Module 4 Advantaged Plans and Nonqualified Plans Flashcards

Question

The simplified employee pension (SEP) IRA is one of the easiest plans to set up and maintain. A SEP IRA eliminates which of these? The administrative complexity found in many retirement plans Lengthy and detailed government reporting Numerous nondiscrimination tests Complicated restrictive contribution formulas associated with many retirement plans A) III and IV B) I, II, III, and IV C) I and II D) I, II, and III

Answer 1

A Here's the thought process: MAGI for both is $155,000 (40,000*2 + 75,000) Looks like it's too high income for IRA contribution tax free, BUT Section 457 contribution doesn't make her an active member in a company plan - so the threshold moves up to that 215k-225k threshold. She's under that, so she can contribute and deduct, AND she's 50+, so she can put an extra thousand in. Her: $8,000. From there, he's not over 50, which means he can't do the catch up of $7500. The maximum that Nicholas can defer in 2024 is $23,000 under the employee elective deferral rules. The maximum elective deferral is $23,000 for an individual under age 50, regardless of how many related or unrelated employers are involved. Kelly can contribute a maximum of $8,000 to her IRA ($7,000 maximum contribution + an additional catch-up contribution of $1,000 because she is already age 50). Participants in a Section 457 plan are not considered active participants for IRA contribution deductibility. Kelly can contribute and deduct the maximum allowable to her IRA, because the phaseout amounts for deductible contributions for married filing jointly taxpayers with an active participant spouse is $230,000–$240,000 MAGI in 2024. LO 4.4.1

Answer 2

B Always remember: 403(b)s are almost always limited to Annuities and Mutual Funds. Funding for a 403(b)/TSA is essentially limited to annuity contracts and mutual funds. CITs, MEPs, and PEPs are also available due to the SECURE Act, but they are rare. The special catch-up provision that allows double the basic contribution in the last three years before the plan document's normal retirement date applies to 457 plans, not 403(b)s. Next, people employed by a not-for-profit organization are taxed like everyone else. Ministers are an exception to this, but that is beyond the scope of the CFP program. 403(b)s allow a worker to elect to treat employer contributions as Roth contributions. However, it is always best to wait until you are fully vested before electing to treat employer contributions as Roth contributions. What would happen if you separated from service before being fully vested? You would lose the non-vested money for sure. LO 4.3.1

Answer 3

C The answer is lower employee contribution limits than a 401(k). Employees may make an elective deferral as a percentage of compensation up to $16,000 (2024). This is a disadvantage because the maximum employee elective deferral for 401(k) plans is higher. The other statements are advantages of a SIMPLE IRA. LO 4.2.1

Answer 4

A Only the employees of Bonnet Company who earned at least $5,000 in the prior year and expect to earn at least that amount in the current year are eligible to participate in the plan (40 employees). Employees may make an elective deferral into the SIMPLE IRA as a percentage of compensation of up to at least $16,000 in 2024. Those age 50 and above can add an additional $3,500. The unofficial, but mathematically set, effective includible compensation limit for SIMPLE IRAs for employees under age 50 is $533,333 in 2024 when the employer elects the 3% match ($16,000 ÷ 0.03). The includible compensation limit is $345,000 if Bonnet Company decides on the 2% nonelective employer contribution. LO 4.2.1

Answer 5

a SEPs and profit sharing plans are both subject to the 25% limit on deductible employer contributions, the controlled group rules, and nondiscrimination requirements. Eligibility requirements are different for a SEP. With a SEP, the eligibility test is age 21 and at least three of the last five years of service plus earning at least $750 in 2024. LO 4.2.2

Answer 6

Public school

Answer 7

d Only Statement IV is incorrect. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary. Participation cannot be denied on the basis of age for any employee who earns at least $750 in 2024. However, there is another qualification for coverage with a SEP: The worker must have also worked for the employer for at least three of the preceding five years (including working part-time). LO 4.2.2

Answer 8

d Statements I and II are both correct. For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contribution plans, such as SEPs and 401(k)s, as Roth contributions. LO 4.1.1

