ACE 449: Exam 1
9.4 Carrie is 70 ½ on January 31, 2015. The fair market value of her IRA account is $185,000 on December 31, 2015. The Uniform Life time table considers her life expectancy to be 27.4 years at age 70 and 26.5 at age 71. Calculate the RMD for 2015. A. $6,981.13 RMD due by 4.1.16 B. $6,751.82 RMD due by 4.1.16 C. $6,751.82 RMD due by 12.31.15 D. $6,981.13 RMD due by 12.31.16 RMD is 185000*(use at 71)26.1=6981.13 and then in the first year of distributions, they are due by 4/1. **Exam Question
A. $6,981.13 RMD due by 4.1.16
9.3 Kathleen is a participant in a qualified plan from which she will receive annuity payments of $4,200 per month for an expected period of 30 years. She has an adjusted basis in the qualified plan of $250,000. Which is a true statement? A. 16.53 % per month is excluded from Ordinary Income B. $1,500,000 is the denominator in the calculation C. $3,505.74 is return of basis D. $694.44 is taxed as Ordinary Income 250000/(4200*12*30)=16.53
A. 16.53 % per month is excluded from Ordinary Income
3.1 The age a catch up contribution may be made to an Individual Retirement Account is ? A. 50 B. 55 C. 70 ½ D. 59 1/2
A. 50
3.6 The age a taxpayer must begin withdrawals from a Traditional IRA account is: A. 59 1/2 B. 55 C. 70 1/2 D. 50
A. 59 1/2
3.3 What is the penalty for excess contribution to an IRA account?? A. 6% B. 10% C. 50% D. No penalty
A. 6%
4.1 Loans from an IRA are considered prohibited transactions? A. True B. False
A. True
Jake worked at State Farm from February 2016 through August 2016 while amassing $25,000 in earnings before suddenly becoming unemployed. How many quarters of coverage did he earn for social security that year? A. 0 B. 1 C. 2 D. 4
Answer is D. For each $1,260 earned, one quarter of coverage is awarded.
How much money can a single 17 year old with no earned income contribute to a Roth IRA? A. $0 B. $1,000 C. $5,500 D. $6,500
Answer: A. With no earned income, a single individual can not contribute money to a Roth IRA.
Defined Benefit Pension Plans can NOT be defined by: A. Flat amount B. Fixed amount C. Unit Credit D. Flat rate
Answer: B, Fixed amount. Benefits can be defined by flat amount, flat rate and unit credit
2. Molly is employed and is expected to make $145,000 of earnings in 2016. How much FICA tax should she pay? A. $7,347.00 B. $9,449.50 C. $11,092.50 D. $22,185.00
Answer: B.
An individual with more than one Roth IRA can treat them as separate accounts when calculating the maximum contribution available each year. A. True B. False
Answer: B. False Individual should treat them in a whole
Shannon McDougal will retire December 31 of this year. Shannon has worked for Shamrock Construction for 30 years. During his last 5 years, he earned $40,000, $47,000, $44,000, $46,000 and $48,000. Shamrock's retirement plan uses a unit credit formula that awards employees 1.5% for each year of service using a financial average of the last 3 years. Shannon's annual benefit will be: a. $19,500 b. $20,250 c. $20,700 d. $21,150 e. $21,600
Answer: C -In his last three years, Shannon earned an average of ($44,000+ $46,000 + $48,000)/3 = $46,000; $46,000 x (.015 x 30) = $20,700]
Andrew established a Roth IRA 5 years ago, when must he begin taking distributions in order to avoid the required minimum distribution penalty? A. 59 ½ B. 70 ½ C. never
Answer: C, because it's a Roth IRA
1. Jack, age 40, has worked full time each year since 19. Jack was killed in a car accident just after his fifth wedding anniversary. His 40-year-old wife and two daughters, age 12 and 15 can receive: A. a wife's benefit equal to 100% of Jack's primary insurance amount (PIA) B. a disability benefit if his wife or children become disables, equal to Jack's primary insurance amount (PIA) C. A child's benefit for each daughter as long as she is unmarried and under age 18. D. None of the above
Answer: C.
