Retirement Plans

Question 1

ERISA legislation was enacted to protect:

A. employee retirement funds from employer mismanagement
B. employee retirement funds from government mismanagement
C. retirement fund accounts against broker-dealer mismanagement
D. retirement fund accounts against investment adviser mismanagement

Answer 1

The best answer is A.

ERISA was enacted to protect employee retirement funds from employer mismanagement.

Question 2

Which statement is TRUE about the use of index option strategies by managers of pension plans subject to ERISA requirements?

A. Index option trades are permitted without restriction
B. Index option trades are permitted only if the options are broad based and exchange traded
C. Index option trades are permitted only if such transactions conform with the objectives stated in the plan document
D. Index option trades are prohibited under ERISA legislation

Answer 2

The best answer is C.

There is no prohibition on the trading of options by retirement plans subject to ERISA (Employee Retirement Income Security Act) regulation. However, before a plan may engage in options trades, it must adopt a policy, in the plan document, of permitting options transactions. It is common for large pension plans to use index options contracts to hedge positions (by buying index puts) and to generate extra income by selling index call contracts.

Question 3

Distributions after age 59 ½ from tax qualified retirement plans are:

A. 100% taxable
B. partial tax free return of capital and partial taxable income
C. 100% tax free
D. 100% tax deferred

Answer 3

The best answer is A.

Contributions to tax qualified plans such as Keogh Plans are tax deductible. They are made with “before-tax” dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

Question 4

Which of the following statements are TRUE regarding contributions to, and distributions from, tax qualified retirement plans?

I Contributions are made with before tax dollars
II Contributions are made with after tax dollars
III Distributions are 100% taxable
IV Distributions are partially tax free, with the amount above the original cost basis being taxable

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 4

The best answer is A.

Contributions to tax qualified retirement plans are tax deductible. They are made with “before-tax” dollars, hence those funds were never taxed. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

Question 5

Distributions after age 59 ½ from non-tax qualified retirement plans are:

A. 100% taxable
B. partial tax free return of capital and partial taxable income
C. 100% tax free
D. 100% tax deferred

Answer 5

The best answer is B.

Contributions to non-tax qualified plans, such as most variable annuities, are not tax deductible. They are made with “after-tax” dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital is not taxed; the earnings are taxed.

Question 6

A defined benefit plan:

A. excludes employees earning less than $20,000 per year
B. is required to vest 100% of contributions after 1 year’s service
C. gives the greatest benefit to high salaried employees close to retirement age
D. bases contributions solely on each employee’s earnings

Answer 6

The best answer is C.

Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions.

Question 7

Which of the following statements are TRUE about non-contributory defined benefit retirement plans?

I Contribution amounts are fixed
II Contribution amounts vary
III Annual benefit payments are fixed
IV Annual benefit payments vary

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 7

The best answer is C.

In a “defined benefit” retirement plan, contribution amounts vary based upon the age of the person covered under the plan. Larger contributions are made for older plan participants nearing retirement than for younger plan participants who have many years left until retirement. Once benefit payments start, the amount of the benefit is fixed - since the plan funded a “defined” benefit. The other type of plan is a “defined contribution.” In this type, the contribution amount is fixed. The benefit payment depends on the investment results of the fixed contributions made, and hence can vary.

Question 8

If a corporation has an unfunded pension liability, this means that:

A. inflation has eroded the value of the portfolio funding the plan
B. the plan is in default because the existing retirees’ benefit claims are not being met
C. the expected future value of fund assets is less than projected benefit claims
D. the expected future value of fund assets is more than projected benefit claims

Answer 8

The best answer is C.

An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.

Question 9

Which of the following are characteristics of Defined Contribution Plans?

I Annual contribution amounts are fixed
II If the corporation has an unprofitable year, the contribution may be omitted
III The annual benefit varies dependent on the number of years that the employee is included
IV This type of plan is not subject to ERISA requirements

A. I and II only
B. I and III only
C. II, III, and IV
D. I, II, III, IV

Answer 9

The best answer is B.

Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements.

Question 10

Which of the following are characteristics of Defined Contribution Plans?

I Annual contribution amounts are fixed
II Annual contribution amounts will vary
III If the corporation has an unprofitable year, the contribution may be omitted
IV If the corporation has an unprofitable year, the contribution must still be made

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 10

The best answer is B.

Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. If the corporation has an unprofitable year, it must still make the contributions.

Question 11

Which of the following are characteristics of Defined Contribution Plans?

I Annual contribution amounts are fixed
II Annual contribution amounts will vary
III The benefit amount to be received is fixed
IV The benefit amount to be received will vary

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 11

The best answer is B.

Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.

Question 12

For the year 2019, the maximum annual contribution to an Individual Retirement Account for a single person is:

A. 100% of income or $6,000 whichever is less
B. 100% of income or $6,000, whichever is greater
C. 100% of income or $12,000, whichever is less
D. 100% of income or $12,000, whichever is greater

Answer 12

The best answer is A.

For the year 2019, the maximum permitted contribution to an IRA is 100% of income or $6,000, whichever is less. If a person earns $1,000 per year, then the maximum permitted contribution would be only $1,000. (Of course, it is highly doubtful that this person would make a contribution, since he or she would probably prefer to eat instead!) Contributions are based on earned income only - dividend or interest income cannot be used as the basis for making a contribution.

Question 13

For the year 2019, the maximum contribution that an individual under age 50 can make to an IRA is:

A. $3,000
B. $6,000
C. $9,000
D. $12,000

Answer 13

The best answer is B.

In 2019, for an individual under age 50, the maximum contribution to an IRA is the lesser of 100% of income or $6,000.

Question 14

A 65-year old individual has just retired after working for the same employer for 20 years. He will collect an annual pension benefit of $50,000, but is not yet ready to stop working. He has lined up a part-time job that will pay $3,000 this coming year. How much can he contribute to a Traditional Individual Retirement Account for his first year in retirement?

A. 0
B. $3,000
C. $6,000
D. $7,000

Answer 14

The best answer is B.

Because this individual is not yet age 70 ½, he can still contribute to a Traditional IRA – but only based on earned income – not on his pension income. The maximum contribution in 2019 is 100% of earned income, capped at $6,000. In addition, he qualifies for a $1,000 additional catch-up contribution. But all of this is moot, because he only has $3,000 of earned income, so this is the maximum IRA contribution for this year.

Question 15

In 2019, the maximum contribution that an individual who earns $1,000 can make to an IRA is:

A. $1,000
B. $4,000
C. $5,000
D. $6,000

Answer 15

The best answer is A.

For the year 2019, the maximum individual contribution to an IRA is the lesser of 100% of income or $6,000. Since this person earns $1,000, the maximum permitted contribution is $1,000. Of course, if someone only earns $1,000 per year, they probably don’t have enough money to eat and the probably don’t have any excess funds to put into an IRA - but that is not part of the question!

Question 16

The maximum contribution in the year 2019 into an IRA for an individual, age 50 or older, is:

A. $1,000
B. $6,000
C. $7,000
D. $9,000

Answer 16

The best answer is C.

For the year 2019, the maximum contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra “catch up” contribution of $1,000, for a total permitted contribution of $7,000.

Question 17

In 2019, an unmarried person under age 50 earning $74,000 a year, is not covered by a pension plan. The maximum tax deductible Individual Retirement Account contribution for this year is:

A. 0
B. $6,000
C. $7,000
D. $9,000

Answer 17

The best answer is B.

In the year 2019, the maximum contribution to an IRA is 100% of income up to $6,000 for an individual. If this person is not covered by a qualified retirement plan, regardless of income, the contribution is deductible.

Question 18

A husband and wife both work, earning $150,000 each. Both are age 45 and are covered by employer-sponsored qualified retirement plans. What is the maximum deductible contribution that can be made to an IRA in 2019?

A. 0
B. $3,000 each
C. $6,000 each
D. $9,000 each

Answer 18

The best answer is A.

Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2019 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $123,000 in year 2019 (the deduction phases out between $103,000 - $123,000 of income). Since this question asks for the maximum “deductible” contribution, the answer is “0.”

Question 19

A working couple has a combined income of $150,000. Neither are covered by an employer sponsored pension plan. Which statement is TRUE about IRA contributions by these persons?

A. IRA contributions are prohibited since these persons can be covered by an employer sponsored plan
B. IRA contributions are prohibited since these persons’ income exceeds allowed limits
C. IRA contributions are permitted; however the contribution amount is not deductible
D. IRA contributions are permitted with the contribution amount being tax deductible

Answer 19

The best answer is D.

Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 20190 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $123,000 in year 2019 (the deduction phases out between $103,000 - $123,000 of income).

Question 20

A married couple earning over $123,000 in year 2019, where both are covered by pension plans, wishes to contribute to an IRA. Which statement is TRUE?

