Unit Two: Questions and Concepts

taxation and 403(b) plans

- 100% taxable

SEP IRAs characteristics

- allow employers to make contributions - the retirement account is usually set up at a bank or other financial institution - sep iras are established for small business owners and their employees - also established for self-employed employees - employer can take income tax deductions for contributions made each year to each employee's sep - the contributions made by an employee are also excludable from the employees gross income

what type of income cash flow is not permitted with opening an IRA

- an individual with current income consisting of dividends and capital gains only -An IRA contribution may be made only from earned income. While dividends and interest are investment income, alimony has been deemed to represent earned income. Individuals may contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. However, although a contribution can be made, it may or may not be deductible, depending on the individual's income.

what can be rolled over into an ira

- another ira - corporate profit-sharing plan

tax deferred, noncontributory defined benefit plans

- contribution amounts vary - benefit payments are fixed

qualified retirement plans and taxation

- contributions are made with pretax dollars - distributions are 100% taxable With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.

qualified plans characteristics

- defined benefit - defined contribution -Defined benefit and defined contribution plans are funded with pretax contributions and are thus qualified plans. Payroll deduction and deferred compensation plans are funded with after-tax contributions and are thus nonqualified plans.

what type of plan requires actuary's services

- defined benefit; promises a specific benefit at retirement that is determined by a formula involving retirement age, years of service, and compensation level achieved - beneficial for older employees -In a defined benefit plan the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement.

what type of retirment plan would be most beneficial to a young employee of a corporation

- defined contribution pension plan - The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years to go in the workforce, so the investments made with the defined contributions will have a maximum time period to grow.

Roth IRAs: distribution and taxes

- earnings can accumulate tax free - distributions are not taxable if an age requirement and holding period are met [distributions are tax free if the account holder is at least 59.5 and has held the account for at least 5 years] -contributions are made with after tax dollars - qualified distributions from Roth IRAs are 100% taxable - earnings accumulate tax free - distributions are not taxable if a holding period is satisfied

simple characteristics

- employers can make matching contributions for employees - employee contributions are pretax - catch-up contributions for those age 50 and older are permitted -simples are retirement plans for small businesses with less than 100 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.

a customer who has just started with an IRA will be vested

- immediately

nonqualified deferred compensation plans cannot

- let employees use accumulated funds as collateral for a bank loan Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.

for an IRA, a 6% penalty will be levied if the account owner

- makes an excess contribution

what is exempt from ERISA guidelines

- public sector plans - high income plans

which type of pension plan allows for the highest annual contributions

- 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.

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. What is the taxation of this action?

- 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.

how much can you delay last year contributions for a IRA

- you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis -You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension.

What is the latest date that an IRA participant may make an IRA deposit for the current year?

April 15 of the following year, if extensions have been filed

what is the latest date that an IRA participant may make an IRA deposit for the current year

December 31 of the current year - contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made

A retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary. Which of the following retirement plans offers this type of payment?

Defined benefit A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree.

A 45-year-old employment counselor has a SIMPLE Plan for himself and three full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his SIMPLE plan, how much may he invest in an IRA?

He may contribute 100% of his earned income or the max allowable IRA limit - which ever is less Regardless of how much is invested in a SIMPLE IRA through work, an investor may still invest in an IRA if he has earned income and is under 70 1/2. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.

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 required minimum distribution -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).

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?

They may contribute 100% earned income or the max annual allowable dollar limit, which ever is less, to an ira

What qualifications would make an employee ineligible to participate in a company's qualified plan

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.

to avoid tax penalty, an IRA may be rolled over once

a year, within 60 days

minimum distributions from a traditional IRA must begin

by April 1 the year after the owner turns 70.5

sep iras cannot

catch-up contributions for employees for the age 50 or older are not permitted with SEPs

under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered called on the securities portfolio

if specifically approved by the covered employees

early withdrawl from a traditional IRA is taxed as

ordinary income plus a 10% penalty

both Roth and trad iras have

same contribution limits

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $300,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct?

they are ineligible to deduct any contribution made It is important to recognize that FINRA does not expect you to know the income level at which deductible contributions for those covered under employer-sponsored plans begins to phase-out. The question uses numbers that are so much higher than current law just to remind you that such a regulation exists. 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.

A businessowner pays himself a salary of $80,000 per year. He employs his spouse and pays her $45,000 per year. What is the maximum contribution that they may make to their traditional IRAs?

they can contribute 100% of their earned income or max allowable limit, whichever is less, to their individual IRAs They both may make annual contributions of 100% of earned income up to the maximum allowable limit, whichever is less, to their own respective IRAs.

a corporate profit-sharing plan must be set up under an

trust All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan.