AD Banker Ch. 7
ERISA sets ________ standards for pension plans in private industry. A Voluntary B Minimum C Maximum D Flexible
B Minimum ERISA sets minimum standards.
If the annuitant, now deceased, was receiving income from a pure life or straight life annuity, how much goes into the annuitant's estate for valuation? A The cost basis B Nothing C The tax-deferred earnings D The cost basis and the remaining tax-deferred earnings
B Nothing If the annuitant was receiving income from a pure life or straight life annuity, the annuity has no residual values at the annuitant's death and nothing goes into the annuitant's estate for valuation.
How often may a person perform a rollover from one IRA to another? A Once each quarter B Once a year C Once every 2 years D Every 6 months
B Once a year IRA rollovers may only be done once every 12 months.
Traditional individual retirement account owner withdraws funds and takes the check to place into a new IRA. How much will the original IRA custodian withhold for taxes? A 25% B 15% C 10% D 20%
D 20% When IRA withdrawals are not directly rolled over, instead a check is sent to the account owner, the distributing IRA custodian must withhold 20%.
What is the name of the plan that is very popular with self-employed individuals and uses employer funded IRA's for their employees? A Profit sharing B Pension C 401(k) D SEP
D SEP SEPs are very popular with self-employed individuals. The SEP plan uses employer funded IRAs.
Which of the following establishes a cost basis in an annuity? A After-tax contributions B Tax deferred interest C Pre-tax contributions D Tax deferred gains
A After-tax contributions Cost basis is established with any after-tax premiums deposited into the annuity.
The only time a policy loan is taxable is in which of the following situations? A Having the policy lapse with a loan outstanding in excess of cost basis B Borrowing less than the cash value C Borrowing the entire cash value D Borrowing more than the premiums paid in
A Having the policy lapse with a loan outstanding in excess of cost basis The loan is not taxed as long as the policy is in force. If the policy lapses with a loan outstanding, the excess over cost basis becomes taxable as ordinary income.
Any employee-paid group life insurance premiums are __________. A Tax-deferred B Tax-deductible C Tax-exempt D Not tax-deductible
D Not tax-deductible
All of the following are true regarding IRA transfers, except: A Funds are directly transferred from one financial institution to another B It is a transaction between the same types of plan, such as two IRA accounts C Transfers are not taxable events D They can only take place once a year
D They can only take place once a year An IRA transfer is the movement of funds between the same type of plan, such as two IRA accounts. The money is transferred directly from one financial institution to another. Transfers are not taxable and can take place as often as desired.
All of the following are times in which life insurance policy cash values can become taxable, except: A When the policy is sold B At policy surrender C If the policy fails to meet the IRS definition of life insurance D When a policy loan is taken out
D When a policy loan is taken out Policy loans do not trigger a taxable event.
Anyone under the age of ______ who has earned income may open an IRA. A 70 1/2 B 59 1/2 C 62 D 65
A 70 1/2 Anyone under the age of 70 1/2 who has earned income may open an IRA.
Generally, life insurance death proceeds are income tax free to the policy beneficiary, except: A When a transfer of ownership has taken place B When the death benefit option B is selected on a Variable Universal Life policy C When the policy is classified as a MEC D If the employer deducts the premiums on a group life insurance plan covering the employees
A When a transfer of ownership has taken place Life insurance proceeds are generally income tax free except when a transfer of ownership has taken place.
To be considered terminally ill, federal law defines a terminal illness as one which is expected to result in the person's death within how many months? A 36 B 24 C 12 D 6
B 24 Federal law establishes 24 months as a person's maximum life expectancy to be defined as terminally ill. For the activation of an accelerated death benefit rider, and for the purpose of limiting such claims, insurance companies often define terminal illness as one which would result in death within 12 months.
The IRS allows for 'catch-up' IRA contributions for those age _______ and older. A 50 B 70 C 62 D 65
A 50 The age at which IRA 'catch-up' contributions can be made is 50 or older.
A SEP uses employer funded _______ accounts. A Profit Sharing B IRA C 401(k) D Defined Benefit
B IRA Section 501(c)(3) is the section of tax code that defines what a non-profit organization is. Section 403(b) is the section of tax code that specifies who may participate in a 403(b) retirement plan.