A. Annual tax deductible contributions of $12,000 can be made to an IRA
B. Annual $12,000 contributions to the IRA can be made, but they are not tax deductible
C. Annual tax deductible contributions of $6,000 can be made to an IRA
D. No contributions can be made

Answer 20

The best answer is B.

Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2019 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $123,000 in year 2019 (the deduction phases out between $103,000 - $123,000 of income).

Question 21

A divorced woman with 2 young children has a small trust fund that gives her $2,500 a year in income. She collects another $2,500 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE?

A. No contribution can be made based on either the alimony payments or the trust fund income
B. A contribution can be made based only on the income received from the trust fund
C. A contribution can be made based only on the alimony payments received
D. A contribution can be made based on both the income received from the trust fund and the alimony payments received

Answer 21

The best answer is A.

IRA contributions can only be made based on earned income - meaning income from one’s work. Portfolio income does not count, since it is not earned income. Alimony and child support payments, starting in 2019, also do not count.

(Of course, the big question here is: “If this person only has total income of $5,000 a year, how would she be able to make an IRA contribution since she doesn’t even have enough money to eat?!”)

Question 22

In the year 2019, a divorced woman under age 50 collects $50,000 of alimony and child support as her sole source of income. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE?

A. No contribution can be made because the woman does not have earned income
B. A contribution of up to $6,000 is permitted, but the contribution is not tax deductible.
C. A tax deductible contribution of up to $6,000 is permitted
D. A tax deductible contribution of up to $12,000 is permitted

Answer 22

The best answer is A.

Alimony and child support payments, starting in 2019, are no longer classified as “earned income” for purposes of making IRA contributions. Thus, a woman whose sole support stems from these payments cannot make an IRA contribution.

Question 23

Individual Retirement Account contributions can be made with:

A. Cash
B. Exempt Securities
C. Non-Exempt Securities
D. All of the above

Answer 23

The best answer is A.

Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).

Question 24

Individual Retirement Account contributions can be made with:

I Cash
II Exempt Securities
III Non-Exempt Securities
IV Money Market Fund Shares

A. I only
B. II only
C. I and IV only
D. II, III, IV only

Answer 24

The best answer is A.

Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).

Question 25

What is the penalty imposed for excess contributions to an IRA?

A. 6% of the excess contribution
B. 8 1/2% of the excess contribution
C. 10% of the excess contribution
D. no penalties are imposed

Answer 25

The best answer is A.

Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.

Question 26

For an Individual Retirement Account contribution to be deductible from that year’s tax return, the contribution must be made by no later than:

A. April 15th of that year
B. December 31st of that year
C. April 15th of following year
D. December 31st of the following year

Answer 26

The best answer is C.

IRA contributions must be made by April 15th of the following year - no extensions are permitted.

Question 27

Which of the following are allowed investments in an Individual Retirement Account?

I Preferred Stock
II U.S. Government Gold Coins
III Antiques, Art, and Other Collectibles
IV U.S. Government Bonds

A. IV only
B. I and IV
C. I, II, and IV
D. II, III, and IV

Answer 27

The best answer is C.

Collectibles are not allowed as an investment in an IRA account. Securities are allowed; so are gold coins minted by the U.S. Government and precious metals bullion.

Question 28

To avoid penalties, funds cannot be withdrawn from tax qualified retirement plans before age:

A. 59 1/2
B. 65
C. 70 1/2
D. 75

Answer 28

The best answer is A.

Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

Question 29

A person can start withdrawing from his or her Individual Retirement Account without penalty at age:

A. 50 1/2
B. 59 1/2
C. 60 1/2
D. 70 1/2

Answer 29

The best answer is B.

Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

Question 30

If an individual, aged 44, takes a withdrawal from his Individual Retirement Account, which statement is TRUE?

A. The amount withdrawn is subject to income tax only
B. The amount withdrawn is subject to a 10% penalty tax only
C. The amount withdrawn is subject to income tax plus a 10% penalty tax
D. The amount withdrawn is not subject to any tax

Answer 30

The best answer is C.

Premature distributions from an IRA (before age 59 1/2), unless for reason of death, disability, to pay qualified education expenses, or to pay up to $10,000 of first-time home purchase expenses, incur normal income tax plus a 10% penalty tax on the amount withdrawn.

Question 31

A 50-year old man becomes totally disabled. He wishes to take a lump sum distribution from his Individual Retirement Account to pay for medical and living expenses. Which statement is TRUE?

A. The distribution is not subject to any tax
B. The distribution is subject solely to a penalty tax of 10%
C. The distribution is subject solely to regular income tax
D. The distribution is subject to regular income tax plus a 10% penalty tax

Answer 31

The best answer is C.

