Module 6 Plan Distributions Flashcards
Which one of these would owe the 10% early withdrawal penalty that applies to qualified plans?
A)
A distribution following separation from service after age 55
B)
A distribution of employee stock ownership plan (ESOP) dividends
C)
A distribution for educational expenses
D)
A distribution made to reduce excess 401(k) plan contributions
c
Distributions from IRAs for qualified education expenses are exempt from the 10% early withdrawal penalty, but not distributions from qualified plans. Distributions from qualified plans following separation from service after attaining age 55 are exempt from the 10% early withdrawal penalty. Distributions made to reduce excess 401(k) plan contributions are exempt from the 10% early withdrawal penalty. Distributions of ESOP dividends are exempt from the 10% early withdrawal penalty.
LO 6.3.2
Under a divorce agreement, the assignment of rights to receive benefits from a qualified retirement plan by a court to the former spouse of a participant is called
A)
a qualified domestic relations order (QDRO).
B)
a qualified domestic trust (QDOT).
C)
a judicial pension split.
D)
a collateral assignment.
QDRO
Henry works for a firm that offers a Section 401(k) plan. Henry, who has a current salary of $60,000, was hesitant to contribute to the plan because in the past he felt as though he may need the money before retirement. He recently learned that he could receive a loan from his Section 401(k) plan without paying any income tax. He is now considering making contributions to the Section 401(k) plan, but he wants to know more specific details regarding loan provisions. Which of the following statements regarding loans from qualified plans is(are) CORRECT?
The limit on loans is generally half of the participant’s vested account balance not to exceed $50,000.
The limit on the term of any loan is generally five years.
If an employee leaves the company, a retirement plan loan may be rolled over to an IRA and the participant continues making the loan payments as planned.
Participant loans to a 100% owner-employee are permissible.
A)
I, II, III, and IV
B)
I only
C)
II only
D)
I, II, and IV
I II IV
Pay attention to this one.
Statement I is correct. Generally, loans are limited to half the vested account balance and cannot exceed $50,000. Note: When account balances are less than $20,000, however, loans up to $10,000 are available. Also, when the vested balance is below $10,000, 100% of the vested balance may be available. Statement II is correct. The limit on the term of any loan is generally five years, unless the loan is for a principal residence. Loans for the purpose of buying a residence must be repaid over a reasonable period of time. Also, a disaster loan can have an extra year. Statement III is incorrect. A qualified plan loan may not be rolled to an IRA and then continue making the loan payments to the IRA as before. However, if the loan is defaulted solely due to separation from service or the retirement plan being terminated, then the defaulted amount is considered a qualified plan loan offset (QPLO). A QPLO would allow the worker’s next qualified retirement plan to accept the loan and continue payments as before if the new employer’s plan document allowed this. Any outstanding loan balance is treated as a distribution and thus is subject to income taxes and the early withdrawal penalty rules. However, if the defaulted loan is a QPLO, he would have until the due date of his tax return for the year the loan defaulted (including extensions) to get as much of the loan back into his IRA or a qualified plan as he could. This would lower his income tax bill and reduce his 10% EWP. It would also help his eventual retirement situation. Statement IV is correct. Participant loans from qualified plans to sole proprietors, partners, shareholders in S corporations and C corporations are permitted. What ERISA specifically does NOT allow is for a retirement plan to make an plan investment in a loan to a “party in interest” or a fiduciary of the plan. A party in interest is essentially any powerful person involved with the retirement plan (such as an owner of the company or another plan fiduciary).
LO 6.3.2
Harry has an IRA that he wishes to leave to his children, Mary (age 15), John (age 10), and Abigail (age 2). Harry would like to designate the beneficiaries in such a way as to emphasize tax-deferred accumulation. Assuming all the children are alive at the time of Harry’s death, which beneficiary designation (of these options) would provide the greatest benefit?
A)
In separate accounts for each of the children: 25% to Mary, 35% to John, and 40% to Abigail
B)
Designating all children as equal beneficiaries of the IRA
C)
In trust for the benefit of the children
D)
Designating 100% of the IRA assets to Mary
A
All these children would currently be EDBs, so creating separate accounts will allow distributions to be taken over the lifetimes of each child until they reach age 21, then the 10-year rule would apply. Because Mary is older than John and Abigail, this will maximize the wealth accumulation provided by Harry’s IRA. If a single trust was used for all his children, then Mary’s situation would be used for all the children because she is the oldest beneficiary.
LO 6.4.1
All of the following statements regarding qualified domestic relations orders (QDROs) are correct EXCEPT
A)
distributions made to an alternate payee under a QDRO are subject to income tax.
B)
an alternate payee who is the former spouse of the participant, and who receives a distribution by reason of a QDRO or other court order, may roll over the distribution in the same manner as if she were the participant (including to her own IRA).
C)
distributions made to an alternate payee under a QDRO are subject to the 10% premature distribution penalty.
D)
assuming the option is available to other retirement plan participants, a QDRO may specify the time at which the alternate payee will receive the plan benefit.
C
Distributions made to an alternate payee under a QDRO are not subject to the 10% penalty on premature distributions. All the other statements are correct.
LO 6.5.1
Which of the following statements regarding qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs) is(are) CORRECT?