All of the following are true regarding ERISA qualified plans, except: A The plan must benefit employees and beneficiaries B The plan must be IRS approved C A vesting schedule must be established D Employers must establish a pension plan
D Employers must establish a pension plan Establishing a corporate pension plan is optional; however, if one is established it must meet the ERISA requirements in order to qualify for favorable tax treatment.
An insured has paid $1,000 in annual premiums for her permanent life insurance policy for 12 years. Now upon surrendering the policy she is due to receive $15,000 of cash value. How much of this cash value is taxable? A $3,000 B $12,000 C $15,000 D Zero
A $3,000 The Cost Recovery Rule states that at surrender, cash values will be recovered tax-free to the extent of the cost basis of the policy. The cost basis is $12,000 (i.e. 12 years x $1,000 annual premium). The $3,000 excess over cost basis ($15,000 of CSV less $12,000 cost basis) is taxed as ordinary income.
An IRA catch up contribution can be made by any person age ______ or older. A 50 B 65 C 62 D 60
A 50 A 'catch up' contribution is for persons age 50 and older.
All of the following are ways in which the 10% additional tax can be waived, except: A Buying a new car B Disability C First-time homebuyers D Qualified education costs
A Buying a new car Distributions taken prior to 59 1/2 are subject to taxation and a 10% penalty. The penalty may be waived for death, disability, qualified education costs, medical expenses, first-time homebuyers, and substantially equal payments over life expectancy.
If dividends are left on deposit with an insurer to earn interest: A The dividend is tax-free, but the interest is taxable B The dividend is taxable as well as the interest C The dividend is taxable, but the interest is tax-free D The interest is tax-free as well as the dividend
A The dividend is tax-free, but the interest is taxable Interest paid by insurers on dividends left on deposit is taxable as income.
What type of retirement plan is not required to have a vesting schedule, is not approved by the IRS, can discriminate in favor of highly compensated employees, and can benefit the employer? A pension plan B A non-qualified plan C An ERISA plan D A qualified plan
B A non-qualified plan A qualified plan is not allowed to have those features or requirements. Only a non-qualified plan can.
A SIMPLE plan may be established either as a(n): A 401(k) or Keogh plan B IRA or a 401(k) plan C TSA or Keogh plan D IRA or TSA plan
B IRA or a 401(k) plan A SIMPLE plan may be established either as an IRA or a 401(k) plan.
If money is paid when a change of ownership in a life insurance policy takes place, this is generally known as a ____________. A Viatical settlement B Transfer for value C 1035 Exchange D Life settlement
B Transfer for value A transfer for value takes place when money is paid for a change in ownership.
There are ____ broad categories of qualified retirement plans. A 3 B 1 C 2 D 4
C 2 There are two broad categories of qualified retirement plans: defined benefit and defined contribution.
If a life insurance policy does not pass the ___ -pay test, it will be deemed a MEC. A 5 B 3 C 7 D 10
C 7 When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.
Roth IRAs and Traditional IRAs have only one of the following in common. Which one is it? A Qualified withdrawals are income tax free B All Roth IRA contributions are nondeductible C Catch up contributions for those age 50 or older D A non-qualified distribution is subject to taxation of earnings and a 10% additional tax, unless an exception applies
C Catch up contributions for those age 50 or older Maximum annual contribution limits apply as set forth by the IRS plus a catch up contribution for persons age 50 or older.
If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes. A State Income B Federal Income C Federal Estate D Probate
C Federal Estate While the death benefit is income tax free, the amount in the deceased's estate may be subject to Federal Estate taxes.
When would a life insurance policy loan be subject to income taxation? A When the outstanding loan is in excess of $10,000 B When any part of the policy loan is used to pay for the policy's premium C If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis D When the policy loan is greater than the premiums paid into the policy
C If the policy lapses when there is a policy loan outstanding which is in excess of the policy's cost basis Only the portion of an outstanding policy loan in excess of the policy's cost basis will be subject to income taxation if the policy lapses.
All of the following are characteristics of a 401(k) plan, except: A Earnings on the investments grow tax deferred B Typical investment choices for 401(k)s include mutual funds C Employees can elect to defer some of their salary into the plan on a pre-tax basis D Employers must match employee contributions
D Employers must match employee contributions Employer matching contributions are up to the employer when the plan is first put into place.
