module 8 retirement planning
All of the following are primary assumptions in any retirement needs calculation except
the number of dependents a client will have at retirement.
Paul estimates he will need a $75,000 annual income in today's dollars when he retires 10 years from now. He assumes a 3% annual rate of inflation, a 5% after-tax rate of return on his investments, and a 20-year retirement period. Using the level payment approach, how much will Paul need to save in a single annual payment at the end of each year to fund his retirement need?
$134,331.53
If the client's business objectives are to reduce income tax, reward executive employees, retain and recruit employees, and reduce employee turnover, which plan selection approach could address these issues?
A pension plan or a profit-sharing plan
Diane and Amanda, who are 28-year-old twins, are partners in a computer software consulting firm with 20 employees. The average age of their employees is 25 and their length of employment averages three years. The firm is profitable and enjoys stable cash flows. Diane and Amanda have talked about a retirement plan as an employee benefit and do not want to assume the investment risk of the plan. The partners do wish to encourage employees to make elective deferrals. Of the following retirement plan options, which is best suited for their business?
A profit-sharing plan with a Section 401(k) provision
Which of the following is the most prudent approach for projecting a client's life expectancy during retirement?
Add a few years to provide a cushion against the client living longer than expected.
Which of the following retirement plans would be appropriate for a general partnership with stable cash flows?
Age-weighted profit-sharing plan
George Elliot, age 45, owns a successful company whose earnings fluctuate significantly from year to year. His salary is $125,000, and he wants to begin saving for retirement using the qualified plan that is not overly expensive to operate with the least cost for participants and the maximum benefit for him. The annual payroll is $780,000, all employees earn less than $30,000 per year, and their average age is 27. Which plan should he install?
Age-weighted safe harbor 401(k)
Which of the following statements is CORRECT? In a single-participant defined benefit pension plan, the employer-participant is assuming all of the investment risk. An owner-employer may not wish to assume the investment risk for employees A)
Both
Which of the following is NOT a characteristic of a target benefit pension plan?
Employer bears the investment risk
Barry is the sole shareholder of Zippy Internet Services, Inc., a C corporation that employs 10 people. The company has been in business for four years and has had fluctuating cash flows during that time. Barry would like to install a qualified plan with the following criteria: Reward, motivate, and retain employees Reduce corporate income taxes Provide for his own retirement Barry would like to contribute to each employee's account an amount equal to 8% of compensation. What would be the most appropriate course of action for Barry?
Establish a profit-sharing plan
Which of the following would merit assuming an after-tax rate of return when considered as part of the accumulation strategy in a client's retirement planning calculations? Corporate zero coupon bonds held outside a qualified plan or IRA High dividend paying blue-chip stocks held in a Roth IRA Aggressive growth mutual funds held in a Section 457 plan sponsored for employees by a tax-exempt organization Cash value of a variable life insurance policy that is a modified endowment contract (MEC)
I
Which of the following should a businessowner accomplish before considering the adoption of a retirement plan? Purchase personal and business liability insurance. Establish cash reserves sufficient to cover potential emergencies. Ensure the business has sufficient cash flow to support ongoing funding of the plan. A)
I II and III
Which of the following statements regarding the taxation of an insurance death benefit received by a beneficiary of the plan participant are CORRECT? The pure insurance element of the plan death benefit is taxable as ordinary income to the beneficiary. The pure insurance element of the plan death benefit is income tax free to the participant's beneficiary. The amount of the distribution in excess of the pure insurance element is taxable as a qualified plan distribution. The lower of the total Table 2001 costs or the actual insurance cost may be recovered tax free from the plan death benefit.
