PFPL 540 Module 6: Plan Distributions

Danielle, who turned age 72 this year, owns 10% of The Moore Company. She has accumulated $5 million in Moore's 401(k) as of December 31st last year and $5.5 million as of December 31st this year. The applicable divisor for age 72 is 27.4. What is the RMD, if any, Danielle must receive for this year? A. $0 B. $182,482 C. $195,313 D. $200,730

B. $182,482 The minimum distribution that must be received for this year is calculated by dividing Danielle's account balance on December 31st of last year ($5 million), by the factor for age 72 (27.4). This results in an RMD of $182,482 ($5 million divided by 27.4). She has until April 1st next year, to take this RMD.

Marian, who turned age 72 this year, owns 10% of ABC Company. She has accumulated $5 million in ABC's stock bonus plan as of December 31 of last year, and $5.5 million as of December 31 this year. Distribution periods are as follows: Age 71, Divisor 28.2 Age 72, Divisor 27.4 Age 73, Divisor 26.5 What is the required minimum distribution (RMD), if any, that Marian must receive for this year? A. $0 B. $182,482 C. $195,313 D. $222,672

B. $182,482 The minimum distribution that must be received for this year is found by dividing Marian's account balance on December 31 last year ($5 million) by the factor for age 72 (27.4). This results in an RMD of $182,482 ($5 million divided by 27.4).

A lump-sum distribution made from a qualified plan may be eligible for the following favorable tax treatments except A. NUA on employer securities portion of distribution. B. 5-year forward averaging for individuals born before January 2, 1936. C. 10-year forward averaging for individuals born before January 2, 1936. D. capital gains treatment on the portion of distribution allocable to pre-1974 contributions.

B. 5-year forward averaging for individuals born before January 2, 1936. Five-year forward averaging for individuals born before January 2, 1936, was repealed and is no longer an available tax treatment for lump-sum distributions from a qualified plan participant

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 at the time of the distribution? I. Distribution for higher education costs for the taxpayer, spouse, child, or grandchild II. Distribution made to a qualifying family member under a QDRO III. Distribution made after separation from service from the employer after attainment of age 55 IV. Distribution to pay employer-sponsored health insurance premiums on a pretax basis A. I and IV B. II and III C. III and IV D. I, II, and III

B. II and III Only choices II and III are correct. Statement I is incorrect because the exception to the 10% premature distribution penalty for higher education expenses only applies to IRAs and not qualified plans and 403(b)s. Statement IV is incorrect because the health insurance premium provision only applies to certain unemployed individuals for distributions from an IRA but not from a qualified plan

Continuing with the facts of the previous question, assume that Karla dies instead of Slade. What is Slade's best option for Karla's IRA if he wants to delay distributions as long as possible? A. Roll over her IRA to his IRA and take distributions based on his own RBD (age 72). B. Move the assets to an inherited IRA and take distributions when Karla would have reached age 72. C. Take the balance by the end of the fifth year following the year of death. D. Withdraw a lump sum and invest the money elsewhere

B. Move the assets to an inherited IRA and take distributions when Karla would have reached age 72. If Karla predeceases Slade, the preferable option is reversed. Slade should move the assets into an inherited IRA and take distributions when Karla would have been age 72, based on his life expectancy.

Danielle, who turned age 72 this year, owns 10% of The Moore Company. She has accumulated $5 million in Moore's 401(k) as of December 31st last year and $5.5 million as of December 31st this year. The applicable divisor for age 72 is 27.4. Which of the following statements regarding Danielle is CORRECT? A. If she continues to work for Moore Company, she is permitted to defer her RMD until after she retires. B. She can roll her account balance into a rollover IRA when she terminates employment. C. If she rolls her account balance into a rollover IRA and she does not commingle the funds with other IRA funds, subsequent distributions from the IRA will be taxed as long-term capital gain. D. If she takes her RMD for this year by April 1 of next year, she will not be required to take any other distributions next year.

B. She can roll her account balance into a rollover IRA when she terminates employment. Danielle is a greater than 5% owner of The Moore Company (she owns 10%); therefore, she is not allowed to defer her RMD until after she retires. Taxable distributions from an IRA are taxed as ordinary income. If she waits until April 1 of the next year to take her first RMD, she must take a second distribution by December 31 of that same year. She must also begin distributions from any traditional IRAs and other employer retirement plans she has. Finally, she can continue to contribute to the 401(k), even while taking RMDs from her other retirement accounts. She can also contribute to a traditional or Roth IRA, depending on her income and tax filing status.

