Module 7 Quiz Flashcards
The IRS permits hardship withdrawals from 401(k) plans in cases of “immediate and heavy financial need.” Which of the following is not considered immediate and heavy?
A) Purchase of a primary residence
B) Payments to prevent defaulting on a mortgage for a vacation home
C) Medical expenses
D) Tuition payments
B) Payments to prevent defaulting on a mortgage for a vacation home
Although payments to prevent eviction from a primary residence are considered immediate and heavy, payments for a vacation home are not. The other options are considered immediate and heavy expenses.
In-service withdrawals prior to age 59½ are not permitted from which of the following plans?
A) Cash balance plans
B) Employee stock ownership plans (ESOPs)
C) Profit sharing plans
D) Stock bonus plans
A) Cash balance plans
In-service withdrawals at any age may be permitted from profit sharing plans (including ESOPs and stock bonus plans), assuming certain other requirements are met. In-service withdrawals prior to age 59½ are not permitted from any pension plan, including cash balance plans.
Before rolling assets from an employer sponsored plan to an IRA, one should consider which of the following?
A) The difference in RMD rules that apply to the two savings vehicles
B) All of the options.
C) The difference in creditor protection between the two savings vehicles
D) The difference in when the 10% penalty will apply to distributions
B) All of the options.
Prior to doing a rollover of assets from an employer plan to IRA, there are a number of factors that need to be considered and compared. These include an examination of fees, services offered, investment options, when penalty free withdrawals are available, when required minimum distributions may be required, and protection of assets from creditors.
Taxes may be deferred on a qualified plan distribution if it is rolled over to an IRA, TSA, SEP, governmental 457 plan, or to another qualified plan. All are true regarding rollovers EXCEPT
A) funds rolled over continue to enjoy asset protection from general creditors.
B) they generally result in less money for retirement.
C) rolling/transferring the retirement account of a former employer into an IRA instead of spending the money reduces the leakage of retirement assets.
D) distributions must be transferred to a new account no later than 60 days after receipt.
B) they generally result in less money for retirement.
Rollovers generally result in more money for retirement. Tax deferral enables the entire distribution to continue to earn tax-deferred money. Taking a lump-sum distribution results in immediate taxation. Amounts distributed from qualified plans must be transferred to a new account within 60 days of receipt to avoid taxation. All distributions from tax-deferred plans lose their protection from general creditors. Keeping retirement plan money in retirement accounts after leaving an employer reduces the leakage from retirement accounts.
All of the following are disadvantages to performing an indirect rollover from a qualified plan to an existing IRA EXCEPT
A) the amount being rolled over might have a delay in processing that took the rollover over the 60-day limit.
B) the entire distribution will be subject to immediate taxation.
C) 20% of the gross distribution will be withheld for taxes.
D) the rollover must be completed within a 60-day period to avoid being taxed.
B) the entire distribution will be subject to immediate taxation.
By rolling over assets to an existing IRA, the plan assets less the amount withheld escape immediate taxation. Taxes are deferred until the participant begins withdrawing money. A mandatory 20% withholding is imposed on a qualified plan distribution if the plan issues a check to the participant. Finally, if an indirect rollover is not completed within 60-days the full distribution amount will be taxed.
Not all distributions from a qualified plan may be rolled over into a traditional IRA. Which one of the following distributions is an “eligible rollover distribution”?
A) The vested cash balance in the plan
B) The taxable cost of life insurance provided by the plan
C) Dividends on employer securities held by the plan that are distributed in cash to participants
D) Distributions that are part of substantially equal periodic payments for the life of the participant
A) The vested cash balance in the plan
The participant’s vested cash balance in the plan may be rolled over to an existing IRA. Distributions that are part of a series of substantially equal payments for the life of the participant or the joint lives of the participant and the participant’s designated beneficiary are not eligible to be rolled over. Hence, such distributions are not eligible rollover distributions. Neither are dividends on employer securities held by the plan that are distributed in cash to participants or the taxable cost of life insurance provided by the plan.
When is the designated beneficiary officially determined?
A) September 30 of the year following the participant’s death.
B) April 1 of the year following the participant’s death.
C) December 31 of the year following the participant’s death.
D) December 31 of the year of the participant’s death.
A) September 30 of the year following the participant’s death.
The designated beneficiary is determined on September 30 of the year following the participant’s death.
Distributions from qualified plans, 403(b) plans, SEPs, SIMPLEs, and IRAs are assessed a 10% penalty if they are taken before age 59½. There are exceptions to this rule. Which of the following is NOT an exception to this penalty?
A) The distribution is made to pay homeowners insurance.
B) Distributions are made as a series of substantially equal periodic payments over the participant’s life expectancy.
C) The plan participant dies prior to age 59½ and the distribution goes to the participant’s beneficiary.
