Quiz 6
Claudia's simplified employee pension (SEP) plan balance is $60,000. She wants to know her options for taking a loan from her SEP plan to pay some college expenses for her daughter, Caroline. Which of the following statements is CORRECT? A) Claudia may not make a loan from her SEP plan account. B) Claudia may borrow up to 50% of her SEP account balance to pay for Caroline's college expenses because she is 100% vested in the account contributions. C) Because Claudia is 100% vested in the SEP plan, she may borrow up to $50,000 from the plan. D) SEP plan loan repayments must be in level installments payable at least quarterly over a 5-year period.
A) A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan.
Julie turned 73 this year, and will correctly take her first required minimum distribution (RMD) from her qualified plan by April 1st of next year. Her qualified plan balance for which year is used to calculate the RMD she must receive by December 31st of next year? A) The plan balance at the end of this year B) The plan balance at the end of next year C) The plan balance at the beginning of this year D) The plan balance at the end of this year minus the April 1 distribution she receives next year
A) The question asks about the RMD for the second year. The RMD for each year is calculated based on the balance at the end of the previous year. Thus, her second year's RMD is determined by the plan balance at the end of this year. Notice that any RMD amount for the trigger year not taken by the end of this year will be included in the calculation of next year's RMD (even if she correctly withdraws money for her trigger year RMD before April 1st of next year). SECURE 2.0 set age 73 as the new trigger year for 2023 and beyond.
Jackie turns 73 years old on March 15th of this year. When must she begin taking distributions from her Section 401(k) plan, assuming she no longer works for the employer-sponsor of the plan? A) December 31st of this year B) April 1st of next year C) December 31st of next year D) April 1st of this year
B) For retirees, the first required minimum distribution (RMD) from a qualified plan must be taken by April 1st of the year following the year in which the participant reaches age 73, so she must complete her trigger year distribution by April 1st of the next year. Even though all or part of the first RMD distribution could be taken the year after the trigger year, it is still the trigger year's RMD (until April 2nd of the year after the trigger year). Also, the age 73 RMD will be based on the account balance at the end of the year prior to the trigger year.
The 20% mandatory withholding requirement applies to distributions from all of the following except A) qualified plans. B) Section 457 plans. C) IRAs. D) Section 403(b) plans.
C) The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs.
Which of these beneficiaries is entitled to move a post-death distribution from a qualified plan into an IRA? A) All three choices are correct B) The surviving mother of the participant C) The oldest surviving child of the participant D) The surviving spouse of the participant
A) A spouse beneficiary can roll the distribution over into an IRA and treat it as the spouse's own; a nonspouse beneficiary can use a direct trustee-to-trustee transfer of the distribution into a specially titled inherited IRA. Our industry can use the terms "rollover" and "roll" loosely to describe moving money from one retirement account to another. If an answer on the CFP Final is correct except it uses the terms "rollover" or "roll" to describe a nonspouse moving retirement money into an inherited account after the death of the original owner, and all other answers are wrong, pick the answer that says inherited retirement money can be "rolled" into an inherited IRA. The intent of the question was to test the rules for moving inherited retirement money.
Blake, age 75, is required to take substantial required minimum distributions (RMDs) from his qualified retirement plan. He has no current need for the cash and has established traditional IRAs with his children as beneficiaries and wishes to deposit the RMD distributions in equal amounts to each IRA within 60 days of the distributions to eventually benefit his children. Which of these statements regarding Blake's rollover of the RMDs is CORRECT? A) Required minimum distributions may not be rolled over. B) A good plan is for Blake to roll over the distribution within 60 days after receipt. C) Required minimum distributions may not be rolled over, but Blake may make equivalent contributions to the traditional IRAs under any circumstance as long as the contributions are within 60 days of receiving his RMDs. D) Because Blake is over age 73, he may not roll over the RMDs to a traditional IRA, but he may roll over the RMDs to a Roth IRA.
A) Blake may not roll over the RMD distributions, but if he has earned income, he may make contributions to a traditional or Roth IRA. The new contributions must be based on earned income and be subject to the normal annual limits and contribution timing rules.
