AFC Retirement and Estate Planning 2 — Questions and Answers
Question 1: A married couple wants to minimize estate taxes. Which strategy allows one spouse to use the other's unused federal estate tax exemption?
- Disclaimer trust
- Portability election (Correct answer)
- Bypass trust
- QTIP trust
Correct answer: Portability election
Portability allows a surviving spouse to elect to use the deceased spouse's unused federal estate tax exemption by filing an estate tax return.
Question 2: Which type of IRA contribution is made with after-tax dollars, allowing qualified withdrawals to be completely tax-free?
- Traditional IRA
- SEP-IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, and qualified distributions in retirement are tax-free.
Question 3: A 55-year-old client separates from service in the year they turn 55. Which penalty exception may allow them to take 401(k) distributions without the 10% early withdrawal penalty?
- Substantially Equal Periodic Payments (SEPP)
- Rule of 55 (Correct answer)
- Disability exception
- First-time homebuyer 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 4: Which estate planning document designates who will manage an individual's financial affairs if they become incapacitated?
- Living will
- Healthcare proxy
- Durable power of attorney (Correct answer)
- Letter of instruction
Correct answer: Durable power of attorney
A durable power of attorney designates an agent to manage financial and legal decisions if the principal becomes incapacitated.
Question 5: What is the primary tax advantage of a Health Savings Account (HSA) in the context of retirement planning?
- Contributions are tax-deductible and withdrawals for any purpose after 65 are penalty-free (Correct answer)
- Contributions grow tax-deferred but withdrawals are always taxable
- Employer contributions are excluded from income but employee contributions are not
- Withdrawals are only tax-free if used before age 65
Correct answer: Contributions are tax-deductible and withdrawals for any purpose after 65 are penalty-free
HSAs offer a triple tax advantage: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses; after 65, withdrawals for any purpose avoid the penalty (though taxed as ordinary income if non-medical).
Question 6: Which retirement account type is most appropriate for a self-employed individual with no employees who wants to maximize retirement contributions?
- SIMPLE IRA
- Solo 401(k) (Correct answer)
- Traditional IRA
- Defined benefit plan
Correct answer: Solo 401(k)
A Solo 401(k) allows self-employed individuals to contribute as both employee and employer, enabling significantly higher annual contributions than a SIMPLE or traditional IRA.
Question 7: In estate planning, what does the term 'per stirpes' mean in the context of beneficiary designations?
- Assets pass equally to all surviving beneficiaries
- A deceased beneficiary's share passes to their descendants (Correct answer)
- Assets are distributed based on age of beneficiaries
- All beneficiaries must survive the grantor to inherit
Correct answer: A deceased beneficiary's share passes to their descendants
Per stirpes means that if a beneficiary predeceases the account owner, that beneficiary's share passes to their descendants (children).
AFC Retirement and Estate Planning 2
A married couple wants to minimize estate taxes.
Which strategy allows one spouse to use the other's unused federal estate tax exemption?