Answer 9

c A SEP plan is a very simple retirement plan that provides for flexible funding and allows employers to make contributions directly to participants' individual IRAs and can be established by any type of employer. The percentage contributed by the employer can fluctuate each year as long as it is the same for every employee. Up to 25% of an employee's covered compensation is allowable for the tax benefit, up to a maximum of $69,000 (2024). LO 4.2.2

Answer 10

I only Statement II is incorrect. Pretax contributions by participants are permitted in an eligible Section 457 plan. LO 4.3.2

Answer 11

A B is wrong bc you can't just plop in 69,000 on your own. C is wrong bc there's a straight up question in it. D is wrong because of this phrase: REGARDLESS OF PREVIOUS CONTRIBUTIONS. -The ability to double up for the last three years comes from UNUSED contributions. Meaning if you put in $16,000 out of $23,000, you missed out on $7,000. Do that for ten years, and you're at $70,000 of unused contributions. You can use UP TO THAT AMOUNT of unused contributions to "double up". The additional deferral amount is available only from prior unused deferrals and is to make up for those years when deferrals were less than the maximum allowed. The other catch-up is for those who have attained age 50. They can increase their deferrals by $7,500 (in 2024) in all but the last three years before retirement if they are using the final three-year catch-up. LO 4.3.2

Answer 12

A I have no idea wtf this is on about. Both statements are correct. Congress passed the long-service catch-up in 1986, but it did not specify which catch-up provision was used first between the 15 years of service catch-up and the age 50+ catch-up. Thus, the IRS had to make that decision and notice what they chose. Finally, the 15 years of service catch-up was much more substantial in 1986 than today. At 3% inflation, it would take in the high $40,000s today. On the other hand, Congress has raised the contribution limit for all workers over the years. LO 4.3.1

Answer 13

D SEP plans and qualified profit-sharing plans are both subject to 25% of the aggregate covered compensation limit on annual employer deductions. Neither plan requires an annual mandatory employer contributions, nor is investment risk borne by the employer. Immediate 100% vesting is required in SEP plans but not in profit-sharing plans. LO 4.2.2

Answer 14

B The employee bears the investment risk under the plan, which is a disadvantage to the employee. All of the other choices are disadvantages of a SEP plan. LO 4.2.2

Answer 15

A The maximum annual contribution that may be contributed to a SEP plan on behalf of an employee is the lesser of 25% of compensation, or $69,000 annually (2024). LO 4.2.2

Answer 16

A George's 2024 maximum is twice the regular deferral limit for the year, $46,000. He cannot take advantage of the age 50 catch-up in his final three-year period if he chooses to double his annual amount. LO 4.3.2

Answer 17

D Think of it more like a mini-pension instead of a modified IRA. It's sort of like, instead of contributing any amount, you can contribute $69,000 (or a lot more than with most retirement plans). Only problem is, it has to be for every employee equally. For 2024, the maximum contribution possible on behalf of a participant to a SEP is the lesser of 25% of employee covered compensation or $69,000. LO 4.2.2

Answer 18

B True facts: 457 no NUA 457 lump sum can be rolled into Qualified Plan 457 can use double the contribution limit during three years before retirement A participant in a governmental Section 457 plan may not use both the special catch-up allowance and the over-age-50 catch-up allowance in the same tax year. LO 4.3.2

Answer 19

d The maximum allowable elective deferral for someone under age 50 for 2024 is $23,000. If Sally contributes $6,000 to ABC's plan in 2024, then she can only contribute up to $17,000 to XYZ's plan ($23,000 − $6,000 = $17,000). LO 4.4.1

Answer 20

d The Section 403(b) plan, like the Section 457 plan, can be used as an employee deferred contribution plan. Certain tax-exempt employers can implement Section 403(b) plans. A SEP plan is funded by employer contributions. A new SARSEP can no longer be established. A SIMPLE requires mandatory employer contributions. LO 4.3.1

Answer 21

c The maximum contribution that may be made on Mark's behalf is $28,000 ($16,000 of employee elective deferrals and $12,000 of employer contributions). Notice that the employer contribution was based on his entire $400,000. SIMPLE IRAs with a 3% match are the only employer retirement plan that can consider compensation over $345,000 in 2024. LO 4.2.1

