Other Tax-Advantaged Retirement Plans - Review Questions

Question 1

When is an IRA used? (Check all that are true.)

1) To shelter earned income from taxation
2) To defer taxes on investment income
3) For long-term accumulation
4) As an alternative to a nonqualified pension

Answer 1

1) To shelter earned income from taxation
2) To defer taxes on investment income
3) For long-term accumulation

IRAs are used:

to shelter earned income from taxation,
to defer taxes on investment income,
for long-term accumulation, and
as an alternative to a qualified pension.

Question 2

Participation in which of the following retirement plans may affect the deductibility of an IRA? (Select all that are true.)

1) Qualified retirement plan
2) 457 plan
3) SEP
4) Section 403(b) tax-deferred annuity plan
5) SIMPLE IRA
6) Nonqualified retirement plan

Answer 2

1) Qualified retirement plan
3) SEP
4) Section 403(b) tax-deferred annuity plan
5) SIMPLE IRA

Current law imposes income limitations on the deductibility of traditional IRA contributions for those persons who are “active participants” in an employer retirement plan that is tax-favored. This includes a qualified retirement plan, simplified employee pension (SEP), Section 403(b) tax-deferred annuity plan or SIMPLE IRA.

Question 3

Assume that Mr. and Mrs. Rogers both participate in qualified retirement plans and that their combined modified adjusted gross income (MAGI) in 2024 is $194,000. Which of the following statements is correct?

Choose the best answer.

1) They may contribute to an IRA but the contribution is not deductible.
2) They may make a contribution to an IRA but the contribution is limited.
3) They may make a contribution to an IRA, but only to the extent allowed under IRS Code Section 415.
4) They may not contribute funds to an IRA.

Answer 3

1) They may contribute to an IRA but the contribution is not deductible.

The Rogers may contribute to an IRA but the contribution is not deductible. Deductible contributions are fully phased out in 2024 when MAGI exceeds $143,000 for active participants. However, spouses can make contributions to traditional IRAs based on either their own income or their spouse’s income.

Question 4

In the case where one spouse is an active participant in an employer-sponsored plan, when does a non-active participant spouse filing a joint return receive a full IRA deduction?

Answer 4

If the joint income is less than $230,000 ( as of 2024)

Question 5

When does the non-participant spouse receive a partial deduction for his or her contribution?

Answer 5

If the joint income is between $230,000 - $240,000 ( as of 2024)

Question 6

Assuming the 5-year holding period has been met, when are withdrawals from a Roth IRA tax-free in their entirety? Click all that apply. (Check all that are true.)

1) After a three-year wait
2) Upon death or disability
3) First-time home-buying expense
4) After the age of 55

Answer 6

2) Upon death or disability
3) First-time home-buying expense

Withdrawals are tax-free in their entirety in a Roth IRA after a five-year wait, and either:

Upon death or disability
First-time home-buying expense (limited to $10,000)
After the age of 59½

Question 7

Assume that in 2024, Kate, age 35, contributes $2,000 to a traditional deductible IRA. How much can she contribute to a Roth IRA for 2024 if the payment is made before April 15, 2025?

Answer 7

$5,000

The maximum Roth-IRA contribution for an individual is the lesser of the dollar limit for 2024 ($7,000) or 100% of the individual’s earned income. Since Kate has contributed $2,000 to a traditional deductible IRA, she can only contribute an additional $5,000 ($7,000 − $2,000 = $5,000) to a Roth-IRA for 2024.

Question 8

What is the tax treatment of a distribution to a beneficiary of a seven year old Roth-IRA following the owner’s death?

Choose the best answer.

1) Taxed as ordinary income
2) Taxed at capital gains rate
3) Tax-free

Answer 8

3) Tax-free

Distributions to beneficiaries after the owner’s death are tax-free to the recipients, but they lose their character as Roth IRAs when distributed. Had the Roth-IRA been established for less than five years, any gain would be taxable at the owner’s death.

Question 9

SEPs must be adopted in the year in which they are to be effective.

Choose the best answer.

True
False

Answer 9

False

SEPs can be adopted as late as the tax return filing date, including extensions, for the year in which they are to be effective.

Question 10

Which of the following statements are true in regards to employer contributions for a SEP? (Check all that are true.)

1) No specific employer amount
2) Specific employer amount
3) Can omit a contribution
4) Must contribute every year

Answer 10

1) No specific employer amount
3) Can omit a contribution

An employer offering a SEP does not have to contribute a specific amount or make contributions every year.

Question 11

The maximum contribution an employer may make to a SEP-IRA plan in 2024 is:

Choose the best answer.

