Retirement Review Questions Flashcards
Sam and Sally (both age 35) plan to retire at age 65. They estimate their annual income need in retirement will be $50,000 in today's dollars.They expect to receive $30,000 (in today's dollars) annually from Social Security. They expect to earn 7% after-taxes both before and after retirement. They also expect inflation to be constant at 4%. Table V (Ordinary Life Annuities One Life-Expected Return Multiples) indicates a multiple of 20 years at age 66. Table VI (Two Lives) indicates 25 years at age 65. They expect to live 30 years after retiring. What amount of money will Sam and Sally need at the beginning of the retirement period to fund an annual income need that increases with inflation? A. $1,003,587 B. $1,117,225 C. $1,327,848 D. $2,943, 062 E. $3,319,620
C - 1st Retirement deficit is $20,000 ($50,000 - 30,000).
2nd The net figure is inflated (PV of $20,000, inflation is 4%, 30 years to retirement); therefore, the income deficit in the first year of retirement (FV) is $64,868.
3rd To determine the lump sum needed:
Payment (PMT)
$64,868
Inflation-adjusted yield
2.8846%
Period
30
Sum needed at beginning of retirement
$1,327,848
age 35 30 years age 65 30 years
$20,000 PV 4 i FV=$64,868 PMT (1.07/1.04) -1x 100i
Solve for PV = $1,327,848
(Must use Begin mode)
After much soul searching, Sam and Sally (from question #1) now estimate they will need $2,000,000 to retire. They project that their assets will grow to $1,500,000 at the first year of retirement. How much must they set aside by the end of each year to fulfill their retirement goal? A. $4,946.92 B. $5,293.20 C. $15,879.60 D. $21,172.80
B - End mode $500,000, FV, 7i, 30n = $5,293.20 PMT There is no inflation factor to solve this question. Inflation was built into the solution to question 1 step #2 and #3.
During what period should the client be willing to bear the most investment risk?
A. During a long-term accumulation period
B. During a short-term accumulation period
C. During a short-term retirement period
D. During a long-term retirement period
A - Investing is long-term, not short-term. Answer A is the best answer.
Which of the following are true about health issues and retirement?
I. Planning for health care issues should not be restricted to the client alone but should also encompass all family members.
II. Good health may allow continued employment even after normal retirement age.
III. If a person is in poor health, he or she may want to retire early to enjoy as many years as possible.
IV. Future caregiving may be required for the retiree or family members even if they are currently in good health.
A. All of the above
B. I, II, III
C. III, IV
D. II, IV
A - All of the answers are true.
Bob and Mary expect to have $300,000 in retirement funds when they retire in 15 years (assuming a 7% investment return rate on current assets). When they retire, they expect to need $22,000 annually which will increase with inflation (3%). They can make an 8.5% after-tax return on their money. They expect their joint life expectancy to be 21 years after retirement. What would you tell them?
NOTE: Slightly different calculation. Compare what they expect to have ($300,000) against what they expect to need.
A. They are okay. The $300,000 will exceed their needs by more than $10,000.
B. They are deficient. The $300,000 will be underfunded by almost $27,000.
C. They need to increase their preretirement investment return rate from 7% to 7.12% to meet their goal.
A - They expect to have when they retire in 15 years $300,000 They need - Begin $22.00 PMT, 5.3398i, 21n = -288,438 PV
Excess $11,562
Why begin? Can they wait until the end of the year to get retirement funds? No, always use begin mode for retirement needs unless the question indicates end mode.
Mr. and Mrs. Nan now have $130,000 in their retirement savings account. They hope to retire in 20 years and want to accumulate sufficient assets to support a 25-year post-retirement period. Assume they make no more additions to the retirement account. They expect to earn on average 10% on tl1e account until they retire and then 7% on the account during retirement. What amount of income should they expect to receive each month during retirement? A. $6,145 B. $6,254 C. $9,897 D. $9,955
A Begin Mode
HP 10BII/17BII+
1 P/YR, $130,000 ± PV, 10 I/YR, 20 N, FV = $874,575
12 P/YR, $874,575 ± PV, 7 I/YR, 25 gold xP/YR, PMT = $6,145
HP 12C
$130,000 CHS PV, 10 I, 20 n, FV = $874,575$874,575 CHS PV, 7 enter 12 Ö i, 25 enter 12 x n, PMT =
$6,145
Sally, age 62, dies. She is a fully-insured worker. Who will receive Social Security benefits when she dies?
