Retirement Planning and Employee Benefits - Other Tax-Advantaged Retirement Plans

Generally, contributions to an Coverdell ESA must be made on or before the beneficiary attains what age?

18 Contributions must be made on or before the date on which the beneficiary attains the age of 18.

Who can be cover in a SIMPLE IRA?

- 100 employees or fewer.

What is the contribution cutoff date for a Roth IRA account?

- April 15th

What tax doctrine is this result of?

- Based on the tax doctrine of constructive receipt

Employers may contribute up to 25% of covered compensation to a SEP-IRA plan fully deductible. Under the 2012 SEP-IRA guidelines, employees earning less than how much may be excluded from receiving contributions in a SEP-IRA?

$550

Dan, age 56, wants to contribute the maximum allowable amount to his IRA account for this year. His AGI will be $167,000 and he actively participates in his 401(k) plan. What amount can he contribute?

$6,000 He can contribute $6,000, the $5,000 regular contribution and an additional $1,000 as a "catch-up" contribution as he age 50 or older. He may not be able to deduct his contribution but he can make it.

A person who has only investment income can contribute to an IRA. State True or False.

- False A person needs to have earned income to be able to contribute to an IRA.

Who can be cover in a 401(k) plan?

- Varying sizes allowed

Assuming the 5-year holding period has been met, when are withdrawals from a Roth IRA tax-free in their entirety?

Withdrawals are tax-free in their entirety in a Roth IRA: · After a five-year wait, and either: · Upon death or disability · First-time home-buying expense · After the age of 59½

Which of the following statements are true in regards to employer contributions for a SEP?

- No specific employer amount - Can omit a contribution

A Roth IRA can be rolled over to another Roth IRA:

- Tax-free A Roth IRA can be rolled over to another Roth IRA tax-free. There are no tax liabilities.

Name nonprofit institutions that are eligible to adopt a 403(b) plan?

- Churches - Hospitals - Private College Nonprofit institutions such as churches, hospitals, private schools and colleges, and charitable institutions are eligible to adopt a 403(b).

When are 403(b) plans salary reduction elections become ineffective?

- If salary reduction is elected after compensation is earned, it becomes ineffective

Earned income comprises which of the following?

- Income from employment - Income from self-employment - Taxable alimony payments

The amount that employees may exclude from income from contributions from an employer in 2012 is:

- Lesser of 25% of compensation or $50,000

Peter, a financial analyst, wants to determine the disadvantages of a Keogh plan. Which of the following are disadvantages of a Keogh plan?

- High costs - Complexities - Penalty for early withdrawal

Following 15 years of service, employees of which of these employers may be eligible for the special "15 years of service" catch-up?

- Hospitals - Schools - Adventist Church Health care insurance agencies, law firms and health maintenance organizations are not tax-exempt organizations, so they cannot install a Section 403 (b) plan.

What are the characteristics of a qualified plan?

- Eligible for 10-year averaging - May invest in incidental life - Main investments - mutual funds

Assume that in 2012, Kate, age 35, contributes $2,000 to a traditional deductible IRA. How much can she contribute to a Roth IRA for 2012 if the payment is made before April 15, 2013?

$3,000 The maximum Roth-IRA contribution for an individual is the lesser of: the dollar limit for 2012 ($5,000) or 100% of the individual earned income. Since Kate has contributed $2,000 to a traditional deductible IRA, she can only contribute an additional $3,000 ($5,000 - $2,000 = $3,000) to a Roth-IRA for 2012.

What is the contribution cutoff date for a Roth IRA?

- April 15th For most individuals or married couples, the contribution cutoff date is April 15th. However, since earnings on a Roth IRA account accumulate tax-free, taxpayers may want to make contributions as early as possible in the tax year.

Which plan is not designed to accumulate funds for retirement?

- Coverdell IRA A Coverdell Education Savings Account is a trust or custodial account that is created for the express purpose of funding the "qualified education" expenses of the designated beneficiary. It is not designed to accumulate funds for retirement.

An HR10 Keogh plan covers which of the following?

- Self employed individuals - Employees of an unincorporated business A Keogh plan only covers one or more self-employed individuals and the employees of an unincorporated business.

Assume that Mr. And Mrs. Stevens are both participants in qualified retirement plans and that their combined modified adjusted gross income (MAGI) in year 2012 is $180,000. Which of the following statements is true?

- They may make a contribution to an IRA, but it will not be deductible The no spousal attribution of active participation rule would be fully phased out at their joint MAGI level of $180,000. However, they can make nondeductible contributions to the traditional IRA within limits.

The five-year holding period begins with the first taxable year for which the account holder has a Roth IRA contribution. State True or False.

- True

Who can be cover in a 403(b) tax-deferred annuity?

