employee benefits test 2

Nick, who is age 45, operates a landscaping business and is self-employed. He has an assistant, Louis, who has worked with him for five years. Nick is establishing a SEP for 2018 and is willing to make a contribution of 25 percent of Louis's salary to the SEP. If Nick earns $100,000 after paying Louis, his expenses, and the contribution to Louis's SEP, what is the most that he can contribute to the SEP for himself?

$18,587. Rationale Choice a is correct. $100,000 less [$100,000 x 0.9235 x 0.153 x ½] x 20% (0.25/1.25) = $18,587. Choice b left out the self employment income. Choice c is incorrect because it does not adjust the 25% to 20%. Choice d is incorrect as it multiplies by 25% instead of 20%.

Jim, a participant in the Zappa retirement plan, has requested a second plan loan. Jim's vested account balance is $80,000. He borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan?

$22,000. Rationale He can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance in the last twelve months - $23,000. Half of the vested account balance ($40,000) less the outstanding loan of $18,000 equals $22,000.

On January 5, Cindy, age 39, withdrew $42,000 from her qualified plan. Cindy had an account balance of $180,000 and an adjusted basis in the account of $30,000. Calculate any early withdrawal penalty.

$3,500. Rationale $30,000/$180,000 = 0.1667 exclusion. $42,000 x 0.1667 = $7,000. $42,000 - $7,000 = $35,000 x 0.10 = $3,500.

Nancy, age 70 on February 2, 2018, had the following account balances in a qualified retirement plan. 12/31/2017 $500,000 12/31/2018 $478,000 12/31/2019 $519,000 12/31/2020 $600,000 Assuming that Nancy is retired and has never taken a distribution prior to 2019, what is the total amount of minimum distribution required in 2019? Life expectancy factors according to the uniform life table are 27.4 for a 70 year old and 26.5 for a 71 year old.

$36,286. Rationale For 2018, look back to 2017: $500,000 ÷ 27.4 = $18,248 For 2019, look back to 2018: $478,000 ÷ 26.5 = $18,038 $18,248 + $18,038 = $36,286 She must take a distribution for 2018 and 2019. However, she can wait to take the 2018 distribution until April 1, 2019 in which case she has 2 distributions in 2019.

Gary quits his job with a 401(k) account worth $500,000. He wants to roll the funds over to his IRA. If his employer sends the funds to Gary directly, how much will they send?

$400,000. Rationale An employer will withhold 20%. Gary should use a direct trustee to trustee transfer to avoid the required withholding.

Gerry is 70½ on April 1 of the current year and must receive a minimum distribution from his qualified plan. The account balance had a value of $423,598 at the end of last year. The distribution period for a 70 year old is 27.4, and for a 71 year old it is 26.5. If Gerry takes a $15,000 distribution next April 1st, what is the amount of the minimum distribution tax penalty associated with his first year's distribution?

$492. Rationale The required minimum distribution for Gerry is $15,985 ($423,598 divided by 26.5) because he is 71 years old as of December 31 of the current year. Gerry only took a distribution of $15,000, therefore, the minimum distribution penalty (50%) would apply to the $985 balance. Therefore, the minimum distribution penalty is $492 (50% of the $985)

Jack and Jill, both age 43, are married, made $20,000 each, and file a joint tax return. Jill has made a $5,500 contribution to her Traditional IRA account and has made a contribution of $2,000 to a Coverdell Education Savings Account for 2018. What is the most that can be contributed to a Roth IRA for Jack for 2018?

$5,500. Rationale The maximum combined contribution to traditional and Roth IRAs is $5,500 per person (who has not attained age 50) for 2018. Therefore, Jack and Jill would have a total of $11,000 to allocate between traditional and Roth IRAs. Jill has already contributed the maximum amount; however, Jack could still contribute $5,500 for himself. The Coverdell Education Savings Account (formerly known as an Education IRA) is not included in the $5,500 limit.

Gary quits his job with a 401(k) account worth $500,000. He wants to roll the funds over to his IRA. If his employer sends the funds to Gary directly, how much will they send?

$500,000.

Which of the following are costs of a stock bonus plan? 1. Periodic appraisal costs. 2. Periodic actuarial costs.

1 ONLY

Generally, older age entrants are favored in which of the following plans? 1. Defined benefit pension plans. 2. Cash balance pension plans. 3. Target benefit pension plans. 4. Money purchase pension plans.

1 and 3. Rationale Cash balance and money purchase pension plans generally favor younger age entrants. While defined benefit and target benefit pension plans favor older age entrants with less time to accumulate and require higher funding levels.

Which of the following is/are elements of an effective waiver for a pre-retirement survivor annuity? 1. Both spouses must sign the waiver. 2. The waiver must be notarized or signed by a plan official. 3. The waiver must indicate that the person(s) waiving understand the consequences of the waiver.

2 and 3. Rationale Only the nonparticipant spouse must sign the waiver.

In June 2018, Cody converts $100,000 in his 401(k) plan to a Roth account through an in-plan Roth rollover. The value of the assets in the Roth account drops by 40 percent due to a significant decline in the stock market that occurs in August 2018. The in-plan Roth rollover results in Cody incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40 percent drop). Which of the following statements is correct?

Cody cannot recharacterize the conversion. Rationale In-plan Roth rollovers cannot be "undone" or recharacterized. The other choices are not correct.

Company A has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A's cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public wthin three years. Which of the following would be the best qualified plan for them to consider adopting?

Stock bonus plan. Rationale A stock bonus plan will allow equity participation without the use of cash flows and the public offering will eventually provide liquidity.

Which of the following cannot be held in an IRA account as an investment?

Variable life insurance. Rationale Life insurance is not permitted in IRA accounts. All of the other choices are permissible.

Jim, who is age 39, converts a $74,500 Traditional IRA to a Roth IRA in 2018. Jim's adjusted basis in the Traditional IRA is $10,000. He also makes a contribution of $5,500 to a Roth IRA in 2018 for the tax year 2018. If Jim takes a $4,000 distribution from his Roth IRA in 2019 when the account is worth $100,000, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2019 federal income tax rate is 24 percent?