I. Daughter, age 19, in college
II. Ex -husband, age 62, married to her from 1974-1995, never remarried
III. Son, age 15, in high school, lived with Sally
IV. Current husband, age 60 (Sally married him 12 years ago)
A. All of the above
B. II, III, IV
C. II, III
D. III, IV
E. I, IV
B - Both the ex-husband and current husband are eligible. The current husband also has a child in care under age 16. Whose? Doesn’t say.
Hal, age 63, decides to take Social Security retirement benefits 30 months early. How much will his PIA be reduced? A. 10% B. 12% C. 13.333% D. 16.667% E. 20%
D - His benefits will be reduced by 30/180 or 16.667%.
Tina, a widow age 70, decides to go back to work. She has been collecting Social Security payments of
$1,000/month. She expects to make $30,000 in salary. She receives $1,000 in dividends, $3,000 in CD interest, and $5,000 in municipal bond interest. Will her Social Security payments become taxable if she goes back to work?
A. No, she is over 70 years old.
B. Her benefits will no longer be reduced by $1 for every $2 earned over a threshold.
C. 6,000 of Social Security income will be taxable income.
D. $10,200 of Social Security income will be taxable income.
D - Do not get caught up with Answer A. You do not lose any benefits after NRA. If her modified AGI (including municipal bond interest) exceeds $25,000, 50% of the Social Security benefits will be included in income (Answer C). If her modified AGI exceeds $34,000, 85% of the Social Security benefits are included ($12,000 x .85 = $10,200). Answer B is true, but her MAGI is $45,000. (Don’t forget to add in 1/2 of her Social Security benefits when calculating MAGI.) Answer D is the best answer.
A man, age 66, receives $1,000 in monthly Social Security payments and continues to be actively employed. What is the maximum that his Social Security could be taxed?
A. $0
B. The benefit is reduced $1 for every $3 earned
C. 50% of the Social Security payment will be subject to income tax
D. 85% of the Social Security payment will be subject to income tax
D - Remember, over $34,000 of MAGI (single) means that 85% of the benefits could be taxed. The $1 for every $3 rule only affects people under NRA (normal retirement age) 66. The key phrase is could be.
Mrs. Kittel was a fully-insured worker. She is survived by the following persons. Who will receive Social Security benefits? I. 19 year old son in college II. 15 year old daughter in high school III. Mr. Kittel, age 55 IV. Ex-husband, age 62, married to her from 1982-1993. He never remarried A. All of the above B. II, III, IV C. II, IV D. II
B - The daughter is Mr. Kittel’s. She divorced her first husband in 1993. The 15-year-old daughter has to be Mr. Kittel’s daughter. Mr. Kittel is caring for his child under age 16. The 19 year old is too old.
What is the maximum contribution amount to a defined benefit plan? A. $52,000 B. $210,000 C. $260,000 D. $400,000 E. None of the above
E - It is the amount necessary to fund the benefit. However, the benefit can only be based on compensation up to $260,000 (2014). The maximum benefit is $210,000, but the contribution could be
$300,000 to $400,000 per year.
If Bob's company's pension plan provides a life annuity equal to 1.5% of earnings up to 30 years of service, how much could Bob ($150,000 average annual compensation) receive as annual pension after 20 years of service? A. $35,000 B. $45,000 C. $46,000 D. $67,500 E. $150,000
B - 1?% x 20 years x $150,000 = $45,000. The question says after20 years of service.
ABC, Inc. has a defined benefit plan. Due to a reversal of fortune, the company cannot afford any type of pension plan. What should ABC, Inc. do? A. Adopt a cash balance plan B. Adopt a money purchase plan C. Adopt a target benefit plan D. Freeze the defined benefit plan
D - The company can no longer afford any type of pension plan.
