Exam #2 Questions Flashcards
Sonya will be retiring soon. All of the following expenditures could be eliminated in her retirement needs calculation except:
A. The $2,200 per year she spends on her work suits and dress clothes.
B. The $18,000 annual mortgage payment she makes that is scheduled to end seven years into retirement.
C. The FICA taxes she pays each year.
D. The $22,000 per year she contributes to her 401(k) plan.
B. The $18,000 annual mortgage payment she makes that is scheduled to end seven years into retirement.
Kendra has an account balance in her employer’s money purchase pension plan of $100,000. The plan has a 2-to-6-year graded vesting policy. She has been a participant for three and a half years and has worked for the company for five years. Assuming the plan permits loans, what is the maximum loan that Kendra could take from the plan?
A. $20,000
B. $30,000
C. $40,000
D. $50,000
C. $40,000
TRUE OR FALSE: 403(b), 457, and SIMPLE are all subject to the same annual contribution limits, including various catch-up provisions.
False
Deferred compensation plans are most often used for which of the following reasons?
- To decrease the executive’s wage replacement ratio
- To defer the executive’s compensation
- In lieu of qualified plan
A. 1 & 2
B. 1 & 3
C. 2 & 3
D. All of the options are correct
C. 2 & 3
TRUE OR FALSE: Once established, qualified plans may not be terminated.
False
Defined benefit plans may use plan forfeitures to:
A. Pay plan administrative costs
B. Reduce plan costs
C. Allocate to remaining plan participants
D. All of the above
B. Reduce plan costs
Stefan saved diligently during his working years and accumulated $1.8 million. Using the 4% per year approach to distribution planning, how much income could he estimate his portfolio might provide?
A. $72,000 per year
B. $180,000 per year
C. $90,000 per year
D. $36,000 per year
A. $72,000 per year
TRUE OR FALSE: When calculating a client’s Capital Needs Analysis, the Annuity Method assumes an individual’s last dollar is spent on their last day of life.
True
Which of the following about SIMPLE plans is NOT true?
A. They have no annual filing requirement
B. The costs associated with the plan are minor
C. Generally, no other retirement plans are permitted
D. Could be set up as a SIMPLE IRA, but almost all are SIMPLE 401(k)s
D. Could be set up as a SIMPLE IRA, but almost all are SIMPLE 401(k)s
In most cases, when selecting the appropriate qualified plan, employers conduct a/an __________ which will identify each employee, their age, compensation, number of years of employment, and any ownership interest in the company contemplating the adoption of a qualified plan.
A. Compliance Inspection
B. Financial Audit
C. Employee Survey
D. Employee Census
D. Employee Census
TRUE OR FALSE: If an employer usually experiences fluctuating cash flows, it is more advisable to select one of the qualified profit-sharing plan options because profit-sharing plans have discretionary contributions each year.
TRUE
Johnny is 35 years old and inherits an IRA from his mother, who dies prematurely at age 60 in May 2023. Which of the following statements is correct regarding his options for the inherited IRA?
A. Johnny does not have to take distributions until he turns 75 years old.
B. Johnny can rollover the IRA into his own IRA.
C. Johnny must take out the entire account value within 10 years.
D. Johnny can take distributions over his single life expectancy.
C. Johnny must take out the entire account value within 10 years.
Jonas turns 40 in 1 month. He has accumulated $200,000 of tax deferred money within a traditional IRA. The account only includes pre-tax contributions. Jonas decides to take an international trip to commemorate his birthday and withdraws $20,000 from his traditional IRA. What are the potential tax implications associated with this withdrawal?
- Ordinary income taxes
- Capital gains taxes
- Net unrealized appreciation
- Early withdrawal penalty
A. 1 only
B. 2 only
C. 1 & 4
D. 3 & 4
C. 1 & 4
TRUE OR FALSE: Loans are permitted from a SIMPLE IRA but not from a SIMPLE 401(k).
False
Which of the following are risks to financial independence?
A. A shortened work life expectancy.
B. An extended retirement life expectancy.
C. Inadequate investment rate of return.
D. All of the above.
D. All of the above.
Benefits of Roth conversions include each of the following EXCEPT:
A. Tax avoidance at time of conversion
B. Tax diversification
C. Minimum distribution avoidance
D. Possible estate tax reduction
A. Tax avoidance at time of conversion
TRUE OR FALSE: Qualified distributions from a Roth account satisfy both a five-year rule and a distribution rule for earnings to be both tax free and penalty free.
