Module 4 Quiz Flashcards
Whole life policies feature
A) level premiums and a flexible death benefit.
B) level premiums and a level death benefit for the insured’s entire life.
C) flexible premiums and a level death benefit.
D) level premiums and a level death benefit for a specific time period.
B) level premiums and a level death benefit for the insured’s entire life.
Whole life policies are designed to provide for level premiums, a guaranteed death benefit no matter when the insured dies, and guaranteed cash value.
Which of the following is a correct statement about a Roth IRA?
A) If a nonqualifying distribution is made prior to age 59½, the principal is subject to the 10% penalty, but it is not considered to be taxable income.
B) Withdrawals of earnings up to $10,000 from a Roth IRA for the purchase of a first home can be penalty-free.
C) An individual can contribute $6,500 annually to a regular IRA and $6,500 annually to a Roth IRA.
D) Distributions from a Roth IRA must begin by April 1 of the year following the year the participant reaches age 73 according to SECURE 2.0.
B) Withdrawals of earnings up to $10,000 from a Roth IRA for the purchase of a first home can be penalty-free.
Withdrawals from a Roth IRA for a first home purchase (up to $10,000) are not penalized if the five-year holding period has been met. Total IRA contributions (Roth and traditional) are aggregated and cannot exceed $6,500 for 2023. Distributions of principal from a Roth IRA are not subject to the 10% penalty. Finally, a Roth IRA is not subject to the required minimum distribution rules (although Roth 401(k)s are until 2024 according to SECURE 2.0).
Norman and Breanna Walker, both age 40, are married taxpayers filing jointly. Norman earned $132 this year, and Breanna earned $125,000. Breanna is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for 2023.
How much, if any, can be contributed to a spousal IRA and deducted for Norman for 2023?
A) $6,500
B) $0
C) $200
D) $132
A) $6,500
The maximum deductible contribution to a spousal IRA for Norman in 2023 is $6,500, and the deductible amount phases out for AGIs of $218,000–$228,000 for Norman, who is the nonactive participant spouse. Their income is aggregated since they file jointly, so he is not limited to his own earned income for the purpose of contributing to a spousal IRA.
James and Doris Stewart will contribute a total of $13,000 to their IRAs for this tax year. James is a teacher at the local high school and contributes to a TSA. Doris’s employer has no retirement plan. Their adjusted gross earnings for 2023 will be $124,000 and they file a joint tax return.
What amount, if any, can they deduct for their IRA contributions?
A) $6,500
B) $10,400
C) $13,000
D) $0
B) $10,400
Doris is entitled to deduct the full $6,500 spousal IRA amount. James is in the phaseout range for active spouses. $136,000 – $124,000 = $12,000; ($12,000/$20,000 phaseout range) = 0.6; (0.6 x $6,500) = $3,900; $3,900 + $6,500 = $10,400.
Flexibility is the key word that describes
A) universal life.
B) whole life.
C) variable life.
D) term life.
A) universal life.
The key word for term life is low-cost (relative to other options). The key word for whole life is guaranteed. For variable life, the key term is variable. Universal life offers a significant degree of flexibility.
Joan is a married taxpayer. She and her husband, Johnny, file jointly and have a combined AGI of $144,000. Johnny is covered by his employer’s profit sharing plan. No employer or employee contribution was made for this plan year, but Johnny’s account balance increased by $1,200 due to investment earnings. Joan does not have a plan where she works. If they contribute $12,000 to their IRAs for this year, what amount, if any, can they deduct?
A) $0
B) $4,800
C) $6,000
D) $12,000
D) $12,000
Because he’s not active (there was no worker contribution, employer contribution, or reallocated forfeiture for this year), Johnny receives the full $6,000 deduction. The IRA deduction for Joan is also $6,000, since she is not active. The total deduction is $12,000 for 2023. They are each $500 short of their maximum allowed contribution for 2023.
Lucy received a $1,200 profit sharing contribution this year. Lucy and George are married, filing jointly. George is an artist who had no earnings this year. Their combined AGI for 2023 is $235,000. How much of their $13,000 IRA contributions can they deduct?
A) $200
B) $6,500
C) $13,000
D) $0
D) $0
Lucy is an active participant since she received an annual addition. Their AGI is greater than the phaseout limit for active participants, so Lucy cannot make a deductible contribution. George has the full spousal deduction available, but the spousal IRA is also phased out because their AGI is greater than $228,000 in 2023. Thus, Lucy and George’s total deduction is zero.
Sally and Joe are married, filing jointly. They are both 45. Their combined AGI is $148,000, and they are both active participants in their employers’ plans. Their plan is to first contribute the maximum to their deductible IRAs and then use the remaining available IRA contribution amounts for contributions to their Roth IRAs. How much will they be able to contribute to their Roth IRAs?
A) $6,500
B) $2,000
C) $0
D) $13,000
D) $13,000
Both are phased out from making deductible IRA contributions since both are active. A Roth IRA is not affected by active status. Sally and Joe can make the full Roth contribution ($13,000) since their AGI is below the Roth phaseout threshold for 2023 ($218,000).