Generally, the payment of an accelerated death benefit is _______ to a recipient if the benefit payment is qualified. A Taxable B Tax free up to $50,000 C Taxable to the extent it exceeds 7.5% of AGI D Tax free
D Tax free Generally, the payment of an accelerated death benefit is tax free to a recipient if the benefit payment is qualified.
If a life insurance policy does not pass the 7-pay test, it will be deemed a(n) _________. A MEC B Savings account C Annuity D Commodity
A MEC
All employer-paid premiums for amounts above $_________ of group life insurance are reported as taxable income to the employee. A $50,000 B $75,000 C $25,000 D $100,000
A $50,000 All employer-paid premiums for amounts above $50,000 are reported as taxable income to the employee.
David withdrew the money from his tax-deductible Traditional IRA and reinvested it 90 days later in another IRA. Which of the following statements is true regarding this transaction? A The distribution from the former IRA is fully taxable B This type of transaction is prohibited C The funds in the new IRA will not accumulate on a tax-deferred basis D The distribution from the former IRA is not taxable
A The distribution from the former IRA is fully taxable The distribution from the former IRA is fully taxable, as the transaction was not completed within the 60-day rollover window to avoid any taxes and penalties.
H is employed by a company that provides group life insurance. How much of the employer-paid premiums for H's $150,000 coverage, if any, is going to be reported as taxable income to H? A The premium paid for $100,000 B Zero C The premium paid for $50,000 D The premium paid for $75,000
A The premium paid for $100,000 Employer paid premiums in connection with group life insurance does not constitute taxable income to the employee unless the death benefit paid for by the employer exceeds $50,000. All employer paid premiums for amounts above $50,000 are reported as taxable income to the employee.
Anyone under the age of 70 1/2 who has _________ can open up a Traditional IRA. A Annuity Income Benefit Payments B Earned Income C Investable Assets D Investment Income
B Earned Income The requirement is earned income.
All of the following are ways in which to avoid the early withdrawal additional tax, except: A Medical expenses not covered or reimbursed by health insurance or to pay health insurance premiums B Qualified educational expenses C Up to $100,000 for a first time homebuyer D Death or permanent disability
C Up to $100,000 for a first time homebuyer An IRA account owner may take an early withdrawal from an IRA without penalty when certain qualified events occur, such as: death or permanent disability, up to $10,000 for the down payment on a home as a first time home buyer, medical expenses not covered or reimbursed by health insurance, or to pay health insurance premiums, and qualified educational expenses.
In the event that an insured receives a periodic benefit as the result of exercising the Accelerated Death Benefit Rider, what information must the insurer provide to the insured? A The amount of the accelerated payment, the remaining death benefit and cash values B The life expectancy of the insured on a semi-annual basis C The amount of taxable income that they will be reporting to the IRS D Verification and update of the policy ownership and beneficiary designations
A The amount of the accelerated payment, the remaining death benefit and cash values The Accelerated Death Benefit Rider advances a terminally ill insured a portion of the death benefit.
Which of the following distributions in a life insurance policy is taxable? A Withdrawal of cost basis B Interest paid on a death benefit settlement option C Cash dividend from a participating policy D Policy loans
B Interest paid on a death benefit settlement option Policy loans, cash dividends, and withdrawal of cost basis are not subject to taxation. Interest paid as part of a death benefit settlement option is taxed as ordinary income.
Which of the following statements regarding Roth IRAs is FALSE? A If the account owner is at least 59 1/2 and has held the account assets at least 5 years, there is no tax on earnings withdrawn B Contributions are not tax-deductible C As long as the account owner is under age 59 1/2 there is no maximum contribution limit D There are no Required Minimum Distribution (RMD) age or amounts
C As long as the account owner is under age 59 1/2 there is no maximum contribution limit Roth IRAs are subject to the same maximum contribution limits as other IRAs.
If no __________ is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate. A Insured B Relative C Beneficiary D Spouse
C Beneficiary The policyowner may name the estate as a beneficiary, or by default, if no beneficiary is living at the time of the insured's death, the benefit will automatically be paid into the insured's estate.
