Retirement: 7 Retirement Plan Distributions Flashcards by David Freiler

Retirement: 7-1,2 Retirement plan Distributions

An individual may obtain a distribution while still employed (called an in-service distribution) if the plan permits such a distribution to an active participant. Such distributions are permitted only in _____ and IRA hybrid plans, such as a SEP or SIMPLE.

a. profit sharing plans
b. defined distribution plans

a. profit sharing plans

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Retirement: 7-1,2 Retirement plan Distributions

For_____ (SIMPLEs, SEPs, and SARSEPs), the participant controls the account and, as is the case with all IRA plans, may make withdrawals at any time for any reason (taxes and 10% early withdrawal penalty may apply).

a. IRA hybrid plans
b. pension plans

a. IRA hybrid plans

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Retirement: 7-1,2 Retirement plan Distributions

For _____ (defined benefit, cash balance, money purchase, and target benefit plans), plan provisions must prohibit in-service withdrawals by employee-participants (individuals who are still employed) prior to the attainment of age 62. Age 62 in-service withdrawal provisions are used to accommodate participants who want to begin a “phased in” retirement rather than terminating all at once.

a. IRA hybrid plans
b. pension plans

b. pension plans

In other words, a pension plan must prohibit in service withdrawals prior to age 62 to retain its status as a qualified plan. If the pension plan’s provisions do not allow in-service withdrawals at age 62 or older, distributions may only be made following death, disability, or separation from service (which includes retirement of the participant).

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Retirement: 7-1,2 Retirement plan Distributions

Typically, _____ may include provisions for in-service withdrawals after the plan’s normal retirement age. This creates an option for the employee who elects to continue working past the plan’s retirement age but who would like to begin tapping into his or her retirement benefits. Defined benefit plans are less likely to allow in-service withdrawals due to the complex record keeping required

a. money purchase and target benefit plans
b. profit sharing-type plans

a. money purchase and target benefit plans

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Retirement: 7-1,2 Retirement plan Distributions

For _____, plan provisions will specify the portions of the participant’s account that may be available for in-service withdrawal (if any)—usually the vested portion of employer contributions, and only after a specified period of time (e.g., after funds have been in the participant’s account for two years, or after five years of participation). It is important to note that the plan document must specifically allow this type of in-service withdrawal.

a. money purchase and target benefit plans
b. profit sharing-type plans

b. profit sharing-type plans

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Retirement: 7-1,2 Retirement plan Distributions

If a traditional profit sharing plan, one that does not include a 401(k) provision, provides for in-service withdrawals, _____ special hardship conditions are required

a. generally
b. generally no

b. generally no

the plan may, however, impose such restrictions

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Retirement: 7-1,2 Retirement plan Distributions

Hardship withdrawals from a profit sharing plan, if allowed, may be from _____

a. employee contributions
b. employer contributions
c. employer contributions and earnings

c. employer contributions and earnings

There are no employee contributions

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Retirement: 7-1,2 Retirement plan Distributions

Hardship withdrawals from a profit sharing plan, if allowed, may be from employer contributions and earnings. Three requirements must be met before hardship distributions may be made from a traditional ______.

the term hardship must be defined in the plan
uniform and nondiscriminatory rules must be followed in determining whether a hardship exists and the amount of the distribution necessary to alleviate the hardship, and
the amount of the hardship distribution cannot exceed the participant’s vested interest under the plan.
a. 401k plan
b. profit sharing plan

b. profit sharing plan

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Retirement: 7-1,2 Retirement plan Distributions

Hardship distributions from a profit sharing plan are taxable to the recipient and _____ be subject to a 10% early withdrawal penalty.

a. may
b. may not

a. may

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Retirement: 7-1,2 Retirement plan Distributions

In contrast to the hardship withdrawal rules for traditional profit sharing plans, hardship withdrawals from a 401(k) plan or 403(b) plan are available only from ______, and only when the plan document specifically allows such withdrawals.

a. elective deferrals
b. employer contributions

a. elective deferrals

Amounts attributable to employer contributions, and earnings associated with either employer or employee contributions, are not available for hardship withdrawal. (There is an exception for certain contributions made prior to December 31, 1988.)

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Retirement: 7-1,2 Retirement plan Distributions

Section 401(k) plans and 403(b) plans can offer hardship withdrawals, but certain requirements must be met. Plan participants may qualify for a hardship withdrawal from the plan if they demonstrate

“an immediate and heavy financial need,” and
a lack of other ______
a. retirement accounts
b. liquid funds of less than $10,000
c. “reasonably available” resources.

c. “reasonably available” resources.

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Retirement: 7-1,2 Retirement plan Distributions

IRS regulations (Reg. Section 1.401(k)–1(d)(2)(iv)) provide the following examples of needs that would be considered “immediate and heavy”:

medical expenses for a parent, spouse, child, dependent, or any beneficiary;
purchase of a ____ residence;
tuition payments for a parent, spouse, child, dependent, or any primary beneficiary;
payments to prevent eviction from one’s _____ residence;
funeral expenses for a parent, spouse, child, dependent, or any primary beneficiary; or
repairs to principal residence that would qualify for a casualty loss income tax deduction.

a. primary
b. secondary

a. primary

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Retirement: 7-1,2 Retirement plan Distributions

A _____ is someone who is named as a beneficiary under the plan and has an unconditional right to all or part of the participant’s plan account balance after a participant dies.

a. family member
b. spouse
c. primary beneficiary

c. primary beneficiary

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Retirement: 7-1,2 Retirement plan Distributions

In determining if the participant has exhausted other “reasonably available” resources, the IRS requires that the participant first receive any employer plan distributions and loans available from other qualified retirement plans and _____.

a. personal loans
b. home equity loans
c. nonqualified deferred compensation plans

c. nonqualified deferred compensation plans

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Retirement: 7-1,2 Retirement plan Distributions

Hardship distribution amounts:

are subject to the 10% early withdrawal penalty for distributions made before age 59½,
are not eligible for rollover, and
_____ subject to mandatory withholding.

a. are
b. are not

b. are not

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Retirement: 7-1,2 Retirement plan Distributions

Ownership of a plan participant’s interest may be changed during his or her lifetime through a qualified domestic relations order (QDRO). A QDRO is a legal judgment mandating the distribution, segregation, or attachment of one person’s property for the benefit of another, referred to as the _____. QDROs are a fairly regular feature of divorce settlements that involve spousal interests in qualified retirement plans.

a. primary beneficiary
b. spouse
c. alternate payee

c. alternate payee

Here, the court orders the distribution or attachment of a plan participant’s interest in a retirement plan in favor of an ex-spouse, a child, or another dependent who is recognized by the court order as having rights to a participant’s qualified plan benefits. A QDRO must be presented to the plan administrator, who must confirm the QDRO as a qualified or valid order.

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Retirement: 7-1,2 Retirement plan Distributions

QDRO requirements apply to qualified plans, 403(b) plans, and Section 457 arrangements, but do not apply to _____.

a. traditional pensions
b. cash balance pensions
c. IRAs or plans utilizing IRAs, i.e., SEPs or SIMPLE IRAs

c. IRAs or plans utilizing IRAs, i.e., SEPs or SIMPLE IRAs

Plans using an IRA may be awarded to an ex-spouse according to the terms of a divorce decree.

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Retirement: 7-1,2 Retirement plan Distributions

QDROs may not require the plan to pay benefits before the earliest retirement age of a participant who is still active and has not separated from service. The “earliest retirement age” is the earlier of

the date on which the participant is entitled to a distribution, or
the later of the date the participant attains age __, or the earliest date upon which the participant could, under the plan document, begin receiving benefits if the participant terminated employment.
a. 50
b. 55
c. 62

a. 50

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Retirement: 7-1,2 Retirement plan Distributions

Under the QDRO, the former spouse is treated as the spouse for purposes of calculating the required minimum distribution. The participant’s required beginning date is the _____’s required beginning date for the QDRO, and distributions are paid out over the life of the alternate payee.

a. the employee
b. alternate payee

b. alternate payee

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Retirement: 7-1,2 Retirement plan Distributions

Example: Plan permits distributions to terminated participants. George Baker is a participant in a plan that permits distributions to terminated participants. George is 48 and his divorce is final. His former spouse’s attorney sends the plan administrator a QDRO requiring the plan to pay the former spouse the benefits awarded by the court in the QDRO when George separates from service or turns age __, whichever occurs first.

a. 50
b. 55
c. 62

a. 50

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Retirement: 7-1,2 Retirement plan Distributions

Distributions made to an alternate payee who is a spouse or former spouse will be taxed in the same manner as if the alternate payee were the participant. For example, if the alternate payee so elects, he or she can qualify for 10-year forward averaging tax treatment if the participant is qualified to so elect. The participant’s status is unchanged by the elections of the alternate payee. The distribution, if made to a spouse or former spouse, is eligible for rollover and is subject to the rollover rules, such as the __% mandatory withholding requirement.

a. 20%
b. 25

a. 20%

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Retirement: 7-1,2 Retirement plan Distributions

The alternate payee who is a spouse or former spouse may also roll the QDRO distribution directly into his or her qualified plan, TSA, SEP, or governmental 457 plan that accounts for such rollovers separately, if that plan so permits. If not, the proceeds may be rolled to an ___.

a. brokerage account
b. savings account
c. IRA

c. IRA

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Retirement: 7-1,2 Retirement plan Distributions

