Unit 4: Session 7: Retirement Plans and Educational Funding Programs

Ways in which a Section 529 Plan differs from a Coverdell ESA include: - tax-free distributions when the funds are used for qualifying educational expenses. - higher contribution limits. - no earnings limitations. - contributions may be made by someone other than a parent or legal guardian.

2 & 3

As a general rule, loans from a 401(k) plan must be repaid within how many years? A)5 years. B)20 years. C)15 years. D)10 years.

A

Which of the following statements, with respect to nonqualified retirement plans, is TRUE? A)Employee contributions grow tax deferred if they are invested in an annuity. B)Employer contributions are tax deductible. C)The employer must abide by all ERISA requirements. D)Employee contributions are tax deductible.

A

Which one of the following statements regarding a characteristic or use of a Roth IRA is CORRECT? A)Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. B)Like regular IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. C)Roth IRA withdrawals are tax-deferred in their entirety regardless of the participant's age at withdrawal. D)Like regular IRAs, Roth IRA contributions may not be made after the participant attains age 70½.

A

In a qualified plan, if the employer makes all of the contributions, the employee's cost basis is: A)the value of the contributions. B)zero. C)the increase in value only. D)one-half of the contributions made.

B

Which of the following statements regarding ERISA is TRUE? A)It covers individual retirement accounts. B)It covers employees in the private sector. C)It covers employees in the public sector. D)It regulates banks and insurance companies.

B

If a retiree is paid an annual amount equal to 30% of the average of his last three years' salary, which of the following retirement plans offers this type of payment? A)Profit-sharing B)Money purchase pension C)Defined benefit ​pension D)Deferred compensation

C

One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate. A)This is prohibited as qualified plans cannot own real estate. B)An asset allocation model would not have 10% in real estate. C)This is not permitted because a prohibited party will benefit. D)This would only be permitted if the home were for his personal use.

C

What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year? A)The current maximum per parent. B)The current maximum per family member. C)The current maximum per child. D)The current maximum per couple.

C

Which one of the following statements regarding a characteristic or use of a Roth IRA is CORRECT? A)Like regular IRAs, Roth IRA contributions may not be made after the participant attains age 70½. B)Roth IRA withdrawals are tax-deferred in their entirety regardless of the participant's age at withdrawal. C)Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. D)Like regular IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan.

C

If a retiree is paid an annual amount equal to 30% of the average of his last three years' salary, which of the following retirement plans offers this type of payment? A)Money purchase pension B)Profit-sharing C)Defined benefit ​pension D)Deferred compensation

C - A retirement plan that establishes the retiree's payout in advance is a defined benefit plan. ​Profit sharing and money purchase pension plans are defined contribution plans.

All of the following are advantages of a 401(k) plan EXCEPT: A)the owner of the business may participate in the plan. B)employees and the business may reduce current taxes. C)tax deferral on the plan earnings is advantageous to employees. D)the employer may make unlimited contributions, which generate unlimited tax deductions for the business.

D

If Gerald turned age 70 on November 15, 2011, when was he required to take his first IRA distribution? A)1-Apr-12 B)31-Dec-12 C)31-Dec-11 D)1-Apr-13

D

Under ERISA, a fund manager wishing to write uncovered calls may do so: A)without restrictions. B)if approved by the IRS in writing. C)if explicitly allowed in the plan document. D)under no circumstances.

D

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A)The furnishing of office space to a plan trustee for reasonable compensation and fair rental value. B)A loan between a 401(k) plan and plan participant. C)None of these transactions constitute a prohibited transaction under the provisions of the legislation. D)An investment adviser using the interest from plan assets to cover the adviser's office expenses.

D

Who is obligated for the payment of taxes in an UTMA account? A)Donor B)Custodian C)Parent D)Child

D -UTMA and UGMA accounts are custodial accounts. They are for the benefit of the child and bear the child's Social Security number. Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child).

An individual has a substantial vested interest in his 401(k) plan at work. Which of the following is NOT an exception to the premature distribution penalty tax? A)Distribution made to purchase a principal residence. B)Distribution because of an employee's death or disability. C)Distribution to pay medical expenses that exceed 7.5% of adjusted gross income. D)Distribution made pursuant to a qualified domestic relations order.

A

When a corporation establishes a qualified money purchase plan, A)the corporation is obligated to make annual contributions at the rate stated in the plan B)the corporation can adjust the contribution rate based on company profits C)the employee is obligated to make annual contributions at the rate stated in the plan D)discrimination in favor of lower-compensated employees is encouraged

A

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A)It must be established under a trust agreement. B)It can permit regular direct cash payouts to participants before retirement. C)It must define a specific contribution amount. D)Contributions are required annually.

A

Which of the following could NOT participate in a Keogh plan? A)Limited partner who does not contribute any personal services to the partnership but has invested money. B)Spouse of a self-employed individual who works for the business. C)Employee of a self-employed individual. D)Self-employed individual who owns an IRA.

