Competency 3 Flashcards
Saving a little more in the last few years of retirement is one of the most effective ways to address a retirement income shortfall.
Faults. Saving a little more just prior to rinse tire meant retirement will have a limited impact on improving the plan.
The best reason to save more in the years prior to retirement may be getting used to living on less during retirement.
True
Saving is hard because it is human nature to value current consumption more than future consumption.
True
Spending less in retirement can be an effective way to address a retirement income shortfall but it can be difficult to reduce the expected standard of living.
True
A well prior to rise spending plan may make it easier to identify reductions and spending that will not feel to the client like a significant drop in the standard of living.
True
Temporary spending cuts in retirement or not likely to have much of an impact on the retirement income plan.
Faults. Spending cuts that are tied to years of poor were negative investment performance can have a significant effect on the long Jevity of the retirement portfolio
Desire for current consumption never overrides the need for future consumption.
False Reason: We equate
consumption with happiness.
Saving more is still an important strategy.The more years to retirement, the more effective the strategy will be. However, for older clients, saving
more is not likely to solve the problem.
True
A well prioritized spending plan will not make it easier to identify reductions
False . It will make it easier
Depending upon the withdrawal strategy, temporary reductions in spending can be meaningful
True
Retirement Deferral does not have a tremendously positive income effect on low-income workers
False . It certainly does,
Self-employed person can establish their own 401(k) plan that has a Roth election.
True
Purchase a nonqualified annuity;Make after-tax contributions to qualified plans. Are plans that provide for tax-deferred earnings.
True
The value of saving on a pretax basis decreases as the individual’s tax rate increases.
False. The value of saving on a pretax basis increases as the individual’s tax rate increases.
Contributions to IRAs must be made in cash during the year or up until the April 15th of the following
year; extensions are allowed
False. No extensions are allowed
To make a contribution to any IRA or Roth IRA the individual must have earnings from employment. No exceptions
False: a contribution can be made for
a nonworking spouse if the couple is married filing jointly and has joint earnings sufficient to
support the contributions.
Roth and Trad IRA Total contributions to all accounts cannot exceed the lesser of 100 percent of employment earnings
or $5,500 ($6,500 if attained age 50) (2014).
True
If an individual is not an active participant in an employer sponsored retirement plan, the contribution
is always deductible no matter how much the client earns; If an individual is an active participant, the deduction is phased out on a pro rata basis
True
A participant can convert any portion of a traditional IRA or a SEP IRA/SIMPLE IRA to a Roth IRA
(after five years).
False. After two years
Tax treatment of a Roth conversion: The value that is taxed is based on fair market value on the date of withdrawal.
False The value that is taxed is based on fair market value on the date of conversion
Tax treatment of a Roth conversion:If there is no cost basis in any IRAs, the entire value is includible as taxable income
True
Because of the Pro Rata rule; A client who makes a $5,000 nondeductible contribution to an IRA and wants
to convert it shortly thereafter may believe there are no tax consequences. However, this is not
the case when other IRAs exist.
True
The Roth election is allowed on employer contributions.
False: The Roth election is not allowed on employer contributions. It is only allowed on salary
deferrals.
SIMPLE Plans cannot allow participant loans or provide for Roth elections
True
Participants in a SIMPLE have withdrawal flexibility; however, withdrawals are taxable income and may be subject
to the early withdrawal penalty tax.
True
SS The maximum benefit is approximately $1,500 a month for a 66-year-old (currently
the full retirement age) in 2012.
False: The maximum benefit is approximately $2,500 a month ($30,000 year) for a 66-year-old (currently
the full retirement age) in 2012.
So when the spouse with the higher Social Security life-time benefit has a short life expectancy, the
surviving spouse will inherit the benefit. So if benefits were claimed early, the surviving spouse is
saddled with the lower benefit for the rest of his or her lifetime
True
SS: Voluntary suspension of benefits is allowed at any partial payment age.