II III and IV
Which of these qualified retirement plans allow unrestricted investment in employer securities? Money purchase pension plans Stock bonus plans Employee stock ownership plan (ESOPs) Traditional profit-sharing plans
II III and IV
Which of the following correctly describe characteristics of unrelated business taxable income (UBTI) in qualified plan trusts? A qualified plan trust that incurs UBTI will be disqualified by the IRS. UBTI generally will result from a qualified plan trust's directly operating a business that is not related to the purpose of the trust. Common stock that is purchased through the use of debt results in UBTI. Real property that is purchased through the use of debt results in UBTI
II and III
Which of the following is a permitted investment in tax-sheltered annuity (TSA) plans? Individual stocks Group or individual annuity contracts Custodial accounts invested in mutual funds
II and III
Which of these types of qualified retirement plans do NOT allow integration with Social Security? Traditional defined benefit pension plan Money purchase pension plan Profit-sharing plan Employee stock ownership plan (ESOP
IV only
Which of these may be taxable to a profit-sharing plan participant even when there is no distribution from the plan?
Life insurance premiums for a policy held by the plan
Russ, 38, and Ralph, 54, are each 50% owners of the Light Emporium. They both make $170,000 per year. Business has been steadily growing for the past five years, and Russ and Ralph believe that now is the time to set up a qualified retirement plan for their business. Russ and Ralph both want to take care of their eight full-time employees, and don't mind making a commitment to fund their retirement accounts. However, they are also concerned about their own retirement, and want to make sure that enough is set aside for them while having some flexibility over how much has to be contributed each year. Because they are equal owners they would like for an equal amount to be contributed on their behalf if possible. Which of the following plans would best suit their requirements?
New comparability plan
Which one of the following describes a basic provision of a SIMPLE IRA? A)
One contribution formula an employer can use under a SIMPLE IRA is to make a 2% nonelective contribution on behalf of each eligible employee with at least $5,000 in current compensation
Which of the following retirement plan alternatives would allow Tomas, a 51-year-old self-employed business owner with $50,000 of self-employment income, the greatest deductible contribution while providing him with only a small cash flow commitment each year based on 2022 plan contribution limits?
Safe harbor 401(k) plan
Which of the following statements regarding the serial payment approach to calculating the amount a client must save each year to meet his retirement income goal is CORRECT?
The amount the client must save increases every year.
Which one of the following rules governs how much life insurance may be provided by a qualified defined contribution plan?
The cost of whole life insurance must be 50% or less of the total employer contribution allocated to a participant's account.
Which of the following statements is NOT correct regarding the various limits that apply to retirement plans?
The maximum amount that is allowed to be contributed to a defined contribution plan in 2022, counting both employee and employer contributions, is $61,000 or 100% of compensation, whichever is greater.
Which of these is CORRECT with respect to a 403(b) plan?
The plan may use annuities or mutual funds as funding vehicles.
Which of the following is a retirement plan that is not easily understood by employees, the employer assumes the investment risk, favors older plan participants, and does not permit elective deferrals?
Traditional defined benefit pension plan
Which of the following plans typically use the percentage test when calculating the amount of life insurance that may be held in the plan for a plan participant?
Traditional profit-sharing plan
The primary reason inflation rates for retirees/senior citizens may exceed historical averages is that
health care costs may increase during retirement.
All of the following are prohibited investment vehicles for IRAs excep
municipal bonds
All of the following are individual savings alternatives an employed person may typically use to meet his retirement savings goals except
nqdc
Which of the following is a retirement plan that is easily understood by employees, the employee assumes the investment risk, does not favor older plan participants, and permits elective deferrals?
simple ira
James and Hannah have determined that they will need a monthly income of $6,000 at the beginning of each month during retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month. Over the 12 remaining years of their preretirement period, they expect to generate an average annual after-tax investment return of 8%; during their 25-year retirement period, they want to assume a 6% annual after-tax investment return. How much do they need to save at the end of each month to build the necessary retirement fund?
$1,621
Assume a client wants to retire in 12 years with the equivalent of $50,000 annually in today's dollars. Further, inflation is estimated to average 3% over the first five years and 4% thereafter until retirement. What must be the amount of first-year retirement income? (Round your answer to the nearest dollar.)
