EXAM #2 – Quizzes (CH. 2, 7-10, 12) Flashcards
TRUE OR FALSE:
An employee, age 40, cannot defer more than $22,500 for 2023 of their compensation into a SARSEP in a single year.
TRUE
TRUE OR FALSE:
To establish a SARSEP, an employer had to have a minimum of 25 employees.
FALSE
TRUE OR FALSE:
A 55-year-old individual can contribute a maximum of $6500 to an IRA in 2023.
FALSE
TRUE OR FALSE:
Annual contributions to an IRA are limited to the lesser of a single individual individuals earned income or the annual limit in effect.
TRUE
TRUE OR FALSE:
Individuals who do not have any earned income are never permitted to contribute to an IRA.
FALSE
TRUE OR FALSE:
IRA contributions that exceed the contribution limits are subject to an excise tax of six percent.
TRUE
TRUE OR FALSE:
Individuals who are active participants in a qualified retirement plan or SEP may be subject to a reduced maximum deductible IRA contribution.
TRUE
TRUE OR FALSE:
Lump sum IRA distributions may be taken at any time without being subject to penalty.
FALSE
TRUE OR FALSE:
The savers credit is generally available to all taxpayers who saved in a 401(k) plan or an IRA regardless of income.
FALSE
TRUE OR FALSE:
The distribution rules for IRA and annuities are the same as for traditional IRAs.
TRUE
TRUE OR FALSE:
As with traditional IRA, Roth IRAs may not be funded after the owner obtain the age of 70.5.
FALSE
TRUE OR FALSE:
An individual may contribute to a Roth IRA if they fall within prescribed earned income limits.
TRUE
TRUE OR FALSE:
Individuals with high taxable incomes are permitted to convert traditional IRAs to Roth IRAs.
TRUE
TRUE OR FALSE:
A backdoor Roth may be used by a taxpayer with high income to funnel contributions from a traditional IRA to a Roth IRA without incurring additional income tax.
TRUE
TRUE OR FALSE:
Cash, stock, bonds, life insurance, and collectibles are all permitted investments for IRAs.
FALSE
TRUE OR FALSE:
Funds in an IRA may be transferred to a qualified plan.
TRUE
TRUE OR FALSE:
IRAs are exempt from creditor’s claims by ERISA.
FALSE
TRUE OR FALSE:
Loans from an IRA are considered prohibited transactions.
TRUE
TRUE OR FALSE:
Requirements for coverage in a SEP include an employees performance of service for three of the last five years.
TRUE
TRUE OR FALSE:
Part-time employees are exempt from being included in a SEP.
FALSE
TRUE OR FALSE:
Employer contributions to SEPs are discretionary and do not have to be made each year.
TRUE
TRUE OR FALSE:
Employer contributions to a SEP are always 100% vested.
TRUE
Axle, who is currently age 52, made his only contribution to his Roth IRA in 2023 in the amount of $6500. If he were to receive a total distribution of $11,000 from his Roth RA in the year 2028 to purchase a new car, how would he be taxed?
A. Since Axle waited, five years, the distribution will be classified as a qualified distribution and will therefore not be taxable or subject to the 10% early distribution penalty
B. Since Axel waited, five years, the distribution will be classified as a qualified distribution and will therefore not be taxable, but will be subject to the 10% early distribution penalty
C. Although Axel waited, five years, the distribution will not be classified as a qualified distribution and will therefore be taxable and will be subjecting the 10% or late distribution penalty
D. Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable
D. Although Axel waited, five years, the distribution will not be classified as a qualified distribution and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that taxable
Gloria, divorced and age 55, received taxable alimony of $72,000 in 2023. In addition, she received $7000 in earnings from a part-time job. Gloria is not covered by a qualified plan. What is the maximum deductible IRA contribution that Gloria can make for 2023?
A. $2000
B. $3000
C. $6500
D. $7500
C. $6500
Robbie and Robyn, both age 45, are married and filed a joint return for 2023. Robyn earned a salary of $100,000 in 2023 and is covered by her employer’s 401(k) plan. The employer made a 2% non-elective contribution to the plan on her behalf in 2023. Robbie and Robyn earned interest of $40,000 in 2023 from a joint savings account. Robbie is not employed, and the couple had no other income. On April 15, 2024, Robyn contributed $6500 to an IRA for herself and $6500 to an IRA for Robbie. The maximum allowable IRA deduction on the 2023 return is:
A. $0
B. $5,850
C. $6,500
D. $13,000
C. $6,500
David took a lump-sum distribution from his employer’s qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David has met 10-year forward averaging requirements, which of the following is/are correct regarding tax treatment of the transaction?
- If at age 59 he distributes the IRA, he benefits from 10-year forward averaging.
- If he rolls the entire IRA to a new employer’s qualified plan, he may be eligible for forward averaging treatment in the future.
- If he rolls over a portion of the IRA to a new employer’s qualified plan, he may preserve any eligibility for forward averaging on that portion that was rolled over.
- If David immediately withdraws the entire amount from his IRA, he may benefit from 10-year forward averaging.
A. 3 only
B. 2 and 3
C. 2, 3, and 4
D. 1, 2, 3, and 4
B. 2 and 3
Which statements are generally correct regarding penalties associated with IRA accounts in 2023?
- Distributions made prior to age 59 1/2 hour subject to the 10% premature distribution penalty.
- There is a 25% access tax. I am required minimum distribution, not made by April 1 of the year following the year in which age 73 is attained.
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
C. Both 1 and 2
Plan selection should only focus on the needs of the company and should never focus on the knees of the small business owner as this would be a conflict of interest.
FALSE
While an employee census is generally essential, it may not be critical if the only objective is to provide a savings vehicle for employee contributions.
TRUE
An employer with fluctuating cash flows will generally choose a pension plan.
FALSE
To take a deduction for contributions for a particular year, the qualified plan must be adopted by the due date of the tax return for the plan year including extensions.