Which of the following Is the reason why premiums paid on personal life insurance are not deductible? A They rarely exceed 10% of a taxpayer's AGI B They are considered to produce a guaranteed source of income C They are considered a personal expense D It makes the deductibility of employer-paid premiums more attractive
C They are considered a personal expense For individuals, premiums are considered a personal expense and are not deductible. They are paid with after-tax dollars. This establishes a cost basis in the policy for tax purposes.
A $500,000 policy is sold for $50,000. After the sale, the new owner pays $10,000 in life insurance premiums while the insured is alive. Upon death of the insured, how much of the death benefit is taxable? A $450,000 B $60,000 C $500,000 D $440,000
D $440,000 A $500,000 policy is sold for $50,000. After the sale the new owner pays $10,000 in life insurance premiums while the insured is alive. Upon death of the insured $60,000 ($50,000 + $10,000) of the death benefit is received income tax free to the beneficiary while $440,000 is taxable ($500,000 - $60,000).
If the annuitant dies during the annuity or payout phase, the remaining value in the account will be: A Added to the beneficiary's estate for immediate estate taxation B Added to the original owner's estate for valuation, if the owner is different from the annuitant C 100% taxable as income to the recipient D Added to the deceased annuitant's estate for valuation
D Added to the deceased annuitant's estate for valuation If the annuitant dies during the annuity or payout phase, the remaining value in the account will be added to the deceased annuitant's estate for valuation.
If an annuity is annuitized, then the _________ investment is recovered income tax-free over the income benefit payment period. A Non-guaranteed B Pre-tax C Exclusion D After-tax
D After-tax Only the after-tax investment is recovered income tax-free from an annuity that is annuitized. It represents a return of the cost basis.
H has an annuity funded with after-tax contributions. So far, H has placed $10,000 into the policy and it is now worth $25,000. If H cashes out the annuity, what is H's cost basis? A $10,000 B $25,000 C $15,000 D Zero
A $10,000 The amount contributed is after tax dollars and is considered the cost basis.
An insured has contributed $12,000 in premiums toward a universal life policy. She decides to cancel the policy and take the cash value of $15,000. What are the tax consequences of this distribution? A $12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income B The distribution at surrender is tax free C $12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as long-term capital gain D The full $15,000 is tax deferred
A $12,000 is a return of after tax dollars (i.e. cost basis), $3,000 is taxable as ordinary income Upon surrender of a permanent life insurance contract, cash value received is taxable to the extent it exceeds total premium paid (i.e. CSV - cost basis = equity). The equity is taxed as ordinary income.
Which of the following is a qualified retirement plan that bases an employee's retirement benefit upon length of service and highest attained salary? A Defined Benefit B Defined Contribution C Profit-Sharing D SIMPLE
A Defined Benefit A defined benefit plan usually bases the employee's retirement check on length of service and highest attained salary.
All of the following regarding employer group life insurance are true, except: A Employee-paid premiums are tax-deductible to the employee B Death benefit proceeds paid to an employee's named beneficiary are received income tax-free C Premiums paid by an employer are tax-deductible to the business as an ordinary and necessary business expense D Employer-paid premiums do not constitute taxable income to the employee unless the death benefit exceeds $50,000
A Employee-paid premiums are tax-deductible to the employee Premiums paid by an employee are not eligible for a tax deduction.
How are employer paid premiums on a group life insurance plan treated for tax purposes? A A barter transaction B As an ordinary and necessary business expense C As compensation in lieu of cash D As a personal expense paid on behalf of the employee
B As an ordinary and necessary business expense Employer paid premiums on a group life insurance plan are treated as an ordinary and necessary business expense which is why it qualifies for tax deductibility.
A Roth IRA is unique for which of the following reasons? A Contributions are tax deductible and distributions are nontaxable B Contributions are nondeductible and distributions are nontaxable C Contributions are nondeductible and distributions are taxable D Contributions are tax deductible and distributions are taxable
B Contributions are nondeductible and distributions are nontaxable Roth retirement plans are funded with after-tax (nondeductible) money. Under current tax law, distributions are received tax-free, including all gains.
If life insurance proceeds are paid to the deceased's estate they may be subject to ________ taxes. A State Income B Federal Estate C Federal Income D Probate
B Federal Estate While the death benefit is income tax free, the amount in the deceased's estate may be subject to Federal Estate taxes.