Danielle, who turned age 72 this year, owns 10% of The Moore Company. She has accumulated $5 million in Moore's 401(k) as of December 31st last year and $5.5 million as of December 31st this year. The applicable divisor for age 72 is 27.4. If Danielle receives a distribution of $160,000 during this year, how much in penalties, if any, will she be required to pay on her tax return for this year, assuming she files this year's tax return on March 15th next year? A. $0 B. $5,372 C. $11,241 D. $20,365

A. $0 Danielle may defer her first RMD until April 1st next year, with no penalty. Therefore, she has until April 1st next year, to take the rest of her trigger year (first) RMD, which is calculated for this year based on her balance on December 31st of last year, without penalty. Naturally, she will also be required to take her RMD for next year by the end of next year.

Marian, who turned age 72 this year, owns 10% of ABC Company. She has accumulated $5 million in ABC's stock bonus plan as of December 31 last year, and $5.5 million as of December 31, this year. Distribution periods are as follows: Age 71, Divisor 28.2 Age 72, Divisor 27.4 Age 73, Divisor 26.5 If Marian receives a distribution of $180,000 during this year, how much in penalties, if any, will she be required to pay on this year's tax return, assuming she files on March 27, this year? A. $0 B. $1,241 C. $4,340 D. $17,422

A. $0 Marian does not have to begin taking an RMD until April 1 next year. Therefore, she has until April 1, next year, to distribute the balance of this years' RMD without incurring a penalty.

Slade is age 68 and his spouse, Karla, is age 64. If Slade dies, what is the best option for his IRA if Karla wants to delay distributions as long as possible? A. Roll over his IRA to her IRA and take distributions based on her own RBD (age 72). B. Move the assets to an inherited IRA and take distributions when Slade would have reached age 72. C. Take the balance by the end of the fifth year following the year of death. D. Withdraw a lump sum and invest the money elsewhere.

A. Roll over his IRA to her IRA and take distributions based on her own RBD (age 72). Because Karla is younger than Slade, she should roll over his IRA proceeds to her own IRA and delay taking the proceeds until age 72, based on her life expectancy.

Sam, age 73, must take an RMD from his IRA this year. The calculated RMD for the year is $22,867. Sam withdraws $18,456 from his IRA for the year and no more. How much excise tax is Sam required to pay? A. $0 B. $4,411 C. $2,205.50 D. $3,308.25

C. $2,205.50 The correct answer is $2,205.50. Sam will have to pay a 50% penalty tax on the amount of the RMD that he did not withdraw from his account. [0.50 ($22,867 - $18,456)] = $2,205.50.

Matt died this year at age 62. He had named his healthy adult daughter, Suzie, as the beneficiary of his IRA. How long does Suzie have before the account must be totally distributed? A. By September 30 of the year following the year of Matt's death B. By December 31 of the year of Matt's death C. By December 31 of the 10th year following the year of Matt's death D. Whenever the plan document specifies that she must begin taking distributions

C. By December 31 of the 10th year following the year of Matt's death Suzie's only RMD rule is that the account must be emptied by the close of business on December 31 of the year containing the 10th anniversary of Matt's death.

Olga, an unmarried individual, recently died at age 67, leaving behind an IRA with a FMV of $200,000. Before her death, Olga named her daughter, Erica, age 41, as the beneficiary of her IRA. Now that Olga has died, Erica has come to you for advice with respect to how these IRA benefits should be distributed. What do you tell her? A. Erica can roll the IRA over into an inherited IRA and take distributions beginning at age 72. B. In the year following Olga's death, Erica must begin taking distributions from Olga's IRA based on Erica's remaining life expectancy, reduced by one each subsequent year. C. Erica must withdraw the entire account by December 31 of the year containing the 10th anniversary of Olga's death. D. As a nonspouse beneficiary, Erica must take a lump-sum distribution by the end of the year.

C. Erica must withdraw the entire account by December 31 of the year containing the 10th anniversary of Olga's death. Erica is not an EDB, but she is a designated beneficiary. Olga died before her RBD. Thus, Erica is definitely under the 10-year rule.