A - Keogh plan participants must work for the business. This may include a sole proprietor, a partner who works in the business, or an employee, but not a limited partner who contributes no personal services (meaning there is no compensation paid).

A customer would like to set aside some money for his grandson's college education in an Education IRA. Which of the following regarding an Education IRA is TRUE? A)The customer may make annual contributions until the grandson graduates from college. B)The maximum contribution permitted is $2,000 annually per donor. C)The customer may take a deduction for the amount contributed. D)The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over to an ESA established in the name of a family member.

D

A woman wishes to make a gift of securities to her niece's account under the Uniform Transfer to Minors Act, but the niece's custodian opposes the gift. All things considered, the woman may give the securities under which of the following circumstances? A)Only after obtaining the court's permission. B)Only if the niece approves. C)Only with the custodian's written approval. D)As she desires.

D - In a custodial account for a minor, any adult, whether related or unrelated, can make gifts to an open UTMA account. However, all gifts are irrevocable.

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations, after deductions and exemptions, how will the income in the UTMAs be taxed? Josh's income is taxed at his tax rate. Drake's income is taxed at his tax rate. Josh's income in excess of $2,100 is taxed at trust rates. Drake's income in excess of $2,100 is taxed at trust rates. A)I and IV B)I and II C)II and III D)III and IV

D -Because the income on the UTMAs is not considered to be earned income, the kiddie tax rules apply. Currently (2019), children younger than 19 have such income in excess of $2,100 taxed at the rate applicable to trusts

Which of the following statements are true about both an individual Roth IRA and a Roth 401(k) plan? - contributions are made with after-tax dollars. - one must have AGI below a certain level in order to maintain either Roth. - if all the conditions are met, withdrawals are tax-free. - there are no RMDs at age 70½.

1 & 3

Terry Bolton employs his 2 sons in the family gardening business. Josh is 12 years old and was paid $2,000 for the year. Drake is 14 years old and was paid $3,000 for the year. Which of the following are correct statements regarding the taxation of the income? - Josh's income is taxed at his tax rate. - Drake's income is taxed at his tax rate. - Josh's income is taxed at Terry's marginal tax rate. - Drake's income is taxed at Terry's marginal tax rate.

1,2 - As the money paid is earned income, it is not subject to the kiddie tax rules, regardless of age.

Who of the following would be permitted to contribute to an IRA? - An individual whose sole income consists of dividends and capital gains. - An individual, divorced prior to January 1, 2019, whose sole income is alimony and child support. - A self-employed attorney who has a Keogh plan. - A corporate officer covered by 401(k).

2, 3, 4

Which of the following statements about 401(k) plans are CORRECT? - 401(k) plans are a type of defined benefit retirement plan. - An employee's elective deferrals are made with pre-tax dollars. - Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis.

2,3

A nonqualified, single-premium variable annuity differs from a Keogh plan in that: A)all payouts are fully taxable in a Keogh plan. B)it is open to self-employed persons. C)earnings are tax deferred. D)both are subject to early withdrawal penalties.

A

Your client, Jane, died, and her 53-year-old son, Patrick, is the beneficiary of her IRA account. There is $750,000 in the account at the time of her death. All contributions were made with pretax dollars. Ten years later, the account has grown to $1.2 million, and Patrick begins to take distributions. The distributions will be: A)taxed on the amount withdrawn in a given year. B)100% taxable on the amount over $1 million. C)tax free because the estate paid the taxes at the time of Jane's death. D)taxable on the growth and earning since Jane's death.

A

A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2019 without having to pay gift taxes? A)$75,000 B)$150,000 C)An unlimited amount since a gift occurs only when he irrevocably changes the beneficiary D)$15,000

A - A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years worth may be used under this method (5 × $15,000 = $75,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $150,000. Please note: The annual exclusion was increased to $15,000 effective January 1, 2018.

Prohibited investments in an IRA would include all of the following EXCEPT A)stamps B)municipal bonds C)gems D)artwork

B

Where would you be most likely to find an IPS? A)IRA B)Defined benefit plan C)GRAT D)SPD

B - The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.

Withdrawals during retirement from which of the following accounts would most likely be subject to the greatest amount of taxation? A)Qualified variable annuity. B)Nondeductible traditional IRA. C)Roth IRA. D)Nonqualified variable annuity.

D

All of the following statements concerning Qualified Tuition Programs for educational funding are correct EXCEPT A)unless there is a change in beneficiary. assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months B)a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred C)prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future D)control over the account passes to the student/beneficiary once withdrawals commence

D - One of the advantages of QTPs (Qualified Tuition ​Programs, better known as Section 529 Plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12 month period.

