Unit 11: Retirement Plans Flashcards
This type of retirement plan is an agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement
Nonqualified deferred compensation plan
This type of retirement plan allows employees to authorize their employer to deduct a specified amount for retirement savings from their paycheck
Nonqualified Payroll deduction plan
This type of retirement plan was created to encourage people to save for retirement in addition to any other retirement plans.
Individual retirement accounts (IRAs)
________ Income is income from work, such as wages, salaries, bonuses, commissions, trips and so forth. Income from investments is not considered earned this type of income.
Earned income
If the contribution limited is exceeded, a _____% excess contribution penalty applies to the amount over the allowable portion.
6% excess contribution penalty
This occurs when the account assets are sent directly from one custodian to another, and the account owner never takes possession of the funds.
Transfer
A qualified employer sponsored plans that allow before-tax contributions to a savings account to be used for medical expenses.
Health Savings Accounts
This type of IRA allows after-tax contributions up to a maximum annual allowable limit.
Roth IRAs
Qualified individual retirement plans that offer self-employed persons and small businesses easy-to-administer pension plans.
Simplified employee pension plans (SEPs)
Qualified plans intended for self-employed persons and owner-employees of unincorporated businesses or professional practices. A person may make contributions until age 70.
Keogh (HR-10) Plans
This type of plan promises a specific benefit at retirement determined by a formula involving retirement age, years of service, and compensation.
Defined Benefit Plan
A legal obligation to pay retirement benefits to future retirees.
Pension Liability
When adequate reserves have not been set aside to meet this future obligation
Unfunded Pension Liability
A popular form of defined contribution plan. Do not require a fixed contribution formula and allow contributions to be skipped during years of low profits.
Profit-sharing Plans
A type of defined contribution plan that allows an employee to elect to contribute a percentage of salary up to a maximum dollar limit to a retirement account.
401(k) Plans (aka Thrift Plans)
________ are considered salary reduction plans
401(k) Plans
For individuals age ______ or older, a catch-up contribution is allowed in an amount as determined by the IRA tax code.
50
FDIC insurance on retirement accounts held at banks is $___________
$250,000
List of investments appropriate for IRAs:
1) Stocks
2) Bonds
3) Mutual Funds
4) UITs
5) Government securities
6) U.S. Government-issued gold and silver coins
7) Annuities
Can a student be a participant in an educational institution’s TSA?
No, because the plan is only available to employees.
All corporate retirement plan administrators have ______ responsibility. Risk must be the first consideration in investment of plan assets. Short sales, uncovered options, and margin account transactions are not suitable within corporate retirement plans.
fiduciary responsibility
Which of the following securities is the least suitable recommendation for a qualified plan? A. Blue-chip common stock B. Investment-grade municipal bond C. Treasury bill D. A rated corporate bond
Answer: B – Investment-grade municipal bond
Two types of nonqualified retirement plans:
1) Deferred compensation plans
2) Payroll deduction plans
Distributions may begin without penalty after age _______and must begin by ______ of the year after the individual turns 70 ½
59 ½;
April 1
Rollovers must be completed within _____ calendar days of withdrawal
60
Earnings in a _______ IRA are not taxed as they accrue or when they are distributed from an account as long as the money has been in the account for fix taxable years and the IRA owner has reached age 59 ½
Roth IRA
RMDs at age 70 ½ do not apply to ______ IRAs
Roth IRAs
Coverdell (Education IRA)
Allows after-tax contributions of up to $______ per student per year for children younger than age 18
$2,000
Two types of education savings accounts:
1) Coverdell (Educational IRA)
2) Section 529 Plans
Two types of Section 529 Plans:
1) Prepaid Tuition Plans for state residents - allows residents to lock in current tuition rates.
2) College savings plans for residents and nonresidents - more popular option allows donors to save money to be used later
403(b) Tax Sheltered Annuities are available to employees of:
1) Public Education Institutions
2) Tax-exempt organizations
3) Religious organizations
This type of plan may be used by firms who wish to favor older key employees because a much greater amount may be contributed for those with only a short time until retirement
Defined Benefit Plan
4 Types of Defined Contribution Plans:
1) Profit-sharing plans
2) SIMPLEs - Savings Incentive Match Plans for Employees
3) 401(k) (aka thrift Plans)
4) Roth 401(k)
The maximum contribution to an _______ is 100% of earned income or the maximum allowable limit, whichever is less.
IRA
Which of the following would make an employee ineligible to participate in a company’s qualified retirement plan?
A) He is only 20 years old.
B) He has been with the company for only 2 years.
C) He is not a member of the company’s management team.
D) He works only 1,200 hours a year for the company.
A) He is only 20 years old.
Under the Employee Retirement Income Security Act, anyone over the age of 21, management or not, who has been with the company for at least 1 year, and who works 1,000 or more hours per year for the company, must be allowed to participate in the company’s qualified plan.
______sales, ________ calls, and ________ bonds are all inappropriate for individual retirement accounts.
Short sales,
Uncovered calls,
Municipal bonds
In a defined benefit plan the payout is established, and employers must contribute annually to assure payment of the benefit amount. An ________ must calculate the annual contribution amount necessary to meet the benefit requirement.
actuary
A teacher has a 403(b) plan and the school system he works for has deposited $10,000 into his plan over a 12-year period. At retirement, if the teacher withdraws the total value of $16,000, on what amount does he pay tax?
A) 8,000.
B) 6,000.
C) 16,000.
D) 10,000.
C) 16,000.