Social security do not cover which of the following: A. Most people who are self-employed B. Most private sector employees C. Federal employee hired before 1984 D. Members of the US Armed Forces E. It covers all of the above
Answer: C. Social Security do not cover federal employees who were hired before the year 1984.
Andrew established a Roth IRA five years ago. When must he begin taking distributions in order to avoid the required minimum distribution penalty? A. 59 ½ B. 70 ½ C. never
Answer： C. Never. RMD's not required from a ROTH IRA.
4.2 What is the lower level of the agi phase out for Roth IRA contribution as a single taxpayer? A. $184,000 B. $117,000 C. $18,000 D. $$118,00
B. $117,000
5.1 What is the current covered compensation limit? A. $53,000 B. $265,000 C. 25% D. Highest 3 years
B. $265,000
9.1 The standard form of benefit from a defined benefit plan is the Qualified Joint & Survivor Annuity. If Kim retires with a $7500 monthly benefit, what is the standard benefit her husband Kevin will receive if she predeceases him? A. $7500.00 B. $3750.00 C. $5625.00 D. $0
B. $3750.00
4.3 At what age must Required Minimum Distributions from a Traditional IRA begin? A. 59 ½ B. 70 ½ C. 55 D. 50
B. 70 ½
6.5 Individual account balances in a defined benefit plan are: A. Separate Accounts B. Comingled C. Invested directly in employer securities D. Deposited with the Employer
B. Comingled
6.1 In a defined benefit plan, forfeitures must be used to: A. Allocate to remaining participants B. Reduce plan costs C. Reduce actuarial assumptions D. Pay terminated employees
B. Reduce plan costs
9.2 Tina divorces Tim. She has a $250,000 vested balance in her defined contribution plan. The QDRO states the two children of Tina and Tim each receive $50,000 from Tina's plan. Tim is in a 15% tax bracket and Tina is in a 25% tax bracket. Which one of the following is true? A. Tim pays $15,000 in O. I. tax. B. Tina pays $25,000 in O. I. tax C. The funds are sheltered in the children's IRA accounts D. Each child pays $5,000 in taxes
B. Tina pays $25,000 in O. I. tax
6.3 Disadvantages of defined benefit plans include A. employee bears investment risk B. higher installation and administrative costs as compared with a defined contribution plan C. older employees will receive a lower retirement benefit than younger employees D. a and b E. a and c
B. higher installation and administrative costs as compared with a defined contribution plan
7.5 Monarch Machines sponsors a 15% money purchase pension plan and 401(k) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Monarch Machines matches employee deferral contributions 100% up to 6% of deferred compensation. If James, age 31, is a highly compensated employee who earns $200,000, what is the maximum he could receive as an employer match from Monarch if the ADP of the NHC is 4%? A. $0. B. $8,000. C. $11,000. D. $12,000. Hint: there is an overall limit on annual additions.