$76,277
Joe and Tammy, both age 45 with a combined AGI of $200,000, have become good clients of Frank, a CFP®professional, since coming to Frank several years ago for help in developing a plan to retire at age 55. As part of the plan, an ongoing investment plan was established, and Joe and Tammy have been dedicated to saving the amount called for in the plan to reach their goal. Lately, Frank has noticed Joe's and Tammy's investment preference has become far more conservative than when the plan for early retirement was developed. What should Frank do next as it relates to the retirement plan?
Frank should discuss the change in investment preference with Joe and Tammy and revise the retirement calculations if Joe and Tammy's risk tolerance has changed.
Which of the following transactions by a qualified plan's trust are subject to the unrelated business taxable income (UBTI) rules? A trust obtains a low-interest loan from an insurance policy it owns and reinvests the proceeds in a certificate of deposit paying a higher rate of interest. A trust constructs a residential apartment building and receives rent from the tenants. A trust owns vending machines located on the employer/plan sponsor's premises. A trust owns raw land that it rents to an oil and gas developer.
I and III
The employer bears the investment risk for which of the following retirement plans? Cash balance pension plan SIMPLE 401(k) plan Age-weighted profit-sharing plan Money purchase pension plan
I only
Which of the following types of retirement plans would be suitable for a businessowner who is uncomfortable with the idea of mandatory annual contributions? Defined benefit pension plan Profit-sharing plan
II only
Assume Bernard, age 55, is planning to retire in 10 years at age 65. He is a sole proprietor of a business with 15 employees but has not yet implemented a formal retirement plan for the business. Bernard's company currently has a strong cash flow which is expected to continue. His own personal savings retirement need is $85,000 per year, and Bernard pays himself only $95,000. The company can afford to contribute $100,000 this year for Bernard's account to any retirement plan that is implemented. Furthermore, Bernard will commit to an annual contribution necessary to fund the retirement plan if needed. Considering only this limited information, which of the following types of qualified retirement plans would you recommend for Bernard and his business?
Traditional defined benefit pension plan
f a businessowner-client is of an older age, near his retirement date, and just establishing a qualified plan, which of the following plans would generally NOT be advantageous to the owner?
Traditional profit-sharing plan
Which of these retirement plans would be appropriate for a general partnership with stable cash flows? A)
age weighted
The incidental benefit rule provides that term life insurance in a defined contribution plan is limited to
aggregate annual premiums of 25% or less of the employer's aggregate contributions to the participant's account.
fully insured Section 412(e)(3) pension plan is funded exclusively by
cash value life insurance or annuity contracts.
The principal disadvantage of assuming a flat annual rate of return when performing a retirement needs analysis is that this method
does not take into consideration the annual volatility of returns
Which of the following statements concerning qualified retirement plans is CORRECT? Cash balance pension plans, money purchase pension plans, employee stock ownership plans (ESOPs), and Section 403(b) plans are all examples of qualified retirement plans. Target benefit pension plans, defined benefit pension plans, profit-sharing plans, and Section 457 plans are all examples of qualified retirement plans.
neither
Which type of plan provides the most employee motivation?
profit sharing
XYZ Corporation wants to establish a qualified plan that is easy for employees to understand, allows for funding flexibility, can be integrated with Social Security, permits unrestricted investment in company stock, provides in-service withdrawals, allows employees to vote their plan stock, and provides an immediate tax deduction for employer contributions. Which of the following types of qualified plans would best meet XYZ's objectives?
stock bonus plan
Which of the following is a retirement plan that is not easily understood by employees, the employee assumes the investment risk, favors older plan participants, and does not permit elective deferrals?
target benefit
Tom and Martha assume they will need $70,000 at the beginning of each year in today's dollars when they retire in six years. The couple is assuming an annual inflation rate of 4% and a 7.5% after-tax return on all of their investments. They are also assuming a 25-year retirement period. What is the total retirement fund they will need to support their retirement income goal?
