Module 7 - Quiz

Question 1

Employee elective deferrals to a 401(k) may be subject to which of the following vesting schedules?

1) 3 year cliff vesting
2) 2 to 6 year graded vesting
3) immediate vesting

Answer 1

3) immediate vesting

- Employee deferrals are always 100% vested to the employee.

Question 2

Which one of the following retirement plan distributions is subject to 20% withholding?

1) a rollover of IRA assets from one IRA to another
2) a lump sum distribution from a 401(k) plan
3) a direct transfer of IRA assets between IRA custodians

Answer 2

2) a lump sum distribution from a 401(k) plan
- 401(k) retirement plan benefits that are paid (or made payable) to an employee (instead of the IRA custodian) in the form of a lump sum distribution are subject to 20% withholding.

Question 3

Which one of the following would an individual receive at full retirement age (FRA)?

1) PIA
2) AIME
3) RMD

Answer 3

1) PIA
- The primary insurance amount (PIA) is the dollar amount that one would receive at FRA.

> AIME stands for average indexed monthly earnings and is the inflation-adjusted average wages on which the worker has paid Social Security taxes, and it is used to then calculate the benefit that the individual would receive at FRA, which is called the primary insurance amount (PIA).

> RMD stands for required minimum distribution.

Question 4

What is the potential maximum contribution that a 51-year-old individual could make to an IRA account in 2019?

1) $5,000
2) $6,000
3) $7,000

Answer 4

3) $7,000
- The maximum IRA contribution amount is $6,000, but there is also a $1,000 catch-up contribution amount available for those who are age 50 or older. The maximum contribution for a 51-year-old would then be $7,000.

Question 5

T / F - The plan only allows employer contributions.

Answer 5

True - Only employer contributions are allowed with SEP-IRAs—employees cannot contribute. Each employee has their own IRA account and can take distributions whenever they want.

Question 6

T / F - The plan works well for small business because of its simplicity.

Answer 6

True - The SEP-IRA is a simple plan to administer. Each employee has their own IRA and can take distributions whenever they want.

Question 7

T / F - Employees can take distributions from their account only with the employer’s permission.

Answer 7

False - Each employee has their own IRA and can take distributions whenever they want—they do not need their employer’s permission.

Question 8

Which one of the following is not a primary source of retirement income?

1) employer-provided retirement plans
2) Medicare
3) savings and investments

Answer 8

2) Medicare
- The three primary sources of retirement income are savings and investments, employer-provided retirement plans, and Social Security. Medicare is health insurance for individuals age 65 and older—it is not a source of income.

Question 9

What would Henry’s retirement benefit be if his highest years of compensation average was $77,000, he had been working for the company for 33 years, and he received 2% of compensation for each year of service as his retirement benefit?

1) $46,540
2) $48,800
3) $50,820

Answer 9

3) $50,820

77,000 x .02 per year x 33 years of service = $50,820

Question 10

Echo Industries provides a 50% match on employee contributions that are up to 5% of employee compensation in the company’s 401(k) plan. John makes $40,000 per year and has contributed $2,500 to the 401(k) plan this year. How much will John’s match be?

1) $1,000
2) $1,250
3) $ 2,500

Answer 10

1) $1,000
- The company matches up to 5% of compensation. 5% of John’s $40,000 a year salary is $2,000. The company will then match 50% up to $2,000, which in John’s case would be $1,000. There is no match on the additional $500 that John has deferred into the plan.

Question 11

Which one of the following plans cannot be used by tax-exempt organizations, such as public schools?

1) 403(b) plan
2) IRA
3) 457 plan

Answer 11

2) IRA
- Both 403(b) and 457 plans can be used by nonprofit organizations. IRAs are individual retirement accounts, and they are established by the individual, not an organization.

Question 12

T / F - Most profit sharing plans are contributory.

Answer 12

False - In a contributory plan, the employee may contribute to the plan. Usually, only the employer contributes to a profit sharing plan. If the plan has 401(k) provisions, then the employees may contribute.

Question 13

T / F - In a profit sharing plan, the contribution percentage is fixed.

Answer 13

False - The contribution percentage in a profit sharing plan can be varied from year to year.

Question 14

T / F - An employer is expected to make contributions to a profit sharing plan on a recurring and substantial basis.

Answer 14

True - While the percentage of contributions to a profit sharing plan may vary, the IRS expects an employer to make contributions to a profit sharing plan on a recurring and substantial basis.

Question 15

Which one of the following retirement plans has the lowest limit on employee elective contributions in 2019?

1) SIMPLE IRA
2) 401(k) plan
3) 403(b) plan

Answer 15

1) SIMPLE IRA
- Employee elective contributions to a SIMPLE IRA are limited to $13,000 in 2019.

