Chapter 7 Federal Tax Considerations and Retirement Plans

The owner of a traditional individual retirement account withdraws funds and takes the check to place into a new IRA. How much will the original IRA custodian withhold for taxes? A 20% B 25% C 10% D 15%

A 20%

If a policyowner of a life insurance policy accidently pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year. A 60 B 45 C 30 D 10

A 60

Which of the following persons may contribute to an HR-10 Keogh Plan? A A self-employed musician B An employee of the YMCA C An unemployed person D A corporate executive

A A self-employed musician

The federal law that governs the rights of plan participants and beneficiaries of most employer-sponsored benefit plans is ____________. A ERISA B HIPAA C COBRA D FCRA

A ERISA

When withdrawing cash from a cash value life insurance policy, the amount of the withdrawal up to the policy's cost basis is tax-free. This tax accounting rule is referred to as: A First-In, First-Out (FIFO) B Dollar Cost Averaging C Last-In, First-Out (LIFO) D First-In, Still There (FIST)

A First-In, First-Out (FIFO)

Which of the following best defines the 'Cost Recovery Rule'? A Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender B The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender C The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy D When a policy is surrendered, the earnings within the policy are accounted for first

A Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender

If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________. A MEC B Savings account C Commodity D Annuity

A MEC

To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place? A The Modified Endowment Contract (MEC) rules were put into place B Loan interest became tax-deductible C Employer-paid premiums were made non-tax-deductible D Death benefits became income-taxable

A The Modified Endowment Contract (MEC) rules were put into place

David withdrew the money from his tax-deductible Traditional IRA and reinvested it 90 days later in another IRA. Which of the following statements is true regarding this transaction? A The distribution from the former IRA is fully taxable B The funds in the new IRA will not accumulate on a tax-deferred basis C The distribution from the former IRA is not taxable D This type of transaction is prohibited

A The distribution from the former IRA is fully taxable

All of the following will determine whether or not an IRA contribution is deductible, except: A Whether the IRA owner is over a specified age B Whether the IRA owner is a participant in an employer sponsored retirement plan C Whether the IRA owner has gross income that exceeds a certain amount D Whether the IRA owner chooses a Roth or a Traditional IRA

A Whether the IRA owner is over a specified age

To be considered terminally ill, federal law defines a terminal illness as one which is expected to result in the person's death within how many months? A 6 B 24 C 36 D 12

B 24

All of the following are ways in which the 10% additional tax can be waived, except: A Qualified education costs B Buying a new car C First-time homebuyers D Disability

B Buying a new car

nyone under the age of 70 1/2 who has _________ can open up a Traditional IRA. A Investment Income B Earned Income C Annuity Income Benefit Payments D Investable Assets

B Earned Income

All of the following are true regarding ERISA qualified plans, except: A The plan must benefit employees and beneficiaries B Employers must establish a pension plan C The plan must be IRS approved D A vesting schedule must be established

B Employers must establish a pension plan

ERISA is a ________ law. A International B Federal C Municipal D State

B Federal

Under what circumstance would a policy loan in a life insurance policy be taxable? A Policy loans in life insurance are always tax-free B If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable C If the policyowner dies, the policy loan becomes taxable D If the insured dies, the policy loan is taxable unless there is sufficient death benefit available to pay off the loan

B If the policy lapses or is surrendered, any loan amount in excess of cost basis is taxable

During the accumulation phase of an annuity, if the contract owner dies and the annuitant is someone other than the owner, the value of the annuity is: A Included in the beneficiary's estate for immediate estate taxation B Included in the owner's estate for valuation C Paid out income tax-free to the beneficiary D 100% taxable to the beneficiary

B Included in the owner's estate for valuation

An Individual Retirement Account (IRA) may be funded with all of the following, except: A Annuities B Life Insurance C Mutual Funds D Certificates of Deposit (CDs)

B Life Insurance

f an accelerated death benefit is in effect, how often must the insurer provide a report showing the amount paid and the amount of the remaining benefit? A Semi-annually B Monthly C Annually D Quarterly

B Monthly

All of the following transactions qualify for IRC Section 1035 exchange tax treatment, except: A Life insurance may be exchanged for an annuity B Nonqualified tax deferred annuities may be exchanged for life insurance policies C A life insurance policy can be exchange for a long-term care policy D A life insurance policy may be exchanged for another life insurance policy

B Nonqualified tax deferred annuities may be exchanged for life insurance policies

ontributions to a nonqualified plan are: A Tax-deductible up to $50,000 B Not tax-deductible C Fully tax-deductible D Partially tax-deductible

B Not tax-deductible

All of the following regarding policy loans are true, except: A The policy loan is not taxable so long as the policy remains in force B Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid C Policy loans cannot exceed the amount in the cash value D The interest on a policy loan is not deductible

B Policy loans are taxable if the policy remains in effect and the amount borrowed exceeds the premiums paid

