Retirement Planning
Which of the following is true concerning vesting in a SIMPLE plan? A. It is similar to vesting in qualified plans. B. It is vested after 2 years of eligibility for plan assets. C. It is fully vested at all times. D. It increases to 25% during the first 2 years of participation.
C SIMPLE is an IRA. IRAs have no vesting provisions. They are always 100% vested.
Tom Sellers is self-employed. He has no other employees. His income after expenses is $100,000. Which of the following plans provides the maximum allowable contribution? A. SEP B. SIMPLE 401(k) C. SIMPLE IRA D. Keogh
A A SEP is easy to install. The SEP contribution would be $100,000 x 18.59% = $18,590. The SEP is subject to the Social Security calculation like a Keogh for self-employed. SIMPLE IRA and SIMPLE 401(k) contributions are $14,000 + $3,000 (3%) = $17,000. There is some paperwork with a SIMPLE because of deferrals, catch-up and match. It is not simple. You cannot do any other plan when you do a SIMPLE. Keogh is not enough of an answer. It should say Keogh defined benefit or money purchase plan.
Harry is granted $250,000 of ISO options that vest in one year. Next year he exercises $150,000 of the options. What will be the result of this exercise? A. $100,000 will be treated as ISOs; $50,000 will be treated as NSOs. B. $50,000 will be treated as ISOs; $100,000 will be treated as NSOs. C. $75,000 will be treated as ISOs; $75,000 will be treated as NSOs. D. $150,000 will be treated as NSOs.
A A company cannot grant more than $100,000 of ISOs (based on exercise price) that are vested in the same year to any one employee if favorable ISO treatment is desired. If more than $100,000 of such ISOs that vest in the same year are granted, the excess options, once exercised, are treated as NSOs (for tax purposes). This would be a disqualifying disposition.
Which of the following plans has the maximum allowable contribution and a mandatory contribution? A. Money purchase B. SEP C. Profit sharing D. SIMPLE 401(k) E. TSA
A A money purchase plan can allow for a $61,000 contribution and is subject to the minimum funding standard (mandatory contribution). A SEP or a profit sharing plan can allow for a $61,000 contribution, but the contribution is not mandatory.
John, a high-performing sales manager for ABC Auto Parts (C corporation), is unhappy with the company's 401(k) program. The $305,000 compensation cap and the ADP test are limiting contributions. ABC, in an effort to keep John, should offer him which of the following? A. A salary continuation plan using a variable annuity policy B. An increase in company contributions to the 401(k) C. A secular trust D. A split-dollar policy E. A pure deferred compensation arrangement using a VUL policy
A A salary continuation plan uses only employer contributions and that would make John happy. Pure deferred compensation uses a portion of the employee's current compensation. This uses his money and is owned by the employer. The question did not indicate a need for life insurance (Answers D and E).
If an IRA participant dies at age 55 and has named a 30-year-old child as the beneficiary, what must happen in order to ensure that distributions can be made over the child's life expectancy? A. Distributions can no longer be made over the adult childs' life expectancy. B. The account must be fully paid out within 10 years of the owner's death. C. Distributions must begin by April 1st of the year following the year of death. D. Because distributions can begin at the child's RBD, nothing must happen.
A For a healthy, adult child the account must now be paid out within ten year of the owners' death. Answer B is true, but does not answer the question.
Lori, age 67, feels good about retirement. She will get about $2,500 from Social Security per month (she paid in the maximum over 35 years). She also elected to take a single life payout from an old defined benefit program (frozen) of $5,000.00 per month. When the defined benefit plan was frozen some years ago, the company opted to do a profit sharing 401(k). She is not planning to take any distributions from the 401(k) at this time. To supplement her income and allow her to ease into retirement, she is working part-time and making $3,000 per month. Her CPA has told her up to 85% of her Social Security will be taxable. How would you respond? A. The CPA is right. B. No, she will have to return half of her $2,500 a month Social Security payment. C. No, the maximum tax rate is 37%. D. No, she is beyond age 66.
A Her income puts her above $34,000 MAGI. Up to 85% of her benefits will be taxable. Her age is above NRA and the $1 for $2 rule and the $1 for $3 rule do not apply.
