Module 6 Plan Distributions Flashcards
Which one of these would owe the 10% early withdrawal penalty that applies to qualified plans?
A)
A distribution following separation from service after age 55
B)
A distribution of employee stock ownership plan (ESOP) dividends
C)
A distribution for educational expenses
D)
A distribution made to reduce excess 401(k) plan contributions
c
Distributions from IRAs for qualified education expenses are exempt from the 10% early withdrawal penalty, but not distributions from qualified plans. Distributions from qualified plans following separation from service after attaining age 55 are exempt from the 10% early withdrawal penalty. Distributions made to reduce excess 401(k) plan contributions are exempt from the 10% early withdrawal penalty. Distributions of ESOP dividends are exempt from the 10% early withdrawal penalty.
LO 6.3.2
Under a divorce agreement, the assignment of rights to receive benefits from a qualified retirement plan by a court to the former spouse of a participant is called
A)
a qualified domestic relations order (QDRO).
B)
a qualified domestic trust (QDOT).
C)
a judicial pension split.
D)
a collateral assignment.
QDRO
Henry works for a firm that offers a Section 401(k) plan. Henry, who has a current salary of $60,000, was hesitant to contribute to the plan because in the past he felt as though he may need the money before retirement. He recently learned that he could receive a loan from his Section 401(k) plan without paying any income tax. He is now considering making contributions to the Section 401(k) plan, but he wants to know more specific details regarding loan provisions. Which of the following statements regarding loans from qualified plans is(are) CORRECT?
The limit on loans is generally half of the participant’s vested account balance not to exceed $50,000.
The limit on the term of any loan is generally five years.
If an employee leaves the company, a retirement plan loan may be rolled over to an IRA and the participant continues making the loan payments as planned.
Participant loans to a 100% owner-employee are permissible.
A)
I, II, III, and IV
B)
I only
C)
II only
D)
I, II, and IV
I II IV
Pay attention to this one.
Statement I is correct. Generally, loans are limited to half the vested account balance and cannot exceed $50,000. Note: When account balances are less than $20,000, however, loans up to $10,000 are available. Also, when the vested balance is below $10,000, 100% of the vested balance may be available. Statement II is correct. The limit on the term of any loan is generally five years, unless the loan is for a principal residence. Loans for the purpose of buying a residence must be repaid over a reasonable period of time. Also, a disaster loan can have an extra year. Statement III is incorrect. A qualified plan loan may not be rolled to an IRA and then continue making the loan payments to the IRA as before. However, if the loan is defaulted solely due to separation from service or the retirement plan being terminated, then the defaulted amount is considered a qualified plan loan offset (QPLO). A QPLO would allow the worker’s next qualified retirement plan to accept the loan and continue payments as before if the new employer’s plan document allowed this. Any outstanding loan balance is treated as a distribution and thus is subject to income taxes and the early withdrawal penalty rules. However, if the defaulted loan is a QPLO, he would have until the due date of his tax return for the year the loan defaulted (including extensions) to get as much of the loan back into his IRA or a qualified plan as he could. This would lower his income tax bill and reduce his 10% EWP. It would also help his eventual retirement situation. Statement IV is correct. Participant loans from qualified plans to sole proprietors, partners, shareholders in S corporations and C corporations are permitted. What ERISA specifically does NOT allow is for a retirement plan to make an plan investment in a loan to a “party in interest” or a fiduciary of the plan. A party in interest is essentially any powerful person involved with the retirement plan (such as an owner of the company or another plan fiduciary).
LO 6.3.2
Harry has an IRA that he wishes to leave to his children, Mary (age 15), John (age 10), and Abigail (age 2). Harry would like to designate the beneficiaries in such a way as to emphasize tax-deferred accumulation. Assuming all the children are alive at the time of Harry’s death, which beneficiary designation (of these options) would provide the greatest benefit?
A)
In separate accounts for each of the children: 25% to Mary, 35% to John, and 40% to Abigail
B)
Designating all children as equal beneficiaries of the IRA
C)
In trust for the benefit of the children
D)
Designating 100% of the IRA assets to Mary
A
All these children would currently be EDBs, so creating separate accounts will allow distributions to be taken over the lifetimes of each child until they reach age 21, then the 10-year rule would apply. Because Mary is older than John and Abigail, this will maximize the wealth accumulation provided by Harry’s IRA. If a single trust was used for all his children, then Mary’s situation would be used for all the children because she is the oldest beneficiary.
LO 6.4.1
All of the following statements regarding qualified domestic relations orders (QDROs) are correct EXCEPT
A)
distributions made to an alternate payee under a QDRO are subject to income tax.
B)
an alternate payee who is the former spouse of the participant, and who receives a distribution by reason of a QDRO or other court order, may roll over the distribution in the same manner as if she were the participant (including to her own IRA).
C)
distributions made to an alternate payee under a QDRO are subject to the 10% premature distribution penalty.
D)
assuming the option is available to other retirement plan participants, a QDRO may specify the time at which the alternate payee will receive the plan benefit.
C
Distributions made to an alternate payee under a QDRO are not subject to the 10% penalty on premature distributions. All the other statements are correct.
LO 6.5.1
Which of the following statements regarding qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs) is(are) CORRECT?
QPSAs and QJSAs must be offered to participants in target benefit pension plans.
Section 401(k) plans are not required to offer QJSAs and QPSAs if certain provisions are met.
Section 403(b) plans that match employee deferrals must meet the automatic survivor benefit rules.
Automatic survivor benefit requirements may be waived by the plan participant with the written, notarized consent of the spouse.
A)
I, II, III, and IV
B)
I only
C)
IV only
D)
II and III
All
All the statements are correct.
LO 6.4.2
Which beneficiary has the most options with the stretch IRA rules?
A)
Qualified charity
B)
Surviving spouse
C)
Decedent’s estate
D)
Adult child
A surviving spouse has more and better options than any other type of beneficiary.
LO 6.4.1
Which of these distributions from a qualified plan would be subject to the 10% early withdrawal penalty?
A)
Distributions made to cover medical expenses that exceed 7.5% of AGI.
B)
Distributions made after a separation from service for early retirement at any age.
C)
Distributions made as part of a series of substantially equal periodic payments made at least annually over the life or life expectancy of the employee or the joint lives or life expectancies of the employee and beneficiary.
D)
Distributions made to a beneficiary or to an employee’s estate on or after the employee’s death.
B would get EWP’d
This is talking about a 401k, and specifically the EWP, despite these exceptions, they would obviously be taxed at income levels.
A: 7.5% is the exact percentage over which you’re fine on the EWP.
B: if you separate from service at age 55 or later
C: This is exception to EWP
D: Death of the employee and distribution to an estate is exempt from EWP. I haven’t taken estate yet, but I’m assuming it’s exempt because the estate taxes will tax it into oblivion.
For a preretirement distribution to escape the 10% penalty for early distribution, the distribution must be made after a separation from service for early retirement after attaining age 55. This exception is not applicable to IRAs.
LO 6.3.1
Jennifer recently separated from service with Acme, Inc., at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began to work for a new employer who provides a profit-sharing plan for employees. Which one of these statements describes an option that will benefit her?
A)
If Jennifer had Acme stock in her IRA, she could retain net unrealized appreciation (NUA) tax treatment.
B)
Jennifer should leave the rollover funds in the rollover IRA until she is age 65; then she can distribute the IRA and benefit from lump-sum forward-averaging treatment.
C)
Jennifer should leave the rollover funds in the IRA for three more years; at age 55, she can distribute the account and benefit from lump-sum forward-averaging treatment.
D)
Jennifer could transfer the entire conduit IRA over into her new employer’s qualified profit-sharing plan if the plan allows her to do so and the plan offers loans.
d
This is sort of a, think it through, question.
A: do IRA’s have NUA? No, so false.
B: do IRA’s get lump-sum forward averaging treatment? No, so false. (I think those are only for qualified plans)
C: again, IRA’s don’t get forward averaging, so false.
D: has to be true, but she can roll the IRA into a new employer’s qualified profit sharing plan if it’s allowed and the plan may offer loans (it may not as well).
Reminder: IRA to 401(k) rollovers, some 401ks don’t like this, and for the ones that do, ONLY pre-tax funds can go into the 401k.
If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Forward-averaging treatment is not available on any distribution from an IRA. Also, Jennifer would not qualify for forward averaging because she was not born in 1935 or earlier. Taking a current distribution from the IRA would result in a current tax liability. Finally, an IRA cannot offer NUA treatment. NUA treatment is only allowed if the employer’s security itself is distributed out of the retirement system when the worker separated from service.
LO 6.3.2
Which of the following is the most favorable as a choice for the beneficiary of a qualified plan participant if stretching benefits is desired?
A)
The participant’s estate
B)
A friend who is 11 years younger
C)
The participant’s spouse
D)
The participant’s healthy adult son
Spouse
Of the options listed, only a surviving spouse is an eligible designated beneficiary. The son is not a minor, disabled, or chronically ill. The friend is more than 10 years younger than the participant and thus is not an eligible designated beneficiary.
LO 6.4.1
SEP IRA. Let’s say you make a contribution to one employee’s account. Would you:
Match the amount across all employees’ accounts
Match the percentage across all employees’ accounts
You don’t have to match the contribution
Match the percentage
Pro-rata rule chatgpt says.
Shockler Consolidated just established a simplified employee pension (SEP) plan for its employees. The company has over 500 employees, 60% of whom are highly compensated. This year, Shockler contributed 6% of each eligible employee’s salary to the SEP plan. Which of these statements regarding SEP plans are CORRECT?
Employees can roll money that is distributed from a SEP plan into an IRA within 60 days without withholding or penalty.
Employees can make direct trustee-to-trustee transfers as often as desired.
Rollovers can occur only once every 12 months.
A SEP plan can be integrated with Social Security.
A)
I, II, III, and IV
B)
I, III, and IV
C)
II and IV
D)
II and III
All
All of these statements are correct. Note: SEP plans may only use the excess method (and not the offset method) of integration. Because a SEP is a type of IRA, rollovers are limited to one per 12-month period according to the Bobrow Rule, but direct trustee-to-trustee transfers can be made as often as desired. The same can be said for SIMPLE IRAs.
LO 6.1.1
Which of these statements regarding traditional IRA required minimum distribution (RMD) rules are CORRECT?
The entire account balance may be taken as a lump sum.
The account balance may be distributed over the life expectancy of the owner under the uniform distribution table (Table III).
The account balance may be distributed over the actual joint life expectancy of the owner and the spouse beneficiary (Table II) if the spouse is more than 10 years younger than the owner.
In the case of multiple IRAs, the minimum distribution must only be calculated for and received from one account.
A)
II and III
B)
I and II
C)
I, II, and III
D)
I, II, III, and IV
I II III
Remember RMD is simply a minimum amount, you can withdraw or distribute way more. It’s not usually the best idea with distribute the entire account as a lump sum (bc taxes go weeee), but you can.
The Table III thing is exactly as it says. You take the account balance (or aggregate balance if there is more than one account) and divide it by the divisor associated with your current age.
Table II represents an exception to the Table III normal situation, it’s only for use if the spouse is more than 10 years younger* than the one receiving RMDs.
Traditional IRA required minimum distribution (RMD) rules allow the account balance to be distributed either as a lump sum or over the life expectancy of the owner determined by the uniform distribution table—Table III. This table uses the life expectancy of the owner and someone 10 years younger than the owner (regardless of the beneficiary’s actual age). Table III is used in all cases for living original owners except when the IRA owner’s spouse is the sole, primary beneficiary and the spouse is actually more than 10 years younger than the owner. In these cases, Table II is used to calculate the RMD. In the case of multiple IRAs, the required minimum distribution is calculated based on the aggregate account balances, but the RMD can be received from one or more than one IRA.
LO 6.2.1
Can a SEP Plan be integrated with Social Security?
Yes
No
Yes, it uses the EXCESS method.
Basically this means that only if your salary is above the taxable wage base for SS, $160,200 (2023), are contributions
Learn how SS integration works.
I still don’t understand after using ChatGPT
Go learn it
Which of these statements regarding required minimum distributions (RMDs) from IRAs and qualified retirement plans are CORRECT?
For lifetime distributions, all single participants will use a uniform life expectancy table.
The amount is determined by dividing the participant’s aggregate account balances as of December 31 of the preceding year by his current life expectancy.
RMDs for all original retirement account owners are calculated using Table III (the Uniform Table).
To calculate the RMD, divide the participant’s aggregate account balance as of December 31 of the preceding year by the joint life expectancy of the participant and spouse beneficiary if the spouse is more than five years younger that the participant.
A)
I, III, and IV
B)
I, II, and III
C)
I and II
D)
III and IV
I II
I wasn’t sure about this one. But I knew III was wrong, because table III is used sometimes and II other times.
The answer is I and II. Most RMDs are calculated from Table III. However, if the spouse is actually more than 10 years younger than the owner, the RMD is calculated using Table II.
LO 6.2.2
Susan participates in a Section 403(b) plan at work that includes loan provisions. Susan has recently enrolled in college and has inquired about the possible consequences of borrowing from the Section 403(b) plan to help pay for her education. As her financial planner, what is your advice to her?
A)
The loan will statutorily be treated as a taxable distribution from the plan.
B)
The Section 403(b) plan cannot make loans to participants because loans are only available from a qualified plan.
C)
The loan must be repayable within five years at a reasonable rate of interest.
