CFP - Retirement Planning - Chapter 24 - Distributions From Retirement Plans - Part I

The required minimum-distribution rules apply to qualified plans, 403(b) plans, traditional IRAs, SIMPLEs, and SEPs. [6] T/F?

True.

Which of the following distributions from a qualified retirement plan will result in an early distribution penalty? (HL 24.4) (A) Joan Garvey, age 52, receives a life annuity when she leaves her employer. (B) George Kent, age 58, takes a lump-sum distribution when he retires from his job. (C) Susan DeAngelo, age 60, is disabled and receives a distribution for rehabilitation costs. (D) Harry Brown, age 47, suffers a financial hardship and takes a distribution to pay debts.

D is the answer. Financial hardship is not grounds for avoiding the early distribution penalty. The distribution is before age 591⁄2, so the penalty will apply. Joan Garvey will not pay an early distribution penalty because she took annuity payments payable over her life expectancy. This kind of distribution can be taken at any age. George Kent can take a lump-sum distribution without paying the penalty because he is over age 55 and is separating from service with his employer. Susan DeAngelo can take a distribution without penalty due to disability.

A qualified pension plan can be established that permits penalty-free distributions prior to retirement (HL 24.4) I The distribution is used to pay for deductible medical expenses, exceeding 10% of adjusted gross income. II The distribution is made to a 55-year-old employee, taking early retirement is not penalty-free for SEPs, SIMPLEs, or IRAs. III The distribution is made to an employee's estate after the employee's death. (A) I only (B) III only (C) I and II only (D) II and III only (E) I, II, and III only

E is the answer. All three are true statements.

A 50 percent joint-and-survivor annuity purchased before the required beginning date will generally fail to satisfy the required minimum-distribution rules. [7] T/F?

False. A 50 percent joint-and-survivor annuity purchased before the required beginning date will satisfy the required minimum-distribution rules.

Under the account plan rules, while the participant is alive, the required minimum distribution is determined by dividing the participant's benefit at the end of the previous year by the applicable distribution period. [7] T/F?

True.

Suppose Janet, who has an IRA, turned 70½ on August 31, 2017, but did not retire until June 30, 2018. What is her first distribution year under the minimum-distribution rules? (A) the year ending December 31, 2017 (B) the year ending December 31, 2018 (C) the year ending December 31, 2019 (D) the year ending December 31, 2020

The answer is (A). (B) is incorrect because, although the first distribution can be delayed up until the required beginning date of April 1, 2018, the distribution is for the year ending December 31, 2017. If Janet delays, she'll have to take a minimum distribution for the second distribution year by December 31, 2018. (C) and (D) are incorrect because there are no exceptions extending the first distribution year or the required beginning date for IRAs. (Chapter 24)

Which of the following distributions from a Roth IRA is (are) a qualifying tax-free distribution? I. A 62-year-old taxpayer who has maintained a Roth IRA for eight years withdraws the balance (which exceeds the amount of contributions) to pay for an extended vacation. II. Because of a disability, a 43-year-old taxpayer who has maintained a Roth IRA for three years withdraws the balance (which exceeds the amount of contributions) to pay for medical expenses. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (A). II is incorrect because even though disability is one of the "trigger events" the withdrawal does not satisfy the 5-year rule. (Chapter 24)

Which of the following statements concerning regular rollovers from one IRA to another is (are) correct? I. With a rollover, a participant has the opportunity to use the money for 60 days. II. The entire amount that qualifies for a rollover must be rolled over or the entire distribution will be subject to income tax and the penalty tax, if applicable. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (A). II is incorrect because the entire amount qualifying for a rollover need not be rolled over. (Chapter 24)

All of the following statements concerning the income tax treatment of pension and IRA distributions are correct EXCEPT (A) Distributions to a death beneficiary are taxable, but the taxpayer could also be eligible for a deduction based on estate taxes paid because of the pension. (B) The taxable distribution from a traditional IRA is taxed as ordinary income. (C) A participant in a 401(k) plan receiving employer securities may be able to defer paying taxes on a portion of the value of the distribution until the stock is sold. (D) The taxable income (Table 2001 costs) associated with the cost of life insurance in a qualified plan can be recovered tax-free by the participant, even if the trustee cashes in the insurance policy and distributes the proceeds to the participant.