All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT: A Distributions on gains withdrawn from a MEC prior to age 59 1/2 are subject to a 10% penalty in addition to taxation B If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status C Distributions received from a MEC are subject to a LIFO tax treatment D A policy that fails the 7-pay test will be deemed a MEC
B If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status A policy that does not pass the 7-Pay Test will be deemed a Modified Endowment Contract for the life of the contract.
In a SIMPLE plan, employer contributions vest: A 1/4 per year over 4 years B Immediately at 100% C 20% per year over 5 years D 100% at the end of year 7
B Immediately at 100% SIMPLE employer contributions must be immediately vested at 100%. This means that the employee is entitled to all the employers' contributions immediately.
During the accumulation phase of an annuity, if the contract owner dies and the annuitant is someone other than the owner, the value of the annuity is: A Paid out income tax-free to the beneficiary B Included in the owner's estate for valuation C 100% taxable to the beneficiary D Included in the beneficiary's estate for immediate estate taxation
B Included in the owner's estate for valuation During the accumulation phase, if the contract owner dies, the value of the annuity is included in the owner's estate for valuation.
All of the following are unique features of a Roth IRA compared to a traditional IRA, except: A Contributions may be made from earned income after age 70 1/2 B Life insurance is an approved funding vehicle C Qualified distributions are completely tax free D Contributions are never tax deductible
B Life insurance is an approved funding vehicle Life insurance is not an acceptable method of holding IRA or Roth IRA assets. Qualified Annuities may be used instead.
All of the following are defined contribution plans, except: A 403(b) B Pension C Profit-sharing D 401(k)
B Pension There are several defined contribution retirement plans available including a 401(k) Plan, a 403(b) Plan, and a Profit-Sharing Plan. Variations of an IRA-based defined contribution plan include the Simplified Employee Pension Plan (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE).
Death benefits are paid to the estate of the policyowner/insured in which of the following situations? A The contingent beneficiary has outlived the primary beneficiary B The beneficiary is the estate C The primary beneficiary is the deceased's spouse D The primary beneficiary is a minor
B The beneficiary is the estate If the beneficiary is listed as the estate, then upon death of the insured that is where the funds will end up.
All of the following are true regarding IRA rollovers, except: A This transaction will be reported to the IRS B The IRA owner has 60 days to deposit the funds into a new IRA to avoid taxation C A 10% withholding is required if the distribution is paid directly to the account owner D Rollovers are only allowed once per year
C A 10% withholding is required if the distribution is paid directly to the account owner A rollover is a payment made directly to the IRA owner. The owner has 60 days to deposit the check into a new IRA to avoid taxes and penalties. This type of transaction is reported to the IRS and is only allowed once per year. A 20% withholding of funds is required unless a direct rollover occurs.
Which of the following statements about Section 1035 transactions is TRUE? A Any surrender charges satisfied on the old policy carry over into the new policy B A 1035 allows an annuity to be exchanged for life insurance C A new application is required when moving into a new life insurance policy D All surrender charges are waived on any existing policy
C A new application is required when moving into a new life insurance policy If an existing policy has a surrender charge, it is still applied. The new policy requires evidence of insurability, and new surrender charges will apply to the new policy if it has them.
If, as the result of an injury or illness, the insured is deemed to be terminal (i.e., expected to die within 1 or 2 years), what rider added to a life insurance policy would advance a portion of the face value? A Viatical Rider B Return of Cash Value Rider C Accelerated Benefit (Living Need) D Disability Rider
C Accelerated Benefit (Living Need) The Accelerated Benefit or Living Need Rider advances a portion of the death benefit to the owner if the insured is diagnosed with a terminal condition (i.e., death expected within 2 years).
All of the following tax-free exchanges of life insurance and annuities are permitted, EXCEPT: A Annuity to long term care insurance B Life insurance to an annuity C Annuity to life insurance D Life insurance to long term care insurance
C Annuity to life insurance Annuities may not be exchanged for life insurance.
___________ are not taxable because they are considered a return of excess premium. A Policy loans B Cash Values C Dividends D Death Benefits
C Dividends Dividends are considered a return of unearned premium which is why are they are paid out income tax free.