TRUE
Notification of the adoption of a qualified plan may be made in person, via email, or by posting notice at the place of business.
TRUE
If the plan sponsor shifts the investment responsibility to the plan participants, then the sponsor no longer has any fiduciary responsibility.
FALSE
Defined benefit plans must make quarterly installment payments of the required contributions.
TRUE
Excess IRA contributions are subject to a/an __________ excise tax on excess contributions for each year the excess contribution remains in the account.
A. 10%
B. 1.45%
C. 6%
D. 6.2%
C. 6%
Based on legislative changes, traditional and/or Roth IRA contributions can be made after age 70½ assuming other eligibility criteria (e.g., earned income) are met.
TRUE
Regardless of a taxpayers Adjusted Gross Income and/or active plan participation, anyone with earned income is allowed to __________ to a traditional IRA, up to the maximum allowable contribution.
A. make contributions
B. deduct contributions
A. make contributions
To which of the following participant accounts would an employer be required to make a SEP-IRA contribution?
A. J.R., an eligible plan participant who died in June of the plan year.
B. LaDonna, a former employee, who worked until September of the plan year.
C. Damien, age 20, who has been employed by the company for the last two years.
D. Choices a and b only
D. Choices a and b only
Your long-time client has reached their Required Minimum Distribution age. Though required to make distributions, they are philanthropic, would like to make a donation to their favorite non-profit organization, and they do not need the money to fulfill their own needs. Which distribution strategy might you recommend?
A. Hardship Withdrawal
B. Indirect Rollover
C. Direct Rollover
D. Qualified Charitable Distribution
D. Qualified Charitable Distribution
Traditional IRA contributions must be made by the due date of the individual’s tax return, including extensions.
FALSE
Always by April 15th (tax return filing date)
An individual may be able to fund a Roth IRA through which of the following methods:
I. Non-deductible contributions
II. Conversion of existing, traditional IRA accumulations
III. Backdoor Roth
IV. Deductible contributions
A. I, II, and IV
B. I and IV
C. I, II, and III
D. All of the choices are ways I which a Roth IRA can be funded.
C. I, II, and III
An IRA owner could choose to invest their portfolio in each of the following except:
A. Stocks
B. Life Insurance
C. Bonds
D. Options, if allowed by the custodian.
B. Life Insurance
IRAs are afforded all the same protections as qualified plans under ERISA.
FALSE
Tristan is single, aged 47, and an active plan participant. His adjusted gross income, or AGI, for 2024 is $82,000. Based on the 2024 phase out range of $77,000 - $87,000 for single filers who are active plan participants, how much of a full $7,000 traditional IRA contribution can Tristan deduct for tax purposes, if any for 2024?
A. $7,000
B. $0
C. $5,000
D. $3,500
D. $3,500
Deduction = $7000 x [($82,000 - $77,000) / $10,000]
When evaluating qualified plans, it is important to remember that pension plans may best suit employers with unpredictable cash flows due to their discretionary funding feature.
FALSE
A qualified plan for a self-employed person might also be called a Keogh plan.
TRUE
One of the purposes of a retirement plan is to accumulate retirement assets. Increases in retirement assets are a result of contributions by employers and employees as well as investment earnings on the retirement assets. Which of the following is correct regarding the investment management of retirement assets?
A. The primary reason that employees are given the right to self-direct plan assets is to empower them.
B. Employers can commingle assets from employees’ retirement accounts and have the assets managed by a third-party asset manager or manage the assets in-house.
C. Employers eliminate fiduciary responsibility by allowing employees to self-direct their retirement accounts.
D. The employer cannot manage assets in a 401(k) plan.
B. Employers can commingle assets from employees’ retirement accounts and have the assets managed by a third-party asset manager or manage the assets in-house.
Which of the following are acceptable reasons for an employer to terminate a qualified retirement plan?
- The employer is not profitable and cannot afford to make plan contributions.
- The employer wants to reduce the cost of retirement benefits. As a result, the employer terminates a defined benefit plan and replaces it with a 401(k) plan.
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 or 2
C. Both 1 and 2
When designing qualified retirement plans, which of the following methods is usually the most costly?
A. Individually designed plans
B. Prototype plans
C. Master Plans
D. Volume Submitter Plans
A. Individually designed plans
Sebastian operates a small business with his wife Ariel. They have no other employees. They have $340,000 of assets in the plan. Which of the following forms must they file?
A. Form 5500-EZ
B. Form 5500-SF
C. Form 5500
D. They do not have to file form 5500.
A. Form 5500-EZ
How frequently are defined benefit pension plans required to make installment payments of their required contributions?
A. Annually
B. Semi-annually
C. Bi-annually
D. Quarterly
D. Quarterly
The first step in qualified retirement plan selection is:
A. Prepare an employee census.
B. Identify the types of plans that can meet both qualitative and quantitative objectives.
C. Establish the objectives of the plan.
D. Assess each plan’s financial characteristics.
C. Establish the objectives of the plan
Communication of certain information to eligible employees is a mandate for qualified plans. Which of the following is not a required document when certain plans are established, a participant becomes eligible to participate, plan changes are made, or on a recurring basis as a plan overview?
A. Summary Annual Report
B. Consolidated Financial Statement
C. Summary of Material Modification
D. Summary Plan Description
B. Consolidated Financial Statement
Contributions to a defined contribution plan over the annual limits are known as excess annual additions. Which of the following is not an option a plan sponsor can use to correct excess annual additions?
A. Invest the excess in capital improvement projects.
B. Make corrective distributions
C. Hold excess annual additions in a separate account and allocate in future years.
D. Make corrective distributions.
A. Invest the excess in capital improvement projects.
Excess IRA contributions are subject to a/an __________ excise tax on excess contributions for each year the excess contribution remains in the account.
