Retirement Practice Test Questions

Question 1

Tom and Sally Johnson plan to retire in 20 years. They feel they need $80,000 at the beginning of each year in income in today’s dollars. They feel they can make 7% after tax on their investments and inflation will be 3%. What is the lump sum needed at the beginning of retirement if they expect to live 25 years after retiring?
A. $2,291,599 ± $10
B. $2,374,004 ± $10
C. $2,380,594 ± $10
D. $2,389,394 ± $10

Answer 1

Answer: B
Step 1: Inflate 80,000 ± PV at 3% for 20 years. In their first year of retirement, they need $144,488.
Step 2: $144,488 PMT, (1.07 + 1.03) - 1, x 100 = 3.8835i, 25 years = $2,374,004 (Begin)

Question 2

Mr. and Mrs. Tea now have $1,000,000 in retirement savings. If they can earn an average of 7.5% on the account, what kind of income can they expect at the beginning of each year if they retire now and completely use up 100% of income and principal over the next 25 years?
A. $83,452 ± $1
B. $89,710 ± $1
C. $163,979 ±$1
D. $13,684 ± $1

Answer 2

Answer: A
Solve for payment (begin)
$1,000,000 ± PV
7.5 i
25N

Question 3

What is pension max?
A. Getting the maximum dollars out of the client’s pension each month.
B. Electing a single life annuity and using part of the higher monthly benefit to purchase life insurance on the employee’s life.
C. Electing a joint life annuity and using part of the higher monthly benefits to purchase life insurance on the spouse’s life.
D. Planning to lengthen the number of years in retirement.

Answer 3

Answer: B
Per definition in lesson #1. Getting the maximum payment out of the plan without leaving your spouse with anything from the pension.

Question 4

How many quarters of coverage are needed for a person to be fully insured under Social Security?
A. NRA (Normal Retirement Age)
B. 6
C. 65+
D. 40
E. It depends on whether they are married or not.

Answer 4

Answer: D
Simple answer.

Question 5

Railroad employees can be covered by all the following except?
A. Medicare A and B after retirement.
B. Group health insurance before retirement.
C. Social Security
D. Railroad Retirement pension plan.

Answer 5

Answer: C
They are excluded from Social Security coverage.

Question 6

Spouses qualify for Social Security in various ways. Which of the following spouses will not quality for Social Security payments?
A. A surviving spouse of a deceased insured worker is age 61.
B. A surviving spouse of a deceased worker is caring for an entitled child of the deceased who was disabled before age 22.
C. A divorced spouse, age 62, who had been married to the insured worker for at least 10 years and has never been remarried.
D. A spouse of a retired worker age 60.

Answer 6

Answer: D
A spouse of a retired worker has to be age 62 or over. Answer A is correct; the spouse could have qualified at age 60. Answers B and C are correct.

Question 7

Who is eligible for the lump-sum death benefit under Social Security?
A. A dependent mother.
B. A son or daughter.
C. A spouse who was living in the same household.
D. A dependent family member.

Answer 7

Answer: C
A dependent child is the only other correct answer.

Question 8

Mrs. Smart, age 63, is taking early Social Security benefits of $1,200 per month. She continues to work part-time making $1,000 per month. How much will her Social Security benefits be reduced?
A. $0
B. $200
C. $1,000
D. $1,200

Answer 8

Answer: A
Her earnings ($12,000 per year) are less than the threshold. Her benefits will not be reduced.

Question 9

All the following are a type of retirement plan except?
A. Money purchase
B. 403(b)
C. ESOP
D. FSA 125 plan

Answer 9

Answer: D
FSA (Flexible Spending Accounts) are employee deferred plans for employee benefits not retirement.

Question 10

In a target benefit plan, which provisions are shared with defined contribution plans?
A. Forfeitures may be reallocated or used to reduce employer contributions.
B. Plan generally benefits older employees.
C. Actuary determines the initial contribution level.
D. Employer assumes the investment risk.

Answer 10

Answer: A
The employee assumes the investment risk.

Question 11

Under a profit-sharing plan the minimum funding is?
A. 3% (DC plan)
B. 15%
C. 25%
D. Substantial and Recurring

Answer 11

Answer: D
The employer’s contributions to each plan year can be a purely discretionary amount or nothing at all. But a profit-sharing plan is subject to a “substantial and recurring” requirement.