What impact would the event below have on a money purchase plan? A key employee retires and is replaced by a clerical employee.
A. Increases company contributions
B. Decreases company contributions
C. No effect
B - The key employee had a higher salary level than the clerical employee. The employer is contributing only.
What impact would the event below have on a money purchase plan? Plan investment returns increase.
A. Increases company contributions
B. Decreases company contributions
C. No effect
C - Investment returns affect account balances, not contributions. This is a money purchase pension plan not a defined benefit plan.
What impact would the event below have on a money purchase plan? Forfeitures are not reallocated to remaining participants.
A. Increases company contributions
B. Decreases company contributions
C. No effect
B - If the forfeiture is not reallocated to the participants, then they must be used to reduce company contributions.
What impact would the event below have on a money purchase plan? Salary levels for all employees increase.
A. Increases company contributions
B. Decreases company contributions
C. No effect
A - Money purchase plan require a percentage of salary to be contributed to the plan.
What is the maximum retirement benefit for a participant in a target benefit plan?
A. $52,000 per year
B. 100% of the participant’s salary ($260,000 cap)
C. The actuarial value
D. The value of the participant’s account at retirement
D - The question asked for the retirement benefit not the contribution. The retirement value is the account value.
On what is the maximum deductible contribution in a target benefit plan based?
A. An actuarial determination
B. The minimum-participation rule
C. A maximum of 25% of the aggregate eligible compensation of all covered participants
D. A maximum of 25% of the firm’s total payroll
C - A target benefit plan is a defined contribution plan. Although an actuarial calculation is made when a target benefit plan is first installed, the maximum deductible contribution is always limited by Answer C. This is true even if the actuarial calculation calls for a larger contribution (likely if there are many older highly compensated employees and relatively few lower-paid rank-and-file employees). Answer D is wrong. It is not total payroll but eligible compensation or payroll.
Which of the following plans would be least appealing to an employer looking to:
1) maximize benefits for older employees,
2) give long-term employees a secure and specified retirement income, and
3) tie employees to the company through the benefit program?
A. Defined Benefit pension plan
B. Cash-balance pension plan
C. Target-benefit pension plan
D. Profit sharing
D - For meeting the three listed objectives, A is the best answer, followed by B (also a DB plan), and finally by C (a DC plan that shares some of the characteristics of a DB).
In which of the following retirement plans may forfeitures increase account balances of plan participants? I. Defined benefit plan II. Profit-sharing plan III. Money purchase plan IV. Cash balance plan A. I, II B. I, IV C. II, III D. II, IV
C - Forfeitures in defined benefit plans and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances.
Forfeitures in a profit-sharing plan normally are allocated to the plan participants.
If you had to suggest a plan to an employer, which plan would provide employer the maximum contribution and the maximum deductible contribution flexibility? A. Defined benefit plan B. Profit-sharing 401(k) plan C. Money purchase plan D. Cash balance
B - All the other plans require a contribution to be made each year. With a profit-sharing 401(k), the employer could contribute nothing at all or the maximum 415 limit. This would allow maximum flexibility and maximum contributions be made.
Which statement is true regarding profit-sharing plans?
A. A company must show a profit in order to make a contribution for a given year.
B. Profit-sharing plans should make contributions that are substantial and recurringaccording to the IRS.
C. Forfeitures in profit-sharing plans must be credited against future years’ contributions.
D. Employer deductions for plan contributions are limited to 15% of the participant’s total compensation.
B - The company doesn’t have to show a profit to make a contribution. Forfeitures are normally reallocated to the plan participants. Employers can contribute for each participant up to the lesser of 100% of compensation or $52,000 (compensation maximum $260,000). However, the employer is still bound by the overall deduction limit of 25% of total plan compensation.
The employee's final-average monthly salary is $4,800. To arrive at the employee's benefit, multiply 1.25% by the $4,800 final-average monthly salary by 25 (the number of years of service). The employee's monthly retirement benefit will be equal to $1,500 paid in the form of a life annuity. This is an example of what type of benefit formula? A. Flat-percentage-of-earnings B. Flat-amount-per-year of service C. Unit-benefit D. Flat-benefit-percentage
C - Answer C is also known as percentage-of-earnings-per-year of service. Answer D is nonsense.
