Comprtency 13 Section 2 Flashcards
- Taking additional taxable distributions from an IRA could result in a higher Medicare Part B premium
True. (LO 13-2-1)
- A deemed distribution from an IRA account could occur if the participant engaged in a prohibited transaction or pledged the IRA as collateral for a loan
True. (LO 13-2-1)
- A division of a pension benefit under a QDRO results in income tax on the entire benefit when the property is divided.
False. A QDRO property division does not trigger income tax—only distributions to the participant or alternate payee under the QDRO would trigger taxes. (LO 13-2-1)
- A qualified charity makes an excellent beneficiary of an IRA because distributions are not subject to income taxes when they are paid to the charity.
True. (LO 13-2-1)
- If a charity and the participant’s child are the primary beneficiaries of an IRA, paying out the charity’s benefit before September 30th of the year following death preserves the ability to stretch out payments over the life expectancy of the child
True. (LO 13-2-1)
- A death beneficiary who takes a withdrawal from an inherited IRA receives a tax credit for any estate taxes that were paid by the participant’s estate because of the IRA.
False. The death beneficiary receives a deduction for estate taxes paid, not a tax credit. (LO 13-2-1)
- When a life insurance policy is part of a participant’s 401(k) plan benefit, the Table 2001 amounts that have already been taxed can only be recovered if the policy is distributed to the participant as part of the benefit
True. (LO 13-2-1)
- One of the best ways to avoid the 10% early withdrawal penalty tax is to have adequate emergency funds outside the plan so that withdrawals from IRAs and other qualified plan accounts are not required
True. (LO 13-2-2)
- The exception to the 10% early withdrawal penalty tax for higher educational expenses applies to withdrawals from IRAs and 401(k) plans, but not defined benefit plans.
False. This exception only applies to IRAs, not qualified plans like a 401(k) plan. (LO 13-2-2)
10.The substantially equal periodic payment exception to the 10% early withdrawal penalty generally allows an individual to take out more than the calculated amount during the prescribed withdrawal period.
False. Distributions cannot be decreased or increased during this period except in the case of a participant that switches to the required minimum distribution approach to calculating required withdrawals. (LO 13-2-2)
11.A participant that wants to lower the amount withdrawn under the substantially equal periodic payment exception to the 10% early withdrawal penalty is likely to benefit by switching to the required minimum distribution approach to calculating required withdrawals.
True. (LO 13-2-2)
12.The 10% early withdrawal penalty is never assessed on the portion of a withdrawal from an IRA or Roth IRA.
False. This is the general rule but there is an exception for early withdrawals from a Roth IRA made within 5 years of the conversion. (LO 13-2-2)
13.The deductible medical expense exception to the 10% early withdrawal penalty tax that applies to distributions from IRAs becomes more valuable in 2013 when medical expenses become deductible when they exceed 5% of AGI.
False. In 2013 the threshold changes from 7.5% to 10%. (LO 13-2-2)
14.Joe retires at age 53 from his company that maintains a 401(k) plan. If Joe waits until age 56 to take withdrawals, any withdrawal from the 401(k) will be exempt from the 10% early withdrawal penalty tax.
False. Joe has to wait to retire until the calendar year that he attains age 55 to be eligible for the age 55 exception. (LO 13-2-2)
15.Withdrawals from an IRA qualify for the higher education expense exception to the 10% penalty tax if expenses are for the participant, spouse, children or grandchildren
True. (LO 13-2-2)
16.To qualify for the first time home buying exception to the 10% early withdrawal penalty, funds have to be withdrawn within 30 days of the purchase of the home.
False. There is a time limit, but it is 120 days. (LO 13-2-2)
17.A client can undermine the opportunity to elect NUA tax treatment by selling employer stock just prior to retirement.
True. (LO 13-2-3)
18.If a client receives a distribution that includes both cash and employer stock, the client can rollover the cash and take the stock into income, taking advantage of the NUA tax rules.
True. (LO 13-2-3)
19.A 30-year-old taking a distribution of employer stock that plans to sell the stock immediately then reinvest the proceeds in other retirement assets is an excellent candidate to elect NUA tax treatment
False. This individual may be better off rolling the benefit into an IRA so that the 10 percent penalty is avoided on the ordinary income portion of the distribution and taxes can be deferred on the entire value of the benefit until distributions are taken from the employer’s plan. (LO 13-2-3)
20.An IRA participant cannot invest directly in a life insurance policy but a life insurance policy distributed from a qualified plan can be rolled into an IRA.
False. IRAs cannot hold life insurance under any circumstances. (LO 13-2-4)
21.A nonspousal beneficiary that receives a death benefit from a qualified plan has 60 days to roll it into an inherited IRA.
False. A payment directly to the participant results in taxation of the entire distribution. To complete this transaction there must be a direct rollover from the qualified plan directly to the trustee of the inherited IRA. This is an important technicality as it has serious tax ramifications. (LO 13-2-4)
22.If a qualified plan benefit is rolled into another qualified plan, the amount rolled over will become subject to the qualified joint and survivor requirements that may apply to that plan.
True. A downside to a rollover to an employer provided plan is that the amount is subject to the rules of the new plan. (LO 13-2-4)
23.If an individual fails to complete an IRA rollover within 60 days an automatic extension is granted if the taxpayer transmitted the funds to a financial institution within 60 days and due to the error of the financial institution the transaction wasn’t completed until 6 months later.
True. (LO 13-2-4)
24.The general rule is that a taxpayer cannot use a rollover to substitute property by rolling over different property of the same value.
True. (LO 13-2-4)