Retirement Plans

In 2018, 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. $45,000 B. $55,000 C. $65,000 D. $110,000

B. $55,000 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 $55,000 in 2018.

A variable annuity is a(n) A. exempt security under the Securities Act of 1933 B. non-exempt security under the Securities Act of 1933 because the purchaser bears the investment risk C. non-exempt security under the Securities Act of 1933 because the issuer bears the investment risk D. insurance product that is not defined as a security, and thus is not subject to securities regulations

B. non-exempt security under the Securities Act of 1933 because the purchaser bears the investment risk

A husband and wife are self-employed and have 3 children, ages 4, 7, and 9. They have a combined income of $300,000. They wish to open Coverdell ESAs for each of their children to pay for qualified education expenses. Which statement is TRUE? A. They can open the account for each child and make an annual $2,000 tax-deductible contribution for each B. They can open the account for each child and make an annual $2,000 non tax-deductible contribution for each C. They are prohibited from opening an account for each child because they earn too much D. They are prohibited from opening an account for each child because Coverdell ESAs cannot be opened by self-employed individuals

C. They are prohibited from opening an account for each child because they earn too much Both Roth IRAs and Coverdell ESAs are not available to high-earning individuals. There is an income phase-out range, above which contributions are prohibited to either of these. For 2018, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

An "annuity unit" of a variable annuity contract is a(n): A. share of common stock representing an interest in the underlying portfolio B. accounting measure of the owner's interest in the separate account C. accounting measure of the annuity amount to be received by the owner D. share of beneficial interest in a fixed portfolio

C. accounting measure of the annuity amount ot be received by the owner Once a variable annuity contract is annuitized, accumulation units are converted to annuity units. These determine the annuity payments to be made.

The separate account that the insurance company maintains for a variable annuity is: A. directly invested in common stocks B. invested in Legal List securities only C. invested in designated mutual funds D. invested in U.S. Government guaranteed securities

C. invested in designated mutual funds The separate investment account buys shares of a designated mutual fund. The performance of the mutual fund shares held in the separate account determines the amount of the annuity to be received.

For the year 2018, the maximum contribution that a married couple, both under age 50, can make to an IRA is: A. $5,500 B. $6,500 C. $8,250 D. $11,000

D. $11,000 For the year 2018, the maximum contribution to a spousal IRA is the lesser of 100% of income or $5,500 each in 2 accounts; for a total of $11,000.

A 50-year old becomes disabled and wishes to withdraw money from his IRA. With regard to the withdrawal, how will it be taxed? A. There will be no tax due B. The withdrawal is subject to income tax only C. The withdrawal is only subject to penalty tax only D. The withdrawal is subject to both income tax and a penalty tax for early withdrawal

b. The withdrawal is subject to income tax only If an individual becomes disabled before age 59 1/2, distributions can be taken without penalty tax. However, since income tax has never been taken on the withdrawal, it will be subject to regular income tax.

In 2018, individuals with earned income who are age 50 or over are permitted to make an extra annual IRA contribution of: A. $1,000 B. $2,000 C. $3,000 D. $4,000

A. $1,000 For the year 2018, the maximum annual contribution for an individual into an IRA is $5,500. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000.

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

B. 60 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.

When comparing Section 529 plans to Coverdell Education Savings Accounts, which statement is FALSE? A. The account may be opened by any adult B. Annual contributions are limited to $2,000 per beneficiary C. Earnings build in the account tax deferred D. Distributions to pay for higher education expenses are not taxable

B. Annual contributions are limited to $2,000 per beneficiary There is a maximum $2,000 annual contribution into a Coverdell Education Savings Account; there is no maximum annual contribution into a Section 529 account - any contribution limits are set by the state (and are typically quite high). Any adult can open either type of account for a beneficiary; contributions to either are not tax deductible; earnings build tax-deferred in both; and distributions to pay for qualified higher education expenses are not taxable for both.