QDRO distributions to someone other than a spouse or former spouse (meaning child or other dependent of the participant) are included in the income of the _____ for the year of the distribution. Withholding requirements will apply unless the participant elects not to have withholding apply. In addition, such distributions are not eligible for rollover treatment.

a. participant
b. other recipient

a. participant

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Retirement: 7-1,2 Retirement plan Distributions

John Kim participates in QualCo’s qualified retirement plan. He was recently divorced. The court awarded 42% of John’s benefit to his former spouse, Rose, under a QDRO. His benefit is valued at $167,000; Rose has elected a lump sum. The plan is not contributory, so John has no basis in the benefit. Unless she rolls over the distribution, ____ will be taxed on the full distribution of $70,140 (42% of $167,000). The 10% early withdrawal penalty does not apply, even though both parties are age 42—QDRO distributions are exempt from the 10% penalty.

a. John
b. Rose

b. Rose

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Retirement: 7-1,2 Retirement plan Distributions The penalty for premature withdrawals is a 10% tax on the taxable portion of the distribution. Four general exemptions from the 10% penalty generally apply to early withdrawals from these plans. These exemptions are for distributions attributable to 1. death 2. disability 3. unreimbursed medical expenses that are in excess of 10% of AGI (or unreimbursed medical expenses in excess of 7.5% of an individual’s AGI if such individual or his or her spouse (for joint filers) attains age 65 or older before the close of the taxable year 4. a series of substantially equal periodic payments (for qualified plans and TSAs, the employee must be separated from service) For periodic payments to be exempt from the 10% penalty, these payments must continue for at least ____ years or until the participant reaches age 59½, whichever is later 5. IRS levy 6. Certain distributions to qualified military reservists called to active duty a. 5 b. 10

a. 5

Retirement: 7-1,2 Retirement plan Distributions In addition to the exemptions that apply to qualified plans, TSAs, and IRAs, three exemptions are available for IRAs only. The 10% penalty does not apply to premature IRA distributions attributable to 1. Education expenses: Withdrawals to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. Qualifying expenses are defined as tuition, fees, books, supplies, and equipment required for enrollment or attendance at post secondary educational institutions, including graduate-level courses, for a taxpayer, his or her spouse, or the child or grandchild of either the taxpayer or the taxpayer’s spouse. 2. First-time home buyer acquisition costs of up to $10,000. Withdrawals up to a $10,000 lifetime limit to pay for qualified acquisition costs of a principal residence for a first-time home buyer. 3. Payment of medical insurance premiums after separation from employment, as long as a minimum of 12 consecutive weeks of unemployment compensation is received; you receive the distributions either the year you receive unemployment or the year after, and you receive the distributions no later than __ days after you have been re-employed. a. 30 b. 60

b. 60

Retirement: 7-1,2 Retirement plan Distributions For periodic payments to be exempt from the 10% penalty, these payments must continue for at least five years or until the participant reaches age 59½, whichever is later, and the distribution amount may not be altered once established, but the method may be changed _____ under some circumstances. a. one time b. two times

a. one time

Retirement: 7-1,2 Retirement plan Distributions Payments will qualify as a series of substantially equal periodic payments if they are made according to one of the three methods described in paragraphs (a)–(c) of Revenue Ruling 2002-62, Section 2.01: The annual payment is determined by dividing the account balance for the year by the applicable life expectancy obtained from the chosen life expectancy table. The participant or IRA owner must select the table from among the three alternatives: RMD Single Life Table, RMD Joint Life Table, and the Uniform Table. Once selected, the table may not be changed. Payments are recalculated each year based upon the life expectancy factor for that year and the account balance for that year. As long as the method remains unchanged, the payment amount can change, and there will not be a deemed modification of the series of substantially equal payments. Method 1: Required minimum distribution method. Method 2: Fixed amortization method. Method 3: Fixed annuitization method.

Method 1: Required minimum distribution method. The account balance used in the calculation is the balance of the account determined in any reasonable manner based on “facts and circumstances.” For example, according to Regulation 2002-62, 2.02(d), it is reasonable to use the applicable balance between December 31 of the year prior and the date of the actual distribution.

Retirement: 7-1,2 Retirement plan Distributions Payments will qualify as a series of substantially equal periodic payments if they are made according to one of the three methods described in paragraphs (a)–(c) of Revenue Ruling 2002-62, Section 2.01: The annual payment is determined by amortizing in level payments the account balance over the number of years specified by the selected IRS life table and the selected interest rate. The interest rate must be less than or equal to 120% of the federal mid-term rate for either of the two months prior to the month the distribution begins. Once the initial distribution amount is determined, it cannot be changed—the payment is the same in all subsequent years. Method 1: Required minimum distribution method. Method 2: Fixed amortization method. Method 3: Fixed annuitization method.

Method 2: Fixed amortization method.

Retirement: 7-1,2 Retirement plan Distributions Payments will qualify as a series of substantially equal periodic payments if they are made according to one of the three methods described in paragraphs (a)–(c) of Revenue Ruling 2002-62, Section 2.01: This method determines the payment by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning on the participant’s or owner’s age in the first distribution year. The annuity factor is arrived at by using the mortality table in Appendix B of Revenue Ruling 2002 and the selected interest rate. Once the first payment is determined, it remains unchanged in the subsequent years. Method 1: Required minimum distribution method. Method 2: Fixed amortization method. Method 3: Fixed annuitization method.

Method 3: Fixed annuitization method.

Retirement: 7-1,2 Retirement plan Distributions Substantially Equal Periodic Payments Life expectancy tables. The life expectancy tables that can be used to determine distribution periods are: (1) the uniform lifetime table, (2) the _____ life expectancy table, or (3) the joint and last survivor table, all of which may be found in the required minimum distribution regulations. a. single b. joint

a. single

Retirement: 7-1,2 Retirement plan Distributions Substantially Equal Periodic Payments The IRS permits taxpayers to make _____ from using either the fixed amortization method or the fixed annuitization method to the required distribution method. However, taxpayers cannot switch from using the required distribution method to the fixed amortization method or the fixed annuitization method. a. a one-time switch b. two changes

a. a one-time switch Some investors whose IRAs suffered investment declines during the 2008 bear market took advantage of this one-time switch.

Retirement: 7-1,2 Retirement plan Distributions Mandatory Withholding Requirements Qualified plans, 403(b) plans, and governmental 457(b) plans are required to withhold __% of any distribution that is eligible for a direct rollover if the participant receiving the distribution does not elect a direct rollover. a. 20% b. 25%

a. 20%

Retirement: 7-1,2 Retirement plan Distributions If a terminated participant’s vested account balance or accrued benefit is $_____ or less, after being given proper notice the participant may be subject to an involuntary cash out, regardless of his or her desire to the contrary. a. $1,000 b. $5,000

b. $5,000 The sponsor need not count rollover assets in determining whether or not a participant’s balance exceeds $5,000.

Retirement: 7-1,2 Retirement plan Distributions The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made changes to these rules to require that certain small cash-outs be automatically rolled over to an IRA, unless the participant makes an election to take cash or make a different direct rollover. This automatic rollover requirement applies if the value of the participant’s vested accrued benefit or account balance is more than ____ but less than or equal to $5,000. Plans must provide participants with a notice explaining the automatic rollover provision. a. $500 b. $1,000

b. $1,000

Retirement: 7-3 Lump Sum Options Doing so will create a large tax liability for that tax year. Note that if part or all of the distribution is employer stock, and the distribution is coming from a qualified plan, then there is preferential tax treatment (NUA—net unrealized appreciation) a. Take the money in a lump sum b. Defer receipt of the money through a rollover to an IRA or to a new employer’s plan

a. Take the money in a lump sum

Retirement: 7-3 Lump Sum Options Properly executed, this option is a nontaxable event and allows retirement funds to continue accumulating on a tax-deferred basis. This, however, is a temporary solution, as distributions are mandated by age 70½. a. Take the money in a lump sum b. Defer receipt of the money through a rollover to an IRA or to a new employer’s plan

b. Defer receipt of the money through a rollover to an IRA or to a new employer’s plan

Retirement: 7-3 Lump Sum Options There are four requirements for a lump-sum distribution: 1. be made in one taxable year (i.e., the calendar year for most individuals); 2. represent the full balance to the participant’s credit (account or benefit is totally distributed from all qualified plans of the same type); 3. be payable due to death, attaining age _____, or separation from service (for self-employed individuals, disability replaces separation from service); and 4. be made from a qualified plan. a. 55 b. 59½ c. 65

b. 59½

A distribution qualifying as a lump-sum distribution may be eligible for ten-year forward-averaging tax treatment if all of the following conditions are met: 1 the participant / was born in _____ or earlier; 2 forward-averaging treatment is elected for all lump-sum distributions received during the year; and 3. the employee has been a participant in the plan for at least five years before the year in which the distribution occurs (this requirement is waived if the distribution is made to a beneficiary following the participant’s death). a. 1935 b. 1945 c. 1955

a. 1935

Retirement: 7-3 Lump Sum Options Forward-averaging tax treatment: The tax calculation (filed on Form 4972) involves figuring the tax on one-tenth of the taxable amount, using 1986 tax rates, and then multiplying this tax by 10. Ten-year forward averaging is a way to avoid “bracket creep” since the individual will be taxed on ______ at whatever tax bracket he or she is in after taking into account just 10% of the lump-sum amount. a. 10% b. the entire lump sum

b. the entire lump sum Ten-year forward averaging does not mean that the taxes will be spread out over 10 years, as the name may suggest.

