Distribution Rules, Alternatives, and Taxation - Review Questions Flashcards
Which of the following are reasons why a participant would NOT want to take a lump sum distribution? (Check all that are true.)
1) Early distribution penalty
2) High tax bracket
3) Mandatory 20% withholding
4) Mandatory 10% withholding
5) Late distribution penalty
1) Early distribution penalty
2) High tax bracket
3) Mandatory 20% withholding
A participant may not want to take a lump sum distribution because he or she may be in a high tax bracket. In addition, he or she may be subject to the 20% mandatory withholding and early distribution penalties.
Employees that contribute after-tax money into their account will have to pay federal income taxes on those contributions when the money is withdrawn.
Choose the best answer.
True
False
False
Employees that make after-tax contributions can receive these amounts free of federal income taxes, although the order in which they are recovered for tax purposes depends on the kind of distribution.
Kristi has retired and turns 73 in November 2024. What is the latest date she has to take her first minimum required distribution from her qualified plan?
Choose the best answer.
1) April 15, 2025?
2) December 31, 2024?
3) April 1, 2025?
4) December 31, 2025?
3) April 1, 2025?
The required distribution subsequent 2024 may be deferred up to April 1, 2025 since it is the first RMD.
However, all subsequent minimum distributions must be made during the year to which they apply. In addition, if the participant defers the first distribution until April 1, he or she must take an additional distribution by the end of the year to cover the current year as well.
Brenda’s daughter Erica is the beneficiary of her retirement plan. Can Erica roll this money to an IRA? Choose the best answer.
Yes
No
No.
The SECURE Act of 2019 removed the ability for children (and other non-Eligible Beneficiaries) to “stretch” withdrawals over their life expectancy. Now the account must be completely distributed no later than ten years following the year of the plan owner’s death.
During the distribution phase, which of the following factors represent critical factors?
I) Time to Retirement
II) Volatility
III) Length of retirement
IV) Annual savings amount
V) Employer contributions to retirement plans
Choose the best answer.
1) II only
2) III only
3) II and III
4) I, III, IV, and V
3) II and III
Time to Retirement applies to the Accumulation Phase as does Annual Savings and Employer contributions.
Which of the following sentences best summarizes the primary advantages and disadvantages of converting a portion of the retirement portfolio to an income annuity?
Choose the best answer.
1) A lifetime income annuity protects against inflation but provides little opportunity for additional investment
growth.
2) An income annuity eliminates investment and longevity risk, but provides little flexibility and may not provide
any benefit to heirs, even if income payments are made for a relatively short period of time.
3) An income annuity may provide a residual benefit to heirs but will reduce the effective rate of return for a
portion of the investment portfolio during retirement.
4) An income annuity is specifically designed to reduce the need to withdraw assets from the investment
portfolio during a market decline, but may not provide income through the end of retirement.
2) An income annuity eliminates investment and longevity risk, but provides little flexibility and may not provide
any benefit to heirs, even if income payments are made for a relatively short period of time.
The requirement for certain retirement plans to provide a qualified joint and survivor annuity as the default form of benefit has which of the following requirements?
I) Must be the default benefit both pre- and post-retirement as long as a balance remains in the plan.
II) May provide a survivor annuity that ceases upon remarriage of the surviving spouse.
III) Survivor benefits must be for not less than 50% and not greater than 100% of annuity payable during joint
lives.
IV) Annuity benefits must be the actuarial equivalent of other forms of benefit.
Choose the best answer.
1) I, III, and IV
2) I and III
3) I and IV
4) All of the above
1) I, III, and IV
When deciding to take a deferred payment or lump sum distribution which of the following are NOT correct statements regarding the relevant considerations in making this decision?
I) The decision may be made primarily on the basis of tax efficiency.
II) Consideration must be paid to Income needs for regular lifestyle costs as well as irregular one-time
expenses.
III) A comparison of equivalent rates of return between each option must be made.
IV) Among the irrelevant factors are age and health of the participant and beneficiary.
Choose the best answer.
1) I, II, and IV
2) I and IV
3) I only
4) IV only
2) I and IV
After consulting with their financial planner Tim and Rebekah Meyers have decided to utilize a Time Defined Asset Pool strategy to fund their retirement income. Which of the following choices correctly describes the steps involved in implementing this strategy and the order in which they are taken?
I) In the first down market year withdraw from cash accounts rather than the invested retirement portfolio.
II) Divide the retirement portfolio into pools for each phase of retirement and invest these pools utilizing an
allocation that is appropriate to the time horizon to each phase.
III) Determine applicable retirement phases and the length of each.
IV) Re-allocate asset pools as time horizons grow shorter during retirement and each successive pool of assets
begins to be drawn down.
Choose the best answer.
1) III, II, then IV
2) III, II, I, then IV
3) II then III
4) III, II, then I
1) III, II, then IV
Carolyn took a full distribution of her retirement plan assets from Tax Masters, Inc. As she elected Net Unrealized Appreciation treatment for this distribution she received in-kind the 1,000 shares of Tax Masters, Inc. stock that was held in her retirement plan. At the time of distribution Carolyn had an average basis in the stock of $10 per share, and stock was trading at $18 per share. One week after receiving the stock the price was unchanged and Carolyn sold 200 shares of her stock. Two years later Carolyn sold the remaining 800 shares at a price of $20 per share. Which of the following choices best describes the tax treatment of these transactions?
Choose the best answer.
1) $11,600 of ordinary income the year the stock is distributed, plus $8,000 of long term capital gain two years
after the distribution when the remaining shares are sold.
2) $11,600 of long term capital gain in the year the stock is distributed, plus $8,000 of long term capital gain two
years after the distribution when the remaining shares are sold.
3) $10,000 of ordinary income plus $1,600 of long term capital gain in the year the stock is distributed, plus
$8,000 of long term capital gain two years after the distribution when the remaining shares are sold.
4) $2,000 of ordinary income plus $1,600 of long term capital gain in the year the stock is distributed, plus
$8,000 of ordinary income and $8,000 long term capital gain two years after the distribution when the
remaining shares are sold.
3) $10,000 of ordinary income plus $1,600 of long term capital gain in the year the stock is distributed, plus
$8,000 of long term capital gain two years after the distribution when the remaining shares are sold.
Which of the following statements correctly describe the grandfathered 10-year averaging option?
I) This option is available only to individuals who were 50 years of age prior to January 1st, 1986.
II) Taxes on the distribution may be paid over a 10-year time period.
III) All taxes on the distribution must be paid in the year of distribution.
IV) Taxes on the distribution are calculated using current ordinary income tax brackets.
Choose the best answer.
1) I and II
2) I and III
3) I, II, and IV
4) I, III, and IV
2) I and III
