Case Studies & Practical Application Flashcards

A 58-year-old client wants to retire at 62 with $1.2M saved. She expects to live to 90 and needs $60,000/year (today's dollars). Inflation is 3%, portfolio return is 6%. Which analysis best determines if she can retire as planned?

Answer: Run a Monte Carlo simulation using inflation-adjusted withdrawals

Monte Carlo simulation accounts for sequence-of-returns risk and inflation variability over a 28-year horizon, providing probability-based retirement sustainability.

David, age 45, earns $180,000 and has maxed his 401(k). His marginal tax rate is 32%. He asks about a Backdoor Roth IRA. He has a $40,000 traditional IRA from a prior rollover. What issue arises?

Answer: The pro-rata rule will make most of the conversion taxable

The pro-rata rule aggregates all traditional IRA balances, making the non-deductible contribution proportionally taxable upon conversion.

A couple has $800,000 in assets and $2M in life insurance. They have three minor children and want to avoid probate on the insurance proceeds. Which planning tool is most appropriate?

Answer: Establish an Irrevocable Life Insurance Trust (ILIT)

An ILIT keeps life insurance proceeds out of the taxable estate and out of probate while allowing trustee-managed distribution to minor children.

Maria, a self-employed consultant earning $120,000 net, wants to maximize retirement savings. She has no employees. Which plan allows the highest contribution?

Answer: Solo 401(k) with employee + employer contributions

A Solo 401(k) allows both employee deferrals ($23,000 in 2024) plus employer profit-sharing (25% of compensation), enabling higher total contributions than a SEP-IRA.

A client sold rental property for $400,000 that he purchased for $250,000 fifteen years ago. He claimed $60,000 in depreciation. What is his total taxable gain and how is it characterized?

Answer: $90,000 long-term capital gain and $60,000 unrecaptured Section 1250 gain

The $60,000 of prior depreciation is recaptured as unrecaptured Section 1250 gain taxed at up to 25%, while the remaining $90,000 qualifies as long-term capital gain.

A 70-year-old widower has $500,000 in a traditional IRA and no other income. His RMD is $18,248. He is charitably inclined. Which strategy eliminates federal income tax on the distribution?

Answer: Qualify the RMD as a Qualified Charitable Distribution (QCD)

A QCD allows taxpayers age 70½+ to direct up to $105,000 of IRA distributions directly to qualified charities, satisfying the RMD while excluding it from gross income.

A 35-year-old client is reviewing her disability insurance policy. Her benefit is $5,000/month and her own-occupation definition ends at age 60, then switches to any-occupation. She earns $120,000. What gap should her CFP address?

Answer: The any-occupation definition after 60 could deny benefits if she can work in any job

The shift to any-occupation at age 60 means she could be denied benefits if she is capable of performing any job, not just her own occupation, leaving significant income exposure.