Retirement Plans
403(b) Plans are permitted to invest in all of the following EXCEPT: A. Common stocks B. Mutual Funds C. Fixed Annuities D. Variable Annuities
The best answer is A. 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Note that these are all "managed" products - where an investment adviser is managing the portfolio. Direct investments in common stocks selected by the plan participant are prohibited.
A money purchase retirement plan would invest in all of the following securities EXCEPT: A. Tax Free Municipal Bonds B. U.S. Government Bonds C. Equities D. Variable Annuities
The best answer is A. A retirement plan would not invest in tax free municipal bonds because such instruments provide a lower yield than taxable bonds. Since the pension plan itself is a "tax free" envelope in which securities are held, the plan would invest in securities that yield a higher amount.
If an individual, aged 69, takes a withdrawal from his Keogh Plan, which statement is TRUE? A. The amount withdrawn is subject to regular income tax only B. The amount withdrawn is subject to a 10% penalty tax only C. The amount withdrawn is subject to regular income tax plus a 10% penalty tax D. The amount withdrawn is not subject to any tax
The best answer is A. Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.
If an individual, aged 69, takes a withdrawal from his IRA, which statement is TRUE? A. The amount withdrawn is subject to regular income tax only B. The amount withdrawn is subject to a 10% penalty tax only C. The amount withdrawn is subject to regular income tax plus a 10% penalty tax D. The amount withdrawn is not subject to any tax
The best answer is A. Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.
Which of the following statements are TRUE regarding contributions to 401(k) plans and the distributions from these plans after age 59 1/2? I Contributions are made with before tax dollars II Contributions are made with after tax dollars III Distributions are 100% taxable IV Distributions are tax free A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Contributions to tax qualified plans such as 401(k) plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.
Which of the following statements are TRUE regarding contributions to, and distributions from, tax qualified retirement plans? I Contributions are made with before tax dollars II Contributions are made with after tax dollars III Distributions are 100% taxable IV Distributions are partially tax free, with the amount above the original cost basis being taxable A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Contributions to tax qualified retirement plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.
ERISA legislation was enacted to protect: A. employee retirement funds from employer mismanagement B. employee retirement funds from government mismanagement C. retirement fund accounts against broker-dealer mismanagement D. retirement fund accounts against investment adviser mismanagement
The best answer is A. ERISA was enacted to protect employee retirement funds from employer mismanagement.
The penalty for making an excess contribution to an Individual Retirement Account is: A. 6% of the excess contribution B. 10% of the excess contribution C. 20% of the excess contribution D. 30% of the excess contribution
The best answer is A. Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.
A divorced woman with 2 young children has a small trust fund that gives her $2,500 a year in income. She collects another $2,500 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A. No contribution can be made B. A contribution can be made based only on the income received from the trust fund C. A contribution can be made based only on the alimony payments received D. A contribution can be made based on both the income received from the trust fund and the alimony payments received
The best answer is A. IRA contributions can only be made based on earned income - meaning income from one's work. Portfolio income does not count, since it is not earned income. Alimony and child support payments are not classified as "earned income" for purposes of making IRA contributions. Thus, a woman who has income from a trust fund and who received alimony payments cannot make an IRA contribution based on either of these sources of income. (Of course, the big question here is, "If this person only has total income of $5,000 a year, how would she be able to make an IRA contribution since she doesn't even have enough money to eat!")
A self-employed individual purchases variable annuity units with funds contributed to a Keogh Account. Once the contract is annuitized, the payments are: A. 100% taxable B. partially taxable and a partial tax free return of capital C. 100% tax free return of capital D. tax deferred until the annuitant reaches the age of 70 1/2
The best answer is A. Keogh contributions are tax deductible (up to $56,000 in 2019), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that person's income tax bracket.
For the past 5 years, an individual earning $40,000 per year, who was not covered by another retirement plan, has made annual contributions to an Individual Retirement Account. That individual has changed jobs at the same salary and has been included in that company's qualified retirement plan. Which statement is TRUE? A. Annual contributions to the Individual Retirement Account must cease B. Annual contributions to the Individual Retirement Account can continue and are an adjustment to income each year C. Annual contributions to the Individual Retirement Account can continue but no adjustment to income is allowed D. The employee has 60 days to roll over the funds from the IRA to the qualified plan in order to maintain tax deferred status
The best answer is B. Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $74,000 per year for an individual in year 2019; between $64,000 - $74,000 the deduction phases out), the contribution is not tax deductible. This person makes $40,000 per year, so the IRA contribution is tax deductible.
