FHCE Chapter 10: Planning for the Future: Retirement and Estate Planning

Laney, age 53, is self-employed and has never made much money. But, she has consistently saved $3,000 per year into a traditional IRA. Over the years, she has taken full advantage of the tax law and deducted each year's contribution from her tax return. If Laney started saving at age 25 and has earned an average annual return of 6%, how much is the account worth today? $15,335. $40,214. $205,584. $334,304.

$15,335.

Ruby is 62 years old. She currently owns both a traditional IRA and a Roth IRA. She has no preference which account to use for this year's contribution. Based on the IRA contribution limits described in this topic, she can contribute a combination of ____________ to the traditional IRA and ____________ to the Roth IRA. $5,500; $5,500 $6,500; $6,500 $0; $5,500 $6,500; $0

$6,500; $0

At her death, Melinda, who is single, has the following assets: $32,000 car. $12,000 in collectible coins. $87,000 403(b) retirement plan with a named beneficiary. $50,000 term-life insurance policy with a named beneficiary. Based on this information, how much will pass under Melinda's will to her beneficiaries? $32,000. $44,000. $94,000. $181,000.

$94,000.

Barney, age 61, has taken full advantage of the tax law and fully deducted each year's contributions to his traditional IRA for the past 35 years. Barney has now begun taking distributions from his traditional IRA. What percentage of each distribution will be taxable? 0%. 50%. 75%. 100%.

100%.

Employer-sponsored retirement plans that are funded primarily by the employee are: 457 plans. 401(k) plans. 403(b) plans. 457 plans, 403(b) plans, and 401(k) plans.

401(k) plans.

Which of the following retirement plans is sponsored by not-for-profit organizations? 401(k) plans. 403(b) plans. Thrift savings plan. Roth IRAs.

403(b) plans.

Which financial services professional is required to recommend a product that is not only suitable for a client but is also the best product in the marketplace? A registered representative. A registered financial planner. A registered investment adviser. A certified planning counselor.

A registered representative.

Jorge and Midge have been married for 23 years and have raised three children. Recently, they have been helping their grown children pay for student loans and other purchases, including homes and cars. As a result, Jorge and Midge have large outstanding credit card bills and other loans. They are having trouble balancing their monthly budget. Which of the following professional advisors is best equipped to help them deal with their cash flow situation? Stockbroker. Certified financial planner. Insurance agent. Accredited financial counselor.

Accredited financial counselor.

Ruby and Chris were married 3 years ago. At that time, they both wrote wills leaving their assets to the other person. Since that time, they have adopted two children. How can they alter their wills without rewriting the wills entirely? Add a letter of last instructions. Add a holographic appendix. Add a codicil. Add a residual clause.

Add a codicil.

At what age may someone draft a living will? Any age as long as they are competent. Age 17 or older. Age 18 or older. Age 21 or older.

Age 18 or older.no

Why do some dislike the probate process? Because probate is public and difficult to maintain privacy for the deceased person and his or her heirs. The court caps the amount a personal representative can earn to $25 per day. The probate process makes it difficult to execute a will efficiently. All of the answer choices are correct.

All of the answer choices are correct.

Somerset, age 43, is self-employed and started saving for retirement 8 years ago using a Roth IRA. He liked the idea of someday taking distributions on a tax-free basis. Unfortunately, he has recently run into some business troubles and needs to raise cash quickly. He would like to take a distribution from his Roth IRA immediately. Which of the following statements is true for Somerset? Because he is younger than age 59½, any distribution will be subject to a 10% early withdrawal penalty. As long as he only takes out his contributions—not the account earnings—the distribution will be tax- and penalty-free. Any distribution will be deemed a return of earnings and principal; this means that his contributions will be subject to tax, while the earnings will be subject to a 10% penalty. The distribution is not allowed, unless he is purchasing a new home or paying for a child's education, before age 59½.

As long as he only takes out his contributions—not the account earnings—the distribution will be tax- and penalty-free.