John has a choice between nonqualified stock options or incentive stock options. The option price is $5/share, and he will exercise when the share price is $10/share. (The options vest a year and a day after the grant date.) The option is for 10,000 shares. What is the tax ramification with each option if he sells the shares for $15/share and, more than one year later, he exercises them? I. Under the ISO, $50,000 is an add back item, and $100,000 is capital gains. II. Under the ISO, $50,000 is an add back item, and $50,000 is ordinary income. III. Under the NSO, $50,000 is ordinary income, and $50,000 is capital gains. IV. Under the NSO, $100,000 is ordinary income. A. I, III B. I, IV C. II, III D. II, IV
A If John is subject to the alternative minimum tax (on the ISO), his basis in the stock for AMT purposes will be increased by the amount included in income (unknown). If the stock is sold before the one-year holding period, John will lose preferential long-term capital gains treatment. 10,000 shares ISO exercise $10 $100,000 ISO option price -5 -50,000 (paid) ISO add back $5 $50,000 ISO sold $15 $150,000 ISO option price -5 -50,000 ISO capital gain $10 $100,000
Arthur and Beth are getting a divorce. Arthur has an IRA with an account value of $500,000. Under QDRO, Beth has which of the following rights? A. None B. 50% of the value of the account C. 50% of the value of the account when Arthur turns 59½ D. A QJSA equal to 50% of the value of the account
A QDROs only apply to qualified plans, 403(b)s, and governmental 457s — not IRAs.
Which of the following is (are) an exception(s) to the 10% early withdrawal penalty for IRAs? I. Medical expense in excess of 7.5% of AGI floor II. Substantially equal payments III. Early termination from employment IV. Distributions used to pay medical insurance premiums after separation from employment (unemployment compensation has been received for at least 12 weeks and the withdrawal was made in year of unemployment or year immediately following unemployment). A. I, II, IV B. I, III C. II, III, IV D. I, IV E. I
A Substantially equal payments can start at any age, but they must be over the owner's life expectancy. The 7.5%* floor for medical care does not apply to health insurance premiums if unemployment compensation has been received for at least 12 weeks and the distribution occurs in the year unemployment payments are received or the year after. Test taking tip. If II is true and III is false, the answer has to be A. Even if you did not know whether IV was true or not, it did not matter.
Joseph Mills, owner of Mills Manufacturing, has seen excessive employee turnover. He would like some kind of retirement plan. The number of employees on the payroll averages 50-60 yearly. He wants a simple plan. He will match to a limited extent. Which plan would be most appropriate? A. SIMPLE IRA B. Profit sharing 401(k) C. SIMPLE 401(k) D. SEP
A The SIMPLE IRA has a special election under the 100% match on the first 3%. Under a SIMPLE IRA, the employer may elect a 1% match in no more than 2 years of any 5-year period. The SIMPLE 401(k) may not have a special match election. It has an extremely rigid plan design. The SIMPLE 401(k) and the profit sharing 401(k) are ERISA plans. They are subject to all the normal ERISA requirements (not simple plans). SEPs do not allow for matching.
Quick Manufacturing, Inc. always has a top-heavy profit sharing plan because of employee turnover due to layoffs that reoccur every year. Which vesting schedule should they adopt if the company feels this will be an on-going situation? A. 3-year cliff B. 5-year cliff C. 2 to 6-year graded D. 100% - 2 years eligibility
A The employees will be eligible after one year, but unless they stay three years, the employees will forfeit all contributions made to the plan. The forfeitures will be allocated to the long-term employees (probably the HCEs) allowing them to potentially get up to 100% of compensation or $61,000 annual additions. There is no indication the company wanted to retain employees (2-6 year graded). The 100% vested plan (2-year eligibility) is not an advantage over the 3-year cliff in this situation. For most companies 2-6 graded is the best option. It just was not for this scenario.
Which investment is the least suitable for an IRA account for a young single client with a moderate risk tolerance? A. High-yield municipal bonds B. Individual stocks C. Variable annuity (growth) D. Growth mutual fund
A The least suitable is the municipal bonds. Do you need tax-free income in a tax deferred account? It defeats the purpose.
