Lesson 4 of Retirement Planning: Other Tax-Advantaged Plans Flashcards

Question 1

Q

IRAs and SEPs!

Answer

A

IRAs, SEPs, SARSEPs, SIMPLEs, and tax-sheltered annuities (403(b) plans) are:

not qualified plans, and
are not entitled to the same benefits as qualified plans.

They are referred to as “other tax-advantaged plans” to indicate that:

while not qualified plans, they have many of the same benefits and features as qualified plans.

Question 2

Q

Important Numbers 2023

Question 3

Q

Chart Compares the Characterisitcs of Qualified Plans and Other Tax-Exempt Plans

Question 4

Q

Exam Question - Tax-Advantaged vs. Qualified Plans

Each of the following are requirements imposed by law on qualified tax-advantaged retirement
plans EXCEPT:

a) Plan documentation
b) Employee vesting
c) Selective employee participation
d) Employee communications

Answer

A

Answer: C

Broad employee participation, as opposed to selective participation, is a requirement of a tax-
advantaged retirement plan. All of the others are requirements for “qualified” plans

Question 5

Q

Individual Retirement Arrangements (IRAs)

Answer

A

There are two general types of Individual Retirement Arrangements ((As) under present Law:

Traditional IRAs, to which both deductible and nondeductible contributions may be made, and
Roth IRAs: to which only nondeductible contributions may be made.

Question 6

Q

Traditional IRAs

Answer

A

IRAs 2 forms

Contribution Limit

Earned Income - Individual IRA
Earned Income - Spousal IRA
Earned Income
Excess Contributions
Timing of Contributions to IRAs
Deductibility of IRA Contributions
No Qualified or Other Retirement Plan
Active Participants of Qualified or Other Retirement Plans
Calculation of IRA Deduction - Subject to Phaseout
Active Participant Status
Nondeductible IRA Contributions

Saver’s Credit

Distributions from Traditional IRAs
-Required Minimum Distributions

The 10% Penalty and Exceptions from Early Withdrawal’s

Question 7

Q

2 Forms

Answer

A

IRAs take one of two forms, an IRA account or an IRA annuity.

An IRA account can hold a wide variety of investments and can be held by a wide variety of
custodians (e.g., brokerage, bank, mutual fund, etc.).

An IRA annuity is usually held by an insurance company as custodian.

Question 8

Q

Contribution Limits

Answer

A

Anyone with earned income can contribute to a traditional IRA, up to applicable limits.

The current annual contribution for individuals under the age of 50 is limited to the lesser of $6,500 or earned income.

Individuals who have attained the age of 50 before the end of the year are also entitled to a catch-up contributions ($1,000 for 2023).

Therefore, the maximum contribution that can be made in 2023 is $7,500 ($6,500 + $1,000 catch-up).

Note that these contribution limits apply to both Traditional and Roth IRAs

Question 9

Q

Earned Income - Individual IRA

Answer

A

The annual contributions to an IRA are limited to the:

lesser of an individual’s earned income or
the annual limit in effect.

Earned income includes:

any type of compensation where the individual has performed some level of services for an employer or is considered self-employed.
Earned income also includes
alimony received by the taxpayer.

Note: 2017 TCIA Modification: Alimony subject to a divorce agreement signed after 12/31/
2018 is not income and thus no longer considered earned income.

ALimony are amount paids from spouse, through seperation or divorce.

Question 10

Q

Earned Income - Spousal IRA

Answer

A

Individuals who do not have any earned income may still be eligible to establish an IRA if their spouse has sufficient earned income.

An IRA for a spouse who has no earned income is generally referred to as a spousal IRA and can be established provided the other spouse has sufficient earned income.

The necessary level of earned income is equal to the total amount that is to be contributed to both IRAs. Spousal IRAs can be established up to the contribution limit for the year in question (i.e., $6,500 for 2023). The catch-up contribution is also available for those individuals age 50 and over.

Question 11

Q

Example - Spousal IRA

Joe, age 48, and Holly, age 43, have been married for twenty years and are currently retired
Although Joe is currently unemployed, Holly earns $12,000 from her part-time work at the local shopping market during 2023. Who can contribute to an IRA?

Answer

A

Because Holly has income of $12,000, both Joe and Holly can contribute up to $6,500 to each of their IRAs in the year 2023.

Question 12

Q

What is Earned Income?

EXAM TIP: Make a flashcard and understand the difference between earned income and unearned income.

Answer

A

W-2 income

Schedule C net income

K-1 income from an LLC

K-1 income from a partnership where the partner is a material participant.

Alimony (If divorce agreement was signed prior to or by 12/31/18. TCJA 2017)

Question 13

Q

What is NOT Earned Income?

EXAM TIP: Make a flasheard and understand the difference between earned income and unearned income.

Question 14

Q

Exam Question - Contribution Limit

Andrew, age 53, had the following items of income:

Investment returns as a limited partner in a partnership of $1,200
Unemployment compensation of $350.
Income from a law practice of $600.
Deferred compensation from a former employer of $14,000, not constructively received this year.
Alimony of $750 (he was divorced in 2017).
Wages of $1,000.
What is the maximum contribution Andrew can make to an IRA for this year?

a) $1,750.
b) $2,350.
c) $6,000.
d) $7,000.

Answer

A

Andrew is limited to making an IRA contribution equal to the lesser of $7,500 (2023) (including
the catch-up) or his earned income for the year. Andrew’s earned income includes his law practice income, alimony, and wages, which total $2,350. Alimony prior to the TCJA will continue
to be considered income for Andrew unless any material modifications to the agreement are
made. Should a material modification be made, the alimony payments will follow the new rules.

Question 15

Q

Earned Income

Answer

A

SECURE Act 2019 removed the age restriction on contribution to IRAs. If an individual has earned income, they may contribute. Earned income comes from a w-2, 1099SE, or alimony from an agreement dated prior to 2018.

Question 16

Q

Excess Contribution

Answer

A

Contributions that exceed the limits discussed above are subject to an excise tax of 6%. This penalty is charged each year that the excess contribution remains in the IRA.

Corrective distributions will not be assessed the 10% early withdrawal penalty on any earnings distributed that were associated with the excess amount of the contribution. This waiver became effective with the passage of SECURE 2.0 Act of 2022.

The six year period of limitations on the excise tax begins when the taxpayer files an individual
tax return (Form 1040) for the year of the violation.

Question 17

Q

Example

Answer

A

In 2023, Ava, age 32, contributed $5,000 to her traditional RIA and $2,000 to her Roth IRA.

She has made an excess contribution of $1,000.

She can avoid the six percent penalty by withdrawing the excess contribution and any related earnings from either the IRA or the Roth IRA account (or both) by the following April 15th.

Question 18

Q

Timing of Contributions to IRAs

Answer

A

For IRAs, contributions must be made to both traditional and Roth IRA accounts by the due date of the individual federal income tax return without considering extensions.

For most taxpayers, this due date is April 15th of the year following the tax year end.
Finally, the contribution to a traditional IRA or Roth IRA must be made in cash with an
exception for rollover contributions.

No other type of asset may be contributed to an IRA.

Question 19

Q

Deductibility of IRA Contributions

Answer

A

Deductibility of the traditional IRA contribution for an individual’s federal income tax return
depends on several factors,:
- including coverage or participation in a qualified plan or
- other retirement plan, also known as the “active participant” rule AND the individual’s Adjusted Gross Income (AGI)

Question 20

Q

No Qualified or Other Retirement Plan

Answer

A

An individual who is not an active participant and whose spouse is not an active participant has no income limitation for purposes of deducting his IRA contributions.

Therefore, his contributions are fuly deductible.

Question 21

Q

Active Participant of Qualified or Other Retirement Plans

Answer

A

For individuals or married couples filing jointly who are considered active participants (defined below) of a qualified plan or other retirement plan, there is an income test to determine the deductibility of IRA contributions.