D)
The loan is not being made for reasons of an unforeseeable emergency and, thus, is not possible.
C
For below: the reason why it has to be at a reasonable rate of interest is because the money from the loan and the interest goes into the retirement account. So if you gave yourself a massive interest rate, you’d get to shove a shit load of extra money into your plan.
For a loan not to be treated as a taxable distribution for tax purposes, it must be repayable within five years at a reasonable rate of interest. A Section 403(b) may include loan provisions similar to that of a qualified plan.
LO 6.3.2
Can 403(b) plans have loan provisions?
Yes
No
Yes
For below, the reason why it should be at a reasonable interest rate is this: the interest on the loan goes INTO your account. So if you gave yourself a 100% interest rate, you’d get to deposit massive amounts into your retirement plan while repaying the loan to your own account.
For a loan not to be treated as a taxable distribution for tax purposes, it must be repayable within five years at a reasonable rate of interest. A Section 403(b) may include loan provisions similar to that of a qualified plan.
LO 6.3.2
David, who turned age 73 on June 30th this year, owns 10% of BCB Company. He has accumulated $5 million in BCB’s stock bonus plan as of December 31st of last year, and $5.5 million as of December 31st of this year. The uniform lifetime table distribution factor for age 73 is 26.5. If David receives a distribution of $170,000 during this year, how much in penalties will he be required to pay on this year’s income tax return?
A)
$9,340
B)
$4,670
C)
$18,679
D)
$0
D
If this 170k had been the only RMD he took for this taxable year, he’d have been in trouble and would’ve owed 25% on the difference between the RMD Taken and the actual Necessary RMD. Last day of previous year balance $5mil / 26.5 = 189k ish I believe, that leaves around 19k, 25% would be B. However, the question uses the wording “this year” meaning, it has not crossed into the following year when the RMD would need to be taken yet
Let’s say you borrow from your 401k and it allows loans. You give yourself a reasonable interest rate (bc you have to) and you make it payable within 5 years (bc you have to). As you pay back this loan, with principal and interest, how does this work with respect to the annual additions limit of $69,000?
The principal is counted towards the annual additions limit, but the interest is not.
The interest is counted towards the annual additions limit but the principal is not.
They are both counted towards the annual additions limit.
Neither are counted towards the annual additions limit.
Neither are counted towards the annual additions limit.
On December 31 of last year, Samuel Herman had $360,000 in his IRA. He has named his wife Trudy as his primary beneficiary. He wants you to determine the amount he must withdraw for his RMD this year and the date by which the withdrawal must be made. This year he is 73 and Trudy is 36. (Assume the IRS RMD Joint Life Table divisor for two individuals ages 73 and 36 is 49.8. The IRS Table I divisor for an individual age 73 is 16.4. The Uniform Table factor is 26.5 at age 73.)
What is the smallest required minimum distribution (RMD) that Samuel can take, and when must distributions begin?
A)
He must begin distributions on April 1 of next year in the amount of $8,072.
B)
He must begin distributions on April 1 of this year in the amount of $13,139.
C)
He must begin distributions on April 1 of next year in the amount of $7,229.
D)
He must begin distributions on April 1 of next year in the amount of $13,585.
C
Greater than ten year gap (to younger spouse) means you can use Table II. Table II gives better divisors because of a higher life expectancy between the both of you. You want HIGHER divisors which will force you to take out less. You don’t want to be forced to take out massive amounts, throwing you into crazy tax brackets.
Because they are married and their ages differ by more than 10 years, the joint life factor results in a longer life expectancy and smaller required distributions, so the joint life factor may be used. A joint distribution is calculated as follows: $360,000 ÷ 49.8 = $7,229.
LO 6.2.2
If you’re 74 and a 10% owner, can you delay the start of your RMDs for your IRA if you continue to work?
No, IRA’s cannot delay.
If you’re 74 and a 10% owner, can you delay the start of your RMDs for your employer plan if you continue to work?
No, if you’re greater than a 5% owner, you cannot delay your RBD for RMDs if you’re past the normal RBD age of 73
If you’re 74 and a 5% owner, can you delay the start of your RMDs of your employer plan if you continue to work?
Yes, the EXACT wording is “Greater than 5% owners cannot delay the start of RMDs until retirement.” So since 5% is not “greater than” 5%, you get to delay until you officially retire.
Specific example: let’s say you’re 76 and own 5% of a company in which you have a vested 403(b) with $4 million. The company buys back some shares which then thrusts you above the 5% ownership, you quickly sell some shares and come back down to 4%. What happens now?
Because you weren’t a >5% owner by the end of the tax year, you don’t need to start RMDs.
Because you weren’t a >5% owner by the start of the tax year, you don’t need to start RMDs.
You need to start RMDs because you went above 5% ownership in the company, and have until December 31st of the following year to take out.
You need to start RMDs because you went above 5% ownership in the company, and have until April 1st of the following year to take out.
You need to start RMDs because you went above 5% ownership in the company, and have until April 1st of the following year to take out.
If you exceed 5% ownership at ANY point during the year this is called a Trigger point and triggers the start of your RMD’s, requiring you to distribute the minimum amount (or more) by April 1st of the following year.
Robert has a Roth IRA. He turns age 73 this year. Which of these statements is(are) CORRECT?
Robert must begin taking required minimum distributions (RMD) by April 1 of next year.
Robert can no longer make contributions to the Roth IRA.
A)
Neither I nor II
B)
II only
C)
Both I and II
D)
I only
Neither
Roths don’t have RMDs. As long as he earns income, he can contribute to the Roth.
Carl, 75, has been receiving required minimum distributions (RMDs) from his qualified plan. His RMD for this year is $8,000. Carl has only taken $6,000 in distributions this year. If he fails to take the full RMD by December 31 of this year, what is the maximum amount of the penalty he might pay?
A)
$500
B)
$1,000
C)
$1,500
D)
$2,000
A
SECURE 2.0 set the penalty at 25% of the difference between the amount that should have been distributed ($8,000) and the amount that was actually distributed ($6,000). In this case, the excise tax is 25% of $2,000, or $500 according to SECURE 2.0. However, the penalty can be reduced to $200 (10% of the shortfall) if he withdraws the $2,000 promptly.
LO 6.2.2
Reminder:
Pushing the RMD to April 1st of the following year is ONLY for the first RMD. The rest must be paid by the end of the tax year, December 31.
Yea that ^
Which of these qualified plans are always required to provide a qualified joint and survivor annuity (QJSA)?
Cash balance plan
Employee stock option plan (ESOP)
Target benefit plan
401(k) plan
A)
III and IV
B)
I, II, and IV
C)
I and II
D)
I and III
I III
QJSAs are always required options for Pension plans. Target Benefit and Cash Balance are pension plans.
ESOP and 401(k) are Qualified Profit Sharing, Defined Contribution Plans.
Target Benefit is a Qualified Defined Contribution Pension Plan.
Cash Balance is a Qualified Defined Benefit Pension Plan.
–
Options I and III are the correct answers for the following reasons. Pension plans are required to provide married participants with a QJSA option. Cash balance plans and target benefit plans are both pension plans. However, defined contribution plans that are not subject to minimum funding standards (profit-sharing plans and ESOPs) are exempt if the plan provides payment of the participant’s nonforfeitable accrued benefit in full to the surviving spouse, the participant does not elect a life annuity benefit form, and the plan is not a transferee of another plan that is subject to survivor annuity requirements.
LO 6.4.2
Which of these are CORRECT regarding the rules governing IRA distributions if an IRA owner dies before their required beginning date?
A spouse who is named as the beneficiary may roll the IRA over into another IRA titled in their own name.
If a designated beneficiary isn’t named, the entire account must be distributed under the five year rule.
If the beneficiary is a spouse, that person must begin taking distributions no later than December 31st of the year following the year in which the deceased died.
A nonspouse eligible designated beneficiary may take distributions based upon the Uniform Lifetime Table (Table III) each year.
A)
I and II
B)
II and III
C)
III and IV
D)
I, II, III, and IV
I II
This is section 6.4.1, I can’t offer explanations because I don’t know the rules
Options I and II are correct. A surviving spouse who is named as the an eligible designated beneficiary may roll over the IRA to another IRA and retitle this account in his or her own name (Option I). If the IRA owner dies before the required beginning date and if no designated beneficiary is named, the entire account must be distributed by the end of the fifth year following the year of the owner’s date of death (Option II, the five-year rule). If the spouse is an eligible designated beneficiary, they can either begin taking distributions immediately or defer them until the end of the year in which the deceased would have reached their RBD, so Option III is incorrect. Option IV is incorrect because a nonspouse eligible designated beneficiary must use the Single Life Table (Table 1) for determining the first required minimum distribution; life expectancy is then reduced by one for each subsequent year. This is called the “non-recalculated” life expectancy. A spouse EDB uses a “recalculated” life expectancy. The difference is that a spouse EDB goes back to Table I each year, but a non-spouse EDB only goes to Table I for their first RMD, then 1 is subtracted from their previous life expectancy factor each year.
LO 6.4.1
The qualified joint and survivor annuity (QJSA) form of payment is a requirement for a vested participant in which of the following types of retirement plans?
A)
An IRA
B)
An age-weighted profit-sharing plan
C)
A traditional defined benefit pension plan
D)
An employee stock ownership plan (ESOP)
C
QJSA - always options for pension plans. Generally it’s the default, and you’d choose another type of payout, such as lump sum distribution or smthn.
The qualified joint and survivor annuity (QJSA) requirements apply to all types of pension plans. It does not apply to an IRA or a defined contribution profit-sharing type of plan in most instances.
LO 6.5.1
Jim expects to begin distributions from his IRA at age 75. Which of these statements are accurate as implications of a distribution made at that time?
I Recalculation of life expectancy is automatic when using the Uniform Lifetime Table because the table is reentered each year at the attained age for that year.
II If Jim dies after the required beginning date without a designated beneficiary, the required minimum distribution (RMD) for the year of death is determined by entering the RMD Single Life Table at his attained age in the year of death. Life expectancy is reduced by one year for each subsequent year.
III Assuming Jim is married and his wife is his beneficiary, if Jim dies after beginning RMDs, remaining benefits may be paid over his wife’s life expectancy, beginning in the year following the year of his death, determined by reentering the RMD Single Life Table each year with her attained age for that year.
IV A maximum distribution penalty of 25% will apply on amounts that were not distributed but should have been.
A)
III and IV
B)
I, II, and III
C)
I and II
D)
I, II, III, and IV
All
Look at Section 6.4.1 for this situation. I genuinely can’t keep up with these rules.
I didn’t know what these (except IV) meant, but this is what they mean.
I This is basically saying that each year you recalculate your RMD with a new divisor. So like your divisor at age 75 is x, divisor at age 76 is y, and so on.
II Basically, this is saying that the life expectancy (divisor) is reduced by one each subsequent year after death. If he dies and the divisor is 11.7 or something, the following year, the divisor would be 11.7-1 = 10.7. Then the next year 9.7, and so on.
III
All of these statements are true. The 25% penalty for all RMD amounts that were not taken when required is extremely important to clients. SECURE 2.0 lowered the penalty from 50% of the shortfall to 25% of the shortfall for the years 2023 and following. Also, the penalty can be reduced to 10% if the shortfall is withdrawn promptly.
LO 6.4.1
When she retired at age 64, Lauren received a lump-sum distribution from her employer’s stock bonus plan. The fair market value of the employer stock contributed to her account was $200,000 at the time of contribution. At the time of the distribution, the employer stock in Lauren’s account had a fair market value of $300,000. Six months later, Lauren sold the stock for $310,000. Which of the following statements regarding the sale of Lauren’s stock is(are) CORRECT?
The $300,000 distribution is taxed at the long-term capital gain rate.
Lauren has a $10,000 short-term capital gain when the stock is sold.
There was no income tax liability incurred when the stock was contributed to the plan.
The net unrealized appreciation (NUA) on the stock is $100,000.
A)
I, II, III, and IV
B)
II, III, and IV
C)
IV only
D)
I and II
II III IV
I, $200,000 when the stock is sold, is taxed as ordinary income, while the $100,000 (the gains) are taxed at long term capital gains rates. The additional $10,000 will be taxed at short term capital gains rates. The entire $300,000 distribution is not the NUA portion.
*When you’re confused about NUA remember the name Net Unrealized APPRECIATION. It’s the portion of the distributed stock that has appreciated since its grant. And the NUA portion is Long Term Cap Gains. The Granted stock is income, and any additional is STCG/LTCG depending on how long post distribution the sale happened.
Of the $300,000 Lauren received as a lump-sum distribution from the stock bonus plan, $100,000 is net unrealized appreciation (NUA) and will be taxed at the long-term capital gain rate. The remaining $200,000 is taxed at Lauren’s ordinary income tax rate in the year of the lump-sum distribution. Because Lauren sold the stock within 6 months of distribution, the $10,000 post-distribution appreciation is taxed as short-term capital gain.
LO 6.1.2
Which of these statements is CORRECT regarding rollovers from qualified plans or IRAs?
Distributions from qualified plans and IRAs require 20% mandatory withholding for federal income taxes if a trustee-to-trustee transfer or a direct rollover is not used to execute a rollover.
A taxpayer is limited to one IRA-to-IRA rollover in a one-year period (on a 365-day basis).
A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan.
If a qualified plan participant has an outstanding loan from her qualified plan upon separation from service, the participant may roll over the loan into a rollover IRA as long as loan repayments continue at least quarterly.