Johnny would like to hire a financial advisor. A financial advisor Johnny is considering said that he would not charge for his advice but would charge a 4.50% commission on any mutual funds that Johnny purchased. The financial advisor that Johnny is considering is using what type of compensation model? Fee-only. Fee-based. Fee-offset. Commission.

Commission.

What is the difference between defined benefit plans and defined contribution plans? Defined benefit plans and defined contribution plans are both pension plans. Defined benefit plans guarantee payments to retirees, whereas defined contribution plans make contributions to retiree accounts without making guarantees. Defined contribution plans are pensions and defined benefit plans are not. Defined contribution plans require employees to save less for retirement, whereas defined benefit plans require employees to save more.

Defined benefit plans guarantee payments to retirees, whereas defined contribution plans make contributions to retiree accounts without making guarantees.

Roger is currently living in a nursing home facility. He is 92 years of age and in relatively good health. What document can Roger use to inform the nursing home staff that he would like them to withhold CPR should he stop breathing? Healthcare proxy. Do-not-resuscitate declaration. Springing power of attorney. Medical directive.

Do-not-resuscitate declaration.

Erika would like to hire a financial advisor. The financial advisor that she has been considering indicated that she would charge $2,500 to write a financial plan and 1% of any asset she manages. The financial advisor that Erika is considering is using what type of compensation model? Fee-only. Fee-based. Fee-offset. Commission.

Fee-based.

Patricia is planning a 3-month trip to Europe. While she is away, she wants to make sure that her bills will be paid and that any other financial obligations that arise will be handled in a prudent manner. Before leaving for Europe, she should do which of the following to achieve her objective? Draft a living will. Give her mother a limited power of attorney. Use a springing power of attorney. Draft a financial planning proxy.

Give her mother a limited power of attorney.

Roger is currently age 68. He is creating a retirement income plan. As such, he needs to estimate his future required distributions from his retirement plans. Help Roger by telling him when he must begin taking distributions from his Roth IRA. He should already be taking distributions because he is older than age 59½. He must begin minimum distributions when he turns age 70½. He can wait until he begins taking Social Security benefits, which is currently age 70. He never needs to take a distribution.

He must begin minimum distributions when he turns age 70½.

Consumers who are interested in minimizing conflicts of interest and avoid being ripped off should work with a financial advisor who: I. fully discloses any and all fees. II. fully discloses any potential conflicts of interest. III. uses mutual funds over individual stocks. I only. III only. I and II only. I, II, and III.

I, II, and III.

Why might Sheila seek the help of a financial advisor? I. She lacks the time to manage her own investments. II. She lacks the knowledge to make informed decisions. III. She lacks the confidence to implement strategies. II only. III only. I and III only. I, II, and III.

I, II, and III.

Which of the following is true regarding 401(k) plans? I. 401(k) plans are primarily funded by employees. II. 401(k) plans are primarily funded by employers. III. Investments grow tax-deferred in 401(k) plans. IV. Employers may provide matching contributions to 401(k) plans. I, II, and IV only. I, II, and III only. I, III, and IV only. I and II only.

I, III, and IV only.

John and Emily are married and have two children, ages 5 and 7. If they purchase a new car, what titling alternative(s) are available to them as a married couple (assuming their state recognizes all available titling options)? I. Tenancy in common. II. Joint tenants with the right of survivorship. III. Tenancy by the entirety. I only. III only. II and III only. I and III only.

II and III only.

Why do 401(k) plan sponsors match employee deferrals? I. It is the right thing to do for employees. II. Employer-matching contributions are employee benefits made to encourage productivity and loyalty. III. 401(k) plan sponsors match employee deferrals because they can get a tax deduction that reduces the taxes they will pay. IV. Employees expect their plan sponsor to make matching contributions when they participate in the plan. II and III only. I and II only. II and IV only. I, II, and IV only.

II and III only.