If the taxpayer’s AGI is greater than the upper limit of the phaseout ($83,000 in 2023 for Single; $136,000 in 2023 for MFJ), no deduction is permitted. If the taxpayer’s AGI is less than the lower limit of the phaseout ($73,000 in 2023 for Single; $116,000 in 2023 for MFJ), then a full deduction is permitted. If the taxpayer’s AGI is between the limits, then the deduction is ratably phased out.

Married couples filing separately are effectively phased out between an AGI of $0 and
$10,000. Individuals falling within these phaseout ranges must calculate the dedictible amount of the contribution utilizing the calculation discussed below:

Solo spouse participant - One spouse being covered by a qualified plan does not prohibit the
other spouse from deducting a contribution to
a traditional IRA. This ability to deduct the contribution, however, is partially phased out for married individuals with AGI beginning at $218,000 and is completely phased out for AGI at or above $228,000.

Two different phase outs schedules are used in this scenario. The active participant follows the MFJ phase out and the non-active participant spouse will follow the spousal IRA phase out.

Question 22

Q

calculation of IRA Deduction - Subject to Phaseout

Answer

A

An individual who is an active participant in a retirement plan and has an AGI within the phaseout range will have a reduced maximum deductible IRA contribution.

The deduction limit ($6,500 for 2023) will be reduced based on a proportion equal to the amount by which the individual’s AGI exceeds the lower limit of the phaseout range divided by $10,000 (or $20,000 in the case of a joint return).

Question 23

Q

The following chart summarizes the deductibility of an IRA contribution:

Question 24

Q

EXAM TIP

Answer

A

Anyone with earned income can make an IRA contribution. Make sure that You understand the circumstances under which an IRA contribution is deductible.

Likely to see this!

Question 25

Q

Example 1

Jody is single, age 38, and an active participant in his employer’s qualified retirement plan. His
AGI for 2023 is $80,000, and he makes the maximum contribution to his traditional IRA.

Answer

A

Reduction = [ 6,500 x ( ( 80,000 - 73,000 ) ÷ 10,000 )
= $4,550

Thus, Jody’s traditional IRA deduction for 2023 is reduced by $4,550 to $1,950 ($6,500 -
$4,550).

Question 26

Q

Example 2

Assume the same facts as above except that Jody is over the age of 50 and is eligible for the catchup contribution of $1,000. In this case, the traditional IRA deduction is reduced by $700.

Answer

A

Reduction = [ 7,500 x ( 80,000 - 73,000 ) ÷ 10,000]
= $5,250

Thus, Jody’s traditional IRA deduction for 2023 is reduced to $2,250 ($7,500 - $5,250). Notice
that the portion that is phased out represents 30 percent of the contribution. Therefore, with the
additional $1,000 contribution, only 70 percent will be deductible (84,550 + $700 = $5,250).

Question 27

Q

Example 3

Amir, age 32, and Stacy, age 31, are married and are active participants in qualified plans. They file a joint return and have AGI of $120,000 for 2023.

Both Amir and Stacy make the maximum contribution to their respective traditional IRAs in 2023.

Answer

A

Reduction = [ 6,500 x ( 120,000 - 160,000 ) ÷ 20,000 ]
= $1,300

Thus, Amir and Stacy can each deduct $5,200 ($6,500 - $1,300).

Question 28

Q

Exam Question - Active and Non-Active Participant Spouse

Use the facts for Amir and Stacy, but assume for this question, that Stacy does not participate in
her company 401(k). What are their combined deductible amounts in this case?

a) 0
b) 1,300
c) 7,800
d) 11,700

Answer

A

Answer: D

(Amir) Reduction = [ 6,500 x ( 120,000 - 116,000) ÷ 20,000]
=$1,300

Stacy will not have a reduction on her deduction. She will use the $218,000 - $228,000 phase
Out for a non-active participant of a participant spouse (aka spousal IRA phase out).

Amir’s deduction is reduced by $1,300, so he can deduct $5,200 ($6,500 - 1,300) while Stacy
Can deduct the full contribution of $6,500. In total, of their $13,000 combined contribution, they can deduct $5,200 plus $6,500, which equals $11,700.

Question 29

Q

Exam Question Deductibility of Contribution

Hamilton, a single 29 year old, deferred 2% of his salary, or $2,000, into a 401(k) plan spon-
sored by his employer during the current year. What is the maximum deductible IRA contribution Hamilton can make during the current year?

a) $0.
b) $1,100
c) $4,000
d) $6,000

Answer

A

Answer: A

Hamilton cannot make a deductible IRA contribution for the year because he is an active participant in a qualified plan with an AGI of at least $100,000 ($2,000 ÷ 2%), which exceeds the single taxpayer phase-out limits for 2023.

Question 30

Q

Active Participant Status

Answer

A

The deductibility of traditional IRA contributions may be reduced if the taxpayer is an active participant in a retirement plan during the same year. An active participant is an employee who has benefited under one of the following plans through a contribution or an accrued benefit.

qualified plan
Annuity Plan
tax-sheltered annuity (403(b) plan)
certain government plans
simplified employee pensions (SEPs)
simple retirement accounts (SIMPLEs)

Question 31

Q

Example

Answer

A

Derek is employed by Healthcare Company, which sponsors a profit sharing plan. The plan was established in 2022. Healthcare decides in January of 2023 to make a contribution to the plan for the year 2022. Since Healthcare made the contribution in 2023, Derek would be considered an active participant for the year 2023, not 2022. If a contribution was made for Derek in 2022, however, then Derek would be an active participant for 2022.

Question 32

Q

Exam Question IRA Contributions

Rex a married 29 ear old, deferred 10% of his salary, or $10.000. into a 401 (k) plan sponsored by his employer this year. His wife was unemployed all year and did not receive unemployment compensation. Assuming Rex has no other income, what is the maximum contribution Rex’s wife can make to her Roth IRA for this year?

a) $0
b) $1,000
c) $4,500
d) $6,500

Answer

A

Answer: D

Rex’s wife can make a $6,500 Roth IRA contribution, the maximum for this year, because Rex’s AGI of $100,000 ($10,000 deferral divided by 10% deferral percentage) is below the phase out limit of $218,000. Even though she does not have any earned income of her own, she can use
Rex’s earnings to qualify for the contribution. The Roth IRA has contribution limitation based
on AGI.

Question 33

Q

Exam Question IRA Contributions

Darryl, single and age 54, is a participant of his employer’s qualified profit sharing plan. For the
current year he received a forfeiture allocation of $25, but the employer did not make any other
contribution for the vear. Darrvl would like to make a deductible IRA contribution. If Darryl’s
AGl is $90,000 (all comprised of W-2 earnings and portfolio income), what is the maximum
deductible IRA contribution Darryl may make?

a) $0
b) $3,250
c) $6,500
d) $7,500

Answer

A

Answer: A

Because of the forfeiture allocation Darryl received from his employer’s plan, he would be con.sidered an active participant of his employer’s qualified plan. Accordingly, his maximum deductible contribution to the IRA may be limited based upon his AGl. The AGI phaseout for a single active participant in a qualified plan is $73,000 - $83,000 (2023). Since Darryl’s AGI
exceeds the threshold. he cannot make a deductible IRA contribution.

He can make a non-deductible contribution. ensure you double check what the question asks for.

Question 34

Q

Nondeductible IRA Contributions

Answer

A

Although one of the advantages of an IRA contribution is that they are often income tax deductible for AGI, contributions to an IRA can be nondeductible.

When an individual makes a nondeductible contribution to an IRA, the individual has an adjusted basis in the IRA. Withdrawals from the IRA will consist partially of account earnings that have not been subject to income tax and partially of return of adjusted basis for which the individual has already paid income tax.

