Chapter 17 Retirement Accounts
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns age 70 1/2
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
Coverdell Education Savings Plan.
Early withdrawal without penalty is allowed for what reasons?
Death, disability, qualified higher education expenses, or first-time home buyer ($10,000 limit)
Who uses 457 Plans?
Employees of state and local governments
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
How much may be contributed to a Simplified Employee Pension (SEP) plan?
Employers may contribute 25% of employee income up to $50,000 per year.
What is ERISA?
Employment Retirement Income Security Act
True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.
False. Excess contributions are non-deductible and will not grow on a tax-deferred basis.
If Joe is 55 years old, how much could he contribute to his IRA?
For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $6,000.
Grandparents contributing to a grandchild's 529 Plan may give how much money and still avoid gift tax consequences?
Front-loading 5 years of contributions is allowed; therefore, each could contribute $65,000 for a total of $130,000
How are withdrawals from a Traditional IRA treated for tax purposes?
If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
What retirement plans are available to the self-employed?
Keogh Plans and SEPs
Identify the acronym: RMD
Required Minimum Distribution (only required of Traditional IRAs)
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
Is it a 529 Plan or Education IRA that imposes income limitation on the contributors?
The Education IRA (Coverdell)
How is a Roth IRA contribution different from a Traditional IRA contribution?
The Roth IRA contribution is always made on an after-tax basis.
In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?
The earnings would be subject to ordinary income tax plus a 10% penalty.
For employers with SEP Plans, where are the contributions they make for their employees directed?
The employee's individual SEP-IRA.
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
True or False: SEPs require employees to become immediately vested in the full amount contributed.
True
True or False: Keogh plans follow a vesting schedule.
True. A scale would indicate how long an employee must remain with the employer to be fully vested.
How are withdrawals from a Roth IRA treated for tax purposes?
Withdrawals will be tax-free if the account is open for at least 5 years and is not considered an early withdrawal.
Does ERISA permit the writing of covered calls in retirement plans?
Yes
If not needed for a child's education, may the funds in a 529 Plan be transferred to a relative's 529 Plan?
Yes
May an individual with a Keogh Plan also fund an IRA?
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employee's self-employment income.
According to ERISA, are there any standards that must be followed regarding how money is invested?
Yes. The plan's trustee must abide by the Uniform Prudent Investor Act.
Anyone with __________ income may contribute to an IRA.
earned
Contributions to a Keogh plan are solely based on _________________ income.
self-employment
What is the maximum annual contribution to a 401(k)?
$17,000
What is the maximum annual contribution to a 403(b)?
$17,000
What is the penalty for making excess contributions to an IRA?
6% of the excess
If an employer makes a Keogh contribution on its own behalf, what must be done for its employees?
A contribution at the same percentage must be made for the employee.
How much may be contributed to a 529 plan and avoid gift tax?
A donor may give up to $13,000 per year and avoid the gift tax.
IRA contributions must be made in what form?
Cash
What are some of the investments that are not suitable for IRA contributions?
Collectibles, insurance, and metals (except U.S. gold and silver coins)
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
True
True or False: 529 Plans allow for a 5-year front-end contribution of $65,000, which avoids gift tax.
True ($13,000 x 5 years)
When is an individual (single filer) eligible to make tax-deductible contributions to a Traditional IRA?
When not covered by an employer-sponsored plan and he is below an adjusted gross income limit.
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
private pension
What is the maximum annual contribution to a 457?
$17,000
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
$5,000
There is a ____% penalty for early withdrawals from an IRA.
10
____% of earned income up to $_______ is the maximum contribution to an IRA.
100% of earned income up to $5,000 is the maximum contribution to an IRA.
What is the maximum annual contribution for a Keogh Plan?
100% of pre-tax income up to $50,000 each year
Only one rollover is allowed per rolling ____ months.
12
What is the late withdrawal penalty?
50% of the amount that should have been taken (an actuarial amount).
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529
When an individual reaches age ______, they may begin withdrawing from an IRA without penalty.
59 1/2
Rollovers must be completed within ____ days.
60
How much may be contributed to a Coverdell each year?
An after-tax contribution of $2,000 is allowed per year.
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.