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 at the time of the distribution? I. Distribution for higher education costs for the taxpayer, spouse, child, or grandchild II. Distribution made to a qualifying family member under a QDRO III. Distribution made after separation from service from the employer after attainment of age 55 IV. Distribution to pay employer-sponsored health insurance premiums on a pretax basis A. I, II, and III B. I and IV C. II and III D. III and IV

C. II and III Only statements II and III are correct. Statement I is incorrect because the exception to the 10% EWP for higher education expenses applies only to IRAs and not qualified plans. Statement IV is incorrect because the health insurance premium provision applies only if payments are made on an after-tax basis or for a private (not employer-sponsored) plan.

Reggie and Jenny are both age 58 and have come to their financial planner, Jordan, a CFP® professional, for advice. Reggie was laid off from his job. He expects to be recalled to work within six months, as the layoff is to allow new machinery to be installed, after which time manufacturing will start again. In the meantime, unemployment benefits are not enough to meet their current financial needs. The couple is afraid of depleting their retirement assets to fill the gap but do not know what else to do. Reggie has an SEP plan account from his former employer with a balance of $360,000. Jenny has a Section 401(k) from her employer with a plan balance of $280,000 and it has loan provisions. They don't have a mortgage, but their savings account is being depleted by living expenses since Reggie ceased working. Which of the following is the best recommendation for Jordan to make to the couple? A. Take a distribution from Jenny's Section 401(k) plan for six months of expenses. B. Take substantially equal payments from Reggie's SEP until he attains age 59½. C. Jenny should take a loan from her Section 401(k) plan for the minimum amount needed. D. Reggie and Jenny should obtain a line of credit using their personal residence as collateral.

C. Jenny should take a loan from her Section 401(k) plan for the minimum amount needed. There would be no early distribution penalty by taking a loan from Jenny's Section 401(k) plan and the loan can be repaid over time. As long as the loan is repaid on time, it will not substantially reduce their retirement assets. If she took a distribution instead of a loan, there would be a 10% early distribution penalty. If Reggie takes the substantially equal payments from his SEP, they must continue for the greater of five years or until he attains age 59½. This will reduce their retirement assets. While it may be possible to obtain a line of credit using the home as collateral, the decrease in income and the fact that they are having difficulty living on one income makes it unlikely they could qualify.

Which one of the following retirement plans generally has loan provisions? A. Defined benefit pension plans B. Money purchase pension plans C. Section 401(k) plans D. SEPs

C. Section 401(k) plans Defined benefit and money purchase pension plans do not generally have loan provisions. SEPs are a type of IRA and, therefore, cannot have loan provisions. Loan provisions are established in the plan document and are common for plans that have elective deferrals, such as a Section 401(k) and Section 403(b) plan.

Monty has died and named his adult daughter, Shannon, as the beneficiary of his qualified plan. Monty had not begun making RMDs from this account because he died at age 62. Which of the following is an RMD rule for Shannon? A. She must start distributions by September 30 of the year following the year of Monty's death. B. She must start distributions by December 31 of the year of Monty's death. C. The account must be completely drained by the close of business on December 31 of the year containing the 10th anniversary of his death. D. The account must be completely drained by the close of business on December 31 of the year containing the 5th anniversary of his death.

C. The account must be completely drained by the close of business on December 31 of the year containing the 10th anniversary of his death. Shannon must clean out the account by December 31 of the year containing the 10th anniversary of his death. This is the 10-year rule. There are no other RMD rules for this account.

All of the following forms of qualified plans must generally provide for a QJSA form of benefit except A. a cash balance pension plan. B. a money purchase pension plan. C. an ESOP. D. a target benefit pension plan.

C. an ESOP. Of the plans above, only an ESOP is not subject to the minimum funding standards. As a profit-sharing plan, an ESOP does not fund or promise a benefit in the form of a pension. Therefore, it is generally exempt from the rules that mandate the QJSA form of benefit.