A 55-year old individual has just retired after working for the same employer for 20 years. She will collect an annual pension benefit of $55,000, but is not yet ready to stop working.She has lined up a part-time job that will pay $4,000 this coming year. How much can she contribute to a Traditional Individual Retirement Account for her first year in retirement? A. 0 B. $4,000 C. $5,000 D. $6,000
The best answer is B. Because this individual is not yet age 70 ½, she can still contribute to a Traditional IRA - but only based on earned income - not on her pension income. The maximum contribution in 2019 is 100% of earned income, capped at $6,000. Because she only has $4,000 of earned income, this is the maximum IRA contribution for this year.
Distributions after age 59 ½ from non-tax qualified retirement plans are: A. 100% taxable B. partial tax free return of capital and partial taxable income C. 100% tax free D. 100% tax deferred
The best answer is B. Contributions to non-tax qualified plans, such as most variable annuities, are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital is not taxed; the earnings are taxed.
If a person under the age of 59 1/2 becomes disabled and wishes to withdraw money from her IRA, which statements are TRUE? I The withdrawal is subject to income tax II The withdrawal is not subject to income tax III The withdrawal is subject to a 10% penalty tax IV The withdrawal is not subject to a 10% penalty tax A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Distributions from tax qualified pension plans such as IRAs and Keoghs prior to age 59 1/2 are subject to regular tax plus a 10% penalty tax, unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax but are not subject to the 10% penalty tax.
Catch-up IRA contributions are permitted for individuals who are at least age: A. 40 B. 50 C. 60 D. 70
The best answer is B. For the year 2019, the maximum annual contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000.
A divorced woman with 2 young children has just re-entered the workforce part time and earns $3,000 from this work. She collects another $2,400 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A. No contribution can be made because the woman received alimony payments B. A contribution can be made based only on the income earned from part-time work C. A contribution can be made based only on the alimony payments received D. A contribution can be made based on both the earned income from part-time work and the alimony payments received
The best answer is B. IRA contributions can only be made based on earned income - meaning income from one's work. Alimony and child support payments are not classified as "earned income" for purposes of making IRA contributions. Thus, a woman who has both earned income from work and who received alimony payments can only make an IRA contribution based on the $3,000 earned from work. (Of course, the big question here is, "If this person only has total income of $5,400 a year, how would she be able to make an IRA contribution since she doesn't even have enough money to eat!")
In 2019, a self-employed person earning $200,000 also has $100,000 of investment income. This person wishes to open a Keogh Plan. Their maximum permitted contribution is: A. $20,000 B. $40,000 C. $56,000 D. $66,000
The best answer is B. Keogh (HR10) contributions are based only on personal service income - not investment income. $200,000 of personal service income x 20% effective contribution rate = $40,000. Note that this is less than the maximum contribution allowed of $56,000 in 2019.
In 2019, a doctor has earned $300,000 from her practice and another $200,000 from investments. Their maximum contribution to an HR 10 plan is: A. $46,000 B. $56,000 C. $66,000 D. $112,000
The best answer is B. Keogh (HR10) contributions are based only on personal service income - not investment income. $300,000 of personal service income x 20% effective contribution rate = $60,000, however the maximum contribution allowed is $56,000 in 2019.
A company has decided to terminate its retirement plan. In order to defer taxation on the distribution, the employee must roll over the funds into an Individual Retirement Account within how many days of the distribution? A. 30 B. 60 C. 90 D. 120
The best answer is B. Lump sum distributions from qualified plans can be "rolled over" into an Individual Retirement Account without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.
A pension plan maintained by a not-for profit corporation is known as a (n) : A. 401(k) plan B. 403(b) plan C. SEP IRA D. HR 10 plan
The best answer is B. Not-for-profit institutions such as hospitals and universities can sponsor 403(b) (tax deferred annuity) plans for their employees. 401(k) plans, and SEP IRA plans are sponsored by for-profit corporations. HR 10 plans (Keogh) are only available to self-employed individuals, based on their self-employed income.
Which statements are TRUE when comparing a Roth IRA to a Traditional IRA? I Traditional IRAs are available to anyone who has earned income II Roth IRAs are available to anyone who has earned income III Traditional IRAs are not available to high-earning individuals IV Roth IRAs are not available to high-earning individuals A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Roth IRAs allow for the same contribution amounts as Traditional IRAs, but the contribution is never tax-deductible (which is usually the case with a Traditional IRA). Earnings build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, it is not available for high-earners. Individuals that earn over $137,000 and couples that earn over $203,000, in 2019, cannot open Roth IRAs. They can open Traditional IRAs, however.
