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Chartered Retirement Planning Counselor

Professional Designation Program

True/False Questions

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Chartered Retirement Planning Counselor

Professional Designation Program

Module 1 The Retirement Planning Process & Meeting Multiple Financial Objectives

Module 1 True/False

The first step in the financial planning process is gathering data.

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Your answer

 1-4

Module 1 True/False

An example of a well-written financial goal is “to accumulate $300,000 for retirement.” Personal assets are shown on financial statements at their purchase value. A cash flow statement shows a person’s cash receipts and cash disbursements over a given period of time. As clients age, income replacement ratios become more useful as a tool for retirement planning. Discounting and compounding are opposite time value of money concepts.

Module 1 True/False

Your client’s current retirement income deficit is $80,000. In 31 years, that figure will be $269,851, assuming a 4% rate of inflation. John has been promised a stream of $30,000 annual payments at the beginning of each year for a period of 20 years. The present value of these payments, discounted at a rate of 6%, is $364,743.

The future value of an ordinary annuity will be greater than the future value of an annuity due if the interest rates and the time periods of the two annuities are the same. 6

Module 1 True/False

10.

Small differences in rates of return create big differences in outcomes over time. For example, a 1% difference in annual return on $20,000 compounded over 30 years is (measuring 12% against 11%) more than $210,000.

Chartered Retirement Planning Counselor

Professional Designation Program

Module 2 Sources of Retirement Income & Legal Entities

Module 2 True/False

Whole life insurance does not build cash value.

Earnings in a variable annuity are subject to capital gains tax each year. Weighting the retirement portfolio heavily toward fixed-income mutual funds makes sense in the early years of retirement asset accumulation.

An individual who is under his or her Social Security full retirement age and has excess earnings may lose some or all of his or her OASDI retirement benefits for the current year. 9

Module 2 True/False

Social Security disability payments are paid to people covered by Social Security who are totally disabled and cease after individuals reach their Social Security full retirement age. A defined benefit plan provides a separate account for each participant. The ultimate benefit provided by a defined contribution plan is not guaranteed and cannot be known in advance. A nonqualified deferred compensation plan may discriminate in favor of selected employees. 10

Module 2 True/False

10.

Pure deferred compensation plans are typically employer-funded plans. As part of an early retirement offer, your client has been offered $120,000 at the beginning of the year for five years. Assuming your client could earn an 8% rate of return on this money if he had it in a lump sum today, the present value of this stream of payments is $517,455. 11

Chartered Retirement Planning Counselor

Professional Designation Program

Module 3 Employer-Sponsored Plans

Module 3 True/False

Money purchase plans specify the amount of a participant’s retirement benefit to be received in advance.

Higher-than-expected investment earnings in a defined contribution plan can be expected to decrease the employer’s annual contribution.

A target benefit plan allows discretionary annual contributions. One way to create a safe harbor 401(k) plan is for the employer to provide each nonhighly compensated employee with a dollar-for-dollar match of his or her salary deferral up to 7% of compensation.

Module 3 True/False

An employee who terminates employment prior to full vesting will be entitled to receive a pro rata share of his or her SEP account balance.

A self-employed owner/employee may contribute a maximum of 25% of his or her Schedule C income to a profit sharing Keogh plan. Withdrawals from a SIMPLE IRA during the first two years of participation are subject to a 10% early withdrawal penalty tax.

A defined benefit plan with a flat-benefit formula is recommended if an employer wants to base a retirement benefit in part upon length of service.

Module 3 True/False

10.

11.

In a defined benefit plan, the highest years’ average pay formula generally is more favorable to employees than career average pay, which considers the average of earnings over the entire period of plan participation.

Only public school teachers and administrators may maintain TSAs. TSA funds may be invested only in annuity contracts and mutual funds only. 15

Chartered Retirement Planning Counselor

Professional Designation Program

Module 4 Traditional, Roth & SIMPLE IRAs

Module 4 True/False

An IRA contribution for a given tax year can be made until the due date for filing that year’s federal income tax return, including extensions.

An IRA distribution that is one of a series of substantially equal periodic payments over life expectancy and that is received before age 59½ is not subject to the 10% early withdrawal penalty.

Alimony received is considered compensation for the purpose of calculating the amount an individual may contribute to an IRA.

The value of collectibles is deductible as an IRA contribution.

Module 4 True/False

Regardless of age, any working individual may make a deductible or nondeductible IRA contribution.

IRA assets cannot be pledged as collateral for a loan. A distribution from an IRA may escape current income taxation by being rolled over to another IRA within 60 days.

