/36 Income Strategies Test 1 / 36 Greg and Dorothy are a 65-year-old higher-income married couple. Greg’s life expectancy is 85, while Dorothy’s is 90. They have $4 million in financial assets, including $300,000 in a taxable account (with cost basis equal to market value) and $3.7 million in tax-deferred accounts (TDAs). They could withdraw funds from their financial portfolio using the conventional wisdom withdrawal strategy. Alternatively, in the next few years before tax rates are scheduled to increase, after withdrawing enough funds following the conventional wisdom withdrawal strategy to meet their spending needs, they could convert additional TDA funds to a Roth IRA to fill relatively low tax brackets. According to the cases in the book, which statement best describes the advantages of the latter withdrawal strategy? The latter strategy would likely lower their joint lifetime taxes and lower their joint lifetime Medicare premiums compared to the conventional wisdom withdrawal strategy. The latter strategy would likely lower their joint lifetime taxes, but not lower their joint lifetime Medicare premiums compared to the conventional wisdom withdrawal strategy. The latter strategy would likely lower their joint lifetime Medicare premiums, but not lower their joint lifetime taxes compared to the conventional wisdom withdrawal strategy. The latter strategy would likely lower neither their joint lifetime Medicare premiums nor their joint lifetime taxes compared to the conventional wisdom withdrawal strategy. 2 / 36 Pat and Paula Smith are a married couple filing jointly and both partners are on Medicare. Pat dies in 2020. Assuming Paula does not remarry, which of the following statements is most likely to be accurate? Paula will file for taxes as a single individual beginning in 2020 and, barring a life-changing event, her 2020 Modified Adjusted Gross Income – as that term is defined for determining her level of Medicare premiums – will be used to determine the size of her Medicare premiums beginning in 2021. Paula will file for taxes as a single individual beginning in 2020 and, barring a life-changing event, her 2020 Modified Adjusted Gross Income will be used to determine the size of her Medicare premiums beginning in 2022. Paula will file for taxes as a single individual beginning in 2021 and, barring a life-changing event, her 2021 Modified Adjusted Gross Income will be used to determine the size of her Medicare premiums beginning in 2022. Paula will file for taxes as a single individual beginning in 2021 and, barring a life-changing event, her 2021 Modified Adjusted Gross Income will be used to determine the size of her Medicare premiums beginning in 2023. 3 / 36 A married couple in their late 40s learned that their marginal tax rate in their retirement years may be substantially higher than their tax bracket in these years. They have substantial savings in tax-deferred accounts, like 401(k)s. Which of the four responses best describes steps this couple could take in their preretirement years to reduce the potential adverse effects of these relatively high marginal tax rates in their retirement years? Making partial Roth conversions in preretirement years. Switching contributions to tax-exempt Roth accounts like a Roth 401(k) instead of tax-deferred accounts like a 401(k). Consider both making partial Roth conversions in preretirement years and switching contributions to tax-exempt Roth accounts instead of tax-deferred accounts. Neither making partial Roth conversions in preretirement years nor switching contributions to tax-exempt Roth accounts would help this couple. 4 / 36 Jane is a single individual who will turned 66 in January 2020. She had not yet begun her Social Security benefits. Her entire financial portfolio consisted of $700,000 in a 401(k). Her life expectancy is 90 years. Which of the following combinations of Social Security claiming strategy and tax-efficient withdrawal strategy would have likely maximized the longevity of her financial portfolio or left the most after-tax funds for her heirs? Begin Social Security immediately at age 66 and withdraw funds following the conventional wisdom withdrawal strategy. Delay Social Security benefits until age 70 and withdraw funds following the conventional wisdom withdrawal strategy. Begin Social Security immediately at age 66 and make a partial Roth conversion of TDA funds in her first few years of retirement. In later years, she can withdraw funds from her TDA to fill a low tax bracket (e.g., 10%) and then withdraw additional tax-free funds to meet her spending needs from her Roth IRA. Delay Social Security benefits until age 70 and make a partial Roth conversion of TDA funds in her first few years of retirement. In later years, she can withdraw funds from her TDA to fill a low tax bracket (e.g., 10%) and then withdraw additional tax-free funds to meet her spending needs from her Roth IRA. 5 / 36 Beth is single and has a life expectancy of 90 years. Based on the results from a multi-part case study in Chapter 7, if she delays the start of her Social Security benefits until age 70, it would likely add the most years of longevity to her financial portfolio if she has a financial portfolio of which size? $250,000 in financial assets $500,000 in financial assets $750,000 in financial assets $1,000,000 in financial assets. 