KEOGH plans have been largely replaced by ________ plans, which have the same contribution limits, but much less paperwork. A 401(k) B SEP IRA C SIMPLE D Profit sharing

B SEP IRA

Which of the following scenarios will cause the value of a life insurance policy death benefit to be included in the insured's estate? A The policyowner at the time the insured dies is an irrevocable life insurance trust that the insured set up B The insured is also the policyowner C An employer owns a policy on the life of a key employee who dies D A business partner owns a life insurance policy on the other partner that died

B The insured is also the policyowner

Generally, life insurance death proceeds are income tax free to the policy beneficiary, except: A When the policy is classified as a MEC B When a transfer of ownership has taken place C If the employer deducts the premiums on a group life insurance plan covering the employees D When the death benefit option B is selected on a Variable Universal Life policy

B When a transfer of ownership has taken place

All of the following will determine whether or not an IRA contribution is deductible, except: A Whether the IRA owner has gross income that exceeds a certain amount B Whether the IRA owner is over a specified age C Whether the IRA owner is a participant in an employer sponsored retirement plan D Whether the IRA owner chooses a Roth or a Traditional IRA

B Whether the IRA owner is over a specified age

An insured has contributed $12,000 in premiums toward a universal life policy. She decides to cancel the policy and take the cash value of $15,000. What are the tax consequences of this distribution? A $12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as long-term capital gain B The distribution at surrender is tax free C $12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income D The full $15,000 is tax deferred

C $12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income

A public school teacher may contribute part of his or her paycheck income into a ____ plan and defer income taxes on not only the contribution but also the growth in the plan. A Keogh/HR 10 B SIMPLE C 403(b) D 401(k) Profit Sharing Plan

C 403(b)

An IRA catch up contribution can be made by any person age ______ or older. A 62 B 60 C 50 D 65

C 50

Failure to take a required minimum distribution (RMD) can lead to a ________ tax penalty. A 20% B 10% C 50% D 15%

C 50%

P is 75. P's required minimum distribution for this year is $10,000. P only withdraws $2,000. What is the consequence to P for this? A A $1,000 tax penalty B An $8,000 tax penalty C A $4,000 tax penalty D A $2,000 tax penalty

C A $4,000 tax penalty

Which of the following establishes a cost basis in an annuity? A Tax deferred interest B Pre-tax contributions C After-tax contributions D Tax deferred gains

C After-tax contributions

Which of the following IRA transactions is subject to taxation? A A Qualified Distribution from a Roth IRA B An IRA to IRA transfer C An IRA rollover reinvested 75 days after receipt D A direct rollover of an IRA to another IRA

C An IRA rollover reinvested 75 days after receipt

A Roth IRA is unique for which of the following reasons? A Contributions are nondeductible and distributions are taxable B Contributions are tax deductible and distributions are nontaxable C Contributions are nondeductible and distributions are nontaxable D Contributions are tax deductible and distributions are taxable

C Contributions are nondeductible and distributions are nontaxable

Which of the following plans provides employees with a fixed and known benefit at retirement, the amount of which generally depends upon length of service and highest attained salary? A Tax-Sheltered Annuity (TSA) B Simplified Employee Pension (SEP) C Defined benefit D Defined contribution

C Defined benefit

All of the following regarding employer group life insurance are true, except: A Premiums paid by an employer are tax-deductible to the business as an ordinary and necessary business expense B Employer-paid premiums do not constitute taxable income to the employee unless the death benefit exceeds $50,000 C Employee-paid premiums are tax-deductible to the employee D Death benefit proceeds paid to an employee's named beneficiary are received income tax-free

C Employee-paid premiums are tax-deductible to the employee

If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes. A Probate B Federal Income C Federal Estate D State Income

C Federal Estate

All of the following are defined contribution plans, except: A Profit-sharing B 403(b) C Pension D 401(k)

C Pension

A permanent policy is surrendered for its cash value, and that sum is greater than the amount of premiums paid in. How is the excess taxed? A Taxed as long term capital gain B Taxed as a short term capital gain C Taxed as ordinary income D No tax is due

C Taxed as ordinary income

Under the Modified Endowment Contract rules the 7-Pay Test is defined as: A The least amount of premium required to be paid in the first 7 years to maintain the policy to age 70 B Any life insurance policy that endows in 7 years C The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit D The cash value at the end of year 7 exceeds the total premiums paid

C The comparison of premiums paid during the first 7 years with the net level premiums that would have been paid on a 7 year pay whole life of the same death benefit

Participating policy dividends become taxable as income when: A They are declared by the board of directors B The policyowner receives them in cash C The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid D They are distributed by the insurer

C The total amount of dividends received by a policyowner exceeds the total amount of premium he/she has paid

Qualified plan employer contributions are tax deductible when _________. A The employee makes a contribution B The employee retires C They are made D The employee dies