An individual, age 40, earns $60,000 per year. He has no family and has $200,000 of life insurance. He contributes 6% of his salary to his company sponsored 401(k) annually. He informs his registered representative that he is getting a $5,000 raise. What should you recommend that the customer do with the raise? A. Purchase a non-qualified variable annuity by making $5,000 a year payments B. Increase the 401(k) contributions by $5,000 per year C. Use the $5,000 annual increase to purchase a fixed annuity contract under a contractual plan D. Roll the 401(k) into a variable annuity contract and then re-roll the variable annuity into an IRA
The best answer is B. Since any permitted 401(k) contribution is deductible, it is best to recommend that the customer max out his 401(k). Remember, he can contribute up to 25% of salary, capped to $19,000 in 2019, and this is a salary reduction. The purchase of either a variable annuity or a fixed annuity will not permit a salary reduction - these are non-qualified plans. Choice D is utter nonsense.
Distributions from Roth IRAs are subject to a penalty if withdrawals are made within: A. 1 year of original contribution B. 3 years of original contribution C. 5 years of original contribution D. 10 years of original contribution
The best answer is C. Contributions to Roth IRAs are not tax deductible. If the monies remain invested in the Roth IRA for at least 5 years, they can be withdrawn with no tax due (assuming that the beneficiary is at least age 59 1/2 when distributions commence).
Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II Annual contribution amounts will vary III The benefit amount to be received is fixed IV The benefit amount to be received will vary A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.
All of the following statements about 403(b) Plans are true EXCEPT: A. employees make voluntary contributions through their employers B. contributions are tax deductible to the employee C. employees of any organization can contribute to this type of plan D. earnings on contributions by employees are tax deferred
The best answer is C. 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income as taken.
A self-employed individual makes $95,000 per year. To which type of retirement plan can the maximum contribution be made? A. Roth IRA B. Traditional IRA C. SEP IRA D. SIMPLE IRA
The best answer is C. A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the recordkeeping associated with retirement plans. Contribution amounts made by the employer cannot exceed 25% of the employee's income (statutory rate - the effective rate is 20%), up to a maximum of $56,000 in 2019. In contrast, the maximum contribution to either a Traditional or Roth IRA in 2019 is $6,000 (plus an extra $1,000 catch-up contribution for individuals age 50 or older), while the maximum contribution for a SIMPLE IRA in 2019 is $13,000.
A small business owner of a firm that has 25 employees wants to establish a retirement plan and make contributions for her employees. What type of plan can the employer establish? A. Traditional IRA B. Roth IRA C. SEP IRA D. 403(b)
The best answer is C. A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $56,000 in 2019). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a smaller business that has variable cash flow. A Traditional or Roth IRA can only be set up by the individual who is employed - it cannot be set up by the employer. A 403(b) plan can only be established by a not-for-profit entity. It cannot be set up by a for-profit company.
If a corporation has an unfunded pension liability, this means that: A. inflation has eroded the value of the portfolio funding the plan B. the plan is in default because the existing retirees' benefit claims are not being met C. the expected future value of fund assets is less than projected benefit claims D. the expected future value of fund assets is more than projected benefit claims
The best answer is C. An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.
In 2019, a self-employed individual earns $180,000 for the year, and contributes the maximum amount to an HR10 plan. If this individual wished to make a contribution to a self-directed Individual Retirement Account for this year, which statement is TRUE? A. A contribution is prohibited because this person is already covered under a qualified retirement plan B. A maximum contribution of $6,000 is permitted, which is an adjustment to that year's taxable income C. A maximum contribution of $6,000 is permitted, but no adjustment is allowed to that year's taxable income for that amount D. A contribution is permitted only if the HR10 contribution is reduced by the same amount
The best answer is C. Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $74,000 in 2019 for an individual) and that person is covered by another qualified retirement plan, the contribution is not tax deductible. This person makes $180,000 per year and contributes to a Keogh plan, so the IRA contribution is not tax deductible.
A working couple that has a combined income of $150,000 are both covered by qualified pension plans. Which statement is TRUE about IRA contributions by these persons? A. IRA contributions are prohibited since these persons are covered by a qualified plan B. IRA contributions are prohibited since these persons' income exceeds allowed limits C. IRA contributions are permitted; however the contribution amount is not deductible D. IRA contributions are permitted with the contribution amount being tax deductible
The best answer is C. Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2019 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $123,000 in year 2019 (the deduction phases out between $103,000 - $123,000 of income).