Question 35

Q

Saver’s Credit

Answer

A

The purpose of this nonrefundable credit is to encourage low-income and middle-income taxpayers to establish and maintain savings for retirement.

The amount of the credit is equal to the applicable percentage times the amount of qualified retirement savings contributions (up to $1,000 if single and $2,000 if married filing jointly) made by an eligible individual in the tax year.

Question 36

Q

Distributions from Traditional IRAs

Answer

A

Generally, distributions from traditional IRAs are taxed as ordinary income.

The one exception is for distributions consisting of a combination of tax-deferred earnings and the return of adiusted basis that results from either nondeductible IRA contributions or rollovers of contributions from qualified plan balances that included after-tax contributions (such as thrift plans).

In such cases, each distribution will consist of a combination of return of Adjusted Basis (AB) and
ordinary income. The ratio of return of AB is equal to the ratio of the total AB of the account before the withdrawal to the fair market value of the total account balance.

Think Income Tax Annuity Rules!!!

Ratio of AB =
AB Before Withdrawl
÷
FMV of account at Withdrawl

Question 37

Q

Required Minimum Distriibutions

Answer

A

Traditional IRA distributions can be taken at anytime, but the Required Minimum Distribution
(RMD) rules state that the distributions must (except Roth IRAs) begin by April 1st of the year following the year in which the owner attains the age of 72 - for those attaining age 72 before
January 1, 2023 or 73 for those attaining age 72 after December 31, 2022, just like qualified
plans.

Required distributions that are not taken are subject to a 25 percent exercisw tax! SECURE 2.0
Act of 2022 reduced this penalty to 25 percent and further reduces the penalty to 10% if a
corrective distabution is made during the correction window

Question 38

Q

The 10% Penalty and Exceptions for Early Withdrawals

Answer

A

The government encourages taxpayers to leave funds in their traditional and Roth IRAs until
retirement by imposing a 10% premature withdrawal penalty for distributions prior to age
59½.

Therefore, traditional and Roth IRA distributions before the age of 59½ will be subject to the 10% penalty unless a specific exception applies.

Certain exceptions from the 10% penalty apply only for withdrawals from IRAs (not qualified plans) including withdrawals for higher education expenses. For acquisition costs of a first home (up to $10,000), and for health insurance premiums for the unemployed.

Question 39

Q

The following chart summarizes the exceptions to the 10 percent withdrawal penalty.

EXAM TIP: Know the Following Chart

Answer

A

Where there is a distribution at divorce and the payee is under 59 1/2, the use of a QDRO directed distribution will result in a taxable event, but will not incur the 10% early withdrawal penalty. Under the same circumstances except that the distribution is from an IRA, the result is both a taxable event and the application of the 10% early withdrawal penalty. However, the payee in any case can choose to rollover the distribution in which case the rollover rules would
apply or the payee can take substantially equal periodic payments under section 72(t).

Question 40

Q

IRA Annuity vs IRA Accounts

Answer

A

An individual retirement annuity is different than a traditional IRA account because it is an annuity contract or endowment contract issued by an insurance company. An IRA annuity, however, must meet certain similar requirements regarding transterability, nontortetability, premiums, and distributions.

Transferability and Nonforfeitability:

An IRA annuity is not transferable by the owner and the benefits must not be forfeitable.
The proceeds from an IRA annuity must be received by the owner or by a beneficiary of the
contract. Similar to traditional IRAs, these IRA annuities cannot be pledged as collateral nor can
loans be taken from the contract.

Premiums:

The annual premiums for an IRA annuity may not exceed $6,500 for 2023.
In the event that premium payments cease, the owner must be given the right to receive a paid up annuity and the owner of the annuity must also be allowed to forgo payment of the annuity
premum.

Distribution:

The distribution rules for IRA annuities, including the required minimum distribution rules, are the
same as for traditional IRAs.

Question 41

Q

Roth IRAs

Answer

A

Although the contributions to a Roth IRA are not deductible, qualified distributions from Roth IRA
accounts consist solely of nontaxable income.

Additionally, Roth IRAs may be funded at any age with earned income, and are not subject to the
required minimum distribution rules during the owner’s life.

Roth IRAs and traditional IRAs share many of the same features and characteristics

Taxpayers can fund Roth IRAs by either making cash contributions or by converting traditional IRAs into Roth IRAs.

Question 42

Q

Exam Tip:

Answer

A

Make sure you know the difference between traditional IRAs and Roth IRAs.

Question 43

Q

Chart Traditional IRA vs Roth IRA

Question 44

Q

Contributions

Answer

A

Both Roth IRAs and traditional IRAs share an annual single contribution limit and use the same
definition for earned income; however, taxpayers may only contribute to a Roth IRA if they fall within the prescribed income limits without regard to active participant status. The following chart specifies the income limits for Roth IRA conributions for 2023.

Question 45

Q

The following chart specifies the income limits for Roth IRA conributions for 2023.

Question 46

Q

Roth 401 (k)

Answer

A

For years beginning after 2005, a 401(k) plan may include a Roth contribution program in which employees are able to make after-tax contributions to a Roth account.

Question 47

Q

Exam Question - Roth IRA Contributions

Sam, age 54 and single, has compensation this year of $85,000. His employer does not sponsor a qualified plan, so Sam would like to contribute to a Roth IRA. What is Sam’s maximum contribution for this year to the Roth IRA?

a) $0
b) $6,500.
c) $7,500.
d) $30,000.

Answer

A

Answer: C

The maximum Roth IRA contribution is $6,500 plus $1,000 (2023) for those individuals 50 and
over. Sam can make a $7,500 contribution to his Roth IRA. Sam is not phased-out (Single Roth
IRA phase-out for 2023 is $138,000 - $153,000).

Question 48

Q

Conversions

Answer

A

An individual may convert a traditional IRA to a Roth IRA, with the expectation that distributions
are completely tax free. At the time of the conversion, however, the taxpayer must include the value of the conversion amount in their taxable income.

For 2010 forward, a traditional IRA may be converted to a Roth IRA regardless of AGI.

Question 49

Q

Recharacterized Contributions

Answer

A

IRA owners may recharacterize certain contributions made to one type of IRA as made to a different type of IRA for a taxable year by the due date of the return plus extensions.

As a result of 2017 TCJA, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions

Question 50

Q

Distributions

Answer

A

A distribution from a Roth IA is not included in the owner’s gross income if it is a “qualified distribution.”

Qualified distributions from Roths are not subject to the 10 percent penalty.

Question 51

Q

Qualified Distributions - VERY IMPORTANT

Answer

A

A qualified distribution is a distribution from a Roth IRA that satisfies BOTH of the following tests:

1) The distribution must be made after a five-taxable-year period (which begins January 1st of the taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, January 1st of the taxable year in which the first conversion contribution is made to any Roth IRA of the individual),

2) The distribution satisfies one of the following four requirements:

Made on or after the date on which the owner attains the age 59½;
Made to a beneficiary or estate of the owner on or after the date of the owner’s death;
Is attributable to the owner being disabled; or
For first-time home purchase (lifetime cap of $10,000 for first-time homebuyers includes
taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years).

The five-taxable-year period is not redetermined when the owner of a Roth IRA dies. Thus, the
beneficiary of the Roth IRA would only have to wait until the end of the original five-taxable-year
period for the distribution to be a qualified distribution.

Question 52

Q

Example 1 - ROTH IRA Distributions

Answer

A

On July 5, 2023, Edward established a Roth IRA for year 2023 with a $1,200 contribution. Since
this was his first contribution to a Roth IRA, his five-year period begins on January 1, 2023

Question 53

Q

Example 2 - ROTH IRA Distributions

Answer

A

On February 16, 2023, Gabrielle made an initial contribution of $900 to a Roth IRA. She made
the contribution for the 2022 tax year (recall that a taxpayer can make contributions until April
15 of the following year to a traditional or Roth IRA for the prior tax year). Gabrielle’s five-year
period begins on January 1, 2022 even though she made her initial contribution in 2023 because
the contribution was for the 2022 tax year.