If a distribution from a Coverdell Education Savings Account in a given year exceeds the beneficiary's qualified education expenses in that year, the: A. excess distribution is not taxable B. excess distribution is taxable and a 10% penalty is imposed C. entire distribution is not taxable D. entire distribution is taxable and a 10% penalty tax is imposed

B. excess distribution is taxable and a 10% penalty is imposed Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!

A salary reduction plan established by a for profit corporation that allows $7,000 per year (indexed for inflation) to be contributed, is a: A. SEP IRA Plan B. Defined Benefit Plan C. 401(k) Plan D. 403(b) Plan

C. 401(k) Plan 401(k) plans are so-called "salary reduction" plans that allow an individual to contribute a dollar amount annually that is tax deductible. The original contribution limit was set at $7,000 annually (in 1986), but this amount is indexed each year for inflation (for example, $18,500 can be contributed for tax year 2018). Tax deferred annuities (403(b) plans) allow non-profit employees to contribute up to 25% of income up to $18,500 in 2018.

Which of the following statements are TRUE regarding tax sheltered annuities for employees of non-profit organizations? I These are known as 401(k) plans II These are known as 403(b) plans III Monies contributed to this plan are excluded from taxable income IV Monies contributed to this plan are included in taxable income A. I and III B. I and IV C. II and III D. II and IV

C. II and III Tax deferred annuities for employees of non-profit organizations are 403(b) plans. These retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.

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

A. 6% of the excess contribution 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.

If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the "AIR" the annuity payment: A. will increase B. will decrease C. is unaffected D. is capped to a maximum amount

A. will increase The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.

Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II Annual contribution amounts will vary III If the corporation has an unprofitable year, the contribution may be omitted IV If the corporation has an unprofitable year, the contribution must still be made A. I and III B. I and IV C. II and III D. II and IV

B. I and IV 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. If the corporation has an unprofitable year, it must still make the contributions.

Payments received by the owner of a tax qualified variable annuity are: A. 100% taxable as investment income B. only taxable to the extent of earnings above the holder's cost basis C. only taxable to the extent of the holder's cost basis D. non-taxable

A. 100% taxable as investment income Funds paid into "tax qualified" retirement plans were never subject to tax, since the contribution amount was deductible from income at the time it was made. Earnings build up tax deferred in the plan. When distributions are taken, since all of the dollars in the plan were never taxed, all of the distribution is taxable. Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed; while the portion that represents the tax deferred earnings buildup is taxable.

Which recommendation would be most suitable for a 40-year old client whose main objective is retirement income and preservation of capital? A. Fixed deferred annuity B. Fixed immediate annuity C. Variable deferred annuity D. Variable immediate annuity

A. Fixed deferred annuity Because this customer is looking for income in retirement and he or she is only 40 years old, a deferred annuity is the right choice. Because the customer wants preservation of capital, a fixed annuity ensures a fixed guaranteed growth rate, while the growth rate of a variable annuity can go higher, or lower, or negative. So for preservation of capital, a fixed annuity is best. Note that at retirement age, the holder of an annuity can opt for a lump sum payment instead of taking annuity payments, and a fixed annuity guarantees a fixed amount of capital at retirement age, whereas a variable annuity does not.

Maximum income limits that reduce permitted contributions do NOT apply to: I IRAs II Spousal IRAs III Roth IRAs IV Coverdell Education Savings Accounts A. I and II B. III and IV C. I and III D. II and IV

A. I and II As one's income increases, permitted contributions to Roth IRAs and Coverdell Education Savings Accounts are phased out (so high earning persons cannot contribute to these accounts). However, there is no income limit for making a contribution to a Traditional IRA or spousal IRA (however, if the contributor is covered by another qualified retirement plan and earns too much, the permitted contribution may not be tax deductible).

Which statements are TRUE? I Distributions from a 529 plan to pay for higher education costs are not taxable II Distributions from a 529 plan to pay for higher education costs are taxable III Distributions from a Coverdell ESA to pay for qualified education costs are not taxable IV Distributions from a Coverdell ESA to pay for qualified education costs are taxable A. I and III B. I and IV C. II and III D. II and IV

A. I and III Contributions to both Coverdell ESAs and 529 plans are not tax deductible. Earnings build tax-deferred in both. Distributions from both, when used to pay for appropriate educational expenses, are not taxable. Coverdell ESA distributions can be used without limit to pay for all levels of education. 529 plan distributions can only be used without limit to pay for college and higher; distributions to pay for education below the college level are limited to $10,000 per year. High earning individuals cannot open a Coverdell; there is no similar restriction on a 529 plan. Coverdell ESA contributions are limited to $2,000 per child per year; 529 plan contribution limits are set by each state and are much higher.