QPSAs and QJSAs must be offered to participants in target benefit pension plans.
Section 401(k) plans are not required to offer QJSAs and QPSAs if certain provisions are met.
Section 403(b) plans that match employee deferrals must meet the automatic survivor benefit rules.
Automatic survivor benefit requirements may be waived by the plan participant with the written, notarized consent of the spouse.
A)
I, II, III, and IV
B)
I only
C)
IV only
D)
II and III
All
All the statements are correct.
LO 6.4.2
Which beneficiary has the most options with the stretch IRA rules?
A)
Qualified charity
B)
Surviving spouse
C)
Decedent’s estate
D)
Adult child
A surviving spouse has more and better options than any other type of beneficiary.
LO 6.4.1
Which of these distributions from a qualified plan would be subject to the 10% early withdrawal penalty?
A)
Distributions made to cover medical expenses that exceed 7.5% of AGI.
B)
Distributions made after a separation from service for early retirement at any age.
C)
Distributions made as part of a series of substantially equal periodic payments made at least annually over the life or life expectancy of the employee or the joint lives or life expectancies of the employee and beneficiary.
D)
Distributions made to a beneficiary or to an employee’s estate on or after the employee’s death.
B would get EWP’d
This is talking about a 401k, and specifically the EWP, despite these exceptions, they would obviously be taxed at income levels.
A: 7.5% is the exact percentage over which you’re fine on the EWP.
B: if you separate from service at age 55 or later
C: This is exception to EWP
D: Death of the employee and distribution to an estate is exempt from EWP. I haven’t taken estate yet, but I’m assuming it’s exempt because the estate taxes will tax it into oblivion.
For a preretirement distribution to escape the 10% penalty for early distribution, the distribution must be made after a separation from service for early retirement after attaining age 55. This exception is not applicable to IRAs.
LO 6.3.1
Jennifer recently separated from service with Acme, Inc., at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began to work for a new employer who provides a profit-sharing plan for employees. Which one of these statements describes an option that will benefit her?
A)
If Jennifer had Acme stock in her IRA, she could retain net unrealized appreciation (NUA) tax treatment.
B)
Jennifer should leave the rollover funds in the rollover IRA until she is age 65; then she can distribute the IRA and benefit from lump-sum forward-averaging treatment.
C)
Jennifer should leave the rollover funds in the IRA for three more years; at age 55, she can distribute the account and benefit from lump-sum forward-averaging treatment.
D)
Jennifer could transfer the entire conduit IRA over into her new employer’s qualified profit-sharing plan if the plan allows her to do so and the plan offers loans.
d
This is sort of a, think it through, question.
A: do IRA’s have NUA? No, so false.
B: do IRA’s get lump-sum forward averaging treatment? No, so false. (I think those are only for qualified plans)
C: again, IRA’s don’t get forward averaging, so false.
D: has to be true, but she can roll the IRA into a new employer’s qualified profit sharing plan if it’s allowed and the plan may offer loans (it may not as well).
Reminder: IRA to 401(k) rollovers, some 401ks don’t like this, and for the ones that do, ONLY pre-tax funds can go into the 401k.
If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Forward-averaging treatment is not available on any distribution from an IRA. Also, Jennifer would not qualify for forward averaging because she was not born in 1935 or earlier. Taking a current distribution from the IRA would result in a current tax liability. Finally, an IRA cannot offer NUA treatment. NUA treatment is only allowed if the employer’s security itself is distributed out of the retirement system when the worker separated from service.
LO 6.3.2
Which of the following is the most favorable as a choice for the beneficiary of a qualified plan participant if stretching benefits is desired?
A)
The participant’s estate
B)
A friend who is 11 years younger
C)
The participant’s spouse
D)
The participant’s healthy adult son
Spouse
Of the options listed, only a surviving spouse is an eligible designated beneficiary. The son is not a minor, disabled, or chronically ill. The friend is more than 10 years younger than the participant and thus is not an eligible designated beneficiary.
LO 6.4.1
SEP IRA. Let’s say you make a contribution to one employee’s account. Would you:
Match the amount across all employees’ accounts
Match the percentage across all employees’ accounts
You don’t have to match the contribution
Match the percentage
Pro-rata rule chatgpt says.
Shockler Consolidated just established a simplified employee pension (SEP) plan for its employees. The company has over 500 employees, 60% of whom are highly compensated. This year, Shockler contributed 6% of each eligible employee’s salary to the SEP plan. Which of these statements regarding SEP plans are CORRECT?
Employees can roll money that is distributed from a SEP plan into an IRA within 60 days without withholding or penalty.
Employees can make direct trustee-to-trustee transfers as often as desired.
Rollovers can occur only once every 12 months.
A SEP plan can be integrated with Social Security.
A)
I, II, III, and IV
B)
I, III, and IV
C)
II and IV
D)
II and III
All
All of these statements are correct. Note: SEP plans may only use the excess method (and not the offset method) of integration. Because a SEP is a type of IRA, rollovers are limited to one per 12-month period according to the Bobrow Rule, but direct trustee-to-trustee transfers can be made as often as desired. The same can be said for SIMPLE IRAs.