1) 10% of income decreased from 15% to 10%
2) Unlimited
3) Increased from 15% to 20%
4) Lesser of 25% of compensation or $23,000
5) Lesser of 25% of compensation or $69,000

Answer 11

5) Lesser of 25% of compensation or $69,000

Question 12

The limit on a SIMPLE IRA is the same as it is for contributions to a traditional or Roth IRA.

True.
False.

Answer 12

False.

Unlike traditional and Roth IRAs, the SIMPLE IRA is limited to $16,000 in 2024. Workers age 50 or older can make additional catch-up contributions of $3,500, for a total of $19,500.

Question 13

Which plans may the employer not maintain if he maintains a SIMPLE IRA?

Answer 13

Qualified plan, SEP, 403(a) annuity, 403(b) tax sheltered annuity or a governmental plan. Exception to the governmental plan exclusion is the Section 457 plan.

Question 14

Which of the following statements are true regarding SIMPLE IRAs? (Check all that are true.)

1) Annual contributions are generally lower than amounts that would be available in a qualified plan.
2) The catch-up contribution limits are greater for SIMPLE IRAs (and SIMPLE 401(k) plans) than for traditional
401(k) plans and 403(b) plans.
3) Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified
plan distributions.
4) Distributions from SIMPLE IRAs are eligible for special 10-year averaging available for certain qualified plan
distributions.

Answer 14

1) Annual contributions are generally lower than amounts that would be available in a qualified plan.
3) Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified
plan distributions.

Annual contribution restrictions are generally less than amounts that would be available in a qualified plan. In addition, the catch-up contribution limits are also less for SIMPLE IRAs (and SIMPLE 401(k) plans) than for traditional 401(k) plans and 403(b) plans. Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified plan distributions.

Question 15

Which of the following items is a SIMPLE-IRA limitation?

Choose the best answer.

1) Percentage limitation
2) Limitation of Section 404(a)
3) Limitation of Section 415
4) Dollar limitation

Answer 15

4) Dollar limitation

In 2024, the dollar limit for employee deferrals is $16,000.

Question 16

What taxes are direct employer contributions not subject to? (Check all that are true.)

1) FICA
2) Capital Gains Tax
3) Federal Income Tax
4) FUTA

Answer 16

1) FICA
2) Capital Gains Tax
3) Federal Income Tax
4) FUTA

Direct employer contributions are not subject to any of the taxes listed.

Question 17

Name nonprofit institutions that are eligible to adopt a 403(b) plan? (Check all that are true.)

1) Churches
2) Hospitals
3) C Corporation
4) Private College
5) S Corporation
6) Charitable institution

Answer 17

1) Churches
2) Hospitals
4) Private College
6) Charitable institution

Nonprofit institutions such as churches, hospitals, private schools and colleges, and charitable institutions are eligible to adopt a 403(b).

Question 18

A business owner client with two employees needs information regarding contributions to her SEP-IRA for the 2024 tax year. The business owner expects to have $23,000 in self-employment income, while each of her employees should earn $40,000 in W-2 income. One employee, Employee A, has been working for the business for four years earning between $30,000 and $40,000 per year. Employee B joined the business last year, and has been employed for 15 months. The plan was established using Form 5305-SEP. Which of the following correctly describes how this business owner can maximize contributions to her own account, while minimizing contributions to her employees?

Choose the best answer.

1) The business owner’s contribution is limited to $23,000 per year, while each employee would then have to
receive a contribution equal to 10% of their income as $23,000 equals 10% of the owner’s gross
compensation.
2) The business owner may contribute 25% of her own compensation, but would also have to contribute 25% of
compensation for each of her two employees.
3) The business owner may contribute 20% of compensation net of one-half of her self-employment tax, and
would be required to contribute 25% of compensation for Employee A only.
4) The business owner may contribute 25% of her own compensation net of the deductible portion of her self-
employment income, and would also have to contribute 25% of compensation for Employee A, with no
contribution required for Employee B.

Answer 18

For individuals with self-employment income both the deductible portion of self-employment tax, equal to one-half of the tax, as well as the current-year SEP contribution itself must be subtracted from gross compensation before application of the 25% contribution limitation. In practice this results in a maximum contribution amount of 20% of income net of one-half of the tax-payer’s self-employment tax. Employers are not required to make contributions for employees with less than 3 years of service.

Question 19

Which of the following concerning the aggregation of contributions to SEP-IRA’s and other tax-advantaged plans is NOT true:

1) A W-2 employee covered under a 401(k) plan for Company A may not contribute to a SEP-IRA established for
unrelated self-employment income.
2) Employer contributions made to an employee’s SEP-IRA account will not affect the employee’s current-year
maximum traditional IRA contribution amounts.
3) A self-employed individual transitioning from a SEP-IRA to a solo 401(k) plan will need to subtract year-to-date
SEP contributions in calculating the maximum contribution they may make to the 401(k) for the remainder of
the year.
4) An employee covered by a SEP-IRA may still make the maximum allowable contribution to a Roth IRA for the
current tax year, assuming all Roth IRA income and eligibility requirements are met.