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

A. The amount withdrawn is subject to regular income tax only 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.

In 2018, a self-employed individual has an adjusted gross income of $100,000 per year. This person has no other retirement plan and contributes $5,500 to an Individual Retirement Account. Which statement is TRUE? A. The contribution is fully tax deductible B. The contribution is partially tax deductible C. The contribution is not tax deductible D. The contribution is prohibited because income limitations are exceeded

A. The contribution is fully tax deductible If a person is not covered by another retirement plan, contributions to an IRA are tax deductible, without any income limitation. If the person is covered by another plan, as that person's income rises, the tax deduction for the IRA contribution phases out.

Which statement is FALSE about a SIMPLE IRA? A. The maximum annual contribution is the same as 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 only available to small employers D. The employer must make a matching contribution

A. The maximum annual contribution is the same as for a Traditional IRA 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 administer than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $12,500 (in 2018) 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.

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

A. employee retirement funds from employer mismanagement

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

A. the amount withdrawn is subject to regular income tax only 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 a corporation has an unfunded pension liability, this means that: A. the expected future value of fund assets is less than projected benefit claims B. the expected future value of fund assets is more than projected benefit claims C. inflation has eroded the value of the portfolio funding the plan D. existing retirees' benefit claims are not being met

A. the expected future value of fund assets is less than projected benefit claims 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.

A woman in the highest tax bracket has $105,000 to invest for her teenage child's college education. She wants to make sure that, if he doesn't attend college, that he will not have access to these funds. She should be advised to make the investment in a: A. Coverdell ESA B. 529 Plan C. UTMA account D. Growth mutual fund

B. 529 Plan The keys here are that the parent wishes to maintain control and wishes to save for college. A 529 plan allows the parent to maintain control - the kid has no access to the account. There are no income limits on opening a 529 Plan, and this parent is in the highest tax bracket. She cannot open a Coverdell ESA because these are not available to high earners. An UTMA account would allow the kid to control the account at the age of transfer, so this is not the best choice. A growth mutual fund would be taxable each year, while the purchase of a growth mutual fund in a 529 plan would grow tax free. The 529 plan is the way to go!

Any changes in value of a variable annuity accumulation unit are directly related to changes in the: A. Standard and Poor's 500 Average B. Value of the securities funding the separate account C. Consumer Price Index D. Dow Jones Averages

B. Value of the securities funding the separate account Since the separate account of investments funds a variable annuity, accumulation unit values are directly influenced by changes in the values of the securities in the separate account.

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

B. Annual contributions to the Individual Retirement Account can continue and are an adjustment to income each year 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 $73,000 per year for an individual in year 2018; between $63,000 - $73,000 the deduction phases out), the contribution is not tax deductible. This person makes $40,000 per year, so the IRA contribution is tax deductible.

Which statement is TRUE about Roth IRAs? A. Contributions are tax deductible; distributions after age 59 1/2 are not taxed B. Contributions are not tax deductible; distributions after age 59 1/2 are not taxed C. Contributions are tax deductible; distributions after age 59 1/2 are taxed D. Contributions are not tax deductible; distributions after age 59 1/2 are taxed

B. Contributions are not tax deductible; distribution after age 59 1/2 are not taxed Roth IRAs, unlike Traditional IRAs, do not permit a tax deduction for the amount contributed. On the other hand, when distributions are taken, unlike a Traditional IRA, the distributions are not taxable (given that the investment has been held for at least 5 years).

