Unit 24 (5) Flashcards
1
Q
Similarities between IRAs and Keoughs
A
- Tax deferral of contributions
- Tax sheltered
- Only cash contributions. If a rollover or transfer, securities from the transfer account are permitted
- Distributions after 59.5 no penalty
- Early withdrawal penalty 10%
- Payouts in lump sum or periodic
- Upon death, payments made to beneficiary, bypass probate
2
Q
Who can open an IRA?
A
Most individuals with earned income under the age of 70.5
3
Q
Can you roll a qualified employer retirement plan into an IRA if you’re leaving the company?
A
Yes, as long as it’s completed within 60 days
4
Q
What happens when spouse stays beneficiary on an inherited IRA
A
No 10% for withdrawals before 59.5 but the withdrawals must start when the deceased would have turned 70.5. RMDs are computed based on the beneficiaries age, not the deceased. Also, if its a ROTH and hadn’t been open for 5 years, still 10% penalty.
5
Q
When can you delay a qualified retirement plan?
A
April 1 of the year after you retire
6
Q
Non-spouse take RMDs based on oldest beneficiary life expectancy
A
Results in higher payout, higher taxes. Can be avoided if set up separate inherited IRA accounts for each account
7
Q
Who can give a gift to a minor in a custodial account?
A
Any adult. There is no limit on the size of the gift.
8
Q
The definition of security specifically excludes what?
A
Retirement plans
9
Q
When must margin forms and agreements be completed?
A
Promptly after the initial margin trade.
10
Q
Do Roths and traditional have different contribution limits?
A
No. You can contribute a total of 6k to an IRA and can be split between a traditional and Roth however you want
11
Q
Is income on a UTMA considered earned income?
A
No. The kiddie tax rule applies where children younger than 19 with income in excess of $2,200 is taxed at a rate applicable to trusts
12
Q
Is tax exempt income from Munis included in Adjusted Gross Income?
A
No
13
Q
Governmental section 457 plan must be funded. What does funded mean?
A
It must hold plan assets in trusts or custodial accounts for the benefit of individual participants
14
Q
Your married client has an AGI of 105k and is covered by his employers defined benefit pension plan. Can they open a Roth IRA?
A
Yes and without any restriction. As long as a married couples AGI does not exceed 203k, a Roth can be opened without any restrictions
15
Q
What happens to $ that is left over in a 529?
A
If you withdraw the excess, the portion representing earnings is taxed as ordinary income, plus a 10% penalty.
16
Q
When are you vested in a SEP?
A
Immediately. Once the money is deposited into the account, it belongs to the employee
17
Q
Tax sheltered annuity
A
403b or TSA
18
Q
Non-spouse cash out in 5 years
A
If deceased wasn’t 70.5, you can withdraw all the funds by Dec. 31 of the fifth year after owner’s death. Added to taxable income for beneficiary. No frequency to withdrawals. Can take some first year, wait a few years, take some more. Must take all funds by Dec 31 of 5th year
19
Q
Who cannot benefit from real estate held in an IRA?
A
Any member of the family, even adopted children and great grandchildren. EXCEPT brother or sister
20
Q
What are some things a prudent expert could buy as a fiduciary?
A
AAA rated debentures
Growth mutual fund
New issues of a AAA rated issuer
Writing covered calls on dividend paying stocks
Must be non-speculative, low to moderate risk, and likely to be considered prudent if used in a way consistent with MPT
21
Q
A self employed individual who operates a Keough plan must make contributions for
A
Full time employees who are at least 21 and have worked for 1 year (1,000 hrs)
22
Q
Roth key points
A
- Contributions not tax deductible
- Distributions tax free after 5 yrs and 59.5 age
- Can contribute after 70.5 if still have earned income
- Distributions not required at 70.5
- Death, disability, first time home, dist. is qualified and no 10% or tax
- Minor can be named beneficiary
23
Q
You file for tax extension. When do you have to contribute to your IRA?
A
Even though you got an extension, you can still only contribute from Jan 1 to April 1
24
Q
Which has earnings restrictions for contributors - 529 or Coverdell ?
A
Coverdell
25
At what level gift will you be subject to gift tax?
Over 15k
26
Can you contribute to a Roth after age 70.5?
