FINA 4325 Module 6
Jackie turns 72 years old on March 15, 2021. When must she begin taking distributions from her Section 401(k) plan, assuming she no longer works for the employer-sponsor of the plan? A) April 1, 2022 B) December 31, 2022 C) December 31, 2021 D) April 1, 2021
A) April 1, 2022 Generally, the first required minimum distribution (RMD) from a qualified plan must be taken by April 1 of the year following the year in which the participant reaches age 72, so she must complete her trigger year distribution by April 1, 2022. Even though all or part of the first RMD distribution could be taken in 2022, it is still the 2021 RMD (until April 2, 2022). Also, the 2021 RMD will be based on the account balance at the end of 2020.
Which of the following is correct regarding qualified joint and survivor annuities (QJSA) provided for in qualified pension plans? A) The QJSA amount payable to the surviving spouse may not be less than 50% of the amount of the annuity payable during the life of the participant. B) The maximum QJSA payable to a surviving spouse may not exceed 150% of the amount of the annuity payable during the life of the participant. C) QJSA provisions are never applicable to a Section 401(k) plan. D) QJSA provisions may never be waived.
A) The QJSA amount payable to the surviving spouse may not be less than 50% of the amount of the annuity payable during the life of the participant. The QJSA amount payable to the surviving spouse may not be less than 50% (nor greater than 100%) of the amount of the annuity payable during the life of the participant. The QJSA may be waived with written notarized consent of the participant's spouse. A Section 401(k) plan may be subject to QJSA requirements unless certain requirements are met.
The 20% mandatory withholding requirement applies to distributions from all of the following except A) Section 457 plans. B) IRAs. C) qualified plans. D) Section 403(b) plans.
B) IRAs. The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs.
Which of the following reasons for an early distribution from a qualified retirement plan is NOT an exception to the 10% penalty? A) It is made after separation from service from an employer-sponsor of the plan after age 55. B) It is a distribution for higher-education costs. C) The plan owner becomes totally and permanently disabled. D) The distribution is made to a beneficiary of the account due to the owner's death.
B) It is a distribution for higher-education costs. The exception from the 10% early distribution penalty for distributions for higher-education costs only applies to IRA distributions.
Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution is CORRECT? The NUA portion is A) taxed as ordinary income in the year of the distribution. B) taxed at the capital gains rate when the stock is sold. C) received tax free. D) taxed as ordinary income when the stock is sold.
B) taxed at the capital gains rate when the stock is sold. The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.
Claude's ex-wife, Sara, has secured a qualified domestic relations order against his Section 401(k) plan. What are Sara's rollover options if she takes a lump-sum distribution of her share of Claude's retirement plan account? A) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, or Section 457 plan, but not to an IRA. B) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, or an IRA, but not to a Section 457 plan. C) Sara may rollover the distribution to her own qualified plan, Section 457 plan, or an IRA, but not to a Section 403 (b) plan. D) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, Section 457 plan, or IRA.
D) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, Section 457 plan, or IRA.
Karen, age 51, wishes to take distributions from her traditional IRA and avoid imposition of the 10% early distribution penalty. Which of the following distributions will allow Karen to avoid the penalty? I. Karen is totally and permanently disabled. II. Karen wants the distribution to pay medical expenses exceeding 10% of her adjusted gross income (AGI). III. Karen may take distributions under the substantially equal payments rule. IV. Karen needs cash to pay for tuition for her child at State University.
I, II, III, and IV
Which of the following statements is(are) CORRECT regarding tax-free rollovers of qualified plan distributions pursuant a qualified domestic order (QDRO)? I. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into another qualified plan. II. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a SEP. III. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a Section 403(b) plan. IV. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a Section 457 plan.
I, II, III, and IV
David, a 63-year-old investor, wants to know which of the following penalties he might be subject to at some point if he continues tax deductible contributions to his traditional IRA. The applicable penalties are I. a 10% early distribution penalty. II. a 50% minimum distribution penalty. III. a 6% penalty on excess contributions. IV. a 6% penalty on excess withdrawals.
II and III Statement I is incorrect. Because David is over age 59½, he will not be subject to the early withdrawal penalty. Statement II is correct. If David does not begin taking minimum distributions by the required beginning date (typically April 1 following the year in which the participant attains age 72), he will be subject to the 50% minimum distribution penalty. Statement III is correct. If David contributes more than the permitted amount to an IRA, he will be subject to a 6% penalty on the excess contribution. Statement IV is incorrect. There is no penalty for excess withdrawals.