- Varying sizes allowed but needs to be a educational or 501(c).

Who can establish a Keogh retirement plan?

- sole proprietor - partnership

Employees must make salary reduction elections during a 60-day period prior to what date of the year for which the elections are made?

- January 1st Employees must make salary reduction elections during a 60-day period prior to January 1st of the year for which the elections are made.

Who can be cover in a Keogh plan?

- Owners and their spouses. It also covers employees.

Which of the following are advantages of traditional IRAs?

- Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA. - This amount may be deducted from their current taxable income - Investment income earned on the assets held in a traditional IRA is not taxed until it is withdrawn from the account Eligible individuals can contribute up to the maximum annual contribution amount to a traditional IRA, and the amount may be deducted from their current taxable income. Income earned from the assets in a traditional IRA is not taxed until it is withdrawn (subject to the 10% early withdrawal penalty).

The ___ bears the investment risk in a 403(b) plan.

- Employee The employee bears investment risk in a 403(b) plan. However, 403(b) funds are in large part invested in low risk annuity contracts.

Which employees can employers exclude from contributions for Sep coverage?

- Employees whose compensation for the calendar year is less than $550 - Employees who are members of collective bargaining units if retirement benefits have been the subject of good faith bargaining - Nonresident aliens

Keogh Plans are subject to an annual funding limit of $17,000 per year. State True or False.

- False The maximum contribution under a Defined Contribution Keogh Plan is the lesser of 25% of compensation or $50,000 in 2012.

Which of the following statements are true regarding SIMPLE IRAs?

- Annual contributions are generally lower than amounts that would be available in a qualified plan. - Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified plan distributions. Annual contribution restrictions are generally less than amounts that would be available in a qualified plan. In addition, the catch-up contribution limits are also less for SIMPLE IRAs (and SIMPLE 401(k) plans) than for traditional 401(k) plans and 403(b) plans. Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified plan distributions.

Which plans may the employer not maintain if he maintains a SIMPLE IRA?

- Qualified plan - SEP - 403(a) annuity - 403(b) tax sheltered annuity or a governmental plan except for Section 457 plans.

Brad is a retirement planning analyst who wishes to determine the benefits of a Section 403(b) tax annuity plan. All of the following are benefits of a Section 403(b) tax-deferred annuity plan, except:

- Lump-sum distributions qualify for special 5-year averaging. Contributions to a 403(b) tax deferred annuity plan may or may not be currently taxable. It depends on whether the contributions are traditional or Roth. The plan account balances can accumulate tax-free (and may even be distributed under certain circumstances tax free). Lump sums do not qualify for any special averaging.

John is leaving his present job and has contributed to his Roth 403(b) account every year since starting it three years ago. His total contributions have equaled $33,600. The account value is $48,000. John is 63. After he leaves the company, he plans on withdrawing $25,000 to help finance the down payment on a summer home. What portion, if any, of his withdrawal will be taxable?

$7,500 The withdrawal from John's 403(b) account is not a qualified withdrawal as his account did not satisfy the five year rule. Therefore, the gains in the account are taxable when withdrawn but his contributions are not taxable when withdrawn. Withdrawals from a Roth 403(b), when not qualified, are made based on the Section 72(t) annuity rules, i.e. pro-rata. Since 30% of the account balance has not been taxed, 30% of the withdrawal, $7,500, will be taxable. The remaining 70% of the withdrawal is assumed to be from is contributions.

Which of the following statements is true about what an employer has to do in a SEP plan?

- Can choose not to contribute anything - Can contribute any percentage within the limits that the employer wishes The employer is not bound to contribute any particular amount to a SEP, or for that matter, to make any contribution at all. He can contribute anything he wishes within the limits. However, there is no compulsion to contribute 10% or 20% of the employee contribution.

Which of the following is a SIMPLE IRA limitation?

- Dollar limitation The SIMPLE-IRA does not have a percentage limit. In 2012, the maximum dollar limit for employee deferrals is $11,500.

What taxes are direct employer contributions not subject to?

- FICA - Capital Gains Tax - Federal Income Tax - FUTA Direct employer contributions are not subject to any of the taxes listed.

A money purchase Keogh plan does not have to meet minimum funding requirements. They just have to make substantial and recurring contributions or the plan may be deemed to have terminated. State True or False.

- False A money purchase plan is subject to the Code's minimum funding requirements. These require the employer to make contributions to each employee's and self-employed person's account each year equal to the percentage of compensation stated in the plan.

SEPs must be adopted in the year in which they are to be effective. State True or False.

- False Qualified plans must be adopted before the end of the year in which they are to be effective. But, on the other hand, SEPs can be adopted as late as the tax return filing date, including extensions, for the year in which they are to be effective.