Yes, as long as you still have earned income
27
IRA Contribution Limit
$6,000 or $7,000 for over 50
28
Holding period return
Income plus capital appreciation over a specific period
29
Which has higher contribution limits - Keough or IRA
Keough has a much higher contribution limit than IRA
30
SEP Participation
All eligible employees to participate
31
Simple plan
Retirement plan for biz with < 100 employees who earned 5k or more during the preceding year
32
Qualified plan
Employer sponsored plan such as a pension, 401k or 403b where the contributions are made with pretax dollars and earnings in the account grow tax deferred until withdrawal
33
Total return
Includes the income from dividends or interest plus any capital appreciation or minus any depreciation.
Ex. Common stock purchased at $20 with annual divvy $1 is sold one year later for $24. The total return is $5. $4 in gains plus $1 divvy. Total return 25%
34
Which has a higher contribution limit, IRA or Keough?
Keough is significantly higher than IRA
35
Are HSA contributions tax deductible?
Yes. Eligible participants can claim tax deductions on contributions
36
What does an employer have to do to qualify under ERISA section 404c?
1. Employees must have individual accounts (must enjoy the benefits and risks of their decisions)
2. Have independent control of their accounts
3. Sufficiently broad range of options to choose from
37
In a Coverdell, can someone other than the parent/guardian be the “responsible individual”?
No. It must be the parent or guardian
38
RMD minimum distribution penalty
50% of the amount you didn’t withdraw
39
Mutual fund current return/current yield
Sec requires current return based on income dist. for the past 12 mo. divided by the POP. Capital gains are not included
ABC fund has a POP of $10.50 and a NAV of $10. It has made 4 $.15 distributions in the last year. And one cap gain distribution for $.25. The current yield is?
.5*4= $.60 then .60/10.50 = 5.7%
40
Qualified tax deferred retirement plan for school and non-profit employees
403b
41
Is an IRA ERISA qualified?
No because it does not involve employer contributions
42
How does a direct rollover differ from a transfer?
A direct rollover is one type of plan to an IRA. A transfer is IRA to IRA
43
What earnings count toward determining the max that may be contributed to a Keough?
Only self-employment earnings
44
4 options for inherited IRA when beneficiary is not a spouse
1. Take the cash now
2. Cash out IRA in 5 years
3. Take RMDs during beneficiaries own life expectancy
4. Take RMDs during life expectancy of oldest beneficiary
45
Simplified employee pension plans (SEP IRA)
Offer self employed persons and small business easy to administer pension plans
46
Are profit sharing and 401ks pension plans?
No, and as such employer contributions are not mandatory
47
Annualization factor
Number of months in the year divided by the number of months held.
48
Ineligible investments for an IRA
Collectibles, whole life insurance, term life
49
If a beneficiary of an inherited IRA is not a spouse, what are they not allowed to do?
Can’t rollover into their own IRA
50
457b facts
1. Exempt from erisa
2. Not required to follow non discrimination rules
3. Tax exempt only for highly compensated employees, gov for anyone
4. Distributions at any age and no 10% penalty
5. You can have this as well as a 403b or a 401k and make max contribs to both
6. Unlike 401ks, loans from 457bs are available for gov employees
51
An retiree is paid an annual amount equal to 30% of the average of his last 3 years salary. What type of plan is this?
Defined benefit plan. A defined benefit plan establishes the retirees payout in advance
52
In order to have matching contributions, participants in a Roth 401k must have what?
They must have 2 accounts. The Roth and the regular 401k. The employer contributions are made to the regular 401k
53
Ineligible investment practices for IRA
Shorting
Speculative options
Margin account trading
54
If a customer wants to open at UTMA or UGMA for his nephew, can the uncle make himself the custodian?
Yes, the donor may name himself custodian. The custodian is not required to be a legal guardian
55
When is a SEP tax deductible?
Employer contributions are tax deductible to the employer. Contributions are not taxable to an employee until withdrawn. Earnings accumulate tax deferred
56
You open a UTMA for each of your sons, Josh age 12 and Drake age 14. Under current regs, after deductions and exemptions, how will the income in each UTMA be taxed?
Each account’s income in excess of $2,200 is taxed at the rate applicable to trusts.