Retirement: 7-3 Lump Sum Options When stock is purchased by a qualified plan or contributed to the plan by the employer and credited to a participant’s account, the stock value at that time becomes the participant’s basis in stock acquired through that stock transaction. Net _____ appreciation is the appreciation in value of the stock while held in the qualified plan. a. realized b. unrealized

b. unrealized If employer stock (attributable to employer contributions or after-tax employee contributions) is included in a lump-sum distribution, the NUA of the stock may be subject to favorable tax treatment.

Retirement: 7-3 Lump Sum Options Unless waived by the participant, the NUA (amount above the basis) of the stock is not taxed at the time of distribution; instead, it is taxed as _____ at the time of sale. a. ordinary income b. long-term capital gain

b. long-term capital gain This long-term capital gain treatment applies whenever the stock is sold, regardless of the holding period.

Retirement: 7-3 Lump Sum Options When stock is purchased by a qualified plan or contributed to the plan by the employer and credited to a participant’s account, the stock value at that time becomes the participant’s basis in stock. The basis is taxed as ______ in the year of distribution. Appreciation in excess of the excluded net unrealized appreciation is taxed as long-term capital gain or short-term capital gain at the time of sale depending on the time held after the distribution a. ordinary income b. long-term capital gain

a. ordinary income

Retirement: 7-3 Lump Sum Options Example. Ted is eligible to take his $50,000 defined contribution benefit as a lump sum upon retirement. Instead of taking the distribution and paying ordinary income taxes on the total amount, he has decided to roll over the full amount into an IRA set up by his retirement counselor. To qualify as a rollover: 1. The amount distributed to Ted from his retirement plan must be transferred to the new account not later than __ days after receipt. 2. If property other than cash is received from the old account, that same property must be transferred to the new account. a. 30 b. 60

b. 60 As a result, he will defer recognition of the lump-sum distribution for tax purposes. Of course, any amounts he subsequently takes from the IRA will be treated as taxable ordinary income (i.e., they now take on characteristics of the distribution vehicle and not that of the original plan).

Retirement: 7-3 Lump Sum Options By deferring the day of tax recognition, the entire lump sum has the opportunity to remain invested and accumulate more earnings. In most scenarios where positive earnings on investments are involved, a client is money ahead when taxation is deferred. The obvious instance in which this would not be true would be the one in which the client’s tax bracket at the time of the lump sum distribution is lower than his or her future tax bracket. a. Advantage b. Disadvantage

a. Advantage

Retirement: 7-3 Lump Sum Options Up to April 1 of the year following the attainment of age 70½, the age at which the government requires minimum distributions, the client has the flexibility to withdraw as much or as little from the IRA as desired. This flexibility may be particularly useful in tax planning and personal budgeting. a. Advantage b. Disadvantage

a. Advantage

Retirement: 7-3 Lump Sum Options Once the client starts taking distributions (which must eventually happen), the distributions will be taxed as ordinary income and there will be no opportunity to use forward averaging to lower the total tax take. a. Advantage b. Disadvantage

b. Disadvantage

Retirement: 7-3 Lump Sum Options Money in a qualified plan is protected from the claims of non bankruptcy and bankruptcy creditors under federal law. Although several states provide similar protection for IRAs, IRA assets in certain states (creditor-friendly states) are partially subject to the claims of non bankruptcy creditors! However, as a practical matter, many debtors in creditor-friendly states may choose to file for bankruptcy to protect a large IRA from the claims of their creditors. a. Advantage b. Disadvantage

b. Disadvantage Why? Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), IRA rollover assets from a qualified plan or 403(b) arrangement are fully (100%) protected from the claims of bankruptcy creditors. Furthermore, BAPCPA protects regular IRA and Roth IRA assets of up to $1 million (adjusted for inflation) from the claims of bankruptcy creditors.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: The _____ acts as a way station between qualified plans. The employee can roll over funds from one qualified plan to another by using a flow through IRA. Thus, this IRA applies only to the person who expects to join a new employer and a new qualified retirement plan. The client in this scenario merely shifts his or her assets, step by step, from the qualified plan of one employer to the qualified plan of another, using this as an intermediate step. 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth account

1. conduit IRAs Transferring money from one qualified retirement plan to another through a conduit IRA may provide certain advantages:  For persons born before 1936, use of a conduit IRA would preserve the eligibility of the funds for forward-averaging and capital gains tax treatment at some future date.  An employer-sponsored plan may provide low-cost access to expert investment advice, although the owner of an IRA may have more freedom in making investment decisions.  The required beginning date (RBD) for distributions to participants other than 5% owners (individuals who own more than 5% of the business sponsoring the plan) under an employer-sponsored plan is April 1 of the year following the later of (1) attainment of age 70½, or (2) retirement. An Important Caution About Conduit IRAs Don’t commingle funds in these IRAs with other assets or with new contributions. For example, don’t roll over lump-sum distributions from a qualified plan to an IRA to which a client has been making other contributions; doing so will undermine the client’s ability to use forward averaging for distributed funds. A client should have a separate IRA set up as a conduit for his or her vested pension assets. If your client wants to make IRA contributions based on other earnings, he or she should set up a second IRA for that purpose.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: A _____ occurs when a distribution is moved from an employer-sponsored retirement plan to an IRA or other eligible retirement plan. These typically occur when there is a change in employment or another triggering event that causes the investor to want or need to move money out of an employer’s retirement plan into an IRA. 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth

2. direct rollovers According to IRS regulations, a direct rollover may be accomplished by any reasonable means of direct payment to an eligible retirement plan, including a wire transfer or the mailing of a check to the plan. If payment is made by check, the check must be negotiable only by the trustee of the eligible retirement plan. If the payment is by wire transfer, the transfer must be directed only to the trustee of the plan. In the case of an eligible retirement plan that does not have a trustee (such as an individual retirement annuity), the custodian of the plan or issuer of the contract under the plan, as appropriate, shall act in this capacity.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: Legally speaking, a _____ transfer involves the transfer of assets between plans of the same type; e.g., from one IRA to another IRA or from one qualified plan to another qualified plan. Unlike rollovers or direct rollover transfers, these transfers between plans of different types are not permitted. For example, this type of transfer from a qualified plan to an IRA or 403(b) plan is not permitted. 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth

3. trustee-to-trustee transfers A trustee-to-trustee transfer is technically not a rollover, but the terms are often used interchangeably. The key to a successful trustee-to-trustee transfer is that the account owner never be in receipt of the funds. This direct transfer of funds avoids the 20% mandatory withholding, and because a trustee-to-trustee transfer is not a rollover, it does not have to be reported on IRS Form 1099–R. Finally, a trustee-to-trustee transfer avoids the need to worry about either the 60-day or the one-per-year rule.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: In this case, the client takes a distribution from a qualified plan, SEP, TSA, IRA or governmental 457 plan and within 60 days rolls it over to an IRA or the qualified plan, SEP, TSA, or governmental 457 plan of a new employer. Any amount that is not rolled over by the 60th day after receipt of the distribution will be subject to income tax (and the 10% penalty, if applicable). 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth

4. indirect rollovers An indirect rollover from a qualified plan to an existing IRA other than a conduit IRA has distinct disadvantages:  the opportunity to roll the funds into a new employer’s qualified plan is eliminated;  the potential benefits of forward averaging are eliminated; and  if coming from a qualified plan or TSA, 20% of the gross amount of the distribution will be withheld for taxes. Indirect rollovers are often used to permit the account owner to utilize the funds for 60-days; essentially taking an interest-free loan. To limit this practice, only one indirect rollover is permitted per IRA per year. This rule does not apply to indirect rollovers from qualified plans to IRAs.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: As a general rule, a distribution from a qualified plan, tax-sheltered annuity (403(b) plan), or Section 457 governmental plan to a surviving spouse on account of the death of the plan participant may be rolled over into an IRA titled in the survivor’s name. In addition, if an individual inherits an IRA from his or her deceased spouse, the IRA may be treated as the survivor’s IRA and retitled in his or her own name. Another alternative would be to keep the IRA titled in the name of the decedent for the benefit of the surviving spouse. 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth

5. spousal beneficiary rollovers Note: Distributions such as periodic annuity distributions, age 70½ minimum required distributions, and hardship distributions cannot be rolled over by the survivor.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: Effective for 2010 and subsequent years, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) requires qualified plans, 403(b) tax-sheltered annuity plans, and IRC Section 457(b) governmental plans to give nonspouse beneficiaries of deceased participants the right to elect IRA direct rollover treatment in connection with plan distributions. All retirement plans have been amended to offer this feature. 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth

6. nonspouse beneficiary rollovers Unless a non spouse beneficiary elects a direct rollover into an IRA, many qualified plans require a non spouse beneficiary’s benefits to be paid out within five years, or immediately in some cases. Because prior law did not permit an inherited IRA to be established on behalf of a nonspouse beneficiary of a qualified plan, tax-sheltered annuity (403(b) plan), or Section 457 governmental plan, taxation (and shrinkage) of the benefits was accelerated.