A. 10%
B. 1.45%
C. 6%
D. 6.2%
C. 6%
TRUE OR FALSE:
Based on legislative changes, traditional and/or Roth IRA contributions can be made after age 70½ assuming other eligibility criteria (e.g., earned income) are met.
TRUE
Regardless of a taxpayers Adjusted Gross Income and/or active plan participation, anyone with earned income is allowed to __________ to a traditional IRA, up to the maximum allowable contribution.
A. make contributions
B. deduct contributions
A. make contributions
To which of the following participant accounts would an employer be required to make a SEP-IRA contribution?
A. J.R., an eligible plan participant who died in June of the plan year.
B. LaDonna, a former employee, who worked until September of the plan year.
C. Damien, age 20, who has been employed by the company for the last two years.
D. Choices a and b only
D. Choices a and b only
Your long-time client has reached their Required Minimum Distribution age. Though required to make distributions, they are philanthropic, would like to make a donation to their favorite non-profit organization, and they do not need the money to fulfill their own needs. Which distribution strategy might you recommend?
A. Hardship Withdrawal
B. Indirect Rollover
C. Direct Rollover
D. Qualified Charitable Distribution
D. Qualified Charitable Distribution
TRUE OR FALSE:
Traditional IRA contributions must be made by the due date of the individual’s tax return, including extensions.
FALSE
An individual may be able to fund a Roth IRA through which of the following methods:
I. Non-deductible contributions
II. Conversion of existing, traditional IRA accumulations
III. Backdoor Roth
IV. Deductible contributions
A. I, II, and IV
B. I and IV
C. I, II, and III
D. All of the choices are ways I which a Roth IRA can be funded.
C. I, II, and III
An IRA owner could choose to invest their portfolio in each of the following except:
A. Stocks
B. Life Insurance
C. Bonds
D. Options, if allowed by the custodian.
B. Life Insurance
TRUE OR FALSE:
IRAs are afforded all the same protections as qualified plans under ERISA.
FALSE
Tristan is single, aged 47, and an active plan participant. His adjusted gross income, or AGI, for 2024 is $82,000. Based on the 2024 phase-out range of $77,000 - $87,000 for single filers who are active plan participants, how much of a full $7,000 traditional IRA contribution can Tristan deduct for tax purposes, if any for 2024?
A. $7,000
B. $0
C. $5,000
D. $3,500
D. $3,500
Apostolia has a target, gross retirement income of $75,000 per year. Using the 4% per year approach to distribution planning, what does she need the total balance of her portfolio to be at retirement to achieve this level of income?
A. $4 million
B. $7.5 million
C. $1.5 million
D. $1.875 million
D. $1.875 million
Lionel earns $120,00 as an employee of a corporation. He is subject to Social Security and Medicare taxes, and he saves 10% of his gross salary each year. Using the top-down approach to estimating Lionel’s Wage Replacement Ratio (WRR), what percentage of Lionel’s income might he need to replace during retirement? Round to the nearest dollar.
A. 82%
B. 90%
C. 92%
D. 100%
A. 82%
TRUE OR FALSE:
Retirement planning should only be done on a pre-tax, or gross basis.
FALSE
Which of the following are factors affecting retirement planning?
I. Savings
II. Annual Income Needs
III. Investment Returns
IV. Retirement Life Expectancy
A. I and III only
B. I, III, and IV
C. II and IV only
D. All the above are factors affecting retirement planning.
D. All the above are factors affecting retirement planning.
Karlee began her full-time career at age 22. She is now 32 and plans on retiring at age 60. What is Karlee’s Work Life Expectancy, or WLE?
38
10
60
28
TRUE OR FALSE:
The top-down approach to estimating an individual’s Wage Replacement Ratio (WRR) is better served for individuals closer to retirement because expenses are not as likely to change as much, and this approach reviews each current expense to evaluate which preretirement expenses are needed during retirement.
FALSE
Karlee began her full-time career at age 22. She is now 32 and plans on retiring at age 60. What is Karlee’s Remaining Work Life Expectancy, or RWLE?
38
10
60
28
Which of the following Capital Needs Analysis calculation methods assumes an individual’s last dollar is spent on their last day of life?
A. Capital Preservation Model
B. Purchasing Power Preservation Model
C. Annuity Method
D. Capitalization of Earnings Model
C. Annuity Method
Severo saved diligently during his working years and accumulated $2.2 million. Using the 4% per year approach to distribution planning, how much income could he estimate his portfolio might provide?
A. $22,000 per year
B. $88,000 per year
C. $44,000 per year
D. $66,000 per year
B. $88,000 per year
Which of the following investments may be considered low risk using standard deviation as a measure of risk, but may also not keep up with inflation, especially when taxes are considered?
A. Small-Capitalization Stocks
B. U.S. T-Bills
C. Large-Capitalization Stocks
D. All the above may be considered low risk using standard deviation as a measure of risk, but may also not keep up with inflation, especially when taxes are considered.
B. U.S. T-Bills
TRUE OR FALSE:
Under normal circumstances, the maximum allowable loan from a qualified plan is the greater of $50,000 or 1/2 of the participant’s vested account balance.
FALSE
Which is the following is NOT true regarding Qualified Domestic Relations Orders (QDRO)?
A. A QDRO could be related to child support.
B. A QDRO may specify a distribution option not outlined in the plan document.
C. A QDRO may be pursuant to a divorce.
D. A distribution pursuant to a QDRO deposited into an IRA or qualified plan is non-taxable.
B. A QDRO may specify a distribution option not outlined in the plan document.
TRUE OR FALSE:
Taxable distributions from a qualified plan are subject to a mandatory 10% income tax withholding.
FALSE
Under current legislation, the Required Minimum Distribution age is _____ and is set to increase to _____ for individuals born in 1960 and later.