Which of the following statements is(are) CORRECT regarding rollovers from qualified plans or IRAs? I. Distributions from qualified plans and IRAs require 20% mandatory withholding for federal income taxes if a trustee-to-trustee direct transfer is not used to execute a rollover. II. A taxpayer is limited to one rollover in a one-year period (on a 365-day basis) unless the rollover is a trustee-to-trustee direct transfer. III. A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan. IV. If a qualified plan participant has an outstanding loan from a qualified plan upon separation from service, the participant may roll over the loan into a rollover IRA as long as loan repayments continue at least quarterly.
II only Statement I is incorrect because IRA distributions do not require 20% mandatory federal income tax withholding. Statement III is incorrect because a rollover is permitted from a qualified plan to a governmental Section 457 plan. Statement IV is incorrect because loans are not permitted from an IRA. If a person separates from service with an unpaid retirement plan loan balance, the person is allowed to move some or all of the unpaid balance into an IRA or another employer plan as a plan loan offset up to the due date of the tax return for the year the unpaid retirement plan loan was defaulted, as described in Module 3.
Jerry and Barbara recently filed for divorce after 25 years of marriage. The property settlement approved by the court included an award to Barbara of half of Jerry's vested benefit in his defined benefit pension plan. This was done via the drafting and implementation of a qualified domestic relations order (QDRO). Which of the following is an implication of the QDRO for Jerry and Barbara? A) When Jerry retires, Barbara's benefit is taxable to her. B) Barbara's benefit upon receipt is not subject to income tax. C) Barbara's benefit is subject to an additional 10% penalty if received before her age 59½. D) Under QDRO rules, Barbara is not eligible to roll over the distribution to an IRA.
A) When Jerry retires, Barbara's benefit is taxable to her. A distribution by a qualified retirement plan to an alternate payee who is a spouse or former spouse of the participant is taxable to the spouse, if it is made pursuant to a QDRO. The distribution to Barbara pursuant to a QDRO is not subject to the 10% penalty for early distribution. Barbara may roll over the distribution to an IRA.
The trustee for Debra Bennett's qualified retirement plan is calculating her required minimum distribution for 2021. The trustee should use the plan balance for A) December 31, 2022. B) December 31, 2020. C) December 31, 2021. D) December 31, 2019.
B) December 31, 2020. The trustee should use the plan balance for December 31 of the year preceding the distribution year—in this case, December 31, 2020.
Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution by a plan participant is CORRECT? A) The NUA on the employer stock is taxed as ordinary income in the year of the distribution. B) The NUA portion of the stock value is taxed at the capital gains rate when the stock is sold. C) When the taxpayer receives the employer stock, the stock is taxed as ordinary income when sold. D) The portion of the fair market value on the date of distribution that is NUA is tax free to the plan participant.
B) The NUA portion of the stock value is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.
Using the Uniform Lifetime Table to calculate the required minimum distributions (RMDs) from a qualified plan is mandatory unless A) there is more than 1 designated beneficiary. B) there is no designated beneficiary. C) the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. D) the designated beneficiary is a child under the age of 16.
C) the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. The Uniform Lifetime Table must be used to calculate required minimum distributions (RMDs) under a qualified plan or IRA unless the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant.
Jake has named a trust as the beneficiary of his qualified retirement plan. The trust beneficiaries include his four children, ages 4 through 18, and his nephew, age 30. For the trust beneficiaries to be treated as the designated beneficiaries of the plan, the trust must meet all of the following requirements except A) the trust must be valid under state law. B) the trust must be irrevocable or become irrevocable when Jake dies. C) the trust beneficiaries must not be identifiable from the trust instrument. D) the appropriate documentation has been provided to the plan administrator.
C) the trust beneficiaries must not be identifiable from the trust instrument. For the trust beneficiaries to be treated as designated beneficiaries, the beneficiaries must be identifiable from the trust instrument.
Geraldine participates in a Section 403(b) plan at work. Three years ago, she borrowed $5,000 from the plan. She has had an outstanding loan balance of $1,000 the past year, and 6 months ago she made the final payment of $1,000 to pay off that loan. Her vested account balance is currently $300,000. What is the maximum allowable loan amount she can take from the plan this year? A) $50,000 B) $145,000 C) $150,000 D) $49,000
D) $49,000 Generally, the limit on loans from qualified plans is 50% of the vested account balance, up to a maximum loan of $50,000. The maximum loan must be reduced by any loan balance the participant had in the 1-year period preceding the loan. Geraldine's maximum allowable loan is $49,000.
