Retirement and Wealth Management Flashcards

A business owner wants to maximize retirement contributions for herself while minimizing contributions for part-time employees who work 500 hours per year. Which plan type best achieves this goal?

Answer: Defined Benefit Pension Plan

A defined benefit plan can be structured to heavily favor long-tenured key employees, and part-time employees working under 1,000 hours per year can generally be excluded from participation.

The 'Monte Carlo simulation' method in retirement planning is primarily used to:

Answer: Assess the probability of portfolio success across thousands of randomized return scenarios

Monte Carlo simulations run thousands of random market scenarios to estimate the probability that a given retirement portfolio and withdrawal strategy will sustain income throughout retirement.

Which technique allows a high-income earner who exceeds Roth IRA income limits to still fund a Roth IRA each year?

Answer: Backdoor Roth IRA using a nondeductible traditional IRA contribution followed by conversion

The backdoor Roth strategy involves making a nondeductible traditional IRA contribution (no income limit) and then immediately converting it to a Roth IRA.

Under the 'income floor' approach to retirement income planning, what assets are typically used to fund the income floor?

Answer: Social Security, pensions, and annuities that provide guaranteed lifetime income

The income floor is built from guaranteed, predictable income sources — Social Security, defined benefit pensions, and income annuities — to cover essential living expenses.

A qualified plan must pass the ADP test to ensure it does not discriminate in favor of Highly Compensated Employees (HCEs). What is the IRS definition of an HCE for 2024?

Answer: An employee earning more than $150,000 in the prior year or owning more than 5% of the business

For 2024, an HCE is defined as someone who earned more than $150,000 in the prior year or who owns (or is family of someone who owns) more than 5% of the employer.

A widow age 60 is entitled to both her own Social Security retirement benefit and a survivor benefit from her deceased spouse. What is the optimal general strategy?

Answer: Claim the survivor benefit first and switch to her own benefit at 70 if it is larger

Since survivor benefits do not increase past full retirement age and own benefits earn delayed credits to age 70, taking the survivor benefit first while allowing her own benefit to grow often maximizes lifetime income.

What is the primary tax advantage of using a Health Savings Account (HSA) as a supplemental retirement savings vehicle?

Answer: Contributions are tax-deductible, growth is tax-deferred, and withdrawals for medical expenses are tax-free — a triple tax advantage

The HSA's triple tax advantage — pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses — makes it uniquely powerful for funding healthcare costs in retirement.