IRA distributions must begin no later than April 15 of the year the owner turns age 70½.

Module 4 True/False

10.

11.

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13.

A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead.

The spouse may roll over an IRA when the owner dies.

When received as distributions after age 59½, nondeductible IRA contributions may be taxed according to the exclusion ratio.

Earnings on investments held by qualified plans are taxable to the employer.

Favorable forward-averaging tax treatment may be available on distributions from qualified plans, IRAs, and TSAs.

Module 3 True/False

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Active participation status needs to be determined for traditional IRA deductibility, but not for Roth IRA eligibility.

The five-year clock for Roth IRAs starts on January 1 st of the year for which the contribution was made, which is not necessarily the same year as the contribution itself is made.

There are three ways in which a substantially equal and periodic payment can be calculated, but only one of the ways results in a payment that will vary from year to year.

Roth IRA contributions can be made at age 80.

Module 3 True/False

18.

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21.

As is the case with any IRA accounts, ERISA protection does not apply to deemed IRAs.

SIMPLE IRAs have the same employee deferral limit as 401(k) plans.

With SIMPLE IRA plans, employers must match at least 3% of compensation, or make a nonelective contribution of at least 2% of compensation.

If a 39-year-old-employee is making $45,000 a year, the maximum contribution to a SIMPLE IRA plan with an employer match would be $13,350.

Module 3 True/False

22.

23.

24.

If a 48-year-old employee who has been in the plan for just one year takes a distribution from his or her SIMPLE IRA, that employee will be subject to a 10% early withdrawal penalty tax.

SEPs are normally employer funded, but employee deferrals can be allowed at the discretion of the employer.

The special eligibility requirements for SEPs generally makes them unsuitable for employers with seasonal employees.

Module 3 True/False

25.

26.

The Keogh plan rules apply for self employed individuals who establish a SEP.

SIMPLE IRAs must be established by October 1 st for the current year, whereas SEPs can be established up until April 15 th for the previous year.

Chartered Retirement Planning Counselor

Professional Designation Program

Module 5 Individual Deferred Compensation

Module 5 True/False

The major advantage of a nonqualified plan, from the perspective of the employer, is the employer can deduct its contribution to the plan for the year in which the contribution is made. The major advantage of a nonqualified plan, from the perspective of the employee, is that the law provides that nonqualified plan retirement benefits are taxed at a lower rate when paid. A pure nonqualified deferred compensation plan consists of employee funding and employer funding to provide funds for retirement benefits.

Module 5 True/False

A supplemental executive retirement plan is a plan maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on contributions and benefits imposed by IRC Section 415. An excess benefit plan is one type of top hat plan.

Benefits provided by a SERP cannot exceed three times the IRC Section 415 limits.

For purposes of determining who is a “highly compensated employee,” nonqualified deferred compensation plans use the same definition as qualified plans. 26

Module 5 True/False

10.

Nonqualified deferred compensation plans may provide for a defined contribution or defined benefit formula. An employee is not taxed on contributions made to a secular trust or a rabbi trust. Generally, the IRS will issue rulings concerning the status of individually designed rabbi trusts adopted by employers.

Chartered Retirement Planning Counselor

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Module 6 Planning for Incapacity, Disability & Long-Term Care

Module 6 True/False

Disability does not usually result in severe financial loss.

The majority of disabilities last less than 90 days.

Occupational classifications can be roughly categorized as blue collar, white collar, and professional.

It is helpful to employ worksheets and calculations to help determine how much disability insurance a client needs.

Generally, the more liberal a policy’s definition of disability, the higher the premium.

Module 6 True/False

Split definitions of disability are rare in group policies.

The elimination period in a disability policy refers to the period of time after the disability occurs and before benefit payments begin.

Group disability policies usually exclude bonuses and overtime when calculating maximum benefit payments.

Group disability policies can normally be converted to individual policies when an employee changes jobs.

Module 6 True/False

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14.

Disability waiver of premium benefits are nearly always included as standard provisions in disability income policies.

Riders are specific provisions added to a contract to modify its coverage.

Cost-of-living riders are generally inexpensive to add to disability policies.

A financial adviser who offers disability insurance advice in his or her domestic state may always give advice in other states.

An insurer’s legal department interprets what is meant by the language used in disability contracts.

Module 6 True/False

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Long-term care insurance is available only to people over 55 years old.

Living benefit riders accelerate death benefits in cases involving terminal illness.

LTC policy applications that do not ask extensive medical questions normally have comprehensive preexisting conditions exclusion clauses.