A. 70.5, 73
B. 72, 73
C. 73, 75
D. None of the above are the correct RMD ages.
C. 73, 75
Anthony turned 73 this year. His account value at the beginning of last year, when Anthony was 72, was $400,000. By the end of last year (December 31) the value had grown to $500,000. The distribution period according to the IRS table for an individual age 72 is 27.4. The distribution period for an individual age 73 is 26.5. To calculate Anthony’s Required Minimum Distribution this year, you would __________
A. Divide $500,000 by 26.5
B. Divide $400,000 by 27.4
C. Divide $500,000 by 27.4
D. Divide $400,000 by 26.5
A. Divide $500,000 by 26.5
TRUE OR FALSE:
Generally, distributions from qualified plans are classified as ordinary income. Ordinary income tax rates are the same rates applied to earned income, like income reported on a W-2.
TRUE
Cassidy has a 401(k) balance of $100,000. $80,000 of the balance is vested. Cassidy would like to take a loan, has not taken a loan in the last 12 months, and has no other qualified plan loans outstanding. What is the maximum loan Cassidy could request from her 401(k)?
A. $80,000
B. $50,000
C. $100,000
D. $40,000
D. $40,000
TRUE OR FALSE:
One benefit of converting taxable dollars into a Roth plan is that the transition of taxable assets to tax-free assets could ultimately provide a reduction in estate taxes.
TRUE
Which of the following is NOT traditionally a distribution option from a pension plan after attainment of normal retirement age?
A. Single Life Annuity
B. Qualified Joint and Survivor Annuity
C. Lump Sum
D. All the above are traditionally distribution options from a pension plan after attainment of normal retirement age.
D. All the above are traditionally distribution options from a pension plan after attainment of normal retirement age.
Michayla has $250,000 in her traditional IRA. Since all her savings is currently taxable at ordinary income rates, she would like to implement a strategy to provide tax diversification. Which of the following would be a strategy Michayla could implement to create tax diversification for her portfolio?
A. Make a tax-deductible IRA contribution.
B. Consolidate her traditional IRA into a tax-deferred 401(k) offered by her current employer.
C. Enroll in her employer’s 401(k) and contribute 10% of her salary on a pre-tax basis towards retirement.
D. Convert some or all of her traditional IRA to a Roth IRA.
D. Convert some or all of her traditional IRA to a Roth IRA.
Randolph is retiring early from his position as CEO of BIG Co. BIG is providing him with a lucrative severance package for early retirement. Which of the following is the name of this type of benefit?
A. Golden Handcuff
B. Golden Parachute
C. Golden Retriever
D. Golden Handshake
D. Golden Handshake
Which of the following is subject to IRC Section 409A?
A. ESOPs
B. ESPPs
C. ISO plans
D. 457(f) plans
D. 457(f) plans
Qualified plans, ESPPs, ISOs are all excluded from coverage, in most cases. 457(f) plans are subject to 409A.
Chloe is a consultant who issues an invoice December 18th. The company she works for always pays within ten days, including the time for the check to be mailed. If Chloe checks her mailbox on January 1st
and the check is there, which of the following tax rules would cause it to be taxable in the prior year?
A. Substantial risk of forfeiture.
B. Tax triads.
C. Constructive receipt.
D. Economic benefit doctrine.
C. Constructive receipt.
Acme Corporation has created a deferred compensation plan (Plan) for 50 key executives (participants), all of whom are highly compensated employees. Acme contributes each year on behalf of each participant to a trust, T. The trust is not and never has been a qualified trust under §401(a) and is not
exempt from taxation under §501(a). T’s assets are not subject to the claims of Acme’s creditors. Separate accounts that reflect the participant’s share of the net trust assets and income are maintained
for each participant.
A participant’s entire interest in T becomes vested upon completion of three years of service with Acme beginning on the date the individual first becomes a participant in the plan. Participants or their
beneficiaries are entitled to receive their vested interest in the net assets of T, net of applicable withholding and other taxes, on death, disability, or termination of employment. In addition, T is required to distribute to each participant each year an amount that the trustee reasonably estimates will be equal to the amount of federal, state, and local income and employment taxes payable by the participant with respect to the increase in the participant’s vested accrued benefit in T during such year.
T is permitted to make the distribution in part as a distribution of cash to the participant, and in part in
the form of applicable employment tax withholding under federal, state, or local law.
What type of plan is
this?
A. Rabbi trust
B. Unfunded plan
C. Wrap plan
D. Secular trust
D. Secular trust
Which of the following plans is typically subject to a substantial risk of forfeiture as a result of funds being available to creditors upon liquidation of the employer?
- Secular trust.
- Rabbi trust.
- Unfunded promise to pay.
A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 1, 2 and 3
C. 2 and 3
Non-qualified deferred compensation plans often use life insurance for funding within the plan. Why is this?
A. Life insurance investment products typically have higher returns.
B. Life insurance products have tax advantages.
C. Life insurance provides an additional layer of avoidance for constructive receipt.
D. Life insurance limits the liability of the company sponsor for the NQDC plan.
B. Life insurance products have tax advantages.
ISOs are a common benefit for executives. Which of the following statements is not correct regarding ISOs?
A. ISOs can only be granted to an employee of the corporation issuing the ISOs.
B. The exercise of the ISO is limited to a 10-year period.
C. To the extent that the aggregate fair market value of stock with respect to which ISOs are exercisable for the 1st time by any individual during any calendar year exceeds $100,000, such options shall be treated as NQSOs.
D. To qualify as an ISO, the executive must hold the stock for either two years from the grant of the ISO or one year from the date of exercise of the ISO.
D. To qualify as an ISO, the executive must hold the stock for either two years from the grant of the ISO or one year from the date of exercise of the ISO.
On January 15, Year 1, Oscar, a Senior Vice President for Meyer Corporation, is granted 20,000 ISOs at an exercise price of $5. On February 6, Year 2, he exercises all his options when the price of Meyer stock is
$22. When can Oscar sell the ISO shares and avoid a disqualifying disposition?
