Chapter 11 Retirement Plans

An individual, age 40, at a median income level and covered by an employer sponsored retirement plan wants to save more for retirement. What is the following is the most suitable recommendation?

A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule

The amount paid into a defined contribution plan is set by the:

A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

Two customers in their twenties, married only a few years, should select which investment for their IRAs?

A growth mutual fund may be appropriate for a young couple's IRA account; all other selections incur high risk that is not appropriate for a retirement account.

What is the latest date that an IRA participant may make an IRA deposit for 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.

Which of the following are qualified plans? I. Payroll deduction. II. Deferred compensation. III. Defined benefit. IV. Keogh.

Defined benefit and Keogh 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.

Minimum distributions from a traditional IRA must begin:

Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 70½.

Qualified pension plans grow

Tax free Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax-free. All growth is taxable at the time of distribution

type of retirement plan would be most beneficial to a young employee of a corporation?

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.

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 both may make annual contributions of 100% of earned income up to the maximum allowable limit, whichever is less, to their own respective IRAs.

HR-10 Plan (Keogh)

This is a qualified form of retirement plan. A self-employed person must also make contributions on behalf of any eligible employees if he is making a contribution on his own behalf.

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

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.

A grandchild inherits his grandfather's IRA from which mandatory distributions had already begun. With regard to future distributions, which option is allowed?

When a grandchild inherits an IRA from which mandatory distributions have already begun, payout must continue but is now based on the life expectancy of the new owner.

An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is a:

defined benefit plan A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age as specified by the plan document.

Qualified distributions from Roth IRAs are:

tax free

Payments received by the owner of a 403(b) plan are:

100% taxable When TSA funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.

An unfunded pension liability is generally associated with which type of corporate retirement plan?

An unfunded liability is one that has been incurred but does not have to be paid until a future date, and for which sufficient money to meet the obligation has not been set aside. Defined benefit plans guarantee a specific payout in the future and require an actuary to determine the monies that must be set aside today to meet this future obligation. If sufficient monies are not set aside or if poor investment performance wipes out a portion of these funds, an unfunded liability results.

Each of the following are permitted to open an IRA

Corporate officer covered by a 401(k) plan. A self-employed attorney who has a Keogh plan A divorced mother whose sole income is alimony and child support

If a corporation begins a nonqualified retirement plan

Employee contributions grow tax deferred if they are invested in an annuity. 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.

When operating a Keogh plan, a self-employed individual must make contributions for

Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1 year, and work full-time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 or have just started working with the employer

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

Excess contributions to an IRA are subject to a 6% penalty tax.

public sector plans are

Public sector plans are not covered by ERISA guidelines. Corporate and certain union retirement plans are subject to ERISA guidelines.

To avoid penalty, a rollover of an IRA may occur no more frequently than:

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.

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?

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 61-year-old wanting to take a lump-sum distribution from his Keogh will

be taxed at ordinary income rates.

A member firm's customer is requesting that IRA contributions converted from a traditional IRA to a Roth IRA now be moved back to a traditional IRA. This is

called a re-characterization and is allowed by the IRS so long as certain requirements are met The IRS allows an individual to recharacterize contributions made to one type of IRA as if they had been made to another type of IRA as long as the requirements as to when the recharacterization can occur have been met

If your 40-year-old client wants to withdraw funds from her Keogh, her withdrawal will be taxed as:

ordinary income plus 10% penalty An early withdrawal from a Keogh is taxed in the same way as an early withdrawal from an IRA - as ordinary income plus a 10% penalty

All of the following statements regarding 529 plans are true EXCEPT A) states impose very high overall contribution limits. B) contributions to a 529 plan may be subject to gift taxation. C) the income level of the contributor can affect the annual contribution amount. D) the assets in the account are controlled by the account owner, not the child

the income level of the contributor can affect the annual contribution amount Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.

A corporate profit-sharing plan must be set up under a(n):

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.

Under ERISA, a plan trustee wishing to write uncovered calls may do so

under no circumstances ERISA prohibits retirement plan trustees from making investments that are excessively speculative; an uncovered call writer has unlimited risk