Question 54

Q

Exam Question ROTH IRA Distributions

At the age of 57, Julian converted his traditional IRA, valued at $45,000, to a Roth IRA. At age
60, Julian took a distribution from this Roth IRA of $100,000 to buy a new car for his daughter
for college. Which of the following statements is true with regards to the distribution from the
Roth IRA?

a) $100,000 will be subjected to ordinary income tax.

b) $55,000 will be subjected to ordinary income tax.

c) $55,000 will not be subjected to ordinary income tax or penalty.

d) $55 000 will be subjected to ordinary income tax and penalty.

Answer

A

Answer: B

For a distribution from a Roth IRA to be a qualitied distribution, the distribution must be on
account of death, disability, the owner attaining the age of 59½, or the first-time purchase of a
home. AND the distribution must occur live years after the account was created. In this case
since the Roth was not created five or more years betore the distribution. the distribution will be
taxable to the extent it represents earnings in the account, $$5,000. Since the distribution was
taken after Julian attained 59½, it will not be subjected to the 10% penalty,

Question 55

Q

Exam Question ROTH IRA Distributions

What is the first year in which a single taxpayer, age 58 in 20x1, could receive a qualified distribution from a Roth IRA, if he made a $4,000 contribution to the Roth IRA on April 1, 20x2, for
the tax year 20x1?

a) 20x3
b) 20x4
c) 20x5
d) 20x6.

Answer

A

Answer: D

A qualified distribution can only occur after a five-year period has occurred and is made on or
after the date on which the owner attains age 59½, made to a beneficiary or the estate of the
owner on or after the date of the owner’s death, attributable to the owner’s being disabled, or for
a first-time home purchase. The five-year period begins at the beginning of the taxable year of
the initial contribution to a Roth IRA. The five-year period ends on the last day of the individual’s fifth consecutive taxable year beginning with the taxable year described in the preceding
sentence. Therefore, the first year in which a qualified distribution could occur is 20x6.

Question 56

Q

Nonqualified Distributions

Answer

A

Any amount distributed from an individual’s Roth IRA that is not a qualified distribution is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category).

FIRST from regular contributions (i.e.. the $6,500 for 2023 annual contributions).
NEXT from conversion contributions on a first-in-first-out (FIFO) basis,and
FINALLY from earnings

Question 57

Q

10% Early Withdrawal Penalty

Answer

A

The 10% early withdrawal penalty will generally apply to any portion of a distribution from a
Roth IRA that is includable in gross income (such as distributions that consist of earnings within
the Roth IRA).

The penalty also applies to a non-qualified distribution, even if it is not includable in gross income to the extent it is allocable to a conversion contribution if the distribution is made within the five-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made.

It is important to note that although a non-qualified distribution may be subiect to the 10%
penalty based on the Roth IRA rules, the penalty may be avoided if the distribution falls within one of the exceptions to the early 10% early withdrawal penalty.

The following table summarizes the treatment from the standpoint of taxation and penalties of
distributions from a Roth IRA to the extent the distribution is not a qualified distribution.

Question 58

Q

The following flow chart outlines the process for determining the taxability of an ROTH IRA distribution.

Question 59

Q

Comparing ROTH IRAs to Traditional IRAs

Answer

A

An important distinctions when comparing Roth IRAs to traditional IRAs is:

The required minimum distribution rules do not apply to Roth IRAs during life.
However, minimum distributions must be taken from inherited IRAs - both traditional IRAs and Roth IRAs.

Question 60

Q

Other IRA Issues

Answer

A

Investments:

IRAs have a wide selection of investment choices, BUT certain types of investments are prohibited and are not allowed to be held within an IRA, mainly life insurance and collectibles.

If either life insurance or collectibles are purchased within an IRA, the purchase is deemed as distributions, the value of the purchase is subject to tax and/or penalty.

Collectibles include all of the following:
- any work of art, antiques, metal, gems, stamps, coins, wines, etc.

An EXCEPTION to the collectibles rule exists for certain US minted coins and bullion, such as
American Gold, Silver, and Platinum Eagle coins, are permitted to be purchased and held in an IRA
account. Coins of most foreign countries, however, such as South African Krugerrands, are
considered collectibles and are therefore not permissible investments for an IRA. In addition,
investments in gold, silver, platinum, palladium bullion are permitted.

Question 61

Q

Exam TIP

Answer

A

Know that life insurance and collectibles are not allowed in an IRA. Also, know the
exceptions that gold, silver, platinum or palladium are permitted.

Question 62

Q

Tax-Free Distributions for Charitable Purposes

Answer

A

Qualified charitable distributions from a traditional or Roth IRA may be excluded from gross income. The exclusion may not exceed $100,000 per taxpayer per taxable year.

A qualified charitable distribution is any distribution from an IA directly by the IRA trustee to a charitable organization.

Question 63

Q

Example of Tax-Free Distributions for Charitable Purposes

Answer

A

Kimber, age 71, has a traditional IA with a balance of $100,000, consisting solely of deduct-
ible contributions and earnings. The entire IA balance is distributed to Community Hospital.
The entire distribution of $100,000 is a qualified charitable distribution, Therefore, no amount is
included in Kimber’s income as a result of the distribution and the distribution is not taken into
account in determining the amount of Kimber’s charitable deduction for the year.

Question 64

Q

IRA Rollovers

Answer

A

There are a variety of rollover rules that facilitate taxpayers transferring their retirement balances
from one type of plan or account to another.

Distributions from Qualified Plans (as previously discussed)

When an individual terminates employment with the plan sponsor of a qualified plan, the
individual may roll the qualified plan balance over into an IRA. Typically, an IRA that holds funds that have been transferred from a qualified plan is referred to as a “conduit” IRA or an IRA rollover account. The funds in such a conduit IRA are allowed to be rolled back into another qualified plan, assuming the new plan permits such rollovers.

Under the PPA 2006, direct rollovers from qualified plans to Roth IRAs are allowed

Answer 58

A

Although it is now permissible to roll an IRA balance into a qualified plan, 403(b), or 457 plan, these plans are not required to accept such rollovers.

Indirect IRA Rollovers:

1. An indirect rollover is a distribution to the participant with a subsequent transfer by the
  participant to another account. This process must be completed within 60 days.
1. As of January 1, 2015, individuals are permitted only one annual 60-day rollover from any one of the individuals IRAs.
1. There is no limit on the number of direct rollovers between IRAs

Answer 59

A

IRAs are now afforded similar protection to qualified plans under federal bankruptcy law. The Act clarifies that retirement accounts that are exempt from tax under the Internal Revenue Code are also exempt from the debtor’s estate.

The aggregate value of the assets in a traditional IRA or a Roth IRA that may qualify for this exemption cannot exceed $1 million (as indexed for inflation) for an individual debtor. The assets subject to the $1 million (as indexed for inflation every three years) cap do not, however, include amounts attributable to rollover contributions or earnings on these amounts.

For tax years 2022, 2023 and 2024, the bankruptcy protection is $1,512,350.

Answer 60

A

If an individual or beneficiary of an IRA engages in ANY of the following transactions, then the
account will cease to be an IRA as of the first day of the current taxable year:

Selling, exchanging, or leasing of any property to an IRA;
Lending money to an IRA;
Receiving unreasonable compensation for managing an IRA;
Pledging an IRA as security for a loan,
Borrowing money from an IRA, or
Buying property for personal use (present or future) with IRA funds.

