CH 6 Qualified Plans Flashcards by Rose Edwards

Traditional IRA

Earned Income
Contributions:
pretax, up to 70.5, up to a limit, deductible
Withdrawals:
59.5-70.5 rule, 10% penalty if early

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Roth IRA

Earned Income
Contributions: 
        after tax, contributions after 70.5, up to a limit, not 
        deductible
Withdrawals: 
         no 70.5 rule, not taxed
Qualified Distribution: 
         have to have for at least five years, distribution 
         must wait till 59.5

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Retirement Plan: HR-10 Keogh
Who is eligible?
Who contributes?
What is the contribution limit?

Self employed

Employer matches employee’s contribution

Established by IRS; Adjusted annually

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Retirement Plan: SEP
Who is eligible?
Who contributes?
What is the contribution limit?

Self employed/small employer

Employee + Employer

Established by IRS; Adjusted annually

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Retirement Plan: Simple
Who is eligible?
Who contributes?
What is the contribution limit?

Small employer <100 employees

Employer matches employee’s contribution

Established by IRS; Adjusted annually

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Retirement Plan: 401(k)
Who is eligible?
Who contributes?
What is the contribution limit?

Any employer

Employer mathces employee’s contribution

Established by IRS; Adjusted annually

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Retirement Plan: 403(b) - TSA
Who is eligible?
Who contributes?
What is the contribution limit?

Nonprofit charitable, educational, religious

Employee + Employer

Established by IRS; Adjusted annually

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What type of an annuity has zero cost basis? (Money that you already paid taxes on)

TSA

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For a retirement plan to be qualified, it must be designed for whose benefit?

Employees

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In what form of payment must the contributions to a traditional IRA be made?

In cash.

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SIMPLE plans are available to groups of how many employees?

No more than 100.

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What type of plan is a 401(k)?

Qualified profit-sharing plan.

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What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59.5?

10% penalty.

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What is the primary purpose of a 401(k) plan?

Provide retirement income.

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What are some examples of qualified plans?

IRA
401(k)
HR-10 Keogh
SEP
SIMPLE

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What qualified plan is suitable for the self-employed?

HR-10 Keogh

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What is required to qualify an individual to contribute to a traditional IRA?

Earned income.

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If a retirement plan is qualified, what does that mean?

The plan has favorable tax treatment.

What is the penalty for excessive contributions to a traditional IRA?

Who qualifies for tax-sheltered annuities (TSA), or 403(b) plans?

Employees of nonprofit organizations under section 501(c)(3) and employees of public school systems.

An employer is sponsoring a qualified retirement plan for its employees where the employer contributes money whenever the business has profit. What is this type of plan called?

Profit sharing plan.

In qualified plans, are employer contributions taxed as income to the employees?

What are the income benefits of a qualified plan?

Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.

Employer contributions made to a qualified plan

A) Are subject to vesting requirements
B) May discriminate in favor of highly paid employees
C) Are after-tax contributions
D) Are taxed annually as salary

Are subject to vesting requirements.

What is true regarding a qualified plan?

It has a tax benefit for both the employer and employee.

A 35 year old spouse of the insured collects early distributions from her husband's retirement plan as a result of a divorce settlement. What penalties, if any, will she have to pay? A) 15% penalty tax B) Age-based penalty stipulated in the contract C) No penalties D) 10% penalty tax

No penalties. Under normal circumstances, a 10% penalty tax is imposed on distributions made before the age of 59½. There are exceptional circumstances, however, that are exempt from the penalty tax, including distributions made as a result of a divorce decree.

Who would not qualify for a Keogh Plan?

Someone who works 400 hours per year. A person must have worked at least 1,000 hours per year to be eligible for a Keogh Plan.

How are contributions to a tax sheltered annuity treated with regards to taxation? A) They are never taxed B) They are taxed as income for the employee C) They are taxed as income for the employee, but are tax free upon withdrawal D) They are not included as income for the employee, but are taxable upon distribution

They are not included as income for the employee, but are taxable upon distribution.

What type of retirement account does not require the owner to start taking distributions at age 72?

Roth IRA.

Which of the following is an IRS qualified retirement program for the self-employed? A) Buy and Sell Agreement B) 401(k) C) Keogh D) Split Dollar

HR-10 Keogh.

If a retirement plant or annuity is "qualified", this means...

It is approved by the IRS.

All of the following would be eligible to establish a Keogh retirement plan EXCEPT A) The president and employee of a family corporation B) a Sole proprietor of a service station who employs four employees C) A sole proprietor of film development store with no employees D) A hair dresser who operates her business at her house

The president and employee of a family corporation. Keogh plans are for self-employed individuals and their employees.

All of the following would be different between qualified and nonqualified retirement plans EXCEPT A) IRS approval requirements B) Taxation on accumulation C) Taxation of withdrawals D) Taxation of contributions

Taxation on accumulation. It's deferred in both types of plans, the others would differ.

If a company has a Simplified Employee Pension Plan, what type of plan is it? A) A qualified plan for a small business B) The same as a 401(k) plan C) The same as an IRA, with the same contribution limits D) An undefined contribution plan for a large business

A qualified plan for a small business.

Which of the following scenarios will incur a 10% tax penalty on distributions? A) Distributions are made on a policy before age 59.5 B) Distributions are made prior to the age of 70.5 C) Distributions are made to the beneficiary D) Distributions are made as part of a qualified rollover

Distributions are made on a policy before age 59.5

All of the following statements are true regarding tax-qualified annuities EXCEPT A) Annuity earnings are tax deferred B) They must be approved by the IRS C) Withdrawals are taxed D) Employer contributions are not tax deductible

Employer contributions are not tax deductible.

All of the following employees may use a 403(b) plan for their retirement EXCEPT A) A part-time classroom aid B) The vice president of a charitable organization C) The CEO of a private corporation D) A school bus driver

The CEO of a private corporation.

Which of the following is NOT true regarding a nonqualified retirement plan? A) It needs IRS approval B) Contributions are not currently tax deductible C) It can discriminate in benefits and selecting participants D) Earnings grow tax deferred

It needs IRS approval. Nonqualified plans do not meet the IRS requirements for favorable tax treatment of deductions and contributions.

For a retirement plan to be qualified, it must be designed for the benefit of A) Key employee B) Employer C) IRS D) Employees

Employees

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called? A) HR-10 plan B) Profit sharing plan C) 401(k) D) Tax-sheltered account plan

Profit sharing plan.

Under the 401(k) bonus or thrift plan, the employer will contribute A) An undetermined percentage for each dollar contributed by the employee B) All of the money to the plan C) 30% of what the employee contributes D) 75% of what the employee contributes

An undetermined percentage for each dollar contributed by the employee.

Which of the following is TRUE of a qualified plan? A) It may discriminate in favor of highly paid employees B) It may allow unlimited contributions C) It has a tax benefit for both employer and employee D) It does not need to have a vesting schedule

It has a tax benefit for both employer and employee

SIMPLE Plans require all of the following EXCEPT A) No other qualified plan can be used B) No more than 100 employees C) Employees must receive a minimum of %5,000 in annual compensation D) At least 1,000 employees

At least 1,000 employees

An IRA purchased by a small employer to cover employees is known as a A) Simplified Employee Pension Plan (SEP) B) 401(k) C) Defined contribution plan D) 403(b) plan

Simplified Employee Pension Plan (SEP)