Which of the following beneficiaries is entitled to roll over a post-death distribution from a qualified plan into an IRA? A) The oldest surviving child of the participant B) The surviving mother of the participant C) The surviving spouse of the participant D) All three choices are correct
D) All three choices are correct A spouse beneficiary can roll the distribution over into an IRA and treat it as the spouse's own; a nonspouse beneficiary can use a direct trustee-to-trustee transfer of the distribution into a specially titled inherited IRA.
Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan? I. IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. II. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment.
Both I and II Both statements are correct. IRA-funded employer-sponsored tax-advantaged plans are SEPs, SAR-SEPs, and SIMPLE IRAs.
Maryellen is considering naming her estate as the beneficiary of her traditional IRA. Which of the following is(are) a disadvantage of this approach? I. Her estate cannot be treated as a designated beneficiary for purposes of determining the distribution period after she dies. II. The estate will probably pay more income tax on the IRA distributions than would an individual beneficiary.
Both I and II These are both potential disadvantages of naming one's estate as beneficiary. The estate cannot be treated as a designated beneficiary for purposes of determining required minimum distributions, and the estate will begin paying income tax at the maximum rate at a much lower level than an individual beneficiary would.
Claudia's simplified employee pension (SEP) plan balance is $60,000. She wants to know her options for taking a loan from her SEP plan to pay some college expenses for her daughter, Caroline. Which of the following statements is CORRECT? A) SEP plan loan repayments must be in level installments payable at least quarterly over a 5-year period. B) Claudia may borrow up to 50% of her SEP account balance to pay for Caroline's college expenses because she is 100% vested in the account contributions. C) Claudia may not make a loan from her SEP plan account. D) Because Claudia is 100% vested in the SEP plan, she may borrow up to $50,000 from the plan.
C) Claudia may not make a loan from her SEP plan account. A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan.
Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA at his local banking institution. Which of the following statements regarding his transfer is(are) CORRECT? I. The distribution from the SIMPLE 401(k) plan is not subject to mandatory 20% withholding. II. A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement.
II only The answer is II only. Statement I is incorrect. SIMPLE 401(k) plans are qualified plans and are subject to mandatory 20% income tax withholding for a distribution that is not a direct trustee-to-trustee transfer. When there is a direct transfer of a distribution from a qualified plan to an IRA, the mandatory 20% withholding rule does not apply.
This year, Martin received a lump-sum distribution from his qualified retirement plan. The distribution consisted entirely of his employer's stock, which has a fair market value of $100,000 on the date of distribution to Martin. The adjusted basis of the stock to the trustee of the plan was $70,000. Assuming Martin does not sell the stock this year, what amount is included in Martin's gross income as a result of the distribution? A) $0 B) $70,000 C) $100,000 D) $30,000
B) $70,000 Because the distribution is a lump-sum distribution of employer stock, the net unrealized appreciation (NUA) rules apply. Under the NUA rules, the adjusted basis of the stock to the trust ($70,000) is included in Martin's gross income in the year of the distribution and is treated as ordinary income.
Mark attained age 72 this year. He does not plan to retire from his position with Big Trucks, Inc., until his birthday on December 1, when he is 75. Mark is a 3% shareholder in Big Trucks. When must Mark begin to receive required minimum distributions (RMDs) from his qualified retirement plan at Big Trucks? A) Mark is not required to receive his first RMD until December 31 of the year following his actual retirement date from Big Trucks. B) Because Mark is a shareholder in Big Trucks, he must receive his first RMD by April 1 of next year. C) Mark is not required to begin his RMDs until April 1 of the year following his actual retirement from Big Trucks. D) Because Mark is still employed by Big Trucks, he is not required to take his first RMD until December 31 of the year he actually retires from Big Trucks.
C) Mark is not required to begin his RMDs until April 1 of the year following his actual retirement from Big Trucks. Participants in qualified plans, Section 403(b) plans, and governmental Section 457 plans may defer the required beginning date until April 1 following the year of retirement, if the participant continues to work after attaining age 72. If the employee-participant owns more than 5% of the business sponsoring the retirement plan, the RMD may not be deferred but must be taken by April 1 of the year after the employee attains age 72.
Blake, age 73, is required to take substantial required minimum distributions (RMDs) from his qualified retirement plan. He has no current need for the cash and has established traditional IRAs with his children as beneficiaries and wishes to deposit the distributions in equal amounts to each IRA within 60 days of the distributions to eventually benefit his children. Which of the following statements regarding Blake's rollover of the RMDs is CORRECT? A) A good plan is for Blake to roll over the distribution within 60 days after receipt. B) Because Blake is over age 72, he may not roll over the RMDs to a traditional IRA, but he may roll over the RMDs to a Roth IRA. C) Required minimum distributions may not be rolled over. D) Required minimum distributions may not be rolled over, but Blake may make equivalent contributions within 60 days of his RMD to the traditional IRAs.