Answer 22

d Statement I is incorrect. An employee who participates in a Section 403(b) plan is considered an active participant for purposes of determining the deductibility of traditional IRA contributions. Statements II, III, and IV are correct. LO 4.3.1

Answer 23

a Employers can make discretionary contributions to a SEP IRA of up to $69,000 in 2024. An additional consideration is that the contribution to a SEP is limited to 25% for employees. There are special adjustments for self-employed workers. On the other hand, SIMPLEs have a lower contribution limit, but it is based on 100% of the worker's compensation. Thus, a SIMPLE IRA allows a higher total contribution until the worker's compensation goes over around $100,000 for those under 50 and $120,000 for those age 50 and older. Employees cannot contribute to a SEP IRA. Employers cannot make discretionary contributions to a Traditional IRA or Roth IRA. The normal salary deferral limit in a SIMPLE IRA is $16,000. An employer can make either a 3% matching contribution or 2% nonelective contribution to a SIMPLE IRA. No other types of contributions may be made to a SIMPLE IRA. LO 4.2.2

Answer 24

c sep = no ee conts A SIMPLE IRA will allow for employee elective deferrals as a percentage of compensation of up to $16,000 (2024) annually. The plan would require the employer to match dollar for dollar up to 3% of the employee's compensation or a 2% of compensation nonelective contribution for each eligible employee. A SEP plan does not allow employee deferrals. According to SECURE 2.0, for 2023 and following, most defined contribution plans like SEPs and SIMPLE 401(k)s may offer their workers a chance to treat some or all of the employer's contribution as a Roth contribution. A SIMPLE IRA does not allow a worker to elect to treat an employer contribution as a Roth contribution. SIMPLEs (both SIMPLE 401[k]s and SIMPLE IRAs) may accept worker Roth contributions. LO 4.2.1

Answer 25

d The answer is the maximum contribution possible on behalf of an individual participant is the same for both types of plans ($69,000 for 2024). Both SEP plans and qualified plans can be funded as late as the due date of the return plus extensions. Qualified plans are protected under ERISA and federal bankruptcy law. SEPs share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules. LO 4.2.2

Answer 26

b The maximum elective deferral limit in a Section 403(b) plan for 2024 is $23,000, assuming no catch-up provisions apply. LO 4.3.1

Answer 27

c If an employer decides to elect the 3% matching contribution for a SIMPLE IRA, the includible compensation limit in 2024 is effectively $533,333, or $16,000 ÷ 0.03. For a SIMPLE 401(k), it is the same includible compensation amount ($345,000) in 2024 as for other qualified retirement plans. If a SIMPLE IRA has the 2% mandatory employer contribution, the 2% stops at $345,000 in 2024. Notice that the law is designed to encourage a higher total contribution. It allows the owner to get more of a contribution with a match than with a mandatory annual employer contribution. Many people would not contribute without the match, so their retirement savings rate would be 2%. The same people will often do the 3% worker contribution to get the match, so their effective savings rate becomes 6%—thus, allowing the owner to save a little bit more ends up tripling the retirement savings account for many workers. LO 4.2.1

Answer 28

d The maximum elective deferral into a 403(b) for someone under age 50 with less than 15 years of service is $23,000 in 2024. LO 4.3.1

Answer 29

c A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules. Withdrawals from a 457 plan are not subject to the 10% EWP unless money is rolled into the plan. That outside money and the earnings on it are subject to the 10% EWP. That is why 457 plans that allow rollovers must account for the rollover money separately. LO 4.3.2

Answer 30

b A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan. LO 4.2.2

Answer 31

c Mike could contribute $23,000 to the Section 457 plan in addition to the $16,000 contributed to the SIMPLE plan in 2024. Since the 457 plan is not aggregated with other plans, a participant could contribute $23,000 to a 457 plan and, if also participating in a SIMPLE plan, contribute an additional $16,000 to that plan, or, if participating in a 403(b) or 401(k), contribute up to $23,000 to one of those plans. LO 4.3.2