Quick Manufacturing, Inc. always has a top-heavy profit-sharing plan because of employee turnover due to layoffs. Which vesting schedule should they adopt if the company feels this will be an ongoing situation? A. 3-year cliff B. 5-year cliff C. 2- to 6-year graded D. 100% - 2 years eligibility
A - The employees will be eligible after one year, but unless they stay three years, the employees will forfeit all contributions made to the plan. The forfeitures will be allocated to the long-term employees (probably the HCEs) allowing them to potentially get up to 100% of compensation or $52,000 annual additions. There is no indication the company wanted to retain employees (2-6 year graded). The 100% vested plan (2-year eligibility) is not an advantage over the 3-year cliff in the situation.
If the plan was adopted on 12/31/2014 for the plan year 2014, which employee would be eligible under 21 and one?
A. Ned, date of birth 1/1/1994
B. Seth, date of employment 1/10/2014
C. Martha, date of birth 10/21/1984, date of employment 7/1/2011, works 1,500 hours per year part time
D. Beth, date of birth 6/28/1992, date of employment 2/1/2010, works 750 hours per year part time
C - Ned is age 20 (plan year 2014). Seth’s age isn’t known. He may or may not qualify under the one-half year rule. Beth works part-time (less than 1,000 hours each year).
Assume that an 8% money purchase plan is to be integrated. What is the plan's maximum permitted disparity? A. 4.3% B. 7.65% C. 5.7% D. 13.7%
C - The question asked for permitted disparity (5.7%) not base contribution or excess contribution percentage (13.7%). It does not specify that the integration level is below the taxable wage base, so 5.7% must be used.
Dale works for a company with an integrated profit-sharing plan. She makes $150,000. The integration level is $113,700 with a base contribution of 10% and an excess contribution of 15.7%. What amount will be contributed to her account this year? A. $15,000 B. $16,881 C. $23,550 D. $25,000 E. $52,000
B - $117,000 @ 10% = $11,700.00 ($150,000 - $117,000) @ 15.7% = - 5,181.00 $16,881.00
Which of the following retirement plans can be integrated with Social Security? I. Stock bonus II. ESOP III. SEP IV. Defined benefit V. Target benefit A. I, II, IV, V B. I, III, IV, V C. I, IV, V D. I, IV E. II, III
B - A SEP and a stock-bonus plan can be integrated with Social Security. An ESOP cannot be integrated.
Assume that a 25% defined benefit plan is to be integrated. What is the plan's permitted disparity using the excess method? A. 25% B. 26.25% C. 50% D. 51.25%
A - The lesser of the base benefit (25%) or 26.25%
Four doctors own 100% of Labs, Inc., a support organization. The ownership percentages are 80%, 10%, 5%, and 5%. The doctors have their own practice, a personal service corporation with no employees, and each have their own defined benefit plan. Which type of controlled group would Labs, Inc. fall under?
A. Parent-subsidiary controlled group (80% combined)
B. Brother-sister controlled group (80% combined)
C. Affiliated service group
D. Leased employees
C - The IRS defines this as an affiliate service group. I realize the 80% factor may lead you to answer this as brother -sister.
Which of the following is not an example of a controlled group? A. Parent-child control group B. Brother-sister control group C. Combined group under common control D. Parent-subsidiary control group Retirement Planning Quiz Lesson 4
A - Answer A is no such control group.
Retirement Planning Quiz - Lesson 5
Tim works two jobs, and both provide SIMPLE plans. He wants to maximize his deferrals and matches. At Company A he defers $6,000. How much can be deferred at Company B?
A. None as an employee can only have one SIMPLE plan
B. $12,000 at Company B
C. $6,000 at Company B
D. $12,000 at Company B ($17,500 total)
C - Multiple plan deferrals are generally aggregated. In case of SIMPLE/SIMPLE, the limit is $12,000 total. A worker having two employers, both of which offer a SIMPLE plan, may participate in both plans but may only defer $12,000 (total) in the aggregate.