Which of the following statements are TRUE about Individual Retirement Accounts? I Contributions are allowed based solely upon personal service income II Contributions may be made if the individual is covered by another type of retirement plan III All contributions reduce the individual's taxable income IV To remain tax deferred, distributions from other retirement plans must be rolled over within 60 days A. I and III B. II, III, IV C. I, II, IV D. I, II, III, IV
The best answer is C. Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan, however they may not be tax deductible if the person's income is too high (making Choice III wrong). IRA "rollover" rules allow pension plan distributions to be rolled over into an IRA within 60 days to remain tax deferred.
A 50-year old man becomes totally disabled. He wishes to take a lump sum distribution from his Individual Retirement Account to pay for medical and living expenses. Which statement is TRUE? A. The distribution is not subject to any tax B. The distribution is subject solely to a penalty tax of 10% C. The distribution is subject solely to regular income tax D. The distribution is subject to regular income tax plus a 10% penalty tax
The best answer is C. Distributions from tax qualified pension plans such as IRA's and Keogh's prior to age 59 1/2 are subject to regular tax plus a 10% penalty unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax, but are not subject to the 10% penalty tax.
ERISA requirements regarding the investments that are suitable for a retirement account stress: A. income potential B. capital gain potential C. safety of principal D. legal list securities
The best answer is C. ERISA rules regarding retirement plans stress that investments should be "safe."
For the year 2019, couples who are age 50 or over are permitted to make a maximum annual IRA contribution of: A. $12,000 B. $13,000 C. $14,000 D. $15,000
The best answer is C. For the year 2019, the maximum annual contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000. For couples where at least 1 person works that are age 50 or older, this amount is doubled to $14,000.
A husband and wife wish to open a spousal IRA. The wife works while the husband does not. What is the permitted maximum contribution to this spousal IRA for the year 2019? A. $6,000 for the wife; $0 for the husband B. $6,000 for the wife; $3,000 for the husband C. $6,000 for the wife; $6,000 for the husband D. $60,000 for the wife; $60,000 for the husband
The best answer is C. For the year 2019, the maximum contribution to a spousal IRA, is $6,000 each, in two accounts, for a total of $12,000. It makes no difference if the spouse works or not.
For an Individual Retirement Account contribution to be deductible from that year's tax return, the contribution must be made by no later than: A. April 15th of that year B. December 31st of that year C. April 15th of following year D. December 31st of the following year
The best answer is C. IRA contributions must be made by April 15th of the following year - no extensions are permitted.
Which of the following statements are TRUE about non-contributory defined benefit retirement plans? I Contribution amounts are fixed II Contribution amounts vary III Annual benefit payments are fixed IV Annual benefit payments vary A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. In a "defined benefit" retirement plan, contribution amounts vary based upon the age of the person covered under the plan. Larger contributions are made for older plan participants nearing retirement than for younger plan participants who have many years left until retirement. Once benefit payments start, the amount of the benefit is fixed - since the plan funded a "defined" benefit. The other type of plan is a "defined contribution." In this type, the contribution amount is fixed. The benefit payment depends on the investment results of the fixed contributions made, and hence can vary.
In an Individual Retirement Account or Keogh Plan, a 10% penalty tax will be imposed for: A. failing to pay $5,500 to an Individual Retirement Account or Keogh Plan by April 15th B. the purchase of a mutual fund in an Individual Retirement Account or Keogh Plan C. premature distributions from an Individual Retirement Account or Keogh Plan D. excess contributions to an Individual Retirement Account or Keogh Plan
The best answer is C. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax. Do not confuse this penalty with that imposed on excess contributions to these plans. Excess contributions to an Individual Retirement Account or Keogh Plan are subject to a 6% penalty tax.
All of the following retirement plans require that minimum distribution amounts be taken once the participant reaches the age of 70 1/2 EXCEPT: A. 403(b) plans B. 401(k) plans C. Roth IRAs D. Traditional IRAs
The best answer is C. Roth IRA contributions are not deductible. As long as the assets are held in the Roth IRA for at least 5 year and distributions start after age 59 1/2, they are tax-free. Since the IRS does not get to tax the distributions, they don't care when they start! On the other hand, Traditional IRA contributions, 401(k) contributions and 403(b) contributions, are all tax deductible. Distributions at retirement age are taxable, and the government wants its money before the plan participant dies. Thus, RMDs (Required Minimum Distributions) must commence at age 70 1/2. If they don't, a draconian tax rate of 50% is applied to any underdistributed amount.