All of the following are true regarding Tax-Sheltered Annuities (TSAs), except: A Contributions are pre-tax and earnings grow tax deferred B The accounts are owned by each employee separately and are nonforfeitable C Employees can make direct contributions into their account D The account values will be paid upon death, retirement, or termination of the employee
C Employees can make direct contributions into their account Employees do not make direct payments to the retirement fund.
All of the following are characteristics of a 403(b) plan, except: A Contributions are pre-tax B Earnings grow tax-deferred C Employees can make direct payments into the retirement fund D Account values are paid out upon death, retirement, or separation of service
C Employees can make direct payments into the retirement fund The question describes a Tax-Sheltered Annuity (TSA) plan whereby a teacher participates through a deduction from his or her pay. Earnings grow tax-deferred, but employees cannot make direct payments into the retirement fund.
All of the following are characteristics of a qualified retirement plan, EXCEPT: A Employer contributions are immediately tax deductible to the employer B Employee contributions are either pretax or tax deductible C Employers in private industry are required to establish pension plans D The penalty for premature distributions may be waived for death, disability, qualified education costs, medical expenses and first -time homebuyers
C Employers in private industry are required to establish pension plans Qualified retirement plans receive favorable tax treatment, such as deductible premiums to the employer, pretax or deductible premiums to the employee, and waived penalties for the listed situations. ERISA is a federal law that sets minimum standards for employers who establish pension plans in private industry, but does not require employers to establish a plan.
Withdrawals from a non-qualified annuity that is not part of an annuitization are taxed on which of the following methods? A Cost basis identification B Weighted average C Last-in, first-out basis (LIFO) D First-in, last-out basis (FIFO)
C Last-in, first-out basis (LIFO) A withdrawal is any amount distributed from the annuity that is not part of the annuitization process and will be taxed on a last-in, first-out basis (LIFO). That means for income tax purposes, the first money out of the annuity will be considered as earnings, not principal.
F has a $100,000 face amount term life policy for which F paid $10,000 in premium to date. F dies and the benefit is paid out to G, the beneficiary. What amount of the death benefit received is taxable as income to G? A $90,000 B $50,000 C Nothing D $100,000
C Nothing Lump sum death proceeds are not taxable as income to a named beneficiary.
All of the following are characteristics of a 401(k) plan, except: A Employer contributions are not taxed in the year they are made B Balances grow tax deferred C Post retirement distributions are made federal income tax free D Employee contributions are made pre-tax
C Post retirement distributions are made federal income tax free Because 401(k) accounts are funded with untaxed contributions, all distributions are fully taxable in the year received.
To eliminate the use of life insurance as a short-term, tax-free savings vehicle, what tax law change took place? A Death benefits became income-taxable B Loan interest became tax-deductible C The Modified Endowment Contract (MEC) rules were put into place D Employer-paid premiums were made non-tax-deductible
C The Modified Endowment Contract (MEC) rules were put into place The rule states that if a policy is funded too quickly, it will be classified as a Modified Endowment Contract (MEC). MEC rules impose stiff penalties to eliminate the use of life insurance as a short-term, tax-free savings vehicle.
When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan. A Defined Contribution B SEP-IRA C Profit-Sharing D Defined Benefit
D Defined Benefit Defined benefit plans pay out a fixed and known benefit to retirees based on a formula considering years of employment and highest earnings.
H owns a nonqualified variable annuity that has a separate account invested in the stock market. If H withdraws funds from the annuity, the earnings on the withdrawal will be taxed as: A Short-term capital gains B Dividend income C Long-term capital gains D Ordinary income
D Ordinary income Regardless of the source of the gains inside an annuity, all taxable withdrawals are subject to ordinary income tax rates.
Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes? A Choose the interest income only settlement option B Elect the life only settlement option C Select the 10-year period certain settlement option D Receive the claim amount in a lump sum
D Receive the claim amount in a lump sum Any settlement option will generate taxable income to the beneficiary. The only way to be exempt from any income taxation is to receive the death benefit in a lump sum.
Chad and Sue have successfully owned and operated their bakery for 10 years and have decided to plan for their retirement. They are not incorporated and have no full-time employees, and want a qualified plan to maximize the tax advantages while at the same time not bog them down with paperwork. Which of the following plans would be their best option? A Tax-Sheltered Annuity (TSA) B Defined Benefit Pension Plan C HR-10 (Keogh) Plan D Simplified Employee Pension (SEP)
D Simplified Employee Pension (SEP) Chad and Sue are looking for a plan to benefit them as owners and at the same time reduce the paperwork load associated with setting up and maintaining the plan.