Answer 32

d Earnings within the account are tax deferred. Contributions by the employee are made with pretax dollars, and the employer may deduct its contributions as an ordinary business expense. For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPs, as Roth contributions. LO 4.2.1

Answer 33

d The answer is simplified employee pension (SEP) plan requires employer contributions on a nondiscriminatory basis. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary. On the other hand, a SEP does not allow workers to contribute, so a SIMPLE IRA is another great choice for small employers. However, when the small business owner makes more than around $100,000 if younger than 50 and more than $120,000 for owners 50 and older, then a SEP will allow a larger contribution than a SIMPLE. These numbers do not include the enhanced contribution limits for SIMPLEs for 2024 and following. Finally, SEPs essentially require a business owner to have the same contribution rate for all eligible workers. Thus, a SIMPLE IRA is better for the self-employed owner because it requires a far lower contribution for the workers while still allowing a sizable contribution for the owner. LO 4.2.2

Answer 34

b TSA funding is limited to annuity contracts and mutual funds. LO 4.3.1

Answer 35

d SIMPLE max contribution EE side: 16000 SIMPLE % match cont ER side: .03*200k = 6000 Total contribution = 22000 The maximum total contribution is $22,000 ($16,000 maximum employee contribution for 2024 + $6,000 employer match). The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum). Therefore, the employer can make a contribution of up to $6,000 ($200,000 compensation × 3%). For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPs, 401(k), etc. as Roth contributions. SIMPLE IRAs do not offer the worker the option to treat employer contributions as Roth contributions. Starting in 2024, employers may make additional non-elective contributions of 10% of pay. This additional contribution is limited to $5,000/year (meaning the first $50,000 gets the extra 10% employer contribution. Finally, the annual deferral limits for SIMPLE plans (both SIMPLE IRAs and SIMPLE 401[k]s) will be increased 10% from what it would normally be in 2024 for eligible firms with 25 or fewer employees. An eligible firm has not had a qualified retirement plan in the last three tax years. Employers with 26-100 employees will qualify for the higher limit if they have a 4% match instead of the normal 3% match, or if their non-elective contribution is 3% instead of the normal 2%. This is why SECURE 2.0 can be thought of as the "Retirement Plans Formerly Known as SIMPLEs Act." The CFP Final is not expected to get to this degree of depth. LO 4.2.1

Answer 36

B SIMPLE IRA plans are available to employers with 100 or fewer employees and with no other qualified retirement plan. The employer contribution requirement may be satisfied by either a 3% matching contribution formula or a 2% nonelective contribution for each employee with current-year compensation of $5,000 or more. LO 4.2.1

Answer 37

b A SEP plan would not be appropriate because it would require coverage of Dorothy's part-time employees. A traditional Section 401(k) is not appropriate because it would involve special nondiscrimination testing and annual filing of the Form 5500 series. A Section 457 plan is not appropriate because it is available only for certain, private tax-exempt organizations. A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Dorothy's retirement planning goals. LO 4.2.1

Answer 38

c All of these institutions may provide Section 403(b) plans. Tax-exempt organizations are those qualifying under Section 501(c)(3) of the Internal Revenue Code. Other prospects for a Section 403(b) plan include hospitals, private nonprofit schools, charities, civic leagues, and tax-exempt organizations. LO 4.3.1

Answer 39

A *DOES THIS MEAN SOMETHING?* "If the employer does not amend the plan for the additional contributions allowed in 2024 and following?" Does this have something to do with the $3500 50+ catch up amount? The following explanation doesn't elaborate, and ChatGPT is down. The total of the employee and employer contributions that may be made to George's account in 2024 is $27,000. $16,000 employee contribution + $7,500 employer contribution ($250,000 × 0.03) + $3,500 employee age-50-and-over catch-up contribution $27,000 LO 4.2.1

