retirement ch 7

Steve, who was born in 1954, is an employee of X2, Inc. He plans to work until age 75. He currently contributes six percent of his pay to his 401(k) plan, and his employer matches with three percent. Which one of the following statements is true?

Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he retires. Rationale Generally, an individual who is born in 1954 must receive their first minimum distribution by April 1 following the year the individual attains age 73. However, if the individual remains employed beyond age 73, they may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer's qualified plan. Therefore, options a and c are incorrect. Option d is incorrect because Steve can continue to contribute to the 401(k) plan as long as he is still working for X2, Inc. and the plan permits.

Reese has assets both in her Roth IRA and in her Roth account that is part of her employer's 403(b) plan. However, she is not sure about the differences between the two types of accounts. Which of the following statements would you tell her is correct?

The nature of the income received by beneficiaries in a qualified distribution is the same for distributions from both Roth IRAs and Roth accounts. Rationale Option a is not correct because the five-year holding period is separate for each type of account. Option b is not correct because the Roth IRA has an additional distribution triggering event for first time home buying. Otherwise, the rules are the same. Option c is not correct because, as a result of the SECURE 2.0 Act, neither Roth IRAs nor Roth accounts are subject to lifetime RMDs after 2023.

Roger and Anita were happily married until Roger fell in love with Sam. As a result, Roger and Anita have agreed they need to get a divorce. As part of the process, the court has provided a domestic relations order that calls for Anita's profit-sharing plan to be divided into equal portions such that Roger will have his own account with half of the value of the retirement account. What type of approach has been taken?

The separate interest approach. Rationale The separate interest approach calls for splitting a retirement account into two separate accounts. Each party is free to act with regard to their separate account without the interference or consent of the other party. There is not such term as split payment approach or divided account approach.

One approach that is used in some domestic relations orders is to "split" the actual benefit payments made with respect to a participant under the plan to give the alternate payee part of each payment. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. This approach is often used when a support order is being drafted after a participant has already begun to receive a stream of payments from the plan (s

The shared payment approach.

Carlton recently died at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Carlton was married to Vanessa, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct?

Vanessa can receive annual distributions over her remaining single-life expectancy, recalculated each year Vanessa can receive distributions over her remaining single-life expectancy. A spouse beneficiary is an eligible designated beneficiary who may distribute over her life expectancy and can recalculate life expectancy each year. Option a is incorrect. She is not required to distribute the entire account within five years. Option b is incorrect. Vanessa can wait until Carlton would have been age 75 and begin taking distributions over her life expectancy. Option c is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death. Vanessa could also roll the account over to her own IRA and begin distributions when she attains age 75.

Maren, a participant in the Zappa retirement plan, has requested a second plan loan. Her vested account balance is $70,000. Maren borrowed $30,000 ten months ago and still owes $20,000 on that loan. Could she increase his maximum permissible loan if she repaid the outstanding loan before taking the new loan?

Yes. Paying off the loan will increase the loan available by $5,000. Rationale Maren can borrow the lesser of $50,000 or half of the vested account balance. However, the $50,000 must be reduced by the highest outstanding balance ($30,000) in the last twelve months, which equals a maximum new loan of $20,000. Half of the vested account balance also requires an adjustment; it must be reduced by the outstanding loan amount. Half of the vested account balance ($70,000 ÷ 2 = $35,000) less the outstanding loan of $20,000 equals $15,000. If the loan of $20,000 is repaid, which it could be, then the available loan would increase by $5,000 to $20,000.

MaryAnn, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. MaryAnn did not make the request of the IRS until six months after the mistake was made. Will the IRS permit the waiver?

Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances. Rationale The IRS generally grants such requests if timely made.

Brooks, a participant in the Zappa retirement plan, has requested a second plan loan. His vested account balance is $80,000. Brooks borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan?

$22,000. Rationale Brooks can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance in the last twelve months ($27,000) which equals a maximum new loan of $23,000. Half of the vested account balance also requires an adjustment; it must be reduced by the outstanding loan amount. Half of the vested account balance ($40,000) less the outstanding loan of $18,000 equals $22,000.

