UNIT 23 QBANK

Question 1

What is the penalty, if any, for overcontribution to an IRA?

A) No penalty
B) 50%
C) 6%
D) 10%

Answer 1

C) 6%

Explanation
There is a 10% penalty is for early withdrawal. There is a 50% penalty is for failure to make the minimum required distribution for the year. Contribution of more than the maximum amount in a year carries a 6% penalty.

Question 2

Which of the following are true of nonqualified plans but not true of qualified plans?

I. Contributions are not tax deductible
II. Contributions are tax deductible
III. Plan needs IRS approval
IV. Plan does not need IRS approval

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

Answer 2

C) I and IV

I. Contributions are not tax deductible
IV. Plan does not need IRS approval

Explanation
Qualified plans require IRS approval and the contributions are tax deductible. Because nonqualified plans’ contributions are not deductible they do not require IRS approval

Question 3

What is a big advantage Roth IRAs have over traditional IRAs?

A) There are no penalties for early distributions
B) Contributions are tax free
C) There are no income limits
D) Distributions are normally tax free

Answer 3

D) Distributions are normally tax free

Explanation
If taken after age 59½ and the account has been open for five years, there are no taxes or penalties on distributions from Roth IRAs. Contributions are made with after-tax dollars. There may be penalties on distributions if the account hasn’t been open for five years and the distributions are made before age 59½. Roth-allowable contribution amounts decrease and then end above certain income levels.

Question 4

Each of the following investments and practices are deemed ineligible for an IRA or any other retirement plan except

A) collectible fine art.
B) variable annuities.
C) life insurance.
D) margin account trading.

Answer 4

B) variable annuities.

Explanation
Annuities are eligible for IRAs. However, FINRA deems them generally unsuitable. The tax-deferred nature of a variable annuity comes with some cost. Placing this tax-deferred vehicle inside a tax-deferred account (like an IRA) will be hard to justify.

Question 5

Who is responsible for meeting the desired returns on a defined contribution plan?

A) The sponsor
B) The employee
C) The Pension Benefit Guaranty Corporation
D) The custodian

Answer 5

B) The employee

Explanation
The employee chooses how the money is invested, so the employee takes responsibility for the returns.

Question 6

All of the following are true of Roth IRAs except

A) distributions are required after reaching 72.
B) contributions are not deductible.
C) distributions are not required after reaching 72.
D) anyone with earned income under a certain limit may contribute.

Answer 6

A) distributions are required after reaching 72.

Explanation
Because distributions are not taxable on Roth IRAs, there are no required distributions. Roth IRAs have income limits and contributions to Roth IRAs are not deductible.

Question 7

Who can contribute to an IRA?

A) Anyone with earned income under the age of 72
B) Anyone with earned income
C) Anyone with earned income not covered by an employer-sponsored plan
D) Anyone with earned income under the age of 59½

Answer 7

B) Anyone with earned income

Explanation
Anyone with earned income can contribute, even if covered by an employer-sponsored plan. The contribution, however, may or may not be deductible, depending on income level.

Question 8

What is the penalty for not taking the required minimum distribution (RMD) for the year?

A) 10% of the annual contribution limit
B) 50% of the amount short of what should have been taken
C) 50% of the annual contribution limit
D) 10% of the amount that should have been taken

Answer 8

B) 50% of the amount short of what should have been taken

Explanation
There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 50% of the amount missed.

Question 9

In a defined contribution plan

I. the benefit amount is fixed.
II. the benefit amount is variable.
III. the contribution amount is fixed.
IV. the contribution amount can vary.

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

Answer 9

A) II and III

II. the benefit amount is variable.
III. the contribution amount is fixed.

Explanation
In a defined contribution plan, the amount that the employer is depositing is fixed by the employer, but the employee chooses the investments, so the benefit varies.

Question 10

Which of the following retirement plans does not require minimum distributions once the participant has reached age 72?

A) Traditional IRA
B) Roth IRA
C) 401(k)
D) 403(b)

Answer 10

B) Roth IRA

Explanation
The Roth IRA has no specific requirement that the participant receive distributions. In all of the other plans, generally, upon reaching age 72, minimum distributions must commence no later than the following April 1.