LO 6.1.1
Which of these statements regarding traditional IRA required minimum distribution (RMD) rules are CORRECT?
The entire account balance may be taken as a lump sum.
The account balance may be distributed over the life expectancy of the owner under the uniform distribution table (Table III).
The account balance may be distributed over the actual joint life expectancy of the owner and the spouse beneficiary (Table II) if the spouse is more than 10 years younger than the owner.
In the case of multiple IRAs, the minimum distribution must only be calculated for and received from one account.
A)
II and III
B)
I and II
C)
I, II, and III
D)
I, II, III, and IV
I II III
Remember RMD is simply a minimum amount, you can withdraw or distribute way more. It’s not usually the best idea with distribute the entire account as a lump sum (bc taxes go weeee), but you can.
The Table III thing is exactly as it says. You take the account balance (or aggregate balance if there is more than one account) and divide it by the divisor associated with your current age.
Table II represents an exception to the Table III normal situation, it’s only for use if the spouse is more than 10 years younger* than the one receiving RMDs.
Traditional IRA required minimum distribution (RMD) rules allow the account balance to be distributed either as a lump sum or over the life expectancy of the owner determined by the uniform distribution table—Table III. This table uses the life expectancy of the owner and someone 10 years younger than the owner (regardless of the beneficiary’s actual age). Table III is used in all cases for living original owners except when the IRA owner’s spouse is the sole, primary beneficiary and the spouse is actually more than 10 years younger than the owner. In these cases, Table II is used to calculate the RMD. In the case of multiple IRAs, the required minimum distribution is calculated based on the aggregate account balances, but the RMD can be received from one or more than one IRA.
LO 6.2.1
Can a SEP Plan be integrated with Social Security?
Yes
No
Yes, it uses the EXCESS method.
Basically this means that only if your salary is above the taxable wage base for SS, $160,200 (2023), are contributions
Learn how SS integration works.
I still don’t understand after using ChatGPT
Go learn it
Which of these statements regarding required minimum distributions (RMDs) from IRAs and qualified retirement plans are CORRECT?
For lifetime distributions, all single participants will use a uniform life expectancy table.
The amount is determined by dividing the participant’s aggregate account balances as of December 31 of the preceding year by his current life expectancy.
RMDs for all original retirement account owners are calculated using Table III (the Uniform Table).
To calculate the RMD, divide the participant’s aggregate account balance as of December 31 of the preceding year by the joint life expectancy of the participant and spouse beneficiary if the spouse is more than five years younger that the participant.
A)
I, III, and IV
B)
I, II, and III
C)
I and II
D)
III and IV
I II
I wasn’t sure about this one. But I knew III was wrong, because table III is used sometimes and II other times.
The answer is I and II. Most RMDs are calculated from Table III. However, if the spouse is actually more than 10 years younger than the owner, the RMD is calculated using Table II.
LO 6.2.2
Susan participates in a Section 403(b) plan at work that includes loan provisions. Susan has recently enrolled in college and has inquired about the possible consequences of borrowing from the Section 403(b) plan to help pay for her education. As her financial planner, what is your advice to her?
A)
The loan will statutorily be treated as a taxable distribution from the plan.
B)
The Section 403(b) plan cannot make loans to participants because loans are only available from a qualified plan.
C)
The loan must be repayable within five years at a reasonable rate of interest.
D)
The loan is not being made for reasons of an unforeseeable emergency and, thus, is not possible.
C
For below: the reason why it has to be at a reasonable rate of interest is because the money from the loan and the interest goes into the retirement account. So if you gave yourself a massive interest rate, you’d get to shove a shit load of extra money into your plan.
For a loan not to be treated as a taxable distribution for tax purposes, it must be repayable within five years at a reasonable rate of interest. A Section 403(b) may include loan provisions similar to that of a qualified plan.
LO 6.3.2
Can 403(b) plans have loan provisions?
Yes
No
Yes
For below, the reason why it should be at a reasonable interest rate is this: the interest on the loan goes INTO your account. So if you gave yourself a 100% interest rate, you’d get to deposit massive amounts into your retirement plan while repaying the loan to your own account.
For a loan not to be treated as a taxable distribution for tax purposes, it must be repayable within five years at a reasonable rate of interest. A Section 403(b) may include loan provisions similar to that of a qualified plan.
LO 6.3.2
David, who turned age 73 on June 30th this year, owns 10% of BCB Company. He has accumulated $5 million in BCB’s stock bonus plan as of December 31st of last year, and $5.5 million as of December 31st of this year. The uniform lifetime table distribution factor for age 73 is 26.5. If David receives a distribution of $170,000 during this year, how much in penalties will he be required to pay on this year’s income tax return?
A)
$9,340
B)
$4,670
C)
$18,679
D)
$0
D
If this 170k had been the only RMD he took for this taxable year, he’d have been in trouble and would’ve owed 25% on the difference between the RMD Taken and the actual Necessary RMD. Last day of previous year balance $5mil / 26.5 = 189k ish I believe, that leaves around 19k, 25% would be B. However, the question uses the wording “this year” meaning, it has not crossed into the following year when the RMD would need to be taken yet
Let’s say you borrow from your 401k and it allows loans. You give yourself a reasonable interest rate (bc you have to) and you make it payable within 5 years (bc you have to). As you pay back this loan, with principal and interest, how does this work with respect to the annual additions limit of $69,000?