The answer is (D). To recover Table 2001 costs, the policy must be distributed. (Chapter 24)

When an individual owns multiple Roth IRAs, the 5-year measuring period for all of those IRAs begins the first time a contribution is made to any of the Roth IRAs. [4] T/F?

True.

A distribution from a qualified plan can generally be rolled over into a 403(b) tax-sheltered annuity. [5] T/F?

True.

A distribution must be rolled over by the 60th day after the day it is received (unless the IRS waives the 60-day requirement), or the entire distribution is subject to income tax and, if applicable, the 10 percent Sec. 72(t) penalty tax. [5] T/F?

True.

A nonspousal beneficiary can roll over a participant's death benefit into an existing IRA. [5] T/F?

True.

A participant receiving a nonqualifying distribution from a Roth IRA can withdraw up to the amount of accumulated contributions without income tax consequences. [4]

True.

A profit-sharing participant who contributed $25,000 of voluntary after-tax contributions prior to 1987 can generally withdraw this amount in-service without income tax consequences. [3] T/F?

True.

A profit-sharing participant who receives his or her entire benefit of $320,000 can roll the entire amount into an IRA, even if $25,000 represents after-tax contributions (cost basis). [3]

True.

An automatic waiver of the 60-day rollover rule is available if a participant fills out all required paperwork to roll a benefit into an IRA, the funds are delivered to the financial institution within the 60-day period, and the financial institution fails to complete the transaction in a timely manner. [5] T/F?

True.

An individual who receives a lump-sum distribution that consists of $70,000 of cash and $40,000 of qualified employer securities (with cost basis of $10,000) can roll the cash into an IRA and continue to hold the securities. This will require the participant to include $10,000 as taxable income at the time of the distribution. [6] T/F?

True.

Distributions to death beneficiaries are subject to income tax, which may be offset somewhat by a deduction for estate taxes paid on account of the death benefit. [1] T/F?

True.

If The American College is one of several beneficiaries, paying them out before the September 30 deadline can mean a longer required distribution period for the other beneficiaries. [8] T/F?

True.

If a participant elects a direct rollover from a qualified plan to an IRA, no income tax is required to be withheld. [5] T/F?

True.

A withdrawal of $50,000 from an IRA by a participant to purchase his first home is not subject to the 10 percent Sec. 72(t) penalty tax. [2] T/F?

False. There is an exception from the 10 percent penalty tax for IRA distributions for first-time homebuyer expenses. However, the exception is limited to a lifetime maximum of $10,000.

Which of the following plan distributions from a qualified plan is subject to the 10% early distribution penalty? I. Death benefit payable to the widow of a 38-year-old employee II. Lump-sum benefit payable to a disabled employee, age 46 III. Lump-sum distribution to a 56-year-old employee from a profit-sharing plan, after funds have been in the plan for five years (A) I only (B) II only (C) III only (D) I and II only (E) II and III only (F) I, II and III

C is the answer. Distributions because of the death or disability of the employee escape the 10% penalty. III does not escape the 10% penalty because the employee has neither attained age 59 1⁄2 nor elected early retirement pursuant to an early retirement provision.

A withdrawal from a qualified plan in the amount of qualified educational expenses for the participant's child is not subject to the 10 percent Sec. 72(t) penalty. [2] T/F?

False. The education exception only applies to IRAs (which includes SEPs and SIMPLEs), not to qualified plans.

The minimum-distribution rules impose a 10 percent excise tax on the amount by which a distribution in a given year falls short of the minimum required distribution. [7] T/F?

False. The tax is 50 percent of the shortfall.

Under the minimum-distribution rules, benefits always must be distributed within 5 years after the death of the participant. [7] T/F?

False. There are several things wrong with this statement. If the participant dies after attaining the required beginning date, the 5-year rule does not apply at all. Even if the participant dies prior to the RBD, in many cases the 5-year rule still does not apply.

In order for distributions prior to age 59½ to satisfy the substantially equal periodic payment exception, distributions must continue for the participant's entire life. [2] T/F?

False. Distributions can cease after the later of 5 years or the attainment of age 59½ without penalty.

Sole proprietors that receive a distribution of a life insurance policy from a qualified plan may recover cost basis due to accumulated PS 58 (Table 2001) costs. [3] T/F?

False. Even though Table 2001 costs can be recovered when an insurance policy is distributed to a participant, sole proprietors and partners in a partnership are not allowed to recover these costs.