A large financial organization wants to hire Tom. Tom is a successful financial planner with a large practice. To entice Tom, the company is proposing a large nonqualified stock grant. The grant will be based on Tom's ability to build the financial planning division over the next five years. When will the grant be taxable to Tom? I. The grant will be taxable in five years when the substantial risk of forfeiture expires. II. The grant will be taxable now. III. The grant will be taxable when Tom can freely transfer the stock. IV. The grant of restrictive stock will not be taxable until Tom sells the stock. A. I, III B. I, IV C. II, III D. II E. III
A The two major determinants of taxation are the following: — the free transferability of the employee's interest and — the presence of a substantial risk of forfeiture
Your client has $500,000 in her IRA at Mutual Fund A, and she withdraws $100,000 of that IRA. Before 60 days pass, she deposits $100,000 in an IRA at Bank B. When can she take another 60-day withdrawal? A. From Mutual Fund A or Bank B after 12 months B. From Bank B anytime (no penalty) C. She can do a direct transfer anytime (no penalty). D. She can use the other $400,000 anytime in the next 12 months.
A The withdrawal affected both accounts. You only get one 60-day rollover per person per one-year interval per IRA account. The law is now one per person per one-year interval. Answer C is true but does not answer the question.
Bob and Sally, married filing jointly, have an AGI of $220,000. Neither Bob nor Sally has a retirement plan at work. What IRA options are available to them? A. They can both start deductible IRAs. B. They can both start Roth IRAs. C. They can either start deductible IRAs or Roth IRAs. D. The cannot start deductible IRAs or Roth IRAs.
A Their AGI is too high to do Roth IRAs, but since neither has a pension plan, they can both do deductible IRAs. It says neither has a retirement plan at work. Therefore they must have compensation. They would not be able to put much in the Roth so it would not really be too viable an option.
Bill age 72 and Jane age 69, married and filing jointly, want to contribute to a Roth IRA. He earns $18,000 per month. They normally have limited itemized deductions. How much can they contribute? A. $0 B. $6,000 C. $7,000 D. $12,000 E. $14,000
A Their AGI is too high. The phaseout is $204,000 to $214,000. The only number you have been given is monthly income. Their AGI is around $216,000 ($18,000 x 12 = $216,000).
Tito works for ABC, Inc. and they have adopted a new profit sharing plan for all their employees. He is 52 and wants to know how much he can deposit into the plan this year. A. $0 B. $20,500 C. $27,000 D. $61,000 E. $67,500
A Unless the plan has a 401(k) feature attached, the employee cannot deposit any of their own money to the plan.
Which plan contributions are not subject to FICA and FUTA? A. SEP B. SARSEP C. 403(b) D. SIMPLE IRA E. SIMPLE 401(k)
A In the deferral-type plans, the employee contribution is subject to FICA and FUTA.
If company XYZ establishes a 10% money purchase plan and integrates it with Social Security, what is the normal permitted disparity? A. 5.7% B. 10% C. 15.7% D. 25%
A The permitted disparity is the difference allowed.
Which retirement plan is best for a woman who is a consultant (self-employed) and makes $150,000? She wants to fund her retirement with 10% of her earnings. A. Keogh B. SEP C. IRA D. Roth IRA
B The SEP allows for up to 18.59% (self-employed). It is simple. A Keogh answer by itself is not enough of an answer. It should say Keogh DB, MP, or PS.
Nate, a sole proprietor, is going to contribute to a SEP. His net income is $50,000. What is the maximum he can contribute? A. $6,059 B. $9,295 C. $10,000 D. $11,000 E. $13,000
B 25% short-cut method $50,000 x 18.59% = $9,295 He is self-employed.
Judy White, age 67, is taking her Social Security benefits of $2,000 per month. She is also working, never retired, and is making $5,000 per month. How much will be taxable on the 1040? A. $5,000 per month B. $6,700 per month C. $7,000 per month D. Not enough information
B 85% of her Social Security will be taxable plus her earned income.
Which of the following retirement plans can be integrated with Social Security? I. Stock bonus II. ESOP III. SEP IV. Defined benefit V. Target benefit A. I, II, IV, V B. I, III, IV, V C. I, IV, V D. I, IV E. II, III
B A SEP and a stock bonus plan can be integrated with Social Security. An ESOP cannot be integrated.