6 / 36 By delaying the start of Social Security benefits from age 67 to 70, Phil could increase his annual Social Security benefits by $10,000. As a first estimate, he believes that by delaying his benefits from age 67 to 70 he could withdraw $10,000 less from his tax-deferred accounts (TDAs) at 70 and still meet his spending needs. How would this $10,000 increase in annual Social Security benefits and $10,000 decrease in TDA withdrawals if he delays his Social Security benefits until age 70 (compared to these amounts if he begins his benefits at age 67) affect the level of his age-70 Provisional Income, where Provisional Income is the measure of income used to calculate the taxable portion of his Social Security benefits? His Provisional Income would be the same. His Provisional Income would decrease by $5,000. His Provisional Income would decrease by $8,500. His Provisional Income would decrease by $10,000. 7 / 36 Consider the following two cases. First, Martha wishes to contribute, on average, $5,000 per year to qualified charities. By donating $20,000 every four years to a donor-advised fund and then distributing these funds roughly evenly over each year, Martha will likely attain more tax savings over the four years than she would likely attain by donating $5,000 to charities each year. Second, Tom and Nancy Jones make, on average, $10,000 in charitable contributions each year. Tom sells his firm in 2021, which causes their income to be much higher that year than in any other tax year. By combining ten years of contributions into a $100,000 contribution to a donor-advised fund in 2021, the Jones will likely gain more tax savings than if they donated $10,000 each year. Which statement is an accurate answer to these two cases? Both cases are false. Martha’s case is true, but the Jones’ case is false. The Jones’ case is true, but Martha’s case is false. Both cases are true. 8 / 36 A single individual is considering two ways to contribute to a qualified charity. First, the usual approach of withdrawing funds from a traditional IRA, depositing the funds in his bank, and writing a check to the charity. Second, making a Qualified Charitable Distribution (QCD) from his traditional IRA. Which statement is not an accurate statement about the QCD strategy? The contributor must be at least 70.5 years old to make a QCD. The QCD cannot satisfy any of the required minimum distribution for that contributor for that year. The QCD strategy may result in this individual paying taxes on fewer Social Security benefits in the contribution year than with the usual approach. The QCD strategy can result in this individual having a lower Modified Adjusted Gross Income –as that term is defined for determining the size of Medicare premiums paid in a future year—than the MAGI from the usual approach. 9 / 36 Which statement most accurately reflects the changes legislated in the Tax Cuts and Jobs Act (TCJA) that passed in December 2017? The TCJA calls for temporarily lower tax rates from 2018 through 2022 before returning to higher tax rates beginning in 2023. The TCJA calls for temporarily lower tax rates from 2018 through 2025 before returning to higher tax rates beginning in 2026. The TCJA calls for temporarily lower tax rates from 2018 through 2027 before returning to higher tax rates beginning in 2028. The TCJA calls for temporarily lower tax rates from 2018 through 2030 before returning to higher tax rates beginning in 2031. 10 / 36 Mike and Claudia Thomas are married. They are both enrolled in Medicare Parts B and D. If their 2017 Modified Adjusted Gross Income level (that is, the sum of AGI plus tax-exempt interest) exceeds $214,000 by a single dollar then their joint annual Medicare premiums would increase in a later year by over $2,400. This income-based increase in their Medicare premiums is effectively an increase in their income taxes. The spike in their marginal tax rate on this last $1 of income would be: Over 240% Over 2,400% Over 24,000% Over 240,000% 11 / 36 A same-age married couple had a Modified Adjusted Gross Income (MAGI) level – as that term is defined for determining the level of their monthly Medicare premiums – of $165,000 in 2018, which is below the first MAGI income