Amani, age 45, has a vested account balance of $140,000 in his employer-sponsored 401(k) plan. This year, Amani's home was damaged during the incident period related to a qualified disaster, causing Amani to suffer an economic loss. What is the maximum distribution Amani can take from his 401(k) without penalty, assuming that the distribution meets the requirements in relation to the timing of the incident period for the disaster?

$22,000. RationaleUnder the SECURE 2.0 Act, qualified individuals whose place of principal residence at any time during the incident period is located in the qualified disaster area and who sustained an economic loss by reason of the qualified disaster may take a penalty-free distribution of up to $22,000 per disaster. The distribution must be made on or after the incident period and before the date which is 180 days after the applicable date with respect to the disaster. The applicable date is the later of the date of enactment of the SECURE 2.0 Act, the first day of the incident period, or the date of the disaster declaration. Since Amani is a qualified individual and has met the timing rules, he may take a penalty-free distribution of $22,000.

On January 5, Belinda, age 39, withdrew $42,000 from her qualified plan. Belinda had an account balance of $180,000 and an adjusted basis in the account of $30,000. Calculate any early withdrawal penalty.

$3,500. Rationale The penalty applies only to the taxable amount.$30,000 ÷ $180,000 = 0.1667 exclusion$42,000 x 0.1667 = $7,000 excluded from taxation$42,000 - $7,000 = $35,000 x 0.10 = $3,500

Arisa has a vested account balance of $150,000 in her employer-sponsored 401(k) plan. This year during a hurricane, Arisa failed to evacuate her home which was located in an area that was declared a qualified disaster area. The experience was very frightening, but Arisa feels lucky because her home was not damaged, and she did not suffer any economic loss as a result of the hurricane. What is the maximum loan Arisa can take from her 401(k), assuming the plan permits loans, and she has not had an

$50,000. RationaleThe maximum loan amount is generally limited to the lesser of 50% of the vested account balance or $50,000, reduced by the highest outstanding loan balance within the 12 months prior to taking the new plan loan. However, under the SECURE 2.0 Act, for loans made to qualified individuals, the limit is increased to the lesser of 100% of the vested account balance or $100,000. Qualified individuals are those whose place of principal residence at any time during the incident period is located in the qualified disaster area and who sustained an economic loss by reason of the qualified disaster. Since Arisa did not suffer an economic loss as a result of the disaster, she is not a qualified individual. Arisa may take a maximum plan loan of $50,000.

Owen turned 73 on November 1, 2024 and must receive a minimum distribution from his qualified plan. The account balance had a value of $437,989 at the end of 2023. The distribution period for a 73-year-old is 26.5, and for a 74-year-old it is 25.5 under the Uniform Lifetime Table effective for distribution years after 2021. If Owen takes a $15,000 distribution on April 1, 2025, what is the amount of the minimum distribution tax penalty associated with his first year's distribution? Assume that

$544.Rationale The required minimum distribution for Owen is $16,528 ($437,989 divided by 26.5) because he is 73 years old as of December 31, 2024. Owen only took a distribution of $15,000, therefore, the minimum distribution penalty (25%) would apply to the $1,528 balance. Therefore, the minimum distribution penalty is $382 (25% of the $1,528). Under the SECURE 2.0 Act, beginning in 2023, the penalty tax for failure to take a required minimum distribution was reduced from 50 percent to 25 percent. The 25 percent penalty is further reduced to 10 percent if the distribution failure is corrected within a specified correction window which ends on the earlier of 1) the date the IRS issues a notice of deficiency, 2) the date the IRS assesses the excise tax, or 3) the last day of the second taxable year that begins after the end of the year in which the tax is imposed. D $764. Confidence of your answer

Which of the following are benefits of converting assets in a qualified plan to a Roth account through an in-plan Roth rollover?1. The conversion may result in a reduction in income tax in future years.2. The conversion will result in increasing after-tax deferred assets and reducing the gross estate.3. The conversion will eliminate the need for minimum distributions during the life of the participant.

1 and 2. Rationale While there are no guarantees, the conversion may result in a reduction in tax in future years since all future income in the account will escape taxation. The conversion does result in increasing after-tax deferred assets and reducing the gross estate. Prior to 2024, RMDs are required from Roth accounts during the lifetime of the participant; however, the SECURE 2.0 Act eliminated this requirement for taxable years beginning after December 31, 2023.

