UNIT 23 CHECKPOINT EXAM

Question 1

A 73-year old client in the 25% income tax bracket withdraws $20,000 from her traditional IRA. Based on her life expectancy, the withdrawal should have been $30,000. How much tax will she owe?

A) $10,000
B) $7,500
C) $5,000
D) $12,500

Answer 1

D) $12,500

Explanation
Failure to meet the required minimum distribution results in a 50% penalty on the shortfall. In this case, she took $20,000 when she should have taken $30,000 so there will be a 50% tax on the $10,000 difference ($5,000 penalty). In addition to that $5,000 penalty, the ordinary income tax on the total amount that should have been withdrawn must also be paid (25% × $30,000 = $7,500). Total tax liability on the withdrawal equals $12,500 ($5,000 penalty tax plus $7,500 ordinary income tax).

Question 2

Another term for a defined benefit plan is

A) a traditional term plan.
B) an annuity.
C) a defined withdrawal plan.
D) a pension plan.

Answer 2

D) a pension plan.

Explanation
Though an annuity acts much like a defined benefit plan, it does not require sponsorship by an employer. The other two responses are just made up.

Question 3

Andrea recently began working for the Seabird Coffee Company as a barista. She tells you that her company has two retirement plans she can participate in. In one plan, she contributes a portion of her salary into an account where she can choose from a set of investments. The contributions reduce her taxable income. The money grows and when she retires, or leaves the company, she can take the balance. In the other program, she does not contribute to the plan; the company pays into the plan and invests the money. When she retires, and if she qualifies, she will receive a retirement income for life from the plan based on her working income. You explain that Seabird Coffee has

A) two different defined benefit plans.
B) a defined benefit and a nonqualified-deferred compensation plan.
C) a defined contribution and a defined benefit plan.
D) two different defined contribution plans.

Answer 3

C) a defined contribution and a defined benefit plan.

Explanation
The plan she contributes into on a pretax basis is a defined contribution plan. The other plan promises an income for and is a defined benefit plan. Both are types of qualified plans.

Question 4

Individual retirement accounts allow a catch-up contribution of $1,000 to be made into the account for those who are

A) 59½ years old or over.
B) over 72 years old.
C) 50 years old or over.
D) over 50 years old.

Answer 4

C) 50 years old or over.

Explanation
Catch-up contributions are for those ages 50 and over (not over 50).

Question 5

Which of these features does the Roth IRA include?

I. There are no minimum required distributions after age 70½ with a Roth IRA.
II. There are higher contribution limits to a Roth IRA than to a traditional IRA.
III. Withdrawal of earnings in the Roth IRA may be made without any taxation as long as a Roth IRA has been open for a minimum of one year and the participant is age 59.
IV. There is the ability to contribute to both a Roth IRA and a traditional IRA.

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

Answer 5

A) I and IV

I. There are no minimum required distributions after age 70½ with a Roth IRA.
IV. There is the ability to contribute to both a Roth IRA and a traditional IRA.

Explanation
One of the primary benefits to the Roth IRA is that reaching age 70½ does not trigger the required minimum distributions found in other retirement plans. Probably the biggest benefit is that all earnings grow tax deferred, and may be withdrawn free of any tax, as long as there has been an open Roth IRA for at least 5 years AND the participant is at least 59½. One may contribute to both types of IRA, but the combined contribution may not exceed that annual maximum for a single plan.