$0. Rationale Any amount distributed from an individual's Roth IRA is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category): • From regular contributions; • From conversion contributions, on a first-in-first-out basis; and • From earnings. Jim's $4,000 distribution comes from the "contribution" layer, and is therefore, not subject to tax or penalty. All distributions from all of an individual's Roth IRAs made during a taxable year are aggregated. The 10% additional tax under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10% additional tax under IRC §72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution and if the distribution is made within the five-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.

Rustin recently retired from Fox, Inc., a national plastics supplier. When Rustin retired his stock bonus plan had 10,000 shares of Fox, Inc. stock. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustin's behalf. At retirement, Rustin took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $35 per share. Six months after distribution, Rustin sold the stock for $40 per share. How much gain was Rustin subject to at the date the stock was distributed

$0. Rationale Rustin will not have any capital gain until the stock is sold.

Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account for 2018?

$10,409. Rationale $56,000 Schedule C net income - 3,956 (less 1/2 self-employment taxes at 15.3% x 0.9235) $52,044 Net self-employment income x 0.20 (0.25 ÷ 1.25) $10,409 Keogh profit sharing contribution amount

For the year 2018, Katy (age 35) and Stefen (age 38), a married couple, reported the following items of income: Katy Stefen Total Wages $50,000 - $50,000 Dividend Income $2,000 $1,200 $3,200 Cash won from lottery $500 $500 $52,000 $1,700 $53,700 Katy is covered by a qualified plan. Stefen does not work; he makes his own wine and samples it most of the day. Assuming a joint return was filed for 2018, what is the maximum tax deductible amount that they can contribute to their IRAs?

$11,000. Rationale Because their income is less than the limit for joint income tax filers ($101,000 for 2018), they can contribute and deduct $11,000 for 2018.

Rustin recently retired from Fox, Inc., a national plastics supplier. When Rustin retired his stock bonus plan had 10,000 shares of Fox, Inc. stock. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustin's behalf. At retirement, Rustin took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $35 per share. Six months after distribution, Rustin sold the stock for $40 per share. What gain is Rustin subject to at the date the stock was sold?

$150,000 long-term capital gain and $50,000 short-term capital gain. Rationale When Rustin sells the stock any appreciation after the employer's contribution will be capital gain. Rustin's adjusted basis in the stock is the amount that was subjected to ordinary income ($200,000). The appreciation before the date of distribution will be long- term capital gain ($150,000) while the taxation of the appreciation after the date of distribution will depend on the holding period. Since Rustin only held the property for six months after the date of distribution, the $50,000 of appreciation after the date of distribution will be short-term capital gain.

Kathy (age 55) is single, recently divorced, and has received the following items of income this year: Pension annuity income from QDRO $21,000 Interest and dividends $5,000 Alimony $1,000 W-2 Income $1,200 What is the most that Kathy can contribute to a Roth IRA for 2018?

$2,200. Rationale Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $5,500 for 2018. Kathy has earned income of $2,200 from the alimony and W-2 income she received. Thus, she is limited to a contribution of $2,200. The other $26,000 of income is not earned income and therefore is unavailable for contributions to any IRA. An additional catch-up contribution of $1,000 for 2018 is permitted for individuals who have attained age 50 by the close of the tax year. Her total remains at $2,200 because that is all the earned income she has. Note: Alimony resulting from divorce agreements after 2018 is not income or earned income (2017 TCJA).

Rustin recently retired from Fox, Inc., a national plastics supplier. When Rustin retired his stock bonus plan had 10,000 shares of Fox, Inc. stock. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustin's behalf. At retirement, Rustin took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $35 per share. Six months after distribution, Rustin sold the stock for $40 per share. What amount was subject to ordinary income on Rustin's tax return at the date the stock was distributed?

$200,000. Rationale Rustin will be subject to ordinary income at the date the stock is distributed equal to the value of the contributions made by the employer ($200,000).

Diggs is a 47-year-old executive who earns $315,000 from his job at Acme Arrows (AA) and contributes the maximum amount to the AA 401(k) plan. He wants to make a contribution to a Roth IRA for the current year, but his compensation is over the income limit. He decides he wants to fund a Roth IRA by using the backdoor Roth technique. Assume that Diggs has a traditional IRA with a balance of $24,500 that was funded entirely with pre-tax contributions. If Diggs contributes $5,500 (var) to a traditional IRA and then converts $5,500 (var) to a Roth IRA, how much income will he have to pick up as a result of the conversion?

$4,492. Rationale The backdoor Roth technique is less effective when the taxpayer has funds in a traditional IRA as all IRA amounts must be aggregated. Thus, Diggs must pick up $4,492 into income [1-($5,500/ ($5,500+ $24,500) x $5,500].

Jose Sequential, age 70½ in October of this year, worked for several companies over his lifetime. He has worked for the following companies (A-E) and still has the following qualified plan account balances at those companies. Company Jose's Account Balance A $250,000 B $350,000 C $150,000 D $350,000 E $200,000 Jose is currently employed with Company E. What, if any, is his required minimum distribution for the current year from all plans? Life expectancy tables are 27.4 for age 70 and 26.5 for age 71.

$40,146. Rationale Jose is required to take a minimum distribution for the years in which he is 70½ from each qualified plan, except from his current employer ($1,100,000 ÷ 27.4 = $40,146). He can delay the payment until April 1 of next year, but the question asks for the distribution required for the current year. Note: He must take from each account. He cannot take $40,146 from one account as he could if A-D were IRAs.

Taylor, age 65, retires from Tickle Tile corporation and receives 25,000 shares of Tickle Tile stock with a fair market value of $500,000 in 2018. Taylor recognized $48,000 of ordinary income upon the distribution. What is Taylor's NUA immediately after the distribution?

$452,000. Rationale The NUA immediately after the distribution is $452,000 ($500,000 - $48,000).