Duke and Delores own rental real estate together. They are not married but have been business partners for nearly 20 years. Delores is very worried about her private affairs becoming public if she were to die unexpectedly. Duke told her that they should retitle their business holdings in a way that avoids probate. Which of the following forms of title can they use to meet this objective? I. Tenancy in common. II. JTWROS III. Tenancy by the entirety. II only. III only. II and III only. I and III only.

II only.

Scotty and Kirk own a speedboat together. They are not related but have been friends since childhood. They own equal shares of the boat. Thinking about the future, Kirk decides he would like to leave his half of the boat to Scotty should he die first. What form of titling would ensure that Kirk's wishes are met, even if Kirk's son Leonard contested the transfer? Fee simple. Tenancy in common. JTWROS. Community property.

JTWROS.

Who may contribute to an IRA this year? Miguel who works part-time at a pretzel shop in the mall. Linda who is enrolled full-time in school but not employed. Tony who is retired and living off Social Security. All of these answer choices are correct.

Miguel who works part-time at a pretzel shop in the mall.

Fan just received a $45,000 check in the mail from her great uncle. A note with the check said that Fan was to use the money for the down payment on a new house. Is this gift taxable to Fan? No, although it is true that generally taxes must be paid, because the gift was to be used for the purchase of a home, the federal tax is waived. No, the gift is not taxable to Fan, but because it exceeds the annual gift tax exclusion amount, it may be taxable to Fan's great uncle. Yes, because the gift exceeds the annual gift tax exclusion amount. Yes, because all gifts, regardless of intent or recipient, are taxable.

No, the gift is not taxable to Fan, but because it exceeds the annual gift tax exclusion amount, it may be taxable to Fan's great uncle.

Preet just learned that he is going to be reassigned for his job to Eastern Europe. The transfer is temporary. Because Preet knows that he is going to return home in a year or two, he has decided to rent out his home. He wants to make sure that someone can take care of his financial issues while he is away, particularly depositing the rent payments and paying bills. His best strategy involves naming his sister in a: durable power of attorney. springing power of attorney. general power of attorney. power of attorney for health care.

Not general power of attorney.

Xavier recently graduated from college with a degree in mechanical engineering. He currently makes $87,000 per year. He has aspirations to move up within his firm and eventually earn much more. If his plan works out, he will be paying more taxes sometime in the future. Which of the following retirement plan options should Xavier choose today? Treasury Direct IRA. Traditional IRA. Roth IRA. Rollover IRA.

Roth IRA.

Scotty and Kirk own a speedboat together. They are not related but have been friends since childhood. They own equal shares of the boat. When thinking about the future, Kirk would like to pass his share of ownership to his son, Leonard. How must Scotty and Kirk title the boat? Fee simple. Tenancy in common. JTWROS. Community property.

Tenancy in common.

Lini is age 30. She is single and has never been married. Two months ago, Lini was involved in a terrible automobile accident. She was taken to the hospital where it was determined that she was in a long-term coma with little chance of recovery. She did not appoint a healthcare proxy. Who may make legal decisions for Lini while she is in a coma? Her mother or father. Her closest living relative. The court in the district where she is being cared for. An attorney.

The court in the district where she is being cared for.

Thurmond would like to hire a financial advisor. He has interviewed two potential advisors. The first person indicated that he would not charge for his advice but would charge a 5.0% commission on any mutual funds purchased when managing Thurmond's investments. The second person indicated that she would charge a flat fee of 1% of any asset she manages. Who is more likely to have a negative conflict of interest? The second advisor because her income increases as the assets under management increases. The first advisor because his income goes up as he sells more mutual funds. The second advisor because she charges a flat fee when writing a financial plan. The first advisor because his commission rate is fully disclosed.

The first advisor because his income goes up as he sells more mutual funds.

Molly is interested in ensuring that the advice she receives is guided by the fiduciary standard. She has talked to two different financial advisors. One advisor is paid based on a set fee based on the amount of managed assets. The other financial advisor has not made it clear to Molly how he gets paid, but he has assured her that she will not have to pay anything for his services. Knowing nothing else about the advisors other than how they are compensated, which advisor is more likely to follow the fiduciary standard? The second advisor because he follows a suitability approach. The first advisor because she does not charge a commission. The first advisor because she charges a commission. Both advisors are following the fiduciary standard.