For couples filing taxes jointly, which of the following statements hold true for traditional IRAs?

- If both spouses have earned income, each can have a traditional IRA. - The maximum contribution limit for each spouse is the lesser $5,000 or 100% of joint earned income. - An individual is not subject to the "active participant" restrictions simply because his or her spouse is an active participant in a tax-favored retirement plan. The phase-out range when only one spouse is an active participant is $169,000 to $179,000 for 2011. Each spouse can make an IRA contribution as long as at least one of them has sufficient earnings to cover it and they are both under age 70½ . The phase-out range for deductions for married filing jointly couples is $90,000 - $110,000 in 2011. The maximum IRA contribution is the lesser of the annual limit or the amount of earned income (or alimony).

Paul is a financial planner who wants to find the uses of a Keogh plan. A Keogh plan is used for which of the following reasons?

- Long-term capital accumulation - Retirement purposes - Loan purposes - To shelter current earnings from federal income tax for a self-employed individual A Keogh plan is used for long-term capital accumulation, loan purposes, retirement purposes, and to shelter current earnings from federal Income tax for a self-employed individual. It is also applicable in the case of an employee of a self-employed individual.

Harry Grisham is 45 years old. He joins a company which provides a SEP to its employees. Which of the following statements is true regarding Harry and the SEP plan?

- May not provide an adequate retirement benefit for him. - May not provide significant benefits Employees must not rely upon a SEP to provide them with an adequate retirement benefit. Benefits are significant only if the employer makes substantial, regular contributions to the SEP. But such regular contributions are not a requirement for a SEP, so it may not provide significant benefits.

Evershine Inc. is setting up retirement plans for its employees. Can Evershine Inc. set up a Keogh plan?

- No A Keogh plan can only be set up for an unincorporated business.

Is it advisable to incorporate a business just to obtain corporate treatment for qualified plans?

- No, it does not help to incorporate. Incorporation results in higher taxes in most cases.

What are the IRS requirements for a profit sharing plan that prevent it from being deemed terminated?

- Payments must be substantial and recurring. The IRS requires substantial and recurring contributions, or the plan may be deemed to have terminated. This contribution flexibility is very advantageous for a small business, whose income may fluctuate substantially from year to year.

Which plans can an employer not maintain, if he maintains a SIMPLE IRA?

- Qualified plan - SEP - 403(a) annuity - 403(b) tax sheltered annuity The plans an employer cannot maintain if he maintains a SIMPLE IRA include the qualified plan, SEP, 403(a) annuity and 403(b) tax sheltered annuity. The Section 457 plan can be maintained, on the other hand.

Current law imposes income limitations on the deductibility of traditional IRA contributions for those persons who are "active participants" in an employer-sponsored retirement plan that is tax-favored. These include which of the following?

- Qualified retirement plan - Simplified Employee Pension (SEP) - Section 403(b) plan - SIMPLE IRA Non-qualified tax-deferred annuities are not employer-sponsored retirement plans. All the other plans are employer-sponsored plans.

Participation in which of the following retirement plans may affect the deductibility of an IRA?

- Qualified retirement plan· - SEP - Section 403(b) tax-deferred annuity plan - SIMPLE IRA Current law imposes income limitations on the deductibility of traditional IRA contributions for those persons who are "active participants" in an employer retirement plan that is tax-favored. This includes a qualified retirement plan, simplified employee pension (SEP), Section 403(b) tax-deferred annuity plan or SIMPLE IRA.

Tom is a financial analyst. A client with a small business approaches him and briefs him about setting up a tax-favored retirement plan, and Tom determines that a SIMPLE IRA is the best alternative for the client. Which of the following is an accurate statement of one of the aspects of SIMPLE IRAs that Tom would discuss with the client?

- SIMPLE IRAs are usually funded in part through salary reductions by employees. Salary reductions by employees fund SIMPLE IRAs. These plans do not place the risk of investment performance on the employer by promising a specific benefit. The disbursements provided under a simple IRA may not provide adequate retirement income to most employees. SIMPLE IRAs are not more flexible with respect to amount and timing than a profit sharing plan.

Patrice, age 32, has been contributing to her Roth 401(k) plan for 6 of the 8 years that she has worked for Entertech Enterprises. She has contributed $9,500 to the account and it has a current balance of $12,345. She will be leaving her current employer. Which of the following options will be available to Patrice following her separation from service?

- She can roll her Roth-401(k) account over to her new employer's Roth 401(k) plan. - She can roll her Roth 401(k) to a Roth IRA account. - She can leave her account at Entertech until retirement. A Roth 401(k) can be transferred to another Roth 401(k) plan. Distributions from a Roth 401(k) follow the annuity distribution rules and must be pro-rata, contributions cannot be separated from gains. Roth 401(k) can be rolled to a Roth-IRA. Since her balance is greater than $5,000, she can leave her assets in the plan. Although she has met the five year rule, a distribution would not be due to death, disability or after age 59 ½ so taxes and penalties would be assessed on any distribution.

