Unit 6 Book 2

David, a 63-year-old investor, wants to know which of the following penalties he might be subject to at some point if he continues tax deductible contributions to his traditional IRA. The applicable penalties are a:

50% minimum distribution penalty. 6% penalty on excess contributions.

Derek owns a Roth IRA with a current value of $200,000. He turns 70½ years old on August 23, 2019. Which of the following statements is CORRECT?

Derek can continue making contributions to his Roth IRA assuming he has qualifying earned income.

The premature distribution penalty does not apply to which of the following IRA distributions?

A distribution made for purpose of paying qualified higher education costs. A distribution paid to a beneficiary after the death of the IRA owner who had not begun receiving minimum distributions.

David, who turned age 70½ on June 30, 2019, owns 10% of BCB Company. He has accumulated $5 million in BCB's stock bonus plan as of December 31, 2018 and $5.5 million as of December 31, 2019. The uniform lifetime table distribution factor for age 71 is 26.5. If David receives a distribution of $180,000 during 2019, how much in penalties will he be required to pay for 2019?

$0

Mike participates in a Section 401(k) plan maintained by his employer. His vested account balance is $18,000, and he has not taken any plan loans. What is the maximum loan amount Mike can take from his Section 401(k) plan?

$10,000.

Rudy attained age 70½ in March 2018. Rudy will be 71 years old on December 31, 2019. His distribution period is 27.4 years for age 70 and 26.5 years for age 71. If Rudy's IRA balance is $500,000 on December 31, 2018, what is his required minimum distribution for 2019?

$18,868.

The premature distribution penalty does NOT apply to which of the following qualified plan distributions?

A distribution made on or after the attainment of age 59½. A distribution made to a qualified plan participant's beneficiary or estate on or after the participant's death. A distribution made on or after the participant's disability. A distribution that is part of a series of substantially equal periodic payments made at least annually over the life or life expectancy of the participant.

Rhett is 65 years old and is retiring from Widgets, Inc. Rhett has a Section 401(k) plan with Widgets, Inc., as well as a traditional IRA that he established 12 years ago. He is currently looking at his distribution and rollover options regarding his retirement plans. Which of the following distributions or rollovers from retirement plans is (are) subject to the 20% withholding rule?

A partial distribution from a qualified plan directly to the participant.

Required minimum distributions from a traditional IRA must begin no later than:

April 1 of the year following the year in which the IRA owner attains age 70½.

Allison retired five years ago. She will be 70 years old on February 28, 2019. When must Allison begin taking distributions from her Section 401(k) plan?

April 1, 2020.

Retirement plan participants who wish to take advantage of the plan's loan provision must agree to the following restrictions on the amount of the loan and how it is repaid:

Generally, a participant may borrow no more than $50,000 or one-half of the vested account balance, whichever is less. A participant's loan must be repayable by its terms within 5 years, except if the loan is used to acquire a participant's principal residence.

Dexter, who turned age 70½ on June 30, 2019, owns 10% of BCB Company. He has accumulated $5 million in BCB's stock bonus plan as of December 31, 2018 and $5.5 million as of December 31, 2019. Which one of the following statements is CORRECT?

He can roll his account balance over into a rollover IRA when he terminates employment.

The 20% mandatory withholding requirement applies to distributions from all of the following EXCEPT:

IRA

Under the required minimum distribution (RMD) rules for IRAs, a penalty tax of:

50% is assessed on the amount of required minimum distribution not taken before the required date.

A participant's loan from a qualified plan, Section 403(b) plan or governmental Section 457 plan for the purpose of purchasing a principal residence is considered qualified residence interest and it is deductible if the participant itemizes. Under what circumstance is this loan interest not deductible?

If the loan is made to a greater than 5% owner of the employer. If the loan is made to an officer of the company earning more than $180,000 in 2019. If the loan is made to a greater than 1% owner with income greater than $150,000.

Which of the following statements regarding loans from qualified plans are CORRECT?

Loans must bear reasonable rates of interest. Generally, loans must be repaid within 5 years. Loans used to acquire a personal residence may exceed 5 years. A loan of up to $10,000 may be made, even if it is greater than one-half of the participant's vested plan balance.

Which of the following statements regarding qualified plan distributions and IRA rollovers is CORRECT?

Plans are required to provide participants with the option of rolling over distributions.

The rules that apply to all rollovers are:

Required minimum distributions (RMDs) may not be rolled over. The distribution to the participant must be rolled over within 60 days of distribution receipt. Both the existing plan and the rollover plan must be legally eligible retirement plans or IRAs. If the distribution is not rolled over within the required time frame, the distribution becomes taxable.

Which of the following retirement plans generally have loan provisions?

Section 403(b)plans. Section 401(k) plans.

Tony, age 65, is a non-owner employee of Widget, Inc. He wants to defer his retirement from Widget, Inc. until age 75 and continue to work. Tony contributes 6% of his pay to the Section 401(k) plan, and his employer matches 100%. Which of the following statements regarding Tony's distribution options is CORRECT?

Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he retires if he does retire after age 70½.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump sum distribution is CORRECT? The NUA portion is:

taxed at the capital gains rate when the stock is sold.

Under the IRA minimum distribution rules, if the IRA account owner dies before distribution payments begin:

the beneficiary can begin receiving distributions based on the beneficiary's individual life expectancy.