False: Voluntary suspension of benefits is allowed after attainment of full retirement age
Eligibility for Roth IRA: The single taxpayer contribution is phased out on a pro rata basis with AGI between $114,000 to $129,000 (2014)
True
Roth Conversions for a tax year must occur by April 15 of that year.
False Conversions for a tax year must occur by December 31 of that year
Simples have the same salary deferral contribution limits as 401(k) plans
False SIMPLE: Have lower salary deferral contributions than 401(k) plans
Many take SS early to try and get their money’s worth. Under the traditional break-even analysis, die early
(under approximately age 80) and you would have received more benefits by beginning at age 62.
However, betting on dying young is a bad gamble—since losing means living a long life with too
little income.
True
A conventional home equity loan or line of credit has higher up-front costs which makes it a better option to tap home equity for people who do not plan to stay in the house for a long time
False :A conventional home equity loan or line of credit has lower up-front costs which makes it a better
option to tap home equity for people who do not plan to stay in the house for a long time
Because the reverse mortgage has high up-front costs, it is a better option for a client when costs
can be amortized over a longer period—meaning when the individual is planning to stay in the
home for a long time.
True
Single purpose loans:An advantage is that once one of these loans has been taken you may still tap additional equity.
False:A disadvantage is that once one of these loans has been taken you may not be able to tap additional
equity
Almost all Reverse Mortgage loans today are made under the Home Equity Conversion Mortgage (HECM) program. The HECM encourages lenders to make loans by providing FHA insurance to the lenders
True
Repayment of a Reverse Mortgage Loan is required only when the last surviving borrower dies, becomes disabled , sells the home, or permanently
moves.
False:Repayment is required only when the last surviving borrower dies, sells the home, or permanently
moves.Disability does not factor.
Recent research from EBRI shows that deferring retirement by one year has very little effect on the retirement income adequacy of low-income worker
False. The research demonstrates that deferring even one year has the most positive impact on low-income workers. (LO 3-2-
In a McKinsey report offering suggestions for improving American’s Retirement Security, working longer and deferring retirement was one of the key recommendations
T
Deferring retirement shortens the retirement period, allows assets to continue to accrue interest, and generally means higher Social Security benefits as well as employer provided retirement benefits
T
Working longer is an important strategy and individuals should take steps to protect their ability to continue to work by maintaining health, job skills and their professional network
T
A number of organizations such as Your Encore and AARP offer assistance to older workers seeking employment
T
Looking for opportunities to maximize contributions to tax-advantaged retirement plans should be part of an annual tax planning process
T
Self-employed individuals can establish retirement plans allowing them to make tax-deferred contributions or even Roth contributions
T
The value of saving on a tax-deferred basis decreases as the individual’s tax rate increases.
False. The value of tax-deferral increases as the tax-rate increases
The value of saving on a tax-deferred basis decreases somewhat if future tax rates at the time of withdrawal are higher than the tax rate at the time of deferral
T
Contributions to IRAs and Roth IRAs for a year can be made after the following
April 15th as long as the taxpayer has filed for an income tax extension.
False. Contributions to IRAs and Roth IRAs for a year must be made by the following April 15th. (LO 3-3-1)
New contributions to a traditional IRA cannot be made after an individual attains age 70½.
T
A single taxpayer with AGI of $150,000 can make a $5,000 contribution to a Roth
IRA in 2012.
False. In 2012, a single taxpayer with AGI in excess of $125,000 cannot make any contributions to a Roth IRA. (LO 3-3-1
Converting an IRA to a Roth IRA results in income tax based on the value of the converted account on the date of the conversion.
T
A taxpayer that has an IRA account that only has nondeductible contributions (and no earnings) and a rollover IRA consisting of all tax-deferred contributions will be able to convert the nondeductible IRA without income tax consequences.