True
All the following types of income are considered earned income for a traditional IRA contribution except:
A. K-1 income from an S corporation
B. W-2 income
C. Self-employment income
D. Alimony resulting from a divorce agreement signed June 1, 2018
A. K-1 income from an S corporation
TRUE OR FALSE: One thing that both secular and rabbi trust have in common is that they are both revocable trusts.
False
Defined contribution plans may use plan forfeitures to:
A. Pay plan administrative costs
B. Reduce plan costs
C. Allocate to remaining plan participants
D. All of the above
D. All of the above
Corey has a vested account balance in his employer-sponsored qualified money purchase pension plan of $60,000. He has two years of service with his employer and the plan follows the least generous graduated vesting schedule permitted under PPA 2006. If Corey has an outstanding loan balance within the prior 12 months of $15,000, what is the maximum loan Corey could take from this qualified plan, assuming the plan permitted loans?
A. $15,000
B. $30,000
C. $35,000
D. $50,000
A. $15,000
TRUE OR FALSE: SIMPLE plans can only be established by companies with 100 or fewer employees who earned at least $5,000 of compensation from the employer for the preceding calendar year.
True
Mike owns a yard maintenance company. He mowed his client’s lawn in November of Year 1, and he received a check in the mail for his services in December of Year 1. Mike has been successful in Year 1, earning more money than he believes he will make in Year 2. To minimize his year 1 tax bill, Mike decides to not cash the check until Year 2. Which principle/doctrine below prevents Mike from utilizing the described strategy?
A. Constructive Receipt
B. Economic Benefit
C. Substantial Risk of Forfeiture
D. Assignment of Income
A. Constructive Receipt
Karl began his full-time career at age 20. He is now 30 and plans on retiring at age 62. What is Karl’s Work Life Expectancy, or WLE?
A. 32
B. 62
C. 10
D. 42
D. 42
Ralph, a 40-year-old nurse who earns $80,000 a year, saves 14% of his annual gross income. Assume that Ralph wants to maintain his exact pre-retirement lifestyle. Calculate Ralph’s wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars.
A. 70%
B. 78%
C. 86%
D. 92%
B. 78%
TRUE OR FALSE: An IRA owner can invest assets within the account in life insurance.
False
TRUE OR FALSE: Excess IRA contributions are subject to a 6.2% excise tax on excess contributions for each year the excess contribution remains in the account.
False
When an employer is designing a qualified plan, they can individually design the plan using an ERISA attorney or the company can use an IRS-approved master or prototype plan. Individually designing a plan is usually __________ than using a master or prototype plan.
A. More Expensive
B. More Advisable
C. More Compliant
D. Less Expensive
A. More Expensive
Employers generally must file an annual report with the Department of Labor. Which of the following forms is used if the plan only provides benefits for the employer, the employer and their spouse, or one or more partners and their spouses?
A. Form 5500-EZ
B. Form 5500-SF
C. Form 5500
D. None of the above
A. Form 5500-EZ
TRUE OR FALSE: The Pension Benefit Guarantee Corporation (PBGC) provides coverage to defined contribution plans, but it does not cover defined benefit pension plans of professional services corporations with 25 or fewer participants.
False
A distribution from a tax-deferred, qualified plan was made payable to a plan participant. What strategy could the participant utilize if they want to avoid current taxation on the distribution?
A. Deposit an amount equal to the gross distribution in another tax-deferred plan within 60 days, known as a direct rollover.
B. Claim hardship as the reason for the withdrawal.
C. Deposit an amount equal to the gross distribution in another tax-deferred plan within 60 days, known as an indirect rollover.
D. No strategies exist to avoid current taxation once the distribution occurs.
C. Deposit an amount equal to the gross distribution in another tax-deferred plan within 60 days, known as an indirect rollover.
TRUE OR FALSE: Qualified plans generally offer a several distribution options including but not limited to annuities, lump-sum distributions, and in-service withdrawals.
True
TRUE OR FALSE: Defined contribution plan participants assume investment risk for the assets in their accounts.
True
A SEP can be established by which of the following entities?
- S corporation.
- LLC taxed as a partnership.
- C corporation.
A. 1 only
B. 1 & 2
C. 2 & 3
D. All of the options are correct
D. All of the options are correct
What is the earliest age that an IRA catch-up contribution can be made?