Distributions from tax qualified pension plans such as IRA’s and Keogh’s prior to age 59 1/2 are subject to regular tax plus a 10% penalty unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax, but are not subject to the 10% penalty tax.

Question 32

Distributions from an Individual Retirement Account must commence:

A. by April 1st of the year preceding that person reaching age 70 1/2
B. by April 1st of the year following that person reaching age 70 1/2
C. upon reaching age 70 1/2
D. upon reaching retirement

Answer 32

The best answer is B.

Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 70 1/2.

Question 33

Which statements are TRUE regarding RMDs (Required Minimum Distributions) from IRA accounts?

I The RMD is based on the life expectancy of the account beneficiary
II The RMD is based on the investment value of the account
III If the RMD is not taken, a penalty tax of 10% is applied
IV If the RMD is not taken, a penalty tax of 50% is applied

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 33

The best answer is B.

The penalty applied for not taking required minimum distributions from a qualified plan starting at age 70 1/2 is 50% of the under-distribution. There is an incentive to take the money out (and pay tax on it, which is what the Treasury is really looking for)! The IRS creates tables that lay out the required minimum distribution amount each year; and these are based on life expectancy.

Question 34

A 50 year old individual leaves a corporate employer and receives a $50,000 lump sum distribution from the pension plan. He rolls over $30,000 of the funds within 60 days into an IRA and deposits the rest to his checking account. The individual pays:

A. no tax
B. income tax on the $50,000 distribution
C. tax on the $30,000 rollover
D. tax on the $20,000 not rolled over

Answer 34

The best answer is D.

Any pension plan distributions before age 59 1/2 not rolled over into an IRA are subject to tax. The individual rolled over $30,000 - this remains tax deferred. The $20,000 not rolled over is taxable.

Question 35

A new customer, age 45, has been terminated from his assembly-line job of the past 20 years at an automotive parts supplier. During that time period, he has accumulated $124,000 in the company’s 401(k) plan. He wishes to rollover the funds to an IRA account with your brokerage firm. This customer, who is an unsophisticated investor, has the entire 401(k) invested in a growth mutual fund and has no other investments. As the representative for this customer, you should be concerned about which of the following?

I Communicating effectively with an unsophisticated customer in an understandable manner to assess financial goals and risk tolerance
II Setting the investment allocation strategy that should be employed in order to provide sufficient retirement income for this individual
III Creating a financial plan that emphasizes asset preservation and that is likely to provide a prolonged income stream for a prolonged period of retirement
IV Minimizing the tax implications of any recommended transactions to increase the long-term growth potential of investments made

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 35

The best answer is D.

All of the choices are important. This customer has a “blue-collar” job and is an unsophisticated investor. He has no other investments than his 401(k), all in one growth mutual fund. The registered representative’s immediate concern should be communicating effectively with such an unsophisticated customer using simple, understandable language, in order to assess the customer’s financial goals and risk tolerance level. Once this is completed, the registered representative can set the investment allocation strategy that should be employed in order to provide sufficient retirement income for this individual. When creating a financial plan for this customer, asset preservation must be emphasized and the plan must be likely to provide a prolonged income stream since life spans are increasing. Finally, recommended transactions should not have any negative tax implications that could reduce overall investment return. Since this is a qualified retirement plan which is tax deferred, this basically means not recommending tax-free municipal bonds that give a lower yield than equivalent-risk category taxable investments.

Question 36

Distributions prior to age 59 1/2 from qualified retirement plans that are not rolled over into an IRA or other qualified plan are subject to:

I 10% penalty tax
II 20% penalty tax
III 10% withholding tax
IV 20% withholding tax

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 36

The best answer is B.

Distributions from qualified retirement plans, unless they are rolled over into an IRA, are taxable. In addition, if the recipient is under age 59 1/2, then the 10% penalty tax for premature distributions is imposed as well. To ensure that the tax will be paid, the tax code requires that 20% of the distribution amount be withheld as a credit against taxes due. No withholding tax is imposed if a trustee to trustee transfer is made - with the assets being transferred directly into another IRA or qualified retirement plan.

Question 37

All of the following statements are true regarding the transfer of Individual Retirement Accounts from one trustee to another EXCEPT:

A. there is no limit on the number of transfers that can be made each year
B. the funds can be transferred by having the trustee or custodian make a check payable to the account holder; who will then deposit the check with the new trustee or custodian
C. the transfer can be effected by wiring the funds directly between trustees or custodians
D. the transfer can be effected by having the predecessor trustee or custodian make a check payable to the successor trustee or custodian

Answer 37

The best answer is B.

