AFC Investment and Retirement Planning 4 — Questions and Answers
Question 1: A client aged 55 wants to withdraw from their 401(k) due to a job loss. Which provision allows penalty-free withdrawals in this scenario?
- Rule of 55 (Correct answer)
- 72(t) SEPP rule
- Roth conversion ladder
- Hardship withdrawal exception
Correct answer: Rule of 55
The Rule of 55 allows penalty-free 401(k) withdrawals if you separate from service in or after the year you turn 55.
Question 2: Which of the following best describes the 'sequence of returns risk' in retirement planning?
- The risk that inflation outpaces investment returns over time
- The risk that poor early-retirement returns permanently deplete a portfolio (Correct answer)
- The risk of holding too many sequence-correlated assets
- The risk that Social Security payments arrive in the wrong order
Correct answer: The risk that poor early-retirement returns permanently deplete a portfolio
Sequence of returns risk refers to the danger that negative returns early in retirement, combined with withdrawals, can permanently impair a portfolio even if average returns are acceptable.
Question 3: A married couple files jointly with $180,000 MAGI. What is their ability to contribute directly to a Roth IRA in 2024?
- Full contribution allowed
- Partial contribution allowed (phase-out range) (Correct answer)
- No contribution allowed
- Contribution allowed only via spousal IRA
Correct answer: Partial contribution allowed (phase-out range)
In 2024, the Roth IRA phase-out for married filing jointly begins at $230,000, so $180,000 MAGI qualifies for a full contribution.
Question 4: What does the term 'duration' measure in the context of a bond portfolio?
- The maturity date of the longest bond held
- The weighted average time to receive all cash flows, expressed in years (Correct answer)
- The number of years until the bond can be called
- The credit rating stability period of the issuer
Correct answer: The weighted average time to receive all cash flows, expressed in years
Duration measures a bond's price sensitivity to interest rate changes and equals the weighted average time to receive all cash flows.
Question 5: A client's portfolio has a beta of 1.4. If the market declines 10%, what is the expected portfolio decline assuming CAPM holds?
- 10%
- 14% (Correct answer)
- 7.1%
- 4%
Correct answer: 14%
Under CAPM, expected portfolio return change = beta × market return change, so 1.4 × -10% = -14%.
Question 6: Which Social Security claiming strategy involves a higher-earning spouse delaying benefits while the lower-earning spouse claims early?
- Restricted application strategy
- File and suspend strategy
- Split-claiming strategy (Correct answer)
- Widow's election strategy
Correct answer: Split-claiming strategy
A split-claiming strategy has the lower earner claim early to provide income while the higher earner delays to maximize their eventual benefit and survivor benefit.
Question 7: Under IRS rules, what is the maximum age by which a traditional IRA owner must begin taking Required Minimum Distributions (RMDs) as of 2023?
- 70½
- 72
- 73 (Correct answer)
- 75
Correct answer: 73
The SECURE 2.0 Act raised the RMD starting age to 73 for individuals who turn 72 after December 31, 2022.
AFC Investment and Retirement Planning 4
A client aged 55 wants to withdraw from their 401(k) due to a job loss.
Which provision allows penalty-free withdrawals in this scenario?