Series 7 Chapter 11: Retirement Plans

Which of the following option strategies is the most suitable for a qualified retirement account? A) No option strategies are permissible investments for qualified retirement plans under ERISA. B) Purchases and sales of naked calls and puts C) A short straddle D) Covered call writing

Your answer, Covered call writing, was correct!. While the use of options in qualified retirement accounts is not prohibited by ERISA, some strategies (those which involve undue risk) are considered to be highly inappropriate and therefore not suitable. Of those listed, only covered calls would be considered suitable as a way to hedge risk in long securities positions. Short straddles have unlimited risk and the buying and selling of naked option contracts is generally considered speculative.

Which of the following would make an employee ineligible to participate in a company's qualified retirement plan? A) He is not a member of the company's management team. B) He is only 20 years old. C) He works only 1,200 hours a year for the company. D) He has been with the company for only 2 years.

Your answer, He works only 1,200 hours a year for the company., was incorrect. The correct answer was: He is only 20 years old. Under the Employee Retirement Income Security Act, anyone over the age of 21, management or not, who has been with the company for at least 1 year, and who works 1,000 or more hours per year for the company, must be allowed to participate in the company's qualified plan.

Which of the following individuals are eligible to participate in a tax-sheltered annuity? Maintenance engineer at a state university. Student in a public school system. Minister. Office clerk at a small corporation. A) III and IV. B) II and IV. C) I and III. D) I and II.

Your answer, I and II., was incorrect. The correct answer was: I and III. Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs).

All of the following are true regarding Section 529 college savings plans EXCEPT: A) tax-free withdrawal at the federal level for qualified education expenses. B) tax-deductible contributions at the federal level. C) not subject to income limitations. D) high contribution limits.

Your answer, tax-deductible contributions at the federal level., was correct!. Contributions are made with after-tax dollars and are not deductible.

An investment adviser representative recommending investments for an IRA should give primary consideration to: A) the beneficiary's tax status. B) liquidity. C) maximum current income. D) risk.

Your answer, risk., was correct!. Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return.

Your client who has not yet attained the age of 59 ½ wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal you explain that the amount taken will be subject to a penalty of: A) 10%. B) 25%. C) 5%. D) 15%.

Your answer, 25%., was incorrect. The correct answer was: 10%. Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn in addition to ordinary income taxes.

Which of the following investment activities are suitable for an individual retirement account? Writing uncovered calls. Writing covered calls. Buying puts on stock held long. Writing naked puts. A) I and IV. B) I and II. C) II and III. D) II and IV.

Your answer, II and III., was correct!. Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.

The amount paid into a defined contribution plan is set by the: A) trust agreement. B) employee's age. C) employer's profits. D) ERISA-defined contribution requirements.

Your answer, employee's age., was incorrect. The correct answer was: trust agreement. A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

If a self-employed attorney earns $110,000 per year and he has no other retirement plans and contributes $4,000 to his IRA, his contribution is: A) not tax deductible. B) fully tax deductible. C) not permitted. D) partially tax deductible.

Your answer, fully tax deductible., was correct!. IRA contributions are fully deductible, regardless of income, if the taxpayer is not covered by any other qualified plans.

A nonqualified deferred compensation plan: A) must be offered to all employees. B) does not guarantee that the employer will fulfill the obligation. C) must be approved by the IRS. D) guarantees payment to the employee even if the company becomes insolvent.

Your answer, must be approved by the IRS., was incorrect. The correct answer was: does not guarantee that the employer will fulfill the obligation. Nonqualified deferred compensation plans are agreements between an employer and an employee in which the employee agrees to defer receipt of part of their salary. Nonqualified deferred compensation plans do not require IRS approval and may discriminate (need not be offered to all employees). In fact, they are generally offered only to officers and other high-ranking executives. In the event of a business failure, there is no guarantee that deferred amounts will be paid.

Your client is a self-employed physician who makes annual contributions to his Keogh plan. If he also receives additional income from making speeches at medical conventions, this income is: A) not eligible for inclusion in either his Keogh or IRA. B) not eligible for inclusion in an IRA. C) not eligible when computing his Keogh contribution. D) eligible for inclusion in both his Keogh and IRA.