A. January 16, Year 3.
B. January 16, Year 4
C. February 7, Year 3
D. February 7, Year 4
C. February 7, Year 3
REASON: For a qualifying disposition, he must wait two years from the date of grant and one year from the date of exercise.
On January 15, Year 1, Buddy, a Senior Vice President for Creative Cake Corporation (CCC), is granted 20,000 ISOs at an exercise price of $5. On February 6, Year 2, he exercises all his options when the price
of CCC stock is $22. He sells the ISO shares three years later when CCC stock is trading at $42 per share.
What is his long-term capital gain per share?
A. $20
B. $22
C. $37
D. $42
C. $37
REASON: His basis of the ISO shares (for regular tax) is $5. Thus, the difference between $42 and $5 is the capital gain.
Paris was awarded 1,000 shares of restricted stock of Diamond Corporation at a time when the stock price was $7. Assume Paris properly makes an 83(b) election at the date of the award. The stock vests
three years later at a price of $19 and Paris sells it then. What are Paris’s tax consequences in the year she sells the stock?
A. Paris has W-2 income of $19,000.
B. Paris has a long-term capital gain of $12,000.
C. Paris has W-2 income of $12,000.
D. Paris has a $19,000 long-term capital gain.
B. Paris has a long-term capital gain of $12,000.
REASON: At the time Paris makes the 83(b) election, the value of the stock at that date will be included in her taxable income. Thus, Paris will have W-2 income of $7,000 ($7 x $1,000)in the year the stock was awarded. Any gain beyond that will be capital. Thus, $12,000 will be capital gain.
TRUE OR FALSE:
Approximately 80% of men work past age 65.
FALSE
TRUE OR FALSE:
The RLE is that time period beginning at retirement and ending at death.
TRUE
TRUE OR FALSE:
As the RLE increases because of early retirement, there is generally both an increase in need of funds to finance the RL and the shortened WLE in which to save and accumulate assets.
TRUE
TRUE OR FALSE:
Our society tends to save at a rate that is adequate for retirement planning.
FALSE
TRUE OR FALSE:
Fixed-income securities generally provide the best hedge against inflation and loss of purchasing power.
FALSE
TRUE OR FALSE:
Individuals must considerably impact of inflation when projecting retirement needs.
TRUE
TRUE OR FALSE:
The WRR is an estimate of the percentage of an annual income needed during retirement compared to income earned prior to retirement.
TRUE
TRUE OR FALSE:
The two methods for calculating WRR or the top-down approach and the budgeting approach.
TRUE
TRUE OR FALSE:
Retirees generally rely on Social Security, private pension plans, and personal savings to fund their retirement incomes.
TRUE
TRUE OR FALSE:
Social Security is an adequate wage replacement for most individuals.
FALSE
TRUE OR FALSE:
Personal savings as a source of retirement income is most influenced by the individual.
TRUE
TRUE OR FALSE:
Needs analysis is the process of calculating the amount of investment needed at retirement to maintain the retirement lifestyle.
TRUE
TRUE OR FALSE:
The annuity method assumes that the individual will die at the expected life expectancy with a retirement account balance of zero.
TRUE
TRUE OR FALSE:
The capital preservation model, the purchasing power preservation model, and the capitalization of earnings are used to medicate the risk of our living retirement funds.
TRUE
TRUE OR FALSE:
Sensitivity analysis eliminates the risk of retirement planning.
FALSE
TRUE OR FALSE:
Monte Carlo analysis predicts particular events.
FALSE
TRUE OR FALSE:
Simulations allow for an unlimited number of simultaneous ranging variable.
TRUE
Which of the following expenditures will most likely increased during retirement?
A. Clothing costs
B. Travel
C. FICA
D. Savings
B. Travel
Gemma a 35-year-old client who earns $45,000 a year pay 7.65% of her gross pay and Social Security payroll, taxes, and saved 8% of annual gross income. Assume that Gemma wants to maintain her exact priest retirement lifestyle. Calculating Gemma’s weight replacement ratio using the top down approach (rounded to the nearest percent) and using pretax tax dollars.
A. 70%
B. 80%
C. 84%
D. 90%
Omar would like to determine his financial needs during retirement. All of the following are expenditures, he might eliminate in his retirement needs calculation except:
A. The $200 per month he spends on dry cleaning for his work suits.
B. The $1500 mortgage payment he makes that scheduled to end five years into retirement.
C. The FICA taxes he pays each year
D. The $2000 per month he puts in the savings
B. The $1500 mortgage payment he makes that scheduled to end five years into retirement.
Scarlet has the following expenditures during the current year.
- Health Care – $800
- Savings – $4,000
- Travel – $500
- Gifts to Grandchildren – $1,000
Which of these expenditures would you expect to decrease during Scarlet’s retirement?
A. 2 only
B. 1 and 3
C. 2 and 4
D. 1, 2, 3, and 4
A. 2 only
Nales and Daphne are near retirement. They have a joint life expectancy of 25 years of retirement. Daphne anticipates their annual income in retirement will need to increase each year at the rate of inflation, which they assume is 4%. Based on the assumption that their first year of retirement needs begin on the first day of retirement, for an annual income will be $85,000, of which they have $37,500 available from other sources, and an annual after tax rate of return of 6.5%. Calculate the total amount that needs to be in place when Nils and Daphne begin their retirement.
A. $743,590.43
B. $859,906.74
C. $892,478.21
D. $906,131.31
D. $906,131.31
REASON:
N = 25
i = [(1.065 ÷ 1.04) - 1] x 100 = 2.4038
PMT = 85,000 - 37,500 = 47,500
FV = 0
PV = -906,131.3080
TRUE OR FALSE:
SIMPLE plans may operate on a calendar or fiscal year basis.
FALSE
SIMPLE IRA plans are permitted for tax-exempt employers and governmental entities.