1,531,215
Jason has determined he will have an annual retirement income deficit. The deficit for the first year of retirement, 10 years from now, is $90,000. He expects to be in retirement for 30 years, and believes he can earn a 7% after-tax annual return on invested dollars. Inflation is expected to average 4% annually over this same period. What is the amount of lump-sum retirement funds needed by Jason at the beginning of retirement to fund his additional retirement income needs? (Round to the nearest dollar.)
1,842,297
Richard participates in a traditional defined benefit pension plan at work. His projected monthly benefit under the plan is $1,000. If the plan provides life insurance for Richard, the death benefit payable under the policy is limited to
100000
Assume the Josephs would like to be able to spend $8,000 per month (in today's dollars) when they retire in seven years. They believe they can earn a 7% annual return on any invested funds and inflation will be 4% annually over this same time frame. What future monthly income will the Josephs need to meet their first-year retirement expenditures? (Round the answer to the nearest dollar.) A)
10527
Which of the following retirement plans, maintained by an eligible employer, would also permit the employer to establish a SIMPLE IRA?
457 plan
Use the following information about Kevin and Cindy, a married couple, to answer the question that follows. Kevin and Cindy are both 38 and are planning to retire at 65. They estimate that they will need a lump sum of $2.4 million at retirement to provide the income stream required during their retirement years. They project that their current assets will grow to a value of $1.9 million at the first year of retirement. They feel they can earn a 6% after-tax return on their investments and would like to assume that inflation will average 4% over the long term. They would like to increase their annual savings amount each year as their incomes increase. They would like to assume a 30-year period of retirement. They have no heirs and would like to assume the worst-case scenario: that they will use up all their assets during retirement. They would like you, their financial planner, to determine the annual serial saving requirement needed to make up for their asset shortfall. What is the first end-of-year savings payment, adjusted for inflation that Kevin and Cindy must set aside
5,157
Which of the following are CORRECT statements about Keogh plans? Benefits provided by a defined benefit Keogh plan cannot exceed the lesser of $245,000 in 2022 or 100% of a participant's average compensation for their high three years. Keogh plans are qualified plans established by any unincorporated business entity. Keogh contributions for owner-employees are based on their gross salary. Keogh plans are permitted to make loans to common-law employee participants and owner-employees.
I II and IV
n which of these retirement plans can forfeitures be reallocated to participants to increase account balances of plan participants? Traditional defined benefit pension plans Cash balance pension plans Employee stock ownership plans (ESOPs) SIMPLE IRAs
III
For which of the following plans does the employee bear the investment risk in the plan? SIMPLE 401(k) Traditional profit-sharing plan SEP IRA plan SIMPLE IRA
all
Increases in which of the following can push a retiree's rate of inflation higher than the overall annual rate? Housing costs Travel goals Food prices Personal buying habits
all
Which of the following qualified plans can an S corporation implement? Profit-sharing plan Stock bonus plan Money purchase pension plan Employee stock ownership plan (ESOP
all
Terri is 58 years old. Her company anticipates that the next several years will be profitable, but not extravagant. Terri's actuary informed her that a defined benefit plan would cost her $100,000 per year. Terri is only willing to put a total of $50,000 into the company's retirement plan. Most of her workers are 20-35 years old. What type of qualified retirement plan should Terri select?
target benefit plan
All of the following are primary assumptions that are made in any retirement needs analysis calculation except
the type of retirement plan used by the client.
All of the following statements regarding the capital preservation approach to retirement needs analysis calculations are correct except
this approach is the most commonly used approach in making retirement needs analysis calculations.