Which of the following is true about plan loans from a 401(k)?
A. They are prohibited because the plan accepts employee elective deferrals.
B. Interest is never deductible.
C. If married, the spouse never needs to consent.
D. They do not have to be secured.
E. If a plan allows loans, they must be made available to all participants without discrimination.
E - Interest paid on a plan loan for a principal residence may be deductible. If the plan is subject to QPSA/QJSA and if the loan is secured with plan assets, both spouses must sign off on the loan. In all cases, the loans must be adequately secured (with plan assets or other collateral acceptable to the plan administrator).
Tom, age 55, has an annual salary of $120,000 (HCE). His company offers a 401(k) plan in which Tom does not participate at this time. His company also has a money purchase pension plan (12%). Tom is considering contributing to the 401(k) plan. Under the best circumstances, what is the maximum Tom is allowed to defer in 2014 including catch-up using ADP/ACP testing if the NHCEs are contributing 4%? A. $7,200 B. $12,700 C. $17,500 D. $23,000 E. A maximum total of $52,000
B - The deferral is limited to 6% under ADP/ACP testing (4% + 2%) of his salary ($7,200) plus $5,500 catch- up. NOTE: The catch up is not an employer contribution; it is an employee deferral. The 6% is a plan limitation. The total of employer contributions, employee contributions, and forfeitures to the two plans cannot exceed $52,000 (415 limits). The question asked the amount of the deferral, not how much the employer is matching.
Bill works for two related employers. Each employer has a 401(k) plan. With one employer he makes
$50,000, and with the second employer he makes $60,000. If both plans allow for a 6% deferral and a 3% match, how much can he defer in 2014?
A. $3,000
B. $3,600
C. $6,600
D. $9,900
E. $17,500
C - 6% of a total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $17,500.
A plan participant takes a 401(k) loan to purchase a house. When is the interest deductible?
A. The participant, a key employee, secures the loan with the primary residence purchased with the loan.
B. Home mortgage interest is always deductible.
C. The participant, a rank-and-file employee, secures the loan with both the primary residence purchased with the loan and elective deferrals.
D. The participant, a rank-and-file employee, secures the loan only with the primary residence purchased with the loan.
D - 401(k)s [and 403(b)s] do allow principal residence loans to key employees and non-key employees. However, interest paid on a plan loan for a principal residence is only deductible under two conditions.
1) The loan is secured by the residence for which the loan is made, and 2) the participant is not a key employee. Interest on plan loans (even if for a primary residence) will be considered consumer interest if secured by elective deferrals. Home mortgage interest isn’t always deductible. Consumer interest is not deductible.
Nate, a sole proprietor, is going to contribute to a SEP. His net income is $50,000. What is the maximum he can contribute? A. $6,059 B. $9,295 C. $10,000 D. $11,000 E. $12,500
B - 25% short-cut method
$50,000 x 18.59% = $9,295
He is self-employed.
How are qualified plans and traditional IRAs most similar? A. Funding limits B. Required minimum distributions C. Participation qualifications D. Vesting requirements
B - Both have required minimum distribution requirements.
Which of the following is (are) an exception(s) to the 10% early withdrawal penalty for IRAs?
I. Medical expense in excess of 7.5% of AGI
II. Substantially equal payments
III. Early termination from employment
IV. Distributions used to pay medical insurance premiums after separation from employment (Unemployment compensation has been received for at least 12 weeks and the withdrawal was made in year of unemployment or year immediately following unemployment).
A. I, II, IV
B. I, III
C. II, III, IV
D. I, IV
E. I
A - Substantially equal payments can start at any age, but they must be over the owner’s life expectancy. The 7?% floor for medical care does not apply to health insurance premiums if unemployment compensation has been received for at least 12 weeks and the distribution occurs in the year unemployment payments are received or the year after. Test taking tip. If II is true and III is false, the answer has to be A. Even if you did not know whether IV is true or not, it did not matter.
