Qualified Plans

If a person receives funds directly from a qualified pension plan and intends to roll them over to an IRA, within how many days must the rollover be completed? a. 90 days b. 75 days c. 30 days d. 60 days

d. 60 days A plan participant does not only have 30 days to roll over a distribution from a qualified plan to an IRA.

Although exceptions exist, distributions from a qualified retirement plan are subject to a penalty tax if taken any earlier than the employee's: a. Social Security full retirement age b. age 59½ c. age 55 d. age 62

b. age 59½ If taken before the employee's age 59½, plan distributions may be subject to a 10 percent tax penalty. Social Security retirement benefits may be taken as early as age 62.

Emily, age 48, withdrew $8,000 from her SIMPLE plan to buy a car. How much penalty tax will she owe? a. $4,000 b. $0 c. $800 d. $1,600

c. $800 Emily will not have to pay a penalty tax of $4,000 (or 50 percent) on her premature distribution.

Which of the following statements about IRA rollovers is correct? a. Tax laws impose limits on amounts that can be rolled over from qualified plans to IRAs. b. When a distribution from a qualified plan is rolled over to an IRA, the entire amount is subject to immediate taxation. c. A penalty tax must be paid on the amount rolled over. d. Funds can be rolled over tax free from one IRA to another.

d. Funds can be rolled over tax free from one IRA to another. Immediate taxation results only if a plan participant receives the funds directly and fails to complete the rollover within 60 days.

All the following organizations are eligible to set up a 403(b) tax-sheltered annuity plan for their employees EXCEPT: a. a religious center b. a not-for-profit cancer society c. a hardware store d. a state university

c. a hardware store A cancer society that is organized on a not-for-profit basis would be eligible to offer a tax-sheltered 403(b) plan for its employees.

Generally speaking, which of the following most correctly describes the taxation of a Roth IRA qualified distribution? a. Distributions are generally subject to income tax. b. Distributions may or may not be subject to income tax, depending on whether or not the IRA owner tax-deducted the IRA's contributions. c. Distributions may or may not be subject to income tax, depending on the IRA owner's income level. d. Distributions are generally tax free.

d. Distributions are generally tax free. Roth IRA contributions are not tax deductible, and the tax treatment of a Roth IRA distribution is the same for everyone.

Which statement regarding defined benefit employer retirement plans is correct? a. The employee typically contributes a portion of the plan funding, through pre-tax contributions. b. There are no limits to the monthly benefit amount participants can receive from the plan. c. Individual accounts are typically NOT set up for individual employees in a defined benefit plan. d. When the plan participant reaches retirement, the employer typically pays benefits by withdrawing funds directly from the plan each month.

c. Individual accounts are typically NOT set up for individual employees in a defined benefit plan. When the employee reaches retirement age, the employer uses plan funds to buy an annuity. The annuity then pays the specified benefit.

Paul, who owns a Roth IRA worth $100,000, turned age 72 last year. Which statement correctly describes his distribution options? a. Paul can delay the first RMD for five years. b. Paul must take his first required minimum distribution (RMD) by April 1 of this year. c. Paul is not required to take any distributions from his Roth IRA. d. Paul is not required to take any distributions from his Roth IRA, but as a practical matter he should because Roth IRA funds cannot be passed on to heirs.

c. Paul is not required to take any distributions from his Roth IRA. A Roth IRA does not require mandatory distributions, and funds can be passed on to beneficiaries and heirs income tax free.

Which of the following correctly identifies qualified educational expenses that can be covered under a Section 529 prepaid tuition plan? a. tuition, mandatory fees, room and board, and books b. tuition only c. tuition, mandatory fees, and room and board only d. tuition and mandatory fees only

d. tuition and mandatory fees only Prepaid tuition plans do not cover room, board, or book expenses.

Which statement regarding qualified employer plans is correct? a. All types of employer plans are subject to IRS contribution limits. b. All types of qualified employer plans involve the setting up of individual accounts on each plan participant's behalf. c. They must be structured as some form of a defined contribution plan. d. Employee contributions are permitted in all types of employer plans.

a. All types of employer plans are subject to IRS contribution limits. Employee contributions are not permitted in defined benefit plans and some types of defined contribution plans (e.g., profit-sharing plans).

