRA?" [3]
b. "I'm a college student and I'm not planning to work in 2012. Can my
parents make a Roth IRA contribution for me?" [3]
c. "When is the last date I can make a contribution for 2012?" [3]
d. "I made a Roth IRA contribution of $4,000, expecting that my income
would be under the allowable threshold. I ended up earning too much and
now am ineligible to make the contribution. What do I do now?" [3]
14. Which of the following employees is considered an active participant?
a. John has a target-benefit Keogh plan to which he contributes annually. [4]
b. Barb works for an employer who maintains a defined-benefit plan, but
Barb is not eligible to participate in the plan. [4]
c. Patty is a member of a 401(k) plan and makes a 5 percent salary
reduction that is not matched. [4]
d. Bob is a member of his employer's profit-sharing plan; the employer has
announced that no contribution will be made for the year. [4]
e. Tim's employer does not have any form of retirement plan. Tim's wife
works for an employer who contributes an amount equal to 10 percent of her
salary each year to a money-purchase plan. [4]
15. George and Mary Barke (married filing jointly) have a combined adjusted
AGI of $97,634 in 2012. Each is aged 45. George is an active participant
in an employer-maintained plan but Mary is not. What is the amount of
the deductible IRA contribution that George and Mary can make for 2012,
assuming that both earn more than $5,000? [4]
16. Answer the following common Roth IRA client questions:
a. "How do I know if I'm eligible to make a Roth IRA contribution?" [5]
b. "I'm 72 years old. Can I make a contribution to a Roth IRA?" [5]
c. "I'd like to start a Roth IRA, but I'm concerned about needing some
of the money in the case of emergencies. Could you explain the tax
consequences?" [5]
17. In 2012, Joe, age 52, converts a $100,000 IRA to a Roth IRA.
a. What are tax consequences of this transaction? [5]
b. Assuming that the conversion was Joe's first Roth IRA, what are the tax
consequences of a withdrawal of $15,000 2 years later to pay for a new
car? [5]
18. Explain the IRA and Roth IRA options for the following individuals in 2012:
a. Carlos, a single 35-year-old taxpayer, has an adjusted gross income
(AGI) of $80,000 and is not an active participant in an employer-sponsored
retirement plan in 2012. [4, 5]
b. Anthony, a single 45-year-old taxpayer, has an AGI of $120,000 and is
an active participant in a qualified retirement plan. [4, 5]
c. Sam and Sally, each under age 50, are married and file a joint tax
return. Sam has an AGI of $120,000 and is an active participant in an
employer-sponsored retirement plan. Sally does not work outside of the
home. [4, 5]
d. Della and George, aged 40, are married and file a joint tax return. Della
earns $92,000 and George earns $85,000 (joint AGI is $175,000). They are
both active participants in employer-sponsored retirement plans. [4, 5]
19. Which of the following item(s) is (are) a permissible IRA investment?
a. investment in life insurance [6]
b. investment in antiques [6]
c. investment in gold bullion [6]
d. investment in real estate that is owned by the client [6]
20. Why might the nondeductible IRA be an inappropriate retirement investment
vehicle in today's tax environment? [7]
21. When is the Roth IRA potentially more advantageous than the deductible
IRA contribution? [7]
Chapter 5
1. Why is it difficult to forecast an inflation assumption for a client? [1]
2. List three factors concerning inflation that a planner should consider when
forecasting a client's inflation assumption. [1]
3. What are the major reasons why clients choose early retirement? [2]
4. What advice should a planner give a client concerning problems associated
with early retirement? [2]
5. List and discuss the factors to consider when estimating a client's longevity.
[3]
6. Describe two techniques that help a planner keep a client from outliving
the longevity assumption. [3]
7. Discuss the types of tax breaks a retiree can expect with regard to
a. Social Security taxes [4]
b. the standard deduction [4]
c. the Social Security benefits exclusion [4]
8. List the different types of state and local tax breaks that may apply to retirees.
[4]