Retirement: 7-3 Lump Sum Options Assuming that the benefits of deferring distributions outweigh the negatives, there are seven types of IRA rollovers (or transfers) with which you should be familiar: Section 401(k) plans, Section 403(b) plans, and governmental Section 457(b) plans that offer a qualified Roth contribution program may be amended to allow ______ of an “eligible rollover distribution” (including distributions of employer contributions and elective deferrals) to a designated Roth account 1. conduit IRAs 2. direct rollovers 3. trustee-to-trustee transfers 4. indirect rollovers 5. spousal beneficiary rollovers, 6. nonspouse beneficiary rollovers, and 7. in-plan rollovers to a designated Roth

7. in-plan rollovers to a designated Roth Amounts so distributed are includible in the participant’s gross income (except to the extent they represent a return of after-tax contributions). The 10% early distribution tax, however, does not apply. An in-plan Roth rollover may be accomplished at the election of the employee-participant (or surviving spouse) through a direct rollover or by a distribution of funds to the individual who then rolls over the funds into his or her designated Roth account within 60 days.

Retirement: 7-3 Lump Sum Options The client _____ roll over the entire amount of his or her retirement plan. a. needs to b. needs not

b. needs not There may, in fact, be instances when the client chooses to leave a portion with the employer’s plan for future distributions and roll some other portion into an IRA under his or her control.

Retirement: 7-3 Lump Sum Options Some distributions do not qualify as eligible rollover distributions for regular rollover treatment. The 20% mandatory withholding requirement _____ apply to these distributions that are rollover ineligible. a. does b. does not

b. does not

Retirement: 7-3 Lump Sum Options If property other than cash is distributed from a retirement plan, that same property may be rolled over into an IRA or other plan. A contribution of cash equal to the fair market value of property received as a distribution from a retirement plan does not qualify as a rollover. An individual _____ sell property received as a distribution from a retirement plan and roll over the net proceeds from the sale into an IRA or other plan. No gain or loss can be recognized on this sale. a. may b. may not

a. may

Retirement: 7-3 Lump Sum Options Example. On September 4, John received a lump-sum distribution from his employer’s retirement plan of $50,000 in cash and $50,000 in stock. The stock was not stock of his employer. On September 26, he sold the stock for $60,000. On October 3, he rolled over $110,000 in cash ($50,000 from the original distribution and $60,000 from the sale of stock). John _____ include the $10,000 gain from the sale of stock as part of his income because he rolled over the entire amount into an IRA. a. must b. does not

b. does not

Retirement: 7-3 Lump Sum Options Distributions from tax-qualified retirement plans, tax-sheltered annuities, and governmental 457 plans (“retirement plans”) _____ be rolled over directly from these plans into a Roth IRA. a. may b. may not

a. may These distributions do not have to be rolled over to a traditional IRA and then to a Roth IRA. Individuals are permitted to roll over amounts from a deductible IRA, tax qualified retirement plan, tax-sheltered annuities, or governmental 457 plan directly into a Roth IRA, regardless of what their adjusted gross income is for the year. Of course, this type of rollover into a Roth IRA is includible in gross income (except to the extent that it represents a return of after-tax contributions), but the 10% early distribution tax does not apply.

Retirement: 7-3 Lump Sum Options Eligible individuals (age 59½ or older, retired, terminated employment, etc.) with before-tax and “after-tax” (not designated Roth assets) amounts in their 401(k), 403(b), or 457 retirement plans _____ take a distribution of the full amount of these contributions, and use a direct rollover to transfer the before-tax portion of the distribution (including earnings on after-tax amounts) to a traditional IRA and the after-tax portion of the distribution to a Roth IRA. a. may b. may not

a. may

Retirement: 7-3 Lump Sum Options Example. Art Villanovo’s 401(k) plan account balance is $200,000 and consists of $150,000 in pretax contributions and $50,000 in after-tax contributions. Earlier this year, Art retired and ______ a direct rollover to transfer the before-tax portion of the distribution (including earnings on after-tax amounts) to a traditional IRA and the after-tax portion of the distribution to a Roth IRA. a. was able to use b. was not able to use

a. was able to use

Retirement: 7-3 Lump Sum Options An individual _____ not to roll over just the after-tax amounts in his or her account to a Roth IRA and leave the remaining amounts in a 401(k) plan (i.e., take a partial distribution of just the after-tax amounts). a. can b. cannot

b. cannot Unfortunately, a partial distribution such as this is not an option. In order for individuals to be able to use a direct rollover to move after-tax contributions to a Roth IRA, they must roll over the full amount (all before-tax and after-tax amounts) in their account

Retirement: 7-3 Lump Sum Options Example. Jim Dawkins received a $5,000 eligible rollover distribution that was not a qualified distribution from his Roth 401(k) account, consisting of $4,700 of after-tax Roth contributions (investment in the contract) and $300 of earnings. Within 60 days of receipt, Jim rolled over the entire distribution into a Roth IRA. The $5,000 rollover amount is deemed to consist of $300 of earnings and $4,700 of investment in the contract. Because the only portion of the distribution that could be includible in gross income (the earnings) is rolled over, the $300 of earnings of the distribution is _____ as taxable income to Jim. a. includible b. not includible

b. includible

Retirement: 7-3 Lump Sum Options Example. Scott Adams, age 60, received a $10,000 eligible rollover distribution that was not a qualified distribution from his Roth 401(k) account, when the value of his account held $18,800 of after-tax Roth contributions (investment in the contract) and $1,200 of earnings. He decided not to roll the distribution over into a Roth IRA. Scott’s distribution consists of $9,400 of designated Roth 401(k) contributions that are not subject to income tax and $600 of earnings that are _____. a. not subject to income tax. b. subject to ordinary income tax.

b. subject to ordinary income tax.

Retirement: 7-4 Distribution Requirements For individuals who participate in an employer-sponsored qualified plan (or 403(b) and 457 plans) and are not a 5% owner of the sponsoring business the required beginning date is April 1 of the calendar year following the later of the calendar year in which the employee _____. a. attains age 70½ b. attains age 70½, or retires

b. attains age 70½, or retires

Retirement: 7-4 Distribution Requirements Individuals who own an IRA (or simplified employee pension (SEP) and SIMPLE plans) must begin minimum distributions by April 1 of the calendar year following the calendar year in which the employee ______. a. attains age 70½ b. attains age 70½, or retires

a. attains age 70½

Retirement: 7-4 Distribution Requirements For the plan participant, the required minimum distribution amount for each distribution year is the account balance on December 31 of the year prior to the distribution year divided by the life expectancy obtained from the _____. This life expectancy is obtained by entering the owner’s attained age each distribution year. a. Joint Life Table b. Last Survivor Table c. Uniform Table

c. Uniform Table RMD = December 31 account balance ÷ life expectancy

Retirement: 7-5 Distribution Due to Death Survivor annuities need not be provided if the participant and spouse have been married less than _____ prior to the annuity starting date. a. 1 year b. 5 years c. 10 years

a. 1 year

Retirement: 7-5 Distribution Due to Death If a participant in a “pension plan” dies prior to retirement, the plan must pay benefits to the surviving spouse in the form of a ______. The amount of the _____ may not be less than the annuity resulting from a joint and 50%-to-the-survivor annuity; the benefit is based on the benefit the participant would have received had he or she retired on the day before his or her death. In the case of a defined contribution plan, the _____ is an annuity for the life of the surviving spouse equal to a single premium annuity purchased from an insurance company with a minimum premium of 50% of the participant’s vested account. a. The qualified preretirement survivor annuity (QPSA) b. The qualified joint and survivor annuity (QJSA) c. The qualified optional survivor annuity (QOSA)

a. The qualified preretirement survivor annuity (QPSA) Profit sharing and profit sharing-type plans may offer such a payout, but are not required to provide a QJSA if three other conditions are met: 1. the plan does not allow for any life annuity options; 2. the plan does not accept direct transfers from other plans that are subject to QJSA; and 3. the plan provides that the participant’s vested benefits are payable in full, minus any outstanding loans, to the participant’s spouse in the event the participant dies prior to retirement, although the spouse can waive the benefit.

Retirement: 7-5 Distribution Due to Death If death occurs after retirement, pension plans must provide a _____ to the surviving spouse. Profit sharing plans and profit sharing-related plans may provide such benefits, but are not required to provide them unless the plan document requires such a benefit form. For an unmarried participant, a _____ is an annuity for the life of the participant. For a married participant, it is an annuity for the life of the participant and spouse with a minimum of 50% annuity payment over the life of the survivor. a. The qualified preretirement survivor annuity (QPSA) b. The qualified joint and survivor annuity (QJSA) c. The qualified optional survivor annuity (QOSA)

b. The qualified joint and survivor annuity (QJSA) Note: If the participant dies after retirement and after benefit distributions have begun, the beneficiary may be able to choose between taking a lump-sum distribution or annuitizing the benefit, if the plan so provides. However, if the deceased had already annuitized the benefit, no change can be made to this form of payment.

Retirement: 7-5 Distribution Due to Death A _____ is an annuity for the life of the participant with a survivor annuity for the life of the surviving spouse equal to a required percentage of the joint annuity payable during the joint lives of the participant and spouse. The ______ must be at least 75% if the percentage in effect for the plan’s qualified joint and survivor annuity was less than 75% of the annuity payable during the joint lives of the participant and spouse. The required percentage must be at least 50% if the percentage in effect for the plan’s qualified joint and survivor annuity was greater than or equal to 75% of the annuity payable during the joint lives of the participant and spouse. a. The qualified preretirement survivor annuity (QPSA) b. The qualified joint and survivor annuity (QJSA) c. The qualified optional survivor annuity (QOSA)

c. The qualified optional survivor annuity (QOSA) The purpose of this new option is to allow the participant and spouse to elect a smaller initial joint annuity payment while they are both alive to have an increased benefit paid to the survivor following the death of either. Note: Each participant of a plan subject to these rules must be given the right to waive them and may do so, provided the spouse also elects to waive them.