threshold level of $170,000. The husband dies in 2018, and his surviving wife inherits his TDAs. Her MAGI in 2019 and later years will be about $145,000. How would the husband’s death in 2018 likely affect 1) the surviving wife’s tax bracket in 2019 and later years (compared to their likely tax bracket if both spouses were still alive) and 2) her Medicare premiums beginning a few years after her husband’s death (compared to Medicare premiums she would pay if both spouses were still alive)? The husband’s death would not likely affect either her tax bracket beginning in 2019 or her future monthly Medicare premium levels. The husband’s death would likely 1) increase her tax bracket beginning in 2019 but 2) not increase her future monthly Medicare premium levels. The husband’s death would likely 1) not affect her tax bracket beginning in 2019 but 2) increase her future monthly Medicare premium levels. The husband’s death would likely 1) increase her tax bracket beginning in 2019 and 2) increase her future monthly Medicare premium levels. 12 / 36 Suppose a married couple’s 2019 Modified Adjusted Gross Income level – as that term is defined for determining the level of their monthly Medicare premiums – exceeded $170,000, which was the first MAGI income threshold level in 2019, by $1. This would likely increase the level of their monthly Medicare premiums for which year? 2019 2020 2021 2022 13 / 36 Jan and Bob Brown are a married couple filing jointly. The have a Provisional Income (PI) level of $60,000, which exceeds the second PI income threshold level of $44,000, but they pay taxes on well less than 85% of their Social Security benefits. Their taxable income places them in the middle of the 12% tax bracket. If they withdraw another $100 from one of their tax-deferred accounts, what would their federal-alone marginal tax rate likely be on this $100 withdrawal? 0% 12% 18% 22.2% 14 / 36 Beth is single and has a Provisional Income (PI) level this year of $40,000, which exceeds the PI income threshold levels of $25,000 and $34,000. She receives $20,000 in annual Social Security benefits this year. How much of her Social Security benefits will be included in this year’s adjusted gross income? $4,500 $9,600 $12,750 $17,000 15 / 36 John is single and has a Provisional Income (PI) level of $28,000, which is between two PI income threshold levels of $25,000 and $34,000. He receives $20,000 in annual Social Security benefits and his taxable income places him in the 10% tax bracket. If he withdraws another $100 from his 401(k), what would his federal-alone marginal tax rate be on this $100 withdrawal? 0% 10% 15% 18.5% 16 / 36 Joan is single. For a given year, she has a Modified Adjusted Gross Income level – as that term is defined for determining the taxable portion of her Social Security benefits – of $20,000, annual Social Security benefits of $20,000, and no tax-exempt interest. What will be the size of her Provisional Income for that year? $20,000 $30,000 $37,000 $40,000 17 / 36 What is the maximum amount of a household’s annual Social Security benefits that can be taxable, that is, that can be included in adjusted gross income? 0% 50% 85% 100% 18 / 36 Chapter 5, entitled “Tax-Code Complexities and their Implications for Retirees,” argues that two tax-code complexities cause the largest increases in retirees’ marginal tax rates. These two complexities are: First, the taxation of long-term capital gains and qualified dividends and, second, the Net Investment Income Tax. First, the taxation of long-term capital gains and qualified dividends and, second, the taxation of Social Security benefits. First, the taxation of long-term capital gains and qualified dividends and, second, IRMAA Medicare premium increases. First, the taxation of Social Security benefits and, second, IRMAA Medicare premium increases. 19 / 36 Pam is single and retired. She has funds in a tax-deferred account (TDA), a taxable account (with cost basis equal to market value), and a Roth IRA. If she withdraws funds from the taxable account until exhausted, then from the TDA until exhausted, and then from her Roth IRA until exhausted, how would this likely affect her tax brackets in her retirement years? She will likely be in a lower tax bracket in her early and late retirement years, but in a higher tax bracket in her middle retirement years. She will likely be in a lower tax bracket in her early and middle retirement years, but in a higher tax bracket in her late retirement years. She will likely be in a higher tax bracket in her early retirement years, but in a lower tax bracket in her middle and late retirement years. She will likely be in a higher tax bracket in her early and late retirement years, but in a lower tax bracket in her middle retirement years. 