Retirement Savings and Income Planning practice questions

Answer: C) By the end of the tenth year following the year of death

Under the SECURE Act, a designated beneficiary who is not an eligible designated beneficiary must empty an inherited IRA by the end of the 10th year after the owner's death. Annual RMDs are also required during that period if the owner died after the required beginning date.

• AIncorrect. Life expectancy payouts are for eligible designated beneficiaries, such as a surviving spouse, a minor child of the owner, a disabled or chronically ill person, or someone not more than 10 years younger than the owner. A 40-year-old nephew is none of these.
• BIncorrect. The 5-year rule comes from pre-2020 law and can still apply to some non-designated beneficiaries. An individual designated beneficiary like the nephew follows the 10-year rule.
• CCorrect. A designated beneficiary who is not an eligible designated beneficiary must empty the account by the end of the 10th year after the owner's death. If the owner died after her required beginning date, he must also take annual RMDs during that period.
• DIncorrect. No one-year full-distribution deadline applies. The nephew has until the end of the 10th year.

Answer: D) Per benefit period, not per calendar year

• AIncorrect. That's Part D.
• BIncorrect. It can apply more than once.
• CIncorrect. That's Part B.
• DCorrect. A new period can start after 60 days out of care.

Answer: A) Contributions are set so each participant has the same equivalent benefit accrual rate, which favors older participants

An age-weighted profit-sharing plan allocates contributions based on age and pay so that every participant has the same equivalent benefit accrual rate. Older employees therefore get larger allocations, and the plan passes nondiscrimination through cross-testing.

• ACorrect. Age-weighted plans convert allocations into benefits projected to normal retirement age and equalize the equivalent accrual rate. Older participants have fewer years to retirement, so they receive larger allocations as a percentage of pay. These plans pass nondiscrimination through cross-testing.
• BIncorrect. This is a standard pro rata (uniform) allocation. It ignores age, so it is not age-weighted.
• CIncorrect. This reverses the design. Equalizing projected benefits gives older participants, who have less time to compound, the larger allocations.
• DIncorrect. This describes a service-based (points) allocation formula. An age-weighted plan bases allocations on age and compensation.

Answer: C) Partial Roth conversions to fill lower brackets

• AIncorrect. That isn't allowed.
• BIncorrect. That can bunch income later.
• CCorrect. This can reduce future RMDs and taxes.
• DIncorrect. That isn't a tax strategy.

Answer: A) 10 years and they're currently unmarried

• ACorrect. Other conditions also apply.
• BIncorrect. That isn't the rule.
• CIncorrect. Ten years is enough.
• DIncorrect. That isn't the rule.

Answer: D) Employer stock

• AIncorrect. It invests in employer stock.
• BIncorrect. It invests in employer stock.
• CIncorrect. It invests in employer stock.
• DCorrect. Often used in succession planning.

Answer: A) They must be the same percentage of compensation for every eligible employee, including the owner.

SEP contributions come only from the employer, which may vary them or skip them from year to year. In any year it contributes, it must give every eligible employee, including the owner, the same percentage of compensation.

• ACorrect. The IRS requires the employer to contribute equally for all eligible employees. Under the model Form 5305-SEP, contributions are allocated in proportion to pay, so each eligible employee, including the owner, receives the same percentage of compensation.
• BIncorrect. Every employee who meets the plan's eligibility rules (no stricter than age 21, service in 3 of the last 5 years and minimum compensation) must receive a contribution in any year the employer contributes.
• CIncorrect. Contributions are set as a uniform percentage of each employee's pay, not a flat dollar amount. The employer may also vary the percentage from year to year or skip contributing in some years.
• DIncorrect. A SEP set up today is funded only by employer contributions. Salary deferrals were allowed only in SARSEPs established before 1997, and new SARSEPs cannot be set up.

Answer: B) Longevity risk

• AIncorrect. Annuitization reduces liquidity.
• BCorrect. Income for life.
• CIncorrect. It addresses longevity risk.
• DIncorrect. It addresses longevity risk.

Answer: B) 35 years

• AIncorrect. It's the highest 35 years.
• BCorrect. Missing years count as zero.
• CIncorrect. It's the highest 35 years.
• DIncorrect. It's the highest 35 years.

Answer: C) Applies to the combined total across both plans

• AIncorrect. It still applies.
• BIncorrect. It's per person.
• CCorrect. The limit is per person, not per plan.
• DIncorrect. It's combined.