Unit 11 - Retirement Plans

Under a Keogh (HR-10) plan, employers

MUST CONTRIBUTE THE SAME PERCENTAGE TO THEIR ELIGIBLE EMPLOYEES AS THEY CONTRIBUTE TO THEIR OWN PLANS Under a Keogh (HR-10) plan, employers must contribute, the same percentage to their eligible employees as they contribute to their own plans.

Which of the following statements pertaining to SIMPLE plans is NOT correct?

THESE PLANS ARE RESERVED FOR EMPLOYERS WITH 500 OR MORE EMPLOYEES. SIMPLE plans are reserved to small businesses that employ 100 or fewer employees.

Contributions to a simplified employee pension (SEP) are not included in the employee's taxable income fo the year as long as the contribution does not exceed

25% OF THE EMPLOYEE'S INCOME UP TO A SPECIFIED MAXIMUM AMOUNT Contributions to a SEP are not included in the employee's taxable income for the year, to the extent that the contribution does not exceed 25% of the employee's compensation up to a specified maximum amount.

Taxpayers are able to withdraw IRA funds without penalty for all of the following reasons EXCEPT

TRAVEL NECESSITATED BY MEDICAL REASONS Transfers to the owner's estate or beneficiaries are also not penalized.

Which of the following statements pertaining to tax-sheltered annuities (TSAs) is CORRECT?

TSAs ARE AVAILABLE TO EMPLOYEES OF CERTAIN NONPROFIT ORGANIZATIONS Tax-sheltered annuities are available to employees of certain nonprofit organizations, such as schools. Participants do not pay current taxes on their contributions, but they will be taxed on benefits when they are received.

Which of the following statements regarding a traditional individual retirement account (IRA) is NOT correct?

A 10% PENALTY IS ASSESSED ON ANY DISTRIBUTION FORM AN IRA BEFORE AGE 59 1/2 Although distributions before age 59 1/2 are subject to a 10% penalty in most situations, there are exemptions to this rule. For example, annuitized distributions and distributions made upon the death or disability of the IRA owner are exempt from the penalty tax. All distributions are subject to ordinary income taxation, assuming that the IRA was funded only with tax-deductible contributions.

Which of the following statements regarding a traditional individual retirement account (IRA) is NOT correct?

A 10% PENALTY IS ASSESSED ON ANY DISTRIBUTION FROM AN IRA BEFORE AGE 59 1/2 Although distributions before age 59 1/2 are subject to a 10% penalty in most situations, there are exemptions to this rule. For example, annualized distributions and distributions made upon the death or disability of the IRA owner are exempt from the penalty tax. All distributions are subject to ordinary income taxation, assuming that the IRA was funded only with tax-deductible contributions.

Acme Corporation has established a non qualified deferred compensation plan with life insurance as the funding vehicle. Acme currently has 100 employees, 90 of whom work full time. Which fo the following individuals must be covered but the plan?

ANY EMPLOYEE, OFFICER, OR EXECUTIVE THAT ACME SELECTS Acme's deferred compensation plan is a non qualified plan, which means that Acme can pick and choose which employees and owners can participate in the plan without regard to years of service, salary level, or any other criteria.

To enroll in an employer's qualified retirement plan, employees must

BE AT LEAST 21 YEARS OLD AND COMPLETE 1 YEAR OF SERVICE In general, employees who are at least 21 years old and have completed 1 year of service must be allowed to enroll in a qualified plan. If the plan provides for 100% vesting upon participation, they may be required to complete 2 years of service before enrolling.

A primary difference between a SEP and an IRA is that

THE LIMIT OF MOEY AN EMPLOYER IS PERMITTED TO CONTRIBUTE TO A SEP EACH YEAR IS HIGHER THAN THE LIMIT FOR AN IRA A SEP is an arrangement whereby an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much larger amount that can be contributed each year to a SEP. The allowable limit for a SEP is much higher than that of an IR.

What are the tax consequences if Maksim makes a partial rollover of his 401(k) plan assets?

HE MUST PAY A 10% PENALTY PLUS INCOME TAX ON THE AMOUNT RETAINED Distributions from employer-sponsored plans are eligible for a tax-free rollover if they are reinvested in an IRA within 60 days after receipt of the distribution and if the plan participant does not actually take physical receipt fo the distribution. The entire amount need not be rolled over; a partial distribution may be rolled over from one IRA or eligible plan to another IRA. However, if a partial rollover is executed, the part retained will be taxed as ordinary income and subject to a 10% penalty.

Which of the following statements regarding traditional IRAs is NOT correct?

PETER INHERITS $15,000 IN TRADITIONAL IRA BENEFITS FROM HIS FATHER WHO RECENTLY DIED. PETER CAN SET UP A TAX-FAVORED ROLLOVER TRADITIONAL IRA WITH THE MONEY. Only the individual who establishes the traditional IRA and his spouse are eligible to benefit from the rollover treatment.

The combination of current tax deduction for the employer plus tax deferral for the employee is possible with all of the following types of plans EXCEPT

A SAVINGS ACCOUNT The combination of current tax deductibility by the employer and tax deferral for the employee is the primary tax benefit of all qualified plans. A savings account does not enjoy either of these tax advantages.