20 / 36 Paul is single and retired. He has funds in a tax-deferred account (TDA) like a 401(k), a taxable account (with cost basis equal to market value), and a Roth IRA. If he follows the conventional wisdom withdrawal strategy, he will withdraw funds in the following order: Withdraw all funds from his TDA, then withdraw all funds from his taxable account, and then withdraw all funds from his Roth IRA. Withdraw all funds from his TDA, then withdraw all funds from his Roth IRA, and then withdraw all funds from his taxable account. Withdraw all funds from his taxable account, then withdraw all funds from his TDA, and then withdraw all funds from his Roth IRA. Withdraw all funds from his taxable account, then withdraw all funds from his Roth IRA, and then withdraw all funds from his TDA. 21 / 36 Bob is 60 and will in the 24% tax bracket this year, which will also be his marginal tax rate. He wants to save for retirement. He expects to be in the 15% tax bracket when he withdraws the funds in retirement. Moreover, because he has saved relatively little for retirement, he expects the withdrawal of each dollar of these additional savings in his retirement years will cause an additional $0.85 of Social Security benefits to be taxed. Thus, his marginal tax rate on these additional savings is expected to be 27.75%. Which savings vehicle should he select for this retirement savings? (The underlying investment would be the same in each savings vehicle.) Roth IRA Tax-deferred account like a 401(k) Taxable account Non-qualified annuity 22 / 36 Betty graduated from college in August, began a job in September, and will be in the 10% tax bracket that year, which will also be her marginal tax rate. She wants to begin saving for retirement. She expects to have a higher-than-10% marginal tax rate in her retirement years. Which savings vehicle should she select for this retirement savings? (The underlying investment would be the same in each savings vehicle.) Roth IRA Tax-deferred account like a 401(k) Taxable account Non-qualified annuity 23 / 36 Pam is deciding whether to contribute this year to a Roth IRA or a traditional IRA. In either case, the funds will be spent in retirement. Which statement best explains whether she should contribute to a Roth IRA this year? She should contribute to the Roth IRA if her tax bracket this year is less than her expected tax bracket in retirement. She should contribute to the Roth IRA if her tax bracket this year is greater than her expected tax bracket in retirement. She should contribute to the Roth IRA if her marginal tax rate this year is less than her expected marginal tax rate in retirement. She should contribute to the Roth IRA if her marginal tax rate this year is greater than her expected marginal tax rate in retirement. 24 / 36 Pam is considering making a partial conversion this year of funds in her tax-deferred account (TDA) to a Roth IRA. If she does not make the partial Roth conversion this year then the funds in her TDA will be withdrawn and spent years later during her retirement. Which statement best explains whether she should make such a partial Roth conversion this year? Make the partial Roth conversion if her tax bracket this year is less than her expected tax bracket in retirement. Make the partial Roth conversion if her tax bracket this year is greater than her expected tax bracket in retirement. Make the partial Roth conversion if her marginal tax rate this year is less than her expected marginal tax rate in retirement. Make the partial Roth conversion if her marginal tax rate this year is greater than her expected marginal tax rate in retirement. 25 / 36 During times with usual market conditions, the conclusion of the asset-location section is best described as: Locate stocks in taxable accounts and locate bonds in tax-deferred accounts and tax-free Roth accounts to the degree possible, while attaining your target asset allocation. Locate bonds in taxable accounts and locate stocks in tax-deferred accounts and tax-free Roth accounts to the degree possible, while attaining your target asset allocation. Locate stocks in taxable accounts and tax-free Roth accounts and locate bonds in tax-deferred accounts to the degree possible, while attaining your target asset allocation. Locate bonds in taxable accounts and tax-free Roth accounts and locate stocks in tax-deferred accounts to the degree possible, while attaining your target asset allocation. 