57
IRA contribution limit
$6,000 per individual or $12,000 per couple. Or 100% of taxable compensation for the taxable year.
58
Is an independent contractor eligible for a 403b?
No, only employees
59
How often can you rollover an IRA?
Once every 12 moth period
60
The uniform prudent investor law allows a fiduciary to delegate investment decisions to a third party. What would that third party not be able to do?
Amount and timing of distributions are not included in portfolio management and can only be done by the fiduciary (trustee)
61
What can an employer match in a SIMPLE
2% of employee compensation regardless of if the employee contributes
Or dollar for dollar up to 3% where only the employees who contribute will receive a match from the employer
62
Can a corporation use a Keough?
No
63
Earned income can be
1. Wages, salaries, tips
2. Commissions and bonuses
3. Self employment income
4. Alimony from pre-2019 divorce decrees
5. Nontaxable combat pay
64
Can you roll excess money in a 529 to an IRA?
No. Money in a 529 is not part of a qualified plan so you can’t roll it into an IRA
65
Economic Growth and Tax Relief Reconciliation Act of 2001
Permits catch up contributions to IRAs if you’re over 50 above the max annual amount. Can go to traditional or roth. After 2006 its been $1,000
66
Nondeductible contribution
Contribution to a qualified plan or an Ira made with after tax dollars. Funds do grow tax deferred but there is no tax benefit derived from the contribution
67
What is the maximum employer share of contributions to a 401k or any deferred compensation plan?
May not exceed 25%
68
Once a gift is given to a minor under a UTMA, can it be reclaimed?
No
69
Not compensation for IRA purposes
1. Capital gains
2. Interest and dividend income
3. Pension or annuity income
4. Child support
5. Passive income from DPPs
6. Alimony from post dec 2018 divorces
70
Can a tax exempt, nongovernmental section 457 plan be funded?
No
71
Who is obligated for the payment of taxes in a UTMA and a UGMA?
The child. Even though they are usually paid by the parent or guardian, they are the responsibility of the beneficial minor
72
GIC guaranteed investment contract
Investment option for 403b and 401k. Issued by insurance company w/gtd return of principal. Fixed rate of return higher than bank issued CD. GICs are not FDIC insured
73
In what plans are employer contributions mandatory?
Defined benefit or defined contribution pension plans
74
3 methods of IRA to IRA transfer
60 day rollover
Direct rollover
Trustee to trustee transfer
75
What account to employer contributions go into in a Roth 401k?
The go into the regular 401k on a tax deductible basis and are fully taxable upon withdrawal
76
Compensation for IRA purposes
1. Wages, salaries, and tips
2. Commissions and bonuses
3. Self-employment info
4. Alimony from pre-2019 divorces
5. Non taxable combat
77
Thomas is 49 and his wife is 51. He owns his own business and pays himself a salary of 80. His wife is a receptionist and she is paid 45k a year. What can they contribute to their IRAs?
Thomas can contribute 6k but his wife can contribute 7k bc she is over 50
78
Does money in an HSA roll over?
Yes
79
Does an IRA need a IPS?
No, the investor manages the IRA so an investment policy statement is not needed
80
If your company has a SIMPLE can you have another retirement plan in place
No
81
When during the year can you contribute to an IRA?
Between January 1 and April 15 for this year and the previous year. If you obtain a tax extension, the deadline is still the same.
82
The prudent expert rule permits what
It permits a fiduciary to invest in securities a prudent investor might buy.
83
What is the max amount an adult can gift to a minor?
There is no limit. But, anything higher than 15k will possibly subject the donor to gift tax liability.
84
Current yield
Annual income stream divided by the current price. Be sure to check if they give you a quarterly dividend, multiply by 4
85
What happens to money in an FSA if you don’t use it?
Use it or lose it
86
What is the penalty for over contribution to an IRA
6% of the excess contribution if it is not removed by the time a tax return is filed. No later than April 15
87
Roth IRA earnings may be withdrawn tax free if
Five years following the initial deposit
You are older than 59.5
$ being used for primary home purchase
Account holder has died or become disabled (only for account holder not spouse)
88
Three types of IRAs
Traditional
Roth
Simplified Employee Pension Plan
89
Qualified means
Pretax dollar contributions
90
What type of IRAs allow tax deductions?