Use the following information about Lisa and Tim, a married couple, to answer the question that follows. Lisa and Tim are both 48 and are planning to retire at 62. They estimate that their annual income need at retirement will be $62,000 in today's dollars. They expect to receive $32,000 (in today's dollars) annually from Social Security and they wish to include this amount in their retirement needs analysis. Assume that Social Security benefits will be adjusted for inflation. After discussions with their financial planner, they feel confident that they can earn a 7% after-tax return on their investments and would like to assume that inflation will average 4% over the long term. Life expectancy tables are provided in IRS Regulations Section 1.401(a)(9)-9. RMD Single Life Table—Life Expectancy indicates a factor of 23.5 years at age 62. RMD Joint Life and Last Survivor Table—Life Expectancy indicates a factor of 29.0 years at age 62. Due to a history of longevity in both their families, Lisa and Tim would like to assume a retirement period of 35 years. What amount of assets will Lisa and Tim need at the beginning of their retirement period to fund an annual income need that increases annually with inflation (i.e., a growing annuity) with the payments at the first of each year (annuity due)?
$1,168,060
George and Julia anticipate that they will require an annual income of $72,000 (in today's dollars) when they retire 15 years from now. They expect to receive Social Security benefits of $18,000 per year at that time. In calculating their retirement savings need, they are assuming a 3% annual rate of inflation, an 8% after-tax return on investments, and a 25-year retirement period. What is the total amount of retirement fund or capital that George and Julia will require to support their income needs at the beginning of their retirement? (Round your answer to the nearest dollar.) A)
$1,412,257
Bob and Nancy have analyzed their current living expenses and estimated their lump sum retirement need, net of expected Social Security benefits, to be $5 million in today's dollars. Their current assets and investments will grow to $3 million at the first retirement year, leaving $2 million to be saved over the preretirement period. They are confident that they can earn a 7% after-tax return on their investments, and they expect inflation to average 4% over the long term. Use the following worksheet to calculate their annual serial (increasing) savings requirement. (1) Determine the deflated value of the additional savings needed at retirement in today's dollars:$ 2,000,000additional savings need at retirement25number of periods until retirement4%% inflation rateDeflated value of additional savings need at retirement- $750,234(2) Determine the amount that Bob and Nancy need to save at the end of the first (current) year. This amount is increased each year during the preretirement period at the inflation rate:$750,234deflated value of additional savings need at retirement (from (1))—used as the future value to calculate the first serial (increasing) savings25number of periods until retirement % inflation-adjusted yield determined using:7%% after-tax return4%% inflation rateformula: I/YR = ([(1 + r) ÷ (1 + i)] - 1) × 100Calculate the first after-tax serial (increasing) savings payment before adjustment for inflation.$_____(3) Inflation adjustment:First year unadjusted serial savings required (from (2))4%% inflation rateFirst Year Serial (Increasing) Savings Amount Adjusted For Inflation$_____ What is Bob and Nancy's first end-of-year savings payment, adjusted for inflation? A)
$21,727
Bob and Nancy Reed have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are confident that they can earn a 7% after-tax return on their investments, and they expect inflation to average 4% over the long term. They want to assume a 30-year retirement. Determine the lump sum amount the Reeds will need at the beginning of retirement to fund their retirement income needs, using the following worksheet. (1) Adjust income deficit for inflation over the preretirement period:-$ 90,000present value of retirement income deficit (PV)25number of periods until retirement (N)4%% inflation rateFuture value of income deficit in first retirement year (FV)$239,925(2) Determine retirement fund needed to meet income deficit:$239,925payment (future value of income deficit in first retirement year)30number of periods in retirement% inflation-adjusted yield determined using:7%% after-tax return4%% inflation rateformula: I/YR = ([(1 +r) ÷ (1 + i)] - 1) × 100Lump sum needed at beginning of retirement (PVAD) to fund annual income deficit that increases annually with inflation (i.e., a growing annuity)$ What is the lump sum needed at the beginning of the Reeds' retirement period?