The ability to use the beneficiary's Table I life expectancy when calculating the RMD for an inherited retirement account applies for which of these? A) a surviving spouse B) a charity C) an estate D) a healthy 50-year-old son of the deceased
A) For deaths in 2020 and later, the SECURE Act eliminated the inheritor's ability to stretch their IRA based on their life expectancy from Table I except for eligible designated beneficiaries (EDBs). The foremost EDB is the surviving spouse. The other EDBs are minor children (until age 21 when the 10-year rule kicks in); people with permanent disabilities; those who are chronically ill; and those who are not more than 10 years younger than the deceased. Only a surviving spouse is allowed to return to Table I each year to "recalculate" their RMD from Table I. All other EDBs subtract one from the previous year's life expectancy factor. In the real world, a person who inherited a retirement account due to a death before 2020 is grandfathered under the pre-2020 rules. The rules for a surviving spouse were not changed by the SECURE Act. For anyone other than a surviving spouse, RMDs are calculated like a generic EDB. You start with the Table I life expectancy factor and then subtract 1 for each subsequent year. The SECURE Act did not change the treatment of an estate.
Jake has named a trust as the beneficiary of his qualified retirement plan. The trust beneficiaries include his four children, ages 4 through 18, and his nephew, age 30. For the trust beneficiaries to be treated as the designated beneficiaries of the plan, the trust must meet all of these requirements except A) the trust beneficiaries must not be identifiable from the trust instrument. B) the trust must be irrevocable or become irrevocable when Jake dies. C) the appropriate documentation has been provided to the plan administrator by October 31st of the year following the year of death. D) the trust must be valid under state law.
A) For the trust beneficiaries to be treated as designated beneficiaries, the beneficiaries must be identifiable from the trust instrument.
Using the Uniform Lifetime Table to calculate the required minimum distributions (RMDs) from a qualified plan is mandatory unless A) the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. B) there is no designated beneficiary. C) there is more than 1 designated beneficiary. D) the designated beneficiary is a child under the age of 16.
A) The Uniform Lifetime Table must be used to calculate required minimum distributions (RMDs) under a qualified plan or IRA unless the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant.
Which of the following descriptions of a regular rollover from a qualified plan to a traditional IRA is CORRECT? A) A 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. B) Amounts rolled over are taxable according to rules governing the source of contribution. C) It generally must be completed within 90 days of the date of distribution from the previous plan. D) The rollover amount to the IRA is counted as a new IRA contribution and thus limits the amount that can be contributed to the IRA that year.
A) The answer is a 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. In a regular rollover, the recipient physically receives a check, made payable to the recipient, for the eligible rollover distribution from the plan trustee. Under this method of distribution, the issuer must withhold 20% of the proceeds for federal income tax. A rollover does not count against the annual contribution limit.
Which of the following reasons for an early distribution from a qualified retirement plan is NOT an exception to the 10% penalty? A) It is a distribution for higher-education costs. B) The distribution is made to a beneficiary of the account due to the owner's death. C) The plan owner becomes totally and permanently disabled. D) It is made after separation from service from an employer-sponsor of the plan after age 55.
A) The exception from the 10% early distribution penalty for distributions for higher-education costs only applies to IRA distributions.
David, a 63-year-old investor, wants to know which of these penalties he might be subject to at some point if he continues tax deductible contributions to his traditional IRA. The applicable maximum penalty is A) a mandatory 20% withholding on all transfers. B) a 25% minimum distribution penalty. C) a 6% penalty on excess withdrawals. D) a 10% early distribution penalty.
B) Because David is over age 59½, he will not be subject to the early withdrawal penalty. If David does not begin taking minimum distributions by the required beginning date (April 1 following the year in which the participant attains age 73 for traditional IRAs), he will be subject to the maximum minimum distribution penalty of 25%. This could be reduced to 10% if the shortfall is withdrawn promptly. There is no penalty for excess withdrawals. Also, there is not a 20% mandatory withholding from all transfers for IRAs and employer retirement plans. Finally, there is no 20% mandatory withholding on IRA rollovers.