Robin and Robbie, both age 45, are married and filed a joint return for 2018. Robbie earned a salary of $100,000 in 2018 and is covered by his employer's 401(k) plan. Robbie and Robin earned interest of $30,000 in 2018 from a joint savings account. Robin is not employed, and the couple had no other income. On April 15, 2019, Robbie contributed $5,500 to an IRA for himself and $5,500 to an IRA for Robin. The maximum allowable IRA deduction on the 2018 joint return is:

$5,500. Rationale The ability to deduct the IRA contribution depends on the individual's income and whether the individual has a qualified plan. Based on the information provided in the problem, Robin and Robbie have an AGI of $130,000 ($100,000 salary + $30,000 interest income). Since Robbie has a qualified plan, they cannot deduct the contribution for him because his income exceeds the AGI phaseout of $101,000 - $121,000 for 2018. Robin, on the other hand, can deduct her contribution because she does not have a qualified plan and their joint income is less than the $189,000 to $199,000 phaseout. Therefore, Robin's deduction is $5,500. She can use Robbie's earned income as her own.

Cavin sells stock several years after he received it as a distribution from a qualified stock bonus plan. When the stock was distributed, he had a net unrealized appreciation of $7,500. Cavin also had ordinary income from the distribution of $29,000. The fair market value of the stock and the sales price at the time of sale was $81,000. How much of the sale price will be subject to long-term capital gain treatment?

$52,000. Rationale Sale Price - Adjusted Basis. $81,000 - $29,000 = $52,000 long-term capital gain.

Delores, age 62, single, and retired, receives a defined benefit pension annuity of $1,200 per month from Bertancinni Corporation. She is currently working part time for Deanna's Interior Design and will be paid $18,000 this year (2018). Deanna's Interior has a 401(k) plan, but Delores has made no contribution to the plan and neither will Deanna this year. Can Delores contribute to a traditional IRA or a Roth IRA for the year and what is the maximum contribution for 2018?

$6,500 to a traditional IRA or $6,500 to a Roth IRA. Rationale Delores has earned income and is over age 50. She is not an active participant in a retirement plan and even if she were, her AGI is below the income limits.

Amy, divorced and age 55, received taxable alimony of $50,000 in 2018. In addition, she received $1,800 in earnings from a part-time job. Amy is not covered by a qualified plan. What was the maximum deductible IRA contribution that Amy could have made for 2018?

$6,500. Rationale The deductible IRA contribution limit is $5,500 for 2018. The additional catch-up amount, for over age 50, is $1,000 for 2018. Alimony counts as earned income for IRA purposes for any divorce or separation agreement executed prior to 2019 (2017 TCJA). She is not covered by a qualified plan and therefore is not subject to AGI phase-outs. Therefore the total is $6,500 for 2018.

Davin sells stock six months after he received it as a distribution from a qualified stock bonus plan. When the stock was distributed, he had a net unrealized appreciation of $7,500. He also had ordinary income from the distribution of $29,000. The fair value of the stock at the time of sale was $81,000. How much of the sale price will be subject to long-term capital gain treatment?

$7,500. Rationale Appreciation on the stock after the date of distribution is taxed as long-term capital or short-term capital gain, depending upon the holding period beginning at the date of distribution. In this case, only the net unrealized appreciation of $7,500 is treated as long-term capital gain because the holding period for the sale was only six months. The remaining $44,500 of gain is taxed as short-term capital gain. $81,000 ($29,000) Basis $52,000 Total capital gain ($7,500) NUA long-term capital gain $44,500 Short-term capital gain

Mike, age 60, is a participant in the stock bonus plan of Tantalus, Inc., a closely held corporation. Mike received contributions in shares to the stock bonus plan and Tantalus, Inc. took income tax deductions as follows: Year # of Shares Value per Share (At Time of Contribution) 2014 100 $10 2015 125 $12 2016 150 $13 2017 200 $15 2018 400 $18 Mike terminates employment and takes a distribution from the plan of 975 shares of Tantalus, Inc., having a fair value of $19,500. What are Mike's tax consequences?

) Mike has ordinary income of $14,650 at distribution. Rationale Mike's ordinary income is exactly equal to Tantalus, Inc.'s deduction at the time of contribution, $14,650 (see chart below). Mike's net unrealized appreciation is $4,850 ($19,500 - $14,650) and will be taxed as long-term capital gains when the stock is sold. # of Shares Value per Share Value of Contribution 100 $10 $1,000 125 $12 $1,500 150 $13 $1,950 200 $15 $3,000 400 $18 $7,200 Total $14,650

Employees generally contribute to which of the following plans? 1. 401(k) plans. 2. Thrift plans. 3. Cash balance pension plans. 4. Defined benefit pension plans.

1 and 2. Rationale Cash balance pension plans and defined benefit pension plans are almost always exclusively funded by the employer (noncontributory). 401(k) plans and thrift plans allow employee contributions.

Investment portfolio risk is generally borne by the participant/employee in all of the listed qualified plans, except: 1. Defined benefit pension plan. 2. Cash balance pension plan. 3. 401(k) plan. 4. Profit sharing plan.

1 and 2. Rationale In defined benefit and cash balance pension plans, the employer bears the investment risk.

A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements? 1. SEPs and qualified plans have the same funding deadlines. 2. The contribution limit for SEPs and qualified plans (defined contribution) is $55,000 for the year 2018. 3. SEPs and qualified plans have the same ERISA protection from creditors. 4. SEPs and qualified plans have different nondiscriminatory and top-heavy rules.

1 and 2. Rationale SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $55,000 for 2018 ($275,000 maximum compensation x 25%, limited to $55,000). Thus, statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.

Which of the following are benefits of converting assets in a qualified plan to a Roth account through an in-plan Roth rollover? 1. The conversion may result in a reduction in income tax in future years. 2. The conversion will result in increasing after-tax deferred assets and reducing the gross estate. 3. The conversion will eliminate the need for minimum distributions during the life of the participant.

1 and 2. Rationale While there are no guarantees, the conversion may result in a reduction in tax in future years since all future income in the account will escape taxation. The conversion does result in increasing after-tax deferred assets and reducing the gross estate. However, because the funds are in a qualified plan, they will have to be distributed to comply with the minimum distribution rules or be rolled over to a Roth IRA.

The early distribution penalty of 10 percent does not apply to qualified plan distributions: 1. Made after attainment of the age of 55 and separation from service. 2. Made for the purpose of paying qualified higher education costs. 3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

1 and 3. Rationale Statement 2 is an exception for distributions from IRAs, not qualified plans. Statements 1 and 3 are exceptions to the 10% penalty for qualified plan distributions

Which of the following distributions from a qualified plan would not be subject to the 10% early withdrawal penalty, assuming the participant has not attained age 59½? 1. A distribution made to a spouse under a Qualified Domestic Relations Order (QDRO). 2. A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company. 3. A distribution to pay for costs of higher education. 4. A distribution made immediately after separation from service at age 57.