Traditional and certain SEPs. Deductibility limits are lowered for those who are eligible for a qualified employer sponsored plan.
91
SEP Eligibility
Employee must be 21, worked 3 of last 5 years, received at least $600 in compensation in current year
92
ERISA section 404c deals with what?
Employers fiduciary responsibility for investment decisions by employees if certain conditions are met.
93
Non-spouse taking cash immediately
Can withdraw 100% of the inherited value immediately. Entire value included in taxable income during withdrawal year
94
Withdrawals during retirement from which of the following accounts would most likely be subject to the greatest amount of taxation?
1. Nondeductible traditional Ira
2. Qualified variable annuity
3. Nonqualified variable annuity
4. Roth IRA
Qualified variable annuity. The entire amount of the distribution from a qualified annuity will be subject to taxation at ordinary income rates. No tax is due on the Roth, and only the earnings on the non-qualified annuity and the nondeductible Ira are taxed
95
KEOGH
ERISA-qualified plans intended for self employed individuals and owner-employees of unincorporated business concerns or professional practices
96
Is there a margin suitability form?
No. There is an options suitability form.
97
Owner-employee
Sole proprietor
98
Employer eligibility for a 403b must qualify as
Public educational 403b institution
Tax exempt 501c3
Church organization
99
A pension plan administrator hires an IA to oversee the investment decisions of the plan. The advisers primary responsibility is to whom?
The plan.
100
The safe harbor requirement relieve the trustee of a 401k of liability if:
The plan participants have the ability to select from three different investments and are allowed to make selection changes no less frequently than quarterly.
101
IRAS and Keoughs are similar in that
Distributions without penalty may begin as early as 59.5
Taxes on earnings are deferred
Rollovers are allowed once every 12 months and must be completed within 60 days
102
Annualized return
Multiplying the actual return by the annualization factor. You receive $5 on a $100 investment held for 6 months. Take $5 times the annualization factor (12/6 = 2) 5*2= 10% annualized return
103
Who can give a gift to a minor in a custodial account?
Any adult. There is no limit on the size of the gift.
104
Are contributions to a Roth tax deductible?
No
105
What is the maximum employer share of contributions to a 401k or any deferred compensation plan?
May not exceed 25%
106
If you have an HSA and don’t use all the funds for health expenses, what can you do with the rest of the $?
Funds not used for medical expenses can be invested in mutual funds and other securities
107
Which of the following is considered to be a security?
1. 403b
2. 529
3. Coverdell
4. 457
529. A 529 is technically considered a municipal fund security. The term security specifically excludes retirement plans
108
Keough eligibility rules
1. Full time employees - at least 1,000 hrs of work per year
2. Tenured employees - 1 or more yrs continuous employment
3. Over age 21 but not older than 70.5
109
Keough plans do not include who?
Employees under 21 or who haven’t worked for 1 year
110
When must you take your first RMD from an IRA?
April 1 of the year after you turn 70.5. After that year, including the year you took the delayed RMD, distributions must be made by December 31.
111
Is there an income limit on those who can have a traditional IRA?
No
112
Nonqualified
Employer sponsored plan such as a deferred compensation where there are no tax advantages other than the pay is not received until sometime later when the person is in a lower tax bracket
113
What happens when you roll a traditional Ira into a Roth?
The entire amount converted is added to the investors ordinary income. There is no 10% fee if done within 60 days or if done trustee to trustee.
114
Section 457b plan
Deferred compensation plan for gov employees and tax exempt employees.
115
What is the max amount an adult can gift to a minor?
There is no limit. But, anything higher than 15k will possibly subject the donor to gift tax liability.
116
Once a gift is given to a minor under a UTMA, can it be reclaimed?
No
117
At what level gift will you be subject to gift tax?
Over 15k
118
Inheriting an IRA when beneficiary is a spouse
1. Do a spousal rollover. The amount of the inheritance is rolled into the spouses IRA
2. Continue to own the IRA as a beneficiary
119
Net unrealized appreciation approach when taking distribution of company stock
If the stock has gone up in value, when you take a distribution, you pay ordinary income tax on the cost basis and long term capital gains on the appreciation
120
Section 529 plans offer a gift tax exclusion
Equal to 5 times the annual limit that may be repeated every 5 years
121
Only case where 10% doesn’t apply for an inherited IRA withdrawal before 59.5
Non-spouse beneficiaries
122
What can you invest in in a 403b?