Answer 19

1) A W-2 employee covered under a 401(k) plan for Company A may not contribute to a SEP-IRA established for
unrelated self-employment income.

Contributions may be made to a 401(k) and a SEP-IRA if not sponsored by the same employer.

Question 20

A new client has come to you who has a SIMPLE IRA account held with a former employer. The client would like to roll over this account to a traditional IRA and have the account managed by your firm. What would be the most conscientious response to the client’s request?

Choose the best answer.

1) Ask if it has been at least 2 years since the account was funded, if it has been more than 2 years offer to
manage the money through a rollover, if it has been less than 2 years communicate to the client that you can
discuss management of these assets when the 2-year time period has been reached.
2) Ask if it has been at least 2 years since the account was funded, if it has been more than 2 years offer to
manage the money through a rollover, if it has been less than 2 years examine the current allocation of the
account and provide education regarding the appropriateness of the current investments.
3) Agree to manage the money and immediately prepare transfer paperwork.
4) Agree to manage the money and immediately prepare transfer paperwork, and communicate to the client
that while taxes and penalties may be due depending on how long the account has been opened, they are
worth paying since you will deliver superior investment results that will allow the client to recoup these costs
over time.

Answer 20

2) Ask if it has been at least 2 years since the account was funded, if it has been more than 2 years offer to
manage the money through a rollover, if it has been less than 2 years examine the current allocation of the
account and provide education regarding the appropriateness of the current investments.

Question 21

A business establishing a SIMPLE IRA plan may utilize all of the following employer contribution formulas for the plan EXCEPT:

Choose the best answer.

1) A matching contribution of 100% of employee deferrals up to 3% of compensation.
2) A matching contribution of 100% of employee deferrals up to 1% of compensation, with a commitment to
increase to a match on 3% of compensation in the following year.
3) A non-elective contribution equal to 2% of participant compensation for all eligible employees earning at
least $5,000.
4) A matching contribution of 100% of employee deferrals of less than 1% of compensation.

Answer 21

4) A matching contribution of 100% of employee deferrals of less than 1% of compensation.

An employer cannot elect a matching contribution amount of less than 1% in no more than two out of the five years ending with the current year.

Regarding the second answer:

A matching contribution of 100% of employee deferrals up to 1% of compensation, with a commitment to increase to a match on 3% of compensation in the following year.
Businesses may reduce their SIMPLE IRA plan matching contribution to as low as one percent of compensation as long as it is not from the requisite 3% match in more than 2 years of the past 5.

Question 22

Which of the below accurately describes a business entity that is eligible to establish a SIMPLE IRA?

Choose the best answer.

1) A business with 105 employees, 15 of whom performed only incidental services and received BETWEEN
$5,000 and $10,000 in compensation in the preceding plan year.
2) A business with 140 full-time employees but with no other established retirement plan.
3) A business with 120 employees, 30 of whom performed only incidental services and received less than $5,000
in compensation in the preceding plan year.
4) A business with 110 full-time employees, 20 of whom have indicated they will not participate in the plan if
established.

Answer 22

3) A business with 120 employees, 30 of whom performed only incidental services and received less than $5,000
in compensation in the preceding plan year.

In order to operate a SIMPLE IRA a business must have 100 or fewer employees with $5,000 or more in
compensation during the preceding calendar year. Participation does not factor into eligibility.

Question 23

You are preparing a financial plan for Jennifer, who is 48 years old and has worked as an administrator for a local non-profit for 17 years. On your advice she has recently started to participate in her organization’s section 403(b) retirement plan. What is the maximum amount Jennifer may defer to the plan from her salary for the 2024 tax year to this plan?

Choose the best answer.

1) $69,000
2) $23,000
3) $16,000
4) $26,000

Answer 23

4) $26,000

Jennifer is eligible to make the maximum allowable 15 years of service catch-up contribution of $3,000, in addition to the basic $23,000 deferral amount.

Question 24

The local school system for your town is establishing a 403(b) plan and would like to exclude certain employees from participation to ease the administrative burden on the district. Which of the following classes of employees would the school system be able to legally exclude?

I) Employees with less than 2 years of service
II) Part time employees working less than 20 hours per week
III) Hourly employees
IV) Participants in an existing 457 plan

Choose the best answer.

1) II, III, and IV
2) II and IV
3) I only
4) IV only

Answer 24

2) II and IV