The principal is counted towards the annual additions limit, but the interest is not.
The interest is counted towards the annual additions limit but the principal is not.
They are both counted towards the annual additions limit.
Neither are counted towards the annual additions limit.
Neither are counted towards the annual additions limit.
On December 31 of last year, Samuel Herman had $360,000 in his IRA. He has named his wife Trudy as his primary beneficiary. He wants you to determine the amount he must withdraw for his RMD this year and the date by which the withdrawal must be made. This year he is 73 and Trudy is 36. (Assume the IRS RMD Joint Life Table divisor for two individuals ages 73 and 36 is 49.8. The IRS Table I divisor for an individual age 73 is 16.4. The Uniform Table factor is 26.5 at age 73.)
What is the smallest required minimum distribution (RMD) that Samuel can take, and when must distributions begin?
A)
He must begin distributions on April 1 of next year in the amount of $8,072.
B)
He must begin distributions on April 1 of this year in the amount of $13,139.
C)
He must begin distributions on April 1 of next year in the amount of $7,229.
D)
He must begin distributions on April 1 of next year in the amount of $13,585.
C
Greater than ten year gap (to younger spouse) means you can use Table II. Table II gives better divisors because of a higher life expectancy between the both of you. You want HIGHER divisors which will force you to take out less. You don’t want to be forced to take out massive amounts, throwing you into crazy tax brackets.
Because they are married and their ages differ by more than 10 years, the joint life factor results in a longer life expectancy and smaller required distributions, so the joint life factor may be used. A joint distribution is calculated as follows: $360,000 ÷ 49.8 = $7,229.
LO 6.2.2
If you’re 74 and a 10% owner, can you delay the start of your RMDs for your IRA if you continue to work?
No, IRA’s cannot delay.
If you’re 74 and a 10% owner, can you delay the start of your RMDs for your employer plan if you continue to work?
No, if you’re greater than a 5% owner, you cannot delay your RBD for RMDs if you’re past the normal RBD age of 73
If you’re 74 and a 5% owner, can you delay the start of your RMDs of your employer plan if you continue to work?
Yes, the EXACT wording is “Greater than 5% owners cannot delay the start of RMDs until retirement.” So since 5% is not “greater than” 5%, you get to delay until you officially retire.
Specific example: let’s say you’re 76 and own 5% of a company in which you have a vested 403(b) with $4 million. The company buys back some shares which then thrusts you above the 5% ownership, you quickly sell some shares and come back down to 4%. What happens now?
Because you weren’t a >5% owner by the end of the tax year, you don’t need to start RMDs.
Because you weren’t a >5% owner by the start of the tax year, you don’t need to start RMDs.
You need to start RMDs because you went above 5% ownership in the company, and have until December 31st of the following year to take out.
You need to start RMDs because you went above 5% ownership in the company, and have until April 1st of the following year to take out.
You need to start RMDs because you went above 5% ownership in the company, and have until April 1st of the following year to take out.
If you exceed 5% ownership at ANY point during the year this is called a Trigger point and triggers the start of your RMD’s, requiring you to distribute the minimum amount (or more) by April 1st of the following year.
Robert has a Roth IRA. He turns age 73 this year. Which of these statements is(are) CORRECT?
Robert must begin taking required minimum distributions (RMD) by April 1 of next year.
Robert can no longer make contributions to the Roth IRA.
A)
Neither I nor II
B)
II only
C)
Both I and II
D)
I only
Neither
Roths don’t have RMDs. As long as he earns income, he can contribute to the Roth.
Carl, 75, has been receiving required minimum distributions (RMDs) from his qualified plan. His RMD for this year is $8,000. Carl has only taken $6,000 in distributions this year. If he fails to take the full RMD by December 31 of this year, what is the maximum amount of the penalty he might pay?
A)
$500
B)
$1,000
C)
$1,500
D)
$2,000
A
SECURE 2.0 set the penalty at 25% of the difference between the amount that should have been distributed ($8,000) and the amount that was actually distributed ($6,000). In this case, the excise tax is 25% of $2,000, or $500 according to SECURE 2.0. However, the penalty can be reduced to $200 (10% of the shortfall) if he withdraws the $2,000 promptly.
LO 6.2.2
Reminder:
Pushing the RMD to April 1st of the following year is ONLY for the first RMD. The rest must be paid by the end of the tax year, December 31.
Yea that ^
Which of these qualified plans are always required to provide a qualified joint and survivor annuity (QJSA)?
Cash balance plan
Employee stock option plan (ESOP)
Target benefit plan
401(k) plan
A)
III and IV
B)
I, II, and IV
C)
I and II
D)
I and III
I III
QJSAs are always required options for Pension plans. Target Benefit and Cash Balance are pension plans.
ESOP and 401(k) are Qualified Profit Sharing, Defined Contribution Plans.
Target Benefit is a Qualified Defined Contribution Pension Plan.
Cash Balance is a Qualified Defined Benefit Pension Plan.