IRA transfers between trustees must be made directly from trustee to trustee. There is no limit on the number of transfers that can be made each year. If the transfer is effected by having the check made out to the account holder, this is considered to be an IRA rollover, which must be completed within 60 days and only 1 rollover per year is permitted. Thus, transfers cannot be effected by having the check made out to the account holders - the funds must go directly from trustee to trustee.

Question 38

Your customer, age 68, that has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his wife, age 48, who does not work. She needs current income and wishes to know her best option to minimize taxes. You should advise the spouse to:

A. roll the funds over into a new IRA in the spouse’s name
B. transfer the IRA funds to a beneficiary distribution account
C. cash out the inherited IRA account
D. disclaim or give away the inherited IRA account

Answer 38

The best answer is B.

If the spouse rolls over the IRA into her a new account in her name, and begins to take distributions immediately (which is not required in a roll over), then she would be subject to regular income tax plus the 10% penalty tax imposed on premature distributions (since she is under age 59 1/2 and the account is her IRA). If the funds are transferred into an IRA beneficiary distribution account, then it is titled in both the decedent’s name and the beneficiary’s name. Distributions must start immediately and are taxable, but there is no penalty tax (even if the beneficiary is under age 59 1/2), since the account is considered to be the property of the estate of the decedent. The minimum amount to be distributed annually is based on the longer of 5 years or the expected life of the beneficiary (since she is age 48, and she would be expected to live to age 81, this would be 33 years). This is the best option. Immediate cash out of the account would subject the entire proceeds to ordinary income tax that year - again, not meeting the customer’s goal of minimizing taxes. Finally, the customer needs the income, so disclaiming (giving away) the account makes no sense.

Question 39

A customer dies, leaving his $300,000 IRA account to his 3 daughters, who are age 46, 50, and 52. Which daughter’s life expectancy would be used to determine the minimum annual payout to be made from the IRA?

A. The 46 year old daughter’s age
B. The 50 year old daughter’s age
C. The 52 year old daughter’s age
D. The arithmetical average of the 3 daughters’ ages

Answer 39

The best answer is C.

If an IRA is bequeathed to multiple beneficiaries, as in this case, then the annual payout is determined based on the age of the oldest beneficiary. Just remember that the IRS likes to interpret things in a way that benefits the tax man. The oldest will die in the shortest length of time, so she has the shortest expected payout period. This would increase the annual payout needed to deplete the account, giving the IRS more income to tax sooner for all 3 beneficiaries.

Question 40

All of the following are true statements about Individual Retirement Accounts EXCEPT:

A. the earliest a taxpayer may make an annual contribution is January 1st of that tax year
B. the latest a taxpayer may make an annual contribution is April 15th of the following tax year
C. if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date
D. annual contributions may be made even if the person is covered by another qualified retirement plan

Answer 40

The best answer is C.

Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.

Question 41

Which statements are TRUE when comparing a Roth IRA to a Traditional IRA?

I Anyone with earned income can open a Roth IRA
II Anyone with earned income can open a Traditional IRA
III Roth IRAs are not available to high-earning individuals
IV Traditional IRAs are not available to high-earning individuals

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 41

The best answer is C.

Roth IRAs allow for the same contribution amounts as Traditional IRAs, but the contribution is never tax-deductible (which is usually the case with a Traditional IRA). Earnings build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, it is not available for high-earners. Individuals that earn over $137,000 and couples that earn over $203,000, in 2019, cannot open Roth IRAs. They can open Traditional IRAs, however.

Question 42

Which statements are TRUE about Roth IRAs for tax year 2019?

I The maximum permitted contribution for an individual is $3,000
II The maximum permitted contribution for an individual is $6,000
III If an individual contributes $6,000 to a Traditional IRA in that year, no additional contribution to a Roth IRA is permitted
IV If an individual contributes $6,000 to a Traditional IRA in that year, an additional contribution to a Roth IRA is permitted

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 42

The best answer is C.

For 2019, the maximum permitted annual contribution to a Roth IRA is $6,000 for an individual. If the full $6,000 contribution is made to a Traditional IRA, no Roth contribution is permitted. If the full $6,000 contribution is made to a Roth IRA, no Traditional IRA contribution is permitted.

Question 43

Which statements are TRUE about Roth IRAs?

I Contributions must cease at age 70 1/2
II Contributions can continue after age 70 1/2
III Distributions must start after age 70 1/2
IV Distributions are not required to start after age 70 1/2

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 43

The best answer is D.

