Module 6 Plan Distributions Flashcards

Question

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.

Answer 1

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.

Answer 2

Neither Roths don't have RMDs. As long as he earns income, he can contribute to the Roth.

Answer 3

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

Answer 4

Yea that ^

Answer 5

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

Answer 6

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

Answer 7

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

Answer 8

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

Answer 9

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

Answer 10

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

Answer 11

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

Answer 12

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

Answer 13

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

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

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

Answer 19

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

Answer 20

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

Answer 21

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

Answer 22

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

Answer 23

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

Answer 24

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

Answer 25

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

Answer 26

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

Answer 27

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

Answer 28

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

Answer 29

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.

Answer 30

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

Answer 31

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

Answer 32

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

Answer 33

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

Answer 34

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

Answer 35

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

Answer 36

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

Answer 37

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

Answer 38

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

Answer 39

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

Answer 40

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

Answer 41

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

Answer 42

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

Answer 43

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

Answer 44

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.

Answer 45

Yes ^ That.

Answer 46

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

Answer 47

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

Answer 48

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

Answer 49

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.

Answer 50

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).

Answer 51

No, unless you default and don't have an exception.

Answer 52

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.

Answer 53

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

Answer 54

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

Answer 55

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

Answer 56

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

Answer 57

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

Answer 58

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

Answer 59

The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs. LO 6.1.1

Answer 60

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

Answer 61

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

Answer 62

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

Answer 63

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

Answer 64

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

Answer 65

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.

Answer 66

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.

Answer 67

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

Answer 68

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.

Answer 69

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.

Answer 70

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

Answer 71

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

Answer 72

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

Answer 73

Both The answer is both I and II. LO 6.4.1

Answer 74

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

Answer 75

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

Answer 76

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

Answer 77

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

Answer 78

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

Answer 79

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

Answer 80

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

Answer 81

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

Answer 82

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

Answer 83

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

Answer 84

c Any amount from vested up to $10k Then up to 50% Then up to $50k max

Answer 85

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

Answer 86

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