–
Options I and III are the correct answers for the following reasons. Pension plans are required to provide married participants with a QJSA option. Cash balance plans and target benefit plans are both pension plans. However, defined contribution plans that are not subject to minimum funding standards (profit-sharing plans and ESOPs) are exempt if the plan provides payment of the participant’s nonforfeitable accrued benefit in full to the surviving spouse, the participant does not elect a life annuity benefit form, and the plan is not a transferee of another plan that is subject to survivor annuity requirements.
LO 6.4.2
Which of these are CORRECT regarding the rules governing IRA distributions if an IRA owner dies before their required beginning date?
A spouse who is named as the beneficiary may roll the IRA over into another IRA titled in their own name.
If a designated beneficiary isn’t named, the entire account must be distributed under the five year rule.
If the beneficiary is a spouse, that person must begin taking distributions no later than December 31st of the year following the year in which the deceased died.
A nonspouse eligible designated beneficiary may take distributions based upon the Uniform Lifetime Table (Table III) each year.
A)
I and II
B)
II and III
C)
III and IV
D)
I, II, III, and IV
I II
This is section 6.4.1, I can’t offer explanations because I don’t know the rules
Options I and II are correct. A surviving spouse who is named as the an eligible designated beneficiary may roll over the IRA to another IRA and retitle this account in his or her own name (Option I). If the IRA owner dies before the required beginning date and if no designated beneficiary is named, the entire account must be distributed by the end of the fifth year following the year of the owner’s date of death (Option II, the five-year rule). If the spouse is an eligible designated beneficiary, they can either begin taking distributions immediately or defer them until the end of the year in which the deceased would have reached their RBD, so Option III is incorrect. Option IV is incorrect because a nonspouse eligible designated beneficiary must use the Single Life Table (Table 1) for determining the first required minimum distribution; life expectancy is then reduced by one for each subsequent year. This is called the “non-recalculated” life expectancy. A spouse EDB uses a “recalculated” life expectancy. The difference is that a spouse EDB goes back to Table I each year, but a non-spouse EDB only goes to Table I for their first RMD, then 1 is subtracted from their previous life expectancy factor each year.
LO 6.4.1
The qualified joint and survivor annuity (QJSA) form of payment is a requirement for a vested participant in which of the following types of retirement plans?
A)
An IRA
B)
An age-weighted profit-sharing plan
C)
A traditional defined benefit pension plan
D)
An employee stock ownership plan (ESOP)
C
QJSA - always options for pension plans. Generally it’s the default, and you’d choose another type of payout, such as lump sum distribution or smthn.
The qualified joint and survivor annuity (QJSA) requirements apply to all types of pension plans. It does not apply to an IRA or a defined contribution profit-sharing type of plan in most instances.
LO 6.5.1
Jim expects to begin distributions from his IRA at age 75. Which of these statements are accurate as implications of a distribution made at that time?
I Recalculation of life expectancy is automatic when using the Uniform Lifetime Table because the table is reentered each year at the attained age for that year.
II If Jim dies after the required beginning date without a designated beneficiary, the required minimum distribution (RMD) for the year of death is determined by entering the RMD Single Life Table at his attained age in the year of death. Life expectancy is reduced by one year for each subsequent year.
III Assuming Jim is married and his wife is his beneficiary, if Jim dies after beginning RMDs, remaining benefits may be paid over his wife’s life expectancy, beginning in the year following the year of his death, determined by reentering the RMD Single Life Table each year with her attained age for that year.
IV A maximum distribution penalty of 25% will apply on amounts that were not distributed but should have been.
A)
III and IV
B)
I, II, and III
C)
I and II
D)
I, II, III, and IV
All
Look at Section 6.4.1 for this situation. I genuinely can’t keep up with these rules.
I didn’t know what these (except IV) meant, but this is what they mean.
I This is basically saying that each year you recalculate your RMD with a new divisor. So like your divisor at age 75 is x, divisor at age 76 is y, and so on.
II Basically, this is saying that the life expectancy (divisor) is reduced by one each subsequent year after death. If he dies and the divisor is 11.7 or something, the following year, the divisor would be 11.7-1 = 10.7. Then the next year 9.7, and so on.
III
All of these statements are true. The 25% penalty for all RMD amounts that were not taken when required is extremely important to clients. SECURE 2.0 lowered the penalty from 50% of the shortfall to 25% of the shortfall for the years 2023 and following. Also, the penalty can be reduced to 10% if the shortfall is withdrawn promptly.
LO 6.4.1
When she retired at age 64, Lauren received a lump-sum distribution from her employer’s stock bonus plan. The fair market value of the employer stock contributed to her account was $200,000 at the time of contribution. At the time of the distribution, the employer stock in Lauren’s account had a fair market value of $300,000. Six months later, Lauren sold the stock for $310,000. Which of the following statements regarding the sale of Lauren’s stock is(are) CORRECT?
The $300,000 distribution is taxed at the long-term capital gain rate.
Lauren has a $10,000 short-term capital gain when the stock is sold.
There was no income tax liability incurred when the stock was contributed to the plan.
The net unrealized appreciation (NUA) on the stock is $100,000.