C. $11,000. 7.5 Worked Out: 1. Making $200,000 (less than $260,000 so that's fine) $200,000*.15=$30,000 = Mandatory contribution 2. Annual additions = $52,000 $52,000 - $30,000 = $22,000 22,000*.6 = 12000 How much of the match can go in ? Half -- $11,000
8.3 Tyler wants to borrow from his 401 (k) plan. His account balance is $55,000 from salary deferrals and $25,000 from employer matching contributions. He has been with his Employer for 4 years. How much can Tyler borrow from his 401 (k) plan? A. $50,000 B. $35,000 C. $40,000 D. $25,000
C. $40,000
8.4 Tammy terminates from employment with a $28,000 vested account balance. She requests a lump sum distribution. Her employer must withhold how much before the funds are distributed to Tammy? (UCA of 1992) A. $2,800 B. Ordinary Income Tax C. $5,600 (20% of 28,000) D. 50%
C. $5,600 (20% of 28,000)
3.2 The maximum contribution to an IRA for a taxpayer who turns 50 in 2016 is? A. $5,000 B. $5,500 C. $6,500 D. $18,000
C. $6,500
5.6 Kathy is age 35 and has worked for ABC Corp. for 2 years. She is leaving the company. ABC Corp. has a defined contribution plan. Kathy's account balance in the defined contribution plan is $45,500. How much of this account balance will be paid to Kathy? A. $5,500 B. $0 C. $9,100 D. $45,500
C. $9,100
5.6 Kathy is age 35 and has worked for ABC Corp. for 2 years. She is leaving the company. ABC Corp. has a defined contribution plan. Kathy's account balance in the defined contribution plan is $45,500. How much of this account balance will be paid to Kathy? A. $5,500 B. $0 C. $9,100 (with the 2-6 year graduated scale) D. $45,500
C. $9,100 (with the 2-6 year graduated scale)
5.3 Using standard eligibility rules, an employee must be allowed to enter a qualified plan after completing a year of service and attainment of age : A. 26 B. 19 C. 21 D. 55
C. 21
5.3 Using standard eligibility rules, an employee must be allowed to enter a qualified plan after completing a year of service and attainment of age : A. 26 B. 19 C. 21 D. 55
C. 21
5.2 Dalton Construction has a money purchase plan that provides 65% of account balances to the three owners. To remain qualified, which of the following vesting schedules would Dalton be permitted to use? A. 5 year cliff B. 3 to 7 year C. 3 year cliff D. a and b E. b and c
C. 3 year cliff
9.6 403 (b) plans have a unique provision called the 15 year catch up provision for those employees with 15 or more years of service. Which of the following is true? A. The employee can contribute an additional $15,000 in 2016. B. The employee can contribute $3,000 beyond the general limit of $12,500 in 2016. C. A 55 year old who hasn't maxed out contributions to the 403 (b) in previous years can contribute $27,000 in 2016 D. An employee can contribute an additional amount up to $15,000 over the next 5 years.
C. A 55 year old who hasn't maxed out contributions to the 403 (b) in previous years can contribute $27,000 in 2016
7.3 Which of the following statement is true? A. All 401(k) plans must pass the ADP test. (Not correct because you could use the safe harbor) B. The plan sponsor of a 401(k) plan can require its employees to attain the age of 21 and complete 2 years of service to be eligible for participation in the 401(k) plan. (not correct because it can be 1 instead of 2) C. A profit sharing plan that uses permitted disparity allocates a higher percentage of the plan contribution to those participants whose earnings are in excess of the Social Security wage base. D. If ICE Electronics, Inc. (ICE) established a profit sharing plan for the current year, ICE is required to make contributions to the profit sharing plan for the current plan year. (Not correct)
C. A profit sharing plan that uses permitted disparity allocates a higher percentage of the plan contribution to those participants whose earnings are in excess of the Social Security wage base.
7.6 Which of the following statements regarding an age-based profit sharing plan is correct? A. An age-based profit sharing plan provides a greater benefit to those plan participants whose earnings exceed the Social Security wage base and who are over fifty years old. B. An age-based profit sharing plan only provides a benefit to those plan participants whose age is within 10 years of the age of the owner of the plan sponsor. C. An age-based profit sharing plan provides greater benefits to the older plan participants. D. Younger plan participants in an age-based profit sharing plan usually receive the majority of the profit sharing plan allocation.
C. An age-based profit sharing plan provides greater benefits to the older plan participants.
4.5 Which of the following isn't a exception to the 10% early withdrawal penalty? A. Higher Education Expenses B. First Time home purchase C. Attainment of age 55 with separation of service D. IRS Tax Levy
C. Attainment of age 55 with separation of service
5.1 Which of the following statements concerning choosing the most appropriate type of vesting schedule for a qualified plan --restrictive vs. generous--is (are) correct? 1. Two advantages of choosing a restrictive vesting schedule are (1) to reduce costs attributable to employee turnover and (2) to help retain employees. 2. Three advantages of choosing a liberal vesting schedule in which there is immediate and full vesting are (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family." A. 1 only. B. 2 only. C. Both 1 and 2. D. Neither 1 nor 2.