If a “deemed distribution” is made due to a prohibited transaction then the entire balance in the IRA is treated as having been distributed. In this case, the taxpayer will be subject to ordinary income tax on the entire balance and will also be subject to the 10% early withdrawal penalty.

Answer 61

A

A Simplified Employee Pension (SEP) is a practical retirement plan alternative to a qualified plan that can be used by small businesses and sole proprietors.

SEPs are easier to establish than qualified plans and have practically no filing requirements.

Because SEPs use IRAs as the receptacle for contributions, there is no trust accounting for the plan sponsor.

In addition, SEPs have similar characteristics to profit sharing plans.

Contributions to a SEP are limited to the lesser of 25% of compensation or $66,000 (2023)

Answer 62

A

Employers that sponsor SEPs must provide benefits to almost all employees. The requirements for coverage include the following:

Attainment of age 21 or older;
Performance of services for three of the last five years; and
Received compensation of at least $750 (2023) during the year.

Based on this definition, even part-time employees must be covered. If a company has high employee turnover. however. a SEP may be used to exclude the employees who do not remain employed for a period of at least three years.

Answer 63

A

SEPs can be established, as well as funded, for a plan year as late as the due date of the federal income tax return including extensions. Therefore, SEPs can be established for the following entities as lale do the date indicated below:

Answer 64

A

A formal written agreement to provide benefits to all eligible employees must be executed.
All eligible employees must be given notice about the SEP
A SEP-IRA (the receptacle account) must be set up for each eligible employee.

Answer 65

A

Similar to profit sharing plans, employer contributions to SEPs are discretionary.

In years that a contribution is made to a SEP however, a contribution must be made to all employees eligible during the year, whether or not they are employed or alive as of the end of the year.

Contributions to SEPs are made by the employer and must be made to employees’ IRA accounts based on a written formula that does not discriminate in favor of highly compensated employees.

Contributions to SEPs may be integrated with Social Security (permitted disparity).

For self-employed individuals, the general 25% limit converts to 20% (0.25 ÷ 1.25) of net
self-employment income - just like the Keogh calculation.

Roth contributions:

SECURE 2.0 Act of 2022 provides the opportunity for employees to request that their employer treat the contributions on their behalf as Roth contributions, either in whole or part. This is effective for taxable years beginning after December 31, 2022.
Employee will be taxed on the contribution amount due to being after tax contributions for a Roth.

Answer 66

A

Contributions for a SEP are made to IRA accounts on behalf of employees. As a result, there is NO vesting for employer contributions.

Employees are able to withdraw funds in any amount from their SEP-IRA.

So there would be 100% vesting?

Answer 67

A

Answer: D

None of the statements are true.

The maximum contribution to a SEP is the lesser of 25% of compensation or $66,000 for 2023
A SEP is inappropriate for employers with many part-time employees who want to limit cover.
age under the SEP as the SEP requires coverage after a short period of time. Contributions to a
SEP are always 100% vested. A partner is considered self-employed and, therefore, subject to the special calculation for self-emploved individuals

Answer 68

A

Answer: A

Contributions to a SEP IRA are limited to the lesser of 25% of the employee’s compensation or
$66,000 (2023). In this case, Julia’s compensation is $14,000, so the contribution on her behalf
would be limited to 25% of $14,000, or $3,500

Answer 69

A

Although SIMPLE plans were introduced to replace SARSEPs, which are not permitted to be established for years after 1996, many of the SARSEPs in existence prior to 1997 are still in operation.

SARSEPs allow employees to elect to defer a portion of their current salary into a SEP-IRA in a similar fashion to 401(k) plans.

In fact, the SARSEP deferral limit is the same as 401(k) plans; however,

the SARSEP was very easy to establish and had minimal reporting and testing requirements

Answer 70

A

At least 50% of the employees eligible to participate must choose to defer a portion of their salary.

The employer had to have no more than 25 eligible employees.

The elective deferrals of the highly compensated employees had to meet the SARSEP ADP test (discussed below)

Answer 71

A

Under this test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the Average Deferral Percentage (ADP) of all nonhighly compensated employees eligible to participate.

The deferral percentage equals:

ADP = Elective employee deferral ÷ Employee’s compensation

Answer 72

A

Just like the 401(k), an employee cannot defer more than $22,500 for 2023 of compensation into a SARSEP.

Those taxpayers who have attained the age of 50 by the end of the tax year, however; may, make additional catch-up contributions as detailed in the chart that follows.

Answer 73

A

It is important to note that the $22,500 deferral limit for 2023 applies to the aggregate elective deferrals the employee makes for the year to a SARSEP and any of the following plans:

Cash or deferred arrangement (401(k) plan)
Salary reduction arrangement under a tax-sheltered annuity plan (403(b) plan)
SIMPLE IRA plan

Answer 74

A

NO DOUBLE DIPPING ON ELECTIVE DEFERRALS!

However, other income sources may be eligible to be considered for some other type of qualified plan arrangement or simplified employee pension.

Answer 75

A

If the employer makes non-elective contributions to the SARSEP, the combined employee and employer contributions cannot exceed the lesser of 25% of the employee’s compensation or $66,000 for 2023.

Answer 76

A

Excess deferrals in a SARSEP are elective contributions made by highly compensated employees that violate the SARSEP ADP test.

The highly compensated employees must be given notice within 2½ months after the end of the plan year of their excess contributions.

These deferral contributions must then be removed from the SARSEP.

If the employer does not inform the highly compensated employees, then the employer must pay a 10% excise tax on the excess portion.

Answer 77

A

The IRC provides for “other tax-advantaged plans” that provide favorable tax treatment but are NOT qualified plans. These plans are often easier and less costly to administer.

Savings Incentive Match Plans for Employees (SIMPLEs) provide incentives to “small employers” (100 or fewer employees) to adopt retirement plans for employees with less administrative costs and fewer setup procedures than qualified plans and no annual filing requirements.

Section 403(b) plans, also called Tax-Sheltered Annuities (TSAs) or Tax-Deferred Annuities (TDAs), are plans available to certain nonprofit organizations and to employees of public educational systems.

Section 457 plans resemble deferred compensation plans that allow certain employees of state and local governments and of nongovermental tax-exempt entities the ability to defer compensation free from current income taxation.

These employee deferral contributions to 457 plans are separate and not combined with other deferral contributions to retirement plans such as SARSEPs, 401(k)s, SIMPLEs, or 403(b)s for purposes of overall contribution limits.

Answer 78

A

Savings Incentive Match Plans for Employees (SIMPLEs) are retirement plans for small employers.

SIMPLE plans are attractive to employers because they are NOT required to meet all of the nondiscrimination rules applicable to qualified retirement plans, and they do not have the burdensome annual filing requirements.

Answer 79

A

Employer establishes written SIMPLE plan
Employer contracts with employee to have salary reduction.
Employer withholds employee deferral over the course of a year
Employee elective deferrals are not subject to income tax but are subject to payroll tax.
Employer deposits match on a regular basis tax deferred without payroll tax.
Earnings grow tax deferred on all contributions

Answer 80

A

A sponsor company may establish the SIMPLE as either a:

SIMPLE IRA plan or
a SIMPLE 401(k) plan.

Answer 81

A

A SIMPLE IRA utilizes an IRA account as the funding vehicle of the plan.

Employee’s contribute through salary deferral, much like a 401(k), although the deferral limit is
$15,500 (2023).

SIMPLE IRAs REQUIRE the employer to either match the employee contributions of those that participate or provide non-elective contributions to all employees who are eligible.

All contributions made under a SIMPLE IRA must be paid to a SIMPLE IRA, not to another other type of IRA.

SIMPLE IRA plans can be established by for-profit entities, tax-exempt employers, and governmental entities.