At the time of his death this year at age 52, Chad owned two Roth IRAs (J and T) that he had established four years ago. Roth IRA J has a balance of $14,000, consisting of $12,000 in regular contributions and $2,000 in earnings. Chad's spouse, Jen (age 48), is the beneficiary of Roth IRA J. Jen's marginal income tax bracket is 25% (federal and state). Roth IRA T has a balance of $16,000, consisting of a conversion contribution of $14,000 three years ago and $2,000 in earnings. Chad's son, Tim (age 28), is the beneficiary of Roth IRA T. Tim's marginal income tax bracket is 12%. Which of the following statements is CORRECT regarding Chad's Roth IRAs? I. Jen and Tim must begin distributions no later than December 31 next year. II. If Tim liquidates Roth IRA T this year, he will pay a total income tax of $240. III. The latest Jen could defer required minimum distributions is until Chad would have attained age 72. IV. Jen and Tim may each make a direct trustee-to-trustee rollover of their respective amounts into their own previously established Roth IRAs. A. All of these B. None of these C. I, II, and IV D. II only

D. II only Only Statement II is correct. A total distribution by Tim of Roth IRA T this year would be subject to regular income taxes of $240. The distribution would be nonqualified and subject to regular income taxes of 12% of the taxable earnings of $2,000. It is nonqualified because the account was started four years ago. Next year, all distributions will be qualified. The distribution would not be penalized because death is one of the allowable exceptions to the early withdrawal penalty. Statement I is incorrect because neither must begin distributions no later than December 31st of the year following Chad's death. Tim is a non-eligible designated beneficiary and thus is under the 10-year rule. Jen may treat Roth IRA J as her own, and not be subject to lifetime RMDs, which also makes Statement III incorrect. She is younger than Chad. Statement IV is incorrect because only Jen may transfer Roth IRA J into her own Roth IRA. As an inherited Roth IRA, Tim may not combine Roth T with his own Roth IRA.

All of the following forms of qualified plans must generally provide for a QJSA form of benefit except A. a money purchase pension plan. B. a target benefit pension plan. C. a cash balance pension plan. D. an ESOP.

D. an ESOP. Of the plans listed, only an ESOP is not subject to the minimum funding standards, because a profit-sharing plan does not fund for or promise a benefit in the form of a pension. Thus, it is generally exempt from the rules that mandate the QJSA form of benefit.

Terry and Sally, both 50, got a divorce. Terry had $200,00 in his 401(k) and $50,000 in his IRA. The divorce decree gave half of each to Sally. She immediately took $50,000 from the 401(k) under the QDRO and she took $25,000 from her new IRA. What are the tax ramifications for Terry? What are the tax ramifications for Sally?

Like an IRA, there is no 10% EWP for separating money from the employer retirement account under orders from a court in a divorce situation. However, if money is withdrawn later from the ex-spouse's new retirement account under a QDRO, then there is no 10% penalty. For example, Terry and Sarah divorced. Terry had a 401(k) worth $200,000 and an IRA worth $50,000. The divorce decree gave Sarah half of each account. Terry and Sarah are each 50 years old. 1. When the two accounts were split in half after the divorce was finalized, there was no 10% EWP or for either Terry or Sarah. Now Terry is totally off the hook for any withdrawals from either of Sarah's new retirement accounts. 2. Sarah received $100,000 of the 401(k) under a QDRO and withdrew $50,000 for various living expenses. She is income taxed on the $50,000 withdrawal, but she is not penalized 10% because the withdrawal was under a QDRO. 3. Sarah also immediately withdrew all $25,000 from her new IRA account. This was not under a QDRO, so she is both income taxed and also subject to the 10% EWP on the entire $25,000. Takeaway from the story, employer retirement accounts should be received in a divorce instead of IRA assets if the receiver is less than 59 ½. Sarah would have been better off with $125,000 of the 401(k) and none of the IRA.

Jerry and Barbara recently filed for divorce after 25 years of marriage. The property settlement approved by the court included an award to Barbara of half of Jerry's vested benefit in his 401(k). This was done via the drafting and implementation of a qualified domestic relations order (QDRO). Which of the following is an implication of the QDRO for Jerry and Barbara? a. Barbara will be income taxed on withdrawals of this money. b. Under QDRO rules, Barbara is not eligible to roll over the distribution to an IRA. c. Barbara's benefit is subject to an additional 10% penalty if received before her age 59½. d. Barbara's benefit upon receipt is not subject to income tax.

a. Barbara will be income taxed on withdrawals of this money. A distribution by a qualified retirement plan to an alternate payee who is a spouse or former spouse of the participant is taxable to the spouse, if it is made pursuant to a QDRO. The distribution to Barbara pursuant to a QDRO is not subject to the 10% penalty for early distribution. She may roll over the distribution to an IRA.