An in-service distribution from a qualified plan made to a 50-year-old employee in the form of a life annuity is not subject to the 10 percent Sec. 72(t) penalty. [2] T/F?

False. Even though a life annuity would qualify as "substantially equal periodic payments," the exception does not apply in a qualified plan unless the participant terminates employment.

To qualify for special tax treatment, a lump-sum distribution must come from a pension, profit-sharing plan, 401(k), stock-bonus plan, employee stock ownership plan, or SEP. [6] T/F?

False. False. Special lump-sum tax treatment is only available from qualified plans. A SEP does not qualify.

A distribution that is one of a stream of life annuity payments from a qualified plan is an eligible rollover distribution. [5] T/F?

False. Life annuity payments are not eligible for rollover distributions and cannot be rolled over into an IRA.

A death beneficiary inheriting employer securities that have net unrealized appreciation can avoid income taxes under the step up in basis rules. [6] T/F?

False. Net unrealized appreciation is not eligible for the step up in basis, so that the beneficiary cannot avoid paying income taxes.

The executor of the estate is allowed to add a new beneficiary to the beneficiary designation form in an IRA after the participant's death. [8] T/F?

False. No new beneficiaries can be added to a beneficiary form after the participant dies.

The required beginning date for distributions is always April 1 of the year following the calendar year in which the covered individual attains age 70½. [7] T/F?

False. Non-5-percent owners in qualified plans who are still working at age 70½ can wait until they retire to begin distributions.

If an IRA owner dies with three children as beneficiaries, and separate accounts are established for each child during the year that the participant dies, then the life expectancy of the oldest child is used to calculate the required distribution from each separate account. [8] T/F?

False. Since separate accounts were established in a timely manner, the life expectancy of each child can be used when calculating the required distribution from each account.

Reducing the taxation on a client's retirement distribution is the only consideration when making a distribution decision. [1] T/F?

False. Tax planning is only part of the process when making a retirement decision. The ultimate goal is to maximize wealth while meeting the client's cash flow and other needs, not merely to save taxes.

The Sec. 72(t) penalty applies to both the taxable and nontaxable portions of a distribution. [2] T/F?

False. The Sec. 72(t) penalty applies only to the taxable portion of a distribution.

A hardship withdrawal from a 401(k) plan to a 40-year-old participant is not subject to the 10 percent Sec. 72(t) penalty. [2] T/F?

False. This question is answered incorrectly fairly often. There is no specific exception from the 10 percent penalty tax for hardship withdrawals from a 401(k) plan.

A participant with $8,000 of nondeductible IRA contributions can generally withdraw $8,000 without income tax consequences. [3] T/F?

False. With IRAs, a pro rata recovery rule applies to recovering the cost basis of nondeductible contributions.

All of the following statements concerning minimum distributions when the plan participant dies after the required beginning date are correct EXCEPT (A) In the year of death and thereafter, the required distributions will depend upon the chosen beneficiary. (B) When the beneficiary is an individual other than the deceased participant's spouse, the remaining distributions are made over a fixed period, even if the beneficiary dies before the end of the period and leaves the benefit to his or her heirs. (C) When the beneficiary is a nonperson, such as a charity, the remaining distributions are paid over a fixed period that reflects the participant's life expectancy calculated in the year of death. (D) When the beneficiary is the participant's spouse and the beneficiary rolls the benefit to his or her own IRA, subsequent distributions are calculated with the spouse treated as the participant.

The answer is (A). In the year of death, the heirs must take the decedent's required distribution (if this distribution was not taken before death) based on the method under which the decedent had been taking distributions. Thereafter, the required distributions will depend upon the chosen beneficiary. (Chapter 24)

All of the following statements concerning the taxation of a lump-sum distribution from a qualified plan that includes the employer's stock are correct EXCEPT (A) The net unrealized appreciation in the employer's stock is taxable as either a short-term or a long-term capital gain to the recipient when the shares are sold, depending on how long the stock was held after distribution. (B) At the time of the distribution, the recipient will have to pay tax on the cost basis of the employer's stock. (C) To ensure that the participant's unrealized appreciation in the employer's stock is taxed at some point, if the stock is left to an heir, the unrealized appreciation is not entitled to a step-up basis, but it is treated as income in respect of a decedent. (D) The net unrealized appreciation in the employer's stock is excluded when computing the income tax on the distribution.