TRUE
SIMPLE plans can only be established for businesses that employ 100 or fewer employees.
TRUE
Employers who sponsor a SIMPLE IRA must make either matching contributions or non-elective contributions.
TRUE
Distribution from non-Roth SIMPLE IRAs are generally taxed like traditional IRAs.
TRUE
Employers that sponsor SIMPLE 401(k) plans must allow for catch-up contributions for participants age 50 and older.
FALSE
Employers or individuals can establish a 403B plan.
FALSE
403(b) plans may be covered under ERISA.
TRUE
Additional catch-up contributions to a 403(b) plan may be after-tax contributions from the employee.
FALSE
For 403B plans the “most recent year service” is always based on a calendar year of service.
FALSE
403(b) plans generally provide for 100% immediate vesting of contributions.
TRUE
Churches may established 457 plans.
FALSE
A 457 plan may accept after tax contributions from employees.-
FALSE
The 457 deferral limit for 2023 is $22,500.
457 plans have a special final three-year catch-up provision that allows employees to contribute up to 100% of their compensation in the last three years.
FALSE
For 2023, an employer can contribute an additional $22,500 to a 547 plan in addition to the employee deferral contribution of $22,500.
FALSE
Distributions from a 457 plan maybe subject to the 10% penalty for early withdrawal prior to age 59.5.
TRUE
Monique, age 42, earns $350,000 annually as an employee for CTM Inc. Her employer sponsors a SIMPLE IRA retirement plan and matches all employee contributions made to the plan dollar for dollar up to 3% of compensation. What is the maximum contribution (employer and employee) that can be made to Monique’s SIMPLE account in 2023?
A. $19,800
B. $21,000
C. $26,000
D. $31,000
C. $26,000.
REASON: The maximum total contribution is $26,000. ($15,500 maximum employee contribution for 2023 + $10,500 employer match). The maximum employee contribution for 2023 is $15,500. The employer has chosen to make matching contributions of up to $10,500 ($350,000 compensation x 3%). Note that the annual compensation limit of $330,000 (2023) does not apply with the SIMPLE IRA match (but does apply with a nonelective contribution).
Which of the following is/are correct regarding SIMPLE plans?
- A SIMPLE plan does not require an annual testing.
- A SIMPLE IRA must follow a three-year cliff investing schedule if the plan is top-heavy.
- A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan
- The maximum elective deferral contribution to a SIMPLE 401(k) plan is $22,500 for 2023 and $30,000 for 2023 for an employee who has attained the age of 50.
A. 3 only
B. 1 and 3
C. 1, 2, and 3
D. 2, 3, and 4
B. 1 and 3
REASON: Statement 1 is correct. Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always a 100% vested. Statement 3 is correct. The early withdrawal penalty is 25% for distributions taken within the first two years of participation. Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $15,500 for 2023. Employees who have attained age 50 by the end of the tax year will also be eligible to make a catch-up contribution ($3,500 for 2023).
All of the following statements is/are correct regarding tax, sheltered annuities (403b plans) except:
- The non-age based catchup provision is available to employees of all 501(c)(3) organization employers that sponsor a TSA
- Active employees who take withdrawals from TSAs prior to 859.5 or subject to a 10% penalty tax
- TSAs are available to all employees of 501(c) three organization to adopt such a plan
- If an employee has had at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed
A. 1 only
B. 1 and 2
C. 1, 2, and 3
D. 2, 3, and 4
A. 1 only
REASON: Statement 1 is incorrect. The catch-up provision requires specified service and the correct kind of employer. Statements 2, 3, and 4 are correct.
Which of the following statements is/our correct regarding TSAs and 457(b) deferred compensation plans?
- Both plans require contracts between an employer and an employee
- Participation in either a TSA or a 457 plan will cause an individual to be considered in “active participant“ for purposes of phasing out the deductibility of traditional IRA contributions
- Both plans allow a special final three-year catch-up contribution
- Both plans must meet minimum distribution requirements that apply to qualify plans
A. 1 only
B. 1 and 4
C. 2, 3, and 4
D. 1, 2, and 4
B. 1 and 4
REASON: Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an “active particiapnt”. Statement 3 is incorrect. Only 457(b) plans allow a “final 3-year” catch-up contribution. TSAs have a different special catch-up contribution for employess with at least 15 years of service.
Rex works for New Orleans Museum of Art, which sponsors a 403(b) plan. If Rex is 45 years old and has worked at the museum for the last 20 years, what is his maximum elective deferral for 2023?
A. $22,500
B. $25,500
C. $30,000
D. $33,000
a. $22,500.
REASON: The salary reduction for 2023 is $22,500. An additional catch-up contribution of $7,500 is allowed for individuals who have attained age 50. The other type of catch-up contribution is not available to employees of employers such as museums.
In May 2023, Seth converts $100,000 in this traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40% due to a significant decline in the stock market that occurs in October 2023. The Roth conversion results in Seth incurring $100,000 of taxable income, when he could’ve waited and converted only $60,000 (after the 40% drop). Which of the following statements is correct?
A. Seth cannot re-characterize the conversion
B. Seth can re-characterize as long as it is done within six months from the date of the conversion
C. Seth can re-characterize after December 31, 2023
D. Seth can re-characterize at any time before the due date of his tax return, including extensions
A. Seth cannot re-characterize the conversion
REASON: Prior to 2018, taxpayers had the ability to recharacterize a Roth conversion up to the due date of the income tax return, including extensions. As a result of The TCJA 2017, Roth conversions cannot be recharacterized after 2017.
Laura, age 43, has several retirement accounts and wants to know what accounts can we rolled over to other accounts. Which of the following statements regarding rollover’s is not correct?
A. She could take a distribution from her SEP IRA and roll it over to a qualified plan without incurring a 20% withholding.
B. She could roll over her government 457(b) plan to her new employer’s qualified plan.
C. She could roll over the funds from her employers qualified plan to our new employer, who sponsors a 401(k) plan with a Roth account, and will be able to convert the funds in an in-plan Roth rollover.
