Retirement Exam 2

Traditional IRA funds can generally be invested in any type of asset, with three specific exceptions

1. Collectibles such as stamps, coins or antiques 2. Life insurance policies 3. Any form of participant note or obligation ; an IRA cannot make loans to an IRA participant also an IRA cannot own S corporation stock as it is not a permissible shareholder under the S corporation rules.

A worker who starts social security retirement benefits early (as age 62 is allowed)

will receive a reduced benefit, which will continue for life. The reduced benefit will be adjusted for inflation each year.

The social security wage base in 2021 is

$142,800

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.

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 taxed at capital gains rate when the stock is sold. the adjusted basis of the stock to the qualified plan is taxed as ordinary income to the participant in the year of the distribution.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution by a plan participant is CORRECT?

The NUA portion of the stock is taxed at the capital gains rate when the stock is sold.

A section 457 plan

can be adopted only by private, tax-exempt organizations and state and local government entities

Which of the following plans is not subject to the annual additions limit?

defined benefit pension plans

Social Security began as a program to provide retirement income but has been expanded to provide all of the following income

disability survivor benefits to children under age 19 survivor benefits to spouses at age 60-61 survivor benefits to spouses caring for a child under 16 or disabled

For 2021, a worker receives 1 credit for

each $1,470 in annual earnings on which Social Security taxes are withheld up to a maximum of 4 credits annually. All 4 credits may be earned in the same calendar quarter.

to qualify for disability income benefits under Social Security, a worker must have an impairment that

is expected to last at least 12 months or result in death

Prohibited Transactions

is the improper use of an IRA account or annuity by the individual or any disqualified person

Higher-income earners will have a social security retirement income replacement ratio that is

lower than low-income earners

Required minimum distributions

may not be rolled over

Which workers are covered under the social security system?

members of the armed services self-employed workers employees of tax-exempt organizations

SEP plan

participants are not permitted to borrow from a SEP plan

A section 403(b)

plan may be adopted by Section 501(c)(3) nonprofit organizations

Money Market Instruments

provide low risk, safety, and liquidity.

Roth IRAs do not offer current deductions

so low income wage earners needing current deductions benefit from Traditional IRAs

Social Security payments are

taxable if your provisional income exceeds the applicable threshold

The Uniform Lifetime Table must be used to calculate required minimum distributions (RMDs) under a qualified plan or IRA unless

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

The following statements are a requirement for the beneficiaries of a trust to be treated as a designated beneficiary of a qualified plan or an IRA?

the trust is valid under state law the appropriate documentation is provided to the plan administrator the trust is irrevocable at participants death or prior The beneficiaries of the trust must be named (identified) in the trust instrument.

Under the Social Security system, immediate survivor income benefits based on a deceased worker's primary insurance amount and coverage are available to which of the following persons?

1. A surviving spouse, age 55, caring for the worker's 13-year-old child 2. Unmarried, dependent children under age 18 3. Unmarried children who become disabled before age 22 4. A surviving divorced spouse, age 62, who has not remarried and was married to the decedent for more than 10 years

Which of the following statements is(are) CORRECT regarding tax-free rollovers of qualified plan distributions pursuant a qualified domestic order (QDRO)?

1. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into another qualified plan. 2.The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a SEP. 3.The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a Section 403(b) plan. 4. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a Section 457 plan.

Which of the following is subject to the required minimum distribution (RMD) requirements after the account owner/plan participant dies?

1. Traditional IRAs 2. Roth IRAs (RMD reqs do not apply while owner is alive) 3. Qualified Plans

In the case of a qualified retirement plan, there are three basic distribution options

1. lump-sum distribution 2. annuity or other form of periodic payment 3. rollover or direct transfer

The full retirement age for individuals born in 1960 and later is

67

Which of the following descriptions of a regular rollover from a qualified plan to a traditional IRA is correct?

A 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over.

Which of the following statements best describes the definition of disability in qualifying for disability benefits under Social Security?

An individual must not be able to engage in any substantial, gainful activity, and the impairment must be expected to last at least 12 months or result in death.

The employer portion of the payroll tax rate, including the portion dedicated to Social Security (OASDI) and the portion dedicated to Medicare funding, on a covered worker's earnings up to the Social Security taxable wage base is

Employers must pay a combined Social Security (OASDI) and Medicare rate of 7.65%. Employers pay 6.2% for Social Security and 1.45% for Medicare.