Unlike Traditional IRAs, Roth IRA contributions can continue after age 70 1/2, as long as that person has earned income. And unlike Traditional IRAs, there are no required minimum distributions after age 70 1/2 for Roth IRAs.

Question 44

Which of the following statements are TRUE regarding Roth IRA?

I Contributions are tax deductible
II Contributions are not tax deductible
III Distributions are taxable
IV Distributions are not taxable

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 44

The best answer is D.

Roth IRAs, unlike Traditional IRAs, do not permit a tax deduction for the amount contributed. On the other hand, when distributions are taken, unlike a Traditional IRA, the distributions are not taxable (given that the investment has been held for at least 5 years). The maximum contribution cannot be made to both a Traditional IRA and a Roth IRA in the same year. But the amount can be divided between the 2 types of accounts: one half of the amount contributed to a Traditional IRA, and the other half contributed to a Roth IRA for that tax year.

Question 45

In 2019, a customer earns $500,000 as a self-employed doctor. The maximum contribution to a Keogh plan is:

A. $25,000
B. $50,000
C. $56,000
D. $112,000

Answer 45

The best answer is C.

The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh “deduction”) or $56,000 in 2019, whichever is less. 20% of $500,000 = $100,000. However, only the $56,000 maximum can be contributed in 2019. (Note that this amount is adjusted each year for inflation.)

Question 46

In 2019, a doctor has earned $300,000 from her practice and another $200,000 from investments. Their maximum contribution to an HR 10 plan is:

A. $46,000
B. $56,000
C. $66,000
D. $112,000

Answer 46

The best answer is B.

Keogh (HR10) contributions are based only on personal service income - not investment income. $300,000 of personal service income x 20% effective contribution rate = $60,000, however the maximum contribution allowed is $56,000 in 2019.

Question 47

In 2019, a customer earns $300,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $30,000 per year. The contribution to be made for the nurse is:

A. $3,000
B. $3,750
C. $6,000
D. $7,500

Answer 47

The best answer is D.

If an employer earns $280,000 or more and contributes the maximum of $56,000 to a Keogh in 2019, then 25% of “after Keogh earnings” is used to compute the percentage to be contributed for employees.

If the employer earns $300,000 and contributes $56,000 to the Keogh, the “after Keogh earnings” are based on the “cap” income amount of $280,000.

$280,000 - $56,000= $224,000 of “after Keogh deduction” income.

$56,000/$224,000 = 25%. Thus, for the nurse, $30,000 of income x 25% = $7,500 contribution.

Question 48

Contributions to qualified retirement plans, other than IRAs, must be made by:

A. December 31st of the calendar year in which the contribution may be claimed on that person’s tax return
B. April 15th of the calendar year in which the contribution may be claimed on that person’s tax return
C. April 15th of the calendar year after which the contribution may be claimed on that person’s tax return
D. The date on which the tax return is filed with the Internal Revenue Service

Answer 48

The best answer is D.

Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.

Question 49

A self-employed individual purchases variable annuity units with funds contributed to a Keogh Account. Once the contract is annuitized, the payments are:

A. 100% taxable
B. partially taxable and a partial tax free return of capital
C. 100% tax free return of capital
D. tax deferred until the annuitant reaches the age of 70 1/2

Answer 49

The best answer is A.

Keogh contributions are tax deductible (up to $56,000 in 2019), so the original investment was made with “before tax” dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that person’s income tax bracket.

Question 50

To avoid penalties, funds cannot be withdrawn from a Keogh retirement plan before age:

A. 59 1/2
B. 65
C. 70 1/2
D. 75

Answer 50

The best answer is A.

Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax

Question 51

A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statement is TRUE?

A. There will be no tax liability
B. There will be regular tax liability, but no 10% penalty tax liability
C. There will be a 10% penalty tax liability, but no regular tax liability
D. There will be both regular tax liability and a 10% penalty tax liability

Answer 51

The best answer is D.

Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.

Question 52

Under Keogh rules, distributions from a Keogh Plan must commence the year after the individual turns age:

A. 55
B. 59 1/2
C. 60 1/2
D. 70 1/2

Answer 52

The best answer is D.

Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 70 1/2.

Question 53

Which statements are TRUE about SEP IRAs?

I The plan is established by the employer
II The plan is established by each employee
III The maximum annual contribution is the same as for a Traditional or Roth IRA
IV The maximum annual contribution is significantly greater than for a Traditional or Roth IRA

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 53

The best answer is B.

