Certified Financial Planner (CFP) Retirement Savings and Income Planning Flashcards

24 sample cards from the Retirement Savings and Income Planning deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is the key risk difference between a governmental 457(b) and a tax-exempt (nongovernmental) 457(b) plan?

   Governmental 457(b) assets are held in trust for participants (protected from the employer's creditors). Nongovernmental (tax-exempt) 457(b) assets remain the employer's property subject to its creditors, making them effectively unfunded/top-hat plans for select management.

2. What distinguishes a nonqualified deferred compensation (NQDC) plan from a qualified plan in terms of ERISA and tax treatment?

   NQDC plans are generally exempt from ERISA's funding/participation/vesting rules (often "top-hat" for executives), can discriminate in favor of HCEs, but the employer's deduction is deferred until the employee recognizes income, and benefits are unfunded and subject to the employer's creditors.

3. What is IRC §409A and what is the consequence of violating it in an NQDC plan?

   §409A governs the timing of deferral elections and distributions in NQDC plans. Violations cause immediate income inclusion of all vested deferrals, a 20% additional federal penalty tax, plus interest—penalizing the employee.

4. Compare a rabbi trust and a secular trust used to informally fund NQDC.

   A rabbi trust holds assets for the executive but remains subject to the employer's creditors (so the executive avoids current taxation but bears insolvency risk). A secular trust protects assets from creditors, but because the benefit is no longer subject to substantial risk of forfeiture, the employee is taxed currently.

5. At what age must Required Minimum Distributions (RMDs) begin under current law (SECURE 2.0)?

   RMDs must begin at age 73 (for individuals reaching 72 after 2022); the applicable age rises to 75 in 2033. The first RMD may be delayed until April 1 of the year following the year the participant reaches the applicable age (the required beginning date).

6. How is the annual RMD amount calculated?

   $$\text{RMD}=\frac{\text{Account balance as of prior Dec.\ 31}}{\text{Distribution period (life expectancy factor)}}$$ The factor comes from the IRS Uniform Lifetime Table (or Joint Life Table if the sole beneficiary is a spouse more than 10 years younger).

7. What is the penalty for failing to take an RMD under SECURE 2.0, and how can it be reduced?

   The excise tax is 25% of the shortfall (reduced from the prior 50%), and it drops to 10% if the failure is corrected within a 2-year correction window. Roth IRAs have no RMDs during the owner's lifetime; Roth 401(k)s no longer require lifetime RMDs starting 2024.

8. State the general 10% early-distribution penalty rule and list four common exceptions.

   A 10% additional tax applies to taxable distributions taken before age 59½. Exceptions include: death, disability, substantially equal periodic payments (SEPP/72(t)), unreimbursed medical expenses over 7.5% of AGI, qualified higher-education expenses (IRAs), first-time home purchase up to $10{,}000 (IRAs), and IRS levy.

9. What is the "Rule of 55" exception to the early-withdrawal penalty?

   Distributions from an employer's qualified plan or 401(k) are penalty-free if the employee separates from service during or after the year they turn 55 (age 50 for qualified public-safety employees). It applies only to that employer's plan—NOT to IRAs or to amounts rolled into an IRA.

10. Explain the §72(t) Substantially Equal Periodic Payments (SEPP) exception and its required duration.

    SEPP allows penalty-free pre-59½ withdrawals taken in substantially equal amounts using one of three IRS methods (RMD, fixed amortization, or fixed annuitization). Payments must continue for the longer of 5 years OR until age 59½; modifying them early triggers retroactive penalties plus interest.

11. What is the critical difference between a direct (trustee-to-trustee) rollover and a 60-day (indirect) rollover?

    A direct rollover moves funds trustee-to-trustee with no withholding and no tax. An indirect rollover pays the participant, who must redeposit within 60 days; eligible rollover distributions from employer plans are subject to mandatory 20% federal withholding, which the participant must replace from other funds to roll over the full amount.

12. What is the one-rollover-per-12-months rule, and what is excluded from it?

    An individual may make only one IRA-to-IRA 60-day rollover per 12-month period (aggregated across all IRAs). Direct trustee-to-trustee transfers, Roth conversions, and rollovers between IRAs and employer plans are NOT subject to this limit.