$4,911,256
Carol has an additional retirement need of $30,000 annually in today's dollars. She will retire in 15 years and projects a retirement period of 20 years. Carol believes she can achieve a 6% after-tax rate of return and is assuming a 4% annual rate of inflation. She has accumulated $175,000 toward her retirement plan. What lump-sum amount should Carol have accumulated over the next 15 years to support her retirement income need?
$907,144
David has been calculating his retirement savings needs. He has $250,000 of assets set aside now. His goal is to have $800,000 in 15 years. How much more does he need to save, assuming a 7% annual after-tax rate of return throughout this period? (Round to the nearest dollar.)
110242
Brad Elberly has been the sole owner and operator of Woodmasters Inc. for the past 15 years. Brad is age 45, and his salary from the business is $130,000. Brad and his wife, Laura, want to retire when Brad is age 65. Relevant information regarding the business is summarized below: Financial performance fluctuated over the first 10 years. Cash flow and profits have stabilized during the past five years and are expected to show modest but consistent growth in the future. Excess cash flow of approximately $150,000 is expected to be available this year. Future years should be about the same. Brad has expressed some concern about the company's outdated equipment and is considering renovating the plant and replacing the outdated equipment over the next five years. The total cost should be about $300,000. Total compensation for all employees (including Brad) is $245,000. The four full-time rank-and-file employees range from age 19 to age 38, and have been with Woodmasters for periods ranging from four months to six years. Age and service information is shown below: EmployeeAgeCompleted Years of ServiceCompensationBrad4515 years$130,000Beth386 years$40,000Todd276 months$25,000Carol302 years$28,000Jim194 months$22,000 Brad and Laura need to save an additional $500,000 (in first-retirement-year dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this retirement fund. What level savings amount will the Elberlys need to deposit at the end of each year? A)
12196
Use the following information about Ji and Fa, a married couple, to answer the question that follows. Ji and Fa are both 40 and are planning to retire at 62. They estimate that their annual income need at retirement will be $51,000 in today's dollars. They expect to receive $18,000 (in today's dollars) annually from Social Security and they wish to include this amount in their retirement needs analysis. Assume that Social Security benefits will be adjusted for inflation. After discussions with their financial planner, they feel confident that they can earn a 6.5% after-tax return on their investments and would like to assume that inflation will average 3.25% over the long term. Life expectancy tables are provided in IRS Regulations Section 1.401(a)(9)-9. RMD Single Life Table—Life Expectancy indicates a factor of 23.5 years at age 62. RMD Joint Life and Last Survivor Table—Life Expectancy indicates a factor of 29.0 years at age 62. Due to a history of longevity in both their families, Ji and Fa would like to assume a retirement period of 35 years. What amount of assets will Ji and Fa need at the beginning of their retirement period to fund an annual income need that increases annually with inflation—i.e., a growing annuity?
1446838
se the following information about Kent and Susan, a married couple, to answer the question that follows. Kent and Susan are both 32 and are planning to retire at 62. They estimate that they will need a lump sum of $4.3 million at retirement to provide the inflation-adjusted income stream required during their retirement years. They project that their current assets will grow to a value of $3.1 million by their first year of retirement. They feel they can earn a 6% after-tax return on their investments and would like to assume that inflation will average 4% over the long term. They want to fund their retirement by making level annual payments. They would like to assume a 26-year period of retirement. What annual end-of-year level savings will Kent and Susan need to deposit during their preretirement years
15179
A variable universal life insurance benefit provided as a part of a qualified defined contribution plan is considered incidental so long as the employer's contributions toward that benefit are no more than ___ of aggregate contributions to the plan.
25%
Caitlin has determined she has a future value of retirement savings need of $1,157,140. If she retires in 16 years and achieves an 8% after-tax annual return on her investments, what amount of level end of year annual deposit is required to fund this need?