What entity or regulation imposes extensive reporting and disclosure requirements on a defined benefit plan? A. PBGC B. ERISA C. PPA D. IAA
B A defined benefit plan is subject to mandatory insurance by the PBGC. Benefit levels are guaranteed by the PBGC. However, the plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor. The DOL enforces ERISA rules.
If you had to suggest a plan to an employer, which plan would provide the employer the maximum contribution and the maximum deductible contribution flexibility? A. Defined benefit plan B. Profit sharing 401(k) plan C. SIMPLE IRA D. Age weighted target benefit plan
B Answers A and D require a contribution to be made each year. With a profit sharing 401(k), the employer could contribute nothing at all or the maximum 415 limit. This would allow maximum flexibility and maximum contributions to be made. A SIMPLE IRA does not allow a large employer contribution, they are also not flexible.
How are qualified plans and traditional IRAs most similar? A. Funding limits B. Required minimum distributions C. Participation qualifications D. Vesting requirements
B Both have required minimum distribution requirements that are quite similar. Beyond that, the funding and participation requirements for each are fairly different.
Sally, age 62, dies. She is a fully-insured worker. Who will receive Social Security benefits when she dies? I. Daughter, age 20, in college II. Ex-husband, age 64, married to her from 1984-1996, never remarried III. Son, age 14, in high school and lived with her IV. Current husband, age 58 (Sally married him 12 years ago) who lives with Sally A. All of the above B. II, III, IV C. II, III D. III, IV E. I, IV
B Both the ex-husband and current husband are eligible. The current husband also has a child in care under age 16, so he can receive benefits at any age. It is not relevant whose child the kid is.
Which of the following type of plan is subject to PBGC? A. Target benefit pension plan B. Cash balance pension plan C. Money purchase pension plan D. ESOP
B Defined benefit plans are generally subject to PBGC insurance program. Answers A, C, and D are defined contribution plans.
Sally Adams works for ABC, Inc. ABC has a 401(k) that Sally has been contributing to. ABC does a 3% match. Sally is upset with the plan's performance. Her personal financial planner has suggested she transfer money out of the 401(k) and into an IRA while she is still working at ABC. Can this adviser help this employee? A. No, it could be construed as a violation of the adviser's fiduciary duty to keep her in the plan. B. Yes, as long as the adviser does not exercise control over the qualified plan's assets. C. No, in-service withdrawals are never allowed. D. Yes, the funds are just going from one retirement account to another.
B First, in service withdrawals are allowed in some plans. As you read on you can see how touchy the question could get. Some may select Answer A. In an advisory opinion issued in 2005, the DOL said that an adviser not connected to a plan can recommend that a participant roll over plan funds to an individual retirement account he or she manages without triggering fiduciary-duty rules under the Employee Retirement Income Security Act of 1974. The situation is more complicated when an adviser works for a plan. The DOL opinion stated, "If a fiduciary exercises control over plan assets to cause the participant to take a distribution and then to invest the proceeds in an IRA account managed by the fiduciary, the fiduciary may be using plan assets in his or her own interest, in violation of ERISA."
Sam, age 64, decides to take Social Security retirement benefits 20 months early. How much will his PIA be reduced? A. 10% B. 11.1% C. 13.33% D. 20% E. 31.25%
B His benefits will be reduced by 20/180 or 11.1%.
Pierce died at age 69. Match up his IRAs to the correct distributions. His wife Mrs. Pierce is the beneficiary of one IRA. I. Take distributions at the Mr. Pierce's RBD based on her single life expectancy recalculated each year II. Roll into her own IRA; take distributions based on Mrs. Pierce's RBD (new uniform lifetime table) III. Roll into her own IRA and take distributions over Mr. Pierce's life expectancy starting by December 31st of the year after his death IV. Take distributions at least as rapidly as under the schedule in effect A. I B. I, II C. III D. II, IV
B NOTE: Answer IV is just a distractor answer.
Sally, a widow, would like to continue to work past age 72. She will continue to add to her 401(k). She has $100,000 in her IRA and $150,000 in her 401(k). Will she have to take minimum distributions? A. Yes, from both plans B. Yes, from her IRA C. Yes, from her 401(k) D. No
B She must take RMDs from her IRA. Distributions from the 401(k) can wait until she retires.