What is "defined" in a defined contribution plan? A The employer's percentage or amount of distribution to an employee from the plan B The percentage or amount of an employee's distributions from the plan C The percentage of the employee's income provided as life insurance to the employee D The percentage or amount of an employee's deposits to the plan
D The percentage or amount of an employee's deposits to the plan In a defined contribution plan, the employee chooses how much of his/her pay to contribute to the plan each payroll period. The employer deducts that amount from the employee's pay before income tax is calculated and remits that amount to the plan's custodian for the benefit of the employee.
A SIMPLE plan is available to companies that have ______ employees or less. A 100 B 35 C 50 D 75
A 100 A SIMPLE Plan is designed for companies with less than 100 employees. Employee participation is entirely voluntary and there is no minimum participation requirement. SIMPLE plans are much less costly to administer than 401(k) plans, but contribution limits are also smaller.
A public school teacher may contribute part of his or her paycheck income into a ____ plan and defer income taxes on not only the contribution but also the growth in the plan. A 403(b) B SIMPLE C 401(k) Profit Sharing Plan D Keogh/HR 10
A 403(b) A 403(b) is specifically intended for public school employees and employees of certain other non-profit organizations.
If a policyowner of a life insurance policy accidently pays in premiums in excess of the MEC guidelines, the insurer can refund the excess within ______ days of the end of the contract year. A 60 B 10 C 30 D 45
A 60 Any excess premium can be refunded by the insurer within 60 days after the end of the contract year.
Required Minimum Distributions must begin from Traditional IRAs by April 1st of the year following the year the account owner turns _____. A 70 1/2 B 60 C 65 D 62
A 70 1/2 RMDs must start no later than April 1 of the year following the year the account owner turns 70 1/2.
P is 75. P's required minimum distribution for this year is $10,000. P only withdraws $2,000. What is the consequence to P for this? A A $4,000 tax penalty B A $2,000 tax penalty C A $8,000 tax penalty D A $1,000 tax penalty
A A $4,000 tax penalty Failure to take all or part of an annual RMD incurs a 50% penalty tax on the amount not distributed. $10,000 - $2,000 = $8,000 x 50% = $4,000.
A Tax Sheltered Annuity may be established and funded by which of the following? A A not-for-profit community hospital association B A professional law firm C Johnson Accountants, Inc. D XYZ's Catering, a small unincorporated business
A A not-for-profit community hospital association 403(b) plans are established for nonprofit organizations.
A stay at home father wants to open up an IRA. What is required in order for him to do so? A Be married to a spouse that has earned income B Be under the age of 59 1/2 C Be a first time homeowner D Have the money available to afford to do so
A Be married to a spouse that has earned income A spousal IRA can be set up for a non-working spouse based on the working spouse's earned income.
Which of the following best defines the 'Cost Recovery Rule'? A Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender B The amount of the policy's internal expenses plus the life producer's commission make up the total cost of the policy C When a policy is surrendered, the earnings within the policy are accounted for first D The earnings on the policy's cash values are taxed every year and build up a cost basis which is recovered income tax-free upon surrender
A Generally, the difference between the amount of cash value received and the amount of premium paid in is subject to income tax upon surrender The 'Cost Recovery Rule' stipulates that upon a partial withdrawal of cash or the surrender of a policy, the cash value in excess of premiums paid (cost basis) is subject to income tax.
Which of the following statements about a Modified Endowment Contract (MEC) is FALSE? A If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment B Taxable distributions include cash value surrenders and policy loans C The 7-Pay Test compares the premiums paid for the policy during its first 7 years with the annual net level premiums of a 7-Pay Policy D Funds distributed before age 59 1/2 are subject to a 10% penalty on any gains
A If a contract is deemed a MEC, any funds distributed are subject to a first-in/first-out (FIFO) tax treatment Any funds distributed are subject to a last-in, first-out (LIFO) tax treatment, meaning gains will be taxed before principal.
If a(n) ________ does not pass the 7-pay test, it will be deemed a Modified Endowment Contract (MEC). A Life insurance policy B Endowment contract C Annuity D Viatical settlement
A Life insurance policy When a life insurance policy does not pass the 7-pay test, it will be deemed a MEC.
