Ch. 15 Quiz Retirement Plans

3. At what age can people begin making catch-up contributions to their retirement plans? A. 50 B. 55 C. 60 D. 65

A. 50

13. Kim is required to take a $2,000 minimum annual distribution from her IRA. She fails to comply and only takes a $1,000 distribution. Because of this failure, Kim will be subject to A. a deductible excise tax of$1,000 B. a nondeductible excise tax of $1,000 C. a deductible excise tax of $500 D. a nondeductible excise tax of $500

D. a nondeductible excise tax of $500

9. At what age is an individual no longer subject to early withdrawal penalties under an IRA? A. 55 B. 55 1⁄2 C. 59 D. 59 1⁄2

D. 59 1/2 Roth IRAs are different that a traditional IRA in the fact that contributions to the Roth IRA are not tax deductible but distributions are received tax free (this includes contributions and interest earned). Roth contribution limits are set by the IRS. Interest earned and distributions made are tax free if the IRA is maintained for at least five years and the distribution meets specific qualifications (the attainment age of 59 1/2, death, disability, the purchase of a first home, or qualified higher education expenses). There is no requirement in a Roth IRA for distributions to begin before age 70 1/2.

6. Under which of the following circumstances are qualified plan distributions likely to receive a tax penalty? A. Premature distributions only B. Late distributions only C. Both A and B D. Neither A nor B

C. Tax penalty may apply to premature and late distributions

Exercise 15. A 1. This plan, formally called a "Qualified Tuition Program" helps build funds for higher education. 2. An elective deferral plan for employees of organizations such as school systems, churches, and hospitals 3. A qualified retirement plan for self-employed individuals and their eligible employees 4. A qualified plan in which a small employer contributes specific amounts directly into IRA accounts on behalf of eligible employees 5. A type of IRA where contributions are not tax deductible but distributions are received tax free and where distributions do not have to begin before age 701⁄2 6. A type of elective deferral plan that allows an employee to reduce compensation by a stated percentage on a tax deductible/tax deferred basis; often the employer matches employee contributions

1. C. Section 529 Plan 2. D. 403(b) Plan 3. E. Keogh Plan 4. F. Simplified Employee Pension 5. B. Roth IRA 6. 401 (k) Plan

5. Who may contribute to an IRA? A. Anybody with earned income B. Only people who don't participate in company retirement plans C. Only people who earn less than certain specified amounts D. Only people who are self-employed

A. Anybody with earned income may contribute to an IRA - IRAs are qualified retirement plans to individuals. IRAs help individuals save money to finance their retirement by allowing them to make pre tax contributions to the IRA. An IRA allows an individual to contribute 100% of that person earned income (wages) up to the limits ( a specific dollar amount) established by the IRS. Almost any individual with earned income (wages) who is under the age of 70 1/2 is eligible to open an IRA.

1. Curtis knows that when he retires, he will receive $100 a month for every year of service with his employer. This is an example of A. a defined-benefit plan B. a defined-contribution plan C. a profit-sharing plan D. a money purchase plan

A. a defined-benefit plan - Is a qualified plan in which the employer agrees to make necessary contributions on behalf of eligible employees in order to provide a specific retirement benefit. The amount of the retirement benefit is clearly defined (usually as a percentage of salary), but the amount of the employers contribution is not specifically known. A defined benefit plan defines how much a participant can receive at retirement (money-out)

7. Premature distribution from a qualified plan or an IRA can result in the amount being taxed as income plus a penalty tax of A. 5% B. 10% C. 15% D. 25%

B. 10% - Since qualified plans are designed as retirement plans, a tax penalty is imposed for early withdrawals by an individual - all withdrawals are taxable as current income, but any withdrawal before age 59 1/2 is subject to an additional tax penalty of 10% of the amount withdrawn. However, no early withdraw penalty is charged for the following exceptions: - Medical expenses in excess of 7.5% of adjusted gross income. - Distributions toward the purchase of a first home. - Distributions used toward qualified higher education expenses. - Distributions due to death or disability of the participant. - Distributions to a former spouse or dependent child as a result of a divorce decree - Distributions which are part of a series of periodic payments under a life annuity arrangement. There is a 6% excess contribution penalty that applies to IRAs. There is also a retirement that distributions from any qualified plan must begin at a certain age. Ex. amounts in a traditional IRA must start to be withdrawn by April 1 of the year following the year in which the individual reaches age 70 1/2; the individual must take a distribution from the account or at least begin a plan of distribution. Failure to do so results in a late withdrawal penalty equal to 50% of the amount that should have been received by the participant. Individuals over age 50 are allowed to make an additional contribution per year, called the catch up provision.