9. List and discuss some reduced living expenses that a retiree may encounter.
[4]
10. List and discuss some living expenses that may increase for the retiree. [4]
11. Describe how the expense method can be used to estimate a client's
retirement income. [4]
12. Discuss how the expense and replacement ratio assumptions should be
adjusted for spending habits later in retirement. [4]
13. List the factors that a planner should consider when predicting tax rate and
investment-return assumptions. [5]
14. Describe the five-step approach that underlies many pieces of retirement
planning software. [6]
15. Determine Joe Smith's retirement need using the following formula:
Cr = Er × [(1 – an) ÷ (1 – a)]
where
Cr = capital needed at retirement in then-current dollars
Er = income needed in the first year of retirement in then-current dollars
a = (1 + i) ÷ (1 + r)
i = inflation rate
r = after-tax rate of return
n = duration of retirement
Joe projects an $80,000 need in the first year of retirement (he earns
$100,000), 3 percent inflation, 6 percent after-tax rate of return, and 25 years
of longevity after retirement. [7]
16. Based on the facts below, use the consumer worksheet to compute the
percentage of salary to be saved for Kathy and Bill.
• Guide the client toward focusing on important issues.
• They are 20 years from retirement.
• They have a current salary of $50,000.
• They each have a defined-benefit plan of $800 per month ($19,200
annually).
• Their estimated combined Social Security benefits are $12,800.
• They have $25,000 in IRAs, 401(k) plans, and mutual funds for
retirement. [8]
17. What is the difference between goal based and cash flow based software? [9]
Chapter 6
1. Do the following:
a. Graph the efficient frontier when only risk assets are considered. [1]
b. Graph the efficient frontier when a risk-free asset is added to a large
number of risk assets. [1]
2. Use indifference curves and the capital market line to demonstrate how the
planner determines the optimal portfolio for a client to hold. [1]
3. What normally happens to the riskiness of a portfolio as more securities are
added to it? [1]
4. How does the amount of time between making an investment decision and
seeing the results of that investment decision affect a person's willingness
to take risk? [2]
5. What happens when a client is given more choices in making investment
decisions? [2]
6. How might the relative sizes of human capital and financial asset holdings
affect the asset allocation and composition of the financial assets? [3]
7. If a portfolio has an expected return of 10 percent and a standard deviation
of 15 percent, what is the probability that next year's rate of return will be
less than –20 percent? [3]
8. What is the relationship between the standard deviation of returns for a
one-year period and that for a 30-year period? [4]
9. What are the arithmetic mean return and the geometric mean return for a
portfolio with the following five annual rates of return: –3%, + 18%, +4%,
–12%, and +30%? [4]
10. What are the three necessary conditions that make the intended holding
period irrelevant to the optimal portfolio to be held? [4]
11. How does strategic asset allocation differ from tactical asset allocation? [5]
12. What is the biggest potential problem with being a market timer (in other
words, one who jumps in and out of the market on a regular basis depending
on the short-term outlook for stocks)? [5]
13. A client has suffered some investment losses. What is the problem with
advising the client to increase the percentage of the client's portfolio allocated
to securities with higher expected returns to make up the losses? [5]
14. What are the choices an overfunded client might consider? [5]
15. What sort of client is more likely to be affected by erroneous assumptions in
portfolio modeling? [6]
16. Why are time-based measures of diversification ineffective? [6]
17. Answer the following:
a. You have a portfolio of all common stocks with the following weights:
22%, 16%, 12%, 10%, 8%, 6%, 6%, 5%, 5%, 4%, 3%, 2%, 1%. What is the
Woerheide-Persson Index value? [6]
b. What is the risk-equivalent portfolio size if all of the holdings are equal in
weight? [6]
18. What is meant by tax-efficient allocation among types of accounts? [6]
19. What is the potential problem with tax-efficient allocation? [6]
20. What is the appropriate role of liquidity in a retirement-oriented portfolio? [6]
21. Why would not the best way to save for retirement be to buy a
retirement-oriented mutual fund whose target date is the same as one's own
retirement date? [6]
22. What are the five assumptions and observations that might convince the
client to avoid including investment companies in the retirement portfolio? [6]
23. What is the major advantage and major disadvantage of using dollar cost
averaging in building a retirement portfolio? [6]
24. What is the impact on asset allocation of borrowing money from one's 401(k)
plan? [6]
