Retirement Income and Distribution Strategies - Review Questions Flashcards
Which of the following is NOT an investment option that is typically offered in a retirement plan?
Choose the best answer.
1) Stock
2) Series EE Bond
3) Cash equivalent
4) Bond
2) Series EE Bond
Most plans offer stock, bond and cash equivalent options in their plan, which will cover the three investment alternatives that are required.
Using the appropriate life insurance products in a qualified plan can provide unpredictable costs for the employer.
Choose the best answer.
True
False
False
The use of appropriate life insurance products for funding a qualified plan can provide extremely predictable plan costs for the employer.
Which of the following statements are true regarding fully insured pension plans? (Check all that are true.)
1) Funded exclusively by life insurance or annuity contracts.
2) There is a trusteed side fund.
3) Fully insured plans may solve the problem of “overfunded” plans.
4) Fully insured plans are very popular currently.
1) Funded exclusively by life insurance or annuity contracts.
3) Fully insured plans may solve the problem of “overfunded” plans.
A fully insured pension plan is one that is funded exclusively by life insurance or annuity contracts. There is no trusteed side fund. Such plans were once common, but the high interest rates of the late 1970s lured many pension investors away from traditional insured pension products.
Profit sharing plans can use 100% of the employer contribution to purchase insurance of any type after it has been in the plan for two years?
Choose the best answer.
True
False
True
Any employer contribution that has been in the profit sharing plan for at least two years can be used up to 100% for insurance purchases of any type as long as the plan specifies that the insurance will be purchased only with such funds.
Insurance outside the plan is paid for entirely by after tax dollars, so the person is benefitting from tax deductibility.
Choose the best answer.
True
False
True
Insurance outside the plan is paid for entirely with after-tax dollars, so there is no tax deferral.
Kate has a 403(b) account and she would like to roll it into her new 401(k) account. Is this transaction permissible?
Choose the best answer.
Yes
No
Yes
Rollovers between various types of retirement plans are allowed provided the receiving plan document permits the rollover
Neely participates in her retirement plan. She received a notice to elect a survivorship benefit, but never made the election. What is her automatic benefit?
Choose the best answer.
1) Preretirement survivor benefit
2) Non-spousal benefit
3) No preretirement survivor benefit
1) Preretirement survivor benefit
The preretirement survivor annuity is an automatic benefit. If no other election is made, a preretirement survivor annuity is provided.
An annuity or pension payout option that provides a guaranteed lifetime payment to the participant and will provide payments to a designated beneficiary for a predetermined length of time if the participant dies shortly after initiating payments is known as a:
Choose the best answer.
1) Fixed period option
2) Joint life option
3) Guaranteed payment option
4) Lifetime payments with period certain option
4) Lifetime payments with period certain option
Which of the following statements best describe the taxation of an immediate annuity or annuitized deferred annuity?
I) Once all basis has been received from a non-qualified annuity 100% of remaining payments will be taxed as
ordinary income.
II) Income payments from an IRA annuity will be 100% taxable as ordinary income.
III) Income payments from a non-qualified annuity will consist partially of non-taxable return of basis and
partially as investment earnings taxed as capital gains.
IV) Income payments from a non-qualified annuity will consist partially of non-taxable return of basis and
partially as investment earnings taxed as ordinary income until all basis has been returned.
Choose the best answer.
1) I and IV
2) I, III, and IV
3) II and IV
4) I, II, and IV
4) I, II, and IV
The following all describe advantages of life insurance held within a defined contribution plan EXCEPT:
I) Life insurance cash values will provide a secure rate of return that is comparable to that of a diversified target
date mutual fund.
II) The net cost for insurance may be less as it can be paid for with pre-tax income.
III) Any amount of coverage may be purchased within the plan.
IV) Life insurance allows an employer to provide a participant’s beneficiaries with a large benefit that may
compensate for the years of contributions that are lost when a participant dies prematurely.
Choose the best answer.
1) II and IV
2) I and III
3) I, II, and III
4) I, III, and IV
2) I and III
Although very secure and often providing a guaranteed minimum interest rate, the rate of return of life insurance cash values is low compared to a balanced mutual fund such as a target date fund. Life insurance in a qualified plan is limited to an amount deemed to be an incidental benefit, defined as coverage with maximum costs of 50% of the participant’s cost to the plan for whole life and 25% of the participant’s cost to the plan for term or universal life insurance.
Which of the following is NOT a possible funding arrangement for a qualified defined benefit plan incorporating the use of life insurance?
Choose the best answer.
1) Partially Insured
2) Envelope Funding
3) Fully Insured
4) Combination Plan
1) Partially Insured
Your client has approached you asking to deposit the annual required minimum distribution she received from her IRA into her employer-sponsored 401(k) retirement plan, which you advise. The client is still working full time. How should you reply to this request?
Choose the best answer.
1) Deposit the funds in your client’s 401(k) account within 60 days.
2) Explain that the RMD cannot be rolled over and suggest the client contact her CPA to discuss how the RMD
will affect her annual tax liability.
3) Suggest that the amount of the RMD be rolled over to your participant’s IRA annuity to increase the income
benefit available from that account.
4) Explain the RMD cannot be rolled over and suggest transferring the IRA account to the 401(k) account in
order to delay subsequent required minimum distributions until retirement.
4) Explain the RMD cannot be rolled over and suggest transferring the IRA account to the 401(k) account in
order to delay subsequent required minimum distributions until retirement.
“Explain that the RMD cannot be rolled over and suggest the client contact her CPA to discuss how the RMD will affect her annual tax liability.”
and
“Explain the RMD cannot be rolled over and suggest transferring the IRA account to the 401(k) account in order to delay subsequent required minimum distributions until retirement.”
Both are feasible options.
“Explain the RMD cannot be rolled over and suggest transferring the IRA account to the 401(k) account in order to delay subsequent required minimum distributions until retirement.” is the better choice as it not only concurs with tax law but provides the client with a means of reducing their tax liability prior to retirement.
Your client, Edward, has done very well in IT sales and is retiring at age 56. He wants to be able to use his IRA account to pay for his fixed-rate mortgage prior to the start of his pension at age 62. Which of the following would best allow Edward to fulfill this objective?
Choose the best answer.
1) Use the IRA to fund a variable deferred annuity that will provide a guaranteed amount of lifetime income
equal to the mortgage payment.
2) Begin receiving a series of substantially equal periodic payments calculated using the amortization or annuity
factor method.
3) Suggest that Edward simply withdraw funds as needed, and that he will not incur a penalty since he is no
longer employed.
4) Begin receiving a series of substantially equal periodic payments calculated using the required minimum
distributions method.
2) Begin receiving a series of substantially equal periodic payments calculated using the amortization or annuity
factor method.
The VA will provide income for life when Edward is only concerned here with funding mortgage payments to age 62, after which he will have a pension to help fund his needs. A Series of Substantially Equal Periodic Payments may be discontinued after the later of 5 years of payments or the attainment of age 59½. The amortization or annuity factor method must be used to provide a fixed amount of income to match the fixed amount of Edward’s mortgage. The required minimum distributions method results in an increasing payment amount each year.