Brian contributes 10 percent of his salary to his company's 401(k) plan. His employer contributes a matching contribution of 4 percent of his salary. All the following statements regarding this arrangement are correct, EXCEPT: a. Brian's taxable income is reduced by the amount he contributed to his 401(k) plan account. b. Brian will not be taxed this year on the amount that his employer contributed to his account. c. Brian's contributions to his 401(k) plan account are made with pre-tax dollars. d. Brian must be 100 percent vested in both his and his employer's contributions at all times.

d. Brian must be 100 percent vested in both his and his employer's contributions at all times. Employer contributions to a 401(k) plan on behalf of an employee-participant are not taxable to the employee when they are made. Benefits are taxed only when they are withdrawn or otherwise distributed from the plan to the employee.

Which statement is correct about interest earnings within an individual's qualified plan account? a. The participant pays no income tax on the earnings while accruing in the plan but will have to pay tax on them whenever and however they are withdrawn. b. The participant will not have to pay income tax on the earnings if the account is distributed in the form of an immediate annuity. c. The participant must pay income tax on the earnings in the year earned. d. The participant will never have to pay income tax on the earnings.

a. The participant pays no income tax on the earnings while accruing in the plan but will have to pay tax on them whenever and however they are withdrawn. Employer contributions to a qualified retirement plan are not taxed to the plan participant when the contributions are made, but they are taxable to the participant however and whenever they are distributed.

Failure to begin taking required minimum distributions (RMDs) from a qualified retirement plan when required can result is a penalty tax equal to: a. 10 percent of the difference between the amount that was taken and the RMD amount that should have been taken b. 10 percent of the RMD amount c. 50 percent of the RMD amount d. 50 percent of the difference between the amount that was taken and the RMD amount that should have been taken

d. 50 percent of the difference between the amount that was taken and the RMD amount that should have been taken Failure to take an RMD results in one of the stiffest penalties the IRS imposes. This penalty is 50 percent of the difference between the amount that was taken and the amount that should have been taken.

Which of the following statements is true if a traditional IRA owner is covered by an employer-sponsored defined benefit retirement plan? a. Contributions to the IRA are fully deductible. b. Contributions to the IRA may or may not be deductible, depending on his or her income level. c. Contributions to the IRA will be made on a pre-tax basis. d. Contributions to the IRA are not deductible.

b. Contributions to the IRA may or may not be deductible, depending on his or her income level. Traditional IRA contributions are made with after-tax dollars.

Which statement regarding the conversion of a traditional IRA to a Roth IRA is correct? a. The right to convert to a Roth IRA is dependent on the IRA owner's modified adjusted gross income in the year of conversion. b. Income taxes must be paid on the traditional IRA when the account is converted. c. To convert to a Roth IRA, a person must currently be eligible to contribute to a Roth IRA. d. Distributions from the Roth IRA will be taxable as they would be from the traditional IRA.

b. Income taxes must be paid on the traditional IRA when the account is converted. Anyone can convert a traditional IRA to a Roth IRA regardless of their modified adjusted gross income.

Which statement regarding Simplified Employee Pension (SEP) plans is correct? a. SEP plans do not accept employee contributions. b. Employers are required to contribute to a SEP every year. c. Employer contributions can be subject to a five-year cliff vesting schedule. d. Employer contributions are made to a single account from which participant retirement benefits are drawn.

a. SEP plans do not accept employee contributions. All contributions made to a SEP on the employees' behalf are immediately and fully vested.

Jason, age 27, earns $125,000 a year working for a small computer company that does not have a qualified retirement plan. If Jason sets up and contributes to a traditional IRA this year, which of the following statements is correct? a. Jason cannot take a deduction for his IRA contribution because his adjusted gross income is too high. b. Jason can deduct the full amount that he contributes to his traditional IRA. c. Jason cannot take a deduction for his IRA contribution because he is not covered by a qualified employer plan. d. Jason can deduct part of his IRA contribution this year.

b. Jason can deduct the full amount that he contributes to his traditional IRA. If Jason were covered by a qualified employer plan, then it would be necessary to check his modified adjusted gross income (MAGI) to see if he qualifies for full or partial deductible contributions.

Steve, age 72, owns an IRA. The required minimum distribution (RMD) for Steve this year was $6,000, but he only withdrew $4,000. What, if any, penalty tax will Steve have to pay? a. $2,000 b. $600 c. $0 d. $1,000

d. $1,000 Failure to take an RMD results in a tax penalty of 50 percent of the difference between the amount that was taken and the amount that should have been taken. In this case, the RMD is $6,000 and only $4,000 was distributed, so Steve will owe a tax of $1,000 (i.e., 50 percent of the $2,000 difference between the two amounts).