Chapter 9 Review (Life): Retirement Plans

Question 1

______ ______ are retirement plans that meet federal requirements and receive favorable tax treatment. ______ ______ provide tax benefits and must be approved by the IRS. The plans must be permanent, in writing, communicated to employees, defined contributions or benefits, and cannot favor highly paid employees, executives, or stockholders. The primary types of ______ ______ includes defined benefit and defined contribution plans.

Answer 1

Qualified Plans

Question 2

If more than 60% of a qualified retirement plan’s assets are in key employee accounts, the plan is considered ___ _____.

Answer 2

top heavy

Question 3

To comply with ERISA minimum participation standards, qualified retirement plans must allow the enrollment of all employees over ___ __ with one year experience.

Answer 3

Age 21

Question 4

Qualified Plan feature:

Employer’s contributions are ___ ____ as a business expense.

Answer 4

tax deductable

Question 5

Qualified Plan Feature

Employee contributions are made with:

Answer 5

pretax dollars - contributions are not taxed until withdrawn.

Question 6

Qualified Plan Feature

Interest earned on contributions is tax-deferred until:

Answer 6

Withdrawn upon retirement.

Question 7

Qualified Plan Feature

The annual addition to an employee’s account in a qualified retirement plan

Answer 7

cannot exceed the maximum limits set by the Internal Revenue Service

Question 8

Non-qualified Plans

__ ___ need to be approved by the IRS

Answer 8

do not.

Question 9

Non-qualified Plans

___ descriminate in favor of certain employees.

Answer 9

Can

Question 10

Non-qualified Plans

Contributions are

Answer 10

not tax-deductable.

Question 11

Non-qualified Plans

Interest earned on contributions is tax-deferred until

Answer 11

withdrawn upon retirement.

Question 12

Distributions are mandatory by _____ ___ of the year following age _____, and failure to take the required withdrawal results in a ___ excise tax on those funds.

Answer 12

April 1st,
70 1/2,
50%

Question 13

Withdrawals by the employee made prior to age _____ are assessed an additional ___ penalty tax.

Answer 13

59 1/2
10%

Question 14

Funds may be withdrawn prior to the employee reaching age 59 1/2 without the 10% penalty tax: if

Answer 14

the employee dies or becomes disabled; if a loan is taken on the plan’s proceeds; if the withdrawal is the result of a divorce proceeding; if the withdrawal is made to a qualified rollover plan; or if the employee elects to receive annual level payments for the remainder of his life.

Question 15

_____ ________ plans pay a specified benefit amount upon the employee’s retirement. When the term pension is used, it normally is referring to a _____ _____ plan. The benefit is based on the employee’s length of service and/or earnings. _____ _____ plans are mostly funded by individual and group deferred annuities.

Answer 15

Defined Benefit

Question 16

_____ _____ plans do not specify the exact benefit amount until distribution begins. Two main types of plans are _____ _____ and _____ plans. The maximum contribution is the lesser of the employee’s earnings or $49,000 per year.

Answer 16

Defined contribution
profit-sharing
pension

Question 17

A type of retirement plan that sets aside a portion of the firm’s net income for distributions to employees who qualify under the plan. Plans must provide participants with the formula the employer uses for contributions. The contributions may vary year to year, and contributions and interest are tax-deferred until withdrawal.

Answer 17

Profit-Sharing Plans

Question 18

Employers contribute to a plan based on the employee’s compensation and years of service, not company profitability or performance.

Answer 18

Pension Plans

Question 19

Allow employers to contribute a fixed annual amount, apportioned to each participant, with benefits based on funds in the account upon retirement. _____ _____ plans have a _____ _____ amount.

Answer 19

Target benefit

Question 20

These plans are similar to a profit-sharing plan, except that contributions by the employer do not depend on profits, and benefits are distributed in the form of company stock.

Answer 20

Stock Bonus Plans

Question 21

_____ plans allow employers to make tax-deferred contributions to the participant, either by placing a cash bonus into the employee’s account on a pre-tax basis or the individual taking a reduced salary with the reduction placed pre-tax in the account. The account’s funds are taxable upon withdrawal.

Answer 21

Cash or Deferred Arrangement (401(k) Plans)

Question 22

_____ _____ are a special class of retirement plans available to employees of certain charitable, educational, or religious organizations.

