Retirement and Estate Planning
The Retirement and Estate Planning domain tests how tax-advantaged accounts, Social Security, and estate documents fit together. Expect questions on traditional versus Roth treatment, employer matches, early withdrawals, required distributions, beneficiary designations, and basic estate tools.
Retirement accounts
A 401(k) or 403(b) is an employer-sponsored plan; an IRA is opened individually. Traditional contributions are generally pre-tax, grow tax-deferred, and are taxed as ordinary income when withdrawn. Roth contributions are made with after-tax dollars, and qualified withdrawals are tax-free. An employer match is free money but may vest over time. Early withdrawals before age 59½ generally face a 10% penalty plus income tax, with exceptions such as disability, certain medical costs, or qualifying birth/adoption expenses. Required minimum distributions (RMDs) generally begin in the early 70s and apply to traditional accounts, not Roth IRAs for the owner.
Social Security and estate documents
Social Security retirement benefits depend on earnings history and claiming age. Claiming before full retirement age reduces benefits; delaying past full retirement age increases them, up to age 70. A will directs property but does not control accounts with beneficiary designations, joint ownership, or trusts. Probate is the court process for validating a will and distributing probate assets. A durable power of attorney handles financial matters; a health care directive and health care proxy handle medical decisions. Trusts can manage property, provide privacy, and reduce probate, but they are not automatically tax-free.
Worked example
$10,000 is contributed pre-tax to a traditional account and grows tenfold to $100,000. At a 22% withdrawal tax rate, the after-tax value is $78,000. Alternatively, $10,000 is taxed at 22% now, leaving $7,800 for a Roth. Growing tenfold gives $78,000, withdrawn tax-free. If tax rates are equal, the two are equivalent; the Roth wins if future rates are higher, while the traditional wins if future rates are lower. An employer match adds value regardless of this comparison.
Traps
A beneficiary designation generally overrides a will. Roth contributions do not give an immediate deduction. Early withdrawal penalties are separate from income tax. Social Security is not designed to replace all pre-retirement income. Do not assume a trust eliminates all taxes or that probate applies to every asset.