13. What is Net Unrealized Appreciation (NUA) and its tax benefit on employer stock in a qualified plan?

    NUA is the growth of employer stock above its cost basis inside the plan. With a lump-sum distribution of the stock, the participant pays ordinary income tax only on the basis at distribution, and the appreciation is taxed at long-term capital gains rates when later sold—not as ordinary income.

14. At what ages can a worker claim Social Security retirement benefits, and what is the effect of claiming at 62 versus full retirement age (FRA)?

    Benefits can start as early as age 62 (permanently reduced) up to age 70. Claiming at 62 reduces the benefit by roughly 25–30% below FRA. For those with FRA of 67, claiming at 62 yields about 70% of the full primary insurance amount (PIA).

15. How are delayed retirement credits applied to Social Security, and until what age do they accrue?

    Delaying benefits past FRA earns delayed retirement credits of 8% per year (2/3 of 1% per month), accruing only until age 70. There is no benefit to delaying past 70.

16. How many quarters of coverage (credits) are generally required to be fully insured for Social Security retirement benefits?

    40 quarters of coverage (credits), equivalent to about 10 years of covered employment. A worker can earn a maximum of 4 credits per year.

17. Describe the Social Security earnings test for beneficiaries below full retirement age.

    For beneficiaries under FRA who are still working, $1 of benefits is withheld for every $2 of earnings above the annual limit ($23{,}400 in 2025). In the year FRA is reached, $1 is withheld for every $3 above a higher limit; after FRA there is no earnings test. Withheld benefits are recredited later as an increased benefit.

18. How is the taxability of Social Security benefits determined?

    Taxation depends on "provisional income" (AGI + tax-exempt interest + one-half of Social Security benefits). Up to 50% of benefits become taxable above the first threshold and up to 85% above the second (e.g., for single filers, $25{,}000 and $34{,}000; for married filing jointly, $32{,}000 and $44{,}000). These thresholds are not indexed for inflation.

19. What is a spousal Social Security benefit and what is its maximum amount?

    A spouse may claim a benefit based on the worker's record, up to 50% of the worker's primary insurance amount (PIA) if claimed at the spouse's full retirement age. Claiming the spousal benefit before the spouse's FRA permanently reduces it.

20. What is a survivor (widow/widower) Social Security benefit and the earliest claiming age?

    A surviving spouse can receive up to 100% of the deceased worker's benefit. Survivor benefits can begin as early as age 60 (age 50 if disabled), at a reduced amount, or unreduced at the survivor's full retirement age.

21. What is a Qualified Longevity Annuity Contract (QLAC) and its planning purpose?

    A QLAC is a deferred income annuity purchased inside a qualified plan or IRA that begins payments at an advanced age (up to 85). Amounts in a QLAC are excluded from the RMD base, deferring required distributions, and it hedges longevity risk with guaranteed lifetime income. The 2025 purchase limit is $210{,}000.

22. Compare the wage replacement ratio concept used in retirement planning.

    The wage replacement ratio estimates the percentage of pre-retirement gross income needed to maintain the same lifestyle in retirement—typically 70%–80%. It is lower than 100% because retirees stop saving for retirement, pay lower payroll/FICA taxes, and often have reduced work-related expenses.

23. What is the difference between a Roth conversion and a Roth contribution regarding income limits and taxation?

    Roth contributions are limited by modified AGI phase-outs and the annual contribution cap. Roth conversions have NO income limit and NO dollar cap, but the pre-tax amount converted is included in ordinary taxable income in the year of conversion. Conversions are a key strategy in low-income years.

24. Explain the SECURE Act 10-year rule for most non-spouse inherited IRA beneficiaries.

    Most non-spouse "non-eligible designated beneficiaries" who inherit after 2019 must fully empty the inherited IRA by the end of the 10th year after death. If the decedent had already begun RMDs, annual RMDs are also required in years 1–9 plus full depletion by year 10. Eligible designated beneficiaries (spouse, minor child, disabled, chronically ill, or beneficiary <10 years younger) may still use life-expectancy stretch.

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