False. The nondeductible IRA cannot be converted to a Roth IRA tax-free if the individual has other tax-deferred IRAs as the IRAs must be aggregated to determine the tax treatment of the conversion
A 401(k) participant making a salary deferral contribution expecting a matching employer contribution should understand the eligibility and vesting provisions that apply to the match
T
Participants in a 401(k) plan may have the option to make a Roth election on salary deferrals meaning that they exchange tax deferral for tax-exempt earnings
T
Nonqualified deferred compensation is generally subject to the same contribution limits as 401(k) salary deferrals
False. Nonqualified salary deferrals are not subject to any specific dollar limitation
Social Security benefits have the advantage that they are payable for life and benefits include inflation protection
T
Commercial annuities that provide the same type of inflation protection as Social
Security are readily available
False. Commercial annuities that provide inflation protection generally include a cap on the inflation adjustment or provide a specified increase each year that is not directly tied to inflation
Comparing monthly benefits available at different ages is always the best way to illustrate the advantages of deferring Social Security.
False. Converting monthly benefits to annual benefits or better yet stating the benefit as a percentage of earnings (replacement rate) may be more effective choices for illustrating the benefits of deferring.
With Social Security claiming decisions, betting on dying young is a bad gamble.
T
Under the break-even analysis, a married man with a higher Social Security benefit than his spouse who is quite ill and has a short life expectancy should always claim benefits as early as possible.
False. This may not be the right choice if the spouse has an average or longer than average life expectancy as the married man’s benefit will continue as long as the spouse is alive. (
Working longer will have more impact on the calculation of average earnings under the Social Security benefit formula if the client has fewer than 35 years of wage history.
T
Deferring Social Security benefits is never an effective strategy if a client would have to withdraw 401(k) assets to support a decision to defer benefits
False. Reichenstein has shown that in at least some circumstances a portfolio lasts longer if Social Security benefits are deferred and 401(k) assets are withdrawn during the bridge period
A divorced spouse who was married for at least 10 years may be able to receive a spousal benefit at full retirement age and switch to a worker’s benefit at age 70
T
For a client who has already begun to receive Social Security retirement benefits, voluntary suspension of benefits after attainment of full retirement age (before age 70) is a way to get an increase in benefits.
T
A reverse mortgage has high up-front costs, which makes it a good option for tapping home equity for a short-term need
False. With high up-front costs, it is better if expenses can be amortized over a longer period
The risk with conventional mortgages is that the individual cannot afford to repay the loan
T
A disadvantage of a single purpose loan is that once one is taken, it may not be possible to tap additional equity
T
One challenge with downsizing is that many wait to sell their homes until the money is needed immediately
T
The FHA insures HECM reverse mortgages
T
Under a HECM reverse mortgage, the individual may have to sell the home if loan payments cannot be made.
False. HECM loans do not have to be repaid until the homeowner dies or chooses to leave the home.
Receipt of a reverse mortgage payment by the homeowner generally results in taxable income
False. Loan payments are not included in income.
A financial advisor may bring value to the client by rebalancing the portfolio to ensure that the level of risk of the portfolio stays appropriate for the client’s risk tolerance
T
An actively managed stock mutual fund that has a high level of overlap with the appropriate benchmark is referred to as a closeted index fund
T
Mutual funds with high expense ratios generally underperform those with lower expense ratios.
T
Research has shown that established mutual funds outperform newly launched mutual funds
False. Newly launched mutual funds generally outperform established ones
Research has shown that in a cross-section of mutual funds, those with redemption fees outperform their counterparts
T
Funds in the bottom decile of performance show considerable persistence in bad performance over time
T
The portion of the principal in a tax-deferred account owned by the investor is 1
minus the investor’s tax rate
T
The tax rate on earnings is zero in both tax-exempt and tax-deferred retirement plans.
T
With a taxable investment account, the government shares in both earnings and the risk
T
From a tax perspective, it is best to hold stocks in the taxable account and bonds in the tax-advantaged retirement accounts to the fullest extent possible
T
Other assets taxed as ordinary income should be held in taxable accounts
False. Any assets taxed as ordinary income will benefit from being held in tax- advantaged retirement plans