26 / 36 This book argues that, properly viewed, the effective tax rate on pretax funds held in bonds or stocks held in a tax-deferred account like a 401(k) is: 0% This year’s marginal tax rate The marginal tax rate in the withdrawal year The tax bracket in the withdrawal year 27 / 36 Consider Mark and Chelsea, a same-age traditional married couple (that is, neither spouse has child(ren) eligible for benefits based on their earnings record and neither spouse is eligible for benefits based on an ex-spouse’s earnings record). Mark’s Primary Insurance Amount is $2,400 and he has a life expectancy of 75, while Chelsea’s PIA is $2,000 and she has a life expectancy of 90. Their FRA for all benefits is 67. Neither spouse is eligible to file a restricted application for spousal benefits. Which of the following four strategies would maximize their joint expected real lifetime Social Security benefits? Mark begins his retirement benefits at 62 and Chelsea begins her retirement benefits at 62. Mark begins his retirement benefits at 62 and Chelsea begins her retirement benefits at 70. Mark begins his retirement benefits at 70 and Chelsea begins her retirement benefits at 62. Mark begins his retirement benefits at 70 and Chelsea begins her retirement benefits at 70. 28 / 36 George was born before January 1, 1954 and is thus eligible to file a restricted application for spousal benefits. To file this restrictive application, which statement is accurate? George must have attained his FRA for spousal benefits. However, his wife could be any age, including younger than her FRA for retirement benefits. George must have attained his FRA for spousal benefits and his wife must have filed for her retirement benefits. George must have attained his FRA for spousal benefits and his wife must be old enough to be able to file for her retirement benefits. However, she does not need to apply for her retirement benefits for George to be eligible to file the restrictive application. George must have attained age 62 and thus be eligible to file for his retirement benefits. In addition, his wife must have filed for her retirement benefits. 29 / 36 Individuals born between January 2, 1955 and January 1, 1962 have two different full retirement ages (FRAs). Which of the following is a correct statement about these two FRAs? They have one FRA that applies to their retirement benefits, but they have a second FRA that applies to both their spousal and survivor benefits. They have one FRA that applies to both their retirement and spousal benefits, but they have another FRA that applies to their survivor benefits. They have one FRA that applies to both their retirement and survivor benefits, but they have another FRA that applies to their spousal benefits. They have one FRA that applies to their retirement, spousal, and survivor benefits, but they have another FRA that applies to their disability benefits, if any. 30 / 36 Joan is single and has a full retirement age of 67 for all benefits. If she delays the start of her Social Security retirement benefits until age 67 and six months then what will be her monthly benefit amount (before Cost-of-Living Adjustments)? 100% of her Primary Insurance Amount 104% of her Primary Insurance Amount 108% of her Primary Insurance Amount 116% of her Primary Insurance Amount 31 / 36 Laura is single and has a full retirement age of 67 for all benefits. If she delays the start of her Social Security retirement benefits until 70 then what will be her monthly benefit amount (before Cost-of-Living Adjustments)? 108% of her Primary Insurance Amount 116% of her Primary Insurance Amount 124% of her Primary Insurance Amount 132% of her Primary Insurance Amount 32 / 36 Again, consider Mary, the traditional single individual. She wants to begin her Social Security benefits at the age that would maximize her projected real lifetime benefits, based on current promises of the Social Security system. She should delay her benefits until age 70 if her life expectancy is at least approximately what age? 75 80 85 90 33 / 36 Consider Mary, a traditional single individual. That is, she is eligible for benefits based on her earnings record, but she is not eligible for benefits based on an ex-spouse’s earnings record. She wants to begin her Social Security benefits at the age that would maximize her projected real lifetime benefits, based on current promises of the Social Security system. The approximate breakeven age for starting her Social Security benefits at age 62 or 70 is closest to which age? 75 80 85 90 34 / 36 The traditional meaning of alpha is the value added through security selection or market timing. In “The Arithmetic of Active Management,” Nobel-laureate William Sharpe explains that, in aggregate, the value added from security selection before considering investment costs must be: Less than 0% 0% More than 0% uncertain 35 / 36 Chapter 1 discusses an advisor’s value-added components as described in Vanguard’s Advisor Alpha and Morningstar’s Gamma. Which one of the following is not a component of either Advisor Alpha or Gamma? Claiming strategy for when to begin Social Security benefits Behavioral coaching Asset allocation Withdrawal strategy (a.k.a., withdrawal order or withdrawal sourcing) 36 / 36 The largest value-added component in Vanguard’s Advisor Alpha refers to the financial advisor’s ability to provide discipline and guidance to help the client stick with the recommended investment strategy instead of chasing hot returns or running for cover during a bear market. What is the name that Vanguard gives to this value-added component? Asset allocation Cost-effective implementation (expense ratios) Behavioral coaching Asset location Your score is The average score is 5% 0% Restart quiz