1 and 4. Rationale Statement 2 is incorrect for two reasons. The exception to the 10 percent early withdrawal penalty for health insurance premiums is only applicable to unemployed individuals. In addition, this exception is only available for distributions from IRAs, not qualified plans. Statement 3 is incorrect because the exception to the 10 percent penalty for higher education expenses only applies to distributions from IRAs, not qualified plans.

One of the disadvantages of an ESOP is that the stock is an undiversified investment portfolio. Which of the following is correct? 1. An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 100% of the account balance be diversified. 2. An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution.

1 only. B) 2 only. Rationale The first statement is incorrect because the percentage is 25% (increased to 50% for the final year of the election period), not 100%. The second statement is correct.

Qualified retirement plans that permit the employer unlimited investment in sponsor company stock are: 1. 401(k) plans. 2. Stock bonus plans. 3. Profit sharing plans. 4. ESOPs.

1, 2, 3, and 4. Rationale All of the listed plans permit 100% stock in the plans. The 401(k) plan is organized as a profit sharing or stock bonus plan.

Which of the following people can make a deductible contribution to a traditional IRA for 2018? Person AGI Covered by Qualified Plan Marital Status 1. Dianne $90,000 Yes Married 2. Joy $50,000 Yes Single 3. Kim $280,000 No Married 4. Loretta $75,000 Yes Single

1, 2, and 3. Rationale All but Loretta may deduct a contribution made to a traditional IRA. Dianne and Joy are below the phaseout range and Kim is not covered by a qualified plan so there is no income limit. Loretta is single and covered by a plan and her AGI is above the top end of the phaseout for singles ($63,000 - $73,000) for 2018.

Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan for years after 2017? 1. Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax. 2. Distributions used to pay medical expenses in excess of the 7.5% of AGI for a tax filer who itemizes are exempt from the early withdrawal penalty. 3. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the early withdrawal penalty.

1, 2, and 3. Rationale Statements 1, 2, and 3 are correct. The 2017 TCJA reduced the 10% AGI limit to 7.5% of AGI for medical deductions for 2017 and 2018.

Which of the following qualified plans require mandatory funding? 1. Defined benefit pension plans. 2. 401(k) plans with an employer match organized as a profit sharing plan. 3. Cash balance pension plans. 4. Money purchase pension plans.

1, 3, and 4. Rationale 401(k) plans do not require mandatory funding. The other three require mandatory funding.

The target benefit pension plan and the money purchase pension plan provide some employee/participant investment diversification protections by limiting the investment amount in employer stock to less than or equal to:

10%. Rationale Defined benefit, cash balance, target benenit, and money purchase pension plans limit contributions of company stock to 10%.

Ah and Ha, both age 33, are married, not covered by a qualified plan, and file a joint tax return. They have AGI of $164,000. Ah's mother contributed $2,000 to a Coverdell Education Savings Account for each of their two children. What is the most that Ah and Ha can contribute in total together to a Traditional IRA for 2018?

11,000. Rationale The maximum contribution to Traditional and Roth IRAs is a total of $5,500 per person (who has not attained age 50) for 2018 The limits for the Coverdell are not related to traditional or Roth IRAs.

ESOP distributions can be made in installments: 1. No longer than 5 years under any scenario. 2. No longer than 5 years unless the account balance exceeds $1,105,000 for 2018, in which case an additional year is allowed for each $220,000 (2018) over $1,105,000 but not more than 5 additional years. 3. In substantially equal payments.

2 and 3. Rationale Statement 1 is false because the scenario with an excess of $1,105,000 allows an additional year for each $220,000 over $1,105,000.

David took a lump-sum distribution from his employer's qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David has met 10-year forward averaging requirements, which of the following is/are correct regarding tax treatment of the transaction? 1. If at age 59 he distributes the IRA, he benefits from 10-year forward averaging. 2. If he rolls the entire IRA to a new employer's qualified plan, he may be eligible for forward averaging treatment in the future. 3. If he rolls over a portion of the IRA to a new employer's qualified plan, he may preserve any eligibility for forward averaging on that portion that was rolled over. 4. If David immediately withdraws the entire amount from his IRA, he may benefit from 10-year forward averaging.

2 and 3. Rationale Statement 1 is incorrect because 10-year forward averaging is only permitted with qualified plans, not IRAs. Statements 2 and 3 are correct. His new employer's qualified plan may or may not allow him to roll previous distributions into it. Statement 4 is incorrect because 10-year forward averaging is only permitted coming from qualified plans, not distributions from IRAs.

The early distribution penalty of 10 percent does not apply to IRA distributions: 1. Made after attainment of the age of 55 and separated from service. 2. Made for the purpose of paying qualified higher education costs. 3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

2 and 3. Rationale The first statement is incorrect because it is an exception to the 10% penalty for qualified plan distributions, not from IRAs. The second and third statements are correct exceptions for IRAs.

A distress termination of a qualified retirement plan occurs when: 1. The PBGC initiates a termination because the plan was determined to be unable to pay benefits from the plan. 2. An employer is in financial difficulty and is unable to continue with the plan financially. Generally, this occurs when the company has filed for bankruptcy, either Chapter 7 liquidation or Chapter 11 reorganization. 3. The employer has sufficient assets to pay all benefits vested at the time, but is distressed about it. 4. When the PBGC notifies the employer that it wishes to change the plan due to the increasing unfunded risk.

2 only. Rationale Statement 2 is the definition of a distress termination. Statement 3 describes a standard termination. Statement 1 describes an involuntary termination. Statement 4 is simply false.

Which of the following statements is/are correct regarding SEP contributions made by an employer? 1. Contributions are subject to FICA and FUTA. 2. Contributions are currently excludable from employee-participant's gross income. 3. Contributions are capped at $18,500 for 2018.

2 only. Rationale Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $18,500 for 2018. The SEP limit is 25% of covered compensation up to $55,000 for 2018. Note: The maximum compensation that may be taken into account in 2018 for purposes of SEP contributions is $275,000. Therefore, the maximum amount that can be contributed to a SEP in 2018 is $55,000 (25% x $275,000, limited to $55,000).