As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences? - Encourage the daughter to go to graduate school and use the money for qualified expenses there. - Rollover the funds to a member of the beneficiary's family - Rollover the funds to a Coverdell ESA - Rollover the funds to the donor's IRA

1 & 2

GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to: A)permit the loan once you have been satisfied that there is adequate collateralization in place. B)refuse to allow this to happen as it would be a violation of your fiduciary responsibility. C)refuse to allow this to happen because the plan assets will suffer. D)permit the loan because the CFO is the plan trustee.

B

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT: A)Keogh plans. B)profit-sharing plans. C)deferred compensation plans. D)corporate pension plans.

C - Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

Company-sponsored 401(k) retirement programs have which of the following? - Voluntary employee contributions. - Voluntary employer contributions. - Mandatory employee contributions. - Mandatory employer contributions.

1 & 2

Which of the following is (are) TRUE regarding qualified pension plans? - They must not discriminate. - They must have a vesting schedule. - They must be in writing. - Every month the employer must update the current status of all accounts.

1,2,3

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must - offer plan participants at least ten different investment alternatives. - allow plan participants to exercise control over their investments. - allow plan participants to change their investment options no less frequently than monthly. - provide plan participants with information relating to the risks and performance of each investment alternative offered.

2 & 4

Under the minimum distribution rules and Uniform Table, Leslie is required to take a minimum distribution of $15,000 this year from her IRA. However, a distribution of only $10,000 has been made. What is the dollar amount of penalty that may be assessed in this situation? A)$7,500. B)$2,500. C)$5,000. D)$500.

B - The penalty for failure to make the correct amount of required minimum distribution is 50% of the difference between the minimum required amount and the actual distribution. In this case, this would be 50% of $5,000 ($15,000 − $10,000) or $2,500.

Jason, a recently divorced individual, is currently 55 years old and has built up approximately $400,000 in several initially funded and rollover individual retirement accounts (IRAs). He now wants to take an early distribution from one of these IRAs. Which one of the following distributions will escape the imposition of a tax penalty for early withdrawal? A)A distribution made upon separation of service from Jason's current Employer. B)A distribution made on account of financial hardship as determined by Jason's financial planner. C)A distribution made to Jason's ex-wife under a qualified domestic relations order (QDRO). D)A distribution made in payment for higher education costs of Jason's granddaughter.

D

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A)Salary and commissions B)Unemployment compensation C)Dividends paid on preferred stock D)Municipal bond interest

D

Once reaching the age of 70-½, required minimum distributions must be taken for participants in: - Keogh plans. - Roth IRAs. - SEP IRAs. - traditional IRAs.

1,3,4

When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options EXCEPT A)withdrawing all of the funds immediately B)keeping the money in the deceased's IRA C)withdrawing the funds over a 5-year period following the death of the owner D)opening a separate inherited IRA in the name of the deceased FBO the beneficiary

B

Which of the following statements regarding Roth IRAs is NOT true? A)Roth IRAs do not have required distributions. B)There is no age limit on making contributions to Roth IRAs. C)Distributions prior to age 59½ may be subject to penalty. D)Roth IRAs have higher contribution limits than traditional IRAs.

D

Which of the following statements regarding a traditional IRA is TRUE? A)Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. B)Distributions without penalty may begin after the age of 59-½ and must begin by April 1 of the year before an individual turns 70-½. C)Distributions before age of 59-½ are subject to a 10% penalty in lieu of income taxes. D)The income and capital gains earned in the account are tax deferred until the funds are withdrawn.

D

Allowable investments in an IRA would include A)collectible art B)rare stamps C)U.S. government issued silver eagles D)cash value life insurance

C - There are certain coins minted by the U.S. Treasury that are eligible for inclusion in an IRA. No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited.

Becky Biggins has an executive position with a large corporation that covers her under its defined benefit pension plan. This year, Becky's salary will top $235,000. Becky has no dependents and wishes to maximize funds that she can accumulate for her retirement. Becky could - not open a traditional IRA - open a traditional IRA but would not be able to deduct her contributions - open a Roth IRA - not open a Roth IRA

2 & 4

Many parents prefer to use a Section 529 Plan over a Coverdell ESA to finance their child's education plans because - contribution limits are higher - funds may be withdrawn tax-free if used for qualified secondary education expenses - there are no earnings limits - 529 contributions are tax deductible on the federal level

1 & 3

Which of the following statements about plan fiduciaries under ERISA are TRUE? - Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. - Plan fiduciaries must ordinarily diversify plan investments. - Plan fiduciaries are personally liable for fines if they violate their fiduciary duties.

2 & 3

Which of the following statements is NOT an accurate description of the Employee Retirement Income Security Act of 1974 (ERISA) guidelines? A)A uniform formula must determine all employees' benefits and contributions to ensure equitable and impartial treatment. B)Funds contributed to the plan need not be segregated from corporate assets providing they are in custodial accounts for the benefit of covered employees. C)Employees must be entitled to their entire retirement benefit even if they no longer work for the employer. D)Full time employees must be covered in a reasonable period, generally defined by ERISA as no more than one year.