A)
I, II, III, and IV
B)
II only
C)
I and II
D)
III and IV
just II
1 IRAs don’t get a 20% withholding situation. And I
Only Statement II is correct. Statement I is incorrect because IRA distributions do not require 20% mandatory federal income tax withholding. Statement III is incorrect because a rollover is permitted from a qualified plan to a governmental Section 457 plan.
Statement IV is incorrect because loans are not permitted from an IRA. When a retirement plan loan is subject to a default due to separation from service or the plan being terminated, the owner has the option of moving the loan into a new qualified plan, if the plan permits, and continuing the original payments, or make Qualified Plan Loan Offsets (QPLO) contributions to the new qualified plan or into an IRA. Any QPLO contributions until the due date for the tax return (including extensions) are treated as successful rollovers and thus reduce the amount of the loan default.
LO 6.3.1
Charles was an employee of the ABC Corporation for 20 years. He received a lump sum distribution from his qualified retirement plan this year. The distribution was comprised entirely of ABC stock valued at $400,000 on the date of distribution. The value of the stock contributed to Charles’s individual account in the plan over the years was $70,000. If Charles does not sell the stock this year, what amount is included in his gross income this year as a result of the distribution?
A)
$30,000
B)
$100,000
C)
$70,000
D)
$0
c
Because the distribution is a lump sum distribution of employer stock, the net unrealized appreciation (NUA) concept applies. Under the NUA rules, the adjusted basis of the stock (the amount the plan paid for the stock) contributed to the retirement plan ($70,000) is included in Charles’s gross income in the year of the distribution and is treated as ordinary income.
LO 6.1.2
Under the required minimum distribution (RMD) rules for IRAs, a penalty tax of
A)
25% is assessed on the amount of required minimum distribution not taken before the required date.
B)
15% is assessed on the amount of required minimum distribution not taken before the required beginning date.
C)
10% is assessed on excess distributions.
D)
50% is assessed on any distribution shortfall.
A
Reminder, only the first RMD can be pushed to April 1st of the following year. The rest must be taken by the end of December 31.
The IRS requires the owner to take minimum distributions from a traditional IRA no later than April 1 of the year following the owner’s attaining age 73. If the amount distributed is less than the required minimum amount, a 25% excise tax is assessed on the amount of the shortage. The RMD is determined by dividing the IRA account balance (or aggregate account balances) on December 31 of the prior year by the owner’s remaining life expectancy (or joint life expectancy of the owner and beneficiary) shown in the table. The required distribution may be taken from one IRA, but the calculation must be based on the totals in all IRAs. SECURE 2.0 changed the penalty from 50% of the shortfall to 25% of the shortfall starting in 2023. Also, if the shortfall is withdrawn promptly, the penalty is reduced to 10%.
LO 6.2.1
Stanley, age 76, designated his son Tom, 49, as his IRA beneficiary 10 years ago. Stanley is considering adding his daughter Martha, 45, as a beneficiary to the IRA. He wants his children to receive the benefit over as long a period as possible and in an advantageous way. Which of these methods would be beneficial to Tom and/or Martha?
Separate accounts will allow Tom and Martha to each use their own life expectancies for RMDs after Stanley’s death.
Designating a revocable living trust with Tom and Martha as trust beneficiaries will allow for the longest payout period for the distributions from the IRA.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only
B
6.4.1 I don’t understand.
This is a complicated question. Both ideas would be beneficial for Tom and/or Martha. First, as healthy adult children of the deceased, they are under the 10-year rule. For decedents who passed away on or after their required beginning date, this is the complicated 10-year rule. The first issue is the year of death (Year 0). The beneficiary must take any remaining RMD for that year. The next rule covers Years 1-9. It is based on the beneficiary’s age in Year 1 (the year after the death). This will be better for Martha. The final rule is the 10-year rule. The entire account must be emptied by December 31st of the year containing the tenth anniversary of the death. Thus, splitting the accounts will not hurt Tom’s ability to stretch the money over the next 10 years. On the other hand, it will cost him half the account. Splitting the beneficiaries will help Martha a little on the stretch by lowering her RMDs for Years 1-9. Both will still have to empty their accounts by the end of Year 10. Martha would clearly benefit from this arrangement because she currently would not receive anything from the IRA. Designating the estate as the beneficiary is usually not the best way to go when the point is to stretch the retirement account. However, at age 76, using the owner’s life expectancy based on their age as of their birthday in the year of death will give Tom and Martha more than 10 years to stretch Stanley’s IRA. This is because the 2022 and following Table I RMD factor for age 76 is 14.1. This life expectancy factor would be reduced by one for each subsequent year. That means naming the estate would give more of a stretch that the 10-year rule. This is true for deaths after the required beginning date until the owner is age 83. At age 83, the RMD life expectancy factor for 9.3. This question is very unlikely to be encountered in the CFP world. It is designed to give you a heads up in the real world.
LO 6.4.1
Which statement regarding qualified joint and survivor annuities (QJSA) is CORRECT?
A QJSA is an optional benefit that must be elected by the plan participant in a defined benefit pension plan in order for the survivor to receive the benefit.
A QJSA applies to a money purchase plan.
A)
II only
B)
I only
C)
Neither I nor II
D)
Both I and II
II only
QJSA is an optional benefit, however it is the default option for pension plans. Essentially it means that you’ll be paid out over the course of your/your spouse’s lifetime in an annuity format. Qualified Joint/Survivorship Annuity. You can opt for a different option, lump sum, single life annuity, QPSA, or 10 year certain(?).
Only Statement II is correct. Under ERISA, all “pension plans” must offer QPSAs and QJSAs. The pension plans can be remembered as the “Be my cash target plans” (“B” for benefit in defined benefit plans, “M” for money purchase plans, “Cash” for cash balance plans, and “Target” for target benefit plans). On the other hand, “profit sharing plans” (defined in this instance as the other qualified plans and 403(b) plans) are not legally required to offer QPSAs or QJSAs if that is the only money involved. Thus, 401(k) plans and other profit sharing plans are not required to offer a QJSA if they met certain criteria. There can be an option for a plan participant to waive the QJSA, but it requires the spouse to sign a waiver in front of a notary or a plan administrator. Finally, a profit sharing plan that accepts retirement money from a pension plan is required to offer QPSAs and QJSAs unless they meet the requirements outlined in the text for profit sharing plans.
LO 6.4.2
Which of these are exempt from the 10% penalty on qualified plan distributions made before age 59½?
Distributions made to an employee because of “immediate and heavy” financial need
In-service distributions made to an employee age 55 but younger than 59½
A withdrawal due to recent domestic abuse.
$1,000 for a financial emergency.
A)
II and IV
B)
III and IV
C)
I and II
D)
I and III
III IV
I Immediate and Heavy need are not cared about and you’ll get penalized.
II Yes the employee is 55 but the trick to getting those 401k distributions w/o the EWP is that you separated from service at age 55 or later.
III Domestic abuse withdrawals up to $1000 within the last year are exempt from the EWP.
IV $1000 for a financial emergency is allowed - but not just immediate and heavy need.
The 10% premature distribution penalty does not apply to distributions on account of domestic abuse within the last year or for up to $1,000 for an emergency. Options I and II are incorrect. The law does not recognize a heavy and immediate financial need as an exception to the penalty. The age 55 exception does not apply to in-service distributions; i.e., the employee must have separated from the service of the employer on or after attaining age 55. That means the person must be 55 on December 31 of the year of separation. For example, Joe was laid off on March 27th. He turned 55 on December 25 of that year. He would qualify as having separated from service in the year he turned 55 and thus he would avoid the 10% penalty for withdrawals from his qualified plan or 403(b), but not from his IRA.
LO 6.3.1
Which of these beneficiaries is entitled to move a post-death distribution from a qualified plan into an IRA?
A)
The oldest surviving child of the participant
B)
The surviving spouse of the participant
C)
All three choices are correct
D)
The surviving mother of the participant
All
this is 6.4.1 but I remembered the answer
A spouse eligible designated beneficiary can roll the distribution over into an IRA and treat it as the spouse’s own; a nonspouse beneficiary can use a direct trustee-to-trustee transfer of the distribution into a specially titled inherited IRA. The point is that a transfer must always be used for any inherited account because the first custodian is verifying to the recipient custodian that this money is inherited money. This avoids the potential fraudulent use of the 10% EWP exception for distributions due to a death. A surviving spouse may roll the money over into an account in their own name but this would lose the automatic exception to the 10% EWP due to a death. The surviving spouse would need to transfer the money if they were moving the money into an inherited account.
LO 6.4.1
Which of these statements regarding the Section 72(t) 10% early distribution penalty is false?
A)
The 10% tax generally applies only to the taxable portion of the distribution.
B)
The tax does not apply to any distribution from a Roth IRA.
C)
A 10% penalty is imposed on the taxable amount of a distribution made to a participant that has not yet attained age 59½, unless a specific exception applies.
D)
The 10% penalty applies to distributions that are made from a qualified plan, a Section 403(b) plan, a traditional IRA, or a simplified employee pension (SEP) plan.
B
Apparently the 10% EWP only applies to funds that are taxable. So yes, what you’re thinking is right, if you put after-tax money into an IRA, those contributions are not taxable or subject to the EWP. The earnings are though.
The EWP can be levied on conversions for roth IRAs that haven’t been there for five years and get withdrawn. It can also be used on earnings withdrawn if you don’t have the two qualifiers:
1 Five year rule
2a Death of IRA owner
2b Disability of IRA owner
2c First time home purchase up to $10k
2d Reaches 59.5 y/o
The 10% early withdrawal penalty system never applies to the withdrawal of contributions or to the withdrawal of conversions that are at least five Roth years old. However, the withdrawal of converted money within five years of the conversion and the withdrawal of earnings are subject to the 10% early withdrawal penalty rules unless the withdrawal is a qualified distribution.
LO 6.3.1
Sam recently died at age 63, leaving an IRA with a fair market value (FMV) of $200,000 to his wife, Susan, 55, who was the primary beneficiary. Susan has no IRA of her own. Which of these statements regarding Sam’s IRA is CORRECT?
A)
Susan can receive distributions over her remaining single-life expectancy, recalculated each year.
B)
Susan must begin taking distributions over Sam’s remaining single-life expectancy.
C)
Susan must receive the entire account balance within five years of Sam’s death.
D)
Susan can receive a distribution from the IRA now but will be subject to a 10% early withdrawal penalty.
A
This is the case where you take the divisor (life expectancy number) and subtract by one each year to determine RMDs.
Susan, as the surviving spouse, can receive distributions over her remaining life expectancy. A spouse beneficiary can recalculate life expectancy each year, but distributions must begin no later than the year in which Sam would have reached his RBD. Susan would also have the option of treating the IRA as her own and deferring distributions until she reaches her own RBD. This means moving the money to an IRA in her own name as opposed to an inherited IRA. An inherited IRA has the deceased’s name in the title. For example, “Sam B Jones (deceased July 28, 2024) FBO Sally G Jones.” A spouse “recalculating” their life expectancy means the spouse goes back to Table I each year to determine their new life expectancy factor. A non-spouse EDB who is stretching their inherited retirement account only goes to Table I once. After that the non-spouse’s life expectancy is determined by subtracting 1 from last year’s life expectancy factor. The ability to go back to Table I each year to “recalculate” the life expectancy factor is a major advantage for a surviving spouse because the Table I life expectancy factor decreases by less than one year each year. Finally, only a government agency would define looking up a value in table as “recalculating” as opposed to mathematically subtracting one year from the previous year’s life expectancy factor (which is defined as not recalculating the inheritor’s life expectancy factor).
LO 6.4.1
Jane, 53, has retired and taken a full distribution from her employee stock ownership plan (ESOP). Over the years, her employer made a total of $40,000 in contributions into the plan for her, and the stock is currently valued at $110,000. Which one of these statements best describes the tax implications of the distribution that Jane has taken?
A)
Jane will owe ordinary income taxes and a 10% penalty tax on $40,000.
B)
Jane will owe ordinary income tax on the entire $110,000 distribution from the ESOP.
C)
Jane will owe just ordinary income taxes on $40,000.
D)
Jane will owe long-term capital gain taxes on $70,000, which she must pay this year because this is the year of the distribution.
A
She wasn’t 55 at the time she separated from service. ESOP is a qualified plan and she took the lump sum, which is eligible for NUA treatment. So in this case, the basis of the stock (FMV at grant date(s)) is taxable as ordinary income in the year it’s distributed, and since she took distribution (NOT SALE) of the stock before 55, she gets the 10% EWP on the distributed $40,000. The other $70,000 is just chillin. If she were to sell it now, she’d pay LTCG taxes on it. Any appreciation/depreciation from that amount would be netted against it as either STCG/STCL or LTCG/LTCL depending on the time frame of the sale.
Because Jane was not at least age 55 at the end of the year when she separated from service, she will owe not only ordinary income taxes but also a 10% early withdrawal penalty tax on the $40,000 basis unless she withdrew the money for a reason that is an exception to the 10% EWP. She will be taxed at the long-term capital gains rate for the $70,000 of NUA, but she is not subject to this tax until she actually sells the stock. When the stock is eventually sold, the $70,000 NUA amount will usually be a long-term capital gain. If the stock is eventually sold for a profit above $110,000, the gain over the $110,000 mark is long- or short-term capital gain depending how long after the distribution the shares are sold. If the stock is eventually sold for less than $110,000, the loss from $110,000 decreases the NUA amount and thus lowers the long-term capital gain. If Jane dies while owning the stock, the NUA amount will not get a stepped-up basis, but the rest of the stock’s value on the date of death will get a stepped-up basis. Thus, the easiest way to determine the stepped-up basis is to subtract the NUA from the fair market value of the stock on the date of death.