The first advisor because she charges a commission.

Which of the following is an attribute of a gift? The gifting of an asset is irrevocable. A gift occurs when the giver has passed away. The person receiving the gift may force the gifter to transfer the property. All of the answer choices are correct.

The gifting of an asset is irrevocable.

Kirby just inherited $250,000. He would like to hire a financial advisor to provide financial advice and to manage the inheritance. Kirby has interviewed two potential advisors. The first person indicated that he would not charge for his advice but would charge a 4.50% commission on any mutual funds purchased when managing the $250,000. The second person indicated that she would charge $2,500 to write a financial plan and 1% of any asset she manages. Which advisor should Kirby choose if he wants the $250,000 managed and his upfront expenses minimized? The first advisor because there is no planning fee. The second advisor because the total first-year cost is $5,000. The first advisor because the total first-year cost is $5,000. Because the cost is approximately the same, either advisor could be selected.

The second advisor because the total first-year cost is $5,000.

Kimberly and Derek are married. They have two children. Larry is age 14 and enrolled in high school. Terry is age 19 and attends a local community college. Given the family situation, which of the following statements is true? The wills for Kimberly and Derek should specifically indicate a guardian for Larry and Terry. Terry needs his own will to transfer property to his parents should he die. Larry should draft his own will, especially if he wants to leave assets to his brother instead of his parents. The wills for Kimberly and Derek should include a guardian clause for any current or future children who are minors.

The wills for Kimberly and Derek should include a guardian clause for any current or future children who are minors.

In what ways are 401(k) plans, 403(b) plans, and 457 plans similar? They are identical except for the type of employer who may sponsor them. They are each primarily funded by employer contributions. They are all considered pension plans. They each provide employees tax-advantaged opportunities to save for retirement.

They each provide employees tax-advantaged opportunities to save for retirement.

Natasha and Link have been married for 2 years. They live in North Carolina and are about to make an offer on their first home. Their goal is to own the property so that if either Natasha or Link were to die, the surviving spouse would own the property outright. They also want to keep things private and avoid probate. How should they title their new home? Link should own the house fee simple and name Natasha as his beneficiary. Because they live in North Carolina, they should title the home as community property. Tenancy in common is the best way to title the property because it meets all their objectives. They should title the home as JTWROS as a way to accomplish their goals.

They should title the home as JTWROS as a way to accomplish their goals.

Willis, age 50, was a single man who died intestate. In addition to household and personal items, he had a savings account valued at $30,000. Assume Willis engaged in proactive financial planning prior to death. How did Willis ensure that his savings account assets would go to a specific person? Made a bequest in his will. Used a transfer on death title on the bank account. Used a residual clause to avoid probate. Both made a bequest in his will and used a transfer on death title on the bank account.

Used a transfer on death title on the bank account

When must the ownership of property be documented through a title? When you own an asset outright. When you own an asset with another person or persons. When you own an asset that requires contractual payments. Both when you own an asset with another person or persons and when you own an asset that requires contractual payments.

When you own an asset with another person or persons.

Jeff, age 45, is a single man and died intestate. In addition to household and personal items, he had a $25,000 car. Who will receive Jeff's car? Whomever Jeff noted in his will. His brothers and sisters, in equal shares, or his parents. Whomever Jeff listed as the title beneficiary. Whomever the state where he died indicates through probate statute.

Whomever the state where he died indicates through probate statute.

Mark, age 56, is a single man and died intestate. In addition to household and personal items, he had $450,000 in 401(k) retirement assets. Who will receive the 401(k) assets? Whomever Mark noted in his will. His brothers and sisters, in equal shares, or his parents. Whomever Mark listed as the account beneficiary. Whomever the state where he died indicates through probate statute.

Whomever the state where he died indicates through probate statute.