Who should fund a Roth IRA? A. Most clients would benefit from having both pretax and after tax buckets of money in retirement. B. People who will be in a higher tax bracket in retirement versus when they were working C. People who will be in a lower tax bracket in retirement versus when they are working. D. People who are close to retirement
B The Roth IRA works best with a long time horizon for the money to grow. You may tell your clients Answer A, but Answer B is the mathematically correct answer, and how the CFP Board wants you to answer. Most people will benefit more from the tax write-off of a traditional IRA today. Also, a married couple can withdrawal around $80,000 per year and remain in the 10% tax bracket.
Which of the following statements are true concerning a rabbi trust? I. The rabbi trust provides complete protection. II. The rabbi trust is informally funded. III. The employer may fund the rabbi trust from the general assets of the company. IV. Employer contributions to the rabbi trust are not subject to payroll taxes. V. The rabbi trust assets may be used for purposes other than discharging the obligations of the employee. A. I, II, III B. II, III, IV, V C. III, IV, V D. II, IV
B The assets are always subject to the company's creditors. The employer may fund the trust from general assets. Contributions are not subject to payroll taxes, but distributions are subject to withholding and FICA. The rabbi trust offers no protection in case of bankruptcy or financial obligations of the company.
Barney is a participant in his employer's ESOP. The company makes a contribution of stock worth $40,000 ($4 per share) to Barney's account. Twenty years later, Barney retires and takes a qualified lump-sum distribution of the company stock and rolls the balance of the account (the cash portion) into an IRA. The market value of the stock is $100,000 ($10 per share). After two years of retirement, he sells the stock for $150,000. What are the tax implications? A. $150,000 taxed as ordinary income at retirement B. $40,000 as ordinary income at retirement, $110,000 as long-term capital gain at the sale C. $110,000 as ordinary income at retirement, $40,000 as long-term capital gain at the sale D. $100,000 as ordinary income at retirement, $50,000 as long-term capital gain at the sale
B The basis of employer stock is treated as ordinary income at time of distribution regardless of whether the stock is sold or not. NUA is always treated as long-term capital gain regardless of the holding period. There are two assets in the plan, the company stock and cash. He takes a lump sum of the company stock, then that qualifies for NUA treatment. The noncompany stock portion which in this case was cash can be rolled over into the IRA. If he rolls the company stock into the IRA, then it losses its NUA.
Which statement is true regarding profit sharing plans? A. A company must show a profit in order to make a contribution. B. Profit sharing plans should make contributions that are substantial and recurring according to the IRS. C. Forfeitures in profit sharing plans must be reallocated to the other participant accounts. D. Employer deductions for plan contributions are limited to 25% of each participant's total compensation.
B The company does not have to show a profit to make a contribution. Forfeitures are normally reallocated, but can be used to offset the cost of the plan. The employer is still bound by the overall deduction limit of 25% of total plan compensation, but that is not the same as individual compensation and ignores the $305,000 cap.
When RSUs vest (no substantial risk of forfeiture), are they subject to income tax? A. Yes, there is no substantial risk of forfeiture. B. No, the employee can elect to defer taxation for 5 years after the stock vests. C. Yes, they are stock options that vest under Section 83 rules. D. No, RSUs are deferred compensation.
B This 5-year deferral is part of the TCJA.
Gabby Hayes owns a small saw mill corporation. Now at age 50 he has come to you for retirement advice. He is taking a salary of $20,000 per month. His employees come and go and occasionally last more than a year but not much longer. He says he really does not care about the employees. Some years ago he updated the mill to operate by a computer program. He has outsourced the tech servicing problems of the mill. Which plan do you suggest? A. A defined benefit plan with a 3-year cliff vesting and one year eligibility B. SEP IRA C. A profit sharing plan with a 2-6 year graded vesting and one year eligibility D. A profit sharing plan 401(k) plan using a 21 and 1 year eligibility
B Unless it says the corporation is highly profitable, the defined benefit is an overkill. Relative to the simplicity of a SEP, the profit sharing 401(k) is an administrative nightmare. Granted he could contribute an extra $6,500 under the 401(k) catch-up provisions. Answer C is a good answer but again the SEP will work with its 3-year eligibility requirement.