38,159
Tom and Martha, longtime clients of yours, have reviewed their retirement planning and believe they do not have time to accumulate sufficient retirement assets to retire in six years when Tom is 62. Which of the following alternatives should they consider? Retire at an older age Save more Reduce the amount of income they require at retirement
I II and III
Use the following information about Kathleen Williams, president and 100% owner of Security Properties Inc., to answer the question below. Kathleen is 40 years old and hopes to retire at age 60. Kathleen is paid $120,000 in salary plus bonuses by the corporation. Security Properties Inc. employs five rank-and-file employees with annual salaries ranging from $20,000 to $50,000 and an average of $38,000. While rank-and-file employees range in age from 21 to 46, the average age is 34; turnover among these employees is low. Cash flow for Security Properties Inc. has been increasing for the past five years and is expected to increase in the future. Kathleen would like to implement a qualified plan that will maximize her retirement benefits and minimize corporate income taxes. Which of the following are advantages of installing a profit sharing plan? This plan will permit the corporation to take the maximum deduction allowed by law and offer contribution flexibility. Kathleen will benefit as much as the other employees from continuous contributions, investment growth, and compounding of earnings. The plan can be integrated to give Kathleen an even greater share. A plan that provides a contribution equal to 25% of compensation will maximize benefits for Kathleen.
I III and IV
Bedford Enterprises Inc. is a closely held corporation that manufactures computer software products. David owns 100% of the stock in the corporation. Bedford Enterprises Inc. sponsors a money purchase plan. Additional information about the corporation is presented in the following. David is 45 and hopes to retire at age 65. The next-oldest employee expects to retire in 22 years. The corporation has been in business for 10 years and has a history of increasing profits. The corporation employs 35 people, with 60% of the employees under age 40. The average turnover rate among employees is high. The owner's risk tolerance level is medium. The fair market value of the money purchase plan's assets is $4 million. As the financial planner for David, you have been asked to evaluate the money purchase plan's investment portfolio, which is distributed as follows: 10% invested in short-term certificates of deposit with staggered maturity dates20% limited partnership interest in a private commercial real estate project that generates a high income yield40% invested in company stock30% in long-term government bonds with staggered maturity dates Which of the following statements best describe the appropriateness of the money purchase plan's investment portfolio? The investments in the short-term certificates of deposit have fixed maturity dates and therefore are not appropriate for liquidity reasons. The investments in company stock exceed the 10% maximum allowed for a money purchase plan. The investment in the limited partnership may be subject to unrelated business taxable income (UBTI) treatment and therefore is inappropriate. Overall, the types of investments selected by the plan are sufficiently diversified and therefore minimize investment risk.
II and III
Which of the following statements describe the rules for incidental benefits from qualified pension or profit-sharing plans? In a defined benefit plan, life insurance benefits are considered incidental if the cost of the benefits for a participant is less than 75% of the cost of the retirement benefit for that participant. In a defined benefit plan, life insurance benefits are considered incidental if the benefit for a participant is 100 times the participant's expected monthly pension benefit or less. In a defined contribution plan, whole life insurance benefits are considered incidental if the cost for a participant is less than 50% of the cost of all plan benefits for that participant. In a defined contribution plan, term life insurance benefits are considered incidental if the cost for a participant is less than 50% of the cost of all plan benefits for that participant.
II and III
n the construction of a qualified retirement plan portfolio, which of the following investment vehicles would generally be inappropriate? A guaranteed investment contract (GIC) A municipal bond fund A leveraged real estate limited partnership A corporate bond rated A or higher
II and III
Which of the following statements are disadvantages for the employer-sponsor of a cash balance pension plan? A certain level of plan benefit is guaranteed by the PBGC. The employer bears the investment risk in the plan. Cash balance pension plans are less expensive for the employer than a traditional defined benefit pension plan. Retirement benefits may be inadequate for older plan entrants.
