Retirement Plans

The best answer is B. If an individual is not covered by another qualified pension plan, then, regardless of his or her income, a tax deductible contribution to an Individual Retirement Account may be made. This contribution is said to be made with "before tax" dollars. If an individual is covered by another qualified pension plan, and earns more than $76,000 in year 2021 ($125,000 for a couple filing jointly where both are covered by qualified plans), then a contribution may still be made, but is not tax deductible. This contribution is said to be made with "after tax" dollars.

Which statements are TRUE regarding Individual Retirement Accounts for an individual earning more than $76,000 in year 2021? I If the individual is covered by another plan, and has earned income, the IRA contribution is always tax deductible II If the individual is not covered by another plan, and has earned income, the IRA contribution is always tax deductible III If the individual is covered by another plan, and has earned income, an IRA contribution may always be made with "after tax" dollars IV If the individual is not covered by another plan, and has earned income, an IRA contribution may always be made with "after tax dollars"

The best answer is B. The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $58,000 in 2021, whichever is less. 20% of $300,000 = $60,000. However, only the $58,000 maximum can be contributed in 2021. (Note that this amount is adjusted each year for inflation.)

In 2021, a self-employed person earning $300,000 wishes to open a Keogh Plan. The maximum yearly contribution is: A) $6,000 B) $58,000 C) $60,000 D) $78,000

The best answer is C. Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 72.

Under Keogh rules, any distributions from a Keogh Plan must start no later than: Incorrect answer A. You did not choose this answer. C) April 1st of the year following the year the individual turns 72 Incorrect answer D. You did not choose this answer. D) April 15th of the year following the year the individual turns 72

The best answer is C. The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies. Both are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain potential. Dividends and capital gains in variable annuity separate accounts build tax deferred; mutual funds distributions are taxable. When a mutual fund distribution is made, tax liability arises. This is not the case with separate account distributions which must be reinvested.

Which of the following statements are TRUE for both mutual funds and variable annuities that are in the accumulation phase? I Distributions are taxable to the holder in the year the distribution is madeII The underlying portfolios are managedIII The Investment Company Act of 1940 is the regulating legislationIV The return to investors is dependent on the performance of the securities in the underlying portfolio A) I and II only B) III and IV only C) II, III, IV D) I, II, III, IV

The best answer is A. If the spouse rolls over the IRA into a new account in her name, and begins to take distributions immediately (which is not required in a roll over), then she can take distributions over her remaining life expectancy - which is around age 80. Since she is age 62, the account would be depleted over 18 years. If the funds are transferred into an IRA beneficiary distribution account, then it is titled in the decedent's name "for the benefit of" the beneficiary. Distributions from inherited IRAs must be taken over 10 years. Immediate cash out of the account would subject the entire proceeds to ordinary income tax that year - not meeting the customer's goal of receiving payments over the longest time frame possible. Finally, the customer needs the income, so disclaiming (giving away) the account makes no sense.

Your customer, age 68, who has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his wife, age 62, who does not work. She needs current income and wishes to receive payments over the longest time frame possible. You should advise the spouse to: A) roll the funds overinto a new IRA in the spouse's name B) transfer the IRA funds to a beneficiary distribution account C) cash out the inherited IRA account D)disclaim or give away the inherited IRA account

The best answer is D. Health Savings Accounts (HSAs) were first authorized by Congress starting in the beginning of 2004. They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees. More employers are adopting these high-deductible plans coupled with HSAs as a way of reducing, or slowing the growth of, their health insurance expenses. The HSA permits the employer or employee to make a deductible contribution in 2021 of up to $3,600 for a single individual, or $7,200 for a family, to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free. There are no income phase out rules for HSAs.

All of the following statements are true about Health Savings Accounts EXCEPT: A) HSAs are only appropriate for those individuals covered by high-deductible health insurance plans B) HSAs can be set up to include dependents of the covered individual C) HSA contributions are tax deductible D) HSA contributions are subject to phase-out when an individual's income exceeds $250,000

The best answer is D. Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.

Contributions to Keogh Plans must be made by: A) December 31st of the calendar year in which the contribution may be claimed on that person's tax return B) December 31st of the calendar year after which the contribution may be claimed on that person's tax return C) April 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return D) August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return

The best answer is B. IRA contributions can only be made based on earned income - meaning income from one's work. Alimony and child support payments do not count. Because this woman has $3,000 of earned income, she can make an IRA contribution of up to $3,000. (The maximum contribution is 100% of earned income, capped at $6,000 in 2021, and with $3,000 of earned income, this would be the maximum contribution amount).

A divorced woman with 2 young children has just re-entered the workforce part time and earns $3,000 from this work. She collects another $2,400 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A) No contribution can be made B) A contribution can be made based only on the income earned from part-time work C) A contribution can be made based only on the alimony payments received D) A contribution can be made based on both the earned income from part-time work and the alimony payments received