If Betty's company's pension plan provides a life annuity equal to 2% of earnings up to 30 years of service, how much could Betty ($175,000 average annual compensation) receive as annual pension after 20 years of service? A. $35,000 B. $61,000 C. $70,000 D. $105,500 E. $175,000
C 2% x 20 years x $175,000 = $70,000. The question says after 20 years of service.
Bill works for two related employers. Each employer has a 401(k) plan. With one employer he makes $50,000, and with the second employer he makes $60,000. If both plans allow for a 6% deferral and a 3% match, how much can he defer in 2022? A. $3,000 B. $3,600 C. $6,600 D. $9,900 E. $20,500
C 6% of a total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $20,500 if the plans only allow 6%. You have to pay attention to the question.
Mrs. Fitch recently retired. She took a 100% distribution from her retirement plan. Her employer did not take a 20% mandatory withholding. What kind of plan did she have? I. Defined benefit II. 403(b) III. Defined contribution IV. Profit sharing 401(k) V. SIMPLE IRA A. I, III, IV B. II C. V D. I, II, V
C A direct distribution from a qualified plan requires the plan administrator to withhold 20%. A SIMPLE is not a qualified plan; a SIMPLE 401(k) is a qualified plan. 403(b) distributions that are not directly rolled over are subject to mandatory withholding. Answer C is the best choice.
On what is the maximum deductible contribution in a target benefit plan based? A. An actuarial determination B. The minimum participation rule C. A maximum of 25% of the aggregate eligible compensation of all covered participants D. A maximum of 25% of the firm's total payroll
C A target benefit plan is a defined contribution plan. Although an actuarial calculation is made when a target benefit plan is first installed, the maximum deductible contribution is always limited by Answer C. This is true even if the actuarial calculation calls for a larger contribution (likely if there are many older highly compensated employees and relatively few lower-paid rank-and-file employees). Answer D is wrong. It is not total payroll but eligible compensation or payroll.
Which of the following statements correctly describes a SIMPLE? A. Employee deferrals are limited to $14,000, and employer contributions are limited to 25% of compensation. B. An employer can offer a SIMPLE and a money purchase plan. C. Salary deferrals are subject to FICA and FUTA. D. Participant accounts are subject to vesting.
C Answer A is incorrect. There is a 3% match. If a company does a SIMPLE it cannot offer another plan. There is no vesting with IRA type accounts.
Which of the following qualified plan distributions would be exempt from the 10% early withdrawal penalty? A. Distributions following a separation from service B. Distributions for a temporary, partial disability C. Qualified plan loan D. Higher education cost for a participant's child
C Distributions following separation from service must give a year (e.g., age 55). Higher education costs are exempt under IRA rules only. Total, long-term disability is exempt; partial and/or temporary disability does not qualify for the exemption. Plan loans are available at any age tax-free. There is no 59½ rule with plan loans.
XYZ's pension plan has the following investments. Which investment(s) may produce UBTI income? I. Real property rents II. Gain from sale of capital assets III. Equipment leasing program (containers) IV. Annuities V. Whole life insurance A. I, II, IV B. I, II C. III D. III, IV E. III, IV, V
C Equipment leasing programs are normally limited partnerships.
In which of the following retirement plans may forfeitures increase account balances of plan participants? I. SEP II. Profit sharing plan III. Money purchase plan IV. Cash balance plan A. I, II B. I, IV C. II, III D. II, IV
C Forfeitures in defined benefit and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances. Forfeitures in a profit sharing plan normally are allocated to the plan participants. SEP IRAs can't have forfeitures since there is no vesting.
Mr. Hale becomes 72 on April 1st of this year. His IRA account has a value of $96,000. He is married, and his wife's combined life expectancy IRS factor is 24. If Mr. Hale only takes a $2,000 distribution by next April 1st, what will be his tax penalty? A. $0 B. $500 C. $1,000 D. $1,500
C He should have taken the distribution by April 1st of the next year. If the factor is given (24), then use it. His wife could be 20 years younger. $96,000 = $4,000 24 He took - 2,000 Penalty 2,000 x 50% = $1,000
Tim works two jobs, and both provide SIMPLE plans. He wants to maximize his deferrals and matches. At Company A he defers $6,000. How much can be deferred at Company B? A. None as an employee can only have one SIMPLE plan B. $14,000 at Company B C. $8,000 at Company B D. $14,000 at Company B ($20,500 total)
C Multiple plan deferrals are generally aggregated. In case of SIMPLE/SIMPLE, the limit is $14,000 total. A worker having two employers, both of which offer a SIMPLE plan, may participate in both plans but may only defer $14,000 (total) in the aggregate.