A SEP IRA is a “Simplified Employee Pension” plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $56,000 in 2019). The employer sets the actual contribution percentage, which must be the same for all employees.

A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a small business that has variable cash flow. Also, any size business can establish a SEP IRA.

Question 54

Which statement is FALSE about a SIMPLE IRA?

A. The maximum annual contribution is higher than for a Traditional IRA
B. The contribution is made by the employee, who gets a salary reduction for the amount contributed
C. The plan is available to any size employer
D. The employer must make a matching contribution

Answer 54

The best answer is C.

SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administrate than a traditional pension plan (hence the name SIMPLE).

Each employee contributes up to $13,000 (in 2019) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee’s salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.

Note that a SIMPLE IRA gives a higher contribution amount than a Traditional IRA, which is capped at $6,000 in 2019 (plus a $1,000 catch up contribution for employees who are age 50 or older).

Question 55

Which statement is FALSE about a SIMPLE IRA?

A. The maximum contribution amount is the same as for a SEP IRA
B. The contribution is made by the employee, who gets a salary reduction for the amount contributed
C. The plan is only available to smaller employers
D. The employer must make a matching contribution

Answer 55

The best answer is A.

SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administrate than a traditional pension plan (hence the name SIMPLE).

Each employee contributes up to $13,000 (in 2019) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee’s salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.

Finally, SEP IRAs allow for a maximum contribution that is much larger than a SIMPLE IRA. In a SEP IRA, a contribution of up to 25% of salary (statutory rate; actual contribution rate is 20%), capped at $56,000 in 2019 is permitted.

Question 56

Which statement is FALSE about a SIMPLE IRA?

A. The maximum annual contribution is the same as for a Traditional IRA
B. The contribution is made by the employee, who gets a salary reduction for the amount contributed
C. The plan is only available to small employers
D. The employer must make a matching contribution

Answer 56

The best answer is A.

SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administer than a traditional pension plan (hence the name SIMPLE).

Each employee contributes up to $13,000 (in 2019) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee’s salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.

Question 57

A pension plan maintained by a not-for profit corporation is known as a (n) :

A. 401(k) plan
B. 403(b) plan
C. SEP IRA
D. HR 10 plan

Answer 57

The best answer is B.

Not-for-profit institutions such as hospitals and universities can sponsor 403(b) (tax deferred annuity) plans for their employees. 401(k) plans, and SEP IRA plans are sponsored by for-profit corporations. HR 10 plans (Keogh) are only available to self-employed individuals, based on their self-employed income.

Question 58

403(b) Plans are permitted to invest in all of the following EXCEPT:

A. Common stocks
B. Mutual Funds
C. Fixed Annuities
D. Variable Annuities

Answer 58

The best answer is A.

403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Note that these are all “managed” products - where an investment adviser is managing the portfolio. Direct investments in common stocks selected by the plan participant are prohibited.

Question 59

All of the following statements about 403(b) Plans are true EXCEPT:

A. employees make voluntary contributions through their employers
B. contributions are tax deductible to the employee
C. employees of any organization can contribute to this type of plan
D. earnings on contributions by employees are tax deferred

Answer 59

The best answer is C.

403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income as taken.

Question 60

All of the following persons can contribute to a 403(b) plan EXCEPT:

A. professor at a university
B. nurse at a hospital
C. student at a college
D. secretary at a foundation

Answer 60

The best answer is C. 4

03(b) retirement plans are established by non-profit institutions for their employees. Employees of schools, universities, municipalities, hospitals, etc, would fall under this type of plan. Students at a university are not employees of the institution and do not qualify.

Question 61

Which statement is FALSE about 401(k) Plans?

A. The plan is established by the corporate employer
B. The corporate employer can make matching contributions into the plan based on the contribution made by the employee
C. All corporate employees must participate in the plan
D. All contributions into the plan are made with pre-tax dollars

Answer 61

The best answer is C.

401(k) Plans are corporate-sponsored salary reduction plans allow employees to contribute up to $19,000 in 2019 as a salary reduction, so these are pre-tax dollars going into the plan. The account grows tax-deferred and all distributions at retirement age are 100% taxable.

Participation in the plan is voluntary, and employers can make matching contributions for employees that contribute.

Question 62

Distributions from Section 401(k) plans are:

A. 100% taxable
B. partial tax free return of capital and partial taxable income
C. 100% tax free
D. 100% tax deferred

Answer 62

The best answer is A.