Sam recently died at age 63, leaving an IRA with a fair market value (FMV) of $200,000 to his wife, Susan, 55, who was the only beneficiary. Susan has no IRA of her own. Which of the following statements regarding Sam's IRA is CORRECT? a. Susan can receive distributions over her remaining single-life expectancy, recalculated each year, but she is not required to take any distributions from an inherited IRA until Sam would have been 72. b. Susan must begin taking distributions over Sam's remaining single-life expectancy. c. Susan must receive the entire account balance within five years of Sam's death. d. Susan can receive a distribution from the IRA now but will be subject to a 10% early withdrawal penalty.

a. Susan can receive distributions over her remaining single-life expectancy, recalculated each year, but she is not required to take any distributions from an inherited IRA until Sam would have been 72. As the surviving spouse, Susan receive distributions over her remaining life expectancy. A spouse beneficiary can recalculate life expectancy each year, but distributions must begin no later than the year in which Sam would have reached age 72. Susan would also have the option of treating the IRA as her own and deferring distributions until she attains age 72. This means moving the money to an IRA in her own name as opposed to an inherited IRA. An inherited IRA has the deceased's name in the title. For example, "Sam B. Jones (deceased July 28, 2022) FBO Susan G. Jones."

Many of the RMD requirements that apply to inherited IRAs a. also generally apply to inherited qualified plan benefits. b. rarely apply to inherited qualified plan benefits. c. do not apply if the plan participant died before the required beginning date. d. will be waived by the IRS if the person did not understand them.

a. also generally apply to inherited qualified plan benefits. Generally speaking, many of the same rules apply to both IRAs and qualified plans. The specific minimum distribution requirements that apply depend upon whether a plan participant died before or on/after the required beginning date. The IRS can waive the penalty, but they are not required to do so.

Using the Uniform Lifetime Table to calculate the required minimum distributions (RMDs) from a qualified plan is mandatory unless a. the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. b. the designated beneficiary is a child under the age of 16. c. there is no designated beneficiary. d. there is more than one designated beneficiary.

a. the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant.

Julie attained age 72 this year, and will correctly take her first required minimum distribution (RMD) from her qualified plan by April 1st of next year. Her qualified plan balance, for which year, is used to calculate the RMD she must receive by December 31st of next year? a. the plan balance at the end of this year b. The plan balance at the end of this year minus the April 1 distribution she receives next year c. the plan balance at the end of next year d. the plan balance on April 1st of next year

a. the plan balance at the end of this year The 1st-year RMD is based on the participant's plan or IRA account balance as of the end of the year preceding the first distribution year. Her first distribution year is this year because she turned 72 this year. Thus, this year is the "trigger year." The RMD for each year is based on the balance at the end of the previous year. Because the first distribution year is this year, the balance for this year's RMD calculation is the account balance at the end of last year. The second RMD, which will be for next year, is based on the account balance at the end of this year. The question is about the RMD for the second year.

Don, age 40, plans to retire at 67. His retirement goal is $80,000 per year in today's dollars at the beginning of each year for 30 years. He assumes Social Security will pay an inflation-adjusted $30,000 per year. He assumes inflation will average 3% per year for his lifetime. He believes his investments will average 7% before retirement and 6% in retirement. What level payment must he make at the end of each year to accomplish his goal? a. $28,430 b. $30,420 c. $33,553 d. $35,567

b. $30,420 Set the calculator to the END mode and 1 P/YR Step 1: N = 27I/YR = 3%PV = -$50,000FV = Answer $111,064 Step 2: Set the calculator to the BEG mode and 1 P/YRN = 30I/YR = 2.9126PMT = $111,064FV: 0PVad = Answer $2,265,831Set the calculator to the END mode and 1 P/YR Step 3: N = 27I/YR = 7PV = 0FV = $2,265,831PMT = Answer $30,420

Your client is considering how to pay for the last year of her child's college tuition. Her 401(k) balance is $87,000 and she has never borrowed from her retirement account before. How much of a loan could she take from her 401(k)? a. $20,250 b. $43,500 c. $50,000 d. $87,000

b. $43,500 Retirement account loans are generally 50% of the vested balance minus the highest loan amount in the previous 12 months. In this case, there is not previous loan amount in the last 12 months, so she has access to $43,500 ($87,000/2).