A)
I, II, III, and IV
B)
II, III, and IV
C)
IV only
D)
I and II
II III IV
I, $200,000 when the stock is sold, is taxed as ordinary income, while the $100,000 (the gains) are taxed at long term capital gains rates. The additional $10,000 will be taxed at short term capital gains rates. The entire $300,000 distribution is not the NUA portion.
*When you’re confused about NUA remember the name Net Unrealized APPRECIATION. It’s the portion of the distributed stock that has appreciated since its grant. And the NUA portion is Long Term Cap Gains. The Granted stock is income, and any additional is STCG/LTCG depending on how long post distribution the sale happened.
Of the $300,000 Lauren received as a lump-sum distribution from the stock bonus plan, $100,000 is net unrealized appreciation (NUA) and will be taxed at the long-term capital gain rate. The remaining $200,000 is taxed at Lauren’s ordinary income tax rate in the year of the lump-sum distribution. Because Lauren sold the stock within 6 months of distribution, the $10,000 post-distribution appreciation is taxed as short-term capital gain.
LO 6.1.2
Which of these statements is CORRECT regarding rollovers from qualified plans or IRAs?
Distributions from qualified plans and IRAs require 20% mandatory withholding for federal income taxes if a trustee-to-trustee transfer or a direct rollover is not used to execute a rollover.
A taxpayer is limited to one IRA-to-IRA rollover in a one-year period (on a 365-day basis).
A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan.
If a qualified plan participant has an outstanding loan from her qualified plan upon separation from service, the participant may roll over the loan into a rollover IRA as long as loan repayments continue at least quarterly.
A)
I, II, III, and IV
B)
II only
C)
I and II
D)
III and IV
just II
1 IRAs don’t get a 20% withholding situation. And I
Only Statement II is correct. Statement I is incorrect because IRA distributions do not require 20% mandatory federal income tax withholding. Statement III is incorrect because a rollover is permitted from a qualified plan to a governmental Section 457 plan.
Statement IV is incorrect because loans are not permitted from an IRA. When a retirement plan loan is subject to a default due to separation from service or the plan being terminated, the owner has the option of moving the loan into a new qualified plan, if the plan permits, and continuing the original payments, or make Qualified Plan Loan Offsets (QPLO) contributions to the new qualified plan or into an IRA. Any QPLO contributions until the due date for the tax return (including extensions) are treated as successful rollovers and thus reduce the amount of the loan default.
LO 6.3.1
Charles was an employee of the ABC Corporation for 20 years. He received a lump sum distribution from his qualified retirement plan this year. The distribution was comprised entirely of ABC stock valued at $400,000 on the date of distribution. The value of the stock contributed to Charles’s individual account in the plan over the years was $70,000. If Charles does not sell the stock this year, what amount is included in his gross income this year as a result of the distribution?
A)
$30,000
B)
$100,000
C)
$70,000
D)
$0
c
Because the distribution is a lump sum distribution of employer stock, the net unrealized appreciation (NUA) concept applies. Under the NUA rules, the adjusted basis of the stock (the amount the plan paid for the stock) contributed to the retirement plan ($70,000) is included in Charles’s gross income in the year of the distribution and is treated as ordinary income.
LO 6.1.2
Under the required minimum distribution (RMD) rules for IRAs, a penalty tax of
A)
25% is assessed on the amount of required minimum distribution not taken before the required date.
B)
15% is assessed on the amount of required minimum distribution not taken before the required beginning date.
C)
10% is assessed on excess distributions.
D)
50% is assessed on any distribution shortfall.
A
Reminder, only the first RMD can be pushed to April 1st of the following year. The rest must be taken by the end of December 31.
The IRS requires the owner to take minimum distributions from a traditional IRA no later than April 1 of the year following the owner’s attaining age 73. If the amount distributed is less than the required minimum amount, a 25% excise tax is assessed on the amount of the shortage. The RMD is determined by dividing the IRA account balance (or aggregate account balances) on December 31 of the prior year by the owner’s remaining life expectancy (or joint life expectancy of the owner and beneficiary) shown in the table. The required distribution may be taken from one IRA, but the calculation must be based on the totals in all IRAs. SECURE 2.0 changed the penalty from 50% of the shortfall to 25% of the shortfall starting in 2023. Also, if the shortfall is withdrawn promptly, the penalty is reduced to 10%.
LO 6.2.1
Stanley, age 76, designated his son Tom, 49, as his IRA beneficiary 10 years ago. Stanley is considering adding his daughter Martha, 45, as a beneficiary to the IRA. He wants his children to receive the benefit over as long a period as possible and in an advantageous way. Which of these methods would be beneficial to Tom and/or Martha?
Separate accounts will allow Tom and Martha to each use their own life expectancies for RMDs after Stanley’s death.