> Employee elective contributions to a 401(k) plan are limited to $19,000 in 2019.

> Employee elective contributions to a 403(b) plan are limited to $19,000 in 2019.

Question 16

What is the required minimum distribution for Barbara if her account balance at the end of the previous year was $336,000, and her life expectancy is 24.7 years based on her being age 73 at the end of the current year?

1) $4,603
2) $11,704
3) $13,603

Answer 16

3) $13,603

336,000 / 24.7 = 13,603.24

Question 17

What is the limit on contributions to a traditional IRA for a single person who earns $1,500 per year?

1) $200
2) $1,500
3) $5,500

Answer 17

2) $1,500
- Contributions can be made up to the lesser of $6,000 or 100% of earned income (for someone who earns less than $6,000 per year). So if a person earned only $1,500 in a year, the most they could contribute to an IRA would be $1,500.

Question 18

What is the deadline for making contributions to a traditional IRA in a given year?

1) December 31st
2) April 15th of the following year
3) October 15th of the following year (up to the due date of the tax return, including extensions)

Answer 18

2) April 15th of the following year
- Contributions for a prior tax year must be made no later than April 15th of the following year.

> There is no extension available for IRA contributions.

Question 19

According to surveys, what is the percentage of retirees who say that health care costs in retirement are higher than they anticipated?

1) roughly 20%
2) roughly 40%
3) roughly 90%

Answer 19

2) roughly 40%
- According to a 2018 retirement survey conducted by the Employee Benefit Research Institute, worker confidence in being able to afford medical care during retirement is weakening, with four in 10 retirees saying that medical expenses are higher than they expected.

Question 20

When combined, which of the following demographic groups comprise the largest portion of the U.S. population?

1) baby boomers and GenXers
2) baby boomers and millennials
3) millennials and GenExers

Answer 20

2) baby boomers and millennials

Question 21

T / F - There is an increasing trend toward employee contributory plans.

Answer 21

True - We are seeing an increasing trend toward employee contributory plans, like 401(k)s. Pension plans that offer guarantees, and are fully funded by the employer, are going away. Employees are being enrolled in profit sharing plans, which provide lower benefits, along with 401(k) or other similar plans (such as 403(b) plans for nonprofits), which may or may not offer company matches of employee contributions.

Question 22

T / F - Social Security is a funded system with savings accounts set up for worker contributions.

Answer 22

False - Social Security is a “pay-as-you-go” system.

Question 23

T / F - Guaranteed retirement benefit levels in the workplace have remained the same.

Answer 23

False - Guaranteed retirement benefit levels, such as those offered by pension plans, are decreasing in the workplace.

Question 24

Irene, age 60, has made deposits totaling $18,000 into a Roth IRA account. The account is now worth $24,500. Irene withdraws $10,500 to help purchase a car. How much of this withdrawal is taxable?

1) $0
2) $2,000
3) $4,000
4) $6,500

Answer 24

1) $0
- Principal is always deemed to be withdrawn first from a Roth IRA, meaning Irene could have withdrawn up to $18,000 without any tax consequences.

Question 25

Which one of the following is an exception from the 10% early withdrawal penalty that applies to all retirement plans?

1) funds used for a business
2) funds used for higher education costs
3) full and complete disability of the account owner

Answer 25

3) full and complete disability of the account owner
- Death and disability are exceptions from the 10% early withdrawal penalty for all retirement plans. The exception for higher education costs only applies to IRA accounts. Funds used for a business are not listed as an exception for any retirement plan.

Question 26

Assume that a worker’s Social Security full retirement age is 67, and the worker retires and starts drawing Social Security early at age 64. What are the consequences?

1) the worker receives a reduced benefit starting at age 64 but will still receive the full benefit starting at age 67
2) the worker receives the full benefit at age 64, but receives a reduced benefit starting at age 70
3) the worker receives a reduced benefit for the rest of his / her life

Answer 26

3) the worker receives a reduced benefit for the rest of his / her life
- If a worker starts Social Security retirement benefits early (as early as age 62 is allowed), then he or she will receive a reduced benefit, which will continue for life. This reduced benefit will be adjusted for inflation each year.

Question 27

To be eligible for Social Security retirement benefits one must be

1) currently insured
2) fully insured
3) either currently or fully insured

Answer 27

2) fully insured
- One must be fully insured in order to be eligible for Social Security retirement benefits. Currently insured status will provide coverage for survivor benefits.

Question 28

T / F - Distributions from a deductible IRA must commence on or before April 1 of the year before the owner reaches 70½.

Answer 28

False - Distributions from a deductible IRA must commence on or before April 1 of the year following the year in which the owner reaches 70½.

Question 29

T / F - A deductible IRA owner must pay a 50% penalty tax on any missed required minimum distributions (RMDs).