Charles was an employee of the ABC Corporation for 20 years. He received a lump sum distribution from his qualified retirement plan this year. The distribution was comprised entirely of ABC stock valued at $100,000 on the date of distribution. The value of the stock contributed to Charles's individual account in the plan over the years was $70,000. If Charles does not sell the stock this year, what amount is included in his gross income this year as a result of the distribution? a. $0 b. $70,000 c. $30,000 d. $100,000

b. $70,000 Because the distribution is a lump sum distribution of employer stock, the net unrealized appreciation (NUA) concept applies. Under the NUA rules, the adjusted basis of the stock (the amount the plan paid for the stock) contributed to the retirement plan ($70,000) is included in Charles's gross income in the year the distribution and is treated as ordinary income.

Jane, 53, has retired and taken a full distribution from her employee stock ownership plan (ESOP). Over the years, her employer made a total of $40,000 in contributions into the plan for her, and the stock is currently valued at $110,000. Which one of the following statements best describes the tax implications of the distribution that Jane has taken? a. Jane will owe ordinary income tax on the entire $110,000 distribution from the ESOP. b. Jane will owe ordinary income taxes and a 10% penalty tax on $40,000. c. Jane will owe just ordinary income taxes on $40,000. d. Jane will owe long-term capital gain taxes on $70,000, which she must pay this year because this is the year of the distribution.

b. Jane will owe ordinary income taxes and a 10% penalty tax on $40,000. Because Jane was not at least age 55 when she separated from service, she will owe not only ordinary income taxes, but also a 10% early withdrawal penalty tax on the $40,000 basis. She will be taxed at the long-term capital gains rate for the $70,000 of NUA, but she does not need to recognize and pay this tax until she actually sells the stock. When the stock is eventually sold, the $70,000 NUA amount will be a long-term capital gain. If the stock is eventually sold for a profit above the $110,000, the gain over the $110,000 mark is long- or short-term capital gain depending how long after the distribution the shares are sold. If the stock is eventually sold for less than $110,000, the loss from $110,000 decreases the NUA amount and thus lowers the long-term capital gain. If Jane dies while owning the stock, the NUA amount will not get a stepped-up basis, but the rest of the stock's value on the date of death will get a stepped-up basis.

After his divorce, Fred, age 52, changed the beneficiary of his IRA to his estate. If Fred died in a car crash on April 1st this year, how long would his beneficiaries be able to stretch his IRA? Fred has two adult children. a. Their full IRA accounts would need to be distributed by December 31st of this year. b. Their full IRA accounts would need to be distributed by December 31st of the year containing the fifth anniversay of his death. c. Their accounts would be split between the two children and each would have their own required minimum distribution (RMD) figured on thier ages each year. d. Their accounts would be immediately disgorged to their estate.

b. Their full IRA accounts would need to be distributed by December 31st of the year containing the fifth anniversay of his death. An estate cannot be a designated beneficiary. Thus, each of their IRAs would have to take the entire balance by the end of the year containing the fifth anniversary of his death. This is the five year rule.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution is CORRECT? The NUA portion is a. taxed as ordinary income when the stock is sold. b. taxed that the capital gains rate when the stock is sold. c. taxed as ordinary income in the year of distribution. d. received tax free.

b. taxed that the capital gains rate when the stock is sold. The NUA portion of the distribution is always taxed at the long-term capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.

Carl, 74, has been receiving required minimum distributions (RMDs) from his qualified plan. His RMD for this year is $8,000. Carl has only taken $6,000 in distributions this year. If he fails to take the full RMD by December 31 of this year, what is the amount of the penalty he must pay? a. $200 b. $800 c. $1,000 d. $2,000

c. $1,000 The penalty is 50% of the difference between the amount that should have been distributed ($8,000) and the amount that was actually distributed ($6,000). In this case, the excise tax is 50% of $2,000, or $1,000.

Which of the following descriptions of a regular rollover from a qualified plan to a traditional IRA is CORRECT? a. A 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. b. The rollover amount to the IRA is counted as a new IRA contribution and thus limits the amount that can be contributed to the IRA that year. c. Amounts rolled over are taxable according to rules governing the source of contribution. d. It generally must be completed within 90 days of the date of distribution from the previous plan.

c. Amounts rolled over are taxable according to rules governing the source of contribution. The answer that a 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. In a regular rollover, the recipient physically receives a check, made payable to the recipient, for the eligible rollover distribution from the plan trustee. Under this method of distribution, the issuer must withhold 20% of the proceeds for federal income tax. A rollover does not count against the annual contribution limit.