Respite care is one of the levels of care given to a person in a nursing home.

Long-term care premiums are not tax deductible.

Most long-term care policies contain waiver of premium provisions.

Module 6 True/False

21.

Medicare generally does not provide extensive long-term care benefits.

Chartered Retirement Planning Counselor

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Module 7 When to Retire

Module 7 True/False

Defined-benefit pension calculation rules can be crafted in such a way that they penalize workers who stay on the job too long, by lowering the lifetime benefits workers can expect after an additional year of work.

An individual who is under his or her Social Security full retirement age and has excess earnings may lose some or all of his or her Social Security retirement benefits for the current year.

COBRA requires most employers to provide continued coverage through their group medical plans to former employees and their dependents for a period of at least 12 months.

Module 7 True/False

There is a decrease in Social Security retirement benefits if retirement benefits begin after an individual attains his or her Social Security full retirement age.

Up to 100% of Social Security retirement benefits may be subject to federal income taxation.

While an IRA owner is still alive, the only time that the Uniform Table is not used to determine required minimum distributions is when the designated beneficiary is the participant’s spouse who is more than ten years younger than the participant.

Module 7 True/False

10.

When rolling a regular IRA into a Roth IRA, the taxpayer’s AGI cannot exceed $150,000 (without considering the amount of the rollover).

In many cases, transferability of shares in a publicly traded corporation are restricted by agreement.

Pension enhancements to encourage early retirement are exempt from ERISA nondiscrimination requirements.

Payments used to fund qualified pension benefits in excess of a certain amount are considered to be parachute payments.

Chartered Retirement Planning Counselor

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Module 8 Retirement Plan Distributions

Module 8 True/False

The minimum distribution rules for more-than 5% owners who participate in qualified plans require that distributions commence by April 15 of the calendar year following the later of (1) the calendar year in which such employees attain age 70½ or (2) the calendar year in which such employees retire.

A beneficiary under age 59½ who receives a distribution due to the owner’s death will be exempt from the 10% premature distribution penalty.

John Williams, age 64, plans to retire this year. He will be eligible for 10-year forward averaging.

Module 8 True/False

If a beneficiary is not a participant’s spouse, the entire amount of the participant’s plan funds must be distributed within five years of his or her death if distributions had not yet begun, unless the beneficiary elects to receive payments over his or her life expectancy.

The full amount of a qualified plan credited to a participant’s account, when paid in several payments in one taxable year, qualifies as a lump-sum distribution.

An entire plan account distributed to a 56-year old corporate employee at termination qualifies for forward-averaging tax treatment.

Module 8 True/False

A distribution made from a qualified plan to comply with the required minimum distribution rules can be rolled over to another qualified plan, 403(b) plan, or IRA, SEP, or governmental 457 plan.

A conduit IRA allows a rollover from a qualified plan to be rolled over to another qualified plan, but it does not preserve eligibility for tax-favored forward-averaging treatment.

The exclusion ratio allows a recovery of cost basis with no further income taxation.

Module 8 True/False

10.

Plans that are subject to minimum funding standards must provide lifetime survivor benefits in the event of a vested, married participant’s death. These benefits will be in the form of a qualified joint and survivor annuity or a qualified preretirement survivor annuity unless the plan offers full payment of the participant’s nonforfeitable accrued benefit.

Chartered Retirement Planning Counselor

Professional Designation Program

Module 9 Asset Management & Investment Strategy During Retirement

Module 9 True/False

One of the purposes of an investment policy is to provide a basis for review.

One key element of an investment policy is a statement identifying the investment vehicles and investment strategies deemed suitable and unsuitable for the portfolio.

Strategic asset allocation is an active, market timing strategy that responds to changing capital market conditions.

In the Brinson study, the major factor in explaining the variance in returns in a portfolio is asset allocation.

Module 9 True/False

The two major risks associated with common stock are business risk and market risk. Investors during retirement should avoid common stocks and invest in bonds to provide a risk-free portfolio.

One of the steps of the asset allocation process is selecting the securities.

If a stock has a beta of .85 and the market is expected to fall 15%, the stock can be expected to increase 12.8%.

The type of risk that can be diversified away is systematic risk.

Module 9 True/False

10.

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12.

Assume an investor has a required rate of return of 14% and is considering a company with a payout ratio of 70%, expected earnings per share of $4.40, and an ROE of 20%. Using the earnings multiplier method, the value of the stock is $38.50.

Duration measures financial risk.