A customer wishes to open an account to fund payment of private middle school tuition. If the customer does not wish to deposit more than $2,000 per year and wishes to get a tax benefit, the best advice is for the customer to open a: A. 529 Plan B. Coverdell ESA C. Trust account D. UTMA account

B. Coverdell ESA The question meets the definition for a Coverdell ESA. Any adult can open a Coverdell for a child (as long as the adult's income is not too high), and the maximum annual contribution of $2,000 is not tax deductible. The account builds tax-deferred. Funds can be withdrawn without tax due to pay for "qualifying" education expenses, which include the cost of elementary, middle school, high school, and vocational school, as well as college costs. 529 plans are typically used to fund college and the contribution amounts are much higher because college is expensive. This type of account would have deposits that are much higher than $2,000 per year. Trust accounts and UTMA accounts could be used to pay for middle school, but there is no tax-deferral on these accounts - earnings are taxable each year.

Which of the following statements are TRUE about a Life Annuity? I A Life Annuity will cease when the person dies II A Life Annuity will continue to pay to a beneficiary if the person dies before a stated date III The periodic payment for a Life Annuity will be lower than the periodic payment for a Period Certain annuity IV The periodic payment for a Life Annuity will be higher than the periodic payment for a Period Certain annuity A. I and III B. I and IV C. II and III D. II and IV

B. I and IV A life annuity ceases when that person dies. A life annuity-period certain continues to a beneficiary if the person dies prior to the end of the "certain period." For example, if a life annuity-10 year period certain is purchased, and the purchaser dies after the 3rd year, the annuity continues to pay to a beneficiary for another 7 years. Because of the minimum guaranteed payment period, the periodic payment amount is lower than a simple life annuity (since the insurance company must pay for a longer guaranteed time period).

For an investor who has a Keogh Plan, which of the following statements are TRUE? I The plan is a tax qualified II The plan is non-tax qualified III Once distributions commence at age 59 1/2 or later, only the tax deferred build-up is taxed IV Once distributions commence at age 59 1/2 or later, both the original investment and the build-up are taxed A. I and III B. I and IV C. II and III D. II and IV

B. I and IV Keoghs are tax qualified retirement plans for self employed individuals. The investment in a Keogh plan is tax deductible; and the earnings in the plan "build-up" tax deferred. Since none of the dollars were ever taxed, 100% of all distributions from Keoghs are taxable.

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

B. I and IV 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 $135,000 and couples that earn over $199,000, in 2018, cannot open Roth IRAs.** They can open Traditional IRAs, however.

Which statement is TRUE about changing the beneficiary on a Coverdell Education Savings Account? A. The beneficiary cannot be changed on a Coverdell ESA B. The beneficiary can be changed to any relative of the same or later generation C. The beneficiary can be changed to any relative D. The beneficiary can be changed to another individual attending school

B. The beneficiary can be changed to any relative of the same or later generation The donor controls the funds in a Coverdell ESA and the funds can be transferred from one beneficiary to another beneficiary (e.g., transfer of the funds from a daughter to an account for a son). Note that the money cannot be transferred to a relative that is in an older generation, however.

A 529 plan is set up for a child in state A. The child attends a college in state B. Which statement is TRUE? A. The funds in the 529 Plan are not portable and can't be used to pay for college in state B B. The funds in the 529 Plan are portable and can be used to pay for college in state B C. The funds must be transferred into a 529 Plan in state B if they are going to be used to pay for college in state B D. The child must renounce his or her residency in state A and become a resident of state B in order to use the funds in the 529 Plan for college in state B

B. The funds in the 529 Plan are portable and can be used to pay for college in state B As long as the funds are used to pay for college, 529 Plans are completely portable - the money can be used to pay for college in any state.

A client, age 35, is covered by a 401(k) plan at work and also has set up an IRA account. He has been contributing the maximum amount to each of these each year. He lives frugally and has excess income available for investment. He asks you, the registered representative, for an appropriate recommendation to add to his retirement savings. Which recommendation is appropriate? A. 529 Plan B. Variable Annuity C. Keogh Plan D. SEP IRA

B. Variable Annuity Anyone can contribute to a non-qualified variable annuity, with no contribution limits. It makes no difference if the customer is covered by another qualified plan. The contribution is not deductible, but the separate account builds tax deferred. Upon retirement, only the portion of any distribution representing the tax-deferred build up is taxable. 529 Plans can only be used to pay for higher education expenses; Keogh plans can only be set up by self-employed individuals; and SEP IRAs can only be established by businesses for their employees.