Question 12

A solo 401(k) will allow which of the following contributions?
I. Elective deferrals
II. Employer contributions
III. Forfeitures
IV. Catch-up (age 50 or older)
A. All of the Above
B. I, IV
C. II, III
D. I, II, IV
E. I

Answer 12

Answer: D
There are no forfeitures in a solo 401(k). The other contributions are allowed.

Question 13

Carol, age 65, is a HCE. She has received salaries of $150,000, $175,000, and $200,000 for the last three years. What will be Carol’s maximum benefit under a defined benefit plan if she retires at the end of this year?
A. Unknown, she will get her account balance.
B. $175,000
C. $275,000
D. 1.5% times years of service times $275,000

Answer 13

Answer: B
100% of the average compensation over the past three years. The maximum benefit is in answers C and D but does not apply.

Question 14

Jack works for ABC, Inc. If ABC defined benefits plan provides for a life annuity equal to 1.5% of earnings per year up to 30 years of service, how much will Jack get with an average annual compensation of $100,000 received as an annual pension after 20 years?
A. $30,000
B. $45,000
C. $46,000
D. $100,000

Answer 14

Answer: A
1.5% x 20 years = 30%
$100,000 x 30% = $30,000

Question 15

In a defined benefit plan, which factor does not affect the amount of employer contributions?
A. Participant’s proximity to retirement age
B. Forfeiture
C. Salaries of key employees that exceed the salary cap
D. Investment return assumptions

Answer 15

Answer: C
Salaries above the salary cap have no effect.

Question 16

Using the ratio percentage test (70%), if the plan covers only 50% of the HCEs, then up to _______ of the NHCEs could be excluded.
A. 35%
B. 50%
C. 65%
D. 70%

Answer 16

Answer: C
50% x 70% = 35%
35% must be covered. 65% can be excluded.

Question 17

Which of the following is considered a slower vesting schedule?
A. 1-year cliff
B. 3-year cliff
C. 5-year cliff
D. 2 to 6-year graded

Answer 17

Answer: C
5-year cliff and 3 to 7-year graded are considered slower vesting schedules. A one-year cliff isn’t a vesting schedule; it is one year of eligibility.

Question 18

Using ADP/ ACP testing if the ADP for the NHCEs employees for last year was 5%, then the ADP for the HCEs can be as high as?
A. 2%
B. 3%
C. 5%
D. 7%

Answer 18

Answer: D
The shorthand method is NHCE percentage plus 2%.

Question 19

What is the permitted disparity with an integrated money purchase plan if the based contribution is 5%?
A. 5%
B. 5.7%
C. 10%
D. 11.4%

Answer 19

Answer: A
It is the lesser of the base (5%) or 5.7. The excess is 10%.

Question 20

Plan loans are allowed in which of the following type(s) of plans?
I. Money Purchase
II. 403(b)
III. Profit Sharing
IV. Target Benefit
A. All of the Above
B. I, III, IV
C. I, IV
D. II

Answer 20

Answer: A
All qualified plans and 403(b)s can make plan loans.

Question 21

Mr. Jackson, age 65, is retired and has an AGI of $50,000. Can he do a deductible or a non-deductible IRA?
A. Yes, a non-deductible only
B. No
C. Yes, both a deductible and non-deductible IRA
D. No, he can only do a Roth IRA

Answer 21

Answer: B
There is no indication he receives any compensation. AGI in this case is only unearned income.

Question 22

Put in order the ordering rules for distributions from a Roth that contains both contributory and conversion contributions?
I. Converted amount
II. Contributed amount
III. Earnings on converted contributions and contributory contributions.
A. II, I, III
B. I, II, III
C. III, II, I

Answer 22

Answer: A
Contributions are first followed by conversion contributions.

Question 23

With a Roth 401(k) contributions are held in two separate accounts: employee contributions and employer contributions. Are minimum distributions required when the account holder reaches the required beginning date?
A. Yes, from both accounts.
B. Yes, but only from the employee Roth 401(k) account.
C. Yes, but only from the employer Roth 401(k) account.
D. No

Answer 23

Answer: D - No

Question 24

SEP contributions are from?
A. The employer only.
B. The employer only (deferral).
C. Both answers A and B.