Answer 40

D To establish a SIMPLE, an employer cannot maintain another qualified or tax-advantaged plan. However, a Section 457 plan is a nonqualified deferred compensation plan and, therefore, does not constitute a prohibited plan for purposes of also establishing a SIMPLE. A union plan is another exception. A union plan would not stop an employer from establishing a SIMPLE plan for their non-union workers. However, for test purposes, a statement like, "A SIMPLE precludes the employer from having another type of retirement plan" is true unless either of these two exceptions are included in the scenario. The point is that SIMPLEs are supposed to be the only active retirement plan for the employer, and these two exceptions are very minor. LO 4.2.1

Answer 41

B Reminder: It's way early, but 457b is a non-qualified plan, which means there is a substantial risk of forfeiture. Meaning it's not taxable so long as you may lose fuckin all of it. Only Statement I is incorrect. Gary is not eligible for the regular age-50-and-over catch-up provision because he is a participant in a nongovernmental plan and has elected the three-year special catch-up provision. LO 4.3.2

Answer 42

B SEP requirements apparently: 21 y/o + must be covered 3 of the last 5 years, including part time covered Contributions are mandatory for people who earned >=$750 in the past year Union members can be excluded if they have their own retirement plan $750 is a 2024 number for this, I'm assuming it will probably change to $800ish in 2025 The requirements listed are elements of a SEP plan. LO 4.2.2

Answer 43

C For a loan not to be treated as a taxable distribution for tax purposes, it must usually be repayable within five years at a reasonable rate of interest. Disaster loans can get a one year extension and loans to purchase a home have no legal time limit. However, most plan documents limit loans used to buy a principal residence to 10 years. A Section 403(b) may include loan provisions similar to that of a qualified plan. LO 4.3.1

Answer 44

A Only the SIMPLE IRA screws you hard if you take out money within the first two years. Only early distributions from a SIMPLE IRA within the first two years of initial participation in the plan are subject to the 25% early withdrawal penalty tax. LO 4.2.1

Answer 45

D Section 403(b) plans (tax-sheltered annuities) allow employees who have worked for a qualifying employer for at least 15 years to make special catch-up contributions. These are in addition to the catch-up contributions that apply to employees who are age 50 or older. LO 4.3.1

Answer 46

Life insurance cannot be held in any type of IRA, including SEPs and SIMPLE IRAs. Qualified retirement plans can purchase life insurance if they comply with the incidental benefit rules. LO 4.2.2

Answer 47

Life insurance cannot be held in an IRA

Answer 48

A Can't deduct from taxes if you're exempt from taxes to begin with. Because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue. LO 4.3.2

Answer 49

B Simple plans can have one of two possible contributions from ER. SIMPLE plans can have either a 2% nonelective contribution or a 3% match. For 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPs, 401(k)s, 403bs, and SIMPLE 401(k)s, but not SIMPLE IRAs, as Roth contributions. So workers can make Roth contributions to a SIMPLE IRA, but they are not allowed to elect to treat employer contributions as Roth contributions. LO 4.2.1

Answer 50

Tom's goals describe attributes of a SIMPLE IRA. The SEP plan and the target benefit plan do not allow worker contributions. The age-weighted profit-sharing plan is not as easily understood. Also, the target benefit plan and the age-weighted profit-sharing plan favor older employees. LO 4.2.1

Answer 51

No. Elective deferral is fancy talk for "employee contribution"

Answer 52

No. Employees cannot contribute to a SEP IRA.

Answer 53

Savings Incentive Match Plan for Employees. SIMPLE. It's weird to think of an IRA from an employer perspective rather than from a personal perspective, but remember, SEPs are also IRAs and those are employer based.

Answer 54

A For eligible participants with 15 years of service with the sponsor-employer and who have attained age 50, two types of catch-up allowances may be available. In general, the nondiscrimination rules that apply to qualified plans also apply to Section 403(b) plans, and the plan can be designed to allow loans. Individual accounts allow employees to direct their own investments. As such, they bear the investment risk. Loans may be permissible, but are plan specific. LO 4.3.1

Answer 55

B Reminder: this is talking about the EMPLOYEE's contribution. In any employer retirement plan, you are always entitled (100% vested) in the money you put in, no matter the time frame. Participants in every type of employer retirement plan are always 100% vested in their elective deferrals and the earnings from those contributions. LO 4.3.1