25. What are the issues associated with a younger client paying off a mortgage?
An older client? [7]
Chapter 7
1. What is the difference between income from a portfolio and cash withdrawal
from a portfolio, and why is the distinction important? [1]
2. What is the risk and what is the return in the risk-return paradigm for a
retirement portfolio? [1]
3. What are the three basic withdrawal strategies? [2]
4. Describe two withdrawal strategies that are guaranteed not to exhaust the
retirement portfolio. [2]
5. How do research studies reconcile the fact that their tests typically assume
withdrawals at the end of each year, but that people need money to live on
during the year? [2]
6. What three conditions are necessary to have perfect certainty about the
maximum possible withdrawal rate? [2]
7. Describe Bengen's suggestions for the equity allocation for qualified and
nonqualified portfolios. [2]
8. What is the mathematical relationship between the portfolio failure rate and
the portfolio success rate? [2]
9. What determines whether the overlapping-periods methodology or Monte
Carlo simulation is more appropriate for testing an asset allocation/withdrawal
rate strategy? [2]
10. When testing asset allocation/withdrawal rate strategies, why might it be
inappropriate to assign a significant standard deviation to the rate of return
on bonds? [2]
11. When would it most likely be appropriate to consider a nominal, rather than
an inflation-adjusted, withdrawal rate strategy for a client? [2]
12. Answer the following:
a. When faced with the decision of taking a voluntary withdrawal from a
Roth IRA account or a traditional IRA account, assuming they are invested
in identical assets earning the same rates of return, from which account
should the client withdraw first? [3]
b. How is the answer above affected if interest rates are expected to
change at a later date? [3]
c. How is answer [a] above affected if the client's marginal tax rate is
expected to change at a later date? [3]
13. When faced with the decision of taking a voluntary withdrawal from a
traditional IRA account or a non-qualified account, assuming they are
invested in identical assets earning the same rates of return, from which
account should the client withdraw first? [3]
14. When faced with the decision of taking a voluntary withdrawal from a Roth
IRA account or a nonqualified account, assuming they are invested in
identical assets earning the same rates of return, from which account should
the client withdraw first? [3]
15. Explain the concept of dynamic rebalancing. What do current studies
conclude about its effect on portfolio longevity? [2]
16. Describe a 5-year safety stock plan. [4]
17. Describe a laddered portfolio strategy. [4]
18. Describe some procedures for obtaining monthly income without necessarily
liquidating part of the portfolio each month. [5]
19. Based on the most recent CPI data, what would be an appropriate annual
increase in an inflation-adjusted monthly withdrawal? [5]
Chapter 8
1. Describe the difference between qualified funds and nonqualified funds
within annuities. [1]
2. Explain how annuity payments can provide financial security to a consumer.
[1]
3. Identify the four classifications of annuities. [1]
4. Explain the difference between an immediate annuity and a deferred annuity.
[1]
5. Describe how annuity values increase on a tax-deferred basis. [3]
6. Describe a bonus interest rate and a premium bonus and explain how the
two concepts differ. [3]
7. Explain why a prospect would be concerned about the renewal interest rates
a company typically pays to its policyowners. [3]
8. Describe a partial surrender and explain how it differs from a full surrender. [3]
9. Describe a typical free-withdrawal provision. [3]
10. Explain the tax benefits of an IRC Sec. 1035 exchange. [5]
11. Explain why an equity-indexed annuity is appropriate for individuals who
want an investment that offers a better chance of growth than a fixed-interest
deferred annuity and without the downside risk of a variable deferred annuity.