D) The distribution is attributed to a total permanent disability.
A) The distribution is made to pay homeowners insurance.
Distributions for the purpose of paying homeowners insurance would be assessed the 10% penalty. Distributions for the other stated reasons would be exempt from the 10% early withdrawal penalty.
Which of the following is not a step in determining the best plan distribution option?
A) Calculate plan payments and tax implications under each available option
B) Review the distribution options
C) Project cash needs and sources of income
D) Compare the options to what the plan may offer in the future
D) Compare the options to what the plan may offer in the future
Reviewing the distribution options is the first step in determining the best plan distribution option. In order, the other steps are (2) project cash needs and sources of income, (3) calculate plan payments and tax implications, and (4) determine which option is most suitable. Comparing options that may be available in the future is not one of the steps.
Once selected, beneficiaries of a qualified profit sharing plan can be changed
A) never; this is an irrevocable decision.
B) at any time.
C) during open enrollment.
D) once a year.
B) at any time.
Beneficiaries of a qualified profit sharing plan, normally, can be changed at any time.
Participant loans are permitted from
A) SEPs and qualified plans.
B) qualified retirement plans and IRAs.
C) IRAs and 403(b)s.
D) qualified plans and 403(b)s.
D) qualified plans and 403(b)s.
Participant loans are permitted from qualified plans and 403(b)s but they are not permitted from IRAs, including SEPS.
Which of the following statements is correct about qualified joint survivor annuities (QJSAs)?
A) Only defined benefit plans must offer QJSAs.
B) All pension plans must offer QJSAs.
C) All defined benefit and defined contribution plans must offer QJSAs.
D) Only profit sharing plans must offer QJSAs.
B) All pension plans must offer QJSAs.
All pension plans, which include defined benefit, cash balance, money purchase, and target benefit plans, must offer QJSAs.
Which of the following events would result in income taxation to a plan participant?
A) The participant takes a distribution from a qualified plan and rolls it over into an IRA 75 days later.
B) The participant accepts a check made out to the trustee of an IRA and delivers it to the trustee one day later.
C) The participant rolls over his or her assets into a conduit IRA, then rolls over the assets into another qualified plan.
D) The participant uses a direct transfer to move his or her plan assets from one qualified plan to another.
A) The participant takes a distribution from a qualified plan and rolls it over into an IRA 75 days later.
A participant who waits more than 60 days to roll over a distribution will be subject to a 10% penalty (assuming the participant is under age 59½) and income taxation. Use of a conduit IRA or direct transfer to transfer money between qualified plans does not result in income taxation to the plan participant. Also, accepting a check made out to an IRA trustee and delivering the check is a permissible way to affect a direct transfer without imposing income tax upon the plan participant.
The funds from a 403(b) plan may be rolled over into all of the following EXCEPT
A) an IRA.
B) a nongovernmental 457 plan.
C) a conduit IRA.
D) another 403(b) plan, qualified plan, SEP, IRA, or 457 plan that accounts for rollovers separately.
B) a nongovernmental 457 plan.
Funds from a 403(b) may not be rolled over into a nongovernmental 457 plan. They may be rolled into another 403(b) plan, an IRA, qualified plan, SEP, 457 plan that accounts for rollovers separately, or a conduit IRA.
Jeffrey died when he was 70. He has named his daughter, age 48, as the sole beneficiary of his IRA. Which one of the following statements is correct regarding her options for this IRA according to the SECURE Act?
A) As a designated beneficiary she must distribute the full account balance within 10 years.
B) She can roll over the proceeds to an IRA in her own name.
C) She can calculate her annual minimum distribution requirement using the Uniform Life Expectancy table.
D) She must calculate her annual minimum distribution requirement using the fixed-term method.
A) As a designated beneficiary she must distribute the full account balance within 10 years.
Under the SECURE Act, a healthy adult child of the deceased owner who passes away prior to their required beginning date is under the “Simple 10-Year Rule.” The only RMD requirement is that the inherited account must be emptied by December 31st of the year containing the tenth anniversary if the death. If Jeffrey would have died on or after his RBD, his beneficiary would be under the “Complicated 10-Year Rules.” First, there is an RMD for the year of death. This is the Table III RMD established when he lived into the new year. If the decedent had not taken the full RMD, the beneficiary must take the remaining amount. The year of death can be thought of as “Year 0.” Second, the beneficiary will go into Table I to determine their life expectancy for Year 1. This is the only time a nonspouse will ever go into Table I. To determine the Year 2 life expectancy factor, subtract 1 from the Year 1 factor. Years 3-9 will always subtract one from the previous year’s life expectancy factor. Finally, Year 10 is like the “Simple 10-Year Rule.” Just empty the account by the end of the year.
