Dalton Practice Questions Flashcards
(2 cards)
Lisa, age 50, is considering withdrawing funds from her traditional IRA to pay for her daughter’s college tuition. She is concerned about the tax implications and potential penalties. Which of the following is the best advice to give Lisa?
A. She can withdraw the funds penalty-free because the withdrawal is for higher education expenses, but she will still owe income taxes on the distribution.
B. She can withdraw the funds both tax-free and penalty-free because the withdrawal is for higher education expenses.
C. She cannot withdraw funds from her traditional IRA until she is 59½ without incurring both a 10% early withdrawal penalty and income taxes.
D. She can only withdraw funds penalty-free if she repays the distribution within 60 days.
Correct Answer: A
She can withdraw the funds penalty-free because the withdrawal is for higher education expenses, but she will still owe income taxes on the distribution.
Mary, age 52, has $300,000 in her 401(k) and plans to retire at age 67. She currently contributes $15,000 per year to her 401(k), and her employer matches 50% up to 6% of her salary. Mary’s salary is $100,000, and she expects to earn a 7% annual return on her investments. She wants to ensure she has adequate retirement savings and asks if she should adjust her current contributions. Assuming Mary wants to maintain her current lifestyle in retirement, what would be the best recommendation?
A. Increase her 401(k) contributions to the maximum allowable annual amount for her age to maximize tax-deferred growth.
B. Continue her current contributions and focus on paying down her mortgage to reduce future expenses.
C. Diversify by reducing her 401(k) contributions and opening a taxable brokerage account.
D. Stop 401(k) contributions and open a Roth IRA to add tax-free income for retirement.
Answer: A - Increase her 401(k) contributions to the maximum allowable annual amount for her age to maximize tax-deferred growth.
Explanation:
Option A is the best recommendation because Mary, at age 52, has 15 years remaining until her planned retirement at age 67. Increasing her 401(k) contributions to the maximum allowable limit will maximize her tax-deferred growth, enabling her to accumulate more assets for retirement. In 2024, the 401(k) contribution limit for individuals aged 50 and above is $30,000 (including the $7,500 catch-up contribution). By contributing the maximum, Mary will also lower her taxable income, benefiting from immediate tax savings, which is particularly advantageous at her income level.
Option B (Focus on Paying Down Mortgage): While paying down debt before retirement is beneficial, it’s essential to first prioritize maximizing retirement savings, especially with the tax benefits of 401(k) contributions. With her 15-year time horizon, Mary can benefit more from tax-deferred growth.
Option C (Open a Taxable Brokerage Account): Though a taxable brokerage account offers flexibility, it doesn’t provide the same tax advantages as a 401(k). For Mary’s goal of retirement savings, maximizing contributions to her tax-deferred 401(k) is preferable.
Option D (Stop 401(k) Contributions and Open a Roth IRA): A Roth IRA provides tax-free withdrawals in retirement, but Mary would lose her employer’s match and the higher contribution limits available in a 401(k). A Roth IRA may be beneficial in addition to her 401(k), but stopping her contributions would not be ideal.
In summary, increasing her 401(k) contributions allows Mary to fully utilize tax-deferred growth, employer matching, and catch-up contributions, aligning with her goal of ensuring adequate retirement savings.
