CRPC Module 7 questions with verified answers
4% Rule Ans✓✓✓ Using historical data and a 50/50 stock/bond allocation,
Bengen argued that if the initial withdrawal rate is set at 4% of savings, and the
dollar amount of subsequent withdrawals increases with inflation, just about all
well-constructed portfolios will be able to last throughout retirement (for at least
for 30 years). Of course, in his studies Bengen identified years where a client
could have spent 6%-7% of their portfolio. Looking at the worst-case scenario,
however, the safe withdrawal rate was found to be 4%. This "rule of thumb"
caught on because it provided retirees with a fixed rate of withdrawal (like an
annuity), it was easy to calculate and follow, and it minimized the risk of running
out of money.
One of the problems with a 4% initial withdrawal rate is that it doesn't represent
a lot of income for most people. Many analysts, however, place the safe
withdrawal rate at closer to 3%-3.5%, citing longevity projections, predictions of
lower-than-historical stock market returns, and the current low interest rate
environment.
Advantages of rollovers? Ans✓✓✓ -Continued tax deferral. By deferring tax
recognition, the entire lump sum has an opportunity to be invested and
accumulate more earnings. In most scenarios, clients benefit from additional tax
deferral. Obviously, this would not be true if the client's tax bracket at the time of
the lump sum distribution is lower than their future tax bracket.
-Flexibility. Up to April 1 of the year following the attainment of age 73, the age at
which the government requires minimum distributions, the client has the
flexibility to take as much or as little from the IRA as desired. This flexibility may
be particularly useful in tax planning and personal budgeting.
-Expanded investment options with potentially lower fees.
-Ability to consolidate accumulations from various plans.
-Simplified computation and ability to consolidate required minimum
distributions.
,Beneficiary Ans✓✓✓ Being a beneficiary allows the person or entity to receive
the retirement asset after the death. However, if a person or entity is only a
beneficiary, the RMD rules are generally the most severe. Also, the rules for a
situation without a "designated beneficiary" were not changed under the SECURE
Act; they remain the same as before 2020.
Bucket Strategies Ans✓✓✓ this strategy is meant to mitigate the sequence of
returns risk by creating a bucket of cash or money market instruments for
immediate cash flow needs while also maintaining a diversified portfolio of more
volatile assets with higher potential returns for future needs. It recognizes that
clients face different risks as they move through retirement.
Cautions with in-service withdrawals Ans✓✓✓ Some companies impose
penalties for taking such a distribution. Penalties could include a suspension of
plan contributions and charges. If your client is considering rolling funds to an IRA,
keep in mind that IRAs do not have the same creditor protections as qualified
plans and do not offer loans. Also, 401(k) plans allow distributions after
attainment of age 55 without penalty; with an IRA your clients need to wait until
59½ to avoid the early withdrawal penalty. Finally, if the distribution is not rolled
over and is instead taken as cash, it could result in significant taxes and possible
penalties. Because of these drawbacks, taking advantage of a qualified plan's loan
provision may be more advantageous (if available). Loans are discussed in a
following section.
Complicated 10-Year Rule Ans✓✓✓ The Complicated 10-Year Rule is really three
rules. The first rule is for the year of death. This can be thought of as "Year 0." The
RMD for the year of death is the original owner's RMD from Table III. This is good
because Table III assumes an additional hypothetical beneficiary who is 10 years
younger than the owner of the account. If the decedent had not already
withdrawn the full RMD, then the beneficiary must withdraw the remaining
amount. That takes care of Year 0, the year of death. The next set of rules covers
,Years 1-9. Year 1 is the year after the year of the death. A designated beneficiary
is more than 10 years younger than the decedent; otherwise they would be an
EDB. Thus, the Year 1 RMD life expectancy factor is the Table I factor for someone
the designated beneficiary's age in the year after the death. After Year 1 a
designated beneficiary is never allowed to return to Table I again. The RMD life
expectancy for Year 2 would be the Year 1 life expectancy factor minus one. Year
3's factor will be year 2's factor minus 1. This process runs through Year 9.
Conduit IRA Ans✓✓✓ The conduit IRA acts as a way station between qualified
plans (or 403[b] accumulations). Thus, this IRA applies only to the person who
expects to join a new employer and a new qualified retirement plan. Typically,
such an account is used by individuals who receive a distribution from a qualified
plan upon termination of employment and wish to retain the fund's qualified
status, but do not expect to be reemployed within the permitted 60-day rollover
period.