Mark attained age 72 this year. He does not plan to retire from his position with Big Trucks Inc. until his birthday on December 1 of next year, when he will be 73. Mark is an 8% shareholder in Big Trucks Inc. When must Mark begin to receive required minimum distributions (RMDs) from his qualified retirement plan at Big Trucks Inc.? a. Because Mark is still employed by Big Trucks Inc., he is not required to take his first RMD until December 31 of the year he actually retires from Big Trucks Inc. b. Mark is not required to receive his first RMD until December 31 of the year following his actual retirement date from Big Trucks Inc. c. Because Mark is a greater than 5% shareholder in Big Trucks Inc., he must receive his first RMD by April 1 of next year. d. Mark is not required to begin his RMDs until April 1 of the year following his actual retirement from Big Trucks Inc.

c. Because Mark is a greater than 5% shareholder in Big Trucks Inc., he must receive his first RMD by April 1 of next year. Non-owner participants in qualified plans, Section 403(b) plans, and governmental Section 457 plans may defer the required beginning date until April 1 following the year of retirement, if the participant continues to work after attaining age 72. However, if the employee-participant is a greater than 5% owner of the business sponsoring the retirement plan, the RMD may not be deferred, but must be taken by April 1 of the year after the employee attains age 72.

Maryellen is considering naming her estate as the beneficiary of her traditional IRA. Which of the following is(are) a disadvantage of this approach? I. Her estate cannot be treated as a designated beneficiary for purposes of determining the distribution period after she dies. II. The estate will probably pay more income tax on the IRA distributions than would an individual beneficiary. a. I only b. II only c. both I and II d. neither I nor II

c. both I and II These are both potential disadvantages of naming one's estate as beneficiary. The estate cannot be treated as a designated beneficiary for purposes of determining required minimum distributions, and the estate will begin paying income tax at the maximum rate at a much lower level than an individual beneficiary would.

Richard and Debra Bennett will turn 72 in 2022. As of December 31, 2021, Debra has a qualified retirement plan balance of $1 million, and Richard has an IRA with a balance of $50,000. Neither has taken a distribution from their plans even though they are both retired. From which plan must they receive a required minimum distribution (RMD) by April 1, 2023? a. Only Debra must receive an RMD from her qualified plan balance. b. Only Richard must receive an RMD from his IRA. c. Neither Richard nor Debra must receive an RMD by April 1, 2023. d. Both plans must begin RMDs.

d. Both plans must begin RMDs. Because both Richard and Debra attained age 72 in 2022 they must begin receiving required minimum distributions (RMDs) by April 1, 2023 from their plans. If Debra was not retired from the employer and she did not own more than 5% of the firm, she would not be required to start RMDs until after she actually retired.

Karen, age 51, wishes to take distributions from her traditional IRA and avoid the 10% early distribution penalty. Which of the following distributions will allow Karen to avoid the penalty? I. Karen is totally and permanently disabled. II. Karen wants the distribution to pay medical expenses exceeding 7.5% of her adjusted gross income (AGI). III. Karen may take distributions under the substantially equal periodic payments rule. IV. Karen needs cash to pay for tuition for her child at State University. a. III only b. I and IV only c. II and III only d. I, II, III, and IV

d. I, II, III, and IV All of these statements are correct.

The 20% mandatory withholding requirement applies to distributions from all of the following except a. Section 457 plans. b. qualified plans. c. Section 403(b) plans. d. IRAs.

d. IRAs. The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs.

Which of the following reasons for an early distribution from a qualified retirement plan is NOT an exception to the 10% penalty? a. The plan owner becomes totally and permanently disabled. b. It is made after separation from service from an employer-sponsor of the plan after age 55. c. The distribution is made to a beneficiary of the account due to the owner's death. d. It is a distribution for higher-education costs.

d. It is a distribution for higher-education costs. The exception from the 10% early distribution penalty for distributions for higher-education costs only applies to IRA distributions.

Which of the following beneficiaries is entitled to roll over a post-death distribution from a qualified plan into an inherited IRA? a. the surviving spouse of the participant b. the surviving mother of the participant c. the oldest surviving child of the participant d. all of the above

d. all of the above A spouse beneficiary can roll the distribution over into an IRA and treat it as the spouse's own or the spouse can move the money into an inherited account; a nonspouse beneficiary can use a direct trustee-to-trustee transfer of the distribution into a specially titled inherited IRA.