Patrick and Kevin own Irisha Corporation and plan to retire. They would like to leave their assets to their children; therefore, they transfer 70 percent of the stock to a trust for the benefit of their 10 children pro rata. Patrick and Kevin then plan to sell the remaining Irisha shares to a qualified ESOP plan. Which of the following is correct? 1. The stock transfer to the ESOP is not a 50 percent transfer and therefore will not qualify for nonrecognition of capital gains. 2. Any transfer to an ESOP of less than 50 percent ownership may be subject to a minority discount on valuation. A)

2 only. Rationale There must be a sale of at least 30% (not 50%) to the ESOP to qualify for nonrecognition of capital gain treatment. In addition, any transfer that is less than 50% of the stock of the corporation might be subject to a minority discount on valuation.

What is the first year in which a single taxpayer, age 54 in 2018, could receive a qualified distribution from a Roth IRA if he made his first $3,500 contribution to the Roth IRA on April 1, 2019, for the tax year 2018?

2023. Rationale A qualified distribution can only occur after a five-year period has occurred and is made on or after the date on which the owner attains age 59½, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled, or for a first-time home purchase. The five-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The five-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. Therefore, the first year in which a qualified distribution could occur is 2023.

Which of the following are false as to ESOPs? 1. An ESOP is controlled through a trust. 2. ESOPs provide corporate owners with a way to transfer ownership interests to their employees. 3. The trust of an ESOP is prohibited from borrowing money from a bank to purchase the employer stock.

3 only. Rationale A key characteristic of the ESOP is that the trust may borrow money to purchase the employer stock.

Generally, which of the following are contributory plans?

401(k) and thrift plans. Rationale Employers generally contribute to money purchase pension plans, ESOPs, and profit sharing plans. Employees contribute (thus contributory plans) to 401(k)s and thrift plans.

For 2018, what is the maximum amount that can be contributed to a SEP?

55,000. Rationale For 2018, the maximum contribution for an individual to a SEP is the lesser of: 25% of compensation (compensation maximum is $275,000), or $55,000. Therefore, the maximum contribution to a SEP for 2018 is $55,000 ($275,000 maximum compensation x 25%, limited to $55,000).

If Colin receives a distribution from a qualified plan, how long does he have to roll it over to an IRA without it being subject to taxation?

60 days. Rationale Colin has 60 days to rollover a distribution to an IRA.

Beth Ann, age 55, is an attorney who is self employed. Her assistant, Buffy, has worked with her for five years. Beth Ann is establishing a SEP for this year and is willing to make a contribution of 10 percent of Buffy's salary to the SEP. If Beth Ann earns $90,000 after paying Buffy, her expenses, and the contribution to Buffy's SEP, what is the most that she can contribute to the SEP on her behalf for 2018?

7,604. Rationale $90,000 Schedule C Net Income $6,358 Less 1/2 Self-Employment Tax $90,000 x 92.35% x 15.3% x 1/2 $83,642 x 9.09% (10%/1.10) $7,604 SEP Contribution Limit Beth Ann is limited to the same percentage contribution as her employer. However, because she is self employed, the 10% is based on earned income. The short-cut is to use 9.09% (10% / 1.10).

Which of the following is true regarding QDROs?

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's qualified plan. Rationale The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form. QDRO distributions may be subject to the 10% early withdrawal penalty if the distribution is not deposited into the recipient's qualified plan.

Westgate Inc., recently adopted a profit sharing plan. Westgate has two offices, the North Westgate office and the South Westgate office. There are 10 employees in the North Westgate office, 5 of which are eligible for the plan; and 15 employees in the South Westgate office that are all eligible for the plan. Which of the following statements is true?

A Summary Plan Description must be furnished to each participant within 120 days of plan establishment. Rationale Option a is incorrect because the employees must be notified by mail between 10 and 24 days before mailing the determination letter. Option c describes a master plan. Option d is incorrect because all employees must be notified if they work in an office where an eligible employee exists.

The following definition applies to which of the following terms: "the corporation makes tax deductible contributions to a trust in the form of both principal and interest for the loan."

A leveraged ESOP. Rationale Only a leveraged ESOP will have a loan and thus, have principal and interest payments.

To qualify for nonrecognition of gain treatment, the following requirements apply:

A)The ESOP must own at least 30% of the corporation's stock immediately after the sale. B) The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market. C) The seller and 25% shareholders in the corporation are precluded from receiving allocations of stock acquired by the ESOP through the rollover. D) The stock sold to the ESOP must be common or convertible preferred stock and must have owned by the seller for at least 3 years prior to the sale. E) All of the above.

Phillip, who is currently age 52, made his only contribution to his Roth IRA in 2018 in the amount of $5,500. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2023 to purchase a new car, how would he be taxed?

Although Phillip waited five years, the distribution will not be classified as a "qualified distribution" and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable. Rationale A distribution from a Roth IRA is not includible in the owner's gross income if it is a qualified distribution or to the extent that it is a return of the owner's contributions to the Roth IRA. A qualified distribution is one that meets BOTH of the following tests: The distribution was made after a five-taxable-year period, and the distribution was made for one of the following reasons: • Owner has attained age 59½. • Distribution was made to a beneficiary or the estate of the owner on or after the date of the owner's death. • Distribution was attributable to the owner's disability. • Distribution was for a first-time home purchase. The 10 percent early withdrawal penalty under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent early withdrawal penalty under IRC § 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, and if the distribution is made within the five-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.

Bobby Brown would not listen to his financial advisor and decided to rollover his qualified plan assets to a traditional IRA. Which of the following is correct?

Bobby has lost some of his creditor protection by moving the funds from a qualified plan to an IRA. Rationale Choice a is not correct because ten year forward averaging, pre-74 capital gain treatment and NUA treatment are available in a qualified plan, but not available in an IRA. Choice b is not correct because qualified plans can investment in life insurance and collectibles, which is not permitted in an IRA. Choice c is not correct, as he could have converted direct from a qualified plan to a Roth IRA. Choice d is correct as the assets are no longer protected under ERISA. The assets will be protected under bankruptcy law, but not ERISA.