Which of the following statements is true in regards to a SEP tax-deferred employee retirement plan?

- Simple to implement - Not expensive to administer - A preferred option when an employer wishes to install a retirement plan after the time to adopt a qualified plan has passed. A SEP tax-deferred employee retirement plan is very simple to implement and not at all expensive to administer, hence making it a popular choice for employers, and even more so for employers who wish to install a tax-deferred plan and are too late to adopt a qualified plan for the year in question.

Which traditional IRA deduction rules apply to an individual who avails himself/herself of a tax-favored employer retirement plan?

- Strict limits on deduction - No deduction if income is above a certain threshold IRA deduction rules for individuals who avail of a tax-favored employer retirement plan are very harsh. They may offer very little or no deduction at all. There is no provision whatsoever for 90% or a full deduction if income is above a certain threshold.

A SIMPLE IRA provides a simplified, easy to administer plan for small employees. Which of the following is NOT a feature of SIMPLE IRA plans?

- The employer may have up to 500 employees. SIMPLE IRAs are used for employers with 100 or fewer employees who want an easy to administer plan funded through employee salary reductions.

A plan loan to an owner-employee is permitted under the same requirements that apply to those from qualified plans. State True or False

- True Plan loans to an owner-employee are not a prohibited transaction under the code, provided the other plan code regulations for loans are followed.

Rodney is analyzing various retirement plans. From the situations listed below, choose when a SIMPLE IRA is useful?

- When an employer is looking for an inexpensive plan - When an employer has less than 100 employees A SIMPLE IRA is attractive for employers who are looking for inexpensive and easy to install plans. It is ideal for employers with 100 or less employees so that the employer can fund the plan with an employee salary reduction. SIMPLE IRAs are useful for individuals with a small amount of self-employment income, and not for individuals with high income.

A law firm is made up of two partners who will earn $500,000 each this year, a secretary who will earn $40,000 and several law clerks who earn from $25,000 to $35,000 each per year. The partners and the secretary started out the firm over seven years ago. Law clerks serve for a year or two and then move on. The firm has a SEP-IRA plan. Which individuals must receive a contribution to their SEP-IRA account for this year?

- both lawyers and the secretary but not the clerks Contributions do not need to be made to employees until their third year of service.

Martha contributes to a 403(b) plan by salary reduction. She leaves the job for a short time and returns. Select the percentage she is vested in the amounts contributed to the 403(b) plan.

100% In a 403(b) plan, the participant is always 100% vested in all amounts contributed. Even if Martha leaves employment for a short time, her plan account attributable to the contributions cannot be forfeited.

Premature Roth IRA withdrawals in excess of contributions may be subject to:

100% tax 10% penalty Premature Roth IRA withdrawals in excess of contributions are taxed in full and may also be subject to a 10% penalty on premature withdrawals.

Sara Jones is 55 years of age and has taught at the state university for over 15 years. Her tax-deferred annuity plan allows her to make the maximum elective deferral permitted by law, including catch-up contributions. Sara does not participate in any other salary deferral plan. What is the maximum salary deferral she can make to the plan in the 2012 plan year?

$25,500 Normally, Sara could contribute the maximum salary deferral amount for 2012 of $17,000. However, she can take advantage of the age 50 or older catch-up of $5,500 and the "15 years of service" catch-up of another $3,000 for a total of $25,500 assuming that her income from the university is at least that amount.

What are the characteristics of a 403b plan?

- Catch up provisions (15 years) - General investment-annuity contracts - May invest in incidental life - Main investments - mutual funds

The limit on a SIMPLE IRA is the same as it is for contributions to a traditional or Roth IRA. State True or False.

- False Unlike traditional and Roth IRAs, the SIMPLE IRA is limited to $11,500 in 2012.

If a Keogh plan covers only a business owner or partners, or partners and their spouses, then the reporting requirement is satisfied by filing which of the following forms?

- Form 5500-EZ The annual reporting requirement for qualified plans is simplified for Keogh plans and other small plans. When a Keogh plan covers only a business owner or partners, or partners and their spouses, the reporting requirement may be satisfied by filing Form 5500-EZ.

Reduction in dollar limit in phaseout AGI region is _____ to the amount by which the AGI exceeds the lower limit.

- Proportional

The employer provides Clara with a salary reduction election form. She must submit the form before payroll deductions can begin. Employee salary reductions in a 403(b) are subject to the same limit as those applicable to which of the following plans?

- Section 401(k), not including the special catch-up provision for people who have completed 15 years of service for certain employers