LO 6.1.2
Jeff has an IRA at his bank with a balance of $140,000 as of January 1 this year. On April 15th this year, he withdraws the entire amount from the IRA and places it in a non-IRA CD for 57 days. By the 60th day, he promptly and timely reinvests the principal of the CD in an IRA containing an aggressive growth fund with the ABC family of funds. On September 15 of the same year, he becomes dissatisfied with the return and variability of the investment with the ABC funds family and instead wants a less risky investment and wants assurance that any IRA distribution will not be taxed at the time of the change. In fact, he has chosen a bond fund from with the XYZ fund family. Which of these are acceptable alternatives for Jeff?
Withdraw the funds from the ABC fund family and reinvest them within 60 days in the bond fund with the XYZ fund family.
Direct the trustee of the IRA to transfer the funds to the bond fund with the XYZ fund family.
Withdraw the funds and reinvest within 60 days in an IRA into an index fund tracking the S&P 500 with the XYZ fund family.
A)
II only
B)
I only
C)
II and III
D)
I, II, and III
II only
Important to note that the 365 day rule for Rollovers applies solely to IRA-to-IRA situations. You can still rollover an IRA into a qualified plan or a 403(b).
Statement II is correct. There is no limit on IRA-to-IRA transfers. Statements I and III are incorrect due to the Bobrow rule. Because of Bobrow, you must wait more than 365 days to make another IRA-to-IRA rollover. Withdrawing the IRA money a second time within 365 days and attempting to place it into another IRA is treated as a distribution that cannot be rolled into another IRA. The withdrawn money could be moved into a 401(k) or 403(b) because that would not be an IRA-to-IRA rollover, but it cannot go into another IRA. The next IRA-to-IRA rollover is not allowed until more than 365 days has elapsed since the last IRA-to-IRA rollover. The money could go into a Roth conversion because Bobrow only limits IRA-to-IRA and Roth IRA-to-Roth IRA rollovers. The bottom line is that IRA money should be moved between custodians by transfers, not rollovers.
LO 6.1.1
Under the RMD regulations, in cases in which the eligible designated beneficiary is not the surviving spouse, over what time span must benefits from a qualified retirement plan or IRA generally be distributed subsequent to the death of a participant who has not yet begun receiving required minimum distributions?
A)
By December 31 of the third year after the participant’s death
B)
At least as rapidly as distributions were being made before the participant’s death
C)
Over the non-spouse eligible designated beneficiary’s life expectancy as of the next year after the death, reduced by 1 for each subsequent year
D)
Over whatever time period is assigned the distribution per probate court order
c
You can do 10 year simple rule or single life expectancy minus one year per subsequent year.
Under the regulations for post-death distributions to a non-spouse eligible designated beneficiary, the applicable distribution period is generally the life expectancy of the beneficiary in the year after the death reduced by 1 for each subsequent year. The distribution may also be made in accordance with the “simple 10-year rule” when the participant died before the required beginning date (RBD) if plan provisions allow.
LO 6.4.1
Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution is CORRECT? The NUA portion is
A)
received tax free.
B)
taxed as ordinary income when the stock is sold.
C)
taxed as ordinary income in the year of the distribution.
D)
taxed at the capital gains rate when the stock is sold.
d
The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.
LO 6.1.2
Use the following information about Ted to answer the question that follows.
Ted is age 54 and married.
He and his wife, Beth, have a college-age daughter named Meredith.
Ted has been making salary reduction contributions to his employer-sponsored 401(k) plan for the last four years.
Ted is considered a highly compensated employee.
The current 401(k) account balance is $21,500. This total account includes $5,000 of employer contributions. The employer contributions have earned $500. Ted’s contributions have earned $3,000. The plan has a 3-year vesting schedule.
The plan allows for both hardship withdrawals and plan loans.
Plan loans are available to all plan participants on an equal basis.
Meredith is just starting college, and Ted needs to use some of his plan assets to pay college tuition.
Which one of the following is a CORRECT statement about how Ted could meet Meredith’s college expenses?
A)
Ted is not allowed to take a loan from the plan because he is a highly compensated employee.
B)
If Ted took a loan, he would not owe income tax but he would owe the 10% EWP.
C)
The maximum plan loan Ted could take is $10,750.
D)
Ted would not have to pay a premature distribution penalty tax if he made the maximum hardship withdrawal.
C
Loan amounts allowed
Any amount up to $10,000
Then up to half of the vested(?) balance
Then up to $50,000
The maximum loan amount is generally the lesser of $50,000 or one-half of the nonforfeitable accrued benefit of $21,500—i.e., $10,750. As long as loans are available to all employees on an equal basis, highly compensated employees may take loans. Hardship withdrawals from 401(k) plans are subject to the 10% premature distribution tax. Also, higher education expenses are not an exception to the 10% EWP for distributions from a qualified plan or 403(b). This is true even though the exact same expenses are an exception for IRA withdrawals.
LO 6.3.2
Martha’s uncle, Stirling, age 67, died in January of this year. Martha is the designated beneficiary of his $1 million IRA. Which of these statements regarding designated beneficiaries of an IRA is CORRECT? Martha is 40 years old.
Because Martha was the designated beneficiary on the IRA, she may move the account into an inherited IRA via a direct transfer and designate her own beneficiary to the IRA.
As the IRA beneficiary, Martha must take distributions over Uncle Stirling’s remaining lifetime expectancy.
A)
II only
B)
Neither I nor II
C)
Both I and II
D)
I only
D I only
Idk and Idc
Only Statement I is correct. Statement II is wrong. The owner died before his required beginning date (RBD) and Martha is only a designated beneficiary. She is not an eligible designated beneficiary. In this situation, she is under the simple 10-year rule in which she must have the account emptied by December 31st of the year containing the 10th anniversary of his death. If he would have died on or after his RBD, she would have been under the “complicated 10-year rule” in which she would have needed to take any remaining RMD for the year of death. Then, the life expectancy factor for Year 1 would be her Table I life expectancy factor. Then she would subtract one each year for Years 2-9. Finally, the account must be empty by December 31st of the year containing the 10th anniversary of the death.
LO 6.4.1
Bob has an IRA at Mutual Fund Company A with a balance of $115,000 as of December 31, last year. On August 15 of this year, Bob withdrew the entire amount from the IRA and placed it in his stock account for 60 days, earning a 6.5% increase in the account. On October 14, the 60th day, Bob promptly reinvested the principal from his IRA into Mutual Fund Company B, as an IRA account. Then, on October 19, he became dissatisfied with the fund and their lack of service. Bob now wants less risk for his IRA and plans to move it to another company. He wants your assurance that any IRA distribution will not be taxed if he does so. Which of the following transactions meet Bob’s requirement?
Bob may withdraw his balance from Company B and deposit it within 60 days in a mutual fund IRA that invests exclusively in Treasury instruments.
Bob should withdraw from the Company B fund and reinvest within 60 days in an index mutual fund holding common stocks with portfolio risk equal to the S&P 500.
Bob should direct the trustee of his Company B IRA to transfer his funds to another mutual fund IRA that invests more conservatively.
A)
I only
B)
III only
C)
II and III
D)
I, II, and III
III only
I and II are both wrong because IRA-to-IRA Rollovers (with the 60 day mailed check or bank deposit) can only be done once every 365 days. Trustee-to-Trustee transfers can be done as often as you like though.
The other two choices are not possible since he has already rolled his IRA once via an IRA-to-IRA rollover in the current 12-month period.
LO 6.1.1
Which of the following statements regarding distributions from retirement plans where death has occurred before the required beginning date (RBD) of required minimum distributions is FALSE?
A)
A nonspouse beneficiary in a qualified plan, Section 403(b) plan, governmental Section 457 plan, or IRA also may use a direct trustee-to-trustee transfer of an inherited amount to create an inherited IRA.
B)
An estate beneficiary must take distribution from the plan using the 5-year rule.
C)
A spouse beneficiary may roll the distribution over into her own IRA and is not required to take a distribution until the year following the year the spouse attains 73.
D)
A spouse must take distributions over the spouse’s remaining single life expectancy, beginning in the year following the year of death.
D
When an account owner dies prior to his required beginning date (RBD), a surviving spouse eligible designated beneficiary (EDB) is not required to commence distributions in the year following the death of the owner. A spouse EDB may elect to treat the IRA as his own and defer distributions until attainment of age 73. A surviving spouse EDB can also transfer the money to an inherited account. In that case, the surviving spouse does not have any RMDs until the decedent would have been 73 for 2023 and following.
LO 6.4.1
Tom is age 52. His daughter Angela is attending college. Tom has been contributing to his 401(k) plan at work for the past seven years and is considered a key employee. The current balance of his 401(k) is $21,500, which includes $3,500 account earnings. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. In fact, Tom has just finished repaying a plan loan. Two years ago he owed $4,300 on the loan; 12 months ago he owed $2,100. He needs to use some of his plan assets to pay college tuition. Which of these is a CORRECT statement about how Tom could meet Angela’s college expenses?
A)
The maximum plan loan Tom could take is $8,650.
B)
Tom would not have to pay a premature distribution penalty tax if he took a hardship withdrawal.
C)
The maximum plan loan Tom could take is $10,750.
D)
Tom is not allowed to take a loan from the plan because he is a key employee. In fact, his former loan was a prohibited transaction.
A
Important to remember that prior loans factor into new loans that can be taken, and the loan amount is the highest loan balance over the previous 12 month period.
Tom could usually borrow up to 50% of the vested balance. He has been contributing for seven years so he must be fully vested. Half of his $21,500 is $10,750. However, he has had another loan in the past, so the highest loan balance in the previous 12 months must be subtracted: $10,750 - $2,100 = $8,650. This is his maximum available loan. As long as loans are available to all plan participants on an equal basis, key employees and highly compensated employees may take loans based on their own vested balances. What cannot happen is for the retirement plan to make a plan investment by lending plan assets to anyone at the firm or involved with the retirement plan. A hardship distribution from a 401(k) plan for education expenses would be subject to the 10% premature distribution penalty. On the other hand, a withdrawal from an IRA for Angela’s college expenses would be an exception to the 10% EWP.
LO 6.3.2
Using the Uniform Lifetime Table to calculate the required minimum distributions (RMDs) from a qualified plan is mandatory unless
A)
there is no beneficiary.
B)
there is more than one beneficiary.
C)
the beneficiary is a child under the age of 16.
D)
the beneficiary is the participant’s spouse and the spouse is more than 10 years younger than the participant.
D
This is because if your spouse is more than ten years younger, you would use Table II instead of Table III. This table assumes that your joint life expectancy is greater than the normal situation, and as a result gives you a longer life expectancy, which in turn means larger divisors, and then smaller RMD’s each year.
The Uniform Lifetime Table (Table III) must be used to calculate required minimum distributions (RMDs) under a qualified plan or IRA unless the beneficiary is the participant’s spouse and the spouse is more than 10 years younger than the participant.
LO 6.2.2
Charles and Lucy Brown each had $100,000 in their respective IRAs on December 31 of last year. Each has named the other as beneficiary. They need to determine the amount each must withdraw once withdrawals are required. This year, Charles turned age 73 on January 2 and Lucy turned age 73 on August 4.
What is the required minimum distribution (RMD) for each? (Assume the IRS RMD Joint Life Table expected return for two individuals age 73 is 19.1. The Uniform Table factor is 27.4 at age 72 and 26.5 at age 73.)
A)
$3,650
B)
$4,854
C)
$5,284
D)
$3,774
D
Don’t be misled by the question itself, with the very low joint life table expected return.
You use the joint life expectancy table when the age gap is greater than ten years. This is NOT the case here as they are both 73. So in this case you’d use the Uniform Table (Table III).
100,000 / 26.5 = 3774
The reason you use the 73 divisor and not 72 is because they are turning 73 this year.
Cindy attains age 73 on February 1st this year. If Cindy no longer works for the employer-sponsor of the plan, when must she begin taking required minimum distributions (RMDs) from her Section 401(k) plan?
A)
December 31st of next year
B)
December 31st of this year
C)
April 1st of this year
D)
April 1st of next year
D
Generally, the FIRST required distribution from a qualified plan must be taken by April 1 of the year following the year in which the participant reaches age 73. Cindy reaches 73 this year, so she must begin taking distributions by April 1st of next year. The SECURE 2.0 Act changed the trigger year for RMDs to age 73 starting in 2023.
LO 6.2.1
Your client is considering how to pay for the last year of her child’s college tuition. Her 401(k) balance is $87,000 and she has never borrowed from her retirement account before. How much of a loan could she take from her 401(k)?
A)
$50,000
B)
$87,000
C)
$43,500
D)
$20,250
C
Up to 10k
Then up to half
Then up to 50k
Reminder: you half to take out any prior loan balances (highest balance within the prior 12 month period, they will obviously give you these details)
Retirement account loans are generally 50% of the vested balance minus the highest loan amount in the previous 12 months. In this case, there is no previous loan amount in the last 12 months, so she has access to $43,500 ($87,000 ÷ 2).
LO 6.3.2
Which of the following are exceptions to the imposition of the 10% early distribution penalty for IRA withdrawals?