II and IV
Which statements regarding the anticipated effective income tax rate a planner should use for required retirement plan distributions are NOT correct? The projected rate should be based only on a blend of current federal and state marginal income tax rates. The projected rate should be based only on a blend of current federal marginal income tax rates, gift tax rates, and estate tax rates. Accurately predicting future income taxes is not feasible. A planner should only use after-tax rate of return assumptions on retirement plan calculations.
II and IV
A retirement plan participant died before retirement, and there is a cost basis associated with her account. Which of the following state the beneficiary's income tax liability due to death benefits paid from a qualified plan as either life income or installment payments? When the benefits are from life insurance, the cash value portion is taxed under the annuity rules. If the benefits are not related to life insurance, the employee's cost basis becomes the cost basis for the beneficiary. If the benefits are not related to life insurance, the includible amount is generally taxed as ordinary income. When the benefits are from life insurance, the amount deemed to be pure insurance is excludible from gross income.
all
Gwen Yang is 38 years old and hopes to retire at age 60. She is president and 100% owner of BaseLine Economics Inc. Gwen is paid $120,000 in salary plus bonuses by the corporation. BaseLine Economics Inc. employs five rank-and-file employees with annual salaries ranging from $20,000 to $50,000. Rank-and-file employees range in age from 28 to 56; turnover among these employees is low. Cash flow for BaseLine Economics Inc. has been increasing for the past five years and is expected to increase in the future. Gwen would like to implement a qualified plan that will maximize her retirement benefits and minimize corporate income taxes. Which of the following are advantages of a profit sharing plan over other plans? This plan offers maximum contribution flexibility. As a percentage of her compensation, Gwen will benefit from the plan each year as much as the other employees from contributions and investment growth. The plan can be integrated to give Gwen an even greater share. The appropriate plan will provide a maximum contribution equal to 25% of covered compensation.
all
Johnson Services Inc. has been in operation for eight years and has been profitable for the past three years. Due to competitive pressures, the company will undergo an expansion of its workforce over the next five years—from the current 17 employees to a projected 36 employees. Tim Johnson, the owner, is interested in installing a qualified retirement plan to attract employees and reduce the company's tax burden. Tim is 38 years of age, and his financial advisor has recommended that he save 10% of his salary each year for a retirement fund. Which of the following statements describe a key factor that affects the selection of a qualified retirement plan—in this case, making a defined contribution plan more appropriate than a defined benefit plan? Tim's interest in attracting employees to the company The uncertainty of future cash available for plan contributions, given the planned growth of the company Tim's age Tim's retirement savings need
all
Dave is covered by a qualified retirement plan. If the plan provides life insurance on Dave's life, which of the following statements regarding the income tax ramifications to Dave is CORRECT? Dave must include the pure protection cost of the life insurance in his income. The pure protection cost of the life insurance will be treated as nontaxable basis once Dave begins receiving distributions from the plan.
both
Which of the following statements describes a component of calculating the lump-sum capital amount necessary to fund the projected income need over the retirement need period? Adjust or inflate the projected first-year retirement income need (expressed in present value dollars) to future dollars at the time of retirement. Calculate the total retirement fund needed (lump-sum capital amount) to meet the projected income demands. To do this, the planner must calculate the present value of an annuity due using an inflation-adjusted rate of return.
both
Freddy owns a small business as a sole proprietorship and is in the 12% tax bracket. He and his employees are all under 30. He would really like to buy a boat and cruise the coast. It looks like the company will have a second profitable year if the new equipment needed to update the business doesn't cost too much. What plan would be appropriate for this situation?
none
Ross owns a successful manufacturing business as a C corporation. Thanks to his firm's culture of hard work, Ross is willing to share some ownership of the company with his workers. The business is growing at 18% per year, and it could grow faster if he had more cash to reinvest in the business. Ross would like to begin taking care of his retirement needs and also those of his of his workers, but he puts every penny he makes back into the company. What type of qualified plan should Ross select?
stock bonus plan