Contributions to tax qualified plans such as corporate 401(k) plans are tax deductible. They are made with “before-tax” dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

Question 63

All of the following retirement plans require that minimum distribution amounts be taken once the participant reaches the age of 70 1/2 EXCEPT:

A. 403(b) plans
B. 401(k) plans
C. Roth IRAs
D. Traditional IRAs

Answer 63

The best answer is C.

Roth IRA contributions are not deductible. As long as the assets are held in the Roth IRA for at least 5 year and distributions start after age 59 1/2, they are tax-free. Since the IRS does not get to tax the distributions, they don’t care when they start! On the other hand, Traditional IRA contributions, 401(k) contributions and 403(b) contributions, are all tax deductible. Distributions at retirement age are taxable, and the government wants its money before the plan participant dies. Thus, RMDs (Required Minimum Distributions) must commence at age 70 1/2. If they don’t, a draconian tax rate of 50% is applied to any underdistributed amount.

Question 64

An individual, age 40, earns $60,000 per year. He has no family and has $200,000 of life insurance. He contributes 6% of his salary to his company sponsored 401(k) annually. He informs his registered representative that he is getting a $5,000 raise. What should you recommend that the customer do with the raise?

A. Purchase a non-qualified variable annuity by making $5,000 a year payments
B. Increase the 401(k) contributions by $5,000 per year
C. Use the $5,000 annual increase to purchase a fixed annuity contract under a contractual plan
D. Roll the 401(k) into a variable annuity contract and then re-roll the variable annuity into an IRA

Answer 64

The best answer is B.

Since any permitted 401(k) contribution is deductible, it is best to recommend that the customer max out his 401(k). Remember, he can contribute up to 25% of salary (statutory rate), capped to $19,000 in 2019, and this is a salary reduction. The purchase of either a variable annuity or a fixed annuity will not permit a salary reduction - these are non-qualified plans. Choice D is utter nonsense.

Question 65

A 45-year old man earns $150,000 per year and is covered by his employer’s 401(k) Plan. He quits his job and moves to a new company that has no retirement plan, but will also pay him $150,000 per year. He should be advised to:

A. continue to make maximum annual contributions to his 401(k) Plan
B. roll his 401(k) Plan into a Roth IRA and continue to make annual contributions to the Roth IRA
C. roll his 401(k) Plan into a Traditional IRA and continue to make annual contributions to the Traditional IRA
D. request a distribution of the 401(k) and use the proceeds to buy a variable annuity

Answer 65

The best answer is C.

The 401(k) Plan was at this customer’s ex-employer - he can no longer make contributions to it. His new employer does not have a 401(k) plan. He can roll over the 401(k) amount into an IRA account without dollar limit and continue to make annual contributions to the IRA. It must be a Traditional IRA - this guy earns too much to have a Roth IRA (complete phase-out for Roth eligibility occurs if an individual earns over $137,000 in 2019). Any funds rolled-over stay tax deferred. If he requests a distribution and uses the funds to buy a variable annuity, tax will be due, so this is not a good choice.

Question 66

An individual works in a small manufacturing business with fewer than 100 employees. The company does not offer a retirement plan. This individual has $5,000 of discretionary funds that she wishes to put away for retirement. The BEST recommendation for this individual is to make a $5,000 contribution to a(n):

A. Traditional IRA
B. 401(k)
C. SEP IRA
D. SIMPLE IRA

Answer 66

The best answer is A.

SEP IRAs and SIMPLE IRAs are designed for small businesses, but the plans must be established by the corporate employer. Similarly, a 401(k) plan is established by the corporate employer - these plans are designed for larger businesses.

The only retirement plans that can be set up by an individual are a Traditional IRA, a Roth IRA, or an annuity contract purchased from an insurance company.

Question 67

A client, age 35, is covered by a 401(k) plan at work and also has set up an IRA account. He has been contributing the maximum amount to each of these each year. He lives frugally and has excess income available for investment. He asks you, the registered representative, for an appropriate recommendation to add to his retirement savings. Which recommendation is appropriate?

A. 529 Plan
B. Variable Annuity
C. Keogh Plan
D. SEP IRA

Answer 67

The best answer is B.

Anyone can contribute to a non-qualified variable annuity, with no contribution limits. It makes no difference if the customer is covered by another qualified plan. The contribution is not deductible, but the separate account builds tax deferred. Upon retirement, only the portion of any distribution representing the tax-deferred build up is taxable. 529 Plans can only be used to pay for higher education expenses; Keogh plans can only be set up by self-employed individuals; and SEP IRAs can only be established by businesses for their employees.