Which statements are generally correct regarding penalties associated with IRA accounts? 1. Distributions made prior to 59½ are subject to the 10% premature distribution penalty. 2. There is a 50% excise tax on a required minimum distribution not made by April 1 of the year following the year in which age 70½ is attained.

Both 1 and 2. Rationale Statements 1 and 2 are both correct.

Decatur 401(k) Plan maintains a loan program for its participants. The plan has 50 participants, three of whom had participant loans. Decatur conducted a year-end review of its loan program and found the following: • Bob received a loan from the plan one year ago for $60,000 over a five-year term, amortized monthly using a reasonable interest rate. Bob timely made the required payments. Bob's vested account balance is $180,000. • Sandi received a loan of $10,000 to help her mother move to Florida this year, amortized over 72 months. Payments are timely and the interest rate is reasonable. Which of the following individuals have loans that do not comply with the IRC?

Both Bob and Sandi. Rationale Bob's loan exceeds the $50,000 limit and Sandi's exceeds the five-year rule.

Baily is 56 years old and obtained ten years of participation in the Blackwater ESOP in Year 1. Assume she elects to diversify 20% of her account balance, which was $100,000, during the 90-day period following Year 1. Which of the following is correct?

During the 90-day period following Year 6, Baily could diversify up to $100,000, on a cumulative basis with prior diversification amounts, assuming her plan balance was $200,000 at the end of Year Rationale Choice a is incorrect as she could not diversify $37,500, rather, she could diversify that amount on a cumulative basis. Choice b and c are incorrect because it is only during the 90-days following the end of the year. Choice d is correct as she can diversify 50% for the final year.

Marie, the sole shareholder in Marie's Pastries, is contemplating establishing a qualified plan. The corporation's employee census is as follows: Marie's Pastries Employee Census Employee Age Compensation Ownership Length of Service Marie 55 $200,000 100% 30 Years Cheryl 38 $45,000 0 20 years Jeff 42 $28,000 0 14 Years Ruby 34 $24,000 0 11 Years Total $297,000 100% The company experiences very low turnover. Marie, a long-time widow, has always treated the employees like her family and the company has experienced very low turnover. She would like to use the retirement plan to assist her in transferring ownership interest to the employees as she is ready to retire. She has a strong preference for avoiding and deferring taxes. She is opposed to mandatory funding and indifferent to integration. Which plan would be appropriate for Marie?

Employee stock ownership plan. Rationale An ESOP would be the most appropriate plan to meet Marie's objectives. The stock bonus plan would allow Marie to transfer stock, but would not assist her immediately in her retirement plans. The defined benefit and money purchase pension plan would require mandatory funding. The ESOP would provide her with tax benefits and a diversified portfolio because of her age.

Who generally makes elective deferrals to a 401(k) plan?

Employees only. Rationale Generally, 401(k) plans are funded from both employee elective deferrals and employer matching contributions and non-elective deferrals, but the elective deferrals come from the employee.

Which of the following generally contribute to defined benefit plans, profit sharing plans, and money purchase pension plans?

Employer only. Rationale Employees contribute to 401(k) plans and thrift plans. The government does not make contributions to plans, except when it is the employer.

Steve is self-employed as a marketing consultant. He works primarily with start-up internet companies helping to develop corporate brand programs. Several years ago, he established a 401(k) profit-sharing plan and has accumulated $385,000 in the plan. Which of the following forms should he file to meet his compliance requirements?

Form 5500 EZ. Rationale He must file Form 5500 EZ since it is a one-participant plan and total assets exceed $250,000. If assets were below this threshold, he would not have to file the form.

Mr. Reid was very active and loved to go skiing. Unfortunately, he was prone to skiing though the trees and did not believe in helmets. In March of 2018, he skied into a large pine tree that abruptly ended his life. At that time, his Roth IRA contained regular contributions of $10,000, first made in 2016, a conversion contribution of $40,000 that was made in 2015, and earnings of $10,000. He never made any distributions from his IRA. When he established this Roth IRA (his first) in 2015, he named each of his two children, Bill and Phil, as equal beneficiaries. Each child will receive one-half of each type of contribution and one-half of the earnings. Which of the following is true regarding a distribution after Mr. Reid dies?

If Bill immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty. Rationale The question first requires a determination of whether the distribution is a qualified distribution or not. While death is one of the two prongs, the five year rule as not been met. Thus, the distribution is not a qualified distribution. Each of the choices deals with a full distribution by the beneficiary, which makes the problem a bit easier. A full distribution will result in the earnings being taxable. The earnings represent 16.67% of the value of the account and thus, $5,000 will be taxable. No penalty is assessed after death of the owner.

Josh recently died at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Josh was married to Kay, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct?

Kay can receive annual distributions over her remaining single-life expectancy, recalculated each year. Rationale Kay can receive distributions over her remaining single-life expectancy. A spouse beneficiary can recalculate life expectancy each year. Statement a is incorrect. She is not required to distribute the entire account within 5 years. Statement b is incorrect. Kay can wait until Josh would have been 70½ and begin taking distributions over her life expectancy. Statement c is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death. Kay could also roll the account over to her own IRA and begin distributions when she attains age 70½.

Matthew, Mark, Luke and John are all considering making a contribution to a Roth IRA. Which of the following individuals is permitted to contribute to a Roth IRA this year?

Mark, age 16, who earned $8,000 working at Target after school and during the summer. Rationale John and Matthew's income (AGI) is too high to make a Roth IRA contribution. Luke does not have earned income. Mark, who is 16, can make a contribution to a Roth IRA.

Meb, the owner of Meb's Hardware, is considering establishing a stock bonus plan. She recently talked with her advisor, Don T. Know. Don T. Know never studied when he took his certificate program, therefore he gave Meb incorrect information about stock bonus plans. Which of the following statements given to Meb was correc

Meb can require the employees to be age 21 and employed for two years before becoming eligible for the stock bonus plan. Rationale Meb must establish the stock bonus plan by the end of the year in which she would like the plan to begin. When the employees of Meb's Hardware receive distributions of stock from the plan, the value of the distribution equal to the value at the date Meb contributed the stock will be ordinary income. The appreciation will be long-term capital gain. Meb must have the stock valued at the date the plan is established and at the date of any distributions.

