Unit 11 Retirement Plans

Question 1

To be eligible to set up a traditional ____, the individual must have earned income from salary, wages, commissions, bonuses, or self-employment income.

Is passive income from rental properties eligible?

Answer 1

Traditional IRAs

No

Question 2

Limits: Annual IRA contributions are capped at the lesser of:

• ____% of earned income; or
• A ____ - the tax law places limits on IRAs contributions, the amount is adjusted annually for cost-of-living adjustments

The flat dollar amount also applies to ____ IRAs.

Individuals age ____ or over have a “catch-up” provision available to increase the flat dollar amount.

Answer 2

100%

A flat dollar amount

Spousal

50

Question 3

Deductibility: Individuals may deduct IRA contributions from taxable income if:

• The individual or spouse is not covered by an ____
• The ____(AGI) is under a certain limit

IRA contributions can be deducted (partially or full) on a federal income tax return and the income limit ranges are adjusted annually.

The entire contribution is deductible for incomes ____.
A portion of the contribution is deductible for incomes ____.

A full ____ limit contribution is allowed whether it will or will not be deducted from federal income taxes.

Answer 3

Employer-sponsored retirement plan

Adjusted Gross Income

Below the range
Between the ranges
Above the range

Annual

Question 4

Funding Vehicles: There are some restrictions on the types of products in which IRA funds may be invested. The following are not allowed:
1. ____
2. ____
3. ____

Products that may be used include:
1. ____
2. ____
3. ____
4. ____

Answer 4

1. Life insurance
2. Collectibles - artwork, antiques, stamps, coins
3. Hard assets - gems, precious metals in bullion form, BUT US-minted gold and silver coins ARE ALLOWED
4. Flexible premium annuities
5. Bank accounts
6. Brokerage accounts
7. Mutual funds

Question 5

Premature Withdrawals: Earnings on IRA contributions are tax-deferred - income tax is not due until the earnings are withdrawn. A premature withdrawal - withdrawal taken before age ____ - may incur a ____% penalty tax in addition to income tax due on the amount withdrawn.

Answer 5

59.5 Years

10%

Question 6

Premature Withdrawals - The 10% penalty is waived for the following reasons:
1. ____ or ____ disability of the IRA owner
2. Periodic payments made over the owner’s life ____
3. Certain ____ expenses
4. Payment of health insurance premiums while ____
5. Certain higher ____ expenses
6. Down payment for a first-time home purchase ($____ max)
7. Distributions made under a ____ decree to an ex-spouse or dependent child
8. Birth and adoption expenses ($____ max)
9. Correcting an excess ____

Answer 6

1. Death or total and permanent
2. Expectancy
3. Medical
4. Unemployed
5. Education
6. 10k
7. Divorce
8. 5k
9. Contribution

Question 7

There are two ways to move IRA accounts from one company to another or from an employer-sponsored plan to an individual IRA:
1. ____ : the money from the original IRA or qualified plan is distributed to the owner and they deposit it to the new IRA carrier
2. ____ : the money from the original IRA or qualified plan is distributed directly to the new IRA carrier without coming into the owner’s possession

Answer 7

Rollovers

Transfers (direct transfers)

Question 8

Three rules for rollovers:
1. The money must be deposited within ____ days of its receipt by the owner, or it becomes taxable. And if the owner is under 59.5 years old, the 10% tax penalty applies
2. If the rollover is coming from an employer-sponsored plan it is subject to a withholding tax rate of ____%. For example - the owner will only receive 80k out of a 100k employer-sponsored plan rollover. The owner will get the 20k back at tax filing time if the owner deposits 100k with the new IRA custodian. If the owner only deposits 80k, the 20k is taxable and subject to the penalty.
3. An IRA may be rolled over only once in any ____ period.

Answer 8

60 days

20%

12-month

Question 9

Retirees must start receiving a required minimum distribution from qualified retirement plans by ____st of the year following the year they reach the applicable age:
- Age ____ starting in 2023
-Age ____ starting in 2033
If a person fails to take the required minimum distribution, they may be subject to a ____% excise tax penalty. The person is allowed a correction window in which if the person receives the required distribution and submits a tax return reflecting the distribution, then the excise tax penalty is reduced to 10%. Generally, the correction window is ____ years after the end of the taxable year in which the tax is imposed.

Answer 9

April 1st

Age 73
Age 75

25%
2 Years

Question 10

Deductible IRA contributions and earnings are taxed at ____. Nondeductible contributions are distributed tax free.

Answer 10

Distribution

Question 11

If the owner of an IRA dies, the requirements for distributions vary depending on the beneficiary.
- ____ may choose to treat the IRA as their own or they may choose a lump-sum distribution
- ____ beneficiaries may take a lump-sum distribution or take distributions over the ____ years following the owner’s death.

The entire value of the IRA is includable in the deceased owner’s estate.

Answer 11

Spouses

Non-spouses

Question 12

Roth IRAs were introduced in 1997. They follow rules similar to traditional IRAs except:
- Contributions are ____
- Qualified distributions are tax-free if they meet these two requirements
1. The Roth IRA has been set up for at
least ____ years.
2. Distribution is after age ____, or due to
death, disability, or being a ____

Answer 12

Never deductible

5 Years
59.5, 1st time home buyer

Question 13

Roth IRAs have ____ distribution requirements (RMDs), and individuals may contribute to a Roth IRA regardless of their age.

Answer 13

No minimum distribution requirements

Question 14

Individuals may have both a Roth IRA and a traditional IRA, but the total annual contribution to both may not exceed the maximum limit for ____. Contributions to Roth IRAs are phased out for higher-income taxpayers.