B -Funds contributed to the plan must be segregated from corporate assets.

An IAR handling the portfolio of a senior citizen with diminished mental capacity is deemed to be acting as a fiduciary and, therefore, bound by the provisions of the Uniform Prudent Investor Act. Compliance with the act would require the IAR to: - make sure that the investment allocation is done prior to the renewal date of the contract. - use skill and caution in making investment recommendations. - carefully consider the risks of all investments. -seek to meet the client's objectives with minimum risk.

2, 3, 4

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that: A)a tax-exempt plan participant does not have to include plan distributions in his or her taxable income. B)a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants. C)a governmental plan cannot make a distribution before the participant attains age 70½. D)a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment.

B

Which of the following is TRUE of the tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement? A)The income is taxable as capital gains. B)The income is nontaxable. C)The income is taxable as ordinary income. D)The income is partly taxed as ordinary income and partly taxed as capital gains.

C - The employer has been making all of the contributions to the pension plan. Noncontributory means that the employee has made no contributions. Under the Internal Revenue Code, the income to the retiree from the plan is ordinary income.

A self-employed attorney has income of $110,000 per year. If he contributes $4,000 to his traditional IRA and has no other retirement plans, which of the following statements is TRUE? A) The contribution is not tax deductible. B)The contribution is not permitted. C)The contribution is fully tax deductible. D)The contribution is partially tax deductible.

C - Traditional IRA contributions are fully deductible no matter how much income is earned if the taxpayer is not covered by any other qualified plan. Anyone under the age of 70-½ with earned income can contribute to a traditional IRA.

Martha Mae Dixon passed away recently at the age of 87. Among the assets in her estate was an IRA with a value of $150,000. Mrs. Dixon's son, Jerome, a successful 52-year-old surgeon and a client of yours, was named as the beneficiary of the IRA. From a tax standpoint, which of the following options would you recommend to Mr. Dixon? A)Mr. Dixon should take the cash now and use the money fund a new IRA. B)A separate inherited IRA should be opened in Mrs. Dixon's name for the benefit of Jerome. C)Mr. Dixon should take the cash now and use a Section 1035 exchange into an annuity. D)Mr. Dixon should use the 5-year cash-out option.

B - When an IRA is inherited by a nonspouse, there are several different options available. From a tax standpoint, it is generally agreed that the most efficient choice is to create an inherited IRA in the name of the deceased for the benefit of the beneficiary. In this way, the beneficiary (Jerome) will be required to take RMDs using his life expectancy. That will result in much less tax (at least currently) than taking the money now or even over 5 years. One can assume that a successful surgeon is in a relatively high tax bracket. The Section 1035 exchange right does not apply when moving funds from an IRA, and inherited money is not considered earned income for purposes of funding an IAR.

Thomas, age 49, owns his own business and pays himself a salary of $80,000 per year. He employs his wife Grace, age 51 as receptionist and pays her $45,000 per year. What is the maximum deductible contribution that they could have made to their 2013 traditional IRA programs? A)They cannot make deductible contributions because their joint incomes are too high. B)They can contribute $5,500 to each of their individual IRAs. C)They can contribute a total of $5,500 only because they both work at the same business. D)They can contribute $5,500 to his IRA and $6,500 to hers.

D - They both could have made deductible contributions to their own respective IRAs for 2013. Because Grace is 51, she can take advantage of the $1,000 catch-up provision and, therefore, contribute $6,500 rather than Thomas' $5,500 limit. A taxpayer's income does not restrict the deductibility of the contributions unless one or both of the spouses are also covered under some other qualified plan. Even though Thomas could establish a Keogh or SEP, the question did not state that he had. Do not read more into the question than is there.

Paul Rogers is a participant in his employer's Section 401(k) retirement plan, having made both salary reductions as well as receiving employer matching contributions to his account over the past year. In the current year, Paul incurs a family medical emergency, causing him to take a hardship distribution from the plan. After taking this distribution, Paul comes into some found money and, instead, rolls over the amount of the hardship distribution into his traditional IRA. What is the taxable consequence, if any, of this distribution and rollover transaction? A)So long as it is treated as a loan under plan provisions, the distribution will be treated as tax free. B)The distribution is taxable in full as ordinary income since it is not eligible for rollover treatment. C)The portion of the distribution representing Paul's salary reduction contributions is tax free. D)The distribution is taxable but is eligible for a tax credit since it is made from a qualified plan.

B - A hardship distribution made from a Section 401(k) plan (or any other type of qualified plan) is not an eligible rollover distribution under law and is therefore taxable in full as ordinary income.