Answer 24

Answer: A
A SEP provides for employer contributions only.

Question 25

Which of the following entities may not sponsor a 403(b) program?
A. A church
B. A private school
C. A state college
D. A governmental employer
E. A hospital

Answer 25

Answer: D
A tax-exempt organization must be a 501(c)(3). Governmental do not qualify.

Question 26

Which of the following entities may not sponsor a 457 program?
A. A church
B. A private school
C. A state college
D. A governmental employer
E. A hospital

Answer 26

Answer: A
Churches cannot do 457 plans.

Question 27

What is UBTI?
A. Unrelated Business Taxable Income.
B. Universal Bonus Tax Incentive.
C. United Business Taxable Income.
D. Uniform Benefit Target Income.

Answer 27

Answer: A

Question 28

The one-time election out of substantially equal payments allows a participant to switch from?
A. Annuity to amortization method.
B. Annuity to RMD method.
C. Amortization to annuity method.
D. RMD to amortization method.

Answer 28

Answer: B
The one-time election allows participants to switch from the annuity to RMD method.

Question 29

Which type of retirement plans require QJSA (Qualified Joint and Survivor Annuity) for the plan participant spouse?
A. Qualified Plans.
B. Define Benefit Plans.
C. Define Contribution Plans.
D. Qualified Pension Plans.

Answer 29

Answer: D
Qualified pension plans are DB, cash balance, money purchase, and target benefit plans.

Question 30

Mark Johnson is self-employed. He has a Keogh money purchase plan. He will be turning 73 in June of this year. He plans to continue to work until age 75. Can he continue to contribute to the plan after age 73?
A. Yes
B. No

Answer 30

Answer: A
He has to take distributions because he is more than a 5% owner, but he can continue to contribute to the plan.

Question 31

Sherry Patts will be 73 on June 30th. Her IRA has a value of $477,000 at the beginning of this year. If she only takes a $9,000 distribution by April 1st of next year (for this year), what will be the amount of her penalty based on the uniform table distribution period of 26.5?
A. $0
B. $2,250
C. $9,000
D. $18,000

Answer 31

Answer: B
$477,000/26.5 = $18,000

$18,000 - $9,000 = $9,000 shortfall so $2,250 penalty. The penalty is 25% on the amount by which a distribution in a given year falls short of the minimum required distribution.

Question 32

Matt Baker is age 69. His wife, Beth, is age 63. If he dies, what is her best option for his IRA if she wants to delay his distributions as long as possible?
A. Keep the assets in his IRA and take distributions when Matt would have reached 72.
B. Rollover his IRA into her IRA and take distributions based on her own required beginning date.
C. Disclaim the proceeds.
D. Fully deplete the IRA within ten years of Matt’s death.

Answer 32

Answer: B
Beth is younger than Matt. She can delay his distributions until she turns 72.

Question 33

A QDRO (Qualified Domestic Relations Order) applies to which type of retirement plan?
I. Qualified plans like defined benefit.
II. Retirement plans like SIMPLES
A. I
B. II
C. Both I and II
D. Neither I nor II

Answer 33

Answer: A
QDROs apply to qualified plans only. IRA type plans are not subject to QDRO.

Question 34

In a Rabbi Trust (Nonqualified Deferred Compensation), the participant has the same rights as?
A. A secured creditor.
B. An unsecured creditor.
C. Any other employee.
D. Any other officer of the company.

Answer 34

Answer: B
The participant must not have greater rights than unsecured creditors.

Question 35

Kyle Adamson receives 1,000 ISOs to purchase AAA Corporation stock at $50 per share. Within two years of the grant dates, he exercises them when the stock is $100 per share. No AMT is due. Several years later, he sells 1,000 shares of AAA for $200 per share. Which of the following are true?
I. There was a taxable event on the grant of the options of $50,000.
II. He will have a long-term capital gain of $150,000 when he sells the stock.
III. The bargain element (an AMT preference item) is $50 per share.
IV. He will have a long-term capital gain of $200,000 when he sells the stock.
A. I
B. II, III
C. III, IV
D. IV

Answer 35

Answer: B
The gain (long-term) at the time of sale is $150 ($200 - $50). The bargain element is $50 ($100 - $50).