If you are younger than age 18 and own investment assets, who controls the management of the investments? You do. As long as you are competent, you are allowed to manage the investments. Your parent or guardian until you reach age 18. A court-appointed trustee until you reach age 18.

Your parent or guardian until you reach age 18.

A living will is put into place when: a person is in a persistent comatose condition. is nearing death from natural causes. someone dies. only when someone cannot breathe or eat.

a person is in a persistent comatose condition.

Because Marcel and Maria are planning a 1-year mission trip to Africa, they decide to draft a power of attorney naming Maria's father as the person to take care of their financial arrangements while they are away. Maria's father will be known in the document as the: attorney. proxy. director. agent.

agent.

Within an advanced directive, you may: instruct your physician to continue food and water indefinitely. instruct the hospital to distribute your property should you become incapacitated. ask that no life support be used if you are diagnosed as being in a prolonged vegetative state. both instruct your physician to continue food and water indefinitely and ask that no life support be used if you are diagnosed as being in a prolonged vegetative state.

both instruct your physician to continue food and water indefinitely and ask that no life support be used if you are diagnosed as being in a prolonged vegetative state.

A ____________ plan provides a guaranteed payment from an employer for life, whereas a ____________ plan provides a benefit based on the value of contributions to the account and investment returns. defined contribution; defined benefit 401(k); 403(b) defined benefit; defined contribution 401(k); 403(b) or 457

defined benefit; defined contribution

Max is worried about what will happen if he is traveling and gets in an accident. Should this happen, he would like his aunt to step in to make financial decisions for him until he is able to get well. He should name his aunt in a: durable power of attorney. springing power of attorney. general power of attorney. power of attorney for health care.

general power of attorney.

A person who establishes a trust is known as the ____________, whereas the person who is entitled to the income and other distributions from the trust is known as the ____________. trustee; grantor grantor; trustee grantor; beneficiary trustee; beneficiary

grantor; trustee

The best plan to save for retirement is to: make it automatic. consult a professional. only purchase individual stocks. buy high and sell low.

make it automatic.

Ashia recently learned that her uncle passed away. Her uncle left her, through his will, what he thought was a vintage car. It turns out that while the car was old, it was not really worth much. Ashia was grateful to be mentioned in her uncle's will. By law, Ashia: must file a testate claim in the state where she lives to obtain the car. may disclaim the property. must motion the court with a residual intention if she disclaims the property. may request the value of the car in cash rather than taking possession of the car.

may disclaim the property.

Longevity risk is the risk that you will: live beyond 90 years of age. live too long. run out of money just after retirement. outlive your savings.

outlive your savings.

Financial counselors tend to be ____________ oriented, whereas financial planners tend to be ____________ oriented. past; present present; past past; future future; present

past; future

You should start to calculate your retirement need when: you will retire in a few years. you have just retired. you are older than 55. It's always important, regardless of age.

t's always important, regardless of age.

Deciding how to invest retirement savings can be a time-consuming task. However, there are investments that simplify this task. These investments are called: exchange-traded funds. index funds. bonds. target date funds.

target date funds.

A trust that is funded at your death is called a: bypass trust. testamentary trust. will trust. living trust.

testamentary trust.

All of the following are true about life expectancy today, except: most people will need to generate income for longer periods of time than in the past. retirees have to plan for many more years in retirement than in the past. life expectancy is close to 80 years today. the number of years in retirement is about the same as it was in 1930.

the number of years in retirement is about the same as it was in 1930.

A retirement plan that provides the possibility for a tax-deductible contribution and tax-deferral of earnings is called a: traditional IRA. 401(k) plan. Roth IRA. both traditional IRA and Roth IRA.

traditional IRA.

A legal document that dictates your desire to distribute your property after death is called a: gift. title. clause. will.

will.

You may obtain a living will form at no cost from: any attorney. all certified financial accountants. your state office of the attorney general. both all certified financial accountants and your state office of the attorney general.

your state office of the attorney general.