Income Strategies Test
1 / 36
Greg and Dorothy are a 65-year-old higher-income married couple. Greg’s life expectancy is 85, while Dorothy’s is 90. They have $4 million in financial assets, including $300,000 in a taxable account (with cost basis equal to market value) and $3.7 million in tax-deferred accounts (TDAs). They could withdraw funds from their financial portfolio using the conventional wisdom withdrawal strategy. Alternatively, in the next few years before tax rates are scheduled to increase, after withdrawing enough funds following the conventional wisdom withdrawal strategy to meet their spending needs, they could convert additional TDA funds to a Roth IRA to fill relatively low tax brackets. According to the cases in the book, which statement best describes the advantages of the latter withdrawal strategy?
2 / 36
Pat and Paula Smith are a married couple filing jointly and both partners are on Medicare. Pat dies in 2020. Assuming Paula does not remarry, which of the following statements is most likely to be accurate?
3 / 36
A married couple in their late 40s learned that their marginal tax rate in their retirement years may be substantially higher than their tax bracket in these years. They have substantial savings in tax-deferred accounts, like 401(k)s. Which of the four responses best describes steps this couple could take in their preretirement years to reduce the potential adverse effects of these relatively high marginal tax rates in their retirement years?
4 / 36
Jane is a single individual who will turned 66 in January 2020. She had not yet begun her Social Security benefits. Her entire financial portfolio consisted of $700,000 in a 401(k). Her life expectancy is 90 years. Which of the following combinations of Social Security claiming strategy and tax-efficient withdrawal strategy would have likely maximized the longevity of her financial portfolio or left the most after-tax funds for her heirs?
5 / 36
Beth is single and has a life expectancy of 90 years. Based on the results from a multi-part case study in Chapter 7, if she delays the start of her Social Security benefits until age 70, it would likely add the most years of longevity to her financial portfolio if she has a financial portfolio of which size?
6 / 36
By delaying the start of Social Security benefits from age 67 to 70, Phil could increase his annual Social Security benefits by $10,000. As a first estimate, he believes that by delaying his benefits from age 67 to 70 he could withdraw $10,000 less from his tax-deferred accounts (TDAs) at 70 and still meet his spending needs. How would this $10,000 increase in annual Social Security benefits and $10,000 decrease in TDA withdrawals if he delays his Social Security benefits until age 70 (compared to these amounts if he begins his benefits at age 67) affect the level of his age-70 Provisional Income, where Provisional Income is the measure of income used to calculate the taxable portion of his Social Security benefits?
7 / 36
Consider the following two cases. First, Martha wishes to contribute, on average, $5,000 per year to qualified charities. By donating $20,000 every four years to a donor-advised fund and then distributing these funds roughly evenly over each year, Martha will likely attain more tax savings over the four years than she would likely attain by donating $5,000 to charities each year. Second, Tom and Nancy Jones make, on average, $10,000 in charitable contributions each year. Tom sells his firm in 2021, which causes their income to be much higher that year than in any other tax year. By combining ten years of contributions into a $100,000 contribution to a donor-advised fund in 2021, the Jones will likely gain more tax savings than if they donated $10,000 each year. Which statement is an accurate answer to these two cases?
8 / 36
A single individual is considering two ways to contribute to a qualified charity. First, the usual approach of withdrawing funds from a traditional IRA, depositing the funds in his bank, and writing a check to the charity. Second, making a Qualified Charitable Distribution (QCD) from his traditional IRA. Which statement is not an accurate statement about the QCD strategy?