C. Both 1 and 2.
5.5 Which of the following isn't included in family attribution rules? A. Spouse B. Parents C. Grandmother D. Grandchildren
C. Grandmother
5.5 Which of the following isn't included in family attribution rules? A. Spouse B. Parents C. Grandmother D. Grandchildren
C. Grandmother
4.4 What is the income limit under which taxpayer can convert a traditional IRA to a Roth IRA? A. $100,000 B. $150,000 C. No Limit D. 2010 income limits
C. No Limit
3.4 Which of the following isn't Earned Income for purposes of funding an IRA? A. W-2 income B. Alimony C. Pension income D. Schedule C net income
C. Pension income
3.5 Active Participant Status refers to participation in any of the below except: A. Pension Plan B. Profit Sharing Plan C. Social Security Benefit D. Simplified Employee Pension Plan
C. Social Security Benefit
9.5 Karen, age 52, earns $117,000 annually as an employee with ABC Co. Her employer sponsors a SIMPLE retirement plan and matches all employee contributions made to the plan dollar for dollar up to the max allowed for SIMPLE plans. She has been with the company for 1.75 years. Which of the following is a false statement? A. Karen can contribute $12,500 in employee deferrals B. The employer contribution will be $3,510.00. C. The employer contribution will be $2,340.00. D. A current withdrawal from the plan will be accessed a 25% penalty. A & B are true. Employer contribution: 117000*.03= 3,510. In an employer contribution, they can contribute $ for $ up to 3%.
C. The employer contribution will be $2,340.00.
5.4 Which employees may be excluded from a qualified plan? A. Greater than age 55 B. No Exclusions C. Union Employees D. Highly Compensated Employees
C. Union Employees
Distributions related to employee deferral contributions are always made without penalty after all of the following EXCEPT - A. Death B. Separation from Service after age 55 C. Disability D. Hardship
Correct Answer is D. Many hardship withdrawals will be subject to the 10% early withdrawal penalty.
Joe is 40. In January 2015 he made $5,000. That was the only income he made for the year. Joe became disabled on July 1st. How many quarters would be counted towards his insured status a) 1 b) 2 c) 3 d) 4
Correct answer is C. In 2015, one quarter of coverage is $1220. Though making $ 4880 in one month or through out the whole year allows for 4 quarters to count in the insured status, he became disabled in the second quarter, the remaining one quarter does not count.
4.6 Amy wishes to contribute to her ROTH IRA account. She is age 60 and earns $189,000. She is single. How much may Amy contribute to her ROTH in 2016? A. $6,500 B. $2,750 C. $3,250 D. $0
D. $0 ** She makes too much money to contribute to a ROTH IRA account.
5.2 What is the maximum allowable contribution to an individual's account under a defined contribution plan for 2016? The lesser of 100 % of an employee's compensation for the year and A. $265,000 B. $117,000 C. $18,000 D. $53,000
D. $53,000
6.4 The Social Security System is intentionally designed to be discriminatory towards lower income workers. Pension plans may provide higher benefits to higher income workers using: A. Social Security integration (permitted disparity) B. Not available to higher income workers C. Excess Method D. A & C
D. A & C
8.6 Annuities are taxed: A. At Ordinary Income Tax Rates B. And payroll taxes must be paid C. Cost basis is excluded D. At 20% E. A and C F. A and B
E. A and C
6.2 An employer who wants to reward an employee's years of service and contribution to the company (measured as salary) would use a defined benefit plan formula based on: A. a flat amount B. a flat percentage based on years of service C. a flat percentage based on final average pay D. a flat percentage based on career average pay E. a unit credit formula - Years of service * percentage
E. a unit credit formula - Years of service * percentage
What is the free spousal benefit?