Retirement: 7-5 Distribution Due to Death A designated beneficiary is an individual or entity recognized as such by the IRS for purposes of the required minimum distribution rules, and this beneficiary must be designated by _____ of the year following the year of death. The delayed determination (determination period) of the beneficiary allows for changes in the designated beneficiary during the year following the year of death. a. April 1 b. September 30 c. December 31

b. September 30 These changes may include the following: 1. the death of one or more of the designated beneficiaries 2. the disclaimer of one or more designated beneficiaries 3. reducing or eliminating designated beneficiaries due to distributions during the determination period 4. changing group beneficiaries to the individuals making up the group by allocating the beneficiary shares to separate accounts

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs Before the Required Beginning Date 1. _____ can roll the inherited assets into her own IRA (treat as her own). 2. _____ can transfer the inherited assets to a decedent or inherited IRA. 3. _____ can distribute inherited assets according to the five-year rule. 4. _____ can take a lump-sum distribution. a. The Spouse is the Sole Beneficiary b. A Nonspouse is the Sole Beneficiary c. The beneficiary is a group of individuals (may include spouse) d. No IRS-sanctioned beneficiary

a. The Spouse is the Sole Beneficiary

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs Before the Required Beginning Date 1. _____can do a rollover to a decedent or inherited IRA following the death of the original participant. 2. _____ can distribute assets according to the five-year rule. 3. _____ can take a lump-sum distribution. a. The Spouse is the Sole Beneficiary b. A Nonspouse is the Sole Beneficiary c. The beneficiary is a group of individuals (may include spouse) d. No IRS-sanctioned beneficiary

b. A Nonspouse is the Sole Beneficiary

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs Before the Required Beginning Date The required minimum distribution is met by (1) distributing according to the five-year rule or (2) distributing over the life expectancy of the oldest member of the group beginning by December 31 of the year following the year of death. Usually, to avoid having to use the life expectancy of the oldest member the deceased’s account is split up into beneficiary accounts so that each beneficiary can use their own age. a. The Spouse is the Sole Beneficiary b. A Nonspouse is the Sole Beneficiary c. The beneficiary is a group of individuals (may include spouse) d. No IRS-sanctioned beneficiary

c. The beneficiary is a group of individuals (may include spouse)

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs Before the Required Beginning Date When an entity other than a designated beneficiary (that is, an entity not recognized as a designated beneficiary by the IRS) has been named as the recipient of plan benefits, or no beneficiary has been named, the five-year rule requires that the account be distributed in full on or before December 31 of the calendar year that contains the fifth anniversary of the account owner’s death. a. The Spouse is the Sole Beneficiary b. A Nonspouse is the Sole Beneficiary c. The beneficiary is a group of individuals (may include spouse) d. No IRS-sanctioned beneficiary

d. No IRS-sanctioned beneficiary

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs After the Required Beginning Date 1. _____ can transfer the assets to her own IRA. 2. _____ can open a decedent or inherited IRA. 3. _____ can take a lump-sum distribution. a. The Spouse is the Sole Beneficiary b. The Beneficiary is Not the Spouse c. Estate, Charity, or No Named Beneficiary d. Multiple Beneficiaries

a. The Spouse is the Sole Beneficiary

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs After the Required Beginning Date If _____ is the sole IRA designated beneficiary, the required distribution period is the greater of 1. his or her fixed-term or unrecalculated life expectancy (using the Single Life Table), and then reducing by one each year, or 2. the deceased IRA owner’s remaining unrecalculated actuarial life expectancy (fixed term/reduced by one year method using the Single Life Table). a. The Spouse is the Sole Beneficiary b. The Beneficiary is Not the Spouse c. Estate, Charity, or No Named Beneficiary d. Multiple Beneficiaries

b. The Beneficiary is Not the Spouse When there is one individual, nonspouse beneficiary who takes the benefits over his or her life expectancy, the required distribution period begins the year following the year of death and is based on the beneficiary’s life expectancy, determined by his or her age on the birthday in the year following the year of the participant’s death. For each subsequent year, the life expectancy is that of the previous year reduced by one. (The nonspouse beneficiary’s RMD is calculated using the unrecalculated or fixed-term method.)

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs After the Required Beginning Date If ______, the required minimum distribution is determined as if there is no beneficiary. Distributions must continue over the remaining distribution period of the deceased owner. The decedent’s remaining distribution period is reduced by one each year. a. The Spouse is the Sole Beneficiary b. The Beneficiary is Not the Spouse c. Estate, Charity, or No Named Beneficiary d. Multiple Beneficiaries

c. Estate, Charity, or No Named Beneficiary

Retirement: 7-5 Distribution Due to Death Distributions When Death Occurs After the Required Beginning Date If ______, the required minimum distribution is based on the life expectancy of the oldest beneficiary (determined by his or her age on the birthday in the year following the year of death), unless the separate account rule applies; in which case distributions must begin by December 31 of the year following the year of the participant’s death. a. The Spouse is the Sole Beneficiary b. The Beneficiary is Not the Spouse c. Estate, Charity, or No Named Beneficiary d. Multiple Beneficiaries

d. Multiple Beneficiaries

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions To find the nontaxable amount of the distribution, use the following formula: Nontaxable amount of distribution = Basis / (balance on _____, distribution year + distribution) × distribution a. Apr 1 b. Dec 31

b. Dec 31

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Qualified distributions from a Roth IRA are not taxable. For qualified status, the owner must meet two requirements. First, the owner must have established a Roth IRA at least five years prior to the distribution. Then, if this five-year holding period has been met, a distribution is considered qualified if it is made 1. on or after the date the owner attains age 59½, 2. to a beneficiary after the death of the owner, 3. to the owner because of the owner’s disability, or 4. for a qualified special purpose distribution The only qualified special distribution currently available is for first-time homebuyer expenses of up to $10,000. A first-time homebuyer is one who has not held an ownership interest in a residence for the previous _____ years. a. 2 b. 3 c. 5

a. 2

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Example: Distribution of annual contributions. Jo Rubric, age 37, contributes $2,000 to her Roth IRA on January 5th of each of the following years: 2011, 2012, 2013, and 2014. In December 2014, she withdrew $9,000 from her Roth IRA as a down payment for a car. What is the tax treatment of this withdrawal? a. The first $8,000—her annual contributions—is withdrawn tax-free. The remaining $1,000 represents earnings and is also withdrawn tax-free b. The first $8,000—her annual contributions—is withdrawn tax-free. The remaining $1,000 represents earnings taxed as ordinary income, and the 10% early withdrawal penalty will apply since it is not a qualified distribution

b. The first $8,000—her annual contributions—is withdrawn tax-free. The remaining $1,000 represents earnings taxed as ordinary income, and the 10% early withdrawal penalty will apply since it is not a qualified distribution Would she realize any advantage by postponing her car purchase (and thus her withdrawal) until January 31, 2015? Yes. Although her account would now meet the five-year requirement, she’s less than 59½ and the distribution would still not be a qualified Roth IRA distribution. However, she may withdraw the full $9,000 as a return of contributions and not be subject to tax or penalty.

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Example. Charles Podley made a $100 Roth IRA contribution in 2008; this small contribution started his Roth IRA clock. He made a second contribution in 2009, in the amount of $1,000. In 2015, at age 60, Charles took a $500 withdrawal. Because five years had elapsed since he established his initial Roth IRA account, the five-year qualification period was satisfied. The distribution is _____. a. qualified b. not qualified

a. qualified qualified because he is also over 59½.

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Hodley, made a $2,000 Roth IRA contribution in 2008; this contribution started his Roth IRA clock. He made additional contributions in 2010 and 2012, in the amount of $2,000. In 2015, at age 60, Hodley withdrew his entire balance, $7,200. a. he will not pay tax nor a penalty b. he will not pay tax but will pay a penalty

a. he will not pay tax nor a penalty Because five years had elapsed since he established his initial Roth IRA account, the five-year qualification period was satisfied. The distribution is qualified because Hodley is also over age 59½. He will pay no tax or penalty.