Gina, age 66, has worked for the past 35 years as a dermatologist and has funded her defined contribution plan at the maximum allowed each year. She would like to delay taking income from the account for 3 years. Which of the following statements is TRUE?

GINA CAN DELAY TAKING INCOME UNTIL AGE 69 EVEN THOUGH SHE IS RETIRED, AS SHE IS NTO REQUIRED TO BEGIN RMDs UNTIL AGE 72 RMDs from IRA and 401(k) plans and other defined contribution plans must begin no later than when the owner turns 72. The first distribution can be delayed until April 1 of the year following the attainment of age 72.

Which of the following distributions from a Roth RIA would be qualified and, therefore, NOT taxable, assuming the account was established at least 5 years ago?

A DISTRIBUTION OF $10,000 USED TO BUY A FIRST HOUSE A qualified distribution (one that is not taxed) is made after the taxpayer reaches age 59 1/2, made to a beneficiary after the taxpayer's death, made because the taxpayer is disabled, used to buy the taxpayers first home, or used to pay education costs. Furthermore, the distribution cannot be made any earlier than 5 years after the account was set up.

Larry purchased a traditional IRA when he was 32 years old. Over the years he has contributed (and deducted from his taxes) $50,000 into the contract. Now, at age 62, Larry is retiring and plans to annuitize the contract. His life expectancy is 20 years, and he will receive $450 per month under a straight life annuity income option. Of the $5,400 he will receive annually from this annuity, how much will represent taxable income?

$5,400 The exclusion ratio calculation that is used to calculate the tax-free portion of a nonqualified annuity payments is irrelevant with qualified contributions. Since this IRA was fully funded with tax-deducted contributions, the annuity income payment ($5,400 per year) is taxable as ordinary income.

Which of the following statements best describes a Keogh (HR-10) plan?

IT IS A QUALIFIED RETIREMENT PLAN FOR SELF-EMPLOYED INDIVIDUALS AND THEIR ELIGIBLE EMPLOYEES A keogh plan (or an HR-10) is a qualified retirement plan for self-employed individuals and their eligible employees, if any.

Which fo the following statements pertaining to qualified pension plans is NOT correct?

THE INTEREST ON THE EMPLOYER'S CONTRIBUTIONS IS INCLUDED IN THE EMPLOYEE'S GROSS INCOME AND IS CURRENTLY TAXABLE. A qualified pension plan meets requirements set by the federal government to receive favorable tax treatment. This includes the deductibility of employer contributions and the deferral of taxes on the amount of the contributions (and the income earned) for the employee. The employer's contributions, which are limited by law, are considered liabilities to the employer.

Which fo the following statements regarding required minimum distributions is NOT correct?

REQUIRED MINIMUM DISTRIBUTIONS MUST OCCUR NO LATER THAN AGE 59 1/2. RMDs must start at age 72, though the first can be delayed until April 1 of the year following the owner turning 72.

Acme Corporation has established a nonqualified deferred compensation plan with life insurance as the funding vehicle. Acme currently has 100 employees, 90 of whom work full time. Which of the following individuals must be covered by the plan?

ANY EMPLOYEE, OFFICER, OR EXECUTIVE THAT ACME SELECTS Acme's deferred compensation plan is a nonqualified plan, which means that Acme can pick and choose which employees and owners can participate in the plan without regard to years of service, salary levels, or any other criteria.

Oliver, age 48, and Lucia, age 46, are married and file a joint tax return. Both are covered by their companies' pension plans. Which of the following statements regarding contributions they could make to a traditional IRA is NOT correct?

BOTH CAN TAK ADVANTAGE OF THE CATCH-UP PROVISION AND CONTRIBUTE THE CATCH-UP AMOUNT IN ADDITION TO THE BASE AMOUNT There is a maximum deductible contribution limit involved with qualified retirement plans, including traditional IRAs. The actual amount involved is typically indexed, meaning it could change with the new year. Persons covered by a retirement plan at work may have their deduction for contributions to a traditional IRA reduced (phased out) based on their modified AGI. To be eligible for the catch-up provision, individuals must be 50 or older.

Which of the following scenarios regarding individual retirement accounts (IRAs) is NOT correct?

PETER IS CURRENTLY EMPLOYED, BUT HIS SPOUSE, KARING, IS NOT. SINCE KARINA HAS NO EARNED INCOME THAT SHE CAN CONTRIBUTE TO A TRADITIONAL IRA, PETER CAN SET UP A JOINT IRA ACCOUNT FOR THE TWO OF THEM. For married couples, an individual IRA account must be set up for each person, even if only 1 spouse is working. Separate IRA accounts could be set up for Peter and Karina, but not a joint account. All of the other answer choices involve correct scenarios.

A primary difference between a SEP and an IRA is that

THE LIMIT OF MONEY AN EMPLOYER IS PERMITTED TO CONTRIBUTE TO A SEP EACH YEAR IS HIGHER THAN THE LIMIT FOR AN IRA A SEP is an arrangement whereby an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much larger amount that can be contributed each year to a SEP. The allowable limit for a SEP is much higher than that of an IRA.