Your answer, not eligible when computing his Keogh contribution., was incorrect. The correct answer was: eligible for inclusion in both his Keogh and IRA. Keogh plans are designed for persons with self-employment income. The additional income received from making speeches is self-employment income and therefore eligible when computing the maximum allowable contribution. Self-employment income is earned income and therefore also eligible for inclusion in an IRA.

If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? A) Only the higher wage earner may contribute to an IRA. B) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. C) They may not contribute because their combined income is too high. D) They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts.

Your answer, They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA., was correct!. No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

Buying municipal bonds would normally NOT be considered suitable for A) a defined benefit plan portfolio B) a mutual fund portfolio C) an individual investor D) a corporation's investment account

Your answer, a mutual fund portfolio, was incorrect. The correct answer was: a defined benefit plan portfolio A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account. An individual investor, a mutual fund portfolio and a corporate investment account could call benefit from receiving tax-free municipal bond interest.

Which of the following permits the highest annual contributions? A) A Coverdell Education Savings Account. B) A traditional spousal IRA for which the contribution has been deducted. C) A SEP IRA. D) A traditional nondeductible IRA.

Your answer, A Coverdell Education Savings Account., was incorrect. The correct answer was: A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.

What is the latest date that an IRA participant may make an IRA deposit for the current year? A) July 15 of the following year, if extensions have been filed. B) April 15 of the current year. C) December 31 of the current year. D) April 15 of the following year.

Your answer, April 15 of the following year., was correct!. Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.

If a corporation begins a nonqualified retirement plan, which of the following statements is TRUE? A) Employer contributions are tax deductible. B) Employee contributions are tax deductible. C) Employee contributions grow tax deferred if they are invested in an annuity. D) The employer must abide by all ERISA requirements.

Your answer, Employee contributions grow tax deferred if they are invested in an annuity., was correct!. Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral, such as an annuity contract. Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements.

Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans? Contribution amounts are fixed. Contribution amounts vary. Benefit payments are fixed. Benefit payments vary. A) II and IV. B) I and III. C) II and III. D) I and IV.

Your answer, I and III., was incorrect. The correct answer was: II and III. In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.

Which of the following statements CORRECTLY describe a Roth IRA? The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater. The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. Contributions are tax deductible. Contributions are not tax deductible. A) II and IV. B) II and III. C) I and IV. D) I and III.

Your answer, I and III., was incorrect. The correct answer was: II and IV. The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. Contributions are made with after-tax dollars.

For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 70 ½, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as required beginning date (RBD) required minimum distribution (RMD) lock-up provisions vesting A) II and IV B) I and II C) III and IV D) II and III

Your answer, II and III, was incorrect. The correct answer was: I and II For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 70 ½. This is known as the "required beginning date" (RBD). The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the "required minimum distribution" (RMD).

Compared to defined contribution plans, defined benefit plans give the highest return to employees who: are highly compensated. receive lower compensation. have fewer years until retirement have many years left until retirement A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, II and III., was incorrect. The correct answer was: I and III. Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan.

The income level of a donor: may affect contributions into a Coverdell ESA. will NOT affect contributions into a Coverdell ESA. may affect contributions into a Section 529 plan. will NOT affect contributions into a Section 529 plan. A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, II and III., was incorrect. The correct answer was: I and IV. Contributions into a Coverdell ESA are phased out at high income levels, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.

Which of the following statements regarding Coverdell Education Savings Accounts are TRUE? After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) III and IV. B) I and II. C) II and IV. D) I and III.

Your answer, II and IV., was incorrect. The correct answer was: I and II. Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.

How often will the IRS allow a Health Savings Account (HSA) to be funded via an IRA distribution without paying federal taxes or penalties on the distribution? A) Once each calendar year. B) There are no funding limits when HSAs are funded from another qualified account. C) Never, taxes and penalties for early distributions are always due. D) One time.

Your answer, Never, taxes and penalties for early distributions are always due., was incorrect. The correct answer was: One time. Health Savings Accounts (HSAs) are qualified employer sponsored plans. The IRS allows a one time funding distribution from an IRA to a qualified HSA without paying federal taxes or penalties on the IRA distribution.

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $150,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct? A) They are ineligible to deduct any contribution made. B) One spouse only is eligible to deduct their entire contribution. C) Neither is eligible to make a contribution in any amount (deductible or not). D) Both may deduct the entire contribution.