Answer 82

A

A SIMPLE 401(k) is a SIMPLE plan that utilizes a 401(k) plan as the funding vehicle of the plan.

Unlike the SIMPLE IRA, plan loans are permitted with a SIMPLE 401(k). SIMPLE 401(k) plans must be maintained by an eligible employer and satisfy contribution requirements, eligibility requirements, and vesting requirements.

A SIMPLE 401(k) is NOT subject to nondiscrimination requirements or top-heavy restrictions if it meets certain contribution and other requirements that are discussed in this section, but the administrative requirements are greater as compared to a SIMPLE IRA.

Answer 83

A

Answer: A

Answer A is a correct statement.

Answer B is the maximum contribution to a qualified plan,

Answer C is incorrect;, SIMPLEs require employer contributions for matching except for the
first 2 years.

Answer D is incorrect

Answer 84

A

SIMPLE plans can only be established for companies who employ 100 or fewer employees who earned at least $5,000 of compensation from the employer for the preceding calendar year.

Whether the employees are eligible to participate in the SIMPLE or not, all employees who earned
$5,000 or more in the previous year that are employed at any time during the calendar year are taken into consideration for purposes of counting the 100 employee limitation, regardless of whether they meet other eligibility requirements.

What Entities can Establish SIMPLE Plans:

C Corporations
S Corporations
LLC
Partnerships
Proprietorships
Government Entities

Two-Year Grace Period for Employers Who Cease to Comply with 100 Employee Limit:

If an employer meets the 100 employee limitation in a given year, then the employer will have a two-year “grace period” where the employer can exceed the limitation without losing
eligibility to maintain the SIMPLE.

Other Plans Not Allowed: - Very IMPORTANT!

An employer may not establish a SIMPLE if the employer contributes to a defined contribution
plan for its employees during the year, if its employees accrue a benefit from a defined benefit plan during the year, or if the employer contributes to a SEP or 403(b) during the year.

Answer 85

A

Eligible employees are those employees who earned at least $5,000 in compensation from the
employer during any two preceding calendar years and who are reasonably expected to earn at least $5,000 in compensation during the current calendar year.

The employer and employee eligibility for a SIMPLE is determined based on the calendar year.

The following chart summarizes the eligibility characteristics for SIMPLEs:

Employees who earned $5,000 during any two preceding calendar years.
Employees who are expected to earn $5,000 during the current calendar year.

Answer 86

A

All contributions to SIMPLE plans on behalf of employees and the related earnings are fully
(100%) and immediately vested and cannot be forfeited by the employee.

Answer 87

A

With the exception of certain rollover contributions, the only contributions that may be made under a SIMPLE IRA plan are the employee’s elective deferral contributions and the required employer-matching contributions or non-elective contributions.

Employees may make annual elective deferrals to a SIMPLE IRA plan for 2023 and, thereafter, in
the amount of $15,500 adjusted for inflation.

For employees who have attained the age of 50 by the end of the calendar year a “catch-up
contribution” is permitted to the plan for the calendar year. The maximum catch-up contribution for 2023 is $3,500, assuming the employee has sufficient earned income.

Answer 88

A

Employers who sponsor a SIMPLE IRA are required to make either matching contributions for employees who make elective deferrals OR non-elective contributions to all eligible employees.

Answer 89

A

If the employer elects to make matching contributions, the employer is generally required to match the employee’s elective deferral contributions on a dollar-for-dollar matching basis up to 3% of the compensation of the employee (without regard to the covered compensation limit) for the entire calendar year. Note: This is different than a SIMPLE 401(k).

Employers may elect to reduce the three percent matching contribution requirement for a
calendar year, but only under all of the following circumstances:

the limit is reduced to no less than one percent;
the limit is not reduced for more than two years out of the five year period that ends with (and includes) the year for which the election is effective; and
employees are notified of the reduced limit within a reasonable period of time before the sixty-day election period for a salary reduction agreement.

This only applies to SIMPLE IRAs (not available for SIMPLE 401 (k)) AND this generally makes SIMPLE IA’s considered “more flexible?

Answer 90

A

If the employer chooses not to match employee elective deferrals, they MUST make non-
elective contributions for all eligible employees.

The employer’s non-elective contribution must be 2% of each eligible employee’s compensation (up to the covered compensation limit of $330,000 for 2023) to the SIMPLE IRA.

Answer 91

A

Employer Contributions:

3% match on all wages, or
2% non-elective contribution for all eligible employees. (Up to Covered Compensation Limit $330,000)

Employee Elective Deferrals:

% or $ contribution up to $15,500 plus $3,500 for over 50 for 2023.

Answer 92

A

SECURE 2.0 Act of 2022 allows for the election of Roth treat for contributions for taxable years beginning after December 31, 2022
Employee can elect Roth treatment of employee and/or employer contributions.
Employee will be taxed on the contribution amount

Answer 93

A

A SIMPLE 401(k) plan is a qualified plan and must generally satisfy the same requirements as 401(k) plans and SIMPLE IRA plans.

Under a SIMPLE 401(k) plan, an employee may choose to make “salary reduction contributions” or deferrals to a SIMPLE 401(k) account. This salary reduction contribution is expressly stated as a percentage of the employee’s compensation but may not exceed $15,500 for 2023.

The employer MAY, but is not required to, permit certain employees to use the catch-up feature. This feature allows employees age 50 and over to make an additional deferral of up to $3,500 for 2023.

A participant of a SIMPLE 401(k) MAY take a loan (plan permitting) from his SIMPLE 401(k). The amount of the loan is subject to the same restrictions as loans from qualified plans.

This is not allowed in a SIMPLE IRA.

Employers who sponsor SIMPLE 401(k) plans MUST make either

(1) a dollar-for-dollar matching contribution up to 3% of the employee’s compensation (up to covered comp limit for SIMPLE 401(k)) or
(2) a non-elective contribution of 2% of each eligible employees compensation to the plan (up to covered comp limit)
Unlike SIMPLE IRAs there is NO flexibility on the contribution formula!

The ADP test, ACP test, and top-heavy rules DO NOT apply to SIMPLE 401(k)s because they are essentially sate-harbor plans.

Answer 94

A

For both SIMPLE plans contributions are contemporaneously tax deductible for the employer.

The deductible amount includes the employee elective deferral contributions (as compensation) and any employer match or non-elective contribution.

Answer 95

A

Distributions from a SIMPLE are includable as ordinary income in the individual employee’s
taxable income in the year in which they are withdrawn. **SIMPLE Plan distributions are taxed in the same manner as distributions from a traditional IRA; **the SIMPLE 401(k) does not have any “lump sum provision.”

A distribution or transfer made from a SIMPLE during the first two years of an employee’s participation in the SIMPLE must be contributed to another SIMPLE to avoid taxation and penalty

If the distribution is subject to the early withdrawal penalty, the penalty tax increases from 10% to 25%. After the employee’s first two years of plan participation, the 10% penalty for early withdrawal will apply if the distrbution is not because of a penalty-excluded reason.

After the two-year participation period, a SIMPLE can be transferred or rolled over tax free to an
IRA other than a SIMPLE IRA, a qualified plan, a 403(b) account or a tax-sheltered annuity: or a deferred compensation plan of a State or local government (457 plan).

Answer 96

A

Answer: C

Dahlia can defer up to $19,000 ($15,500 deferral + $3,500 catch-up) because she is 50. Travelers’ match for Dahlia is 3% of her compensation, or $3,750 (3% × $125,000).

The maximum contribution to Dahlia’s SIMPLE is $22,750 ($15,500 + $3,500 + $3,750).

Answer 97

A

Answer: B

Nina can defer up to $15,500, the maximum SIMPLE deferral. Travelers can match Nina up to
3% of her compensation, or $6,000 (3% x $200,000). The maximum contribution to Nina’s
SIMPLE is $21,500 ($15,500 + $6,000), but the question asked for the maximum employee
deferral thus $15,500.