A. 45
B. 50
C. 55
D. 60
B. 50
TRUE OR FALSE: Employer contributions to a SIMPLE IRA and the related earnings are fully (100%) and immediately vested and cannot be forfeited by the employee.
True
According to the text, which of the following may establish SIMPLE plans?
- Testamentary Trusts
- Government Entities
- C Corporations
- Partnerships
A. 1 only
B. 2 & 4
C. 2, 3 & 4
D. All of the options are correct
C. 2, 3 & 4
TRUE OR FALSE: Distributions from SIMPLE IRAs before the attainment of age 59 and ½ always incur a 10% early distribution penalty.
False
Which of the following is NOT a covered employee for purposes of the rule that no deduction is allowed by a public company for a covered employee’s compensation to the extent it exceeds $1,000,000 for the year.
A. The current chief compliance officer (CCO), the 7th highest paid officer for the taxable year
B. The chief executive officer (CEO) at any time during the taxable year, or was an individual acting in such a capacity
C. The chief financial officer (CFO) at any time during the taxable year, or was an individual acting in such a capacity
D. The three highest compensated officers for the taxable year
A. The current chief compliance officer (CCO), the 7th highest paid officer for the taxable year
TRUE OR FALSE: Employers who offer a SIMPLE IRA are required to make either matching contributions on behalf of employees who make elective deferrals, or they must make nonelective contributions to all eligible employees.
True
This nonqualified deferred compensation plan involves fictional shares of stock that are initially valued at the time of the grant.
A. Stock options
B. Excess-benefit plans
C. Phantom stock plans
D. Salary-reduction plans
C. Phantom stock plans
If stock acquired after exercising an ISO is disposed of before either two years from the date of the grant or one year from the date of exercise, the sale is known as a/an __________ and some of the favorable tax treatment is lost.
A. Short sale
B. Disqualifying disposition
C. Wash sale
D. Qualifying disposition
B. Disqualifying disposition
TRUE OR FALSE: Stock Appreciation Rights (SARs) are rights that grant to the holder cash in an amount equal to the excess of the fair market value of the stock over the exercise price.
False
If still working, an individual may be eligible to contribute to which of the following plans even after the attainment of their Required Minimum Distribution age?
- Traditional IRA
- SEP-IRA
- SIMPLE IRA
A. 3 only
B. 1 & 3
C. 2 & 3
D. All of the options are correct
D. All of the options are correct
Tori is a young executive at a technology firm. She was awarded stock options several years ago with a total current exercise price of $250,000. Tori would like to exercise the options. Her financial assets include a $150,000 401(k), $20,000 in checking, $10,000 in savings, and $10,000 in government bonds she received as a gift when graduating college. With respect to the options, which of the following strategies, if available, would be most advantageous to Tori?
A. Disqualifying disposition
B. Buy put options
C. Cashless exercise
D. Sell call options
C. Cashless exercise
Which of the following are generally correct about spending during retirement years?
A. Given the length of time in retirement, it is unlikely that inflation will have a significant impact on annual spending.
B. Retirement spending, excluding healthcare costs, tends to decline during the later part of retirement.
C. Spending, on an inflation-adjusted basis, is fairly constant during retirement.
D. Healthcare costs usually decline.
B. Retirement spending, excluding healthcare costs, tends to decline during the later part of retirement.
Which of the following expenditures will most likely decrease during retirement?
A. FICA taxes (i.e., Social Security and Medicare)
B. Home maintenance
C. Health care costs
D. Vacation and travel costs
A. FICA taxes (i.e., Social Security and Medicare)
Participation in which of the following plans will not be considered active participation for purposes of IRA deductibility?
A. Tax sheltered annuity
B. Simplified employee pension
C. SIMPLE
D. 457 plan
D. 457 plan
With incentive stock options, the bargain element is __________.
A. The difference between the exercise price and the fair market value at the date of exercise
B. The difference between the exercise price and the fair market value on the date of grant
C. The difference between the fair market value on the date of grant and the year-end value the year the grant was awarded
D. The difference between the exercise price on the day of grant and the fair market value on the date of Initial Public Offering (IPO)
B. The difference between the exercise price and the fair market value on the date of grant
TRUE OR FALSE: The two methods for calculating the Wage Replacement Ratio (WRR) are the top-down approach and the bottom-up, also known as the budgeting, approach.
False
