Retirement Planning & Employee Benefits | Lesson 4: Other Tax-Advantaged Plans

Question 1

Greg took a lump-sum distribution from his employer’s qualified plan at age 54 when he terminated his service. He chose to use this money as a short-term loan to himself to start his business, expecting to put it back in an IRA account in 60 days. He deposited the money on the 62nd day after his distribution. What are his tax ramifications, if any?

1. 10% early withdrawal penalty.
2. 20% mandatory withholding from the employer plan.
3. Ordinary income taxes due.
4. Long-term capital gains due.

a) 2 only.
b) 2 and 3.
c) 1, 2, & 3.
d) 1, 2, 3, and 4.

Answer 1

Answer: C
All penalties and taxes will need to be accounted for. Missing the 60-day roll-over window in an indirect rollover will have the 20% mandatory withholding, ordinary income would be due on the whole distribution, and a 10% early withdrawal penalty would apply since he is under age 55 at the separation of service. Long-term capital gains would not apply.

Question 2

Ashley (age 55) is single, divorced in 2016, and has received the following items of income this year:
Pension annuity income from QDRO: $21,000
Interest and dividends: $5,000
Alimony: $1,000
W-2 Income: $1,200
What are the most that Ashley can contribute to a Roth IRA for 2022?
a) $1,200.
b) $2,200.
c) $6,000.
d) $7,000.

Answer 2

Answer: B
Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $6,000 for 2022. Ashley had made an income of $2,200 from the alimony (for a divorce before 12/31/2018) and W-2 income she received. Thus, she is limited to a contribution of $2,200. The other $26,000 of income is not earned income and, therefore, is unavailable for contributions to any IRA.
Note: An additional catch-up contribution of $1,000 for 2022 is permitted for individuals who have attained age 50 by the close of the tax year. Her total remains at $2,200 because that is all the earned income she has.

Question 3

Which of the following statements is/are correct regarding SEP contributions made by an employer?

1. Contributions are subject to FICA and FUTA.
2. Contributions are currently excludable from employee participants’ gross income.
3. Contributions are capped at $20,500 for 2022.
   a) 1 only.
   b) 2 only.
   c) 1 and 2.
   d) 1, 2, and 3.

Answer 3

Answer: B
Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $20,500 for 2022. The SEP limit is 25% of covered compensation up to $61,000 for 2022.
Note: The maximum compensation that may be taken into account in 2022 for purposes of SEP contributions is $305,000. Therefore, the maximum amount that can be contributed to a SEP in 2022 is $61,000 (25% × $305,000, limited to $61,000).

Question 4

A SEP is not a qualified plan and is not subject to all of the qualified plan rules; however, it is subject to many of the same rules. Which of the following are factual statements?

1. SEPs and qualified plans have the same funding deadlines.
2. The contribution limit for SEPs and qualified plans (defined contribution) is $61,000 for 2022.
3. SEPs and qualified plans have the same ERISA protection from creditors.
4. SEPs and qualified plans have different nondiscriminatory and top-heavy rules.

a) 1 only.
b) 1 and 2.
c) 2 and 4.
d) 1, 2, 3, and 4

Answer 4

Answer: B
SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $61,000 for 2022 ($305,000 maximum compensation × 25%, limited to $61,000). Thus, Statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same non-discriminatory and top-heavy rules.

Question 5

Sawyer, age 25, works for Island Horticulture. Island Horticulture adopted a SIMPLE plan six months ago. Sawyer made an elective deferral contribution to the plan of $8,000, and Island Horticulture made a matching contribution of $2,400. Which of the following statements is/are correct?

1. Sawyer can withdraw his entire account balance without terminating employment.
2. Sawyer can roll his SIMPLE IRA into his traditional IA upon terminating employment.
3. Sawyer will be subject to ordinary income taxes on withdrawals from the SIMPLE.
4. Sawyer may be subject to a 25% early withdrawal penalty on amounts withdrawn from the SIMPLE.
   a) 1 and 2.
   b) 1 and 3.
   c) 2, 3, and 4
   d) 1, 3, and 4.

Answer 5

Answer: D
Statement 1 is correct. SIMPLEs must provide 100% immediate vesting of employer contributions. The entire balance is available for withdrawal. Statement 2 is incorrect. A SIMPLE IRA cannot be rolled into a traditional IRA until the participant has been in the SIMPLE IRA for two years. Tyler has only been in the SIMPLE for six months. Statement 3 is correct. The entire withdrawal will be subject to ordinary income tax in the year of withdrawal. Statement 4 is accurate because the early withdrawal penalty for a SIMPLE is 25% for withdrawals occurring within the first two years of participation.

Question 6

Which of the following is/are correct regarding SIMPLE plans?

1. A SIMPLE plan does not require annual testing.
2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top-heavy.
3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan.
4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $20,500 for 2022 and $27,000 for 2022 for an employee over 50.
   a) 3 only.
   b) 1 and 3.
   c) 1, 2, and 3.
   d) 2,3, and 4.

Answer 6

Answer: B
Statement 1 is correct. Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always 100% vested. Statement 3 is accurate. The early withdrawal penalty is 25% for distributions taken within the first two years of participation. Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $14,000 for 2022. Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up adjustment ($3,000 for 2022).

Question 7

Which of the following statements is/are correct regarding TSAs and 457 deferred compensation plans?

1. Both plans require contracts between an employer and an employee.
2. Participation in either a TSA or a 457 plan will cause an individual to be considered an “active participant” to decrease the deductibility of traditional IRA contributions.
3. Both plans allow a 10-year forward averaging tax treatment for lump-sum distributions.
4. Both plans must meet minimum distribution requirements for qualified plans.
   a) 1 only.
   b) 1 and 4.
   c) 2, 3, and 4.
   d) 1, 2, and 4.

Answer 7

Answer: B
Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred-compensation arrangement that will not cause a participant to be considered an “active participant.” Statement 3 is false because 10-year forward averaging is not permitted from either plan.

Question 8

Which are permitted investments in a 403(b) TSA (TDA) plan?

1. An annuity contract from an insurance company.
2. An international gold stock mutual fund.
3. A self-directed brokerage account consisting solely of US stocks, bonds, and mutual funds.

a) 1 only.
b) 2 only.
c) 1 and 2.
d) 1, 2, and 3.

Answer 8

Answer: C
TSA (TDA) funds can only invest in annuity contracts (Statement 1) and mutual funds (Statement 2). No self-directed brokerage accounts are permitted.

Question 9

Hugo, age 57, has compensation of $150,000 and wants to defer the maximum to his public 457(b) plan. The normal retirement age for his plan is age 60. How much can he defer in 2022 if he has an unused deferral of $60,000 from age 40 to 49?

a) $20,500.
b) $27,000.
c) $41,000.
d) $61,000.

Answer 9

Answer: C
He can contribute $41,000 (2x $20,500). He must be within three years of retirement and have unused deferral. Note that since he used the final 3-year catch-up, he cannot use the over-50 catch-up.

Question 10

Which of the following plans permits employers to match employee elective deferral contributions or make non-elective contributions?

1. 457(b).
2. 401(k).
3. 403(b).

a) 2 only.
b) 3 only.
c) 2 and 3.
d) 1, 2, and 3.

Answer 10

Answer: D
All three plans permit employer matching and non-elective contributions. The 457 employer contribution goes against the $20,500 limit, whereas employer contributions do not go against the $20,500 limit for 401(k) and 403(b) plans.