A)
Partial disability
B)
As a part of substantially equal periodic payments over at least one year
C)
Attainment of age 55
D)
Owner’s death
D
this is insane. but note it’s for ira’s not ROTH IRAs
Some of the main exceptions to the 10% penalty are as follows:
Owner’s death.
Total and permanent disability. Attainment of age 59½.
As part of substantially equal periodic payments annually over the life expectancy of the owner, or the owner and a designated beneficiary; in addition, these payments, once begun, must continue for the greater of five years or until the owner attains the age of 59½.
For medical expenses exceeding 7.5% of the owner’s AGI.
To pay higher-education costs for the taxpayer, spouse, child, or grandchild.
To pay acquisition costs of a first home for the participant, spouse, child, or grandchild of the participant or spouse, up to a $10,000 lifetime maximum.
To pay health insurance premiums if the owner is unemployed (the participant must file for unemployment and be unemployed for at least 12 consecutive weeks before this exception applies).
LO 6.3.1
Bernie is a participant in his employer’s noncontributory employee stock ownership plan (ESOP). Two years ago, his employer contributed stock with a fair market value of $30,000 into Bernie’s account. Bernie retired one year later and took distribution of the stock when its fair market value was $40,000. Two years after his retirement, Bernie sold the stock for $50,000. What is the appropriate tax treatment available to Bernie upon sale of the stock?
A)
$20,000 long-term capital gain
B)
$20,000 ordinary income
C)
$10,000 long-term capital gain
D)
$50,000 ordinary income
A
So he took distribution at retirement, then TWO YEARS LATER sold for a total gain above the basis (30k) of 20k. So 30k is income taxed and 20k is LTCG.
Employees are not taxed on the stock in an ESOP until such time as the stock is distributed. Upon distribution, the employee must pay ordinary income taxes on the fair market value of the stock when it was contributed to the plan on his behalf. Any net unrealized appreciation (NUA) at that time can be deferred until the stock’s subsequent sale. Upon the subsequent sale of the stock, the NUA portion will be treated as long-term capital gain. Additionally, the growth of the stock subsequent to the distribution will receive long-term capital gain treatment because Bernie held the stock longer than one year after distribution. Therefore, the appropriate tax treatment available to Bernie upon sale of the stock is a $20,000 long-term capital gain.
LO 6.1.2
Which of these describes how RMD Table III works?
A)
The life expectancy used from the Uniform Lifetime Table for the first RMD is the age of the participant as of April 1 of the year in which the participant attains age 73 according to the SECURE 2.0 Act.
B)
The divisor amounts appearing in the Uniform Lifetime Table are calculated on the assumption that the retired taxpayer has a beneficiary who is 10 years younger, regardless of the actual age of any beneficiary.
C)
The Uniform Lifetime Table is designed to liquidate the participant’s account over a single average life expectancy.
D)
The table may not be used if the beneficiary of the participant is not a spouse.
B
This is NOT saying that it’s looking at spouses who are MORE than ten years younger, this is just being generous and assuming you will live ten years longer than the data indicates.
C is wrong bc Single Average Life expectancy is TABLE I not TABLE III.
Table III, the Uniform Lifetime Table, is designed to liquidate a participant’s account over a joint and survivor life expectancy of the participant and a hypothetical beneficiary who is 10 years younger than the participant. The life expectancy for the first IRA RMD is based on the owner being 73 according to SECURE 2.0. It will increase to 75 in 2033. Thus, people born in 1960 or later will start RMDs when they are 75.
LO 6.2.2
Blake, age 73, is required to take substantial required minimum distributions (RMDs) from his qualified retirement plan. He has no current need for the income and wants to decrease the amount of the distributions without incurring a penalty. Blake is not interested in a lump-sum distribution from the plan at this time. Which of the following statements regarding Blake’s options is CORRECT?
Blake may take a distribution and roll it into his IRA.
Blake cannot roll over retirement plan proceeds to a traditional IRA after age 59½.
A)
I only
B)
Neither I nor II
C)
Both I and II
D)
II only
Neither jesus fucking christ this chapter fucking sucks ass
Neither answer is correct. You are not allowed to roll over an RMD distribution. There is no age limit on transfers or rollovers.
LO 6.1.1
After his divorce, Fred, age 52, changed the beneficiary of his IRA to his estate. If Fred died in a car crash on April 1, 2024, how long would his beneficiaries be able to stretch his IRA? Fred has two adult children.
A)
Their full IRA accounts would need to be distributed by December 31, 2029.
B)
Their accounts would be immediately disgorged to their estate.
C)
Since his healthy adult children will eventually get the retirement account through his estate, the children will become designated beneficiaries and will be under the normal 10-year rule (for when the owner died before their required beginning date). Thus, they must empty their accounts by December 31, 2034.
D)
Their full IRA accounts would need to be distributed by December 31, 2024.
A
Estates seem to have a five year hard limit on IRA liquidation. So if someone died in the middle of 2024, their IRA, if it goes to the estate, would have to be completely liquidated by the end of 2029.
An estate cannot be a designated beneficiary. The owner died before his required beginning date (RBD). Thus, each of their IRAs would have to take the entire balance by the end of the fifth year following the year of death. The year of death is 2024, and 2025 is the first year following the year of death. That makes 2029 the fifth year following the year of death. Passing retirement accounts through an estate means the eventual recipient cannot ever become a designated beneficiary.
LO 6.5.1
Rudy attained age 73 in March of this year. His distribution period is 27.4 years for age 72 and 26.5 years for age 73. If Rudy’s IRA balance is $500,000 on December 31st of last year, what is his required minimum distribution (RMD) for this year?
A)
$20,243
B)
$18,248
C)
$18,868
D)
$19,531
c
pretty straightforward, just take the 500k from last day last year and divide by year 73 divisor.
Rudy’s RMD is $18,868 ($500,000 ÷ 26.5). Rudy’s age for RMD calculations is his age on December 31 of that year and not his age on the last day the first RMD is due.
LO 6.2.2
Kim, 44, has been a participant in her employer’s profit-sharing plan for seven years. This year, she withdraws $16,000 (20% of her account balance) from the plan to cover her son’s first year in college. Which of these statements correctly describe the consequences of this withdrawal?
The amount withdrawn will be subject to a 10% early withdrawal penalty.
The amount withdrawn will be subject to ordinary income taxation.
The distribution is exempt from the 10% penalty because it is for higher education.
The distribution is considered a hardship withdrawal and is exempt from any penalty.
A)
II and III
B)
III and IV
C)
I and IV
D)
I and II
I II
Qualified plans don’t have education exceptions to the EWP. So in this case, it would get that 10% EWP, and it would be looked at as a distribution and would be subjected to income taxation.
A withdrawal prior to age 59½ is considered an early withdrawal and is subject to the 10% penalty rules and income taxes. There is no exception from the 10% early withdrawal penalty for higher education expenses when a distribution is taken from an employer retirement plan. There is an exception from this penalty for withdrawals from IRAs for qualified higher education expenses. Categorizing a withdrawal as a hardship gives the person access to the money, but the distribution is still subject to income taxes and the early withdrawal penalty rules. Some remember this by thinking of the early withdrawal penalty and immediate income taxation as a hardship (even though the immediate financial need is met).
LO 6.3.1
Which one of the following statements correctly describes the tax implications of a distribution from a Section 401(k), governmental 457, or Section 403(b) plan?
A)
Distributions from a 401(k), governmental 457, or 403(b) plan could be transferred into another qualified plan, a 403(b) plan, SEP, IRA, or governmental 457 plan that accounts for such rollovers separately, or directly rolled to a Roth IRA.
B)
Distributions from a not-for-profit employer are tax free if the worker is retired.
C)
Distributions from these plans can be rolled over into a cafeteria plan.
D)
Distributions from a 403(b) plan cannot be rolled over or transferred to a SEP.
A
This is a massive amount of information for one question, wtf.
Apparently:
401k, 457, 403b can be transferred to any of these:
Qualified, 403b, IRA, SEP IRA, 457, or Roth IRA.
Distributions from a 401(k), 457, or 403(b) plan can, under the Pension Protection Act of 2006, be directly rolled over or transferred into a Roth IRA. Distributions from a 403(b) plan can be rolled over or transferred to a SEP. Also, even though a not-for-profit employer is income tax free, the employees of a not-for-profit are generally taxed like any other worker. However, there are some exceptions for clergy.
LO 6.1.1
Jerry died on July 17th of this year. He owned a traditional IRA. The designated beneficiaries for his IRA will be determined as of what date?
A)
December 31st of this year
B)
September 30th of next year
C)
July 17th of next year
D)
July 17th of this year
B
It’s weird. They’re TECHNICALLY determined the day of death, but I think as it all relates to his retirement plans, it’ll be as of Sep 30th, the following year.
The designated beneficiaries are determined as of September 30 of the year following the IRA owner’s death. Eligibility to become an EDB is determined on the date of death, but designated beneficiary status is determined on September 30th of the year following the year of death.
LO 6.4.1
Which of the following statements regarding having the owner’s estate as the beneficiary for qualified plans and IRAs is FALSE?
A)
If the decedent had already begun receiving required minimum distributions before death, any installment payout must be over the remaining distribution period of the deceased, reduced by 1 each year.
B)
An advantage when designating the estate as the beneficiary is that the taxation of the benefit is more favorable at the estate income tax rate than at the individual tax rate.
C)
For deaths occurring before the required beginning date for distributions from the IRA or qualified plan, the benefits to the estate must be distributed using the 5-year rule.
D)
An estate cannot be treated as a designated beneficiary even if the estate beneficiary would have been allowed to be a designated beneficiary they had been named as the beneficiary of the retirement account.
B
Remember: Estate taxes SUCK.
Estate named as regular beneficiary:
If you die BEFORE RMDs - then the five year rule applies.
If you die AFTER starting RMDs - then the “life expectancy, life expectancy -1, -2, -3” rule applies.
Estates can be beneficiaries of retirement accounts, but they cannot be DESIGNATED Beneficiaries.
Estate income tax rates reach the highest marginal tax rate at a much lower taxable income amount compared with an individual’s rate. Therefore, having the benefit taxed to the estate is a disadvantage.
LO 6.4.1
Which of the following is NOT an option unique to a surviving spouse when someone dies with a retirement account or IRA?
A)
Only surviving spouses can extend RMDs longer than 10 years.
B)
When the decedent dies prior to the required beginning date, only a surviving spouse can delay RMDs until the decedent would have been 73.
C)
Only surviving spouses can recalculate their life expectancy each year.
D)
Only surviving spouses can absorb the money into their own name and treat the money as if the decedent never existed.
A
Confusing question.
A is wrong because it is something that any Eligible Designated Beneficiary can do.
B is correct because only a surviving spouse EDB can delay RMDs until the decedent would’ve been 73, had they died before RMDs.
C is correct because only surviving spouses can recalculate their life expectancy each year. (?)
D is right because only surviving spouses can roll the money into their own name and treat it as their own money. (?)
–
Eligible designated beneficiaries (EDBs) can extend RMDs past 10 years by taking the distribution according to the Table I life expectancy. For a non-spouse EDB, 1 is subtracted from the previous year’s life expectancy factor. Spouses, however, return to Table I each and every year to determine the life expectancy factor. This is a great advantage because it lowers the RMDs each year compared to the “Minus 1” method.
LO 6.4.1
Mark participates in a Section 401(k) plan maintained by his employer. His vested account balance is $25,000. Four years ago, he took a retirement plan loan for $10,000. The balance on that loan today is $2,200. A year ago, the balance was $4,300. What is the maximum loan amount he can take from his Section 401(k) plan?
A)
$8,200
B)
$12,500
C)
There can only be one loan at a time.
D)
$10,300
A
Okay so for this one, you calculate the maximum loan amount possible, THEN you take the highest balance within the previous 12 months.
Up to $10k, then up to half, then up to $50k maximum.
In this case, $25,000 has a max loan of $12,500.
From there you subtract the $4,300 highest balance w/in 12 months.
Max loan he’s eligible for is $8,200.
–
The general rule is that plan loans are limited to half of the participant’s vested account balance, up to a maximum loan of $50,000. When a participant’s vested account balance is $25,000, the maximum loan is $12,500. However, there is another rule that a retirement plan loan must subtract the highest loan balance in the most recent 12 month period. Thus, the maximum loan in this case would be $8,200 ($12,500 - $4,300). The plan document determines the number of loans available. A plan can prohibit loans. It can also only allow one retirement plan loan, or it can allow multiple plan loans.
LO 6.3.2
On December 31 of last year (year 1), Samuel, age 73, had an IRA. He has named Trudy, his wife, as beneficiary. Samuel died in year 4, on April 15, after withdrawing the required minimum amount from his plan. Trudy is 37. Assume that Trudy elects to continue to receive distributions over her life expectancy. The balance of the IRA on December 31 of year 4 is $456,743. According to her insurance agent, her life expectancy is about 50 years. How much is to be distributed and when? Assume the RMD Single Life Table factors are age 37‒45.4, 38–44.4, 39–43.5.
A)
She must continue distributions in the same amount. The recalculation is frozen upon death of the plan owner. Trudy’s distribution amount is $8,227 each year for life.
B)
Trudy must begin distribution within 30 days of Samuel’s death. The amount is $9,422.