Fixed or variable Annuities but also mutual funds
123
Spousal option
If spouse has little or no earned income and a joint tax return is filed, a spousal IRA can be opened. Contrib limits are the same
124
If a client has a child that is about to be done with college but still has $ left in their 529, what should you recommend?
Use the funds for graduate school or other school expenses or roll over the funds to a member of the beneficiaries family
125
Employer contribution amount to a SEP
Employer can contribute 25% of the employees salary to a SEP Ira up to max of 56k. Must contribute the same percent for each employee and employer
126
What would you most likely find in an IPS?
1. SPD
2. Defined benefit plan
3. IRA
4. GRAT
Defined benefit plan. The investment policy statement, although not required under dept of labor rules, is generally found in corporate qualified plans such as defined benefit or defined contribution plans
127
Non-spouse beneficiary take RMDs over beneficiaries lifetime
Separate inherited IRA account must be established in the deceased’s name for the benefit of (FBO) the beneficiary. Withdrawals are counted as income in that year. First RMD must be taken by Dec 31 of year after death
128
Can you roll money from a 529 into a Coverdell?
No
129
What would you want to avoid in a qualified retirement plan?
Muni bonds. Money in a qualified plan grows tax exempt so the tax exempt status from a muni bond is lost because it isn’t actually being used
130
Which of the following offers tax-deductible contributions?
1. Payroll deduction plan
2. Health savings account
3. Coverdell ESA
4. Roth IRA
Health savings account. In the ESA and the Roth, contributions are made with after tax dollars, but growth, and if qualified, distributions are tax free
131
Substantially equal periodic payment exception
IRS rule 72t. If you receive IRA payments at least annually based on your life expectancy, you can withdraw before age 59.5 without the 10% penalty
132
How many custodians and how many minors under a UTMA account?
Only one custodian and only one minor
133
Adjusted gross income
All earned income plus other income like alimony, interest and divvys, profits from a biz you own. The subtract
1. Trad IRA contributions
2. Alimony paid (if divorce was prior to 2019)
3. Self-employment tax
4. Penalties paid on early withdrawals from savings accounts
134
How many custodians and how many minors under a UTMA account?
Only one custodian and only one minor
135
What is the key consideration in an IRA or other retirement plan?
Risk. These accounts seek to preserve capital first and then achieve a reasonable rate of return.
136
Is there an income limit on those who can have a Roth?
Yes, if you make too much $ you can’t contribute to a Roth.
137
Deductible contribution
Made by an individual to a qualified plan like a 401k or an IRA. The amount contributed is pretax or otherwise deductible on the tax return.
138
If you have a Keough can you also have an IRA?
Yes, but if earnings limits are exceeded, the IRA contributions are not tax deductible
139
Grandma Abigail died at age 82 with a trad IRA of 100k. Her daughter is 53 and the sole beneficiary. What is her option
1. Rolling this Ira to her own Ira
2. Take distributions spread over 5 years
3. Take cash by Dec 31 and pay 10% since she’s < 59.5
4. Leave Ira In name of deceased and keep taking RMDs
2. Take distributions over 5 yrs. Daughter is not a spouse so can’t roll into her own IRA. Even though she is under 59.5, inheritors don’t incur 10% on withdrawals
140
Earned income is not
1. Capital gains
2. Interest and dividend income
3. Pension or annuity income
4. Child support
5. Passive income from DPPs
6. Alimony from post-Dec. 31 2018 divorces
141
If you make tax-deductible and non-deductible contributions to a traditional IRA, how are they taxed when withdrawn?
They are taxed pro-rata. So, a proportion of the pre-tax dollars are taxed separate to the proportion of the after-tax dollars
142
Coverdell contribution limit
$2,000
143
You want to contribute funds to an account for the benefit of the college education of a grandchild. Which account gives you the most control over the assets in the account?
1. UTMA
2. Coverdell
3. Section 529
4. UGMA
3. 529 plan. The 529 allows the donor to take the funds back. Coverdell has the “responsible individual” as the parent or guardian. The grandparent can be a custodian of a UTMA or UGMA but that control is limited to choosing investments
144
Tax deferred
Income tax is put off to a later time
145
What can an employee contribute to a SIMPLE?