Allen Baker, a single taxpayer with AGI of $85,000, is covered by his employer’s profit sharing/401(k) plan. During the current plan year, no employer contribution was made, and Allen did not make any salary reduction contributions to the 401(k) portion of the plan. Allen’s account balance increased by $120 this year, which was attributable to investment earnings of $80 and forfeitures of $40. If he contributes $6,500 to his IRA for this year, what is the amount of his allowable IRA deduction?
A) $6,500
B) $0
C) $600
D) $1,200
B) $0
Allen is an active participant because of the forfeiture allocation. Since his AGI is over the maximum phaseout amount of $83,000 for 2023, he is not entitled to any deduction. However, he could contribute to a Roth IRA because he is well below the 2023 Roth IRA phaseout range that starts at $138,000 for 2023.
Johan is married and his spouse is not employed. They file jointly and their AGI is $125,700. Each has contributed $6,500 to an IRA. Johan is covered by his employer’s defined benefit plan. What is the amount of their IRA deduction for 2023? They are both 40.
A) $9,150
B) $6,500
C) $9,850
D) $13,000
C) $9,850
$136,000 – $125,700 = $10,300; ($10,300/$20,000) x $6,500 = a $3,347.50. However, this is bumped up to a $3,350 deduction for Johan since he is an active participant at work. His wife is allowed the spousal deduction of $6,500. Their total deduction is $9,850. If the calculation would have produced $3,340.01, the deductible amount would still have been bumped up the $3,350 because the final result is “bumped up,” not rounded, to the next tens digit,.
Which one of the following is not exempt from the 10% penalty tax on premature distributions from an IRA?
A) A distribution to a 55-year-old employee following separation from service
B) A series of substantially equal periodic payments
C) A distribution for medical expenses not in excess of deductible medical expenses
D) A distribution following the owner’s death
A) A distribution to a 55-year-old employee following separation from service
This type of distribution is not exempt from the 10% penalty for an IRA. The exemption does apply to qualified plan distributions, however.
Ken and Barbie (both 31) file jointly. Both work, and their combined AGI is $123,150. This year, Ken’s profit sharing account earned over $4,000, but the company made no contributions, Ken made no contributions, and there were no forfeitures. Barbie has a 403(b) at the church where she is employed. This year she contributed $4,400. How much of their combined $13,000 IRA contributions can they deduct?
A) $6,500
B) $13,000
C) $10,680
D) $10,676
C) $10,680
Barbie is an active participant in her 403(b). Ken’s status is not active since he received no annual additions. His available IRA deduction is $6,500 and hers is $136,000 – $123,150 = $12,850; ($12,850/$20,000) x $6,500 = $4,176.25, which we bump up to the next higher $10, or $4,180. $4,180 + $6,500 = $10,680. Notice that the tens digit is bumped up, not rounded up. For example, if the equation would have given $4,170.01, then the final answer would be $4,180.
George and Mabel Taylor, ages 45 and 43, each put $6,500 into their respective IRAs. George’s employer does not provide a qualified retirement plan, but Mabel participates in a 401(k) plan at work. Their AGI is $220,000, and they file jointly. How much of their IRA contributions will be deductible for 2023?
A) $13,000
B) $5,200
C) $1,300
D) $6,500
B) $5,200
Their AGI precludes Mabel, an active participant, from being able to make a deductible contribution. In some cases, the IRA rules allow an IRA deduction for individuals who are not active participants but whose spouses are. However, that option is phased out for 2023 if the couple’s AGI is between $218,000 and $228,000. With a combined AGI of $220,000, they would be able to deduct $228,000 – $220,000 = $8,000; ($8,000/$10,000) x $6,500 = $5,200.
In order to make up for a retirement income shortfall, retirees can
A) borrow against their term life insurance policies.
B) obtain IRS approval to no longer pay income taxes.
C) obtain a retirement loan from their bank.
D) work during retirement.
D) work during retirement.
When not enough money has been saved to properly provide for retirement income, retirees may need to consider working during retirement, reducing their standard of living, or selling their home and moving in with their children. There is no such thing as a “retirement loan.” Banks don’t offer loans unless they are certain they will be repaid. Someone coming to them to borrow for retirement would most likely be declined unless they have equity in assets the bank can use as collateral-an example of this would be a reverse mortgage. Term policies don’t have cash values that can be borrowed against, and the IRS does not waive income tax payments for anyone who has taxable income.
Sam, age 62, retired two years ago and is currently relying on his Social Security retirement benefit for income. Faced with a tight budget, Sam is considering going back to work. Which one of the following would not be true if he returned to work?
A) When he fully retires he will have fewer years of retirement to finance.
B) He could establish and fund an IRA with his earned income.
C) Regardless of the income he earns, he will continue to receive his full Social Security benefit.
D) He may be eligible for employer-paid health care coverage.
C) Regardless of the income he earns, he will continue to receive his full Social Security benefit.
Old-age benefits of Social Security recipients may be reduced if the client earns income from wages and salary during retirement prior to Social Security’s full retirement age. Benefits paid to persons in the years prior to attaining full retirement age are reduced by $1 for every $2 earned over the limit.