Which of the following distributions from a qualified plan would not be subject to the 10% early withdrawal penalty, assuming the participant has not attained age 59½?1. A distribution made to a spouse under a Qualified Domestic Relations Order (QDRO).2. A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company.3. A distribution to pay for costs of higher education.4. A distribution made immediately after separation f

1 and 4. Rationale Statement 2 is incorrect for two reasons. The exception to the 10 percent early withdrawal penalty for health insurance premiums is only applicable to unemployed individuals. In addition, this exception is only available for distributions from IRAs, not qualified plans. Statement 3 is incorrect because the exception to the 10 percent penalty for higher education expenses only applies to distributions from IRAs, not qualified plans.

Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan?1. Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax.2. Distributions used to pay medical expenses in excess of the 7.5% of AGI for a tax filer who itemizes are exemptfrom the early withdrawal penalty.3. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant a

1, 2, and 3. Rationale Statements 1, 2, and 3 are correct. All three are exceptions to the 10% penalty for qualified plans. Note that statement 1 applies to distributions from qualified plans, but not to distributions from an IRA.

The early distribution penalty of 10 percent does not apply to qualified plan distributions:1. Made after attainment of the age of 55 and separation from service.2. Made for the purpose of paying qualified higher education costs.3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

1,3

Which of the following is/are elements of an effective waiver for a pre-retirement survivor annuity?1. Both spouses must sign the waiver.2. The waiver must be notarized or signed by a plan official.3. The waiver must indicate that the person(s) waiving understand the consequences of the waiver.

2 and 3. Rationale Only the nonparticipant spouse must sign the waiver. Note that when the waiver is a separate document, only the nonparticipant spouse must sign the waiver form. In practice, many plan administrators include the waiver as part of the same document in which the participant elects a different form of benefit or different beneficiary, which requires the participant's signature for those elections; however, only the nonparticipant spouse must sign the waiver section.

Which of the following is true regarding QDROs?

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's qualified plan. Rationale The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form. QDRO distributions are an exception to the 10% penalty. Note, however, that if the QDRO distribution is rolled to an IRA, subsequent distributions from the IRA will be subject to the 10 percent penalty unless an IRA penalty exception applies.

Bobby would not listen to his financial advisor and decided to rollover his qualified plan assets to a traditional IRA. Which of the following is correct?

Bobby has lost some of his creditor protection by moving the funds from a qualified plan to an IRA. Rationale Option a is not correct because ten year forward averaging, pre-74 capital gain treatment and NUA treatment are available in a qualified plan, but not available in an IRA. Option b is not correct because qualified plans can investment in life insurance and collectibles, which is not permitted in an IRA. Option c is not correct, as he could have converted direct from a qualified plan to a Roth IRA. Option d is correct as the assets are no longer protected under ERISA. The assets will be protected under bankruptcy law, but not ERISA.

Decatur 401(k) Plan maintains a loan program for its participants. The plan has 50 participants, three of whom had participant loans. Decatur conducted a year-end review of its loan program and found the following:• Lee received a loan from the plan one year ago for $60,000 over a five-year term, amortized monthly using a reasonable interest rate. He timely made the required payments. Lee's vested account balance is $180,000.• Brice received a loan of $10,000 to help her mother move to Flo

Both Lee and Brice. Rationale Lee's loan exceeds the $50,000 limit and Brice's exceeds the five-year repayment rule.

in 2024, Demetres, age 43, is a victim of domestic abuse and needs additional funds to move out of the home in which the abuse occurred. Demetres has a pretax 401(k) balance of $100,000. All of the following statements regarding Demetres's ability to use funds from the 401(k) are correct except:

Demetres may take a $100,000 distribution without incurring a ten percent penalty. RationaleOption a is an incorrect statement because the distribution is limited to the lesser of 50% of the vested account balance or $10,000 in 2024. All of the other statements correctly describe the penalty exception for domestic abuse under the SECURE 2.0 Act (effective for distributions after December 31, 2023).

In June 2023, Mario converts $100,000 in his 401(k) plan to a Roth account through an in-plan Roth rollover. The value of the assets in the Roth account drops by 40 percent due to a significant decline in the stock market that occurs in August 2023. The in-plan Roth rollover results in Mario incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40 percent drop). Which of the following statements is correct?