D. She could roll over her traditional rate to her designated Roth account in her 403(b) plan.
D. She could roll over her Traditional IRA to her designated Roth account in her 403(b) plan.
Owen turned 73 on November 1 of 2024 and must receive a minimum distribution from his qualified plan. The account balance had a value of $437,989 at the end of 2023. The distribution period for a 73 year-old is 26.5, and for a 74-year-old it is 25.5 under the uniform lifetime table effective for distribution years after 2021. If Owen takes a $15,000 distribution on April 1, 2025. What is the amount of the minimum distribution tax penalty associated with his first year’s distribution (assume that Owen does not correct the failure, if any, within the correction window)?
A. $0
B. $382
C. $544
D. $764
C. $544
REASON: The required minimum distribution for Owen is $16,528 ($437,989 divided by 26.5) because he is 73 years old as of December 31, 2024. Owen only took a distribution of $15,000, therefore, the minimum distribution penalty (25%) would apply to the $1,528 balance. Therefore, the minimum distribution penalty is $382 (25% of the $1,528). Under the SECURE 2.0 Act, beginning in 2023, the penalty tax for failure to take a required minimum distribution was reduced from 50 percent to 25 percent. The 25 percent penalty is further reduced to 10 percent if the distribution failure is corrected within a specified correction window which ends on the earlier of 1) the date the IRS issues a notice of deficiency, 2) the date the IRS assesses the excise tax, or 3) the last day of the second taxable year that begins after the end of the year in which the tax is imposed.
Viola, who is 75 years old, requested from the IRS at waiver of the 60 day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently move the funds into a taxable account. Viola did not make the request of the IRS until five years after the mistake was made. Will the IRS permit the waiver?
A. No. The IRS never waves this requirement, except under the most extreme of circumstances.
B. Yes. The mistake was the fault of the financial advisor and the IRS regularly granted waivers in these circumstances.
C. No. Viola waited beyond the one year period for filing such a request.
D. No. Viola waited in unreasonable amount of time before filing the request.
D. No. Viola waited in unreasonable amount of time before filing the request.
Which of the following distributions from the qualified plan would not be subject to the 10% early withdrawal penalty, assuming the participant has not attained to age 59.5?
- A distribution made to his file under a qualified domestic relations order (QDRO).
- A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company.
- A distribution to pay for a costs of higher education.
- He should be made immediately after separation from service at age 57.
A. 1 and 2
B. 1 and 3
C. 1 and 4
D. 2 and 3
C. 1 and 4
TRUE OR FALSE:
Pension plans generally provide a lump sum distribution.
FALSE
TRUE OR FALSE:
A qualified joint and survivor annuity and qualified pre-retirement survivor annuity are required for pension plans.
TRUE
TRUE OR FALSE:
Profit-sharing plans may allow for in-service withdrawals.
TRUE
TRUE OR FALSE:
Rollovers can consist of distributions of any kind, including those from a qualified plan that are part of a series of substantially equal periodic payments.
FALSE
TRUE OR FALSE:
Distributions from qualified plans are always treated as ordinary income.
FALSE
TRUE OR FALSE:
QDROs allow retirement benefits to be distributed to a payee spouse without triggering a tax consequence.
FALSE
TRUE OR FALSE:
Loans from qualified plans can never exceed 50% of the participant’s vested account balance.
FALSE
TRUE OR FALSE:
Loans from qualified plans must always be repaid within five years.
FALSE
TRUE OR FALSE:
The loan requires loans from qualified plans to be repaid upon the participant’s termination of employment from the plan sponsor.
FALSE
TRUE OR FALSE:
Sam has a vested account balance in her employer-sponsored qualified profit-sharing plan of $18,000. Sam had an outstanding loan balance within the prior 12 months of $9000 that has been reduced to $6000. The maximum loan Sam could take from this qualified plan is $4,000.
TRUE
TRUE OR FALSE:
Distributions before a participant attains the age of 59.5 will generally be subject to a 10% penalty.
TRUE
TRUE OR FALSE:
If the participants are already separated from service due to retirement, and they wait until they attain age 55 to begin distributions, then they will not be subject to the 10% penalty.
FALSE
TRUE OR FALSE:
The first minimum distribution must always be no later than April 15 of the year following the year the participant at the age of 72, 73, or 75 (depending on year of birth).
FALSE
TRUE OR FALSE:
Designated beneficiaries for minimum distributions are determined on September 30 of the year following the year of the participant’s death.
TRUE
TRUE OR FALSE:
With regard to minimum distributions, a surviving spouse receives more favorable options than any other type of beneficiary in the event of the owner’s death.
TRUE
TRUE OR FALSE:
Stretch IRAs are available for all designated beneficiaries.
FALSE
TRUE OR FALSE:
For deaths prior to January 1, 2020, stretch IRAs or best accomplished by choosing young beneficiaries.
TRUE
TRUE OR FALSE:
Leaving an IRA to a spouse could be a better way to stretch an IRA then leaving it to a child.
TRUE
TRUE OR FALSE:
The eligible beneficiaries of an inherited IRA will use the life expectancy of the youngest beneficiary on the account.
FALSE
TRUE OR FALSE:
Inherited IRAs or protected in bankruptcy because they are IRAs.
FALSE
TRUE OR FALSE:
Trusteed IRAs allow IRA owners to control how much distributions from the IRA will be paid out into whom the assets will pass to after the death of the primary beneficiary.
TRUE
TRUE OR FALSE:
See-through trusts are the same as trusteed IRAs.
FALSE
TRUE OR FALSE:
Social Security benefits are not payable until an individual reaches full retirement age.
FALSE
TRUE OR FALSE:
Social Security contributions are placed in the following trust funds: OASI, DI, and SMI.