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Helen Garibaldi, age 37, recently terminated her employment with Applied Dynamicals Inc. The company had no qualified plan, but she has a Roth IRA created by rolling over $25,800 from her traditional IRA 20 months ago. Her Roth account has a balance of $30,000. As a result of her layoff, she needed some cash, and so she completed her distribution request form package and requested that her mutual fund company send her $5,500 by check, made in her name. What are the distribution requirements that will directly affect the amount she receives on her distribution check? a. $5,500 - 20%= $4,400 b. In this case, the mandatory withholding requirement will not apply. The check will be for $5,500

b. In this case, the mandatory withholding requirement will not apply. The check will be for $5,500

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Helen Garibaldi, age 37, recently terminated her employment with Applied Dynamicals Inc. The company had no qualified plan, but she has a Roth IRA created by rolling over $25,800 from her traditional IRA 20 months ago. Her Roth account has a balance of $30,000. As a result of her layoff, she needed some cash, and so she completed her distribution request form package and requested that her mutual fund company send her $5,500 by check, made in her name. When should she receive it? a. Since she has invested in securities, she should receive the distribution within three days plus mail time b. Since she has invested in securities, she should receive the distribution within five days plus mail time

a. Since she has invested in securities, she should receive the distribution within three days plus mail time

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Helen Garibaldi, age 37, recently terminated her employment with Applied Dynamicals Inc. The company had no qualified plan, but she has a Roth IRA created by rolling over $25,800 from her traditional IRA 20 months ago. Her Roth account has a balance of $30,000. As a result of her layoff, she needed some cash, and so she completed her distribution request form package and requested that her mutual fund company send her $5,500 by check, made in her name. How will it be taxed? a. tax free with no penalty b. tax free with a penalty

b. tax free with a penalty The distribution will be tax free since it is less than her conversion contribution. She will be assessed a 10% early withdrawal penalty since the distribution is from a converted IRA and five years has not elapsed (she paid the tax that otherwise would be due at the time of conversion).

Retirement: 7-6 Nondeductible IRA and Roth IRA Distributions Gertrude has decided to roll over the distribution she received from her former employer. (Her vested account balance was $10,000.) She had requested that the check be made payable to her, because at the time she thought she would need the money. She has not cashed the check but has held it for 55 days. Can she roll over the distribution? a. yes b. no

a. yes She can roll over the distribution as long as she has not violated the 60-day rule. (The rollover must be completed no later than the 60th day from receipt of the distribution.)

b. no At 65 days she cannot roll over the distribution. Even if she meets the deadline, she will still owe the tax and the penalty on the $2,000 withheld under the mandatory withholding requirement.

(LO 7-2) 2. Which one of the following distributions is not subject to the 10% early withdrawal penalty? Assume the participant is age 35. a. certain distributions made for certain medical expenses b. distributions paid directly from a 401(k) plan to a mutual fund investment account

a. certain distributions made for certain medical expenses Under the provisions of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, certain distributions made for medical expenses can avoid penalties if they fall within HIPAA's parameters.

(LO 7-1 and; LO 7-2) 3. A loan is not a distribution if it meets the loan requirements. Which one of the following will result in a loan being deemed a distribution? a. The term of the loan is for five years. b. Repayment is made on an annual basis. c. The loan is made according to a written loan agreement outlining the terms. d. The loan is less than $50,000 or one-half of the participant's vested benefit, if less. The loan may also be less than the vested amount, if the vested amount is $10,000 or less.

b. Repayment is made on an annual basis. A loan must be repaid according to a schedule of payments that is no less frequent than quarterly, or it will be deemed a distribution.

(LO 7-1 and LO 7-2) 4. A loan is not a prohibited transaction if it meets the loan requirements. Which one of the following is considered a prohibited transaction and will not result in a valid loan? a. a loan made to an unincorporated business owner or partner b. a loan made to the plan sponsor c. a loan made to a 100% owner of a C corporation d. a loan made to a 50% owner of an S corporation

b. a loan made to the plan sponsor A loan made to a plan sponsor is a prohibited transaction; such a loan results in a 15% prohibited transaction penalty and may also result in disqualification of the plan.

(LO 7-1) 5. Hardship distributions must meet certain requirements to be valid, but only certain plans can allow them. Which one of the following plans can allow a hardship distribution? a cash balance plan a money purchase plan a 401(k) profit sharing plan a target benefit plan

a 401(k) profit sharing plan A 401(k) profit sharing plan is permitted to make a hardship distribution and still retain its qualified plan status.

(LO 7-1) 6. Which one of the following types of plans is not subject to qualified domestic relations orders (QDROs)? a. profit sharing plans b. IRAs c. 457 plans d. ESOPs

IRAs IRAs are not subject to QDROs.

(LO 7-4) 7. Distributions from IRAs must begin by April 1 of the year following the year in which an individual reaches age a. 591⁄2. b. 65. c. 701⁄2. d. 75.

c. 701⁄2. Penalties are imposed upon distributions that commence prior to age 591⁄2 or after April 1 following the year the account owner turns age 701⁄2.

(LO 7-4) 8. The required beginning date for required minimum distributions is April 1 of the calendar year following the later of the calendar year in which the employee (1) attains age 701⁄2, or (2) retires. This rule pertains to all but which one of the following? a. IRAs b. qualified plans c. 403(b) plans d. 457 plans

a. IRAs Distributions from an IRA must commence by April 1 of the year following the calendar year in which the individual attains age 701⁄2. Whether or not the individual retires is irrelevant.

(LO 7-4) 9. Which one of the following is not a requirement for electing 10-year forward-averaging tax treatment on a lump-sum distribution? a. The participant must have been born in 1935 or earlier. b. Forward-averaging treatment must be elected for all lump-sum distributions received during the year. c. The taxable amount must be at least $100,000. d. The employee must have been a participant in the plan for at least five years.

c. The taxable amount must be at least $100,000. There is no $100,000 minimum requirement.

(LO 7-4) 10. Charles and Lucy Brown each had $100,000 in their respective IRAs on December 31 of last year. Each has named the other as beneficiary. They need to determine the amount each must withdraw once they are required to make withdrawals. This year, Charles turned age 70 on January 2 and Lucy turned age 70 on March 4. What is the required minimum distribution for each? (Assume the IRS RMD Joint Life Table expected return for two individuals age 70 is 20.6, and when both are age 71, it is 19.8. The Uniform Table factor is 26.2 at age 70 and 25.3 at age 71.) a. $3,750 b. $3,817 c. $4,854 d. $5,284

b. $3,817 $100,000 ÷ 26.2 = $3,817 (The first distribution year results in the same amount for each.)

(LO 7-4) 11. On December 31 of last year, Samuel Hercomavich had $360,000 in his IRA (a five-year CD earning 6.5%). He has named Tuddy Hercomavich, his wife, as beneficiary. He wants you to determine the amount he must withdraw and the date by which the withdrawal must be made. This year, he turned age 70 on October 17, and Tuddy turned age 35 on January 8. (Assume the IRS RMD Joint Life Table expected return for two individuals ages 70 and 35 is 47.5; ages 71 and 36 is 46.6, and ages 72 and 37 is 45.6. The IRS RMD Single Table for an individual age 70 is 16.0, age 71 is 15.3, and age 72 is 14.6.The Uniform Table factor is 26.2 at age 70 and 25.3 at age 71.) What is the smallest required minimum distribution that Samuel can take, and when must distributions begin? a. He must begin distributions on April 1 of this year in the amount of $14,229. b. He must begin distributions on April 1of next year in the amount of $15,154. c. He must begin distributions on April 1 of next year in the amount of $8,072. d. He must begin distributions on April 1 of the year after next in the amount of $8,227.

d. He must begin distributions on April 1 of the year after next in the amount of $8,227. A single distribution is calculated as follows: ($360,000 × 1.065) ÷ 25.3 = $15,154 using the Uniform Table factor at age 71. Since their ages differ by more than ten years, though, the joint life factor results in a larger life expectancy and smaller required distributions, the joint life factor may be used. A joint distribution is calculated as follows: $383,400 ÷ 46.6 = $8,227. (The next payment, due on December 31 of the same year in the amount of $8,954, is obtained when the year-end balance of year 3 is divided by 45.6.) The first payment is due on or before April 1 of the year following the year Samuel attains age 701⁄2 and the next is due by December 31 of that same year.

(LO 7-4) 12. On December 31 of last year (year 1), Samuel Hercomavich had $360,000 in his IRA (a five-year CD earning 6.5%). He has named Tuddy Hercomavich, his wife, as beneficiary. In year 2, Samuel turned 70 on October 17, and Tuddy turned 35 on January 8. Assume that it is now year 4 and that Samuel dies on April 15. Tuddy wants you to determine her distribution alternatives. Which one of the statements below correctly describes one of the choices available to her? a. Because Samuel had selected a joint life expectancy calculation and had begun to receive minimum distribution payments on a recalculated basis (and since his life expectancy became zero), his spouse must receive distribution of the entire amount. b. Tuddy must continue distributions, but they must be recalculated on her life expectancy. c. Tuddy must complete distribution by December 31 of the year containing the fifth anniversary of Samuel's death. d. Tuddy may roll the entire amount remaining in Samuel's IRA into her IRA or continue to distribute it over her life expectancy beginning in the year following the year of Samuel's death. The distribution due in the year of Samuel's death must be made in that year. If she continues distributions, the IRA must be distributed over her life expectancy, reentering the RMD Single Life Table each year.

Tuddy may roll the entire amount remaining in Samuel's IRA into her IRA or continue to distribute it over her life expectancy beginning in the year following the year of Samuel's death. The distribution due in the year of Samuel's death must be made in that year. If she continues distributions, the IRA must be distributed over her life expectancy, reentering the RMD Single Life Table each year. Tuddy could distribute according to any of the previously listed options, but she is not required to do so. The minimum requirements are described in option d.