[6]
12. Identify the three basic types of indexing methods that insurance companies
use in the design of equity-indexed annuities. [6]
13. Describe how a capped interest rate can limit indexed earnings in an
equity-indexed annuity. [6]
14. Describe how minimum interest guarantees protect against negative
performance in an index. [6]
15. Describe the differences in the insurance industry regulation of fixed-interest
deferred annuities and variable deferred annuities. [2, 7]
16. Describe the differences between the variable-deferred annuity's general
account and the separate account. [7]
17. Identify the common charges and fees normally associated with a variable
deferred annuity policy. [7]
18. Identify four types of death benefit guarantees available in variable deferred
annuities. [8]
19. Cite three reasons for recommending either a nonqualified variable annuity
or a nonqualified mutual fund to a client who is considering both investment
vehicles. [9
Chapter 9
1. List the eight immediate annuity payout options. [2]
2. Describe the difference between fixed-amount and fixed-period annuities. [2]
3. Identify the risk to the annuity owner of purchasing a life-only annuity payout.
[2]
4. Explain how a life annuity with a 10-year period certain guarantee functions if
the annuitant dies 7 years after issue. [2]
5. Describe two joint and survivor life annuity payout options for a married
couple, and explain how they work. [2]
6. Besides the payout amount, what is another key consideration in selecting
an immediate annuity? [3]
7. What are two ways to address the inflation risk concern with an immediate
annuity? [3]
8. Identify the risk a variable immediate annuity purchaser assumes from the
insurance company. [4]
9. Describe the basic difference that must be applied in calculating the exclusion
ratio for a fixed life-only annuity versus a fixed life annuity with either a period
certain or refund guarantee. [5]
10. List three practical applications for recommending that a client purchase a
deferred annuity. [6]
11. List three practical applications for recommending that a client purchase an
immediate annuity. [6]
12. List and briefly describe the three major ethical considerations in selling
annuities. [8]
Chapter 10
1. Describe the federal income tax treatment of benefit distributions to a
participant from a tax-advantaged retirement plan. [1]
2. Describe the estate tax treatment of the balance in a qualified plan account
or IRA and how this affects the income tax treatment of a distribution to a
death beneficiary. [1]
3. Which of the following plan distributions is subject to the 10 percent Sec.
72(t) penalty? [2]
a. a death benefit from a defined-benefit plan payable to a beneficiary upon
the death of an employee aged 52
b. a lump-sum benefit from a money-purchase pension plan payable to a
disabled employee aged 57
c. a distribution from a 401(k) plan to an employee aged 52 who qualifies
under the plan's "financial hardship" distribution provision
d. an in-service distribution made to an employee aged 63 from a
profit-sharing plan
e. a $10,000 distribution from a SIMPLE to pay for qualifying acquisition
costs of a first home for the participant
4. Ralph withdraws $100,000 from his IRA for start-up costs for his new
business. In the same year, he pays $40,000 in tuition, $12,000 in room,
board, and fees, and $2,000 for books for his two daughters, who are full-time
students at Haverford College. What is the applicable Sec. 72(t) penalty
tax? [2]
5. What method for avoiding the 10 percent early-withdrawal penalty is the most
useful and flexible for planning purposes? [2]
6. What are the risks of relying on the substantially equal periodic payments
exception? [2]
7. Ralph has two IRAs, one created with nondeductible contributions
(contributions of $12,000 and a current value of $43,000) and one created by
a rollover from a qualified plan ($357,000). He has not taken any previous
withdrawals. Ralph withdraws $12,000 from the nondeductible IRA, thinking
this transaction will have no income tax ramifications. In reality, how much of
the distribution is taxable? [3]
8. Your client, Cherie Reisenberg, is single and plans to retire at age 62.
Payments from her employer's qualified plan will start at the end of the first
month after her 62nd birthday. The monthly retirement benefit that will be
paid to Cherie in the form of a single-life annuity without any guaranteed
payments is $1,000. Her cost basis in the plan is $72,900. What portion of
her first distribution will be nontaxable? [3]
9. Mick Jagner (aged 60 in 2012) made his first Roth IRA contribution on
January 20, 2007, for the 2006 tax year. On February 1, 2012, he withdraws
$19,000 from the Roth IRA to help purchase a new car. This is the first
withdrawal from the Roth IRA that he has taken. As of February 1, the value
of the account is $24,000 and $15,000 represents Roth IRA contributions. [4]
a. Based on these facts, what is the tax treatment of the withdrawal?
b. Now assume that Mick is aged 55, not aged 60. What is the tax treatment
of the withdrawal?