A customer has a 3-year old child and wishes to begin saving for the kid's college education using a tax advantaged investment. The best investment option to meet the customer's objective is a(n): A. zero-coupon bond investment B. age weighted 529 plan C. Coverdell ESA D. UGMA account

B. age weighted 529 plan State sponsored 529 Plans allow much bigger contributions to be made. They grow tax-free as well and are not subject to income limitations. Since college is expensive, socking away more money is definitely better! Furthermore, an "age weighted" 529 plan varies the investment mix based upon the beneficiary's age - in early years weighting the investments towards growth; and in later years, when distributions are needed for college, weighting the investment mix towards income. Thus, an "age weighted" 529 plan is the best choice to meet the customer's objective.

Distributions from an Individual Retirement Account must commence: A. by April 1st of the year preceding that person reaching age 70 1/2 B. by April 1st of the year following that person reaching age 70 1/2 C. upon reaching age 70 1/2 D. upon reaching retirement

B. by April 1st of the year following that person reaching age 70 1/2 Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 70 1/2.

A 60-year old man wishes to receive an annuity payment for himself and his beneficiary for at least 15 years. The recommended payout option is: A. life annuity B. life annuity - period certain C. life annuity - unit refund D. installments for a designated amount

B. life annuity - period certain A life annuity-period certain will pay for one's life, however if that person dies early, the annuity will still pay for a designated period. In this case, the period certain would be 15 years. A life annuity simply pays for one's life. Once that person dies, payments cease. A unit refund annuity pays the remaining balance as a lump sum if the annuitant dies "early". The annuity option that chooses installments for a designated amount allows the annuitant to choose the monthly amount to be received. Payments continue for that amount until the account is exhausted.

All of the following statements are true about SEP IRAs EXCEPT: A. the plan is established by the employer B. the plan is only available to companies with 100 or fewer employees C. the annual contribution percentage can be changed D. the maximum annual contribution is significantly greater than for a Traditional or Roth IRA

B. the plan is only available to companies with 100 or fewer employees 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 $55,000 in 2018). 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. Also note that this type of plan is available to any size business - in contrast, SIMPLE IRAs are only available to business with 100 or fewer employees.

A grandmother wishes to make a gift into her grandson's 529 college savings plan. What is the maximum that can be contributed without incurring gift tax liability? A. 1 times the annual gift tax exclusion amount B. 2 times the annual gift tax exclusion amount C. 5 times the annual gift tax exclusion amount D. 10 times the annual gift tax exclusion amount

C. 5 times the annual gift tax exclusion amount A tax benefit offered by 529 plans is a 1-time gift that can be made into the account equal to 5 times the current gift tax exclusion, without the donor worrying about having to pay gift tax. Since the current exclusion is $15,000 in 2018, 5 times this amount or $75,000 can be donated as a 1-time gift and not be subject to gift tax.

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

C. Federal Government Plans 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

An annuitized account in a variable annuity is most similar to: A. a mutual fund B. a whole life insurance unit C. pension payments D. an individual retirement account

C. pension payments Once a variable annuity separate account interest is "annuitized," the holder gets a fixed number of annuity units. Each month, the holder gets a payment equal to the fixed number of units x the unit value (which varies based upon the performance of the underlying investments). The payments continue for life. Thus, an annuitized account is most similar to pension payments.

Health Saving Accounts (HSAs): I can be established by all employers that offer health insurance plans II can only be established by employers that have high deductible health insurance plans III are funded with tax-deductible contributions IV are funded with non tax-deductible contributions A. I and III B. I and IV C. II and III D. II and IV

C. II and III Health Savings Accounts (HSAs) were first authorized by Congress starting in the beginning of 2004. They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees. More employers are adopting these high-deductible plans coupled with HSAs as a way of reducing, or slowing the growth of, their health insurance expenses. The HSA permits the employer or employee to make a deductible contribution in 2018 of up to $3,450 for a single individual; or $6,900 for a family; to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free.