Which investment is the least suitable for an IRA account for a young single client with a moderate risk tolerance? A. High-yield municipal bonds B. Individual stocks C. Variable annuity (growth) D. Growth mutual fund
A - The least suitable is the municipal bonds.
Can a retired 71-year-old man make a contribution to a Roth IRA?
A. No, he can’t
B. Yes, he can
C. No, he is too old
D. Yes, but it isn’t deductible
E. Yes, but he can only if he is divorced and paying alimony
A - You MUST have earned income to be able to contribute to a Roth IRA. If no earned income is shown, you cannot assume he has earned income. The question says he is retired. The alimony was paid, not received. Alimony received would have been compensation.
Bob and Sally, married filing jointly, have an AGI of $200,000. Neither Bob nor Sally has a retirement plan at work. What IRA options are available to them?
A. They can both start deductible IRAs.
B. They can both start Roth IRAs.
C. They can either start deductible IRAs or Roth IRAs.
D. They can’t start deductible IRAs or Roth IRAs.
A - Their AGI is too high to do Roth IRAs, but since neither has a pension plan, they can both do deductible IRAs.
When can a Roth account be closed with no adverse tax consequences?
A. Immediately
B. When it’s a special purpose distribution
C. After the individual has had the Roth IRA for five years
D. After age 59?
E. C and D combined
E - Earnings must meet the five-year rule, and the person must be 59? to be tax-free.
Seth is age 42 and married. He is an active participant in his employer's governmental 457 plan. Seth and his spouse's joint AGI is $106,000 (before making the maximum allowable 457 deferral). How much can he contribute to his IRA (and deduct) this year (2014)? A. $2,750 B. $4,000 C. $5,000 D. $5,500 E. $11,000
D - The phaseout for married plan participants is $96,000 to $116,000. If someone is an active participant, IRA deductibility depends on whether the MAGI is within the phase-out range. HOWEVER, a 457 plan (any type) does not count as active participation, so he can make a deductible contribution. It only asked about his contribution, not hers.
In 2011, James converted his $25,000 IRA to a conversion Roth IRA. By 2014, his conversion Roth IRA has grown to $31,000, and he takes a full withdrawal. None of the special purposes have been met. Which of the following are true?
I. The $25,000 conversion is not subject to income tax or early withdrawal penalty.
II. The $25,000 conversion is subject to a 10% early withdrawal penalty.
III. The $25,000 conversion is subject to a 10% early withdrawal penalty and a 10% conversion penalty tax.
IV. The $6,000 of earnings is subject to income tax and a 10% early withdrawal penalty.
V. The $6,000 of earnings is subject to a 10% early withdrawal penalty.
A. I, IV
B. II, V
C. III, IV
D. II, IV
E. III, V
D - Five years have not passed and none of the special purposes have been met.
Which of the following statements regarding Roth salary deferral accounts is false?
A. A TSA [(403b)] may be offered as a Roth account.
B. Current 401(k) sponsors may offer Roth 401(k) accounts.
C. Governmental 457 accounts may be offered as Roth accounts.
D. There are income restrictions associated with a Roth 401(k).
D - Only current 401(k), 403(b) and 457(b) sponsors may offer a qualified Roth contribution program.There are no income restrictions like with Roth 401(k) phaseouts ($181,000 - $191,000).
Bill, age 72, and Jane, age 69, married and filing jointly, want to contribute to a Roth IRA. He earns
$18,000 per month. They normally have limited itemized deductions. How much can they contribute?
A. $0
B. $5,000
C. $5,500
D. $10,000
E. $11,000
A - Their AGI is too high. The phaseout is $181,000 to $191,000. The only number you have been given is monthly income. Their AGI is around $200,000 ($18,000 x 12 = $216,000).
Jack, age 40, is employed by Bet-On-Us. The company recently established a SIMPLE. Jack has been a participant fewer than two years. He contributed $3,000, and his employer matched $600. He has decided to leave the company and take all the money as a distribution. Whicl1 of the following is true?