(LO 7-4) 13. Samuel Hercomavich died in year 4, on April 15, after withdrawing the required minimum amount from his plan. He had named Tuddy Hercomavich, his wife, as beneficiary. Tuddy is 37. Assume that Tuddy elects to continue to receive distributions over her life expectancy. The balance of the IRA on December 31 of year 4 is $456,743. According to her insurance agent, her life expectancy is about 50 years. How much is to be distributed and when? Assume the RMD Single Life Table factors are age 37 - 45.4, 38 – 44.4, 39 – 43.5. a. The distribution amount is $7,688 ($384,400 ÷ 50 = $7,688). According to her insurance agent, Tuddy has a life expectancy of 50 years at her present age of 37. Payments must begin within 30 days of Samuel's death. b. She must continue distributions in the same amount. The recalculation is frozen upon death of the plan owner. Tuddy's distribution amount is $8,227 each year for life. c. She must begin distributions by December 31 of the year following Samuel's death. The amount is $10,287 ($456,743 ÷ 44.4 = $10,287). The factors in the RMD Single Life Table must be used to determine her life expectancy at age 38. d. Tuddy must begin distribution within 30 days of Samuel's death. The amount is $9,422.

c. She must begin distributions by December 31 of the year following Samuel's death. The amount is $10,287 ($456,743 ÷ 44.4 = $10,287). The factors in the RMD Single Life Table must be used to determine her life expectancy at age 38. According to the RMD Single Life Table, a person age 38 has a life expectancy factor of 44.4. Tuddy is 38 in the year following the year of death when her distributions must begin.

(LO 7-2) 14. Which one of the following would not be exempt from the 10% early withdrawal penalty that applies to qualified plans? a. a distribution following separation from service after age 55 b. a distribution made to reduce excess 401(k) plan contributions c. a distribution for educational expenses d. a distribution of ESOP dividends

c. a distribution for educational expenses Distributions from IRAs for certain education expenses are exempt from the 10% early withdrawal penalty, but not distributions from qualified plans.

(LO 7-4) 15. Which one of the following is not a step in the selection process used to determine the most appropriate distribution alternative? a. Review the investment options. b. Project the client's retirement situation. c. Calculate the plan benefit and the income tax for each option. d. Recommend a distribution option.

a. Review the investment options. This should be "review the distribution options." It is the first step in the selection process.

(LO 7-3) 16. A SIMPLE IRA may only be rolled over into which of the following? a. another SIMPLE IRA or nongovernmental 457 plan b. a qualified plan, nongovernmental 457 plan, or TSA c. an IRA, nongovernmental 457 plan, or qualified plan d. a SEP, TSA, qualified plan, SIMPLE IRA, IRA, Roth IRA, or governmental 457 plan that accounts for such rollovers separately

d. a SEP, TSA, qualified plan, SIMPLE IRA, IRA, Roth IRA, or governmental 457 plan that accounts for such rollovers separately A SIMPLE IRA may be rolled over to a SEP, TSA, qualified plan, SIMPLE IRA, IRA, Roth IRA, or governmental 457 plan that accounts for such rollovers separately, after two years. Prior to two years there is a 25% penalty unless rolled to another SIMPLE IRA.

(LO 7-5) 17. Which one of the following types of qualified retirement plans would not be required to provide a surviving spouse a qualified preretirement survivor annuity (QPSA) unless the plan document provides for a QPSA and QOSA? a. target benefit plan b. ESOP c. money purchase plan d. defined benefit plan

b. ESOP If a participant in a defined benefit or defined contribution pension plan dies prior to retirement, the plan must pay benefits to the surviving spouse in the form of a qualified preretirement survivor annuity or qualified optional survivor annuity (QPSA or QOSA). Profit sharing and profit sharing related plans, including ESOPs, may offer such a payout but are not required to unless the plan document provides for a QPSA and QOSA.

(LO 7-1) 18. Which one of the following statements is correct regarding in-service distributions? a. A participant in a money purchase plan may make an in-service withdrawal of money that has been in his account at least two years, and is fully vested if the plan allows in-service distributions. Once he or she has participated in the plan for five years, he or she may withdraw all the vested money if the plan so allows. b. A participant in a profit sharing plan may make an in-service withdrawal of funds that have been in the account at least two years, and is fully vested if the plan allows in-service distributions. Once he or she has participated in the plan for five years, he or she may withdraw all the vested money if the plan so allows. c. A participant in a target benefit plan may make an in-service withdrawal of funds that have been in the account at least two years, and is fully vested if the plan allows in-service distributions. Once he or she has participated in the plan for five years, he or she may withdraw all the vested money if the plan so allows.

b. A participant in a profit sharing plan may make an in-service withdrawal of funds that have been in the account at least two years, and is fully vested if the plan allows in-service distributions. Once he or she has participated in the plan for five years, he or she may withdraw all the vested money if the plan so allows. Only a profit sharing plan may allow an in-service withdrawal. A participant in a profit sharing plan may make an in-service withdrawal of funds that have been in the account at least two years, and is fully vested if the plan allows in-service distributions. Once he or she has participated in the plan for five years, he or she may withdraw all the vested money if the plan so allows.

(LO 7-1) 19. Which one of the following statements is correct about the repayment of a loan to a qualified plan or 403(b) plan? a. Loans from a qualified plan or TSA must be repaid over a period no longer than eight years and payments must be made at least once per year until the balance is repaid. b. Loans from a qualified plan or TSA must be repaid over a period not to exceed 10 years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly by payroll deduction. c. Loans from a qualified plan or TSA must be repaid over a period not to exceed five years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly by payroll deduction.

c. Loans from a qualified plan or TSA must be repaid over a period not to exceed five years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly by payroll deduction. Loans from a qualified plan or TSA must be repaid over a period not to exceed five years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly by payroll deduction.

(LO 7-3) 20. Which one of the following statements correctly identifies what can be rolled over into an IRA? Hardship distributions and loans from a 401(k) or a 403(b) may be rolled over to an IRA, a qualified plan, a 403(b) plan, or a governmental 457 plan. Hardship distributions and loans are subject to the 20% mandatory withholding if not rolled over using a direct rollover. a. Vested benefits in a non-governmental 457 plan. b. Distributions that are specified to take place for 15 years. c. A lump-sum distribution from a qualified plan due to separation of service.

c. A lump-sum distribution from a qualified plan due to separation of service.

(LO 7-7) 21. Which plan is appropriate for a business with a fluctuating cash flow and an owner who is significantly older than the rank-and-file employees? a. cash balance b. defined benefit c. target benefit d. age-weighted profit sharing

d. age-weighted profit sharing An age-weighted formula can be used by a profit sharing plan. This arrangement will work best for a business with a fluctuating cash flow and key employees who are older than the other employees. Pension plans (i.e., cash balance plans and target plans) are subject to minimum funding requirements and may create a problem for a business with a fluctuating cash flow, even though they will maximize contributions for older employees. A service-based formula will favor employees who have many years of service with the business.

(LO 7-7) 22. Which one of the following qualified plans is most likely to motivate younger, lower-paid employees and improve a for-profit company's performance? a. profit sharing b. cash balance c. 401(k) d. target benefit

a. profit sharing A profit sharing plan can be structured to reward employees for helping to increase company profits. A cash balance plan is best suited for providing retirement benefits for employees of all ages. Neither a 401(k) plan nor a target benefit plan is considered to be rewarding employees for helping to increase company profits.

(LO 7-2) 23. Which one of the following is exempt from the 10% penalty on qualified plan distributions made before age 591⁄2? a. distributions made to an employee because of "immediate and heavy" financial need b. in-service distributions made to an employee age 55 or older c. substantially equal periodic payments made to a participant following separation from service, based upon the participant's remaining life expectancy

c. substantially equal periodic payments made to a participant following separation from service, based upon the participant's remaining life expectancy The 10% premature distribution penalty does not apply to annuitized payments based upon an individual's remaining life expectancy. The law does not recognize heavy and immediate financial 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.

(LO 7-1). 24. A QDRO (qualified domestic relations order) is a court order. QDROs do not apply to a. IRAs. b. Section 403(b) plans. c. Section 457 plans.

a. IRAs. QDROs do not apply to IRAs, but they do apply to qualified plans, Section 403(b) plans, and Section 457 plans.

(LO 7-2) 25. If a participant with a 403(b) plan turns age 55 and separates from service, the plan distributions resulting from that termination a. are not subject to the early withdrawal penalty. b. would not be taxable, but subject to the 10% penalty. c. would be taxable subject to the 10% penalty.

a. are not subject to the early withdrawal penalty. If a participant turns age 55 and separates from service, the plan distributions resulting from that termination would be subject or ordinary income tax, but is not subject to the early withdrawal penalty. However, such a distribution from an IRA would be subject to the early withdrawal penalty.

(LO 7-7) 26. Alice Smith, age 43, employs three women in their 20s and 30s in the bookkeeping service she started two years ago. She and her employees all make moderate incomes within the range paid for similar work in their city. Alice's business may show a small profit for the first time this year, depending upon how much must be spend for the computer equipment it badly needs to remain competitive. Alice would like to help her employees as much as possible because she remembers her own difficulties at their ages when trying to support herself and her family. Is a qualified retirement plan currently an appropriate option to help fulfill Alice's objective of helping her employees, and why or why not? a. yes, because she could save more for her retirement since the money put into the qualified plan would be deductible b. yes, because she would be required by law to contribute to the qualified plan on behalf of her employees c. no, because the business has not matured sufficiently since excess cash is needed to pay for new equipment

c. no, because the business has not matured sufficiently since excess cash is needed to pay for new equipment Alice's business is only two years old, has not yet shown a profit, and likely will apply all or most of this year's available cash to upgrading the word processing equipment. Even though Alice has good intentions, these factors indicate that it would not be prudent for her to install a qualified plan at this time.