ABLE accounts are: I used to save funds on a tax-deferred basis to pay for medical expenses II used to save funds on a tax-deferred basis to pay for the ongoing care of disabled individuals III regulated by the MSRB IV regulated by FINRA A. I and III B. I and IV C. II and III D. II and IV

C. II and III ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.

LGIPs marketed by broker-dealers are: I defined as a type of investment company II defined as a municipal fund security III regulated by the MSRB IV regulated by the SEC A. I and III B. I and IV C. II and III D. II and IV

C. II and III An LGIP is a "Local Government Investment Pool." It is an investment fund set up under state law that is only offered to local municipal governmental entities in that state. For example, if a town in a state has collected its real estate taxes, but has not yet spent those funds, it can put the balance in that state's LGIP. The LGIP is managed to provide a safe investment return. The MSRB takes the stance that if an LGIP retains a broker-dealer to market its offerings in that state, then it is a municipal fund security subject to MSRB rules. On the other hand, if the LGIP uses its own employees to market itself to local state governmental entities, then it is not subject to MSRB rules.

Which of the following statements is (are) TRUE regarding variable annuity contracts? I The principal amount is guaranteed prior to annuitization by the insurance company that issues the contract II The principal amount is guaranteed after annuitization by the insurance company that issues the contract III The contract holder loses control of the principal amount prior to annuitization IV The contract holder loses control of the principal amount after annuitization A. I and III only B. II and IV only C. IV only D. I, II, III, IV

C. IV only In a variable annuity contract, the principal amount is never guaranteed. The principal value may increase or decrease, depending on the performance of the separate account. The "investment risk" is borne by the contract holder, not the insurance company. Regarding the statement about the contract holder "losing control of the principal," this relates to the contract holder's ability to change the terms of the payout from the contract. Prior to annuitization, the contract holder is allowed to change his payout option, thus he has control over how the principal will be disbursed. However, once the contract is "annuitized," the contract holder cannot change the payout option - he or she loses control over the principal. (Please note that the term "losing control over the principal" does not refer to how the investment manager decides to invest the funds in the separate account.)

Which annuity payout option usually results in the largest periodic payment? A. Unit Refund Annuity B. Joint and Last Survivor Annuity C. Life Annuity D. Life Annuity-Period Certain

C. Life Annuity The shorter the expected annuity period, the larger the payment. A life annuity lasts only for that person's life - this is the shortest expected period of those given. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

A single mother has 2 children, ages 5 and 9. She earns $150,000 per year and wishes to open Coverdell ESAs for each child to pay for qualified education expenses. Which statement is TRUE? A. She can open the account for each child and make an annual $2,000 tax-deductible contribution for each B. She can open the account for each child and make an annual $2,000 non tax-deductible contribution for each C. She is prohibited from opening an account for each child because she earns too much D. She is prohibited from opening an account for each child because Coverdell ESAs are only available to married couples with children

C. She is prohibited from opening an account for each child because she earns too much Both Roth IRAs and Coverdell ESAs are not available to high-earning individuals. There is an income phase-out range, above which contributions are prohibited to either of these. For 2018, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

To sell variable annuities, a salesperson must be registered with all of the following EXCEPT (the): A. FINRA B. State Insurance Commission C. State Banking Commission D. SEC

C. State Banking Commission To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. The salesperson must also be registered in the state to sell this non-exempt security under the state's "Blue Sky" laws. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.

In 2018, 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

D. $7,500 If an employer earns $275,000 or more and contributes the maximum of $55,000 to a Keogh in 2018, 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 $55,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $275,000. $275,000 - $55,000 = $220,000 of "after Keogh deduction" income. $55,000/$220,000 = 25%. Thus, for the nurse, $30,000 of income x 25% = $7,500 contribution.