C)
The distribution amount is $7,688 ($384,400 ÷ 50 = $7,688). According to her insurance agent, Trudy has a life expectancy of 50 years at her present age of 37. Payments must begin within 30 days of Samuel’s death.
D)
She must begin distributions by December 31 of the year following Samuel’s death. The amount is $10,287 ($456,743 ÷ 44.4 = $10,287). The factors in the RMD Single Life Table must be used to determine her life expectancy at age 38.
D
Samuel died in Year 4 after he had taken an RMD. At the end of that year, his balance was $456,743. Trudy is 37 I believe in Year 4, when he died, that’s why it’s in the sentence following his date of death in Year 4. This means, she’ll be 38 the following year, and you calculate her RMD for the following year using the Single Life Table and the ending account balance of year 4.
456743/44.4 = $10,287 RMD to be withdrawn by Dec 31 of year 5.
I don’t remember this being in Kaplan’s questions but IRA Documents OR Beneficiary Designation documents determine WHO GETS MONEY FIRST.
The SECURE act is what introduced EDB vs DB vs B, but that does not change who gets the money first.
You could put your DB adult daughter as primary, and have your EDB sister as the secondary. This simply means that your sister has more options, BUT ONLY IF, your daughter predeceases you, in this example.
Yes ^ That.
Joe is 75 years old. The required minimum distribution from his Section 401(k) plan this year was $10,000, but he withdrew only $4,000 from the plan. As a result, he will owe a maximum penalty of
A)
$2,500.
B)
$1,000.
C)
$1,500.
D)
$3,000.
C
RMD penalties are always 25% of the amount that wasn’t taken that should’ve been. So in this case, he needed to take $10,000 but only took $4,000. That means 25% of the $6,000 shortfall is taxable at 25%.
Secure 2 reduced the penalty from 50% to 25% and if you withdraw the money real quick, that 25% becomes 10%. So in this case, if he took out that money quickly as a result, he’d only owe $600 instead of $1500.
SECURE Act 2.0 reduced the penalty to 25% of the difference between the amount that should have been distributed ($10,000), and the amount that was actually distributed ($4,000). In this case, the excise tax is 25% of $6,000, or $1,500. If the withdrawal of the shortfall is made promptly, then the penalty will be reduced to 10%.
LO 6.2.2
Joe is 75 years old. The required minimum distribution from his Section 401(k) plan this year was $10,000, but he withdrew only $4,000 from the plan. He realized his mistake and withdrew the money promptly, but after he should have. His fee will most likely be:
A)
$2,500.
B)
$600.
C)
$1,500.
D)
$3,000.
B $600
Remember, if the shortfall is withdrawn real quick, the 25% shortfall penalty is downed to 10%.
If the withdrawal of the shortfall is made promptly, then the penalty will be reduced to 10%.
LO 6.2.2
Which of these is not eligible for rollover treatment?
A)
A required minimum distribution payment
B)
The nontaxable portion of qualified plan distribution
C)
The value of an IRA
D)
A total distribution from a Section 401(k) plan
A
can’t plop an RMD into another account lol, that’d be funny though just to daisychain account distributions and contributions.
A required minimum distribution payment is not eligible to be moved into another retirement account. All the IRA and qualified plan distributions listed are eligible for rollover treatment except distributions made to satisfy the minimum distribution rules.
LO 6.1.1
Use the information below about Ted Ridge to answer the question that follows.
Ted is age 54 and married.
He and his wife, Beth, have a college-age daughter named Meredith.
Ted has been making salary-reduction contributions to his employer-sponsored 401(k) plan for the last four years. The company does not have a match and has not made any contributions.
Ted is considered a highly compensated employee.
The current 401(k) account balance (nonforfeitable accrued benefit) is $21,500. This total includes account earnings of $3,500.
The plan allows for both hardship withdrawals and plan loans.
Plan loans are available to all plan participants on an equal basis.
Meredith is just starting college, and Ted needs to use some of his plan assets to pay college tuition.
Which one of the following is a correct statement about how Ted could meet Meredith’s college expenses?
A)
Ted is not allowed to take a loan from the plan because he is a highly compensated employee.
B)
Ted would not have to pay a premature distribution penalty tax if he made the maximum hardship withdrawal.
C)
The maximum plan loan Ted could take is $10,750.
D)
If Ted took a hardship withdrawal, he would not be income taxed on the distribution.
C
401(k) plans do not have EWP exclusions for education withdrawals like IRAs do.
Max 401(k) loan:
Up to $10k
Then up to Half
Then Half up to $50k maximum.
He can take half of the VESTED balance, since his company hasn’t made any contributions and doesn’t match, that means there’s no ER vesting schedule, so the entire nonforfeitable accrued benefit of $21,500 IS the vested amount. And yes earnings are included. He could take the loan on half of that, which is $10,750.
Are 401(k) loans subject to taxation?
Hint: Think
Nope. UNLESS YOU DEFAULT.
Think about it, you’re taking out the money then PUTTING IT BACK, with some interest. Why would you get taxed on it, just to put back the same amount, pretax? It’s simpler just to take it out pre-tax and plop it back in pre-tax, with interest (pre tax as well).
Are 401(k) loans subject to the EWP?
Hint: Think
No, unless you default and don’t have an exception.
401(k) Hardship withdrawals are subject to:
EWP
EWP / Taxation
Taxation
None
Both.
First look at the wording: WITHDRAWAL.
You’re taking out the money with NO PLANS to put it back - if you had plans to put it back, that’d be a loan.
Second: you have to just remember that Hardship withdrawals are not an exception to the 10% EWP.
Which of the following statements regarding a simplified employee pension (SEP) plan are CORRECT?
Distributions used to fund college education costs for the participant’s child are not subject to the 10% early withdrawal penalty.
Distributions from a SEP plan will not be subject to the 10% early withdrawal penalty if the participant leaves the sponsoring company after attaining age 55.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only
I only
College education is a classic exception to the 10% EWP from IRAs.
SEP IRA, even though it’s a company plan, it’s treated differently. Meaning that the 55+ rule regarding separation from service only applies to qualified plans and 403(b) plans. NOT IRAs.
The exception to the early withdrawal penalty for those who leave the employer after attaining age 55 applies only to qualified plans and Section 403(b) plans. Distributions used to fund college education costs for the participant’s child are not subject to the 10% early withdrawal penalty when the retirement plan is a SEP because a SEP is treated as an IRA. Also, QDROs are not allowed with a SEP because a SEP is treated as an IRA.
LO 6.3.1
Many of the minimum distribution requirements that apply to inherited IRAs
A)
will be waived by the IRS if the person did not understand them.
B)
also generally apply to inherited qualified plan benefits.
C)
do not apply if the plan participant died before the required beginning date.
D)
rarely apply to inherited qualified plan benefits.
fuck these 6.4.1 questions
Also answer is B
Generally speaking, many of the same rules apply to both IRAs and qualified plans. The specific minimum distribution requirements that apply depend upon whether a plan participant died before or on/after the required beginning date. The IRS can waive the penalty, but they are not required to.
LO 6.4.1
Ann has a plan to delay withdrawals from her IRA until after she retires. She is 74 and expects to retire in another three years. She told you she has not been taking any IRA distributions because she is still working. Which of these would get you in trouble as her adviser?
A)
Assuming she is married and her spouse is her beneficiary, if Ann dies after beginning distributions, remaining benefits may be paid over her spouse’s life expectancy, beginning in the year following the year of her death, determined by reentering the RMD Single Life Table each year with the spouse’s attained age for that year.
B)
Recalculation of life expectancy is automatic when using the Uniform Lifetime Table because the table is reentered each year at the attained age for that year.
C)
If she dies on or after the required beginning date without a designated beneficiary, the required minimum distribution for the year of death is determined by her Table III life expectancy factor for that year. Her life expectancy factor for the year after her death is determined from the life expectancy factor for the year of her death from Table I minus one. They would continue subtracting one for each subsequent year.
D)
Because she is still working and does not own more than 5% of her employer, she can delay all RMDs until April 1st of the year after she retires.
D
IRAs cannot be postponed till after retirement, it’s either 73 OR greater than 5% that triggers the RMD’s.
One key to this question is that she is dealing with an IRA, not her employer’s plan. Because Ann did not start withdrawing her RMDs from her IRA, a distribution penalty of 25% will apply on amounts that were not distributed but should have been starting April 1 following the year she attained age 73 according to SECURE 2.0. This penalty can be reduced to 10% if she withdraws the shortfalls promptly. Promptly means before the end of the second tax year following the shortfall or before the IRS notices the shortfall and acts. In other words, if a client has a RMD shortfall, they should withdraw the shortfall immediately. This can reduce the penalty by 15%.
LO 6.2.2
When she retired at age 64, Lauren received a lump-sum distribution from her employer’s qualified stock bonus plan. The fair market value of the employer stock contributed to her account was $200,000. At the time of the distribution, Lauren received $300,000 of her employer’s stock. Six months later, Lauren sold the stock for $310,000. Which of these statements regarding the sale of Lauren’s stock is false?
A)
Lauren has a $10,000 short-term capital gain when the stock is sold.
B)
The $300,000 distribution is taxed at the long-term capital gain rate.
C)
There was no income tax liability incurred when the stock was contributed to the plan.
D)
The net unrealized appreciation on the stock was $100,000.
If you’re bored enough, read the answer down below. Otherwise:
Employer contribution basis: $200k
At distribution, the stock was worth $300k.
At SALE, the stock was worth $310k.
Basis is taxed as income in the year of DISTRIBUTION.
(Net Unrealized) Appreciation is taxed as long term capital gains in the year of SALE.
Extra above the appreciation after distribution at that time of sale is taxed as short term or long term capital gains (depending on how long from distribution to sale).
Of the $300,000 Lauren received as a lump-sum distribution from the stock bonus plan, $100,000 is net unrealized appreciation (NUA) and is taxed at the long-term capital gain rate when the stock is subsequently sold. The remaining $200,000 is taxed at Lauren’s ordinary income tax rate in the year of the distribution. Because Lauren sold the stock within six months, the $10,000 post-distribution appreciation is taxed as short-term capital gain.
Read at your own discretion.
The following information is probably beyond the scope of the CFP program, but you should grasp the outline of the options for the real world. In this case two-thirds of the account value when the stock is distributed will be subject to immediate income tax. That is bad. Only a third will be treated as a capital gain.
So should the client take the shares (not cash for the shares), which cannot be moved into an IRA, or should the client move the cash amount of the shares into an IRA and continue to defer the taxes until the money is ultimately withdrawn?
The point is whether it is better to pay income taxes now on the contribution value of the shares and thus get capital gains treatment later, or forgo capital gains treatment by moving the money into an IRA or employer retirement plan and continue to defer taxes? One factor is when the money will actually be spent. For example, if the whole amount was going to be distributed immediately, then it is obviously better in this situation to tax a third as capital gains instead of as ordinary income. If the client intends to hold the stock for a very long time, then the future appreciation being taxed as a capital gain is appealing. A second factor is the amount of appreciation at the distribution. A stock with an extremely low basis compared to the appreciation argues for making the NUA election. If the stock in this question had a basis of $10,000 and an FMV at distribution of $300,00, then making the NUA election would be very advantageous. A third factor in deciding whether or not making the NUA election would impact on the client’s overall portfolio. Making the NUA election and thus keeping the stock could mean too much single stock risk going forward. For example, if the client’s total investment portfolio was 90% former employer stock, then a fall in that single stock can ruin a lifetime of prudent retirement planning. In all, the best candidates for an NUA election would be highly appreciated stocks for a client who was planning to hold the stocks for a long time. Also, the client would need to have a sufficient amount of other investments to address the single stock risk.
LO 6.1.2
At what time is the basis within NUA lump sum taxable?
At sale
At distribution
At exercise
At contribution
DISTRIBUTION
NUA basis - income tax at distribution
NUA gains - LTCG tax at sale (always LTCG)
Above that - LTCG OR STCG (from dist to sale) tax
John died this year leaving an IRA account balance of $5 million. Which of these beneficiary designations is the least favorable to the beneficiary of the IRA?
A)
Designate his child as the beneficiary of the IRA
B)
Name his wife as the beneficiary of the IRA
C)
Name the estate as beneficiary
D)
Designate a qualifying charity as the beneficiary of the IRA
Estate is least favorable - you have the least options.
If he died before RMDs, 5 year rule - either lump sum or installments - applies.
If he died after starting RMDs, lump sum or RMDs with life expectancy -1 each subsequent year applies.
Benefits payable to the estate have to be distributed under the 5-year rule (either as a single lump sum or in installments, but fully distributed before the end of the 5th year following the year of the participant-owner’s death) if death occurs before the required beginning date. If death occurs after the required beginning date, a single lump-sum distribution is still available, but installment payments may continue over the deceased participant’s remaining distribution period, reduced by 1 each year. The application of either of these rules (as compared to the stretching-out effect possible with a nonspouse eligible designated beneficiary or even just a designated beneficiary) is usually not advantageous. A qualifying charity does not recognize taxable income from the IRA. Any beneficiary is permitted to use a direct trustee-to-trustee transfer of the IRA into an inherited IRA. A spouse eligible designated beneficiary has flexibility when taking distributions from a deceased spouse’s IRA. A healthy adult child would be categorized as a designated beneficiary under the SECURE Act; this would mean the ten-year rule. The 10-year rule has two different applications. If the owner died before their required beginning date (RBD), then the only rule is the account must be emptied by December 31st of the year containing the 10th anniversary of the owner’s death. If the owner died on or after their RBD, then the “complicated 10-year rule” is applied. The beneficiary must take any remaining RMD for the year of death. For Years 1-9, the beneficiary’s life expectancy factor is used (subtracting one for each subsequent year), then the account must be emptied by December 31st of Year 10.