Brenda, age 53 and a recent widow, is deciding between taking a lump-sum distribution from her husband's pension plan of $263,500 now or selecting a life annuity starting when she is age 65 (life expectancy at 65 is 21 years) of $2,479 per month. Current 30-year Treasuries are yielding 6 percent annually. Which of the statements below are true? 1. If she takes the lump-sum distribution, she will receive $263,500 in cash now and be able to reinvest for 34 years, creating an annuity of $4,570 per month. 2. If she takes the lump-sum distribution she will be subject to the 10% early withdrawal penalty.

Neither 1 nor 2. Rationale Statement 1 is false. She will only receive $210,800 ($263,500 less 20% withholding). Statement 2 is also false. The distribution is on account of death, an exception to the 10% early withdrawal penalty rule.

Tom, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. His total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Tom is 100 percent vested. Which of the following statements is/are correct? 1. Tom may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years. 2. If Tom takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) he will be subject to income tax, but not the 10% penalty.

Neither 1 nor 2. Rationale Statement 1 is incorrect because he can take a loan equal to one-half of his total vested account balance up to $50,000. Statement 2 is incorrect because the exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Mary, age 50, has an IRA with an account balance of $165,000. Mary has recently been diagnosed with an unusual disease that will require treatment costing $50,000, which she will have to pay personally. Mary's AGI will be $100,000 this year. Which of the following statements are true? 1. Mary can immediately borrow up to $50,000 from her IRA account and repay the loan within five years. 2. Mary can distribute $50,000 subject to income tax but not subject to the 10% penalty because it will be used to pay medical expenses.

Neither 1 nor 2. Rationale Statement 1 is incorrect because loans are not permitted from IRAs. Statement 2 is incorrect because only the portion of the medical expense that exceeds 10% of AGI (2017 TCJA: 7.5% for 2017 and 2018) is exempt from the 10% penalty ($50,000 - $10,000 = $40,000). However, if it were classified as a disability, then she could avoid the penalty on the entire distribution.

Which of the following statements are correct regarding assets reverting back to the sponsor or a qualified plan? 1. Under a merger, assets from a qualified plan can revert back to the plan sponsor without regard to the relationship between the value of the plan assets compared to the value of the obligations under the plan. 2. Any reversion of plan assets will always be subject to a 20% penalty.

Neither 1 nor 2. Rationale Statement 1 is incorrect because the assets must exceed the plan liabilities. Statement 2 is incorrect because the penalty may be 20 percent or 50 percent.

BJ owns NOCTM, Inc. and sells 100 percent of the corporate stock (all outstanding stock) on January 1, 2018 to an ESOP for $5,000,000. His adjusted basis in the stock was $2,400,000. Which of the following is correct? 1. If BJ reinvests the $5,000,000 in qualified domestic securities within 18 months, he has a carryover basis of $2,400,000 in the qualified domestic security portfolio and no current capital gain. 2. BJ has a long-term capital gain of $2,600,000 reduced by the 20 percent small business credit; therefore, his gain is $2,080,000 if he does not reinvest in qualified domestic securities within 18 months.

Neither 1 nor 2. Rationale The $5,000,000 must be reinvested within 12 months and there is not a 20% small business credit. In addition, to qualify for nonrecognition of gain treatment, the NOCTM, Inc. stock must have been owned by BJ for at least three years.

Ginger, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. Ginger did not make the request of the IRS until five years after the mistake was made. Will the IRS permit the waiver?

No. Ginger waited an unreasonable amount of time before filing the request. Rationale The IRS generally grants such requests if timely made. However, Ginger should have realized this long before five years. She would have reported interest on her Form 1040 which would have caused her to realize the mistake. She certainly would have received account statements. Choice a is false. Choice b would be correct if Ginger had filed the request timely. Choice c is false and there is no such one-year period.

Which phrase best completes the following sentence: "A repurchase option allows a terminating employee the choice to receive the cash equivalent of the employer's stock if the stock is _____."

Not readily tradeable on an established market. Rationale This phrase is directly from IRC §409(h)(1).

Andrea recently died at age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 70½ and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account. Which of the following is correct? A)

Reese can roll the account over to an IRA and name a new beneficiary. Rationale Statement a is incorrect because the five-year rule only applies if there is no designated beneficiary, or if a charity is the beneficiary. Since minimum distributions had already begun at the time of Andrea's death, Reese must take distributions over the greater of Reese's life expectancy or Andrea's life expectancy. Thus, statement c is incorrect because Andrea's life expectancy is definitely shorter than Reese's life expectancy. While statement b may appear to be correct, Reese would need to take distributions from the account based on her remaining life expectancy reduced by one year. She is not allowed to recalculate her life expectancy. Statement d is correct. However, the account must be in the name of the deceased (Andrea) for the benefit of Reese. In addition, the distributions can be taken over Reese's single life expectancy and not over a joint life expectancy.

The following individuals are all employed and covered under their employer's qualified retirement plan. Which of them can contribute to a traditional IRA this year?

Robin, age 45, a single taxpayer, whose salary is $25,000. B) Robbie, age 55, a single taxpayer, whose salary is $125,000. C) Reese, age 35, a single taxpayer, whose salary is $1,125,000. D) All of the above.*** Rationale The question is asking about contributions to a traditional IRA, not the deductibility or non-deductibility of a contribution. All of the individuals have earned income and are under the age of 70½. Thus, they can all make a contribution

In May 2018, Seth converts $100,000 in his traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40% due to a significant decline in the stock market that occurs in October 2018. The Roth conversion results in Seth incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40% drop). Which of the following statements is correct?

Seth cannot recharacterize the conversion. Rationale Prior to 2018, taxpayers had the ability to recharacterize a Roth conversion up to the due date of the income tax return, including extensions. As a result of The 2017 TCJA, Roth conversions cannot be recharacterized after 2017.

Laura, age 43, has several retirement accounts and wants to know what accounts can be rolled over to other accounts. Which of the following statements regarding rollovers is not correct?

She could rollover her traditional IRA to her SIMPLE IRA. Rationale Choices a, b and c are all correct and permissible. Basically no other retirement assets can be rolled over to a SIMPLE IRA except assets currently in a SIMPLE IRA.