A preretirement distribution from a qualified retirement plan can escape the 10% penalty in each of the following situations EXCEPT:

the distributions must be made after a separation from service for early retirement at any age.

Required minimum distributions from a qualified plan must be calculated using the Uniform Lifetime Table in all cases EXCEPT:

when the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant.

Gary is 56 years old and has a traditional IRA comprised of deductible contributions. He will withdraw $25,000 from the account to use as a down payment on a second home to be used as a winter retirement home. What are the tax ramifications of this withdrawal?

The withdrawal is subject to ordinary income tax and a 10% early withdrawal penalty tax.

Emma is a school librarian and participates in a Section 403(b) plan at work. Four years ago, she borrowed $10,000 from the plan. Eight months ago, she made the final payment of $1,000 to pay off that loan. Her vested account balance is currently $400,000. What is the maximum loan amount Emma can take from the plan this year?

$49,000.

Henry is a 72-year old retired engineer. The required minimum distribution from his Section 401(k) plan this year was $20,000, but he withdrew only $8,000 from the plan. As a result, the IRS will impose an excise tax of:

$6000

Steve retired from ABC Corporation this year and received a lump sum distribution from ABC's qualified retirement plan. The distribution consisted entirely of ABC stock valued at $200,000 on the date of distribution. The fair market value of the stock at the time of contribution to the plan was $80,000. Assuming Steve does not sell the stock this year, what amount is included in Steve's gross income this year as a result of the distribution?

$80,000.

Shawn, age 32, needs $10,000 for the purchase of a primary residence. She has no other source of funds at her disposal. Her Section 401(k) plan allows participant loans. The current value of Shawn's deferral account is $14,000 of which $9,500 is her aggregate vested balance. What is the maximum loan Shawn can take from the Section 401(k) plan?

$9,500.

When a participant must decide how to take a retirement plan distribution, which of the following factors should be considered?

How the benefit will be used. The amount of the distribution. The participant's life expectancy. If the participant needs both the principal and income or just the income to support his lifestyle.

Which of the following is (are) NOT subject to 20% mandatory federal income tax withholding if a rollover is not a direct transfer?

IRA rollovers

Charles was an employee of ABC Corporation for 20 years. He received a lump sum distribution from his qualified retirement plan this year. The distribution was comprised entirely of ABC stock valued at $100,000 on the date of distribution. The value of the stock contributed to Charles's individual account in the plan over the years was $70,000. If Charles does not sell the stock this year, what amount is included in his gross income this year as a result of the distribution?

$70,000

Thomas received a lump sum distribution of 10,000 shares of stock from his employer's stock bonus plan valued at $1 million when he separated from his employer at age 60. The value of the stock at the time of contribution to the plan was $250,000. What are the tax consequences of this distribution?

$750,000 is treated as net unrealized appreciation (NUA). The NUA is not taxed upon distribution. Thomas' adjusted basis in the shares is $250,000. The $250,000 is taxable as ordinary income in the year of the lump sum distribution.

A client reaches age 70½ on March 15 of the current year and must begin to receive a required minimum distribution (RMD) from his traditional IRA. The client's IRA had a value of $132,500 at the end of last year. The distribution period for a 70-year-old individual is 27.4, and for a 71-year-old individual it is 26.5. If the client takes a $3,500 distribution April 1 of next year, what will be the amount of the minimum distribution tax penalty, if any?

$750.

Ray has an IRA with a balance of $300,000 as of the end of last year. He has named his spouse, Joanna, as the beneficiary. On December 31, 2019, Ray will be 71 years old and Joanna will be 51 years old. Under the uniform lifetime table, the distribution period for Ray at age 71 is 26.5. Their joint life expectancy is 34.2 years. What is the amount of Ray's required minimum distribution?

$8,772.

Which of the following may be eligible for rollover treatment?

A total distribution from a Section 401(k) plan. A distribution from an IRA. The nontaxable portion of qualified plan distribution.

Which of the following statements regarding Roth IRAs is CORRECT?

Distributions from one Roth IRA can be rolled over tax free to another Roth IRA. Amounts in a traditional IRA can be converted to a Roth IRA. Funds from qualified pension, profit-sharing, stock bonus, Section 401(k), Section 403(b), and Section 457 plans can be converted to a Roth IRA.

Which of the following statements concerning lump-sum distributions of retirement funds is NOT correct?

Distributions from qualified plans, SEP plans, SIMPLE plans, and Section 403(b) annuities may qualify for special lump-sum distribution tax treatment.

Which of the following are exceptions to the imposition of the 10% early distribution penalty for IRA withdrawals?

Owner's death.

Which of the following statements regarding IRA rollover contributions is CORRECT?

The ability to roll over benefits from an employer-sponsored, tax-sheltered retirement plan to an IRA gives plan participants the opportunity to defer income taxes and to continue to accrue tax-deferred interest until distributions are needed for retirement. The ability to roll over benefits from an employer-sponsored tax-sheltered retirement plan to an IRA gives the plan participant complete control over the investment direction of retirement funds as well as the timing of distributions. Distributions from a qualified plan (except life insurance distributions) or from an individual retirement arrangement can be made on a tax-free basis if the distribution is reinvested within 60 days in an IRA.

Which of the following statements regarding the Section 72(t) early distribution penalty is NOT correct?

The tax does not apply to any distribution from a Roth IRA.