Deemed distribution Ans✓✓✓ a plan loan fails to meet the five-year term
requirement
a loan that did not involve purchasing, repairing, or remodeling the principal
residence was mistakenly made for seven years, the entire initial loan balance
would be treated as taxable income on day one. On the other hand, if a
retirement plan loan fails to meet the dollar limit, the amount in excess of the
dollar limit is a deemed distribution.
Describe the purpose of a qualified preretirement survivor annuity (QPSA) and
how it differs from a qualified joint survivor annuity (QJSA). Ans✓✓✓ Defined
benefit, money purchase, cash balance and target benefit plans must provide a
QPSA to the spouse of a plan participant who dies prior to retirement. The
payment to the surviving spouse is equal to at least one-half of the participant's
actuarially reduced pension benefit as of the date of death or the earliest
retirement date from the plan.
, A QJSA is mandated in defined benefit plans and continues payments to the
surviving spouse of the plan participant who has died after leaving service.
The surviving spouse does have the option to waive the benefit.
Designated Beneficiary (only) (Deaths on or after RBD Ans✓✓✓ If the beneficiary
is only a designated beneficiary (not an eligible designated beneficiary), then the
distribution is under the "Complicated 10-Year Rule."
Designated beneficiary Ans✓✓✓ Prior to the SECURE Act, a "designated
beneficiary" was the person whose age went into the considerations for how long
the retirement account could be stretched. That is still true for deaths prior to
2020. For deaths in 2020 and later, the SECURE Act changed being a designated
beneficiary (only) to always meaning the maximum a retirement account can be
stretched is to December 31 of the year containing the tenth anniversary of the
decedent owner's death. In other words, being classified as a designated
beneficiary for deaths in 2020 and later means neither the age of the decedent
nor the age of the beneficiary is not important in calculating the stretch. The
maximum stretch for these designated beneficiaries will always be the 10-year
rule.
At a minimum, a retirement vehicle needs to have a named designated
beneficiary. A designated beneficiary is a human (individual) or certain trusts that
name a human(s) as the beneficiary. To be effective, the beneficiary must be
"designated" on September 30th of the year following the year of death.
(Obviously, a beneficiary cannot be "named" after death; however, beneficiary
designation forms and certain estate planning devices used by the participant
may operate to allow the designation of the final particular beneficiary from a
group of possible beneficiaries.) On the other hand, some arrangements can
never be a "designated beneficiary." The two most important are a charity or an
estate; however, certain trusts do not qualify as a designated beneficiary.
4% Rule Ans✓✓✓ Using historical data and a 50/50 stock/bond allocation,
Bengen argued that if the initial withdrawal rate is set at 4% of savings, and the
dollar amount of subsequent withdrawals increases with inflation, just about all
well-constructed portfolios will be able to last throughout retirement (for at least
for 30 years). Of course, in his studies Bengen identified years where a client
could have spent 6%-7% of their portfolio. Looking at the worst-case scenario,
however, the safe withdrawal rate was found to be 4%. This "rule of thumb"
caught on because it provided retirees with a fixed rate of withdrawal (like an
annuity), it was easy to calculate and follow, and it minimized the risk of running
out of money.
One of the problems with a 4% initial withdrawal rate is that it doesn't represent
a lot of income for most people. Many analysts, however, place the safe
withdrawal rate at closer to 3%-3.5%, citing longevity projections, predictions of
lower-than-historical stock market returns, and the current low interest rate
environment.
Advantages of rollovers? Ans✓✓✓ -Continued tax deferral. By deferring tax
recognition, the entire lump sum has an opportunity to be invested and
accumulate more earnings. In most scenarios, clients benefit from additional tax
deferral. Obviously, this would not be true if the client's tax bracket at the time of
the lump sum distribution is lower than their future tax bracket.
-Flexibility. Up to April 1 of the year following the attainment of age 73, the age at
which the government requires minimum distributions, the client has the
flexibility to take as much or as little from the IRA as desired. This flexibility may
be particularly useful in tax planning and personal budgeting.
-Expanded investment options with potentially lower fees.
-Ability to consolidate accumulations from various plans.
-Simplified computation and ability to consolidate required minimum
distributions.
,Beneficiary Ans✓✓✓ Being a beneficiary allows the person or entity to receive
the retirement asset after the death. However, if a person or entity is only a
beneficiary, the RMD rules are generally the most severe. Also, the rules for a
situation without a "designated beneficiary" were not changed under the SECURE
Act; they remain the same as before 2020.
Bucket Strategies Ans✓✓✓ this strategy is meant to mitigate the sequence of
returns risk by creating a bucket of cash or money market instruments for
immediate cash flow needs while also maintaining a diversified portfolio of more
volatile assets with higher potential returns for future needs. It recognizes that
clients face different risks as they move through retirement.