The answer is (A). The net unrealized appreciation in the employer's stock is taxable as a long-term capital gain to the recipient when the shares are sold, even if the stock is sold immediately after distribution. (Chapter 24)

Which of the following statements concerning IRA rollovers is (are) correct? I. An IRA account can never be rolled into a 403(b) plan. II. A qualified plan benefit can generally be rolled into an IRA. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (B). I is incorrect because an IRA can be rolled into or transferred into another IRA, qualified plan, 403(b) plan, and a even government sponsored 457 plan. (Chapter 24)

Which of the following statements concerning planning under the minimum-distribution rules is (are) correct? I. After the participant's death, the chosen beneficiary can name a new beneficiary that was not on the original designation form in order to stretch out the required distribution payments. II. A strategy to maximize the length of the required minimum distribution period must ensure that there is a source other than the pension asset to pay any estate taxes owed after the participant's death. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (B). I is incorrect because no new beneficiaries can be added. The planning opportunity is to have an appropriate list of contingent beneficiaries on the designation form. (Chapter 24)

All of the following statements concerning distributions from qualified retirement plans are correct EXCEPT (A) Distributions from qualified retirement plans made prior to age 59½ are subject to a Sec. 72(t) penalty tax, unless the distribution satisfies one of several exceptions. (B) The tax on the entire value of employer stock distributed as part of a lump-sum distribution from a qualified plan can be deferred until the stock is sold. (C) All taxes, including the Sec. 72(t) penalty tax, can be avoided on most distributions from qualified retirement plans by rolling or directly transferring the benefit into an IRA or other qualified plan. (D) For income tax purposes, benefits payable from a qualified plan to a beneficiary at the participant's death are treated as income in respect of a decedent.

The answer is (B). If employer securities are part of a lump-sum distribution from a qualified plan, the participant can defer tax only on the unrealized appreciation until the stock is later sold, and the value when the stock was allocated to the participant's account must be included as income in the year of the distribution. (Chapter 24)

Which of the following statements concerning plan distributions is (are) correct? I. Minimum distributions from an IRA must begin as of April 1 the following year in which the person reaches age 70½. II. The net unrealized appreciation rule is available to a participant who receives a qualifying lump-sum distribution from a qualified plan that includes a distribution of the stock of the sponsoring employer. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (C).

All of the following statements concerning the substantially equal periodic payment exception from the Sec. 72(t) penalty tax as it applies to distributions from an IRA are correct EXCEPT (A) Under this exception, payments can begin at any age and be exempt from the penalty tax as long as specific requirements are met. (B) Under this exception, the payment amounts can be calculated with one of three IRS-approved methods-life expectancies, amortization, or annuitization-to be exempt from the penalty tax. (C) Payments need not be continued for life but can be stopped without penalty after the later of 5 years after the payment or age 59½. (D) The distribution each year must equal or exceed the amount calculated for the prescribed period in order to avoid the penalty.

The answer is (D). Payments must equal the prescribed amount to avoid the tax. Paying out more or less can result in triggering the excise tax. (Chapter 24)

All of the following statements concerning tax aspects of tax-advantaged retirement plans are correct EXCEPT (A) The employer can deduct contributions to the plan even though participants are not taxed until benefits are distributed. (B) Participants generally pay tax at the time benefits are distributed. (C) Participants can generally continue tax deferral after termination of employment by rolling benefits into another tax-advantaged plan. (D) Earnings on plan investments will be subject to income tax unless they are invested in tax-sheltered investment such as municipal bonds.

The answer is (D). The trust is a tax-exempt entity, and investment earnings are never taxed at the trust level regardless of the type of investment involved. Once investment earnings are paid out as benefits to participants, they are always taxed to the participant. (Chapter 24)

If the beneficiary in the year following death is a person who is not the spouse, the remaining distribution period is fixed, based on the beneficiary's age at the end of that year. [7] T/F?

True.

Most distributions from IRAs, qualified plans, and 403(b) annuities are taxed as ordinary income. [1] T/F?

True.

Under the required minimum-distribution rules, if a trust is the beneficiary, then the beneficiaries of the trust are considered the beneficiaries as long as the trust conforms with specific requirements. [7] T/F?

True.

Under the required minimum-distribution rules, if the plan has multiple beneficiaries, it is still possible to use the life expectancy of each individual beneficiary in the calculation as long as a separate account has been established for each participant by the end of the year following the year of the participant's death. [7] T/F?

True.