C They are made

All of the following are true regarding IRA transfers, except: A It is a transaction between the same types of plan, such as two IRA accounts B Transfers are not taxable events C They can only take place once a year D Funds are directly transferred from one financial institution to another

C They can only take place once a year

E has a $10,000 traditional whole life policy with a $4,000 cash value. Premiums paid to date are $3,500. If the policy lapses with a $4,000 loan outstanding, what amount will be taxable as income to E? A $4,000 B $6,000 C $3,500 D $500

D $500

SIMPLE plans are only available to companies that have ______ employees or less, and must be the only type of plan the company has available for the employees. A 500 B 250 C 35 D 100

D 100

There are ____ broad categories of qualified retirement plans. A 1 B 4 C 3 D 2

D 2

If a life insurance policy does not pass the ___ -pay test, it will be deemed a MEC. A 10 B 3 C 5 D 7

D 7

What is the age that is used to determine when the owner of a traditional IRA must begin to take Required Minimum Distributions? A 62 B 60 C 65 D 70 1/2

D 70 1/2

All of the following are true regarding IRA rollovers, except: A Rollovers are only allowed once per year B The IRA owner has 60 days to deposit the funds into a new IRA to avoid taxation C This transaction will be reported to the IRS D A 10% withholding is required if the distribution is paid directly to the account owner

D A 10% withholding is required if the distribution is paid directly to the account owner

Which of the following statements about Section 1035 transactions is TRUE? A All surrender charges are waived on any existing policy B Any surrender charges satisfied on the old policy carry over into the new policy C A 1035 allows an annuity to be exchanged for life insurance D A new application is required when moving into a new life insurance policy

D A new application is required when moving into a new life insurance policy

A Tax Sheltered Annuity may be established and funded by which of the following? A A professional law firm B Johnson Accountants, Inc. C XYZ's Catering, a small unincorporated business D A not-for-profit community hospital association

D A not-for-profit community hospital association

All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT: A Life insurance to an annuity B Annuity to long term care insurance C Life insurance to long term care insurance D Annuity to life insurance

D Annuity to life insurance

Which of the following statements regarding Roth IRAs is FALSE? A There are no Required Minimum Distribution (RMD) age or amounts B Contributions are not tax-deductible C If the account owner is at least 59 1/2 and has held the account assets at least 5 years, there is no tax on earnings withdrawn D As long as the account owner is under age 59 1/2 there is no maximum contribution limit

D As long as the account owner is under age 59 1/2 there is no maximum contribution limit

When may an employer deduct the premiums it pays for an employee's life insurance benefit? A If the business does not receive more than 50% of the death benefit B Employers can always deduct the premiums it pays for an employee's life insurance benefit C An employer cannot ever deduct premiums it pays for an employee's life insurance benefit D As long as the business does not derive a direct benefit from the policy

D As long as the business does not derive a direct benefit from the policy

Roth IRAs and Traditional IRAs have only one of the following in common. Which one is it? A Qualified withdrawals are income tax free B All Roth IRA contributions are nondeductible C A non-qualified distribution is subject to taxation of earnings and a 10% additional tax, unless an exception applies D Catch up contributions for those age 50 or older

D Catch up contributions for those age 50 or olde

All of the following are TRUE regarding non-qualified retirement plans, except: A Contributions are not tax deductible B Upon withdrawal only the earnings are subject to taxation C Earnings can be tax deferred until withdrawn D Contributions are immediately tax deductible

D Contributions are immediately tax deductible

When an annuitant annuitizes their annuity that has a cost basis in it, the amount of the income benefit payment subject to tax is determined by using the: A Exception rule B Annuity rule C Superannuation ratio D Exclusion ratio

D Exclusion ratio

All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT: A Distributions on gains withdrawn from a MEC prior to age 59 1/2 are subject to a 10% penalty in addition to taxation B A policy that fails the 7-pay test will be deemed a MEC C Distributions received from a MEC are subject to a LIFO tax treatment D If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status

D If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status

In a SIMPLE plan, employer contributions vest: A 100% at the end of year 7 B 20% per year over 5 years C 1/4 per year over 4 years D Immediately at 100%

D Immediately at 100%

Which of these is a qualified plan designed specifically for unincorporated self-employed individuals? A IRA B 403(b) Plan C Tax-Deferred Annuity D Keogh Plan

D Keogh Plan

Any employee-paid group life insurance premiums are __________. A Tax-exempt B Tax-deductible C Tax-deferred D Not tax-deductible

D Not tax-deductible

What is "defined" in a defined contribution plan? A The percentage or amount of an employee's distributions from the plan B The employer's percentage or amount of distribution to an employee from the plan C The percentage of the employee's income provided as life insurance to the employee D The percentage or amount of an employee's deposits to the plan

D The percentage or amount of an employee's deposits to the plan

All of the following are times in which life insurance policy cash values can become taxable, except: A When the policy is sold B At policy surrender C If the policy fails to meet the IRS definition of life insurance D When a policy loan is taken out

D When a policy loan is taken out