8. A rollover from one IRA to another or from a qualified plan to an IRA must be accomplished within how many days if the owner is to avoid an income tax liability on the amount rolled over? A. 10 B. 30 C. 60 D. 90

C. A rollover from one IRA to another or from a qualified plan to an IRA must be accomplished within 60 days to avoid income tax liability on the amount rolled over. Rollover-Is a tax free withdrawal of cash or other assets from one retirement program and its reinvestment in another retirement program. The amount rolled over is not counted as current income and is not taxable until later withdrawn. However, a rollover must be completed within 60 days after the distribution is received, or else the full amount becomes taxable as current income A participant must complete a rollover to another qualified plan within 60 days or the distribution is considered a non qualified distribution and is subject to taxes and penalties. Qualified rollovers must include the total amount that was in the account. This includes the 20% withheld plus 80% received by plan participant or else there will be taxes and penalties on any portion of the total amount that was not reinvested within 60 days. A plan sponsor must withhold 20% of the distribution in federal taxes on a rollover, and there is no withholding on a transfer. Once the rollover takes place to the new custodian, the remainder of the distribution is made.

4. Which of the following types of retirement plans does NOT have a mechanism for making catch-up contributions past a certain age? A. IRA B. Roth IRA C. SIMPLE plan D. SEP

D. SEPs do not provide for catch up contributions - A small employer can contribute specific amounts directly into IRA accounts on behalf of eligible employees. This is a simplified method of establishing a pension plan because an IRA is already a qualified plan and it is easier for an employer to establish and administer. - Contributions to the plan are not included in the employees taxable income for the year made, to the extent that the contribution does not exceed 25% of the employees compensation or $40,000. - Distributions from the plan will be taxable as current income when received after retirement. Once an SEP is established, the employer must make contributions for each employee who is at least 21 years of age, who has performed services for the employer during the current year, and has performed services for at least three of the previous five years.

11. Carmen owns a business that provides a retirement plan to its employees whereby the business makes contributions of up to 25% of the total compensation paid to all participating employees to IRA plans owned by the individual employees. Carmen's plan is most likely A. a SIMPLE plan B. a Keogh plan C. a 403(b) plan D. an SEP

D. an SEP - Simplified Employee Pension A small employer can contribute specific amounts directly into IRA accounts on behalf of eligible employees. This is a simplified method of establishing a pension plan because an IRA is already a qualified plan and it is easier for an employer to establish and administer. - Contributions to the plan are not included in the employees taxable income for the year made, to the extent that the contribution does not exceed 25% of the employees compensation or $40,000. - Distributions from the plan will be taxable as current income when received after retirement. Once an SEP is established, the employer must make contributions for each employee who is at least 21 years of age, who has performed services for the employer during the current year, and has performed services for at least three of the previous five years.

12. Delbert is self-employed and sets up a retirement plan for himself. Delbert most likely sets up A. aSIMPLEplan B. a Keogh plan C. a 403(b) plan D. an SEP

B. A self employed person will most likely set up a Keogh plan AKA the Self Employed Individuals Tax Retirement Act of 1962, makes a special type of retirement plan available for non incorporated businesses. A Keogh plan (or an HR-10) is a qualified retirement plan for self employed individuals and their eligible employees, if any. Examples of self employed individuals include sole proprietors, partnerships, farmers, or professionals such as doctors and lawyers. In order to be eligible for to participate in a Keogh an employer must: - be at least 21 years old - have worked for the company for at least one year. - work 1,000 hours or more in a year. Exceptions is if someone owns at least 10% of the business, that person is still eligible for a Keogh Plan. Under a Keogh plan, an employer must contribute the same percentage to their employees as they contribute to their own plan. As an example, if an employer contributes a specific dollar amount to his own plan, then he must contribute the same dollar amount to his employees plan. Like all qualified plans, Keogh plans are subject to contribution limits set by the IRS.

10. Which of the following organizations would be eligible to offer a 403(b) arrangement? A. Fire department B. Public school system C. Any small business D. Any corporation

B. Public School System - Under a 403 (b) plan, employees of organizations such as school systems, churches, and hospitals are eligible to set aside portions of their current income by means of a salary reduction or an elective deferral. This elective deferral is not currently taxed, will grow tax deferred, and will be taxed as current income when received at retirement. Salary reduction deferrals by an individual may not exceed $15,000 per year.

2. All of the following statements about profit- sharing plans are correct EXCEPT A. such plans are established by employer's so employees can participate in company profits B. the amount of annual contributions is set by law C. the plan must provide a formula for allocating contributions to the plan among plan participants D. plan contributions are held in trust

B. The amount of annual contributions is set by law. Under a defined contribution plan the amount of any annual contribution is usually left to the employers discretion Defined Contribution Plan - Is a qualified retirement plan in which the employer agrees to make a specific contribution on behalf of all eligible employees, which is usually expressed as a percentage of compensation. The amount of the contribution is clearly defined, but the amount of retirement benefits to be received is not specified. A defined contribution plan defines how much a participant can contribute to their plan (money in) Contributions to the plan are made only if profits are realized. Generally, the contribution consists of a specified proportion of company profits, and the maximum contribution per employee is expressed as a percentage of compensation (such as 10% of salary) - In contrast to pension plan obligations, a profit sharing plan is not fixed liability. Profit sharing plans frequently require an immediate distribution of each employees share on an annual basis, in which case the amounts received are taxed as current income to the employees. These plans are not necessarily designed to provide retirement benefits - it is not a requirement. In some cases, they are set up to a accumulate the profit sharing proceeds for the purposes of later paying benefits at retirement.