(LO 7-3) 27. Recently Jennifer separated from service with Acme Inc. at age 52, and rolled her qualified plan lump-sum into a new IRA. She had been a plan participant for 12 years. This year, she began to work for a new employer who provides a profit sharing plan for employees. Jennifer will be eligible to participate in her new employer's profit sharing plan in June of next year. Which one of the following statements describes an option that will be to Jennifer's benefit? a. Jennifer should leave the rollover funds in the IRA for three more years; at age 55, she can distribute the account and benefit from lump-sum forward averaging treatment. b. Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. c. Jennifer should leave the rollover funds in the rollover IRA until she is age 65; then she can distribute the IRA and benefit from lump-sum forward averaging treatment.

c. Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Having the money in a qualified plan could also provide her more flexibility than an IRA when she begins to receive distributions. Forward-averaging treatment is not available on any distribution from an IRA. Jennifer would not qualify for forward averaging since she was not born in 1935 or earlier. Taking a current distribution from the IRA would result in a current tax liability.

(LO7-2) 28. Frank is age 54 and married. Frank and his wife, Helen, have a daughter named Meredith attending college. Frank has been making salary reduction contributions to his employer-sponsored 401(k) plan for the past four years, and is considered a highly compensated employee. The current balance of his 401(k) account (nonforfeitable accrued benefit) of $21,500, which includes $3,500 account earnings. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. Frank needs to use some of his plan assets to pay college tuition. Which of the following is a correct statement about how Frank could meet Meredith's college expenses? a. The maximum plan loan Frank could take is $10,750. b. Frank could withdraw the full $21,500 from his 401(k) account under the hardship provisions. c. Frank is not allowed to take a loan from the plan since he is a highly compensated employee. d. Frank would not have to pay a premature distribution penalty tax if he made the maximum hardship withdrawal.

a. The maximum plan loan Frank could take is $10,750. Frank can borrow up to 50% of the nonforfeitable accrued benefit of $21,500—i.e., $10,750.

(LO 7-3) 29. Which one of the following types of distributions are eligible for rollover treatment? a. Distributions that are part of a series of substantially equal periodic payments are eligible for rollover treatment. b. A lump-sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. c. Distributions that are made to comply with the minimum distribution requirements are eligible for rollover treatment. d. The nontaxable portion of any IRA distribution is eligible for rollover treatment.

b. A lump-sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. A lump-sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. The following distributions are not eligible for rollover treatment. 1. Distributions that are part of a series of substantially equal periodic payments are not eligible for rollover treatment. 2. Distributions that are made to comply with the minimum distribution requirements are not eligible for rollover treatment. 3. The nontaxable portion of any IRA distribution is not eligible for rollover treatment.

(LO 7-4) 30. Terri Nelson, age 44, has been a participant in her employer's profit sharing plan for seven years. This year, she withdraws $16% (20% of her account balance) from the plan to cover her son's first year in college. Which one of the statements below correctly describe the consequences of this withdrawal? a. The amount withdrawn will be subject to a 10% early withdrawal penalty and ordinary income tax. b. The distribution is exempt from the 10% penalty since it is for higher education. c. The distribution is considered a hardship withdrawal and is exempt from any penalty.

a. The amount withdrawn will be subject to a 10% early withdrawal penalty and ordinary income tax. A withdrawal prior to age 591⁄2 is considered an early withdrawal and is subject to the 10% penalty and income taxation. Use of the distribution for higher education does not make it exempt from the penalty.

(LO 7-2) 31. If nondeductible contributions have been made to an IRA, then distributions from the IRA a. are only partially taxable. b. would be based upon first-in first-out to determine if any of the distribution would be taxable. c. would be tax-free up to the amount of the nondeductible contributions.

a. are only partially taxable. A portion of these distributions is considered to be a nontaxable return of contribution.

(LO 7-1) 32. All of the following uses of funds are commonly allowed as hardship withdrawals from 401(k) plans except for distributions to a. purchase a primary residence. b. pay medical expenses. c. fund home repairs. d. make tuition payments.

c. fund home repairs. A distribution to fund home repairs would not normally be allowed as "an immediate and heavy financial need."

(LO 7-2) 33. All of the following reasons for withdrawal allow the participant to avoid the IRS 10% early withdrawal penalty except a. death. b. disability. c. certain medical expenses. d. the purchase of an automobile.

d. the purchase of an automobile. Money withdrawn to purchase an automobile would be subject to the 10% early withdrawal penalty.

(LO 7-5) 34. Many of the minimum distribution requirements that apply to inherited IRAs a. also generally apply to inherited qualified plan benefits. b. rarely apply to inherited qualified plan benefits. c. do not apply if the plan participant died before the required beginning date.

a. also generally apply to inherited qualified plan benefits. Generally speaking, many of the same rules apply to both types of plans. The specific minimum distribution requirements that apply depend upon whether a plan participant died before or after the required beginning date.

(LO 7-4) 35. Anastasia Roamer is a single person and expects to begin distributions from her IRA at age 75 since she retired at age 741⁄2. Which of the following statements would not be accurate as implications of a distribution made at that time? a. Recalculation of life expectancy is automatic when using the Uniform Table since the table is reentered each year at the attained age for that year. b. If Anastasia dies after the required beginning date without a designated beneficiary, the required minimum distribution for the year of death is determined by entering the RMD Single Life Table at her attained age in the year of death. Life expectancy is reduced by one year for each subsequent year. c. Assume that Anastasia is married and her husband is her beneficiary, if Anastasia dies after beginning distributions, remaining benefits may be paid over her husband's life expectancy, beginning in the year following the year of her death, determined by reentering the RMD Single Life Table each year with his attained age for that year. d. Since Anastasia just retired, there will not be any distribution penalty on amounts that were not distributed in the past.

Since Anastasia just retired, there will not be any distribution penalty on amounts that were not distributed in the past. d. Since Anastasia is starting distributions from an IRA. a distribution penalty of 50% will apply on amounts that were not distributed but should have been starting April 1 following the year she attained age 701⁄2.

(LO7-6) 36. All of the following groups would benefit from using Roth IRAs except a. low-income wage earners who need current deductions. b. high-income wage earners who have exhausted the tax benefits of other tax-favored vehicles. c. low-income wage earners who are active participants in their employers' plans and are not eligible to make deductible IRA contributions. d. taxpayers who anticipate being in a higher tax bracket in their retirement years.

a. low-income wage earners who need current deductions. Roth IRAs offer no current deductions. Low-income wage earners needing current deductions are better served by traditional IRAs.

(LO 7-2) 37. A qualified plan offering hardship withdrawals must allow the participant to take withdrawals from a. both elective deferrals: employer contributions, and earnings. b. the employee's total elective deferral contributions reduced by the amount of previous distributions of elective contributions. c. employer contributions, employee contributions, and forfeitures allocated to a participant's account

b. the employee's total elective deferral contributions reduced by the amount of previous distributions of elective contributions. The amount available for a hardship withdrawal consists solely of amounts the employee defers.

(LO 7-2) 38. Which of the following distributions from a qualified plan will be subject to the 10% early withdrawal penalty? a. Harold turns 54 in December and retires the next month, taking a lump sum distribution upon retirement. b. Jessica, 37, separates from service and begins taking approximately equal distributions from her qualified plan over her life expectancy. c. George, 29, passes away and his wife receives George's entire account balance as his named beneficiary. d. Betty, 58, takes a $5,000 distribution from her qualified plan to pay for her daughter's tuition.

d. Betty, 58, takes a $5,000 distribution from her qualified plan to pay for her daughter's tuition. Harold turns 55 in the year he separates, so he will not be subject to the penalty. Jessica is taking a 72(t) distribution of substantially equal periodic payments and thus is exempt from the penalty. George's wife is exempt from the penalty due to the death of the participant. Betty would have escaped the penalty if she took the distribution from an IRA, but qualified plans do not give an exception for tuition expense.

(LO 7-6) 39. Teresa Slater, age 37, recently terminated her employment with Applied Dynamicals Inc. The company had no qualified plan, but she has a Roth IRA created by rolling over $25,800 from her traditional IRA 20 months ago. Her Roth account has a balance of $30,000. As a result of her layoff, she needed some cash, and so she completed her distribution request form package and requested that her mutual fund company send her $5,500 by check, made in her name. Which one of the following statements best describes the distribution requirements that will directly affect the amount she receives on her distribution check? a. The 20% mandatory withholding requirement will apply. b. The distribution will be tax-free since it is less than her conversion contribution. c. The distribution will be tax-free and without any premature distribution penalty since it is less than her conversion contribution

b. The distribution will be tax-free since it is less than her conversion contribution.

(LO 7-7) 40. Which one of the following statements best describes how the design of an employee retirement program may minimize turnover? a. Defined benefit plans that relate the amount of the retirement benefit to years of service and highest compensation may encourage employees to stay at the company until retirement. b. Use of a three-year cliff has been seen to help reduce turnover. c. The need to remain at the company for seven years with a defined contribution plan to be fully vested has been seen to reduce turnover.

a. Defined benefit plans that relate the amount of the retirement benefit to years of service and highest compensation may encourage employees to stay at the company until retirement.

Retirement: 7 Retirement Plan Distributions Flashcards

(130 cards)