Answer 98

A

Noncontributory Plans = Employer contributes, employees not required to contribute.

Contributory: Any matching plan.

Answer 99

A

Tax sheltered or deferred annuities (403(b) plans) are available to certain qualified nonprofit organizations or to employees of public educational systems.

Answer 100

A

A 403(b) plan is a retirement plan for certain employees of public schools, certain ministers, and employees of various tax-exempt organizations. It is a tax-sheltered retirement plan, but not a qualified plan.

Like a 401(k), the 403(b) plan is established by the employer and the employee has an individual
account.

There are two basic types of 403(b) plans:

1) A salary reduction plan, which only accepts employee deferrals AND
2) An employer-funded plan, which accepts employee and employer contributions. If the employer funds the plan, the 403(b) will need to follow all ERISA rules.

Answer 101

A

Only employers can set up 403(b) accounts. Individuals cannot establish 403(b) accounts on their own.

Self-employed ministers, however, are considered both employees and employers and, thus, are able to contribute to a retirement 403(b) income account for their own benefit:

Technically, the two types of entities that can establish 403(b) plans are:

Tax-exempt organizations under IRC Section 501 (c)(3), or
Public schools or public educational organizations.

Answer 102

A

It is very common for a 403(b) plan to be a part of an overall pension or retirement plan. The 403(b) portion may be referred to as the supplemental retirement plan. If this is the case, then the plan is subject to ERISA requirements.

Generally 403(b) plans are NOT subject to ERISA rules if the following are true:

employee participation is voluntary;
there are no employer contributions:
employee has solely enforceable rights under the plan;
employer’s involvement is limited in scope; and sponsored by a government or religious institution.

If a 403(b) plan only provides for salary reduction agreements, then the plan is not considered to be established or maintained by the employer, and ERISA is inapplicable.

Answer 103

A

A 403(b) plan with immediate vesting may require a maximum waiting period of two years and the attainment of age 21, OR one year and the attainment of age 26 (educational institutions only).

Exception: If immediate vesting is not offered, the waiting period is no longer than one year and the attainment of age 21.

The following are considered eligible employees (who must meet the age and service requirements) to participate in a 403(b) plan:

Employees of tax-exempt organizations as defined under IRC Section 501 (c) (3).
Employees who are involved in the day-to-day operations of a public school or public school system.
Employees of cooperative hospital service organizations
Ministers who meet one of the following criteria:
-Ministers employed by Section 501 (c)(3) organizations (discussed above), who are self employed, or who are employed by organizations that are not Section 501(c)(3) organizations and function as ministers in their day-to-day responsibilities with their employer.

Answer 104

A

Employees’ elective deferral contributions to 403(b) accounts are very similar to employee elective deferral contributions to 401(k)s, SARSEPs, and 457s.

The following contributions are permissible contributions (but are not required) for 403(b) accounts:

employee elective deferrals;
non-elective contributions;
after-tax contributions; and
an combination of the above

For 2023, the maximum employee elective deferral is $22,500.

All employee contributions to 403(b) accounts and related earnings are 100% vested.

Answer 105

A

A 403(b) has two different catch-up provisions that can be used, in some circumstances,
simultaneously.

Age 50 Catch-Up Provision
15 Year Rule Exception

Know Both

Answer 106

A

An employee is eligible to make catch-up contributions if:

the employee has reached age 50 by the end of the year, and
the maximum amount of elective deferrals that can be made to the employees account have been satistied for the year.

If these two elements exist, then the total amount of “catch-up contributions” for the employee age 50 and over would be the lesser of:

$7,500 for 2023, or
includable compensation subtracted by other elective deferrals for the year.

Answer 107

A

There is a special catch-up rule, in addition to the $7,500 catch-up for participants age 50 and over, that applies only for 403(b) plans for employees that have worked for the same employer for 15 years (not required to be consecutive).

If an employee has worked for 15 years with an organization that qualifies for eligibility under
a 403(b) plan, then the limit of elective deferrals
to the 403(b) account is increased by the
lesser of

(1) $3,000;
(2) $15,000, reduced by increases to the general limit that were allowed in previous years due to the 15-year rule, or
(3) $5,000 times the number of years of service for the organization by the employee, subtracted from the total elective deferrals made by the
employer on behalf of the employee for earlier years.

If an employee qualifies for the 15-year rule, the maximum elective deferrals for the 403(b) plan for the plan year may be as high as $33,000 for 2023 ($22,500 maximum deferral plus $3,000 from the 15-year rule plus $7,500 for the 50 and over catch-up rule).

In order to qualify for the 15-year catch up, the business has to be a Health, Education or
Religious Organization (HER).

Answer 108

A

Both 403(b) plans and 401(k) plans may allow employees to make Roth contributions to the 403(b) plan.

SECURE 2.0 Act 2022 allows employees to elect to have employer matching contributions treated as Roth contributions. Contributions will be taxable to the employee.

The contribution limit for Roth accounts in a 403(b) in 2023 is $22,500, significantly higher than the limits for contributions to Roth IRAs outside a qualified plan. (IRAs are not qualified plans.)

Contributions to Roth IRAs are also limited based on annual income, but Roth accounts within 403(b)s do not have such income limitations.

Answer 109

A

Answer: D

Answer D is a correct statement accurately describing a 403 (b) plan.

Answer A is incorrect as a 403(b) plan is an employee deferral plan and is not a qualified plan.

Answer B is incorrect as the investment risk is borne by the employee in all cases.

Answer C is incorrect as an employee’s benefit within a 403(b) plan is always 100% vested.

Answer 110

A

The limitation applies to an aggregate of all contributions. The total contributions are comprised of elective deferrals, non-elective contributions, and after-tax contributions. The maximum for 2023 is the lesser of $66,000, or 100% of the employees covered compensation for the employee most recent year of service.

Includable Compensation for the Most Recent Year of Service:

The definition of includable compensation for the most recent ear of service is that amount of taxable wages and benefits that received by the employee from the employer.

Answer 111

A

Funds within a 403(b) account can only be invested in either:

insurance annuity contracts or
mutual funds.

Answer 112

A

Loans to 403(b) employee-participants are allowed and are subject to the same limitations and requirements applicable to loans from qualified retirement plans (e.g., 401(k)).

Answer 113

A

Generally, distributions can be paid from a 403(b) account only after the following events:

the employee turns age 59½;
the employee is separated from service;
the employee dies;
the employee becomes disabled;
birth or legal adoption (up to $5,000 within 12 months of event) or
for salary reduction contributions, the employee endures a severe hardship.

Hardship distributions are permitted in 403(b)s.

Answer 114

A

Employee-participants can generally roll over tax free all or any part of a distribution from a 403(b) plan to a:

qualified plan,
a traditional IRA,
or to another 403(b) retirement plan.
403(b) distributions can also be rolled into a Roth IRA after December 31, 2007.

Any rollover that is not a direct trustee-to trustee rollover will be subject to mandatory 20% withholding and 100% of the distribution must be deposited into the new account by the 60th day following the day on which the employee receives the distribution.

Answer 115

A

403(b)s are subject to the same minimum distribution requirements applicable to IRAs and qualified plans, which require that an individual begin taking withdrawals from the plan by April 1st of the year after the participant attains the age of 72 (73 if attaining age 72 after 12/31/2022).

Answer 116

A

In most instances, the distributions from 403(b) accounts received by participants are taxable as ordinary income in the year received;

however, the employee-participant’s return of adjusted basis is NOT subject to tax.

Answer 117

A

If ERISA does apply to the 403(b) plan, then the QJSA requirements will generally apply.

