Unit 18 Review Flashcards
What new benefit did the TCJA of 2017 bring to 529 plans effective 2018?
A) Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition
B) Withdrawals may be made for qualified expenses at certain foreign educational institutions.
C) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition
D) Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses
C) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition
The big change was the ability to use a 529 plan for K-12 expenses. However, the only expense that qualifies is tuition and there is a maximum limit of $10,000 per year. No contribution to any 529 is tax deductible. The use of the 529 for foreign educational institutions pre-dates the TCJA of 2017.
Under UTMA, which of the following are allowable distributions for the benefit of the minor?
A) A percentage of food expense
B) Clothing expense for a child who has gone through a growth spurt
C) The cost to attend a summer camp
D) A percentage of housing expenses, such as the utilities for his bedroom
C) The cost to attend a summer camp
You cannot use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted.
Health savings accounts (HSAs) offer the opportunity for employees to use pretax funds to pay for a wide range of medical expenses. Medical expenses included are all of the following except
A) long-term disability insurance premiums.
B) Medicare premiums for those age 65 or older.
C) health insurance coverage under COBRA.
D) long-term care insurance premiums.
A) long-term disability insurance premiums.
If an HSA may be used to pay long-term care (LTC) premiums, why can’t it be used for long-term disability premiums? The answer is in the first word of the name: health. Disability insurance is not health insurance. It is used to replace the income lost when one is unable to perform the labor required for their occupation.
Which of the following does not benefit both the employee and the employer?
A) Traditional IRA
B) SEP-IRA
C) Defined benefit plan
D) SERP
A) Traditional IRA
There is no employee/employer relationship in a traditional (or Roth) IRA. A SEP-IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee’s account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.
Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application?
A) A prepaid tuition plan
B) A Roth IRA
C) A Coverdell ESA
D) An UTMA account
D) An UTMA account
Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won’t hurt the individual’s chances for financial aid eligibility.
One of your clients, a couple in their early 30s, asks you to recommend a plan to save for their newborn child’s education. They are only able to contribute $1,800 per year. Which of the following would most likely be the best fit for their situation?
A) Section 529 plan
B) Coverdell ESA
C) Equity index annuity
D) UTMA
B) Coverdell ESA
The key to this choice is the contribution level. The Coverdell ESA has a maximum annual limit of $2,000 and offers tax-free growth. Why not the Section 529 plan? Invariably, that will be the correct choice when the question involves higher contribution amounts or tax benefits on a state level. When the couple can only contribute $1,800 per year, it seems logical to assume that they are in a low tax bracket where those benefits would be of minimal value. Money in an UTMA tends to lower financial aid for higher education. The annuity would not be suitable for anyone wishing to use the funds prior to age 59½.
Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child’s future education except
A) the 529 plan has no age limits.
B) the 529 plan is counted at a lower percentage of assets when applying for financial aid.
C) the 529 plan has no earnings limitation on the donor.
D) the 529 plan allows for higher contribution levels.
B) the 529 plan is counted at a lower percentage of assets when applying for financial aid.
Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan.
A participant in an ERISA qualified retirement plan is studying the investment policy statement (IPS) prepared by the plan’s fiduciary. The contents of the IPS would not include
A) determination for meeting future cash flow needs
B) investment philosophy including asset allocation style
C) specific security selection
D) methods for monitoring procedures and performance
C) specific security selection
One thing that could never be in an IPS is a listing of the securities that will be purchased in the future. Types of securities, yes, but not the specific ones.
The contribution limit has to be aggregated when participating in both
A) a 401(k) and a 403(b)
B) a 403(b) and a 457
C) a 401(k) and a 457
D) a 457 and a Roth IRA
A) a 401(k) and a 403(b)
Contributions to a 457 plan do not have to be aggregated with other retirement plans. That is, if eligible, one could contribute the maximum to a 401(k), a 403(b), or an IRA (traditional or Roth) and could also contribute the maximum to a 457 plan.
Maria, age 49, was discussing with some coworkers the recent family vacation she took. She commented that she was able to afford it by taking a penalty-free withdrawal from her retirement plan. Based on that statement, Maria must be covered under
A) a 401(k) plan.
B) a 457 Plan.
C) a 403(b) plan.
D) a defined benefit plan.
B) a 457 Plan.
The 457 is a nonqualified but tax-advantaged retirement plan. The 457 Plan is unique in that it is the only retirement plan permitting withdrawals, for any reason, before reaching age 59½ without penalty. All other retirement plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason. Even though there is no early distribution tax, Maria will still owe ordinary income tax on the amount withdrawn; the 457 benefit is only that there is no additional 10% tax.
All of the following statements regarding a Section 529 QTP are true EXCEPT
A) the plan owner can rollover any unused funds to a member of the beneficiary’s immediate family without incurring any tax liability as long as the rollover is completed within 60 days of the distribution.
B) a beneficiary may be covered under both a Coverdell ESA and a Section 529 QTP.
C) the plan owner can rollover the assets into a different plan no more frequently than once every 12 months.
D) agents selling a Section 529 Plan must deliver a currently effective prospectus.
D)
agents selling a Section 529 Plan must deliver a currently effective prospectus.
Because Section 529 Plans are technically municipal fund securities, an official statement or offering circular is the document delivered, not a prospectus.
One of your clients has told you that his employer has just instituted a Roth 401(k) plan. If the employer wishes to make matching contributions,
A) the employee may choose whether he wants the matching contribution to be made to the Roth 401(k) or a regular 401(k)
B) it may contribute a specified percentage of the employee’s pay to a regular 401(k)
C) current tax law does not permit matching contributions to be made on behalf of any employee participating in a Roth 401(k) plan
D) it may contribute a specified percentage of the employee’s pay to the Roth 401(k)
B) it may contribute a specified percentage of the employee’s pay to a regular 401(k)
In order to have matching contributions, participants in a Roth 401(k) plan must actually have 2 accounts—the Roth and a regular 401(k). The employer contributions are made on a tax-deductible basis to the regular 401(k) and are fully taxable upon withdrawal.
The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is not true?
A) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period.
B) If there is a distribution of the assets, the rollover must be completed within 60 days.
C) This may be done, but only if the entire account is rolled over.
D) Even though these plans are generally under state control, the rollover rules are federal law.
C) This may be done, but only if the entire account is rolled over.
Partial rollovers are permitted.
Where would you be most likely to find an IPS?
A) SPD
B) Defined benefit plan
C) GRAT
D) IRA
B) Defined benefit plan
The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.
Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 in 2023 from his IRA. However, a distribution of only $8,000 has been made. Assuming that Jason does not correct the problem, what is the dollar amount of penalty that may be assessed in this situation?
A) $500
B) $2,000
C) $4,000
D) $200
A) $500
The penalty for failure to make the correct amount of required minimum distribution is 25% of the difference between the minimum required amount and the actual distribution. In this case, this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0 reduced the penalty to 25% or even as low as 10% if promptly corrected.