If the plan was adopted on 12/31/2022 for the plan year 2022, which employee would be eligible under 21 and one? A. Ned, date of birth 1/1/2001 B. Seth, date of employment 1/10/2022 C. Martha, date of birth 10/21/1989, date of employment 7/1/2020, works 1,500 hours per year part time D. Beth, date of birth 6/28/1999, date of employment 2/1/2019, works 750 hours per year part time
C Ned is age 20 (plan year 2022) plus we do know his employment info. Seth's age is not known. He may or may not qualify under the one-half year rule. Beth works part-time (less than 1,000 hours each year).
Sally plans to get married and have children in the future. Can she take a loan from a Tax Sheltered Annuity (TSA) for college education purposes? A. She can make a hardship loan. B. Loans are only available from qualified plans and are not permitted in TSAs. C. Loans, with qualified plan requirements, are available from TSAs. D. The loan will be treated as a taxable distribution.
C Qualified plan loan rules apply to TSAs. There is no such thing as a hardship loan
Mr. Jones, age 70, died. He was getting $2,500 (NRA) in Social Security benefits. Mrs. Jones, age 67, is getting $1,100 in Social Security benefits. After his death, how much Social Security benefit will she receive? A. $1,100 B. $1,250 C. $2,500 D. $3,600
C She will get the greater of her benefit or his when he dies.
Four doctors own 100% of Labs, Inc., a support organization. The ownership percentages are 80%, 10%, 5%, and 5%. The doctors have their own practice, a personal service corporation with no employees, and each has his own defined benefit plan. Which type of controlled group would Labs, Inc. fall under? A. Parent-subsidiary controlled group (80% combined) B. Brother-sister controlled group (80% combined) C. Affiliated service group D. Leased employees
C The IRS defines this as an affiliate service group. The 80% factor may lead you to answer this as brother-sister.
Who should fund a non-deductible IRA? A. No one. The Roth would be far superior B. People who are above the phaseout for a traditional IRA C. People above the Roth phaseout that have retirement plans at work D. People above the Roth phaseout that do not have retirement plans at work
C The people described in Answer D can (and should) fund a deductable IRA no matter what their income is. If someone can fund a Roth IRA, they should definitely do that versus a non-deductible IRA. Only when no other IRA options are possible, should a non-deductible IRA be considered.
A defined benefit plan has incidental life insurance using the 100 to 1 test. Tom died prior to retiring. His wife received two checks during the year: $200,000 pure death benefit and $20,000 cash value. How much will not be taxable this year? A. 0 B. $20,000 C. $200,000 D. $220,000
C The pure life insurance death benefit will be tax-free. The employee is charged with the cost of the pure death benefit of the life insurance. The cash value will be taxable. The question asks "not taxable."
Mr. Pierce died at age 69. Match his IRAs to the correct distribution. His son Tim is the beneficiary of one IRA. I. Take distributions at Mr. Pierce's RBD based on Tim's single life expectancy recalculated each year II. Roll into his own beneficiary IRA; take distributions based on beneficiary's RBD (new uniform lifetime table) III. Take distributions over ten years starting the year after the owner's death IV. Take distributions at least as rapidly as under the schedule in effect A. I B. I, II C. III D. II, IV
C There is currently no guidance in whether Answer IV is possible or not for nonspousal beneficiaries.
Jane divorces Bill. She is age 42. Per the divorce agreement (QDRO), she decides to take a direct distribution of Bill's qualified plan money ($1,000,000) now. If she gets half, what will be the amount of her check from the plan administrator? A. $500,000 B. $500,000 (less 10%) C. $500,000 (less 20%) D. $500,000 (less 20% plus a 10% penalty) E. $250,000
C There is no 10% early penalty (QDRO), but the plan will deduct 20% (withholding) when a direct distribution is paid.