Answer 14

One IRA

Question 15

Tax Advantages: All employer-sponsored qualified plans have the following tax advantages:

Employer contributions are ____ to the business.
Employee contributions are ____ to the employee.
Neither employer or employee contributions are taxable as ____ to employees.
All (except for the ____ 401k feature) earnings grow tax-deferred

Answer 15

Tax-deductible
Tax-deductible
Current income
Roth 401k

Question 16

All (except for the Roth 401k feature) distributions from employer-sponsored qualified plans are taxable because they come from ____ contributions and ____ earnings.

Answer 16

Deductible contributions
Tax-deferred earnings

Question 17

Tax rules for distributions from employer-sponsored qualified plans are similar to traditional IRAs
- Withdrawals taken before age ____ are considered premature, unless there is an exception, a ____% penalty tax applies in addition to any ordinary income tax.
- Required minimum distributions must begin the year the individual turns the applicable age for required distributions, the first payment may be delayed until ____1st of the following year.

Answer 17

59.5

10%

April 1st

Question 18

All employer-sponsored qualified plans must be approved by the IRS to qualify for favorable tax treatment. The Employee Retirement Income Security Act of 1974 established the following requirements for retirement plans. (1/2)
1. ____ - plans must benefit all regular employees, not just a few selected ones. Generally, participation must be open to any employee age ____ or over with ____ years of service.
2. ____ - plans may not provide benefits to ____ and other highly paid individuals that are out of proportion to those provided to rank-and-file employees. Plans may not discriminate on the basis of ____.

Answer 18

1. Participation - 21, one
2. Non-discrimination - executives, sex

Question 19

All employer-sponsored qualified plans must be approved by the IRS to qualify for favorable tax treatment. The Employee Retirement Income Security Act of 1974 established the following requirements for retirement plans. (2/2)
3. ____ - determines when employees own the money in their plan. Employees are always immediately 100% vested in their own contributions. As for employer contributions, employees generally must become ____% vested after ____ years.
4. ____ - each participant must receive in writing when they enroll, a summary plan description, notification of any changes, and an annual report.
5. ____ - anyone with control over the plan or its assets are ____. They must manage the plan solely in the best interest of its participants using the “____” rule.

Answer 19

3. Vesting - 100%, 6 Years
4. Reporting and Disclosure
5. Fiduciary - Fiduciaries, prudent person rule

Question 20

____ plans may be either defined benefit or defined contribution plans. These plans REQUIRE employers to make funding contributions to the plan every year.
Defined ____ pension plans are designed to provide a specific benefit to an employee upon retirement. The employee payout at retirement typically depends on how long they worked and their salary. The plan may allow a lump-sum payout or a monthly annuity payment.
Defined ____ pension plans do not specify what an employee will receive at retirement; it only specifies how much money the employee and employer can contribute

Answer 20

Pension plans

Defined benefit pension plans

Defined contribution plans

Question 21

A ____ plan is a defined contribution plan that does not require an employer to make a funding contribution every year. Rather, the amount and timing of contributions is at the employer’s discretion. Contributions are dependent on the company making a profit.
The maximum amount that an employer may contribute to a profit-sharing plan as a whole is limited to ____% of the company’s payroll for all employees.

Answer 21

Profit-sharing plan

25%

Question 22

____(HR-10 plans) are qualified retirement plans set up by self-employed persons and non-incorporated businesses such as sole proprietorships (individuals) and partnerships. These plans may be defined benefit or defined contribution.

Answer 22

Keogh Plans

Question 23

____ plans allow taxpayers a break on taxes on their deferred income. employees can save and invest a piece of their paycheck before taxes are taken out. They won’t be taxed until it’s withdrawn.

Employers may make matching contributions up to a certain dollar amount or percentage of the employee’s contributions. The plan has annual contribution limits that are considerably higher than the limit on annual ____ contributions.

Answer 23

401K Plans

IRA

Question 24

____ plans (also known as tax-sheltered accounts) work much like 401k plans but are for employees of non-profit organizations such as public school systems, churches, and hospitals. Employee and employer contribution limits are generally the same as those for 401k plans.

Answer 24

403B Plans

Question 25

____ (SEP) plans have significantly less paperwork and easier administration than qualified retirement plans. Essentially, each employee sets up an IRA and the employer makes contributions to them on the employees’ behalf. Employer contribution limits for SEP-IRAs are much higher than the usual IRA limits. Annual employer contributions may not exceed ____% of the employee’s compensation up to a specified contribution amount.

Employees must be immediately ____% vested in employer contributions made under a SEP plan.

Answer 25

Simplified Employee Pension plans (SEP_

100%

Question 26

____(SIMPLEs) are a simplified retirement plan for small employers with 100 or fewer employees and no other type of retirement plan. This can be structured as an IRA or a 401k plan. These plans allow employees to defer a portion of their compensation into the plan and employers are required to match dollar-for-dollar at least 1% up to ____% of each employee’s compensation. The dollar limit for employee contributions is somewhat less than the amount that applies to 401k and 401b plans. All employees earning at least $____ annually must be allowed to participate in the plan.
Employees are 100% vested in employer contributions made under the SIMPLE plan. A ____% penalty tax on premature distributions applies during the first ____ years and the standard 10% penalty applies thereafter.

Answer 26

Savings Incentive Match Plans for Employees

3%

$5000

25%

2 Years

Question 27

Employers who want to provide a benefit for select employees can use a non-qualified plan, a bonus plan, or a deferred compensation plan. These plans do not get the favorable ____ given to qualified plans. They do not need to meet the participation, non-discrimination, and other general requirements of qualified plans. Employers can design these plans in any way they wish.

Answer 27

Tax Treatment