Answer 56

D The "Non-elective" is referring to the ER side. Meaning they don't have a choice, and will HAVE to contribute whether they want to or not. This is instead of contributing 3% as a match (Required if the employee contributes). Ex-March must make a nonelective contribution of $800 for Christopher. Though Christopher does not make a contribution this year, Ex-March must make a nonelective contribution of $800 (2% × $40,000) on his behalf. Under the employer contribution election Ex-March has selected, even if an eligible employee does not contribute to the SIMPLE IRA, that employee would still receive an employer nonelective contribution to his SIMPLE IRA equal to 2% of compensation. LO 4.2.1

Answer 57

A After-tax contributions are not permitted with a SIMPLE. However, for 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPs, as Roth contributions. While a Roth contribution is like an after-tax contribution because neither gets an immediate income tax deduction, Roth contributions are a different category from after-tax contributions. After-tax contributions are similar to nondeductible IRA contributions and Roth contributions to a SEP or SIMPLE are like Roth IRA contributions in many ways. Nondeductible IRAs are covered in Module 5.The ACP test is not required with SIMPLEs. Distributions for higher education expenses from a SIMPLE IRA (or any IRA) are exempt from the early withdrawal penalty. An employer sponsoring a SIMPLE cannot also maintain a qualified plan. LO 4.2.1

Answer 58

A Somehow it's not the pension plan.. WTF The possibility of favorable income tax treatment for a lump sum distribution (like NUA treatment) is available only for qualified (versus tax-advantaged) plans. In addition, the lump sum distribution option is typically available only in a defined contribution type of plan, such as a profit sharing plan. LO 4.1.1

Answer 59

B SEP is like a mini pension plan. Employers can put in more. The limits for SEP contributions are higher than those of traditional IRAs and are similar to those of the qualified plans. Specifically, SEP contributions are limited to the lesser of 25% of employee compensation (limited to the includible compensation amount of $345,000 for 2024); or $69,000 (2024). For an employee with a compensation of $345,000, the limit would be the lesser of $86,250 (25% × $345,000), or $69,000 in 2024. LO 4.2.2

Answer 60

B $69,000 Because it's a mini (tax advantaged, not qualified) pension plan they can put in more.

Answer 61

A The answer is workers are allowed to have employer SEP contributions treated as Roth contributions. This started in 2023 according to SECURE 2.0. LO 4.2.2

Answer 62

D If you have a SIMPLE, employer can't have any of these alongside it: Qualified plans, SEP IRA, SARSEP, 403(b). You can have tax advantaged plan that's not listed or a non-qualified plan (457 in this case). An employer cannot maintain a SIMPLE if it maintains any other qualified retirement plan, SEP plan, SARSEP plan, or Section 403(b) plan. However, an employer that maintains a Section 457 plan can also maintain a SIMPLE. The same is true for a union plan. LO 4.2.1

Answer 63

D Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% early withdrawal penalty. LO 4.2.1

Answer 64

A Get it right next time dumbass

Answer 65

A A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan. LO 4.2.2

Answer 66

C Is the 401(k) and exception to this? I'm pretty certain an employer can't just plop $69,000 into your account like how it's done in a SEP IRA./ The answer is the maximum contribution possible on behalf of an individual participant is the same for both types of plans ($69,000 for 2024). Both SEP plans and qualified plans can be funded as late as the due date of the return plus extensions. Qualified plans are protected under ERISA and federal bankruptcy law. SEPs share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules. LO 4.2.2

Answer 67

D Remember, there are no employEE contributions to a SEP IRA, so all contributions from the employer are apparently immediately vested. All of the statements are correct. LO 4.2.2

