CFP Retirement Savings and Income Planning Practice Questions
Question 1
Under SECURE 2.0, once the applicable effective date arrives, employees age 50+ whose prior-year FICA wages from their employer exceeded the indexed threshold must make their 401(k) catch-up contributions in which form?
- A. Pre-tax only
- B. Roth (after-tax) contributions
- C. Either pre-tax or Roth, entirely at the employer's discretion
- D. Catch-up contributions are eliminated entirely for affected high earners
Show answer and explanation
Correct answer: B. Roth (after-tax) contributions
SECURE 2.0 requires that catch-up contributions from higher-income employees (those with prior-year wages from that employer above the indexed threshold) be made on a Roth (after-tax) basis, provided the plan offers a Roth option; if the plan has no Roth feature, those employees cannot make catch-up contributions at all under the rule.
- A. Wrong — this is the opposite of the SECURE 2.0 requirement; affected high earners lose the pre-tax catch-up option.
- B. Correct — SECURE 2.0 requires catch-up contributions from age-50+ employees whose prior-year wages from that employer exceeded the indexed threshold to be made as Roth (after-tax) contributions.
- C. Wrong — the Roth requirement is mandated by statute for affected employees, not left to employer discretion.
- D. Wrong — catch-up contributions remain available to affected employees; they're just required to be Roth, not eliminated.
Question 2
A high-income taxpayer's modified AGI exceeds the Roth IRA contribution phase-out range, making a direct Roth contribution unavailable. Which strategy allows the taxpayer to still fund a Roth-type account, subject to tax on any pre-tax amounts converted?
- A. Excess contributions can simply be made and left uncorrected
- B. The taxpayer can only contribute to a Roth 401(k) instead, which fully substitutes for the IRA contribution
- C. The taxpayer must wait until income drops below the phase-out threshold
- D. A 'backdoor Roth' — contributing to a nondeductible Traditional IRA and then converting it to a Roth IRA
Show answer and explanation
Correct answer: D. A 'backdoor Roth' — contributing to a nondeductible Traditional IRA and then converting it to a Roth IRA
Since there is no income limit on nondeductible Traditional IRA contributions or Roth conversions, a high-income taxpayer can make a nondeductible Traditional IRA contribution and convert it to a Roth IRA — the 'backdoor Roth.' Pre-tax amounts (earnings, or basis from other pre-tax IRA funds under the pro-rata rule) are taxed on conversion, but this provides Roth-type access despite exceeding the direct contribution phase-out. Leaving an excess contribution uncorrected risks excise penalties; waiting ignores an available strategy; and a Roth 401(k) is a separate employer-plan vehicle, not a substitute for funding an IRA specifically.
- A. Wrong — leaving excess contributions uncorrected triggers a 6% excise tax each year they remain in the account; it isn't a legitimate funding strategy.
- B. Wrong — a Roth 401(k) has its own separate contribution limit tied to the employer plan and doesn't substitute for or expand IRA contribution room.
- C. Wrong — the taxpayer doesn't have to wait for income to drop; the backdoor Roth strategy is available regardless of current income.
- D. Correct — the backdoor Roth (nondeductible traditional IRA contribution followed by a Roth conversion) has no income limit, letting high earners fund a Roth-type account, with tax owed only on any pre-tax amounts converted.
- Source: IRC section 408A (Roth IRAs)
Question 3
An employee retiring from a company with highly appreciated employer stock inside her 401(k) is evaluating a Net Unrealized Appreciation (NUA) strategy as part of a lump-sum distribution. Which statement about NUA is correct?
- A. At distribution, the employee pays ordinary income tax only on the stock's original cost basis; the appreciation (NUA) is taxed later at long-term capital gains rates when the stock is sold, regardless of holding period after distribution
- B. At distribution, the employee pays ordinary income tax on the stock's cost basis, and the appreciation (NUA) is permanently excluded from income tax as long as the shares are held at least one year after distribution, and the 10% penalty is waived on the cost basis at any age
- C. NUA treatment applies when the employee rolls the employer stock into a rollover IRA within 60 days, after which the appreciation is taxed at long-term capital gains rates on later sales of the shares from the IRA
- D. NUA treatment is available to an employee who has reached age 65 at the time of the lump-sum distribution, provided the employer stock has been held inside the plan for at least ten years before distribution
Show answer and explanation
Correct answer: A. At distribution, the employee pays ordinary income tax only on the stock's original cost basis; the appreciation (NUA) is taxed later at long-term capital gains rates when the stock is sold, regardless of holding period after distribution
With an NUA strategy, employer securities are distributed in-kind (not rolled to an IRA) as part of a qualifying lump-sum distribution. At distribution, ordinary income tax applies only to the stock's cost basis; the net unrealized appreciation is taxed at long-term capital gains rates upon a later sale, and the usual holding-period requirement for long-term treatment is waived for the NUA portion.
- A. Correct — this is the core NUA mechanism.
- B. Incorrect — the appreciation is still taxed, just at capital gains rates upon sale rather than ordinary rates at distribution; it's not tax-free, and the early-distribution penalty is not waived on the cost basis portion at any age.
- C. Incorrect — NUA requires an in-kind distribution of the stock outside the IRA wrapper; rolling the shares into an IRA forfeits NUA treatment and later IRA withdrawals are taxed as ordinary income.
- D. Incorrect — there is no age-65 or ten-year plan-holding requirement; eligibility turns on a qualifying lump-sum distribution of the plan balance following a triggering event.
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A retiree has taxable, pretax and Roth assets, with taxable income varying across years. What is a prudent approach to withdrawal sequencing?
- A. Exhaust Roth assets first because distributions are tax free and the remaining pretax balance can then continue to grow deferred.
- B. Coordinate withdrawals and possible conversions with multi-year marginal tax brackets, RMDs, and estate goals.
- C. Exhaust taxable assets first as a fixed rule, deferring pretax and Roth withdrawals for as many years as possible whatever the bracket outcome.
- D. Select account withdrawals in proportion to current balances, treating pretax, Roth and taxable dollars as equivalent in after-tax value.
Show answer and explanation
Correct answer: B. Coordinate withdrawals and possible conversions with multi-year marginal tax brackets, RMDs, and estate goals.
Rigid ordering rules miss chances to smooth marginal rates and preserve flexible balances. An integrated policy weighs gain realization, Medicare effects, RMD timing and beneficiaries.
- A. Spending the most tax-advantaged Roth dollars first forgoes tax-free growth and flexibility, and is not a prudent default.
- B. Correct: withdrawals should be coordinated across brackets, RMDs and legacy goals.
- C. A fixed taxable-first rule can push later pretax withdrawals and RMDs into higher brackets.
- D. Pretax, Roth and taxable dollars carry different tax character, so balance-proportional withdrawals ignore real tax differences.