Assume you have a stock that pays an annual dividend of $2.00, an expected dividend growth rate of 4%, and your required rate of return is 10%. Based on the constant growth dividend discount model, this stock is worth $34.67.

Module 9 True/False

13.

14.

A ladder bond strategy is intended to combine short-term bonds with long-term bonds.

Assume you have a 7%, $1,000 par value bond with 10 years to maturity and a yield to maturity of 6%. The price of this bond is $1,074.39.

Chartered Retirement Planning Counselor

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Module 10 Income Taxes & the Retiree

Module 10 True/False

In the tax calculation process, the taxpayer deducts the lesser of total itemized deductions or the standard deduction from AGI.

The average tax rate is the rate of tax paid on the last dollar of taxable income.

Avoiding taxes is the equivalent of evading taxes.

The receipt of municipal bond income is an example of tax avoidance.

A nondeductible contribution to a traditional IRA is an example of tax deferral.

Module 10 True/False

Qualified private activity municipal bond interest is tax exempt, but generally is included in the computation of the alternative minimum tax.

In the cash method of accounting, income generally is recognized when received, rather than when earned.

A single taxpayer may exclude up to $500,000 of gain on the sale of a principal residence.

Taxpayers wishing to exclude the maximum amount of gain from the sale of a principal residence must meet certain age, use, and ownership requirements.

Module 10 True/False

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13.

All shares of a mutual fund have the same cost basis under the average cost method for determining basis.

The distribution of interest and dividends from a mutual fund is treated as a long-term capital gain.

A lump-sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured’s death is exempt from income taxation.

Withdrawals from a nondeductible IRA are taken first from the taxpayer’s basis, then from any appreciation or income.

Module 10 True/False

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An additional deduction will create an income tax savings in the amount of the taxpayer’s marginal tax bracket multiplied by the deduction.

The basis of a capital asset is generally its initial cost, adjusted by costs incurred in buying, selling, and owning the asset.

Contributions to IRAs and other retirement accounts can be made only if the taxpayer, or his or her spouse, has earned income.

One distinct advantage of a tax-deferred account is the ability to apply capital gains rates to any realized long-term capital gains.

Module 10 True/False

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20.

U.S. Treasury bills have maturities of one year or less.

Tax-exempt income does not create or add to an income tax liability on Social Security benefits.

Non-dividend-paying growth stocks are essentially a form of tax deferral.

Chartered Retirement Planning Counselor

Professional Designation Program

Module 11 Estate Planning

Module 11 True/False

There are two categories of personal property.

A testator is the holder of legal title to trust property.

A trust must be irrevocable to function as a will substitute.

When property is transferred from an estate, a recipient typically receives a stepped-up cost basis in the property.

When property passes at death by application of the intestate succession statutes, the property is subject to the probate process.

Module 11 True/False

10.

It is a common occurrence for an intestate’s property to escheat to the state.

Property owned in joint tenancy and property owned as tenancy in common both pass by right of survivorship.

It is possible for the same person to be the grantor, the trustee, and the beneficiary of a trust.

The donee of a gift does not receive a stepped-up basis in the gifted property for income tax purposes.

A contingent trust usually receives substantial assets immediately upon creation.

Chartered Retirement Planning Counselor

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Module 12 Retirement Cash Flow Considerations

Module 12 True/False

One of the first considerations in approaching retirement cash flow is to understand what retire means to a particular client.

A person with a final pre-retirement income of $250,000 would receive roughly twice the Social Security retirement benefit of a person whose final pre-retirement income was $125,000.

Waiting until full retirement age is always more beneficial than beginning to receive Social Security retirement benefits at age 62.

The move away from defined benefit pension plans has introduced a great deal of uncertainty into the retirement planning process.

Module 12 True/False

Anchoring is a behavioral bias that causes retirees to freeze and be unable to make a financial decision.

Health insurers can have fairly restrictive underwriting requirements that make it more difficult for older, pre-Medicare eligible people to purchase personally owned coverage.

A 3.5% straight-line inflation rate, over a 20-year period, will reduce the purchasing power of $5,000 by just about half.

Module 12 True/False

10.

One process used to determine the amount of money needed to fund retirement is to first find the inflated value of the desired income (in today’s dollars) and then use a serial payment calculate the present value (annuity due) of the future income stream.

Since the early 1900s, inflation has deviated by only a couple of percentage points.

Stress testing may be used to help design a portfolio around the possibility of negative results due to bad timing.

Chartered Retirement Planning Counselor

Professional Designation Program

True/False Questions End of slides