10. Sally is receiving a life annuity from her former employer's defined-benefit
pension plan. Sometimes she doesn't need the money for day-to-day
expenses. Can she roll over some of the payments into an IRA? [5]
11. Carole Gumley, aged 54, is retiring early and has a profit-sharing plan
account balance of $150,000. She receives a notice of the right to elect a
direct rollover, but she hasn't yet decided where she would like to invest
her retirement money so she receives the distribution from the plan directly.
Answer the following questions. [5]
a. How much will Carole actually receive from the plan?
b. Can Carole roll over the entire benefit?
c. What are the tax ramifications if she doesn't get around to rolling over the
benefit for 75 days?
d. Would the situation be different if the reason that she waited 75 days
is that a financial advisor told her that she had 90 days to accomplish the
rollover?
12. In what situations is it more prudent to take some or all of a distribution into
income instead of rolling the benefit into an IRA? [5]
13. What conditions must a lump-sum distribution meet in order to qualify for
special tax treatment? [6]
14. Andrew Fiddler, aged 45, receives a distribution of $400,000 in cash and
$100,000 of company stock from his employer's 401(k) plan. Andrew rolls
over the cash portion of the distribution and elects to take the stock portion
into income. The company tells him that the cost basis for the stock is
$25,000. Andrew sells the stock 3 years later for $125,000. What are the tax
ramifications of these two transactions? [6]
Chapter 11
1. What types of plans are subject to the required minimum-distribution rules?
[1]
2. Sara Stewart is required to take a minimum distribution of $2,000 from a
qualified retirement plan at the required beginning date. The distribution does
not occur. What penalties arise from this failure? [1]
3. James Daniel was born on July 15, 1934. State his required beginning date
in the following situations: [1]
a. He is a participant in an IRA.
b. He is an employee of Alpha Corp. and he is a participant in a 401(k)
plan. He is not a 5 percent owner. He plans to terminate employment on
June 1, 2010.
4. Distributions for the first two distribution years have to be made by when? [1]
5. Joe is aged 70 at the end of the first distribution year. His IRA account
balance was $250,000 at the end of the previous year. His beneficiary is his
65-year-old spouse, Jenny. What is the required minimum distribution for
the first distribution year? [1]
6. Taking the facts from the previous question, what is the required distribution
for the second distribution year if the account balance is $265,000? [1]
7. Joe is aged 70 at the end of the first distribution year. His IRA account
balance was $250,000 at the end of the previous year. His beneficiary is his
52-year-old spouse, Jenny. What is the required minimum distribution for
the first distribution year? [1]
8. Sally dies at age 75 and leaves her benefit to her 48-year-old son. How is
the required minimum distribution calculated in the year of her death and for
subsequent years? [1]
9. If a participant dies at age 55 and has named a 30-year-old child as
beneficiary, what must happen to ensure distributions can be made over the
child's life expectancy? [1]
10. Will an individual with two IRA accounts satisfy the minimum-distribution
rules by taking a distribution from only one plan? [1]
11. Describe four important planning tools that can be used to maximize
the potential deferral period after the participant's death under the
minimum-distribution rules. [2]
12. What considerations affect an individual's decision concerning the appropriate
form of pension distribution? [3]
13. When do qualified plans typically allow for benefit payments? [3]
14. What options does a participant have with regard to the timing and form of
payment of benefits? Is there any situation in which the participant does not
have these same rights? [3]
15. What is the major limitation of a life annuity? [3]
16. Why can a life annuity with guaranteed payments be used to provide for the
income needs of a beneficiary? [3]
17. Describe an installment payment option from a defined-contribution plan. [3]
18. In a defined-benefit plan, what does it mean to say that if a participant elects
a life annuity with 10-year-certain payments, the amount of the distribution is
the actuarial equivalent to a life annuity? [3]
19. In a defined-benefit plan, what does it mean to say that a benefit is
subsidized? [3]
20. Answer the following.
a. Are distributions from qualified plans always taxed as ordinary income?