LO 6.4.1
The 20% mandatory withholding requirement applies to distributions from all of these except
A)
Section 457 plans.
B)
qualified plans.
C)
IRAs.
D)
Section 403(b) plans.
The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs.
LO 6.1.1
Normally, a qualified plan must prohibit the assignment or alienation of benefits to anyone other than the plan participant. What is one notable exception to this prohibition?
A)
A distribution from the plan used for payment to the participant’s creditors
B)
A qualified domestic relations order (QDRO) in the event of a participant’s legal separation or divorce
C)
A de minimis assignment of up to 20% of any benefit payment due to the participant
D)
An agreement with the plan trustee to provide start-up funds for a participant’s new business
QDRO
QDRO and the IRS can both get your retirement money. Creditors can too but only after an indexed amount - the amount is currently around $1.5 million. Next adjustment will be April 2025. Worth noting that I think RLVR IRAs have unlimited creditor protection as well as most qualified plans.
A payment from a qualified plan may be made to an alternate payee (such as a former spouse) pursuant to a qualified domestic relations order (QDRO) without violating the prohibition on assignment of benefits. The IRS can also get your retirement account money. Other than these two exceptions (QDROs and the IRS), retirement accounts have extremely strong asset protection. Technically, IRAs have a bit less protection than employer plans. IRAs are protected from creditors up to $1 million indexed. The exact amount is currently $1,512, 350. This amount is adjusted for inflation every three years on April Fools Day. The next adjustment is April 1, 2025. Employer plans have unlimited asset protection (except from the IRS and an alternate payee in a divorce). Still, since most peoples’ IRAs are well below $1,512,350, even their IRA has strong creditor protection while they are alive. Inherited IRAs, however, only retain this strong creditor protection when a spouse is the beneficiary. This is another reason to accelerate withdrawals from an inherited account if you can contribute money into your own retirement account. Finally, a domestic relations order must be a qualified domestic relations order to avoid the 10% EWP.
LO 6.5.1
Richard and Debra Bennett will turn 73 this year. As of December 31st last year, Debra has a traditional qualified retirement plan balance of $1 million, and Richard has an IRA with a balance of $500,000. Neither has taken a distribution from their plans even though they are both retired. From which plan must they receive a required minimum distribution (RMD) by April 1st of next year?
A)
Both plans must begin RMDs.
B)
Only Debra must receive an RMD from her qualified plan balance.
C)
Neither Richard nor Debra must receive an RMD by April 1st of next year.
D)
Only Richard must receive an RMD from his IRA.
A
They are both retired, so Debra can’t get away with postponing RMDs.
Because both Richard and Debra attained age 73 this year, they must begin receiving required minimum distributions (RMDs) from their plans by April 1st of last year. If Debra was not retired from the employer and she did not own more than 5% of the firm, she would not be required to start RMDs until after she actually retired.
LO 6.2.1
n July of this year, George Moore, who will be age 56, plans to retire from Metro College. He will then have in excess of 20 years of service with the college. He wants to know what the consequences will be if he begins to make withdrawals from his 403(b) account. Which of these statements would be an accurate response?
A)
A 403(b) is not a qualified plan and does not qualify for the exception to the 10% early distribution tax due to being over age 55 and separating from service.
B)
It would be to George’s advantage to roll the account into his IRA and then begin making distributions from the IRA.
C)
Because he is not yet 59½, the distributions will have to be based upon substantially equal payments based upon George’s life expectancy, or the joint life expectancy of George and the beneficiary George names to avoid being subject to the 10% early distribution tax.
D)
A 403(b) plan participant is subject to the 10% early distribution tax, but an exception applies if the participant is has attained age 55 when they separated from service.
D
Qualified plans, and 403(b)s have that nice “Separated from service at 55+” EWP exception
Although a 403(b) plan is not a “qualified plan,” it is subject to many of the same rules. A 403(b) plan is subject to the 10% early distribution tax and also qualifies for the exception to the penalty if the participant has attained age 55 and separates from service. Age 55 is determined on December 31st of the year of separation. The person does not have to already be 55 on the date of separation as long as they will be 55 on December 31 of the year of separation.
LO 6.3.1
Which of the following people would NOT be an eligible designated beneficiary for Tom?
A)
Alice, Tom’s wife.
B)
Julie, Tom’s child, age 30.
C)
Sally, Tom’s child, age 32. Sally was disabled at age 15.
D)
Britt, Tom’s brother. Britt is two years older than Tom.
Julie, age 30
There are five types of eligible designated beneficiaries: a spouse; someone not more than 10 years younger than the decedent owner; someone disabled or chronically ill on the date the account owner died; and a minor child of the decedent. The minor child with convert to the ten-year rule when they reach the age of majority.
LO 6.4.1
Shawn, age 32, needs $10,000 for the purchase of a primary residence. She has no other source of funds at her disposal. Her Section 401(k) plan allows participant loans. The current value of Shawn’s deferral account is $14,000, of which $9,500 is her aggregate vested balance. What is the maximum loan Shawn can take from the Section 401(k) plan?
A)
$9,500
B)
$10,000
C)
$7,000
D)
$14,000
A
401(k) loans, Imma keep typing this out till I die. VESTED account balance - any loans (highest amount within the past 12 months).
That amount is subject to these thingies:
That ^ up to $10k
Then up to half of that ^ amount
Then up to $50k maximum
Which one of the following statements is correct about the repayment of a loan to a qualified plan or 403(b) plan?
A)
Loans from a qualified plan or TSA must be repaid over a period no longer than 8 years, and payments must be made at least once per year until the balance is repaid.
B)
Loans from a qualified plan or tax-sheltered annuity (TSA) must be repaid over a period not to exceed 5 years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly.
C)
Loans from a qualified plan or TSA must be repaid over a period not to exceed 10 years, unless the loan was for the purchase of a primary residence.
D)
Interest on retirement plan loans is generally deductible.
B
Cannot exceed five year repayment term, unless it’s used for a primary residence.
Loan payments have to be made QUARTERLY.
Retirement plan loan interest is generally not deductible. Probably because it’s for your own benefit (technically), since you’re putting the money into your own account. You shouldn’t be able to deduct that and pay it to yourself.
Which of these reasons for a distribution from an IRA would be 10% penalized as an early withdrawal?
A)
The plan owner becomes totally and permanently disabled
B)
A distribution made after age 55 and separation from service with an employer
C)
Made on or after the account owner attains age 59½
D)
Early distributions made for qualifying medical expenses exceeding 7.5% of the account owner’s adjusted gross income (AGI)
B
remember, the only plans that get that 55+ separation from service EWP exception on withdrawals are qualified plans and 403(b)s.
IRAs don’t care about your career.
Which of these statements regarding a nonspouse eligible designated beneficiary of an IRA is CORRECT?
A)
The nonspouse eligible designated beneficiary may rollover the IRA into his own IRA and defer distribution until attaining age 73.
B)
The nonspouse eligible designated beneficiary must take a lump-sum distribution in the year following the death of the participant-owner.
C)
The nonspouse eligible designated beneficiary must follow the 10-year payout rule.
D)
The nonspouse eligible designated beneficiary may elect to distribute the IRA over the remaining life expectancy of the beneficiary commencing the year following the year of death, reduced by one for each subsequent year.
d
A nonspouse eligible designated beneficiary may not rollover the IRA into his own IRA. While a lump-sum distribution or the 10-year payout are options for the nonspouse eligible designated beneficiary, they are not mandatory.
LO 6.4.1
Can you name the five types of people who can be Eligible Designated Beneficiaries?
Spouses
Minor Children
People who aren’t >10yrs younger than decedent
Disabled people
Chronically Ill - same qualifiers as with LTC
Just for the sake of my future sanity, here is that list:
If there are two (or more) of these six that you can’t perform for 90 days, you qualify for LTC coverage.
Eating
Toileting
Transferring from Bed to Chair (Not joking)
Showering/cleaning yourself
Dressing yourself
Maintaining Continence
OR
You become cognitively impaired
-Alzheimers, Dementia, Schizophrenia, Parkinsons, etc.
Since eligibility for EDB status can be determined via chronic illness, for which the same terms are used in LTC coverage, what are the ADLs? And what are the specifics of coverage?
There are six ADLs:
Eating, Dressing, Transferring (bed to chair), Toileting, Cleaning yourself, Continence.
You qualify for coverage (payout) if there are at least two of these things that you can’t do for a period of at least 90 days. Those 90 days are known as the elimination period, however different contracts can have different lengths here.
You ALSO Qualify for LTC if you develop a cognitive impairment including but not limited to: Alzheimers, Dementia, Parkinsons, Schizophrenia.
Which of the following will exempt a qualified plan distribution from the 10% premature distribution penalty?
A)
Part of a series of substantially equal periodic payments to be paid over the life expectancy of the individual
B)
Used to pay qualified higher-education expenses
C)
As a result of the individual incurring financial hardship, as that term is separately defined in IRS regulations
D)
Separation from service under a plan provision at age 50
a
Of these choices, a qualified plan distribution is exempt from the 10% premature distribution penalty if it is made as part of substantially equal periodic payments. The exception for qualified higher-education expenses applies only to IRA distributions. The separation from service exception only applies if the qualified plan participant is at least age 55 at the time of distribution. Hardship withdrawals are subject to the 10% early distribution rules. That is part of the hardship. It is also why a withdrawal from an IRA is better than a hardship withdrawal from an employer-provided retirement account to pay eligible college costs. The IRA withdrawal for qualified college expenses is not subject to the 10% early withdrawal penalty (EWP).
LO 6.1.1
A client, age 60, is electing to take early retirement this year. She participates in a profit-sharing plan sponsored by her employer that will provide her with a lump-sum distribution. She has been a participant in the plan for the past 12 years and has always invested her account 100% in stock mutual funds. If the distribution is made in a lump sum this year, what is an available option for the client?
A)
Because 100% of her account is invested in equities, she may make a net unrealized appreciation (NUA) election and receive favorable tax treatment for the distribution.
B)
Elect to treat a portion of the distribution as long-term capital gain income.
C)
Execute the lump-sum distribution as a tax-free loan and repay the loan over a 5-year period.
D)
Roll over the lump-sum distribution to an IRA.
d
The client’s only available option (from the given choices) is to roll over the lump-sum distribution to an IRA. The account is invested 100% in a mutual fund and does not qualify for an NUA election. NUA tax treatment is available only for a distribution of employer securities. The client does not have an option of executing the lump-sum distribution as a loan. Because this money is coming from an employer retirement plan other than a SEP or a SIMPLE IRA, “rolling” this money to an IRA is not an IRA-to-IRA rollover. Thus, this rollover would not count as an “IRA rollover.” However, it would be subject to the 20% withholding rules unless it is a direct rollover or a transfer. In all, the word “rollover” should be very scary. It is often used to mean moving money from one retirement account to another, but advisers should be moving retirement plan money with transfers and direct rollovers only.
LO 6.1.2
Which of these is not eligible for rollover treatment?
A)
A total distribution from a Section 401(k) plan
B)
A required minimum distribution payment
C)
The nontaxable portion of qualified plan distribution
D)
A distribution from an IRA
B
You can’t rollover an RMD
The answer is a required minimum distribution payment. All IRA and qualified plan distributions are eligible for rollover treatment except distributions made to satisfy the minimum distribution rules and distributions made as part of a series of substantially equal periodic payments. Required minimum distributions are not eligible for rollover treatment. The law states a nontaxable portion of a qualified plan distribution must be made using a trustee-to-trustee transfer because that is the only reliable way to provide documentation that this money was actually nontaxable.
LO 6.1.1
If the owner’s death occurs before the required beginning date, nonspouse eligible designated beneficiaries of qualified plans or IRAs may take distributions from the inherited plan accounts over the longer of which of these?
The beneficiary’s life expectancy, beginning in the year following the participant-owner’s death, reduced by 1 for each subsequent year
The 10-year rule, if the plan allows
A)
Both I and II
B)
II only
C)
I only
D)
Neither I nor II
Both
The answer is both I and II.
LO 6.4.1
Pat, age 45, is Joan’s only child. She is the primary beneficiary of Joan’s IRA. Joan died at 70. Pat does not need the money. How long can she stretch Joan’s IRA?
A)
Pat must take the first RMD in the next year, but she can stretch the IRA essentially over Pat’s life expectancy by subtracting 1 from the original Table I life expectancy each subsequent year.
B)
Pat is limited to the five-year rule.
C)
Pat can move the money into her own IRA and wait until she reaches 73 before starting RMDs.
D)
To December 31 of the year containing the tenth anniversary of Joan’s death.
D
As a healthy adult child of the deceased, Pat is a designated beneficiary, but she is not an eligible designated beneficiary. Thus, she is under the 10-year rule. The 10-year rule has two manifestations. The normal 10-year rule is the account must be emptied by December 31st of the year containing the tenth anniversary of the owner’s death. This rule applies when the owner dies prior to their RBD. This is the case here. The second type of ten-year rule applies when the owner dies on or after their RBD. In this case, the RMDs for years 1-9 are determined by the beneficiary’s life expectancy factor each year. Then the account must be emptied by December 31st of Year 10.