Answer 29

True - A deductible IRA owner must pay a 50% penalty tax on any missed required minimum distributions.

Question 30

T / F - Roth IRA owners are subject to the age 70½ minimum distribution requirements.

Answer 30

False - Roth IRA owners are not subject to the age 70½ minimum distribution requirements.

Question 31

If an IRA owner’s required minimum distribution (RMD) is $20,000, but only $6,000 was withdrawn in a year, what is the penalty for failure to take the full minimum required distribution?

1) $3,000
2) $7,000
3) $10,000

Answer 31

2) $7,000
- A penalty of $7,000 [50% ($20,000 – $6,000)] would be due on the “missing” remainder of the minimum required distribution.

Question 32

When is an individual most vulnerable to a large loss?

1) while saving for retirement
2) at the beginning of retirement
3) 10 years into retirement

Answer 32

2) at the beginning of retirement
- Individuals are most vulnerable to large losses at the beginning of retirement, as adjustments may have to be made right at the beginning of what could be a long retirement period. A large loss while saving for retirement could be dealt with by continuing to work and save. A large loss 10 years into retirement, while not desirable, is still not as severe as a large loss at the beginning of retirement because 10 years of retirement expenses have already been paid.

Question 33

At what age does an individual become entitled to Medicare benefits?

1) 62
2) 65
3) 67

Answer 33

2) 65
- Age 65 is the earliest age for Medicare coverage. Medicare coverage is an important consideration in the decision of when to retire. For example, a 63-year-old client covered by an employer-sponsored group medical plan may need to delay retirement to age 65 (the earliest age for Medicare coverage) rather than go two years without medical coverage.

Question 34

If a retiree’s annual Social Security benefit is $9,000 at age 62, and $9,600 at age 63, how many years would it take to equal the benefit of forgoing a year of payments (waiting one more year to receive a larger payment), not including inflation?

1) 11 years
2) 13 years
3) 15 years

Answer 34

3) 15 years
- $9,000 divided by the extra amount ($600) equals 15 years to equal the same benefit taking the larger amount the next year.

9,000 / 600 = 15

Question 35

The risk that one might outlive their assets is called

1) mortality risk
2) longevity risk
3) event risk

Answer 35

2) longevity risk
- The risk that one might outlive their assets is called longevity risk.

> Mortality rates (the age and rate at which people die) are used by insurance companies to price products such as life insurance and calculate annuity income streams. The risk that one might outlive their assets is called longevity risk.

> Event risk is the risk that an event may negatively affect an investment, such as forest fire keeping away tourists, which then impacts the level of business at a store in a town near the fire. Event risk also occurred in a big way in 2008, with the meltdown of the financial markets. The risk that one might outlive their assets is called longevity risk.

Question 36

Pitfalls to having enough assets to live a comfortable retirement include all of the following except

1) inheritances
2) fraud
3) lump sum distributions from retirement accounts
4) large losses early in retirement

Answer 36

1) inheritances
- An inheritance would increase assets and be a benefit, not a pitfall.

> Fraud is a concern with seniors in retirement, especially if dementia is a problem.

> Having taken sums of money from retirement accounts before retirement means that there is less to draw upon in retirement.

> The most problematic time to have large investment losses is early in retirement. Managing risk in the first decade of retirement is extremely important.

Question 37

T / F - A simplified employee pension (SEP) allows employer and employee contributions.

Answer 37

False - SEPs only allow the employer to make contributions to the plan.

Question 38

T / F - With a defined benefit pension plan a separate account is set up for each participant.

Answer 38

False - Defined benefit plans are just one account—contributions are paid into a general trust fund that is then used to pay out and provide any promised benefits.

Question 39

T / F - With two-to-six-year graded vesting a plan participant would be 60% vested after four years.

Answer 39

True - Starting with the second year there is 20% vesting each year with two-to-six-year graded vesting. This means that a plan participant would be 40% vested after three years, 60% vested after four years, 80% vested after five years, and 100% vested after six years

Question 40

T / F - A SIMPLE IRA allows the employer to make flexible contributions to the plan

Answer 40

False - SIMPLE IRAs are easy to establish but have mandatory contribution requirements for the employer. The employer must either match up to the first 3% of compensation of the employee that the employee contributes to the plan or make a 2% nonelective contribution to everyone eligible to be in the plan, regardless of whether they contribute or not.

Question 41

Social Security benefits are increased annually based on increases in the cost of living. This is called a(n)

1) RMD
2) PIA
3) COLA
4) FRA

Answer 41

3) COLA
- COLA stands for cost of living adjustment.

> RMD stands for required minimum distribution.

> PIA stands for primary insurance amount.

> FRA stands for full retirement age.