ich statement is TRUE when comparing a Roth IRA to a Traditional IRA? A. Anyone with earned income can open a Roth IRA or a Traditional IRA B. Traditional IRAs are not available to high-earning individuals; Roth IRAs are available to high-earning individuals C. Roth IRAs are not available to high-earning individuals; Traditional IRAs are available to high-earning individuals D. Only individuals with income below federal threshold levels can open either a Roth IRA or a Traditional IRA
The best answer is C. Roth IRAs allow for the same contribution amounts as Traditional IRAs, but the contribution is never tax-deductible (which is usually the case with a Traditional IRA). Earnings build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, it is not available for high-earners. Individuals that earn over $137,000 and couples that earn over $203,000, in 2019, cannot open Roth IRAs. They can open Traditional IRAs, however.
Which statements are TRUE regarding a Roth IRA? I Roth IRAs allow a greater contribution than Traditional IRAs II Roth IRA contributions are not tax deductible III Distributions from a Roth IRA are not taxable if the investment is held for at least 5 years IV The legal maximum contribution amount can be made to both a Roth IRA and a Traditional IRA annually A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Roth IRAs, introduced in 1998, are an alternate to the Traditional IRA. Both allow the same contribution amount - a maximum of $6,000 per person in 2019 for individuals under age 50. If one contributes the maximum to a Traditional IRA, a contribution cannot be made to a Roth IRA; and vice-versa. Roth IRA contributions are not tax deductible. However, all distributions from a Roth IRA made after age 59 1/2 are 100% excluded from taxation as long as the investment has been held for 5 years. Compared to a Traditional IRA which allows a tax deduction for the contribution, a Roth contribution is not tax deductible. The benefit is that when distributions commence from a Roth IRA, there is no tax due (in contrast, distributions from Traditional IRAs are taxable).
Which statement is FALSE about a SIMPLE IRA? A. The maximum annual contribution is higher than for a Traditional IRA B. The contribution is made by the employee, who gets a salary reduction for the amount contributed C. The plan is available to any size employer D. The employer must make a matching contribution
The best answer is C. SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administrate than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $13,000 (in 2019) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company. Note that a SIMPLE IRA gives a higher contribution amount than a Traditional IRA, which is capped at $6,000 in 2019 (plus a $1,000 catch up contribution for employees who are age 50 or older).
All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year to year B. employees with the highest salaries and the fewest years to retirement benefit the most C. benefits paid to employees consists of a tax free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee
The best answer is C. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.
In 2019, an individual earning $60,000 makes an annual contribution of $2,000 to a Traditional IRA. Which statement is TRUE? A. This person is prohibited from contributing to a Roth IRA in that year B. This person can contribute a maximum of $3,000 to a Roth IRA C. This person can contribute a maximum of $4,000 to a Roth IRA D. This person can contribute a maximum of $6,000 to a Roth IRA
The best answer is C. The maximum annual permitted contribution to a Traditional IRA or Roth IRA for an individual is $6,000 total in 2019. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $4,000 can be contributed to a Roth IRA for that tax year.
In 2019, a customer earns $500,000 as a self-employed doctor. The maximum annual contribution to a Keogh plan is: A. $26,000 B. $46,000 C. $56,000 D. $112,000
The best answer is C. The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $56,000 in 2019, whichever is less. 20% of $500,000 = $100,000. However, only the $56,000 maximum can be contributed in 2019. (Note that this amount is adjusted each year for inflation.)
Retirement plans that must comply with ERISA requirements include all of the following EXCEPT: A. Defined benefit plans B. Profit sharing plans C. Federal Government plans D. Payroll deduction savings plans
The best answer is C. ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated. The listing of plans that must comply with ERISA include: - Profit sharing plans - Defined contribution plans - Defined benefit plans - Tax deferred annuity plans - Payroll deduction savings plans
A person, age 55, wishes to withdraw $25,000 from a Keogh plan. The tax will be: A. 10% of the amount withdrawn B. 10% of the amount in the plan C. ordinary income tax + 10% penalty tax on the amount in excess of contributions D. ordinary income tax + 10% penalty tax on the amount withdrawn
The best answer is D. A Keogh plan is tax qualified, so all contributions are tax deductible. Thus, all of the dollars in the plan, including the tax deferred build-up, have never been taxed. When a distribution is taken, ordinary income tax is due on the entire distribution amount. In addition, if a premature distribution is taken (prior to age 59 1/2), an additional penalty tax of 10% is applied to the amount withdrawn.