Answer 68

I II Get ready to read Statements I and II are correct. An employer can make a 2% nonelective employer contribution in a SIMPLE IRA, where employees eligible to participate receive an employer contribution equal to 2% of their includible compensation (limited to $345,000 in 2024 and subject to cost-of-living adjustments for later years), regardless of whether they make their own contributions. Alternatively, an employer may make a dollar-for-dollar match up to 3% of compensation, where only the participating employees who have elected to make contributions will receive an employer-matching contribution. Each year, the employer can choose which contribution level it will use for the following year's contributions. The company is required to communicate this information to employees before the beginning of the 60-day election period. SECURE 2.0 added additional options. First, employers are allowed to make additional nonelective contributions for up to 10% of an employee's compensation with a $5,000 limit on this additional nonelective contribution. Next, employers with 25 or fewer eligible workers (reasonably expected to make at least $5,000 this year and made $5,000 or more in any two preceding years) are allowed to increase their contribution limit for both the regular contribution limit and the age 50+ catch-up contribution by 10%. This is $17,600 in 2024 for the normal contribution limit and $3,850 for the age 50+ catch-up in 2024. Firms with 26-100 workers can also use these increased limits if they increase their normal contributions from a 2% nonelective contribution to a 3% nonelective contribution or increase their match from 3% to 4%. These increased contribution opportunities apply to both types of SIMPLEs (SIMPLE IRAs and SIMPLE 401[k]s). However, this information is only applied in the CFP world if the number of employees is given or there are other indications that the augmented contributions were chosen by the employer. Next, it is not presently known if the 10% increase will be governed by the international agreement called GATT (The General Agreement on Tariffs and Trade) which sets the rules for indexing other retirement numbers like defined benefit plans, defined contribution plans, and IRAs. In all, these augmented contribution opportunities are good things. However, Congress might want to review the definition of the word "simple." Finally, Congress has placed special emphasis on SIMPLEs as a way to give more workers opportunities to save for their retirement. Currently more than 40% of American workers do not have access to an employer retirement plan. LO 4.2.1

Answer 69

B Simple IRA, random ass rule, if you withdraw within the first two years, and there's no exception to the EWP thing, you owe 25% on the withdrawn amount as taxes rather than the standard 10% found on other plans, SIMPLE 401(k) as an example. George will incur a $250 penalty tax on the $1,000 withdrawal. Premature withdrawals made from a SIMPLE IRA within two years of initial participation are subject to an early withdrawal penalty tax of 25%. This is a type of early withdrawal penalty for IRAs. It is like all other IRAs except it is 25% instead of 10%. Once a person reaches age 59½, the withdrawal penalty goes away because that is one of the exceptions for an early withdrawal penalty. LO 4.2.1

Answer 70

II III After-tax contributions are not permitted with a SIMPLE. However, for 2023 and following, SECURE 2.0 allows workers to make Roth contributions to SIMPLEs (both SIMPLE IRAs and SIMPLE 401[k]s). Additionally, workers are allowed to treat employer contributions to many defined contributions, such as SEPs, as Roth contributions. While a Roth contribution is like an after-tax contribution because neither gets an immediate income tax deduction, Roth contributions are a different category from after-tax contributions. After-tax contributions are similar to nondeductible IRA contributions and Roth contributions to a SEP or SIMPLE are like Roth IRA contributions in many ways. Nondeductible IRAs are covered in Module 5.The ACP test is not required with SIMPLEs. Distributions for higher education expenses from a SIMPLE IRA (or any IRA) are exempt from the early withdrawal penalty. An employer sponsoring a SIMPLE cannot also maintain a qualified plan. LO 4.2.1

Answer 71

SEP SEP SEP SEP SEP you keep getting this one wrong there's no $750 number associated with SIMPLEs

Answer 72

B A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules. Withdrawals from a 457 plan are not subject to the 10% EWP unless money is rolled into the plan. That outside money and the earnings on it are subject to the 10% EWP. That is why 457 plans that allow rollovers must account for the rollover money separately. LO 4.3.2

Answer 73

A The maximum contribution that may be made on Mark's behalf is $28,000 ($16,000 of employee elective deferrals and $12,000 of employer contributions). Notice that the employer contribution was based on his entire $400,000. SIMPLE IRAs with a 3% match are the only employer retirement plan that can consider compensation over $345,000 in 2024. 4.2.1

Answer 74

I only I hate this one Statement II is incorrect. Pretax contributions by participants are permitted in an eligible Section 457 plan. LO 4.3.2