All of the following are TRUE regarding qualified plans, except: A Plans can discriminate in favor of highly compensated employees B Employer contributions are immediately tax-deductible C Distributions taken prior to age 59 1/2 are subject to tax and a tax penalty D Employer contributions are not taxable to the employee until withdrawn
A Plans can discriminate in favor of highly compensated employees In an ERISA-qualified plan, there can be no discrimination in favor of highly compensated employees.
All of the following are eligible to participate in a HR-10 Keogh Plan, except: A Silent partner B Sales person C Secretary D Manager
A Silent partner A Keogh plan allows participation by the sole proprietor and any of its eligible employees.
When may an employer deduct the premiums it pays for an employee's life insurance benefit? A An employer cannot ever deduct premiums it pays for an employee's life insurance benefit B As long as the business does not derive a direct benefit from the policy C Employers can always deduct the premiums it pays for an employee's life insurance benefit D If the business does not receive more than 50% of the death benefit
B As long as the business does not derive a direct benefit from the policy As long as the insurance death benefit is not payable to the employer when an employee dies, the premiums paid for the life insurance are deductible to the business.
When an employee receives a fixed and known benefit at retirement, it comes from a(n) __________ plan. A Defined Contribution B Defined Benefit C SEP-IRA D Profit-Sharing
B Defined Benefit Defined benefit plans pay out a fixed and known benefit to retirees based on a formula considering years of employment and highest earnings.
Which of the following plans provides employees with a fixed and known benefit at retirement, the amount of which generally depends upon length of service and highest attained salary? A Tax-Sheltered Annuity (TSA) B Defined benefit C Defined contribution D Simplified Employee Pension (SEP)
B Defined benefit A defined benefit plan provides employees with a fixed and known benefit at retirement, the amount of which generally depends upon length of service and highest attained salary.
If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the ________. A End of the calendar year B End of the contract year C Latest premium payment was received D End of the tax year
B End of the contract year If a policyowner unintentionally pays premiums in excess of the MEC guidelines, the excess premium can be refunded by the insurer within 60 days after the end of the contract year.
Sherman is the custodian at an elementary school and participates in its qualified retirement plan. This describes a: A Simplified Employee Pension B SIMPLE IRA C 403(b) Tax-Sheltered Annuity D HR-10 Keogh Plan
C 403(b) Tax-Sheltered Annuity All four responses are qualified plans, but the one specifically designed for employees of nonprofit organizations and public schools is the 403(b) Tax-Sheltered Annuity.
Which of the following scenarios will trigger an income tax due? A Cancelling the policy during the free look period B Receiving a participating policy's cash dividend C Interest earned on dividends left on deposit with the insurer D Taking out a policy loan in an amount greater than the total premiums paid in
C Interest earned on dividends left on deposit with the insurer While the dividend is free from income tax the interest earned on the dividend is subject to tax.
Janelle is the beneficiary of a life insurance policy in which the insured has died. What is the only way she can receive the claim amount totally free from income taxes? A Choose the interest income only settlement option B Elect the life only settlement option C Receive the claim amount in a lump sum D Select the 10-year period certain settlement option
C Receive the claim amount in a lump sum Any settlement option will generate taxable income to the beneficiary. The only way to be exempt from any income taxation is to receive the death benefit in a lump sum.
If an annuitant withdraws funds from their annuity prior to age 59 1/2 what is the tax consequence? A Tax on the tax deferred portion of the withdrawal along with a 15% tax penalty B Tax on the entire withdrawal plus a 10% tax penalty C Tax and 10% penalty tax on the withdrawal that represents earnings D Tax on cost basis and 10% tax penalty on the tax deferred portion of the withdrawal
C Tax and 10% penalty tax on the withdrawal that represents earnings The withdrawal that represents earnings will be taxed along with a 10% tax penalty.
Which of the following could initiate the Accelerated Benefits Provision or Rider of a life policy? A Inability to perform some activities of daily living B A condition that is terminal C A total disability not reducing life expectancy D A presumptive disability
B A condition that is terminal The qualifying event in the Living Needs rider is the terminal status of the insured (i.e. projected to die within 1 or 2 years).