Answer 118

A

Answer: C

403(6) plan assets cannot be invested in individual securities, and deferrals to 403(b) accounts are always 100% vested. Statements 3 and 4 are true. Remember that 403(b) can have both the catch-up for age 50 & over ($7,500) and 15-year rule ($3,000).

Answer 119

A

Under Section 457 of the Internal Revenue Code, employees of state and local governments and of nongovernmental tax-exempt entities may participate in tax-free deferred compensation plans to aid employees in saving for retirement.

Employee elective deferrals into a 457 plan do not count against deferrals into 401(K) or 403(b)s,
because it is a deferred compensation plan not a retirement plan.

Answer 120

A

Section 457 of the Internal Revenue Code allows employees of state and local governments and
employees of tax-exempt nongovernmental entities to save tax-deferred compensation for retirement.

457 plans are not “qualified plans” and, thus, are not subiect to many of the eligibility standards of the Internal Revenue Code, including such requirements as nondiscrimination, minimum participation, and funding and vesting standards.

A 457 plan is a “non-qualified” deferred compensation plan.

There are three types of 457 plans:

(1) eligible governmental plans,
(2) eligible tax-exempt plans, and
(3) “ineligible plans.”

The main distinction between eligible plans 457(b) plans) and ineligible plans (457(f) plans) is that ineligible plans provide for greater deferral of funds.

Answer 121

A

Eligible employers are defined as:

a State,
a political subdivision of a State,
or any agency
or instrumentality of a State
or political subdivision of a State,
and any other organization other than a
governmental unit that is exempt from tax.

These tax-exempt organizations include:

trade associations,
religious organizations,
private hospitals,
rural electric cooperatives,
farmers’ cooperatives,
private schools and foundations,
labor unions, and
charitable organizations.

Churches and qualified church-controlled organizations are not considered eligible employers under Section 457.

Answer 122

A

457(b) plans sponsored by governmental employers are also called “public 457(b) plans.” 457(b) plans for tax-exempt employers are called “private 457(b) plans.”

Public 457(b) plans are required to be funded through a trust holding all assets and income for the exclusive benefit of plan participants and their beneficiaries.

Under private 457(b) plans for tax-exempt employers, ERISA limits participation to a select group of highly compensated employees or management. Private 457(b) plans are offered only to HC employees or top management because funds in the plan are not placed in trust.

The private 457(b) plan is “unfunded” and remains vulnerable to the employer’s creditors.

An employer does not have to make public 457(b) plans available to all employees but can selectively choose which employees may participate in the plan.

Answer 123

A

Employees are able to contribute up to the lesser of the following amounts:

The employee elective deferral of $22,500 for 2023, or
Up to 100 percent of includable compensation; but, this amount must be less than the employee elective deferral limit.

Answer 124

A

Age 50 Catch-Up Contributions for Governmental 457(b) Plans

Special “Final 3-Year” Additional Catch-Up Provision

Answer 125

A

Employees age 50 or over may contribute an additional $7,500 above the elective deferral limit of $22,500 for 2023.

This catch-up benefit is available only for eligible governmental (public) 457(b) plans.

The age 50 catch-up is not available to employees of eligible tax-exempt (private 457(b) plans.

Answer 126

A

457(b) plans may also have a special catch-up option that is termed the “final 3-year” catch-up
provision. It applies to both public and private 457(b) plans.

Three years prior to normal retirement age (as defined by the plan) an employee may contribute an additional amount equal to the elective deferral limit, which for 2023 is $22,500.

Thus, an employee with adequate compensation could defer $22,500 under the regular deferral limitation and $22,500 as catch-up for a total of $45,000 in 2023.

The “final 3-year” is further limited to prior unused maximum deferral amounts.

Unused deferrals are amounts allowed based on the annual limit in prior years, that you did not contribute.

Employers that sponsor 457 plans are not required to offer the “final 3-year” catch-up option.

Furthermore, participants who utilize the “final 3-year” catch-up cannot simultaneously use the age 50 or older catch-up provisions

Answer 127

A

Answer: A

Frank is not within 3 years of the plan’s normal retirement age and, therefore, can only defer the normal $22,500. The $7,500 catch-up (2023) for those participants age 50 and over is not available because he is only 42 years old.

Answer 128

A

As with other retirement plans an employer may make matching contributions or non-elective deferrals into the 457 plan.

The 457(b) contribution limit of $22,500 for 2023 includes both employee contributions and employer matching contributions. This is a significant difference between 457(b) plans and 401(k)s or 403(b)s.

As a result, matching contributions by employers in 457 plans are very infrequent compared to those for 401(k) or 403(b) plans. Many 457 plans do not offer a matching contribution at all.

SECURE 2.0 Act of 2022 allows employees to elect to treat employer contributions as a Roth contribution
Contributions will be taxable to the employee. This is eftective for plan years beginning in 2023

Answer 129

A

A vital and substantial benefit of contributing to a 457 plan is that the contributions to the 457 plan are not aggregated or combined with contributions to other tax-deferred retirement plans.

An employee may contribute the maximum amount to a 401(k) plan, 403(b) plan, SARSEP, or SIMPLE IRA, in addition in the deferral limits for 457(b)s.

Answer 130

A

457(b) distributions must be included as ordinary income in the calendar year in which the distributions are made.

A distinct advantage of a public 457(b) plan is that the age 59½ withdrawal rule does not apply at separation of service.

There is generally no 10% early withdrawal penalty from 457 plans, except for distributions attributable to rollovers from another type of qualified plan or IRA.

Withdrawals from a 457(b) plan must begin by age 72, or 73 for those 72 after 12/31/22.

Loans may be permitted from public 457(b) plans, which function very much like traditional 401(k) plans or 403(b) plans. The loans are not required by the plan.

Answer 131

A

The rules for rollovers from 457(b) plans are the same as those that apply to rollovers from qualified plans.

The important distinction is whether the 457 plan is a public (governmental) 457(b) plan.

Public 457(b) plans allow funds to be rolled over into a new employer’s 403(b), 401 (k), or 457(b) plan if that plan accepts such transfers.

Otherwise, the assets can be rolled into an IRA.

457(b) plans for nongovernmental tax-exempt entities, however, may allow funds only to be rolled over from the 457(b) plan into another tax-exempt organization’s 457(b) if the plan accepts such transfers.

These funds cannot be rolled into an IRA or any another type of employer-sponsored retirement plan

Answer 132

A

Ineligible plans are non-qualified deferred compensation plans for state and local governmental employers and for tax-exempt employers.

These ineligible plans are also called “top-hat” plans. Only HC employees or top management may participate in a 457(f) plan. Ineligible plans are those plans under Section 457 that fail to meet one or more requirements of the “eligible plan.”

The amounts contributed to the 457(f) are subject to a “substantial risk of forfeiture.”

Taxation of funds in an ineligible plan occurs when there is no risk of forfeiture. Amounts may therefore be taxable prior to the actual payment or distribution to the participant.

Disadvantages of 457(f) Plans:

If the participant terminates employment before the stated payment period, the participant may
forfeit all of the 457(f) plan funds.
Also, even though a distribution may not occur, the participant may be taxed on the value of the
plan once the funds vest in the participant or are no longer subject to substantial risk of forfeiture.

Answer 133

A

Which of the following statements regarding 457 plans is (are) true?

An individual who defers $22,500 to his 403(b) plan during 2023 can also defer $22, 500 to a 457 plan during 2023 (salary and plan permitting).
A 457 plan allows an executive of a tax-exempt entity to deter compensation into an ERISA protected trust.
In the final three years before normal retirement age, a participant of a government sponsored 457 plan may be able to defer $45,000 (2023) for the plan year.

a) 1 only.
b) 2 only.
c) 1and 3
d) 2 and 3.

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Lesson 4 of Retirement Planning: Other Tax-Advantaged Plans Flashcards

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