Your answer, One spouse only is eligible to deduct their entire contribution., was incorrect. The correct answer was: They are ineligible to deduct any contribution made. While each are eligible to make the maximum contribution, at this income level, neither spouse, both covered under employer sponsored plans, would be eligible to deduct their contributions to their respective IRAs.

All of the following statements about SEP IRAs are true EXCEPT A) the retirement account is usually set up at a bank or other financial institution B) SEP IRAs allow employers to make contributions C) catch-up contributions for employees age 50 or older are not permitted with SEPs D) SEP IRAs are established for small business owners and their employees

Your answer, SEP IRAs are established for small business owners and their employees, was incorrect. The correct answer was: catch-up contributions for employees age 50 or older are not permitted with SEPs An employee age 50 or older is permitted to make catch-up contributions to a SEP.

Which of the following investments would be most suitable for an IRA? A) Uncovered call on a stock whose price is extremely stable. B) Technology company whose stock shows a high beta. C) Highly rated GO bond. D) Short sale of a stock which has just started what is expected to be a prolonged decrease in price.

Your answer, Technology company whose stock shows a high beta., was correct!. Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts.

One of your customers has maintained a traditional IRA for the past 15 years. Some of his annual contributions were not tax deductible due to his income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is TRUE? A) The entire withdrawal is taxable as ordinary income. B) The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. C) The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. D) The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income.

Your answer, The entire withdrawal is taxable as ordinary income., was incorrect. The correct answer was: The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income on withdrawal. Only the nondeductible contribution is returned tax free.

Which of the following statements about a Coverdell Education Savings Account (ESA) is NOT true? A) Contributions are tax deductible, subject to a modified AGI phaseout. B) Contributions of $2,000 per child per year are allowed. C) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free. D) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary.

Your answer, The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free., was incorrect. The correct answer was: Contributions are tax deductible, subject to a modified AGI phaseout. Contributions to an ESA are not tax deductible

A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is TRUE? A) The customer may make annual contributions until the grandson graduates from college. B) The maximum contribution permitted is $3,000 annually. C) The customer may take a deduction for the amount contributed. D) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.

Your answer, The maximum contribution permitted is $3,000 annually., was incorrect. The correct answer was: The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over. The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.

Distribution from a traditional IRA can begin at age 59½ and must begin no later than: A) an age as determined by IRS life expectancy tables using the account holders year of birth. B) 15 years from the individual's date of retirement. C) age 70½. D) age 65.

Your answer, age 70½., was correct!. The owner of a traditional IRA has until April 1 of the year after the year in which he turns age 70½ to begin withdrawing from the account.

Each of the following individuals is eligible to participate in a Keogh plan EXCEPT: A) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time. B) an executive of a corporation who receives $5,000 in stock options from his company. C) a self-employed doctor in private practice. D) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time.

Your answer, an executive of a corporation who receives $5,000 in stock options from his company., was correct!. Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.

All of the following regarding savings incentive match plans for employees (SIMPLEs) are true EXCEPT A) SIMPLEs are retirement plans for small businesses with fewer than 100 employees B) employee contributions are pretax C) employers can not make matching contributions for employees D) catch-up contributions for those age 50 and older are permitted

Your answer, catch-up contributions for those age 50 and older are permitted, was incorrect. The correct answer was: employers can not make matching contributions for employees SIMPLEs are retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit which can include catch-up contributions for those age 50 and older. The employer is permitted to make matching contributions for employees.

To avoid penalty, a rollover of an IRA may occur no more frequently than: A) quarterly. B) annually. C) every 5 years. D) semiannually.

Your answer, every 5 years., was incorrect. The correct answer was: annually. Securities or funds may be rolled over by the account holder from one IRA to another only once every year. Direct transfers from one account to another, where the account holder does not receive the funds during the transfer, are not restricted in frequency.

Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should: A) not open the plan. B) open the plan as instructed by your customer. C) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. D) explain that the potential federal tax benefits available to residents of New York may not be available when opening out-of-state plans.

Your answer, not open the plan., was incorrect. The correct answer was: explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened.

Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) nontaxable to either party B) taxable to the niece, the beneficiary of the plan C) automatically reinvested back into the plan D) taxable to the uncle, the donor to the plan

Your answer, taxable to the uncle, the donor to the plan, was incorrect. The correct answer was: taxable to the niece, the beneficiary of the plan Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.