Question 11

Required minimum distributions (RMDs) for IRAs must begin by

A) prior to the year the participant turns 59½.
B) prior to the year the participant turns 70½.
C) the year after the participant turns 59½.
D) the year after the participant turns 72.

Answer 11

D) the year after the participant turns 72.

Explanation
There is a penalty for early withdrawal prior to age 59½, but distributions do not need to begin until the year after the participant turns 72.

Question 12

Which of the following are available to participants in a 401(k) plan that are not available to IRA holders?

I. Tax deferral on the earnings
II. Hardship withdrawals
III. The catch-up provision for those who are age 50 and older
IV. Loans against the vested balance

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

Answer 12

D) II and IV

II. Hardship withdrawals
IV. Loans against the vested balance

Explanation
IRAs have no provisions for either hardship withdrawals or loans. Both IRAs and 401(k) plans offer tax deferral on the earnings, and although the amount is larger with the 401(k), they both offer the catch-up provision for those who are age 50 or older.

Question 13

All of the following are true of Roth IRAs except

A) contributions are not deductible.
B) distributions are not required after reaching 72.
C) anyone with earned income under a certain limit may contribute.
D) distributions are required after reaching 72.

Answer 13

D) distributions are required after reaching 72.

Explanation
Because distributions are not taxable on Roth IRAs, there are no required distributions. Roth IRAs have income limits and contributions to Roth IRAs are not deductible.

Question 14

All of the following are true of Roth IRAs except

A) Contributions are made after tax
B) Contributions may be deductible depending on income limits
C) Contributions may be able to be made after 72
D) Withdrawals are not required at age 72

Answer 14

B) Contributions may be deductible depending on income limits

Explanation
Contributions are not deductible. They are made with after-tax dollars and may continue past age 72 if still working. Roths are not subject to RMDs.

Question 15

All of the following are benefits of a traditional IRA except

A) no penalty is charged for failing to withdraw funds after age 72.
B) earnings accumulate on a tax-deferred basis.
C) funds may be withdrawn without penalty for certain exemptions.
D) contributions may be tax deductible.

Answer 15

A) no penalty is charged for failing to withdraw funds after age 72.

Explanation
Required minimum distributions must begin the year after the account owner reaches age 72.

Question 16

Who is responsible for meeting the desired returns on a defined benefit plan?

A) The Pension Benefit Guaranty Corporation
B) The custodian
C) The sponsor
D) The employee

Answer 16

C) The sponsor

Explanation
The sponsor is the employer who has promised the defined benefit plan to the employee.

Question 17

Distributions from IRAs are taxed at

A) long-term capital gains rate on the amount of the distribution that exceeds the amount contributed.
B) ordinary income tax rates on the full amount of the distribution.
C) ordinary income tax rates on the amount of the distribution that exceeds the amount contributed.
D) long-term capital gains rate on the full amount of the distribution.

Answer 17

B) ordinary income tax rates on the full amount of the distribution.

Explanation
Because no taxes were paid on the amount deposited, the full amount is taxable at distribution, and even though some of the distribution is from capital gains, the whole amount is taxed at the ordinary income tax rate.

Question 18

Which of the following are true of both qualified plans and nonqualified plans?

A) The accounts grow tax deferred
B) Contributions are tax deductible
C) Contributions are not tax deductible
D) Tax on interest and dividends are deferred, but not on capital gains

Answer 18

A) The accounts grow tax deferred

Explanation
With qualified plans, deposits go in before taxes and grow tax deferred. All withdrawals are taxable. With nonqualified plans, deposits are made after tax, and distributions above the cost basis are taxable.

Question 19

Who benefits most from a defined contribution plan?

A) Younger employees
B) All benefit the same
C) Employees with fewer years left to work
D) Older employees

Answer 19

A) Younger employees

Explanation
Younger employees have more time for the money to grow.

Question 20

Which of the following is an acceptable investment for an IRA?

A) A collection of medieval manuscripts and art
B) Gold coins minted in Switzerland but sold in the U.S.
C) A mutual fund specializing in speculative bonds
D) A universal variable life insurance contract

Answer 20

C) A mutual fund specializing in speculative bonds

Explanation
Investments in an IRA are limited to cash and securities. This would include gold coins if they are from a U.S. mint. Collectibles and insurance are not acceptable IRA investments.