Mario cannot recharacterize the conversion.

Alanis recently died at age 77, leaving behind a qualified plan worth $200,000. Alanis began taking minimum distributions from the account after attaining age 70½ (prior to 2020) and correctly reported the minimum distributions on her federal income tax returns. Before her death, Alanis named her granddaughter, Nadine, age 22, as the designated beneficiary of the account. Now that Alanis has died, Nadine has come to you for advice with respect to the account. Which of the following is correct?

Nadine must distribute the entire account balance within ten years of Alanis's death. Rationale Since Alanis's died after December 31, 2019 the post-death minimum distribution rules under the SECURE Act will apply. Nadine is not an "eligible designated beneficiary" (spouse, minor child, disabled, or beneficiary no more than 10 years younger than the deceased), therefore, she must take a full distribution within 10 years of Alanis's death.

Marleen, age 53 and a recent widow, is deciding between taking a lump-sum distribution from her husband's pension plan of $263,500 now or selecting a life annuity starting when she is age 65 (life expectancy at 65 is 21 years) of $2,479 per month. Current 30-year Treasuries are yielding six percent annually. Which of the statements below are true?1. If Marleen takes the lump-sum distribution, she will receive $263,500 in cash now and be able to reinvest for 34 years, creating an annuity of $4,

Neither 1 nor 2. Rationale Statement 1 is false. Marleen will only receive $210,800 ($263,500 less 20% withholding). Statement 2 is also false. The distribution is on account of death, an exception to the 10% early withdrawal penalty rule.

Crystal, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. Her total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Crystal is 100 percent vested. Which of the following statements is/are correct?1. Crystal may take a loan from the plan, but the maximum loan is $41,000 and the normal r

Neither 1 nor 2. Rationale Statement 1 is incorrect because she can take a loan equal to one-half of his total vested account balance up to $50,000. Statement 2 is incorrect because the medical insurance premium exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Viola, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. Viola did not make the request of the IRS until five years after the mistake was made. Will the IRS permit the waiver?

No. Viola waited an unreasonable amount of time before filing the request.

Saki, age 35, is having a run of bad luck. In December 2023, Saki experienced a health emergency forcing her to work only part time for two months (December 2023 and January 2024). Unfortunately, Saki does not have disability insurance and does not have any emergency funds available to help cover the cost of her rent, utilities, and groceries in excess of her part-time income. Saki does, however, have an IRA with a balance of $2,000. Which of the following is correct regarding Saki's potential

Saki cannot take a penalty-free distribution in 2023 but can take a penalty-free distribution of $1,000 in 2024. RationaleUnder the SECURE 2.0 Act, beginning in 2024, a self-certified emergency withdrawal of up to $1,000 per calendar year is permitted from an IRA, 401(k), 403(b), or 457(b) plan. Amounts distributed can be repaid any time during the three-year period beginning on the day after the date the distribution is received. No additional distributions are allowed during the three calendar years immediately following the year of distribution unless the distribution is fully repaid or total employee contributions to the plan (or contributions to the IRA) are at least equal to the amount that has not been repaid.

In May 2023, Seth converts $100,000 in his traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40% due to a significant decline in the stock market that occurs in October 2023. The Roth conversion results in Seth incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40% drop). Which of the following statements is correct?

Seth cannot recharacterize the conversion. Rationale Prior to 2018, taxpayers had the ability to recharacterize a Roth conversion up to the due date of the income tax return, including extensions. As a result of The TCJA 2017, Roth conversions cannot be recharacterized after 2017.

Laura, age 43, has several retirement accounts and wants to know what accounts can be rolled over to other accounts. Which of the following statements regarding rollovers is not correct?

She could take a distribution from her SEP IRA and roll it over to a qualified plan without incurring a 20% withholding. B She could rollover her government 457(b) plan to her new employer's qualified plan. C She could rollover the funds from her old employer's qualified plan to her new employer, who sponsors a 401(k) plan with a Roth account, and be able convert the funds in an in-plan Roth rollover. D She could rollover her traditional IRA to her designated Roth account in her 40(b) plan.Rationale Options a, b and c are all correct and permissible. She cannot roll over traditional IRA funds to a Roth account.