Domain 5 - Retirement Planning
Domain 5 - Retirement Planning
This domain tests qualified plan design and limits, distribution rules and penalties, Social Security claiming strategy, and the accumulation math that connects savings rates to retirement income.
Plan landscape
- Defined contribution: 401(k), 403(b), profit sharing, money purchase; employee deferrals plus catch-up contributions at 50 (and a larger catch-up band for ages 60–63 under SECURE 2.0). Contribution limits are indexed - quote the current-year figure, not a memorized one.
- Defined benefit and cash balance plans favor older, highly compensated owners; funding is actuarially determined and subject to PBGC rules.
- Vesting: three-year cliff or six-year graded for employer contributions; employee deferrals are always 100% vested.
- IRA, Roth IRA (income phase-outs), SEP and SIMPLE for small business.
Distribution rules
- Required minimum distributions begin at 73 for those born 1950–1959 and 75 for those born 1960 or later; Roth IRAs have no lifetime RMDs. The first RMD may be delayed to April 1 of the following year, but then two are taken in one year.
- The early-distribution penalty is 10%, with exceptions including §72(t) substantially equal periodic payments, separation from service at 55 or later (qualified plans only), disability, death, QDRO, unreimbursed medical expenses above 7.5% of AGI, and $10,000 for a first home.
- Roth conversions are taxable but not penalized; inherited IRAs generally must be emptied within 10 years.
Social Security and Medicare
Benefit = PIA adjusted for claiming age. Claiming at 62 permanently reduces the benefit (about 30% for an FRA of 67); delaying to 70 adds 8% per year of delay. Spousal benefit up to 50% of the worker's PIA at the spouse's FRA; survivor benefit up to 100%. Up to 85% of benefits can be taxable. Medicare starts at 65 with IRMAA surcharges based on MAGI from two years earlier.
Worked example. PIA at FRA 67 = $2,800. Claiming at 62: reduction of 5/9 of 1% for the first 36 months (20%) plus 5/12 of 1% for the next 24 months (10%) = 30%, giving $1,960. Claiming at 70: 24% delayed credit, giving $3,472 - a 77% higher lifetime benefit that requires surviving roughly to age 80–81 to break even against the eight years of forgone payments.
Traps. Quoting contribution limits from memory; applying the 55 separation rule to IRAs (it is qualified-plan only); assuming the 4% rule is a guarantee rather than a planning heuristic; ignoring sequence-of-returns risk in early retirement; missing the RMD penalty (25%, reduced to 10% if corrected promptly).