Elaine is currently age 76 and scheduled to take another distribution from her former company's qualified retirement plan later this year. Her account balance in the plan as of December 31 last year was $320,000. Under the Uniform Lifetime Table, the divisor is 23.7. However, Elaine's actual life expectancy is only 16 years. What is the amount, if any, of Elaine's required minimum distribution (RMD) from this plan for this year? A) $41,558 B) $13,502 C) $20,000 D) $0, because Elaine is over age 73
B) Elaine's required minimum distribution this year is $13,502, calculated as follows: $320,000 ÷ 23.7 = $13,502. She must calculate her required distribution using the Uniform Lifetime Table and not her actual life expectancy. This is actually advantageous for the owner because the original owner's RMD is usually based on the owner's age and the age of someone 10 years younger than the owner. This is true even if the account owner is not married. The only time the life expectancy in a RMD calculation for the original account owner does not use Table III is when the original owner is actually married to someone who is more than 10 years younger. In that case, the RMD is based on the actual ages of the married couple according to Table II. LO 6.2.2
Mark attained age 73 this year. He does not plan to retire from his position with Big Trucks, Inc., until his birthday on December 1, when he is 76. Mark is a 3% shareholder in Big Trucks. When must Mark begin to receive required minimum distributions (RMDs) from his qualified retirement plan at Big Trucks? A) Mark is not required to receive his first RMD until December 31 of the year following his actual retirement date from Big Trucks. B) Mark is not required to begin his RMDs until April 1 of the year following his actual retirement from Big Trucks. C) Because Mark is a shareholder in Big Trucks, he must receive his first RMD by April 1 of next year. D) Because Mark is still employed by Big Trucks, he is not required to take his first RMD until December 31 of the year he actually retires from Big Trucks.
B) Participants in qualified plans, Section 403(b) plans, and governmental Section 457 plans may defer the required beginning date until April 1 following the year of retirement, if the participant continues to work after attaining age 73. If the employee-participant owns more than 5% of the business sponsoring the retirement plan, the RMD may not be deferred but must be taken by April 1 of the year after the employee attains age 73. SECURE 2.0 raised the normal trigger year for RMDs from 72 to 73 for 2023 and years following.
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 A) taxed as ordinary income in the year of the distribution. B) taxed at the capital gains rate when the stock is sold. C) taxed as ordinary income when the stock is sold. D) received tax free.
B) The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.
Which of the following is correct regarding qualified joint and survivor annuities (QJSA) provided for in qualified pension plans? A) The maximum QJSA payable to a surviving spouse may not exceed 150% of the amount of the annuity payable during the life of the participant. B) The QJSA amount payable to the surviving spouse may not be less than 50% of the amount of the annuity payable during the life of the participant. C) QJSA provisions are never applicable to a Section 401(k) plan. D) QJSA provisions may never be waived.
B) The QJSA amount payable to the surviving spouse may not be less than 50% (nor greater than 100%) of the amount of the annuity payable during the life of the participant. The QJSA may be waived with written notarized consent of the participant's spouse. A Section 401(k) plan may be subject to QJSA requirements unless certain requirements are met.
Jerry and Barbara recently filed for divorce after 25 years of marriage. The property settlement approved by the court included an award to Barbara of half of Jerry's vested benefit in his defined benefit pension plan. This was done via the drafting and implementation of a qualified domestic relations order (QDRO). Which of the following is an implication of the QDRO for Jerry and Barbara? A) Barbara's benefit is subject to an additional 10% penalty if received before her age 59½. B) Barbara's benefit upon receipt is not subject to income tax. C) When Jerry retires, Barbara's benefit is taxable to her. D) Under QDRO rules, Barbara is not eligible to roll over the distribution to an IRA.
C) A distribution by a qualified retirement plan to an alternate payee who is a spouse or former spouse of the participant is taxable to the spouse, if it is made pursuant to a QDRO. The distribution to Barbara pursuant to a QDRO is not subject to the 10% penalty for early distribution. Barbara may roll over the distribution to an IRA.
