Free CFP Exam Retirement Savings and Income Planning Practice Questions

SEPP under Section 72(t) allows individuals to take distributions from retirement accounts before age 59½ without incurring the 10% early withdrawal penalty. The payments must continue for the longer of five years or until age 59½. Three IRS-approved methods exist for calculating SEPP amounts: required minimum distribution, fixed amortization, and fixed annuitization.
Choice B is incorrect because SEPP has nothing to do with Roth conversions.
Choice C is incorrect because SEPP relates to distributions, not contributions.
Choice D is incorrect because SEPP is used before the RMD age, not to satisfy RMD rules.

The Government Pension Offset (GPO) reduces spousal or survivor Social Security benefits for individuals who receive a pension from a government employer where they did not pay Social Security taxes (non-covered employment). The reduction is two-thirds of the government pension amount. This is distinct from WEP, which reduces the individual's own Social Security worker benefit. Federal employees under FERS do pay Social Security taxes, so GPO generally does not affect them (Option B). GPO applies only when the pension is from non-covered employment (Option D overstates).

The pro-rata rule (IRS Form 8606) requires that when any IRA distribution or conversion occurs, the tax-free basis is prorated across all traditional, SEP, and SIMPLE IRA balances. Victor's total IRA value is \$307,000 (\$300,000 pre-tax + \$7,000 after-tax). His after-tax basis is \$7,000, so the tax-free percentage is \$7,000 / \$307,000 ≈ 2.28%. Converting the full \$307,000, he owes tax on approximately \$300,000 (97.72% of the conversion). This is why the backdoor Roth is most effective when no other pre-tax IRA balances exist.
Choice A is incorrect because the pro-rata rule does not allow you to isolate the after-tax contribution and convert it separately; the tax-free basis is spread proportionally across the entire IRA balance.
Choice B is incorrect because the \$7,000 after-tax basis is not fully excluded; under the pro-rata rule, only 2.28% of the conversion (\$7,000/\$307,000) is tax-free, not the entire \$7,000.
Choice C is incorrect because Roth conversions from traditional IRAs are taxable events; the converted amount (less any after-tax basis) is included in gross income in the year of conversion.