Cautions with in-service withdrawals Ans✓✓✓ Some companies impose
penalties for taking such a distribution. Penalties could include a suspension of
plan contributions and charges. If your client is considering rolling funds to an IRA,
keep in mind that IRAs do not have the same creditor protections as qualified
plans and do not offer loans. Also, 401(k) plans allow distributions after
attainment of age 55 without penalty; with an IRA your clients need to wait until
59½ to avoid the early withdrawal penalty. Finally, if the distribution is not rolled
over and is instead taken as cash, it could result in significant taxes and possible
penalties. Because of these drawbacks, taking advantage of a qualified plan's loan
provision may be more advantageous (if available). Loans are discussed in a
following section.
Complicated 10-Year Rule Ans✓✓✓ The Complicated 10-Year Rule is really three
rules. The first rule is for the year of death. This can be thought of as "Year 0." The
RMD for the year of death is the original owner's RMD from Table III. This is good
because Table III assumes an additional hypothetical beneficiary who is 10 years
younger than the owner of the account. If the decedent had not already
withdrawn the full RMD, then the beneficiary must withdraw the remaining
amount. That takes care of Year 0, the year of death. The next set of rules covers
,Years 1-9. Year 1 is the year after the year of the death. A designated beneficiary
is more than 10 years younger than the decedent; otherwise they would be an
EDB. Thus, the Year 1 RMD life expectancy factor is the Table I factor for someone
the designated beneficiary's age in the year after the death. After Year 1 a
designated beneficiary is never allowed to return to Table I again. The RMD life
expectancy for Year 2 would be the Year 1 life expectancy factor minus one. Year
3's factor will be year 2's factor minus 1. This process runs through Year 9.
Conduit IRA Ans✓✓✓ The conduit IRA acts as a way station between qualified
plans (or 403[b] accumulations). Thus, this IRA applies only to the person who
expects to join a new employer and a new qualified retirement plan. Typically,
such an account is used by individuals who receive a distribution from a qualified
plan upon termination of employment and wish to retain the fund's qualified
status, but do not expect to be reemployed within the permitted 60-day rollover
period.
Deemed distribution Ans✓✓✓ a plan loan fails to meet the five-year term
requirement
a loan that did not involve purchasing, repairing, or remodeling the principal
residence was mistakenly made for seven years, the entire initial loan balance
would be treated as taxable income on day one. On the other hand, if a
retirement plan loan fails to meet the dollar limit, the amount in excess of the
dollar limit is a deemed distribution.
Describe the purpose of a qualified preretirement survivor annuity (QPSA) and
how it differs from a qualified joint survivor annuity (QJSA). Ans✓✓✓ Defined
benefit, money purchase, cash balance and target benefit plans must provide a
QPSA to the spouse of a plan participant who dies prior to retirement. The
payment to the surviving spouse is equal to at least one-half of the participant's
actuarially reduced pension benefit as of the date of death or the earliest
retirement date from the plan.
, A QJSA is mandated in defined benefit plans and continues payments to the
surviving spouse of the plan participant who has died after leaving service.
The surviving spouse does have the option to waive the benefit.
Designated Beneficiary (only) (Deaths on or after RBD Ans✓✓✓ If the beneficiary
is only a designated beneficiary (not an eligible designated beneficiary), then the
distribution is under the "Complicated 10-Year Rule."
Designated beneficiary Ans✓✓✓ Prior to the SECURE Act, a "designated
beneficiary" was the person whose age went into the considerations for how long
the retirement account could be stretched. That is still true for deaths prior to
2020. For deaths in 2020 and later, the SECURE Act changed being a designated
beneficiary (only) to always meaning the maximum a retirement account can be
stretched is to December 31 of the year containing the tenth anniversary of the
decedent owner's death. In other words, being classified as a designated
beneficiary for deaths in 2020 and later means neither the age of the decedent
nor the age of the beneficiary is not important in calculating the stretch. The
maximum stretch for these designated beneficiaries will always be the 10-year
rule.
At a minimum, a retirement vehicle needs to have a named designated
beneficiary. A designated beneficiary is a human (individual) or certain trusts that
name a human(s) as the beneficiary. To be effective, the beneficiary must be
"designated" on September 30th of the year following the year of death.
(Obviously, a beneficiary cannot be "named" after death; however, beneficiary
designation forms and certain estate planning devices used by the participant
may operate to allow the designation of the final particular beneficiary from a
group of possible beneficiaries.) On the other hand, some arrangements can
never be a "designated beneficiary." The two most important are a charity or an
estate; however, certain trusts do not qualify as a designated beneficiary.