This year, Martin received a lump-sum distribution from his qualified retirement plan. The distribution consisted entirely of his employer's stock, which has a fair market value of $100,000 on the date of distribution to Martin. The adjusted basis of the stock to the trustee of the plan was $70,000. Assuming Martin does not sell the stock this year, what amount is included in Martin's gross income as a result of the distribution? A) $0 B) $100,000 C) $70,000 D) $30,000
C) Because the distribution is a lump-sum distribution of employer stock, the net unrealized appreciation (NUA) rules apply. Under the NUA rules, the adjusted basis of the stock to the trust ($70,000) is included in Martin's gross income in the year of the distribution and is treated as ordinary income.
Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and move it in an IRA at his local banking institution. Which of these statements regarding this situation is CORRECT? A) A distribution from the SIMPLE 401(k) plan is not subject to mandatory 20% withholding. B) Ryan cannot transfer employer matching contributions for at least five years. C) A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement. D) A SIMPLE 401(k) plan may include a two-to-six year graded vesting schedule.
C) SIMPLE 401(k) plans are qualified plans and are subject to mandatory 20% income tax withholding for a distribution that is not a direct trustee-to-trustee transfer or a direct rollover (in which the check is made out to the next retirement plan custodian for the benefit of the person, but the check is mailed to the ex-participant to be forwarded to the new custodian). When there is a direct transfer of a distribution from a qualified plan to an IRA, the mandatory 20% withholding rule does not apply. Vesting is always immediate for employer contributions to a SIMPLE plan.
Claude's ex-wife, Sara, has secured a qualified domestic relations order against his Section 401(k) plan. What are Sara's rollover options if she takes a lump-sum distribution of her share of Claude's retirement plan account? A) Sara may roll over the distribution to her own qualified plan, Section 457 plan, or an IRA, but not to a Section 403 (b) plan. B) Sara may roll over the distribution to her own qualified plan, Section 403(b) plan, or Section 457 plan, but not to an IRA. C) Sara may roll over the distribution to her own qualified plan, Section 403(b) plan, Section 457 plan, or IRA. D) Sara may roll over the distribution to her own qualified plan, Section 403(b) plan, or an IRA, but not to a Section 457 plan.
C) Sara may roll over the distribution to her own qualified plan, Section 403(b) plan, Section 457 plan, or IRA.
Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution by a plan participant is CORRECT? A) The NUA on the employer stock is taxed as ordinary income in the year of the distribution. B) When the taxpayer receives the employer stock, the stock is taxed as ordinary income when sold. C) The NUA portion of the stock value is taxed at the capital gains rate when the stock is sold. D) The portion of the fair market value on the date of distribution that is NUA is tax free to the plan participant.
C) The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.
Mary is considering naming her estate as the beneficiary of her traditional IRA. Which of these is a disadvantage of this approach? A) Postmortem distributions are given preferential treatment. B) The estate will probably pay no more income tax on the IRA distributions than would an individual beneficiary. C) Her estate cannot be treated as a designated beneficiary for purposes of determining the distribution period after she dies. D) Postmortem distributions will not go through the probate process.
C) The estate cannot be treated as a designated beneficiary for purposes of determining required minimum distributions, and the estate will begin paying income tax at the maximum rate at a much lower level than an individual beneficiary would. Post-mortem distributions will go through the probate process, and distributions will lose any preferential treatment. Postmortem distributions will go through the probate process, and distributions lose any preferential treatment.
Which of these statements is CORRECT regarding tax-free rollovers of qualified plan distributions pursuant a qualified domestic order (QDRO)? A) The recipient of a distribution from a qualified plan pursuant a QDRO may not execute a tax-free rollover into a SEP. B) The recipient of a distribution from a qualified plan pursuant a QDRO will not owe income tax on any amounts not rolled over to a qualified plan or IRA. C) The recipient of a distribution from a qualified plan pursuant a QDRO may transfer the retirement money into another qualified plan or IRA. D) The recipient of a distribution from a qualified plan pursuant a QDRO may not execute a tax-free rollover into a Section 403(b) plan.
C)The recipient of a distribution from a qualified plan pursuant a QDRO may transfer the money into another qualified plan or IRA. Amounts not rolled over will be considered taxable income.