C) Required minimum distributions may not be rolled over. While Blake may not roll over the RMD distributions, if he has earned income, he may make contributions to a traditional or Roth IRA.
Which of the following is NOT correct regarding qualified preretirement survivor annuities (QPSAs)? A) To waive the QPSA benefit for a married participant's spouse, the participant and the spouse must consent on a notarized written form. B) QPSA payments are to begin no later than the month in which the participant would have reached the earliest retirement age under the plan. C) The QPSA payable to the surviving spouse must be equal to the benefit that would have been payable to the participant. D) QPSA payments must be the actuarial equivalent of not less than half of the participant's vested account balance as of the date of the participant's death.
C) The QPSA payable to the surviving spouse must be equal to the benefit that would have been payable to the participant. QPSA payments are not required to equal the benefit that would have been payable to the participant at retirement but must be the actuarial equivalent of not less than half of the participant's vested account balance as of the date of the participant's death.
Which of the following statements is NOT a requirement for the beneficiaries of a trust to be treated as a designated beneficiary of a qualified plan or an IRA? A) The trust is valid under state law. B) The trust is irrevocable at the participant's death. C) The beneficiary of the trust is named on the decedent's retirement account as a named beneficiary. D) The appropriate documentation is provided to the plan administrator.
C) The beneficiary of the trust is named on the decedent's retirement account as a named beneficiary. The beneficiaries of the trust must be named (identified) in the trust instrument. Only the trust needs to be named as a beneficiary on the account.
Julie attained age 72 in 2021, and will correctly take her first required minimum distribution (RMD) from her qualified plan by April 1, 2022. Her qualified plan balance for which year is used to calculate the RMD she must receive by December 31, 2022? A) The plan balance minus the April 1 distribution she receives in 2022 B) The plan balance at the end of 2023 C) The plan balance at the end of 2021 D) The plan balance at the end of 2022
C) The plan balance at the end of 2021 The postponed 1st-year RMD is based on the participant's plan or IRA account balance as of the end of the year preceding the first distribution year. Her first distribution year is 2021 because she turned 72 in 2021. The RMD for each year is based on the balance at the end of the previous year. Because the first distribution year is 2021, the balance for the 2021 RMD calculation is the account balance at the end of 2020. The second RMD, which will be for the year 2022, is based on the account balance at the end of 2021. This is the year in question.
Elaine is currently age 76 and scheduled to take another distribution from her former company's qualified retirement plan later this year. Her account balance in the plan as of December 31 last year was $320,000. Under the Uniform Lifetime Table, the divisor is 22.0. However, Elaine's actual life expectancy is only 16 years. What is the amount, if any, of Elaine's required minimum distribution (RMD) from this plan for this year? A) $53,333 B) $0, because Elaine is over age 72 C) $20,000 D) $14,545
D) $14,545 Elaine's required minimum distribution this year is $14,545, calculated as follows: $320,000 ÷ 22.0 = $14,545. She must calculate her required distribution using the Uniform Lifetime Table and not her actual life expectancy (nor by using the difference between projected and actual life expectancy as the applicable divisor). This is actually advantageous for the owner because the original owner's RMD is usually based on the owner's age and the age of someone 10 years younger than the owner. This is true even if the account owner is not married. The only time the assumed life expectancy in a RMD calculation for the original account owner is different than this is when the original owner is actually married to someone who is more than 10 years younger. In that case, the RMD is based on the actual ages of the married couple according to Table II.
Which of the following descriptions of a regular rollover from a qualified plan to a traditional IRA is CORRECT? A) It generally must be completed within 90 days of the date of distribution from the previous plan. B) The rollover amount to the IRA is counted as a new IRA contribution and thus limits the amount that can be contributed to the IRA that year. C) Amounts rolled over are taxable according to rules governing the source of contribution. D) A 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over.
D) A 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. The answer is a 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. In a regular rollover, the recipient physically receives a check, made payable to the recipient, for the eligible rollover distribution from the plan trustee. Under this method of distribution, the issuer must withhold 20% of the proceeds for federal income tax. A rollover does not count against the annual contribution limit.
A stretch IRA I. is the informal name for intentionally leaving money in an IRA over an extended time after the death of the original account owner. II. extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the original owner. III. allows the IRA owner's beneficiary to name his own beneficiary upon the owner's death.
I, II, and III