All of the following statements are true about SEP IRAs EXCEPT: A. the plan is established by the employer B. the plan allows for flexible contribution amounts C. the amount that can be contributed is significantly greater than for a Traditional IRA D. the contributions made are not deductible
The best answer is D. A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $56,000 in 2019). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a small business that has variable cash flow.
Which of the following individuals earning $100,000 of income per year can make a deductible contribution to an IRA? I Corporate employee covered by a pension plan II Corporate employee who is not covered by a pension plan III Self-employed individual who has established a Keogh plan IV Self-employed individual who has not established a Keogh plan A. I and II B. III and IV C. I and III D. II and IV
The best answer is D. An individual who is not covered by another qualified retirement plan can make a tax deductible contribution to an IRA. Individuals who are covered by another retirement plan can make a contribution, but the tax deductible amount phases out as income rises. An individual making $100,000 covered by another pension plan is well above the 100% phase-out threshold (which occurs between $64,000 and $74,000 of income in year 2019). Their IRA contributions are not deductible.
All of the following are allowed investments into an Individual Retirement Account EXCEPT: A. Preferred Stock B. U.S. Government Bonds C. U.S. Government Gold Coins D. Antiques, Art, and Other Collectibles
The best answer is D. Collectibles are not allowed as an investment in an IRA account. Securities are allowed; so are gold coins minted by the U.S. Government, and precious metals bullion.
Individual Retirement Account contributions can ONLY be made with: A. stocks B. bonds C. mutual funds D. cash
The best answer is D. Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).
Contributions to qualified retirement plans, other than IRAs, must be made by: A. December 31st of the calendar year in which the contribution may be claimed on that person's tax return B. April 15th of the calendar year in which the contribution may be claimed on that person's tax return C. April 15th of the calendar year after which the contribution may be claimed on that person's tax return D. The date on which the tax return is filed with the Internal Revenue Service
The best answer is D. Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
For a qualified retirement plan contribution to be deductible from that year's tax return, the contribution must be made by no later than: A. April 15th of that year B. December 31st of that year C. April 15th of following year D. the tax filing date of the following year
The best answer is D. Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
Which of the following statements are TRUE regarding defined benefit plans? I Actuarial tables are used to determine contribution rates for each employee II Distributions upon retirement are 100% taxable III Employees with the highest salaries and the fewest years to retirement benefit the most IV Contributions made to the plan can vary from year to year A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is D. Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions. Actuarial tables are used to determine contribution rates for each employee. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings build up is tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The contributions made to the plan can vary from year to year, based on actuarial methods.
Distributions from an Individual Retirement Account must commence by: A. April 1st of the year preceding that person reaching age 59 1/2 B. April 1st of the year following that person reaching age 59 1/2 C. April 1st of the year preceding that person reaching age 70 1/2 D. April 1st of the year following that person reaching age 70 1/2
The best answer is D. Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 70 1/2.
In 2019, a customer earns $300,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $30,000 per year. The contribution to be made for the nurse is: A. $3,000 B. $3,750 C. $6,000 D. $7,500
The best answer is D. If an employer earns $280,000 or more and contributes the maximum of $56,000 to a Keogh in 2019, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $300,000 and contributes $56,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $280,000. $280,000 - $56,000 = $224,000 of "after Keogh deduction" income. $56,000/$224,000 = 25%. Thus, for the nurse, $30,000 of income x 25% = $7,500 contribution.
What is the first age at which distributions must commence from a 401(k) Plan? A. 59 1/2 B. April 1st of the year after reaching age 59 1/2 C. 70 1/2 D. April 1st of the year after reaching age 70 1/2
The best answer is D. Just like IRA accounts, RMDs (Required Minimum Distributions) from 401(k) accounts must start by April 1st of the year after the beneficiary reaches the age of 70 ½. If the RMD is not taken each year thereafter, a penalty tax of 50% (ouch!) is applied to the under-distributed amount.
The penalty tax applied for not taking required minimum distribution from a qualified retirement plan in a given year is: A. 6% of the shortfall B. 10% of the shortfall C. 15% of the shortfall D. 50% of the shortfall
The best answer is D. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 70 1/2 is 50% of the under-distribution. There is an incentive to take the money out and pay tax on it, which is what the Treasury is really looking for!
Under Keogh rules, distributions from a Keogh Plan must commence the year after the individual turns age: A. 55 B. 59 1/2 C. 60 1/2 D. 70 1/2
The best answer is D. Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 70 1/2.