9 / 36
Which statement most accurately reflects the changes legislated in the Tax Cuts and Jobs Act (TCJA) that passed in December 2017?
10 / 36
Mike and Claudia Thomas are married. They are both enrolled in Medicare Parts B and D. If their 2017 Modified Adjusted Gross Income level (that is, the sum of AGI plus tax-exempt interest) exceeds $214,000 by a single dollar then their joint annual Medicare premiums would increase in a later year by over $2,400. This income-based increase in their Medicare premiums is effectively an increase in their income taxes. The spike in their marginal tax rate on this last $1 of income would be:
11 / 36
A same-age married couple had a Modified Adjusted Gross Income (MAGI) level – as that term is defined for determining the level of their monthly Medicare premiums – of $165,000 in 2018, which is below the first MAGI income threshold level of $170,000. The husband dies in 2018, and his surviving wife inherits his TDAs. Her MAGI in 2019 and later years will be about $145,000. How would the husband’s death in 2018 likely affect 1) the surviving wife’s tax bracket in 2019 and later years (compared to their likely tax bracket if both spouses were still alive) and 2) her Medicare premiums beginning a few years after her husband’s death (compared to Medicare premiums she would pay if both spouses were still alive)?
12 / 36
Suppose a married couple’s 2019 Modified Adjusted Gross Income level – as that term is defined for determining the level of their monthly Medicare premiums – exceeded $170,000, which was the first MAGI income threshold level in 2019, by $1. This would likely increase the level of their monthly Medicare premiums for which year?
13 / 36
Jan and Bob Brown are a married couple filing jointly. The have a Provisional Income (PI) level of $60,000, which exceeds the second PI income threshold level of $44,000, but they pay taxes on well less than 85% of their Social Security benefits. Their taxable income places them in the middle of the 12% tax bracket. If they withdraw another $100 from one of their tax-deferred accounts, what would their federal-alone marginal tax rate likely be on this $100 withdrawal?
14 / 36
Beth is single and has a Provisional Income (PI) level this year of $40,000, which exceeds the PI income threshold levels of $25,000 and $34,000. She receives $20,000 in annual Social Security benefits this year. How much of her Social Security benefits will be included in this year’s adjusted gross income?
15 / 36
John is single and has a Provisional Income (PI) level of $28,000, which is between two PI income threshold levels of $25,000 and $34,000. He receives $20,000 in annual Social Security benefits and his taxable income places him in the 10% tax bracket. If he withdraws another $100 from his 401(k), what would his federal-alone marginal tax rate be on this $100 withdrawal?
16 / 36
Joan is single. For a given year, she has a Modified Adjusted Gross Income level – as that term is defined for determining the taxable portion of her Social Security benefits – of $20,000, annual Social Security benefits of $20,000, and no tax-exempt interest. What will be the size of her Provisional Income for that year?
17 / 36
What is the maximum amount of a household’s annual Social Security benefits that can be taxable, that is, that can be included in adjusted gross income?
18 / 36
Chapter 5, entitled “Tax-Code Complexities and their Implications for Retirees,” argues that two tax-code complexities cause the largest increases in retirees’ marginal tax rates. These two complexities are:
19 / 36
Pam is single and retired. She has funds in a tax-deferred account (TDA), a taxable account (with cost basis equal to market value), and a Roth IRA. If she withdraws funds from the taxable account until exhausted, then from the TDA until exhausted, and then from her Roth IRA until exhausted, how would this likely affect her tax brackets in her retirement years?
20 / 36
Paul is single and retired. He has funds in a tax-deferred account (TDA) like a 401(k), a taxable account (with cost basis equal to market value), and a Roth IRA. If he follows the conventional wisdom withdrawal strategy, he will withdraw funds in the following order:
21 / 36
Bob is 60 and will in the 24% tax bracket this year, which will also be his marginal tax rate. He wants to save for retirement. He expects to be in the 15% tax bracket when he withdraws the funds in retirement. Moreover, because he has saved relatively little for retirement, he expects the withdrawal of each dollar of these additional savings in his retirement years will cause an additional $0.85 of Social Security benefits to be taxed. Thus, his marginal tax rate on these additional savings is expected to be 27.75%. Which savings vehicle should he select for this retirement savings? (The underlying investment would be the same in each savings vehicle.)