Answer 22

Tax-Sheltered Annuity (403(b) Plans)

Question 23

_____ are basically an arrangement where an employee (including a self-employed individual) establishes and maintains an IRA to which the employer contributes. Employer contributions are not included in the employee’s gross income. A primary difference between a _____ and an IRA is the much larger amount that can be contributed to an employee’s _____ plan is the lesser of 25% of the employee’s annual compensation.

Answer 23

Simplified Employee Plans (SEPs)

Question 24

_____ plans are available to small businesses (including tax exempt and government entities) that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year. An employer can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee. To establish a _____ plan, the employer must not have a qualified plan in place.

Answer 24

Savings Incentive Match Plan for Employees (SIMPLE)

Question 25

_____ or HR-10 plans are for self-employed persons, such as doctors, farmers, lawyers, or other sole- proprietors. _____ may be defined contribution or defined benefit plans. Defined contribution _____ have a maximum contribution of $49,000 per year, while defined benefit _____ have maximum benefits of $195,000 per year. Contributions are tax-deductible, and interest and dividends are tax-deferred.

Answer 25

Keogh

Question 26

IRA’s are established

Answer 26

by an individual who has earned income to save for retirement.

Question 27

_____ _____ allow for an individual to contribute a limited amount of money per year, and the interest earned is tax-deferred until withdrawal. Contribution limits are indexed annually, currently at _____ per year, with _____ for individuals age _____ or older. Some individuals may deduct contributions from their taxes based on their adjusted gross income (AGI), but all withdrawals are taxable income. If an individual or spouse does not have an employer retirement plan, the entire contribution is _____, regardless of AGI.

Answer 27

Traditional IRAs
$5,000
$6,000
50
tax-deductible

Question 28

To avoid penalties, traditional IRA owners must begin to receive payment from their accounts no later than _____ in the year following the attainment of age _____.

Answer 28

April 1
70 1/2.

Question 29

Funds may be withdrawn prior to the employee reaching age _____ without paying the ___________ (but the interest is still taxable) to the following:

death, disability, first-time homebuyers up to _____, education (no dollar maximum), health insurance premiums if unemployed, qualified medical expenses.

Answer 29

59 1/2

10% penalty tax

$10,000

Question 30

Roth IRAs are designed so that withdrawals are received _____.

Answer 30

income tax-free.

Question 31

Contributions to _____ are subject to the same limits as traditional IRAs, but are not tax-deductible. Interest on contributions is not taxable as long as the withdrawal is a qualified distribution. Qualified distributions must occur

Answer 31

Roth IRAs
after five years in the event of death or disability of the individual, up to $10,000 for first-time homebuyers, or at the age of 59 1/2.`

Question 32

Rollovers are subjected to ___ withholding tax if eligible rollover funds are received personally by a participant in a qualified plan, unless the funds are deposited into a new IRA or qualified plan within _____ _____ of distribution.

Answer 32

20%
60 days

Question 33

Rollover contributions to an individual retirement annuity (IRA) are _____ by dollar amount

Answer 33

unlimited

Question 34

All of the following are types of insurance policy exchanges that can be made without current taxation:

Answer 34

1. The exchange of a life insurance policy for an annuity
2. An annuity exchanged for another annuity contract
3. A life insurance policy exchanged for another life policy

Question 35

The exchange of an annuity for a life insurance policy is

Answer 35

NOT permitted.

Question 36

An employee requested that the balance of her 401(k) account be sent directly to her in one lump sum. Upon receipt of the distribution, she immediately has the funds rolled over into an IRA. What is the tax consequence of the distribution sent to this employee?

Answer 36

Distribution is subject to federal income tax withholding.

(A participant must complete a rollover to another qualified plan within 60 days or the distribution is considered a nonqualified distribution and is subject to taxes and penalties. A plan sponsor must withhold 20% of the distribution for federal taxes on a rollover. Once the rollover takes place to the new custodian, the remainder of the distribution is released.)

Question 37

An individual working part-time has an annual income of $25,000. If this individual has an IRA, what is the maximum deductible IRA contribution allowable?

Answer 37

$6,000

Question 38

Rick recently died and left behind an individual IRA account in his name. His widow was forwarded the balance of the IRA. The widow qualifies for the:

Answer 38

marital deduction.

(technically, Unlimited Marital Deduction, which generally exempts the transfer from estate taxes.)

Question 39

A sole proprietor may use this plan ONLY if the employees of this business are included.

Answer 39

Keogh Pension Plan