Steve, age 69, is an employee of X2, Inc. He plans to work until age 75. He currently contributes 6 percent of his pay to his 401(k) plan, and his employer matches with 3 percent. Which one of the following statements is true?

Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he retires. Rationale Generally, an individual must receive his or her first minimum distribution by April 1 following the year the individual attains age 70½. However, if the individual remains employed beyond age 70½, he or she may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer's qualified plan. Therefore, answers a and c are incorrect. Answer d is incorrect because Steve can continue to contribute to the 401(k) plan as long as he is still working for X2, Inc. and the plan permits.

Roger converted all $100,000 in his traditional IRA to his Roth IRA on December 1, 2014 (his first Roth contribution or conversion). His Form 8606 from prior years shows that $20,000 of the amount converted is his basis. Roger included $80,000 ($100,000 - $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2018, Roger made a regular contribution of $5,000 to a Roth IRA for the 2017 year. Roger took a $10,000 distribution from his Roth IRA on July 31st of 2018 to purchase a ticket for a trip on a cruise ship for his 61st birthday present to himself. How is the distribution taxed if the value of the account just before the distribution equals $120,000?

The distribution is tax free and penalty free. Rationale The question first requires a determination of whether the distribution is a qualified distribution or not. It is not a qualified distribution. Roger is over the age of 59½ but does not meet the five year rule. Therefore, the distribution first comes out of contributions, then conversions, then earnings ($5,000 from contribution and $5,000 from conversion). Since he is over the age of 59½, there is no penalty assessed. The entire distribution is tax free and not subject to a penalty.

Plans that require mandatory funding are generally funded by

The employer. Rationale Plans that have mandatory funding features (defined benefit pension plans, cash balance pension plans, target benefit pension plans, money purchase pension plans) are generally funded by the employer.

Which of the following statements is not correct about Form 8606?

The form tracks basis for contributions and conversions to Roth IRAs. Rationale Statement a is not correct because Form 8606 does not track basis for contributions to Roth IRAs. The taxpayer would have to determine the basis for Roth IRAs when completing Part IV of the form. The other statements are correct - it does track conversions to Roth IRAs, in-plan Roth rollovers, basis for nondeductible traditional IRAs and is used for distributions from Roth IRAs.

Pander's Box, a shop that specializes in custom trinket and storage boxes, has a 401(k) plan. The plan allows plan loans up to the legal limit allowed by law and they may be repaid under the most generous repayment schedule available by law. The plan has the following employee information: Employee 401(k) Balance Outstanding Loan Karen $400,000 $0 Teddy $250,000 $30,000 Josh $75,000 $0 Justin $15,000 $0

The maximum Justin can borrow from his account is $10,000. Rationale Justin can borrow one half of his vested account balance up to $50,000. Since the balance is below $20,000, he can borrow a full $10,000. State law does not require the repayment of the loans within a specified time; however, the plan can require that Teddy repay the loan immediately. Karen can only borrow one-half of her account balance up to $50,000, thus she can only borrow $50,000. Josh will not have to repay the loan in five years because the loan proceeds are being used for a home purchase and an extended period is available.

Reese has assets both in her Roth IRA and in her Roth account that is part of her employer's 403(b) plan. However, she is not sure about the differences between the two types of accounts. Which of the following statements would you tell her is correct?

The nature of the income received by beneficiaries in a qualified distribution is the same for distributions from both Roth IRAs and Roth accounts. Rationale Choice a is not correct because the five year holding period is separate for each type of account. Choice b is not correct because the Roth IRA has an additional distribution exception for first time home buying. Otherwise the rules are the same. Choice c is not correct because Roth IRAs do not have to comply with minimum distribution rules upon attainment of age 70½, while Roth accounts do have to comply.

Sam is a participant in RFK, Inc.'s ESOP. Sam has been a participant in the plan for eight years, and her account balance in the plan is $1,000,000 and is completely funded with employer securities. The plan defines the normal retirement age as 65 years old. Sam is 64 years old this year and would like to retire. Her advisor mentioned that she should have a more diversified portfolio. What, if anything, can she do to diversify her portfolio?

The only way Sam can diversify her portfolio is to take a distribution of the employer stock from the ESOP and reinvest the value in a diversified portfolio. Rationale Sam is not eligible to require the ESOP to diversify her portfolio because she has not been a plan participant for 10 years. Thus, she must take distributions and sell the stock in order to diversify.

Roger and Robin were happily married until Roger fell in love with Sam. As a result, Roger and Robin have agreed they need to get a divorce. As part of the process, the court has provided a domestic relations order that calls for Robin's profit-sharing plan to be divided into equal portions such that Roger will have his own account with half of the value of the retirement account. What type of approach has been taken?

The separate interest approach. Rationale The separate interest approach calls for splitting a retirement account into two separate accounts. Each party is free to act with regard to their separate account without the interference or consent of the other party. There is not such term as split payment approach or divided account approach.

One approach that is used in some domestic relations orders is to "split" the actual benefit payments made with respect to a participant under the plan to give the alternate payee part of each payment. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. This approach is often used when a support order is being drafted after a participant has already begun to receive a stream of payments from the plan (such as a life annuity). This approach to dividing retirement benefits is often called what?

The shared payment approach. Rationale This is the definition of the shared payment approach. There is not such term as split payment approach or divided annuity approach.

Tim, a participant in the Zappa retirement plan, has requested a second plan loan. Tim's vested account balance is $70,000. He borrowed $30,000 ten months ago and still owes $20,000 on that loan. Could he increase his maximum permissible loan if he repaid the outstanding loan before taking the new loan?

Yes. Paying off the loan will increase the loan available by $5,000. Rationale He can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance ($30,000) in the last twelve months, which equals $20,000. Half of the vested account balance ($70,000) less the outstanding loan of $20,000 equals $15,000. If the loan of $20,000 is repaid, which it could be, then the available loan would increase by $5,000 to $20,000.

MaryAnn, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. MaryAnn did not make the request of the IRS until six months after the mistake was made. Will the IRS permit the waiver?

Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances. Rationale The IRS generally grants such requests if timely made.

Which of the following are requirements for a qualified stock bonus plan? 1. Participants must have pass through voting rights for stock held by the plan. 2. Participants must have the right to demand employer securities at a distribution, even if the plan sponsor is a closely held corporation.

both 1 and 2