CRPC Study Guide Questions with
Revised Answers
Types of rollovers available for IRA - Answer-1. Conduit
2. Direct
3. Indirect
Conduit Rollover - Answer-An unofficial term for an IRA used to "park" a distribution
from one qualified plan until it can be rolled over to another qualified plan. With a
conduit IRA, the forward-averaging potential of the distribution can be preserved.
Direct Rollover - Answer-A tax-free transfer of cash or other property between two
qualified plans or IRAs, where the transferred cash or property never passes through
the hands of the owner.
Indirect Rollover - Answer-A transfer of cash or other property between qualified plans
or IRAs in which the owner takes temporary receipt of the funds. Must be done in 60
days
Examples of rollover ineligibility - Answer-Non-taxable portion of distribution
Part of series of substantially equal periodic payments
RMD
Corrective distributions
Loans
Hardship withdrawals
72(t) - Answer--Substantially equal periodic payments after separation from service
1. paid not less frequently than annually
2. based upon the life expectancy of the recipient w/ a reasonable rate of interest
3. if applicable, based upon reasonable mortality assumptions
Only exception of changing 72(t) payment method - Answer-Only exception is a one
time election to switch from the annuity/amortization method to the RMD method. This
will reduce 72t payout amounts. No penalty for making this switch.
72(t) payment changes are only allowed under two conditions - Answer-paid without
changing the amount for the longer of:
-5 years
-payee reaches 59.5
If payment amount of 72(t) changes without meeting requirements - Answer-the 10%
penalty will be retroactively charged against all past distributions
,Requirements for distribution from a Roth IRA to be qualified - Answer-Must meet 5
year holding period AND (any of the following):
- owner is 59.5
- to a bene after death of owner
- disability
- first time home buyer expenses up to $10k
When must distribution of Roth IRA's being to beneficiaries - Answer-Year after the year
of death
Ordering rules for Roth IRA funds - Answer-1st: Annual Contributions
2nd: Conversions
3rd: Earnings
RMD Calculation Formula - Answer-Balance in plan on 12/31 of prior year/Life
Expectancy based off uniform table
RMD's must be taken by - Answer-By April 1st of the year following the year of attaining
age 70.5
With RMD's, if spouse is 10 years younger, use - Answer-Joint Life Table
Example: Client turns 70 in February, has 100k in IRA, life expectancy trigger is 27.4,
calculate RMD - Answer-$3650
How different retirement plan distributions work with aggregation - Answer-IRA's -
aggregated together
403B - aggregated together
401k - not aggregated
Cindy wants to have an annual retirement income of $50,000 protected against 3%
inflation. Assuming an 8% after-tax rate of return and a retirement period of 25 years,
how much money does Cindy need in order to provide the inflation-protected $50,000 at
the beginning of each retirement year? - Answer-BEG Mode
# of Periods (1 P/YR in this example)
C ALL
50000, PMT
4.8544, I/YR [(1.08 ÷ 1.03) - 1] × 100 = 4.8544 I/YR
25, N
PV
Solution: $749,812.61
Frank will retire in 14 years, and he needs to save an additional $380,000 to provide the
retirement income that he wants. Assume that inflation is 4% and after-tax earnings are
10%. How much will Frank need to save at the end of each year to reach his goal? -
Answer-END Mode
,# of Periods (1 P/YR in this example)
C ALL
380000, FV
10, I/YR
14, N
PMT
Solution: $13,583.56 (The answer is actually -$13,583.56, as this represents an outflow
to savings.)
In this case, we do not need to make the inflation adjustment. This problem asks how
much Frank needs to save at the end of each year, so the savings will be level.
Remember, when the payment is level, the inflation adjustment is not called for. Inflation
should have already been taken into account to calculate the need for an additional
$380,000.
Dan and Barbara have saved $850,000. Assume that inflation is 3% and after-tax
earnings are 9%. Also assume that their retirement will last 26 years. How much annual
retirement income, protected against inflation, can the $850,000 provide for 26 years
with payments made at the beginning of each year? - Answer-BEG Mode
# of Periods (1 P/YR in this example)
C ALL
850000, PV
5.8252, I/YR [(1.09 ÷ 1.03) - 1] × 100 = 5.8252 I/YR
26, N
PMT
Solution: $60,721.17
The Smiths are a 50-year-old couple with an annual retirement budget of $75,000 (in
today's dollars). They want to plan for a retirement life expectancy of 25 years (starting
at age 65), and assume a 3.5% average inflation rate and a 7% long-term rate of return.
How much money will they need at age 65 to fund their retirement? - Answer-Step #1:
Find the inflated value of $75,000 in 15 years # of Periods (1 P/YR in this example)
C ALL
75000, PV
3.5, I/YR
15, N
FV
Solution: $125,651.16 (This becomes our starting income payment in Step #2.)
Step #2: Calculate the PVAD of 25 years of payments, using a first payment amount of
$125,651, and factoring both inflation (3.5%) and the rate of return (7%) (i.e., a serial
payment).
BEG Mode
# of Periods (1 P/YR in this example)
C ALL
125651, PMT
3.3816, I/YR [(1.07 ÷ 1.035) - 1] × 100 = 3.3816 I/YR
, 25, N
PV
Solution: $2,168,715.58
John Bennett wants to receive the equivalent of $40,000 in today's dollars at the
beginning of each year for the next nine years. He assumes that inflation will average
5% over the long run and that he can earn a 10% compound annual after-tax return on
investments.
What lump sum does John need to invest today to fund his needs? - Answer-BEG
Mode# of Periods (1 P/YR in this example)
C ALL
40000, PMT
9, N
4.7619, I/YR [(1.10 ÷ 1.05) - 1] x 100 = 4.7619
PV
Solution: $301,035.15
Karen Troy, age 51, wants to quit working in six years. In terms of today's dollars, she
needs an additional $400,000 in six years to have sufficient funds to finance this goal.
She assumes that inflation will average 5% over the long run and that she can earn an
8% compound annual after-tax return on investments.
What serial payment should Karen invest at the end of the first year to fund this goal? -
Answer-END Mode
# of Periods (1 P/YR, in this example)
C ALL
400000, FV
6, N
2.8571,
I/YR [(1.08 ÷ 1.05) - 1] x 100 = 2.8571 I/YR
PMT = $62,061.19X 1.05= $65,164.25
Solution: $65,164.25 (This answer is actually -$65,164.25 as it represents an outflow to
savings.)
Sean Kelley wants to save $50,000 in today's dollars for a future goal. He will need that
sum by the end of 10 years. He plans to fund this goal by investing a serial payment at
the end of each year. Sean believes that his after-tax earnings on investments will be
7% annually and that inflation will average 4% over the long term.
What will be the dollar amount of Sean's first payment, to be made at the end of this
year? - Answer-FV, 50000
10, N
2.8846, I/YR
PMT = $4,384.75x 1.04 = $4,560.14
Solution: $4,560.14 (The answer is actually -$4,560.14, as it represents an outflow to
savings.)