Designating a revocable living trust with Tom and Martha as trust beneficiaries will allow for the longest payout period for the distributions from the IRA.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only
B
6.4.1 I don’t understand.
This is a complicated question. Both ideas would be beneficial for Tom and/or Martha. First, as healthy adult children of the deceased, they are under the 10-year rule. For decedents who passed away on or after their required beginning date, this is the complicated 10-year rule. The first issue is the year of death (Year 0). The beneficiary must take any remaining RMD for that year. The next rule covers Years 1-9. It is based on the beneficiary’s age in Year 1 (the year after the death). This will be better for Martha. The final rule is the 10-year rule. The entire account must be emptied by December 31st of the year containing the tenth anniversary of the death. Thus, splitting the accounts will not hurt Tom’s ability to stretch the money over the next 10 years. On the other hand, it will cost him half the account. Splitting the beneficiaries will help Martha a little on the stretch by lowering her RMDs for Years 1-9. Both will still have to empty their accounts by the end of Year 10. Martha would clearly benefit from this arrangement because she currently would not receive anything from the IRA. Designating the estate as the beneficiary is usually not the best way to go when the point is to stretch the retirement account. However, at age 76, using the owner’s life expectancy based on their age as of their birthday in the year of death will give Tom and Martha more than 10 years to stretch Stanley’s IRA. This is because the 2022 and following Table I RMD factor for age 76 is 14.1. This life expectancy factor would be reduced by one for each subsequent year. That means naming the estate would give more of a stretch that the 10-year rule. This is true for deaths after the required beginning date until the owner is age 83. At age 83, the RMD life expectancy factor for 9.3. This question is very unlikely to be encountered in the CFP world. It is designed to give you a heads up in the real world.
LO 6.4.1
Which statement regarding qualified joint and survivor annuities (QJSA) is CORRECT?
A QJSA is an optional benefit that must be elected by the plan participant in a defined benefit pension plan in order for the survivor to receive the benefit.
A QJSA applies to a money purchase plan.
A)
II only
B)
I only
C)
Neither I nor II
D)
Both I and II
II only
QJSA is an optional benefit, however it is the default option for pension plans. Essentially it means that you’ll be paid out over the course of your/your spouse’s lifetime in an annuity format. Qualified Joint/Survivorship Annuity. You can opt for a different option, lump sum, single life annuity, QPSA, or 10 year certain(?).
Only Statement II is correct. Under ERISA, all “pension plans” must offer QPSAs and QJSAs. The pension plans can be remembered as the “Be my cash target plans” (“B” for benefit in defined benefit plans, “M” for money purchase plans, “Cash” for cash balance plans, and “Target” for target benefit plans). On the other hand, “profit sharing plans” (defined in this instance as the other qualified plans and 403(b) plans) are not legally required to offer QPSAs or QJSAs if that is the only money involved. Thus, 401(k) plans and other profit sharing plans are not required to offer a QJSA if they met certain criteria. There can be an option for a plan participant to waive the QJSA, but it requires the spouse to sign a waiver in front of a notary or a plan administrator. Finally, a profit sharing plan that accepts retirement money from a pension plan is required to offer QPSAs and QJSAs unless they meet the requirements outlined in the text for profit sharing plans.
LO 6.4.2
Which of these are exempt from the 10% penalty on qualified plan distributions made before age 59½?
Distributions made to an employee because of “immediate and heavy” financial need
In-service distributions made to an employee age 55 but younger than 59½
A withdrawal due to recent domestic abuse.
$1,000 for a financial emergency.
A)
II and IV
B)
III and IV
C)
I and II
D)
I and III
III IV
I Immediate and Heavy need are not cared about and you’ll get penalized.
II Yes the employee is 55 but the trick to getting those 401k distributions w/o the EWP is that you separated from service at age 55 or later.
III Domestic abuse withdrawals up to $1000 within the last year are exempt from the EWP.
IV $1000 for a financial emergency is allowed - but not just immediate and heavy need.
The 10% premature distribution penalty does not apply to distributions on account of domestic abuse within the last year or for up to $1,000 for an emergency. Options I and II are incorrect. The law does not recognize a heavy and immediate financial need as an exception to the penalty. The age 55 exception does not apply to in-service distributions; i.e., the employee must have separated from the service of the employer on or after attaining age 55. That means the person must be 55 on December 31 of the year of separation. For example, Joe was laid off on March 27th. He turned 55 on December 25 of that year. He would qualify as having separated from service in the year he turned 55 and thus he would avoid the 10% penalty for withdrawals from his qualified plan or 403(b), but not from his IRA.
LO 6.3.1
Which of these beneficiaries is entitled to move a post-death distribution from a qualified plan into an IRA?
A)
The oldest surviving child of the participant
B)
The surviving spouse of the participant
C)
All three choices are correct
D)
The surviving mother of the participant
All
this is 6.4.1 but I remembered the answer
A spouse eligible designated beneficiary can roll the distribution over into an IRA and treat it as the spouse’s own; a nonspouse beneficiary can use a direct trustee-to-trustee transfer of the distribution into a specially titled inherited IRA. The point is that a transfer must always be used for any inherited account because the first custodian is verifying to the recipient custodian that this money is inherited money. This avoids the potential fraudulent use of the 10% EWP exception for distributions due to a death. A surviving spouse may roll the money over into an account in their own name but this would lose the automatic exception to the 10% EWP due to a death. The surviving spouse would need to transfer the money if they were moving the money into an inherited account.
LO 6.4.1
Which of these statements regarding the Section 72(t) 10% early distribution penalty is false?
A)
The 10% tax generally applies only to the taxable portion of the distribution.
B)
The tax does not apply to any distribution from a Roth IRA.