A 403(b) plan is a qualified retirement plan; contributions to the plan are made before taxes and the growth of the contract is tax-deferred. Any distribution from a 403(b) plan is fully taxable to the participant at the ordinary income tax rate.
Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan.
Defined benefit plans
All of the following are TRUE concerning a Coverdell Education Savings Account (ESA) EXCEPT:
A) unused balances may be used for any purpose the beneficiary chooses
B) the maximum annual contribution is $2,000 per beneficiary
C) the beneficiary may be the contributor’s child or grandchild or child of a friend of the contributor
D) a beneficiary’s unused balance may be rolled over to an ESA account for another child
A) unused balances may be used for any purpose the beneficiary chooses
The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESA accounts may be rolled over to change investment vehicles or to change beneficiaries. Account balances may be used for education only.
Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year?
1000.
Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans? I. Contribution amounts are fixed. II. Contribution amounts vary. III. Benefit payments are fixed. IV. Benefit payments vary.
II. Contribution amounts vary.
III. Benefit payments are fixed.
In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.
In a 529 plan, __________ from one states plan to another states plan are permitted but no more than once every twelve months.
rollovers
Which of the following plans is NOT required to meet the nondiscrimination provisions of ERISA? A) Keogh plans. B) 403(b) plans. C) Deferred compensation plans. D) 401(k) plans.
C) Deferred compensation plans.
Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to which persons may participate.
All of the following statements regarding a qualified pension plan are true EXCEPT
A) it must cover all of its eligible employees
B) it must comply with nondiscrimination rules
C) it requires advance approval from the IRS
D) growth in the account is tax-free
D) growth in the account is tax-free
Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax-free. All growth is taxable at the time of distribution.
Which of the following statements regarding qualified retirement plans are TRUE?
I. Contributions are made with pretax dollars.
II. Contributions are made with after-tax dollars.
III. Distributions are 100% taxable.
IV. Distributions are taxable only to the extent of earnings.
I. Contributions are made with pretax dollars.
III. Distributions are 100% taxable.
With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.
A distribution has been made from a Coverdell Education Savings account in the amount of $12,000 when the educational expenses were only $10,000. The amount distributed beyond the educational expenses will be:
A) a tax-free distribution.
B) taxable to the beneficiary on any portion of the excess representing earnings.
C) completely taxable to the donor.
D) taxable to the donor on any portion of the excess representing earnings.
B) taxable to the beneficiary on any portion of the excess representing earnings.
If a distribution exceeds education expenses, a portion representing earnings will be taxable to the beneficiary and may be subject to an additional 10% penalty tax.
Reference: 11.2.5.1 in the License Exam Manual
A member firm’s customer is requesting that IRA contributions converted from a traditional IRA to a Roth IRA now be moved back to a traditional IRA. This is
A) called a re-characterization and is permitted under all circumstances and within any time frame
B) called a rollover and allowed by the IRS as long all requirements are met
C) called a re-characterization and is allowed by the IRS so long as certain requirements are met
D) never allowed under any circumstances
C) called a re-characterization and is allowed by the IRS so long as certain requirements are met
The IRS allows an individual to re-characterize contributions made to one type of IRA as if they had been made to another type of IRA as long as the requirements as to when the re-characterization can occur have been met.
You may contribute to an IRA only until the first tax filing deadline (______ ____th) even if you filed an extension.
April 15th
Reference: 11.2 in the License Exam Manual
Regarding 529 plans, contributions are made with ______ tax dollars
after-tax dollars
Which two statements are true regarding Section 529 education savings plans?
I. Contributions are considered gifts under federal law.
II. Contributions are tax deductible under federal law.
III. Earnings generated are taxable each year.
IV. Earnings generated are tax deferred.
I. Contributions are considered gifts under federal law.
IV. Earnings generated are tax deferred.
Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level-if used for qualified education expenses.
Each of the following individuals is eligible to participate in a Keogh plan EXCEPT:
A) an executive of a corporation who receives $5,000 in stock options from his company.
B) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time.
C) a self-employed doctor in private practice.
D) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time.
A) an executive of a corporation who receives $5,000 in stock options from his company.
Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.
Reference: 11.3 in the License Exam Manual
What is the latest date that an IRA participant may make an IRA deposit for the current year?
April 15 of the following year.
Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.
Reference: 11.2 in the License Exam Manual
_______ was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities, such as city and state governments.
ERISA
IRAs and Keogh plans are similar in each of the following ways EXCEPT:
A) the maximum allowable cash contribution is the same.
B) rollovers are allowed once every 12 months and must be completed within 60 days.
C) distributions without penalty may begin as early as age 59-½.
D) taxes on earnings are deferred.
A) the maximum allowable cash contribution is the same.
Both IRAs and Keogh plans have maximum annual allowable contribution limits but they are significantly higher in a Keogh Plan.
Which of the following permits the highest annual contributions?
A) A traditional spousal IRA for which the contribution has been deducted.
B) A SEP IRA.
C) A Coverdell Education Savings Account.
D) A traditional nondeductible IRA.
B) A SEP IRA.
Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.
All of the following are true regarding Section 529 education savings plans EXCEPT
A) tax-deductible contributions at the federal level
B) not subject to income limitations
C) tax-free withdrawal at the federal level for qualified education expenses
D) high contribution limits
A) tax-deductible contributions at the federal level
Contributions are made with after-tax dollars and are not deductible.
Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should:
A) open the plan as instructed by your customer.
B) explain that the potential federal tax benefits available to residents of New York may not be available when opening out-of-state plans.
C) not open the plan.
D) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan.
D) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan.
Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened.