Up to 13k with a 3k catch up provision
146
Does a SEP offer a catch up?
No
147
A defined contribution plan is also called what
Money purchase plan
148
403b tax advantages
1. Contributions (Generally from salary reduction) excluded from gross income
2. Earnings accumulate tax free until distribution
149
A prudent investor uses
“Reasonable care, skill, and caution” in exactly that phrasing
150
Which IRA can a minor be made a beneficiary for?
Roth
151
Can you disclaim an inherited IRA?
Yes. Disclaimer must be done in writing within 9 months of death. If done, benefits pass to contingent beneficiaries. If no contingent beneficiary, will follow the orders in the deceased’s will
152
You are disabled and want to take a lump sum withdrawal from your 401k. Is there a 10% and do you have to pay income taxes?
There is no 10% but there is income tax
153
What is the age where catch ups can start?
Age 50
154
A donor to a 529 plan has decided to move the existing plan to one offered by another state
1. Unless a change of beneficiary is involved, there can only be one rollover every 12 months
2. If there is a distribution of assets, it must be completed in 60 days
3. Partial rollover is allowed
4. Even though the plans are under state control, the rollover rules are federal
155
Does section 404c of ERISA take employment length into consideration?
No
156
The custodian of a UGMA or UTMA can do what but cannot do what
They can choose the investments but they cannot take the money back from the account. In a 529, the custodian can take funds back
157
If a beneficiary to an inherited IRA does nothing as of Dec 31 the year after death, what method is used?
5 year withdrawal option
158
What must happen for a Keough to be non-discriminatory?
If the business has employees, the contribution percent must be the same for owner and employee
159
When rolling over a qualified plan to an IRA what must the payor of the distribution do?
Withhold 20% for income tax. If the employee then deposits the full original amount by making up the 20% himself in the new account, he can apply for a refund of that tax from the IRA
160
Where do you generally find an IPS?
In a corporate qualified plan
161
Is a fiduciary receiving a fee for acting as a trustee to a qualified retirement plan a conflict of interest?
No
162
If a fiduciary for a qualified retirement plan sells a real estate investment at the current market rate to the plan, is that a conflict of interest?
Yes, even though it states “current market rate” it is a conflict
163
Is child support deductible to the contributor or income to the receiver?
No in both cases
164
John contributes $300 a month in alimony. Is he able to write that off?
Yes, he is able to deduct $3,600 from his taxable income
165
If someone is unemployed but receives $3,600 a year in alimony, how much are they able to contribute to their IRA?
Since they are unemployed, they can contribute $3,600 to the IRA that year
166
Do deferred compensation plans have to conform to ERISA?
No. They are non-qualified so they don’t have to comply with ERISA
167
If you are in a deferred compensation plan and you leave the company or are fired before you retire, what happens?
You forfeit the benefits
168
Is a deferred compensation plan discriminatory?
Yes
169
Are employer contributions to a money purchase plan mandatory?
Yes. This is a defined contribution plan established by the employer, thereby making contributions mandatory
170
Can you have a 401k and a 403b at the same time?
No
171
If you have a 457, can you also have other retirement plans?
Yes. You can have other retirement plans like a 401k or a 403b
172
You employ your 2 sons, age 12 and 13, in your family gardening business. They make 2k and 3k a year, respectively. What tax rate applies to them?
Yours. The money paid is earned income so it is not subject to the kiddie tax rules
173
If you are covered by a qualified plan at work, can you have a Roth?
Yes
174
Can distributions from a qualified plan be rolled over into a Roth
Yes, distributions from a qualified plan may be rolled into a Roth
175
All of the following plans must set standards for vesting, eligibility, and funding except?
1. Profit sharing plan
2. Corporate pension plan
3. Deferred compensation plan
4. Keough
Deferred compensation. Deferred compensation plans are not qualified and can be discriminatory.
176
Any investment in a qualified plan must be for what?
Future use. Or else it would be considered a distribution
177
If you have real estate in your qualified plan or IRA, who is able to use it?
Only you. It can’t be used by related parties. Related parties are your spouse and lineal members of your family, ancestor or descendent of your spouse