[3]
b. What exception to the 10 percent Sec. 72(t) excise tax applies to
qualified plans and 403(b) plans, but does not apply to IRAs? [3]
c. What is the exception that applies to the minimum-distribution rules for
qualified plans? [3]
d. Do the 20 percent mandatory income tax withholding rules apply to
distributions from IRAs? [3]
e. In an IRA, is the required beginning date ever later than the April 1
following the calendar year in which the participant attained age 70 1/2? [3]
21. Sheila, single and aged 50, is laid off from her job. She receives a $150,000
distribution from a 401(k) plan that she rolls directly into an IRA. She decides
to take some well-deserved time off and plans to go back to work in about a
year. She needs living expenses for the current year. How could she make
withdrawals from her IRA that would avoid the 10 percent penalty tax? [4]
22. Why is choosing the right distribution option so important for someone with a
relatively small account balance? [4]
23. Explain the estate tax threat that faces those with significant retirement plan
balances and the strategies to minimize its effect. [5]
24. Can the Roth IRA conversion be used as an effective tax planning strategy
for the wealthier individual? [5]
Chapter 12
1. List four factors that a client must know about using his or her home as
a financial asset. [1]
2. What is the maximum amount that can be excluded for the sale of a personal
residence by a single taxpayer? A married taxpayer filing jointly? [2]
3. If a client has more than one house, how is it determined which house the
Sec. 121 exclusion applies to? [2]
4. What are the ownership and use requirements that must be satisfied to
be eligible for the exclusion of gain provisions for the sale of a personal
residence? [2]
5. How often can the exclusion of gain rules be used? [2]
6. What are the rules if a taxpayer does not own and use the property as a
personal residence for a 2-year period? [2]
7. If a couple is planning to marry and each owns a home, what should they do
about the two properties? [2]
8. Your client is interested in an age-restricted housing community. Explain the
differences between the age-62 restriction and the age-55 restriction. [3]
9. Describe how life-care communities work. [4]
10. Explain the health care options in a life-care community. [4]
11. Describe how assisted living works. [5]
12. What factors should clients consider when planning to relocate out of state?
[6]
13. Explain how a house can be modified for senior living. [7]
14. Discuss the desirability of home sharing. [7]
15. Describe how a reverse mortgage works. [8]
16. Identify the costs associated with a Home Equity Conversion Mortgage
(HECM). [8]
17. Discuss the sale-leaseback strategy. [9]
18. Describe how a qualified personal residence trust (QPRT) can help a client.
[10]
Chapter 13
1. What are the ten basic key steps of estate planning a senior should address
or review? [1]
2. What are some of the methods and problems concerning the distribution of
personal family property items? [2]
3. Why is an "Upon Death or Incapacity Letter" useful? [2]
4. What are common issues and problems that arise when seniors separate,
divorce, and/or remarry? [3]
5. How is each of the primary incapacity planning methods useful for
incapacitated seniors? [3]
a. durable powers of attorney for asset management and for health care
b. living wills
c. revocable living trusts
d. guardians and conservators
e. special-needs trusts (SNTs)
6. What is a legacy or ethical will, and how is it often helpful to seniors? [4]
7. What is a Totten trust, and how is this arrangement useful for seniors? [5]
8. How can Sec. 529 qualified tuition programs be used for senior estate
planning? [5]
9. Describe the following planning devices that less wealthy seniors may wish
to consider. [6]
a. reverse mortgages
b. life settlements
c. pre-need funeral and cemetery trusts
d. sale-leaseback arrangements
10. How are the following types of trusts useful in estate planning for seniors? [7]
a. intentionally defective trusts
b. grandparent-grandchild trusts
c. incentive trusts
11. How are the following estate planning techniques valuable for some seniors?
[7]
a. family limited partnerships (FLPs) and family limited liability companies
(FLLCs)
b. family life insurance partnerships (FLIPs)
c. qualified personal residence trusts (QPRTs)