FALSE
“Fully insured” means that a worker has earned a certain number of quarters (generally 40) of coverage under the Social Security system.
TRUE
TRUE OR FALSE:
Social Security benefits can be paid to the dependent parents of a deceased insured worker at age 62.
TRUE
TRUE OR FALSE:
Social Security benefits are based on the average of the three highest paid years for a covered worker.
TRUE OR FALSE:
Full retirement age for Social Security is decreasing because of the trend of individuals retiring early.
TRUE OR FALSE:
Up to 85% of an individual’s Social Security benefits may be included in their taxable income.
TRUE
TRUE OR FALSE:
Once divorced, non-working ex-spouses will not receive Social Security benefits.
FALSE
TRUE OR FALSE:
Delaying benefits to age 70 may be beneficial, even if a person does not live beyond age 80.
TRUE
TRUE OR FALSE:
A worker who receives full retirement age at age 67, can increase their benefit, without regard to a COLA, by 32% by the Lane benefits until age 70.
FALSE
TRUE OR FALSE:
Surviving spouses are entitled to 100% of the deceased worker’s benefits after the worker dies.
TRUE
TRUE OR FALSE:
Medicare Part A generally pays for “places” while Part B pays for “services”.
TRUE
TRUE OR FALSE:
Medicare Part C is optional and provides prescription drug coverage when purchased with Parts A and B.
FALSE
TRUE OR FALSE:
A healthy individual need not enroll in Medicare part B upon reaching age 65 since enrollment is permitted at any time without an increase in premium.
FALSE
TRUE OR FALSE:
Traditional Medicare coverage includes deductibles, coinsurance payments, and a maximum out-of-pocket provisions.
FALSE
TRUE OR FALSE:
In order to obtain Supplemental Security Income (SSI), the individual must be 62, disabled, or blind.
FALSE
TRUE OR FALSE:
Social Security beneficiaries who are United States citizens may live in both foreign countries without affecting their eligibility for Social Security benefits.
TRUE
TRUE OR FALSE:
Long-term care insurance does not cover hospice care.
FALSE
TRUE OR FALSE:
Because everyone qualifies for Medicaid, long-term care insurance is only for those who want more choices in long-term care than Medicaid offers.
FALSE
TRUE OR FALSE:
If Tito had a home worth $300,000, it is possible he could qualify for Medicaid.
TRUE
TRUE OR FALSE:
Paying for long-term care services out-of-pocket is not a wise choice for anyone.
FALSE
Social Security is funded through all of the following except:
A. Employee payroll tax
B. Employer payroll tax
C. Sales tax
D. Self-employment tax
C. Sales tax
Brisco, now deceased, was married for 12 years. He had two dependent children, ages,10 and 12, who are cared for by their mother age 48. His mother, age 75, was his dependent and survived him. At the time of his death, he was currently but not fully insured under Social Security. His dependence are entitled to all of the following benefits except:
A. A lump sum death benefit of $255
B. Each children’s benefit equal to 75% of Brisco’s PIA
C. A caretaker’s benefit for the children’s mother
D. A parent’s benefit
D. A parent’s benefit
Medicare Part a provides hospital coverage. Which of the following persons is not covered under Part A.
A. A person 62 or older and receiving railroad retirement
B. Disabled beneficiaries, regardless of age that have received Social Security for two years
C. Chronic kidney patients who required dialysis or a renal transplant
D. A person age 65 or older entitled to a monthly Social Security check
A. A person 62 or older and receiving railroad retirement
A person receiving Social Security benefits under full retirement age can receive earned income up to a maximum threshold without producing Social Security benefits by the earnings test. Which of the following count against the earnings threshold?
A. Dividends from stocks
B. Rental income
C. Pensions and insurance annuities
D. Self-employment income
D. Self-employment income
All of the following statements concerning Social Security benefits are correct except:
A. The maximum family benefit is determined three formula based on the worker’s PIA
B. If a worker applies for retirement or survivor benefits before their 65th birthday, they must also file a separate application for Medicare.
C. People who are disabled or have permanent kidney failure can get Medicare at any age.
D. The Social Security administration is concerned with the beneficiaries’ combined income, which, on the 1040 federal tax return, includes adjusted gross income and non-taxable interest income
B. If a worker applies for retirement or survivor benefits before their 65th birthday, they must also file a separate application for Medicare.
The target benefit pension plan in the money purchase pension plan provides some employee/participant investment diversification protections by eliminating the investment amount in employer stock to less than or equal to:
A. 5%
B. 10%
C. 20%
D. 100%
B. 10%
Plans that require mandatory funding are generally funded by?
A. The employee
B. The employer
C. Both employer and employees
D. For PBGC insured plans, the employee and the employer
B. The employer
Who generally makes elected referrals to a 401(k) plan?
A. Employees only
B. Employer only
C. Both employer and employees
D. Employer, employees, and forfeitures
A. Employees only
Which of the following generally contribute to defined benefit plans, profit-sharing plans, and money purchase pension plans?
A. Employees only
B. Employer only
C. Both employer and employees
D. Employer, employees, and government
B. Employer only
Generally, which of the following are contributory plans?
A. 401(k) and money purchase pension plans
B. 401(k) and thrift plans
C. Thrift plans and ESOPs
D. Money, purchase pension, plans and profit sharing plans
B. 401(k) and thrift plans
TRUE OR FALSE:
Defined benefit plans may use forfeitures to reduce plan costs or relocate them to plan participants.
FALSE
TRUE OR FALSE:
If a prohibited transaction occurs in a qualified plan, a 100% penalty may be assessed if not timely corrected.
TRUE
TRUE OR FALSE:
Qualified plans are often amended to maximize benefits to employees.
TRUE
TRUE OR FALSE:
Qualified plan amendments are difficult and require approval by ERISA.
FALSE
TRUE OR FALSE:
Qualified plans may never terminate without losing their qualified status retroactively to inception.
FALSE