If a retiree claims retirement benefits, the spouse can claim a "free spousal benefit" up to 50% of the retiree's retirement benefit, allowing the spouse with unclaimed retirement to have their benefit grow at 8% a year. The spouse can claim as early as age 62. If the spouse is under the NRA, the spousal benefit will be reduced accordingly.
BestPie sponsors a 15% money purchase pension plan and 401(K) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Assuming Jim, who is a highly compensated employee earning $200,000 a year has been working for Bestpie over 10 years and the company match employee deferral contributions 100% up to 4% of deferred compensation, what would be the maximum Jim could receive as an employer match from BestPie? If ADP of NHC is 1.5%, what would his contribution amount be?
The 2016 limit of annual addition is $53,000 Answer [edited by Y.X.] : $200,000 * 0.15 = $30,000 (Bestpie's sponsorship for the money purchase plan) $200,000* 0.03 = $6,000 (Jim's elective Deferal up to 3% according to ADP test, i.e., 1.5%*2=3%) Altough Bestpie would match 100% of 4% of employee deferral contribution, Jim can only contribute 3%, so the company match is $6,000, as much as Jim's contribution. $30,000 + $6,000 + $6,000 = $42,000 If Jim receives an allocation from Bestpie's money purchase pension plan of $30,000, he can only receive an additional of $23,000. According to the ADP test, Jim can only defer up to 3% or $6,000 and because Bestpie matches up to 100% of 4% of employee deferral contribution the maximum company match would be $6,000. When adding the values, Jim would get a total annual addition of $42,000.
In 2015 from the months of January through June, Henry made $6,000, all of which is subject to Social Security. He was then fired and remained unemployed for the rest of the year. How many Quarters of Coverage did Henry earn throughout these months? In 2015, a quarter of coverage is $1220. A) 0 B) 2 C) 4 D) 3
The Answer is C because he earned a quarter of coverage for each $1220 he made and he lived through the end of the year. $6000 is more than four times of $1220, but the maximum is 4 quarters of coverage per year. Same fact, if he died or became disabled in May (i.e., the second calendar quarter), the remaining 2 calendar quarters should not count. He only earned 2 quarters of coverage.
COLLAPSE How much money is the unfunded Illinois Pension liability currently? A) $100,000,000 B) $111,000,000,000 C)$150,000,000,000 D) $11,000,000,000,000
The answer is B - the unfunded portion of Illinois Pension Debt is currently $111,000,000,000 and because of constitutional amendments the Illinois government is not able to stop paying out pensions currently. This is the non impairment clause in the Illinois Constitution,. [added by Y.X.] http://www.chicagobusiness.com/article/20151211/NEWS02/151219969/illinois-unfunded-pension-liability-now-up-to-111-billion
Which of the following is not considered an IRA Investment option? a. Cash b. Stocks/Bonds c. Life Insurance benefits d. US gold, silver, and platinum coins
The answer is C. Life insurance benefits are not considered IRA investment options. Collectibles and Other Coins are not permitted either.
Joe is 50 years old and is in a SIMPLE retirement plan sponsored by his employer. He loves to shop and has accumulated a lot of debt over the past years. To pay off his debt, he withdraws money from his plan. It has only been a year and a half since he joined the plan. Is he subject to early withdraw penalties? If so, how much? A. Yes, 10% B. No, because it was an emergency C. Yes, 25% D. Yes, 50%
The answer is C. Yes, 25% In a SIMPLE plan, if a withdraw is completed within the first 2 years of the employee's participation in the plan, the penalty rate is 25% instead of 10%. It is 10% after those 2 years.
COLLAPSE David wishes to contribute to his ROTH IRA account. He is age 45 and earns $250,000. He is single. How much may David contribute to his ROTH in 2016? $6,500 $2,750 $5,500 $0
The answer is D - $0. Roth IRA's are subject to phase out limits - $117,000 to $132,00 for single filing status.