A. The $3,000 will be taxable as ordinary income plus a 10% early withdrawal penalty.
B. The $600 will be forfeited and allocated to the remaining employees; the remaining $3 1000 will be taxed at ordinary income tax rates plus a 10% penalty.
C. The $3,600 will be taxable as ordinary income plus a 10% early withdrawal penalty.
D. The $3,600 will be taxable as ordinary income plus a 25% early withdrawal penalty.
E. Jack cannot take any distributions for two years.
D - Employer contributions are non-forfeitable. The 10% penalty is increased to 25% for distributions taken within two years of the employee’s first participation.
Tony's, a specialty deli, has a SIMPLE plan. They would like to provide more retirement benefits to their employees. Which plan can they adopt in addition to the SIMPLE plan? A. Money purchase plan B. SEP C. 403(b) D. None of the above
D - Having a SIMPLE precludes Tony from having another plan.
Tom Sellers is self-employed. He has no other employees. His income after expenses is $80,000. Which of the following plans provides the maximum allowable contribution? A. SEP B. SIMPLE 401(k) C. SIMPLE IRA D. Keogh
A - A SEP is easy to install. The SEP contribution would be $80,000 x 18.59% = $14,872. The SEP is subject to the Social Security calculation like a Keogh for self-employed. SIMPLE IRA and SIMPLE 401(k) contributions are $12,000 + $2,400 (3%) = $14,400. Keogh isn’t enough of an answer. It should say Keogh defined benefit or money purchase plan.
Which of the following plans has the maximum allowable contribution and a mandatory contribution? A. Money purchase B. SEP C. Profit-sharing D. SIMPLE 401(k) E. TSA
A - A money purchase plan can allow for a $52,000 contribution and is subject to the minimum funding standard (mandatory contribution). A SEP or a profit-sharing plan can allow for a $52,000 contribution, but the contribution isn’t mandatory.
Joseph Mills, owner of Mills Manufacturing, has seen excessive employee turnover. He would like some kind of retirement plan. The number of employees on the payroll averages 50-60 yearly. He wants a simple plan. He will match to a limited extent. Which plan would you suggest? A. SIMPLE IRA B. Profit-sharing 401(k) C. SIMPLE 401(k) D. SEP
A - The SIMPLE IRA has a special election under the 100% match on the first 3%. Under a SIMPLE IRA, the employer may elect a 1% match in no more than 2 years of any 5-year period. The SIMPLE 401(k) may not have a special match election. It has an extremely rigid plan design. The SIMPLE 401(k) and the PS 401(k) are ERISA plans. They are subject to all the normal ERISA requirements (not simple plans). SEPs do not allow for matching.
Which retirement plan is best for a woman who is a consultant (self-employed) and makes $150,000? She wants to put away 10%. A. Keogh B. SEP C. IRA D. Roth IRA
B - The SEP allows for up to 18.59% (self-employed). It is simple. A Keogh answer by itself isn’t enough of an answer. It should say Keogh DB, MP or PS.
Sam’s corporation established a SARSEP prior to 1997. Which of the following are correct?
I. The 415 limits apply (total additions equal to the lesser of $52,000 or 25% of compensation)
II. New employees, as they join the firm, can be added to the plan up to 25 total employees.
III. The maximum deferral is $17,500 (not including catch-up)
IV. All contributions are 100% vested
A. I, II
B. I, III
C. I, III, IV
D. II, III, IV
E. All of the above
E - Answers I through IV are true. SARSEPS are subject to the contribution limit (the lesser of 25% of compensation or $51,000). New employees can be enrolled in the plan. A new plan cannot be started, but existing plans may continue.
Which plan contributions are not subject to FICA and FUTA? A. SEP B. SARSEP C. 403(b) D. SIMPLE IRA E. SIMPLE 401(k)
A - In the deferral-type plans, the employee contribution is subject to FICA and FUTA.
When may a SEP or SARSEP account balance be withdrawn by a participant? A. Upon separation of service B. At normal retirement age C. At age 59? D. All of the above
D - Participants must be given the opportunity to withdraw the account balance at any time (for any reason). Of course, there may be a 10% penalty in some situations.