Geraldine participates in a Section 403(b) plan at work. Three years ago, she borrowed $5,000 from the plan. She has had an outstanding loan balance of $1,000 the past year, and 6 months ago she made the final payment of $1,000 to pay off that loan. Her vested account balance is currently $300,000. What is the maximum allowable loan amount she can take from the plan this year? A) $150,000 B) $50,000 C) $145,000 D) $49,000
D) Generally, the limit on loans from qualified plans is 50% of the vested account balance, up to a maximum loan of $50,000. The maximum loan must be reduced by any loan balance the participant had in the 1-year period preceding the loan. Geraldine's maximum allowable loan is $49,000.
Which of these statements is CORRECT regarding rollovers from qualified plans or IRAs? A) If a qualified plan participant has an outstanding loan from a qualified plan upon separation from service, the participant may roll over the loan into a rollover IRA as long as loan repayments continue at least quarterly. B) A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan. C) Distributions from qualified plans and IRAs require 20% mandatory withholding for federal income taxes if a trustee-to-trustee direct transfer is not used to execute a rollover. D) A taxpayer is limited to one IRA to IRA or Roth IRA to Roth IRA rollover in a one-year period (on a 365-day basis) but there is no restriction on the number of IRA transfers.
D) IRA distributions do not require 20% mandatory federal income tax withholding. A rollover is permitted from a qualified plan to a governmental Section 457 plan. Loans are not permitted from an IRA. If a person separates from service with an unpaid retirement plan loan balance, the person is allowed to move some or all of the unpaid balance into an IRA or another employer plan as a qualified plan loan offset (QPLO) up to the due date of the tax return for the year the unpaid retirement plan loan was defaulted, as described in LO 6.3.2.
Which of these describes differences between a tax-advantaged retirement plan and a qualified plan? A) Qualified plans do not have mandatory RMDs. B) All IRA plans must comply with every ERISA regulation. C) Employer stock distributions from a tax-advantaged plan benefit from NUA tax treatment. D) IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions.
D) IRA-funded employer-sponsored tax-advantaged plans are SEPs, SAR-SEPs, and SIMPLE IRAs. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment. Qualified plans do have mandatory RMDs. While some IRA-funded plans are technically covered by ERISA regulations, most plans are exempt from ERISA rules.
Karen, age 51, wishes to take distributions from her traditional IRA and avoid imposition of the 10% early distribution penalty. Which of these distributions will require Karen to pay the penalty? A) Karen needs cash to pay for tuition for her child at State University. B) Karen may take distributions under the substantially equal payments rule. C) Karen is totally and permanently disabled. D) Karen wants the distribution to pay medical expenses exceeding 6.5% of her adjusted gross income (AGI).
D) Medical expenses must exceed 7.5% of her adjusted gross income (AGI).
Which of these is false regarding qualified preretirement survivor annuities (QPSAs)? A) To waive the QPSA benefit for a married participant's spouse, the participant and the spouse must consent on a notarized written form. B) If the participant dies before retiring but after the earliest retirement date, QPSA payments must be the actuarial equivalent of not less than half of the participant's vested account balance as of the date of the participant's death. C) If the participant dies before the earliest retirement date, QPSA payments are to begin no later than the month in which the participant would have reached the earliest retirement age under the plan. D) The QPSA payable to the surviving spouse must be equal to the benefit that would have been payable to the participant.
D) QPSA payments are not required to equal the benefit that would have been payable to the participant at retirement, but must be the actuarial equivalent of not less than half of the participant's vested account balance as of the date of the participant's death.
Which of the following statements is NOT a requirement for the beneficiaries of a trust to be treated as a designated beneficiary of a qualified plan or an IRA? A) The trust is irrevocable at the participant's death. B) The trust is valid under state law. C) The appropriate documentation is provided to the plan administrator. D) The beneficiary of the trust is named on the decedent's retirement account as a named beneficiary.
D) The beneficiaries of the trust must be named (identified) in the trust instrument. Only the trust needs to be named as a beneficiary on the account.
The trustee for Debra's qualified retirement plan is calculating her required minimum distribution for this year. The trustee should use the plan balance for A) September 30th of last year. B) December 31st of this year. C) December 31st of next year. D) December 31st of last year.
D) The trustee should use the plan balance for December 31st of last year.