Jack Jones, age 40, earns $100,000 per year and wants to establish a defined contribution plan to encourage employees to stay with his firm. He employs four people whose combined salaries are $60,000 and who range in age from 23 to 30. The average period of employment is 3.5 years. The defined contribution plan is top heavy. Which vesting schedule is best suited for Jack's plan? A. 3-year cliff vesting. B. 3-7 year graded vesting. C. 5-year cliff vesting. D. 2-6 year graded vesting.
The correct answer is "D." Because 60% of the benefits accrue to a key employee, the plan is top heavy. The only vesting schedules allowed are Options "A" and "D". The only graded vesting schedule is "D". Graded vesting encourages and rewards employee longevity
What is the minimum number of years that a person should work in order to be eligible for social security retirement benefits? A. No minimum B. 7 years C. 10 years D. 25 years
The correct answer is C. The minimum number of credits needed to be eligible for social security benefits is 40 credits, and this is translate to 10 years of working.
Which of the following is COVERED in social security? A. state and local employees B. non-citizens over the age of 70 1/2 C. federal employees hired in 1980 D. members of the US Armed Forces
The correct answer is D, members of the US Armed Forces are covered under social security, don't be fooled by option A, there is a difference between state and local employees and members of our nation's military. Also options B and C are incorrect because only employees hired AFTER 1984 are covered by social security. Being a U.S. citizen isn't a requirement for receiving Social Security, but there is no age limit regarding the Social Security coverage.
John is a very smart professional. However, he agreed to personally guarantee a real estate development loan. Unfortunately, the project has been stalled and John has to pay the interest, which amounts to $45,000 per month? There appears to be little hope for John avoiding bankruptcy. Which of the following assets is not protected from creditors by federal bankruptcy? (a) SEP IRA (b) 401 (K) (c) Roth IRA (d) IRA inherited from his father seven years ago.
The correct answer is a. Because the distribution to Janet does not qualify for the exception to the 10% penalty, the taxable amount of the distribution will be subjected a 10% penalty. To calculate the amount of the distribution that is return of adjusted basis, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution. This ratio is then multiplied times the gross distribution amount. As such, $120,000 (($500,000/$625,000) x $150,000) of the $150,000 distribution is return of adjusted taxable basis. Accordingly, $30,000 ($150,000 - $120,000) will be subject to income tax, and there will be a $3,000 ($30,000 x 10%) tax penalty.
Vance has a vested account balance in his employer-sponsored qualified profit sharing plan of $40,000. He has two years of service with his employer and the plan follows the least generous graduated vesting schedule permitted for a profit sharing plan under PPA 2006. If Vance has an outstanding loan balance within the prior 12 months of $15,000, what is the maximum loan Vance could take from this qualified plan, assuming the plan permitted loans? (a) $5,000. (b) $20,000. (c) $40,000. (d) $50,000.
The correct answer is a. The maximum loan an individual can take is the lesser of $50,000 or 50% of their vested account balance. In this case, Vance has a vested account balance of 20% (2 years of service with 2 to 6 year vesting schedule) of $200,000, or $40,000, so the maximum loan would be 50% of $40,000, or $20,000. However, since Vance had an outstanding loan balance of $15,000 within 12 months, the maximum loan available must be reduced by $15,000. In this case, the maximum loan Vance could take from the qualified plan is $5,000 ($20,000-$15,000).
Which of the following statement(s) regarding 403(b) plans is true? Assets within a 403(b) plan may be invested in individual securities. A 403(b) plan usually provides a 3 to 7 year graduated vesting schedule. A 403(b) plan must pass the ACP test if it is an ERISA plan. In certain situations, a participant of a 403(b) plan can defer an additional $15,000 as a catch up to the 403(b) plan. A. 4 only. B. 1 and 2. C. 3 and 4. D. 2, 3, and 4.
The correct answer is c. 403(b) plan assets cannot be invested in individual securities, and contributions to 403(b) accounts are always 100% vested. Statements 3 and 4 are true.