C)
A 10% penalty is imposed on the taxable amount of a distribution made to a participant that has not yet attained age 59½, unless a specific exception applies.
D)
The 10% penalty applies to distributions that are made from a qualified plan, a Section 403(b) plan, a traditional IRA, or a simplified employee pension (SEP) plan.
B
Apparently the 10% EWP only applies to funds that are taxable. So yes, what you’re thinking is right, if you put after-tax money into an IRA, those contributions are not taxable or subject to the EWP. The earnings are though.
The EWP can be levied on conversions for roth IRAs that haven’t been there for five years and get withdrawn. It can also be used on earnings withdrawn if you don’t have the two qualifiers:
1 Five year rule
2a Death of IRA owner
2b Disability of IRA owner
2c First time home purchase up to $10k
2d Reaches 59.5 y/o
The 10% early withdrawal penalty system never applies to the withdrawal of contributions or to the withdrawal of conversions that are at least five Roth years old. However, the withdrawal of converted money within five years of the conversion and the withdrawal of earnings are subject to the 10% early withdrawal penalty rules unless the withdrawal is a qualified distribution.
LO 6.3.1
Sam recently died at age 63, leaving an IRA with a fair market value (FMV) of $200,000 to his wife, Susan, 55, who was the primary beneficiary. Susan has no IRA of her own. Which of these statements regarding Sam’s IRA is CORRECT?
A)
Susan can receive distributions over her remaining single-life expectancy, recalculated each year.
B)
Susan must begin taking distributions over Sam’s remaining single-life expectancy.
C)
Susan must receive the entire account balance within five years of Sam’s death.
D)
Susan can receive a distribution from the IRA now but will be subject to a 10% early withdrawal penalty.
A
This is the case where you take the divisor (life expectancy number) and subtract by one each year to determine RMDs.
Susan, as the surviving spouse, can receive distributions over her remaining life expectancy. A spouse beneficiary can recalculate life expectancy each year, but distributions must begin no later than the year in which Sam would have reached his RBD. Susan would also have the option of treating the IRA as her own and deferring distributions until she reaches her own RBD. This means moving the money to an IRA in her own name as opposed to an inherited IRA. An inherited IRA has the deceased’s name in the title. For example, “Sam B Jones (deceased July 28, 2024) FBO Sally G Jones.” A spouse “recalculating” their life expectancy means the spouse goes back to Table I each year to determine their new life expectancy factor. A non-spouse EDB who is stretching their inherited retirement account only goes to Table I once. After that the non-spouse’s life expectancy is determined by subtracting 1 from last year’s life expectancy factor. The ability to go back to Table I each year to “recalculate” the life expectancy factor is a major advantage for a surviving spouse because the Table I life expectancy factor decreases by less than one year each year. Finally, only a government agency would define looking up a value in table as “recalculating” as opposed to mathematically subtracting one year from the previous year’s life expectancy factor (which is defined as not recalculating the inheritor’s life expectancy factor).
LO 6.4.1
Jane, 53, has retired and taken a full distribution from her employee stock ownership plan (ESOP). Over the years, her employer made a total of $40,000 in contributions into the plan for her, and the stock is currently valued at $110,000. Which one of these statements best describes the tax implications of the distribution that Jane has taken?
A)
Jane will owe ordinary income taxes and a 10% penalty tax on $40,000.
B)
Jane will owe ordinary income tax on the entire $110,000 distribution from the ESOP.
C)
Jane will owe just ordinary income taxes on $40,000.
D)
Jane will owe long-term capital gain taxes on $70,000, which she must pay this year because this is the year of the distribution.
A
She wasn’t 55 at the time she separated from service. ESOP is a qualified plan and she took the lump sum, which is eligible for NUA treatment. So in this case, the basis of the stock (FMV at grant date(s)) is taxable as ordinary income in the year it’s distributed, and since she took distribution (NOT SALE) of the stock before 55, she gets the 10% EWP on the distributed $40,000. The other $70,000 is just chillin. If she were to sell it now, she’d pay LTCG taxes on it. Any appreciation/depreciation from that amount would be netted against it as either STCG/STCL or LTCG/LTCL depending on the time frame of the sale.
Because Jane was not at least age 55 at the end of the year when she separated from service, she will owe not only ordinary income taxes but also a 10% early withdrawal penalty tax on the $40,000 basis unless she withdrew the money for a reason that is an exception to the 10% EWP. She will be taxed at the long-term capital gains rate for the $70,000 of NUA, but she is not subject to this tax until she actually sells the stock. When the stock is eventually sold, the $70,000 NUA amount will usually be a long-term capital gain. If the stock is eventually sold for a profit above $110,000, the gain over the $110,000 mark is long- or short-term capital gain depending how long after the distribution the shares are sold. If the stock is eventually sold for less than $110,000, the loss from $110,000 decreases the NUA amount and thus lowers the long-term capital gain. If Jane dies while owning the stock, the NUA amount will not get a stepped-up basis, but the rest of the stock’s value on the date of death will get a stepped-up basis. Thus, the easiest way to determine the stepped-up basis is to subtract the NUA from the fair market value of the stock on the date of death.
LO 6.1.2
