Module 7 Retirement Planning

Question 1

What is the dollar amount received at FRA (Full Retirement Age)?

Answer 1

PIA - Primary Insurance Amount

Question 2

What is the average indexed monthly earnings and inflation-adjusted average wages on which the worker has paid Social Security taxes.

Answer 2

AIME this is used to calculate the benefit

Question 3

What is the RMD from retirement plans

Answer 3

Required Minimum Distribution

Question 4

What are COLA’s?

Answer 4

Cost of living adjustments

Question 5

What are the three primary sources of retirement income?

Answer 5

Savings
Investments
Employer-provided retirement plans
Social Security.

Question 6

What would Julian’s annual retirement benefit be if his highest years of compensation was $77,000 on average, he had been working for the company for 33 years, and he received 2% of compensation for each year of service as his retirement benefit?

Answer 6

$77,000 x 0.02 per year x 33 years of service = $50,820.

Question 7

Individuals may not make contributions into their own IRA’s for their nonworking spouses. There are no joint IRA’s. Spousal IRA’s are available for nonworking spouses. Catch-up contributions are allowed for those who are at least 50 by the end of the year. Contributions for the current tax year must be made no later than April 15th of the following year.

Can individuals make nondeductible IRA contributions

Answer 7

Yes

Question 8

How often should an employer contribute to a profit-sharing plan?

Answer 8

Substantial basis. Typically, both the employer and employee contributions to the plan. If the plan has 401(k) provisions, then the employee may contribute. The contribution percentage in a profit-sharing plan can be varied from year to year. Annual employer contributions to the plan are limited to a maximum of 25% of a plan participant’s total compensation.

Question 9

What is the limit on contributions to a traditional IRA for a single person who earns $1,500 per year?

Answer 9

$1,500
For those who earn less than $6,000 annually, contributions can be made up to the lesser of $6,000 or 100% of earned income. therefore, if a person earned only $1,500 in a year, the most the person could contribute to an IRA would be $1,500.

Question 10

What is an important reason to begin saving early for retiremet?

Answer 10

A key reason to begin saving early for retirement is to take advantage of compound interest growth over time. The longer the compounding period, the higher the returns.

Question 11

Roland, age 60, has made deposits totaling $18,000 into a Roth IRA account. The account is now worth $24,500. He withdraws $10,500 to purchase a car. How much of this withdrawal is taxable?

Answer 11

The principal is considered to be withdrawn first from a Roth IRA, meaning Roland could have withdrawn up to $18,000 without tax consequences.

Question 12

To be eligible for Social Security retirement benefits, an individual must be

Answer 12

Fully insured
An individual must be fully insured to be eligible for Social Security retirement benefits. Currently insured status will provide coverage for survivor benefits.

Question 13

What is the penalty tax assessed on any required minimum distributions (RMD’s) not taken?

Answer 13

25%
A deductible IRA owner must pay a 50% penalty tax on any RMD’s not taken.
Distributions from a deductible IRA must commence on or before April 1 of the year following the year in which the owner reaches 72. Roth IRA owners are not subject to the age 72 minimum distribution requirements.

Question 14

If an IRA owner’s required minimum distribution (RMD) for the year is $20,000, but only $6,000 was withdrawn, what is the penalty for failure to take the full RMD?

Answer 14

A penalty of $7,000 [50% ($20,000 - $6,000)] would be due on the missing remainder of the RMD.

Question 15

When is an individual most vulnerable to a large loss?

Answer 15

At the beginning of retirement
Individuals are most vulnerable to large losses at the beginning of retirement, as adjustments may have to be made at the beginning of what could be a long retirement period. A large loss while saving for retirement could be addressed by continuing to work and save. A large loss 10 years into retirement, while not desirable, is still not as severe as a large loss at the beginning of retirement because 10 years of retirement expenses have already been paid.

Question 16

Mitzi is considering working while receiving Social Security benefits. What are the consequences of this.

Answer 16

If taking Social Security benefits at age 70, any income earned will reduce the benefit by by $1 for every 50 cents over a set monthly limit.
If taking Social Security benefits at age 62, any income the earned will reduce the benefit $2 over a set monthly limit until the year of FRA. Benefits are not reduced if an individual continues to work at normal retirement age.

Question 17

What are the pitfalls to having enough assets for a comfortable retirement?

Answer 17

lump-sum distributions from retirement accounts.
401(k) 403(b)
longevity
fraud
large losses early in retirement

Question 18

What does the vesting plan look like for a retirement plan?

Answer 18

In a defined benefit pension plan, a separate account is set up for each participant.
Starting with the second year, there is 20% vesting each year with two-to-six-year graded vesting. this means that a plan participant would be 40% vested after three years. 60% vested after four years, 80% vested after five years, and 100% vested after six years.

Question 19

Employee deferrals to a 401(k) plan may be subject to which vesting schedule?

Answer 19

immediate vesting

Question 20

When are SEP IRA’s fully vested?

Answer 20

immediately