22 / 36
Betty graduated from college in August, began a job in September, and will be in the 10% tax bracket that year, which will also be her marginal tax rate. She wants to begin saving for retirement. She expects to have a higher-than-10% marginal tax rate in her retirement years. Which savings vehicle should she select for this retirement savings? (The underlying investment would be the same in each savings vehicle.)
23 / 36
Pam is deciding whether to contribute this year to a Roth IRA or a traditional IRA. In either case, the funds will be spent in retirement. Which statement best explains whether she should contribute to a Roth IRA this year?
24 / 36
Pam is considering making a partial conversion this year of funds in her tax-deferred account (TDA) to a Roth IRA. If she does not make the partial Roth conversion this year then the funds in her TDA will be withdrawn and spent years later during her retirement. Which statement best explains whether she should make such a partial Roth conversion this year?
25 / 36
During times with usual market conditions, the conclusion of the asset-location section is best described as:
26 / 36
This book argues that, properly viewed, the effective tax rate on pretax funds held in bonds or stocks held in a tax-deferred account like a 401(k) is:
27 / 36
Consider Mark and Chelsea, a same-age traditional married couple (that is, neither spouse has child(ren) eligible for benefits based on their earnings record and neither spouse is eligible for benefits based on an ex-spouse’s earnings record). Mark’s Primary Insurance Amount is $2,400 and he has a life expectancy of 75, while Chelsea’s PIA is $2,000 and she has a life expectancy of 90. Their FRA for all benefits is 67. Neither spouse is eligible to file a restricted application for spousal benefits. Which of the following four strategies would maximize their joint expected real lifetime Social Security benefits?
28 / 36
George was born before January 1, 1954 and is thus eligible to file a restricted application for spousal benefits. To file this restrictive application, which statement is accurate?
29 / 36
Individuals born between January 2, 1955 and January 1, 1962 have two different full retirement ages (FRAs). Which of the following is a correct statement about these two FRAs?
30 / 36
Joan is single and has a full retirement age of 67 for all benefits. If she delays the start of her Social Security retirement benefits until age 67 and six months then what will be her monthly benefit amount (before Cost-of-Living Adjustments)?
31 / 36
Laura is single and has a full retirement age of 67 for all benefits. If she delays the start of her Social Security retirement benefits until 70 then what will be her monthly benefit amount (before Cost-of-Living Adjustments)?
32 / 36
Again, consider Mary, the traditional single individual. She wants to begin her Social Security benefits at the age that would maximize her projected real lifetime benefits, based on current promises of the Social Security system. She should delay her benefits until age 70 if her life expectancy is at least approximately what age?
33 / 36
Consider Mary, a traditional single individual. That is, she is eligible for benefits based on her earnings record, but she is not eligible for benefits based on an ex-spouse’s earnings record. She wants to begin her Social Security benefits at the age that would maximize her projected real lifetime benefits, based on current promises of the Social Security system. The approximate breakeven age for starting her Social Security benefits at age 62 or 70 is closest to which age?
34 / 36
The traditional meaning of alpha is the value added through security selection or market timing. In “The Arithmetic of Active Management,” Nobel-laureate William Sharpe explains that, in aggregate, the value added from security selection before considering investment costs must be:
35 / 36
Chapter 1 discusses an advisor’s value-added components as described in Vanguard’s Advisor Alpha and Morningstar’s Gamma. Which one of the following is not a component of either Advisor Alpha or Gamma?
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The largest value-added component in Vanguard’s Advisor Alpha refers to the financial advisor’s ability to provide discipline and guidance to help the client stick with the recommended investment strategy instead of chasing hot returns or running for cover during a bear market. What is the name that Vanguard gives to this value-added component?
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