LO 6.4.1
Claudia’s vested Section 401(k) plan balance is $60,000. She wants to know her options for taking a loan from her plan to pay some college expenses for her daughter, Caroline. Which of these statements is CORRECT?
Claudia may borrow up to $30,000 from her Section 401(k) plan to pay for Caroline’s college expenses.
A plan loan is generally limited to half of the vested account balance of the plan participant, not to exceed $50,000.
All loan repayments for any loan must be in level installments payable at least quarterly.
If the rules for a plan loan are not followed, a plan loan may be deemed a taxable plan distribution and may also be subject to the 10% early withdrawal penalty.
A)
II and III
B)
I and II
C)
I and IV
D)
I, II, III, and IV
all
Which of these is CORRECT about an inherited IRA?
A)
A nonspouse beneficiary could take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59½.
B)
Any beneficiary of an IRA account can now roll over the account into an IRA in their own name.
C)
If the deceased passed away before their required beginning date (RBD), an adult child of the deceased could retitle the account “Tom Jones (deceased July 27, 2022) FBO Mary Jones,” and use her life expectancy with RMDs starting no later than December 31 following the date of death.
D)
The new owner of the inherited IRA may make contributions into the account if they have earned income.
a
Any beneficiary can take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59½. A healthy adult child of the deceased cannot be an eligible designated beneficiary; thus, Mary, as only a designated beneficiary, would be under the normal 10-year rule in which the account must be emptied on December 31st of the 10th year after the original owner’s death. Whether or not there were RMDs for the year of death and the Years 1-9 would be determined by when the owner died relative to their RBD. New contributions cannot be added to an inherited IRA. This rule prevents people from trying to dodge the 10% EWP by funding an inherited account and later taking an early withdrawal.
LO 6.4.1
Carrie retired last week and received a lump-sum distribution of her employer’s stock from the company’s stock bonus plan. The value of the shares at the time of contribution varied. The first contribution was 2,500 shares at $10 per share. The second consisted of 2,500 shares at $13 per share, and the last 2,500 shares were valued at $15 per share. All stock was contributed by the employer, and the current value of the stock on the date of her retirement is $22 per share. Because she is only 63 years old today, she wants to wait to sell the shares until she is 66. How much of the lump-sum distribution should Carrie report on her income tax return in the year of her retirement?
A)
Carrie has no basis in the shares and must report $165,000 in ordinary income.
B)
Carrie has held the stock long term and must report $165,000 in capital gains.
C)
Carrie has net unrealized appreciation (NUA) of $70,000 in the stock and must report $95,000 as ordinary income.
D)
Carrie must report $95,000 of ordinary income and $70,000 of capital gain.
C
The stock has a basis to the trust of $95,000, and the basis is taxed as ordinary income in the year of the lump-sum distribution, which now becomes her basis in the stock. The NUA will be taxed at the long-term capital gains rate when the stock is subsequently sold. If Carrie keeps the stock until age 66 as planned, the subsequent growth after the lump-sum distribution will also be taxed as long-term capital gain. The holding period for any subsequent growth after the lump-sum distribution begins on the date of distribution.
LO 6.1.2
Parrish Products would like to implement a retirement plan for its employees. The company has over 2,000 employees and would like to help them in saving for their retirement. The company chairman, Roger Parrish, is concerned about the administrative costs of the plan. He was recently informed by one of his colleagues that certain types of retirement plans are required to provide annuities to the participants and their beneficiaries. Which of the following qualified plans must provide qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs)?
Simplified employee pension (SEP)
Target benefit pension plan
Profit-sharing plan
Defined benefit pension plan
A)
I and III
B)
I, II, and IV
C)
I, II, III, and IV
D)
II and IV
II IV
SEPs and profit-sharing plans do not have to provide for preretirement or postretirement joint and survivor annuities because they are not pension plans. In this case, a “pension plan” is a category, not a single type of plan. Pension plans require mandatory annual funding each and every year. The other category besides pension plans is called “profit-sharing plans.” In this usage, a profit-sharing plan is a plan that does not require mandatory annual contributions. You can remember the pension plans as the “Be my cash target plans”: “B” for benefit in defined benefit plans, “M” for money purchase plans, “Cash” for cash balance plans, and “Target” for target benefit plans. This mnemonic device not only separates the pension plans and profit-sharing plans, but it can be extremely helpful in selecting retirement plans for a business. For example, if a firm cannot commit to mandatory annual funding, then the “Be my cash target plans” are eliminated.
Profit-sharing plans pay nonforfeitable balances to surviving spouses as an alternative provision to preretirement and postretirement joint and survivor annuities. Qualified pension plans must provide QJSA and QPSA benefits.
LO 6.4.2
After the required beginning date (RBD), what is the maximum penalty that applies to a required minimum distribution (RMD) from a qualified plan or an IRA that is insufficient in amount for the years 2023 and following?
A)
15% of the required minimum distribution
B)
25% of the difference between the required minimum distribution and the amount actually distributed
C)
25% of the remaining account balance
D)
10% of the earnings distributed
B
The nondeductible penalty tax amount on an insufficient required minimum distribution is 25% for the years 2023 and following. Previously it was 50% of the shortfall. The penalty can be reduced to 10% if the shortfall is withdrawn promptly. This penalty is assessed on the amount of the deficiency and not on the entire amount of the distribution.
LO 6.2.2
Given her uncle’s failing health, Martha has been thinking about the decisions she will need to make as the sole beneficiary of his $1 million IRA. She wants to ensure she ultimately uses these funds wisely for her retirement. Which of these will be an option for Martha upon her uncle’s death? Assume her uncle died after his required beginning date (RBD).
A)
She can use a direct trustee-to-trustee transfer into an IRA and defer any minimum distributions until she reaches her own RBD.
B)
She can take a tax-free lump-sum distribution.
C)
She can use a direct trustee-to-trustee transfer into an inherited IRA. Then she would have RMDs based on her life expectancy for Years 1-9 and the account must be emptied by the end of Year 10.
D)
She can use a direct trustee-to-trustee transfer into an IRA, but may not begin taking distributions without a penalty until she is age 59½.
C
Uncle died AFTER RBD, this means you gotta start taking the RMDs pretty quick and empty by year 10. If he had died before, I think it would just be “empty by Dec 31 of the year of the tenth anniversary of the death”.
A nonspouse beneficiary can use a direct trustee-to-trustee transfer of an IRA to an inherited IRA. RMDs are under the 10-year rule for when the original owner died on or after their required beginning date (RBD). This is the “complicated 10-year rule” in which the beneficiary must take any remaining RMD for the year of death. Then the RMDs for Years 1-9 are determined from the beneficiary’s life expectancy and the account must be emptied by the end of Year 10. Nonspouse beneficiaries may not defer distributions until they reach their own RBD. There is no early withdrawal penalty for distributions due to the death of the owner of an IRA. Thus, the 59½ age limit does not apply.
LO 6.4.1
A traditional Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of their salary simply by electing to contribute to the plan instead of receiving it in cash. Which of the following statements apply to traditional Section 401(k) elective deferrals?
Traditional Section 401(k) elective deferrals are immediately 100% vested and cannot be forfeited.
In-service withdrawals are to be made only if an individual has attained age 59½.
An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts.
A)
I only
B)
I and II
C)
I and III
D)
III only
c
Statement II is incorrect. A traditional Section 401(k) plan may allow in-service distributions prior to age 59½. For example, a 401(k) might allow hardship withdrawals. Very few employer plans will allow wily-nilly in-service withdrawals. The plan sponsor has a fiduciary reprehensibility for their retirement plan to be for retirement.
LO 6.1.1
Tony, age 65, works for Widget, Inc. He wants to defer his retirement from Widget, Inc., until age 78. Tony contributes 6% of his pay to the Section 401(k) plan, and his employer matches 100%. Which of these statements regarding Tony’s distribution options is CORRECT?
A)
Tony will be subject to a 10% early withdrawal penalty on distributions received from his Section 401(k) plan.
B)
Tony cannot contribute to his Section 401(k) plan after age 73.
C)
Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he attains age 73.
D)
Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he retires if he does retire after age 73.
D
Generally, an individual must receive his first minimum distribution by April 1 following the year the individual attains age 73 for 2023 and following. However, if the individual remains employed beyond age 73, he may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer’s qualified plan (not IRAs). Therefore, the other choices are incorrect. Also, this exception is not available if the individual is a greater-than-5% owner of the company sponsoring the retirement plan.
LO 6.2.1
Jerry and Cindy are divorced, and Cindy obtained a qualified domestic relations order (QDRO) assigning her 50% of Jerry’s qualified retirement plan benefit. How will the QDRO affect the benefits received from the plan?
If Cindy receives an early distribution from the plan pursuant to the QDRO, the distribution is tax exempt.
If Cindy receives an early distribution from the plan pursuant to the QDRO, the distribution is exempt from the 10% early distribution penalty.
Jerry becomes an alternate payee of the plan under the QDRO.
The QDRO may specify when Cindy receives the plan benefit (assuming this withdrawal is already allowed to the plan participants).
A)
II and IV
B)
I and III
C)
II and III
D)
I, II, and IV
a
Statement I is incorrect. Cindy will be required to pay income taxes on the distribution to the extent the distribution would have ordinarily been taxable. Statement II is correct. An early distribution from the plan that Cindy receives pursuant to the QDRO is exempt from the 10% early distribution penalty. Statement III is incorrect. Cindy becomes an alternate payee of the plan under the QDRO. Statement IV is correct. The QDRO may specify when Cindy may receive the plan benefit as long as that is an option the plan allows for everyone. In other words, Cindy cannot demand a distribution that is not offered by the retirement plan document.
LO 6.5.1
All of the following statements regarding interest charged to a plan participant for a loan from the participant’s qualified retirement plan account are correct EXCEPT
A)
Generally, interest on a loan from a qualified plan is nondeductible consumer interest for the participant-borrower.
B)
The interest on a retirement plan loan is paid back into the participant’s retirement account.
C)
Generally, loans from qualified plans must be repaid within 10 years, unless the loan is used to acquire a primary residence.
D)
Retirement plan loan payments are essentially taxed twice. The first time is when the loan payment is made because the loan payment is not deductible but it does not increase the participant’s basis. The second time is when the money is distributed out of the retirement account in retirement or sooner.
c
Generally, loans from qualified plans must be repaid within five years, unless the loan is used to acquire a primary residence. Retirement loan payments are taxed twice. First, the retirement plan loan is paid with after-tax money because the loan payment is not deductible. Second, this money will be taxed again when withdrawn.
LO 6.3.2
Mike participates in a Section 401(k) plan maintained by his employer. His vested account balance is $18,000, and he has not taken any plan loans. What is the maximum loan amount Mike can take from his Section 401(k) plan?
A)
$0
B)
$18,000
C)
$10,000
D)
$9,000
c
Any amount from vested up to $10k
Then up to 50%
Then up to $50k max
Thomas received a lump sum distribution of 10,000 shares of stock from his employer’s stock bonus plan valued at $1,000,000 when he separated from his employer at age 60. The cumulative value of the stock when contributed to the plan was $250,000. What are the tax consequences of this distribution?
$750,000 is treated as net unrealized appreciation (NUA).
The NUA amount is not taxed upon distribution from the plan.
Thomas’s adjusted basis in the shares is $250,000.
The $250,000 is taxable as ordinary income in the year of the lump sum distribution.
A)
I, II, III, and IV
B)
I and II
C)
III and IV
D)
I, II, and III
a
All of the statements are correct. $750,000 ($1,000,000 − $250,000) is treated as NUA, which is not taxed upon distribution and is taxed at the capital gains rate upon sale of the stock. The $250,000 value of the stock is taxable as ordinary income in the year of the lump sum distribution. Thomas’s adjusted basis in the shares is $250,000 (the amount of the ordinary income taxable event). If Thomas sells the shares, any gain subsequent to the lump sum distribution will be subject to capital gains tax (either short-term or long-term depending on how long he holds the shares after the distribution before selling). The NUA amount is always treated as a long-term capital gain.
LO 6.1.2
Mark attained age 73 this year. He does not plan to retire from his position with Big Trucks Inc. until his birthday on December 1 of next year, when he will be 74. Mark is an 8% shareholder in Big Trucks. When must Mark begin to receive required minimum distributions (RMDs) from his qualified retirement plan at Big Trucks?
A)
Because Mark is a greater than 5% shareholder in Big Trucks, he must receive his first RMD by April 1 of next year.
B)
Because Mark is still employed by Big Trucks, he is not required to take his first RMD until December 31 of the year he actually retires from Big Trucks.
C)
Mark is not required to receive his first RMD until December 31 of the year following his actual retirement date from Big Trucks.
D)
Mark is not required to begin his RMDs until April 1 of the year following his actual retirement from Big Trucks.
Non-owner participants in qualified plans, Section 403(b) plans, and governmental Section 457 plans may defer the required beginning date until April 1 following the year of retirement, if the participant continues to work after attaining age 73 according SECURE 2.0 for 2023 and following. However, if the employee-participant is a greater than 5% owner of the business sponsoring the retirement plan, the RMD may not be deferred, but must be taken by April 1 of the year after the employee attains age 73. Traditional IRAs, however, must always start RMDs based on 73 being the trigger year. Roth assets never have a RBD. That has always been the case with Roth IRAs. SECURE 2.0 deleted the requirement for employer Roth accounts to have a RBD effective Jan 1, 2024.
LO 6.2.1