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

D. 50% of the shortfall 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!

Contributions to Individual Retirement Accounts 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. December 31st of the calendar year after which the contribution may be claimed on that person's tax return D. April 15th of the calendar year after which the contribution may be claimed on that person's tax return

D. April 15th of the calendar year after which the contribution may be claimed on that person's tax return Contributions to Individual Retirement Accounts must be made by April 15th (tax filing date) of the year after the tax filing year. For example, a contribution for tax year 2018 must be made by April 15th, 2019.

Contributions to Keogh Plans 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. December 31st of the calendar year after which the contribution may be claimed on that person's tax return C. April 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return D. August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return

D. August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return 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 statement is TRUE about Coverdell Education Savings Accounts? A. Contributions are tax deductible; Distributions are taxable B. Contributions are tax deductible; Distributions are not taxable C. Contributions are not tax deductible; Distributions are taxable D. Contributions are not tax deductible; Distributions are not taxable

D. Contributions are not tax deductible; Distributions are not taxable Contributions to Coverdell Education Savings Accounts are not tax deductible; and distributions from Coverdell Education Savings Accounts to pay education expenses are not taxable.

All of the following statements are true about Health Savings Accounts EXCEPT: A. HSAs are only appropriate for those individuals covered by high-deductible health insurance plans B. HSAs can be set up to include dependents of the covered individual C. HSA contributions are tax deductible D. HSA contributions are subject to phase-out when an individual's income exceeds $250,000

D. HSA contributions are subject to phase-out when an individual's income exceeds $250,000 The HSA permits the employer or employee to make a deductible contribution in 2018 of up to $3,450 for a single individual, or $6,850 for a family, to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free. There are no income phase out rules for HSA

Which statements are TRUE when comparing UTMA Custodian Accounts to Coverdell Education Savings Accounts? I Contributions to UTMA accounts are deductible for Federal income tax purposes II Contributions to UTMA accounts are not deductible for Federal income tax purposes III Contributions to Coverdell Education Savings Accounts are deductible for Federal income tax purposes IV Contributions to Coverdell Education Savings Accounts are not deductible for Federal income tax purposes A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Custodian accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the dollar amount that can be donated into the account. There is no tax deduction for the donor for the contribution and earnings in the account are taxable annually to the minor. Because all of the funds in the account represent "after-tax" dollars, there is no tax liability when funds are withdrawn. Coverdell Education Savings accounts can be opened by any adult for a minor, with annual contributions into the account limited to $2,000. The contribution amount is not deductible. Earnings build tax-deferred; and when distributions commence, as long as they are used to pay for that minor's education expenses, the distribution is not taxable (a major tax benefit). Also note that high earning individuals cannot open Coverdell ESAs.

Which statements are TRUE about Roth IRAs? I Contributions must cease at age 70 1/2 II Contributions can continue after age 70 1/2 III Distributions must start after age 70 1/2 IV Distributions are not required to start after age 70 1/2 A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Unlike Traditional IRAs, Roth IRA contributions can continue after age 70 1/2, as long as that person has earned income. And unlike Traditional IRAs, there are no required minimum distributions after age 70 1/2 for Roth IRAs.

An ABLE account: I must be established prior to the beneficiary reaching age 18 II must be established prior to the beneficiary reaching age 26 III is used to pay only for the medical expenses incurred by a disabled individual IV is used to pay for the qualified ongoing expenses incurred by a disabled individual A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.

All of the following are variable annuity payment options EXCEPT: A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor D. Joint Tenants with Rights of Survivorship

D. Joint Tenants with Rights of Survivorship Annuity payment options include a life annuity; life annuity with a period certain (which pays for a minimum guaranteed period, regardless); and a joint and last survivor annuity (which covers 2 lifespans, such as both a husband and wife). Joint tenants with rights of survivorship is an ownership option for a joint account, where each tenant 100% owns the account (typical for a husband and wife).

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

D. The date on which the tax return is filed with the Internal Revenue Service 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 annuity payment options will pay the estate of the annuitant if the full value of the account was not received? A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity

D. Unit Refund Annuity If the holder of a unit refund annuity dies before receiving the full investment value from the separate account, his or her estate gets a "refund" of the remaining value.