The 20% mandatory tax withholding is not applicable to

IRA, SEP IRA, or SIMPLE IRA distributions

The following are reasons for an early distribution from a qualified retirement plan that are an exception to the 10% penalty ?

It is made after separation from service from an employer-sponsor of the plan after age 55 the distribution is made to a beneficiary of the account due to the owner's death the plan owner becomes totally and permanently disabled

Which workers are not covered under Social Security?

Railroad workers covered under the federal Railroad Retirement Act

Life insurance may be a suitable investment for all of the following retirement plans except

SEP Plans, Life insurance cannot be held in any type of IRA, including SEPs. Qualified retirement plans and Section 403(b) plans can purchase life insurance if they comply with the incidental benefit rules.

Employee elective deferrals are permitted in

Section 401(k) plans, profit-sharing plans with a Section 401(k) provision, and SIMPLES, but NOT IN SEP plans

The 20% mandatory tax withholding are subject to

Section 457 plans, Section 403(b) plans, and qualified plans

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.

Which of these statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts is correct?

1. Generally, if an individual or the individual's beneficiary engages in prohibited transaction with the individual's IRA account at any time during the year, the account will be treated as a withdrawal of the IRA as of the first day of the year. 2. If an individual borrows money against an IRA annuity contract, the individual must include in gross income their fair market value of the annuity contract as of the first day of the tax year in gross income. 3. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. 4. The individual may have to pay the 10% additional tax on premature distributions.

Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan?

1. IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. 2. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment. (Both statements are correct. IRA-funded employer-sponsored tax-advantaged plans are SEPs, SAR-SEPs, and SIMPLE IRAs)

Which of the following should a businessowner accomplish before considering the adoption of a retirement plan?

1. Purchase personal and business liability insurance. 2. Establish cash reserves sufficient to cover potential emergencies. 3. Ensure the business has sufficient cash flow to support ongoing funding of the plan.

A stretch IRA

1. is the informal name for intentionally leaving money in anIRA over an extended time after the death of the original account owner 2. extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the original owner 3.allows the IRA owner's beneficiary to name his own beneficiary upon the owner's death

Which of the following beneficiaries is entitled to roll over a post death distribution from a qualified plan into an IRA?

1. the surviving spouse of the participant 2. the surviving mother of the participant 3. the oldest surviving child of the participant

Whose Social Security benefit is included in the calculation of the maximum family benefit for those eligible for benefits based on a retired worker's fully insured status?

1.The retired worker's benefit 2.A dependent child's benefit 3. A caregiver spouse's benefit for caring for a qualified disabled child

Distributions from IRAs must begin by April 1 of the year following the year in which the individual reaches age

72

What is the maximum amount of social security benefits that may be subject to income taxation?

85%

What type of assumed annual rate of return is frequently used in retirement planning calculations?

A flat annual return based on past performance

Traditional IRA facts

an IRA owner cannot contribute more than his earned income for the year, except in the case of a spousal IRA. the total amount that may be contributed to all IRAs, traditional or Roth, deductible or nondeductible , is $6,000 per person, plus applicable age 50 and older catch ups.

Fully insured status generally requires a measure of employment covered by social security (OASDI) that is 40

credits of coverage

under the IRA minimum distribution rules, if the IRA account owner dies before distribution payments begin, what occurs?

the beneficiary can begin receiving distributions. but if there is no beneficiary named the funds revert to the account owners estate and are distributed according to the will or the state's intestacy laws. a nonspouse named beneficiary is not required to distribute the entire IRA balance within five years.

The postponed 1st-year RMD is based on the participants plan or IRA account balance as of

the end of the year preceding the first distribution year.

The trustee should use the plan balance for December 31 of

the year preceding the distribution year

Best describes the purpose of establishing a stretch IRA?

to extend the period of tax-deferred earnings beyond the original owner's lifetime. The goal is to delay the distribution of assets from the IRA for as long as possible.

Correct statement about a ROTH

withdrawals of earnings up to $10,000 from a Roth IRA for the purchase of a first home can be penalty free if the five-year holding period has been met. Distributions are not taxable if they are attributable to disability and the account has been established for at least five years. If the account has been opened for at least five years and the account owner is age 59 1/2, distributions are penalty free and income tax free. Contributions to a roth are made with after tax-dollars