Gail, an employee of Quick, Inc., is given an ISO of 1,000 shares of stock at $20 per share. Three years later, she exercises them when the stock is $30 per share. Then, two years later, she sells the stock at $35 per share. Which of the following is true? A. Gail's taxable gain will be $5,000 of capital gain. B. Quick, Inc. will get a deduction of $10,000 when Gail exercises her option. C. Gail's taxable gain will be $15,000 of capital gain. D. Gail's taxable gain will be $10,000 when she exercises her option and a $5,000 capital gain when she sells the shares.
C With an ISO, the corporation will not receive a tax deduction when the shares are exercised.
Tom is age 72 at the end of the first distribution year. His IRA account balance was $250,000 at the beginning of the first year. He takes his first distribution by April of the next year. What is the required distribution he must take by 12/31 of the second year if the account balance is $265,000 at the beginning of the second year? Uniform Lifetime Table Age Distribution Period 72 27.4 73 26.5 A. $9,124.09 B. $9,433.96 C. $9,671.53 D. $10,000
D $265,000 ÷ 26.5 = $10,000 (2nd year), $250,000 ÷ 27.4 (1st year) = $9,124.09
Javi just turned 73 and recently retired from his 6th distinguished career. He has done everything he has ever wanted to do regarding his working career and now it is time to fish everyday and enjoy his grandchildren. Over the years he has saved consistently in whatever retirement plan was offered by his employer at the time. For various reasons (estate planning, investment selection, costs, changing careers, etc), he has a plethora of different retirement accounts. He has two IRAs, two 401(k)s, and two 403(b)s. Also, Javi's parents both passed away last year and left him each of their IRAs. He is subject to required minimum distributions for all of these accounts. Javi wants to know what is the minimum number of accounts from which he must take a distribution to avoid a penalty. What should the CFP® professional tell Javi? A. 1 B. 4 C. 5 D. 6 E. 8
D 1 - The two IRAs can be aggregated. 2 and 3 - The two 401(k)s cannot be aggregated. They can be calculated separately and taken separately from each account. 4 - The two 403(b)s can be aggregated. 5 and 6 - The Inherited IRAs cannot be aggregated because they are from different decedents, Javi's mother and father. They must be calculated separately and take separately from each account.
On 1/2/2018, James converted his $25,000 IRA to a conversion Roth IRA. By 2022, his conversion Roth IRA has grown to $31,000, and he takes a full withdrawal. None of the special purposes have been met. Which of the following are true? I. The $25,000 conversion is not subject to income tax or early withdrawal penalty. II. The $25,000 conversion is subject to a 10% early withdrawal penalty. III. The $25,000 conversion is subject to a 10% early withdrawal penalty and a 10% conversion penalty tax. IV. The $6,000 of earnings is subject to income tax and a 10% early withdrawal penalty. V. The $6,000 of earnings is subject to a 10% early withdrawal penalty. A. I, IV B. II, V C. III, IV D. II, IV E. III, V
D 5 years have not passed and none of the special purposes have been met.
Which of the following investment vehicles may not be used to fund a TSA? A. Open-end investment management companies B. Mutual funds C. Annuities with incidental life insurance D. U.S. operating company stock (cannot be passive)
D Answer A is a different name for Answer B. Any type of annuity is an acceptable investment. Incidental life insurance within the annuity is also acceptable. A TSA cannot be funded with common stock.
Jack, age 40, is employed by Bet-On-Us. The company recently established a SIMPLE. Jack has been a participant fewer than two years. He contributed $3,000, and his employer matched $600. He has decided to leave the company and take all the money as a distribution. Which of the following is true? A. The $3,000 will be taxable as ordinary income plus a 10% early withdrawal penalty. B. The $600 will be forfeited and allocated to the remaining employees; the remaining $3,000 will be taxed at ordinary income tax rates plus a 10% penalty. C. The $3,600 will be taxable as ordinary income plus a 10% early withdrawal penalty. D. The $3,600 will be taxable as ordinary income plus a 25% early withdrawal penalty. E. Jack cannot take any distributions for two years.
D Employer contributions are nonforfeitable. The 10% penalty is increased to 25% for distributions taken within two years of the employee's first participation.
Dale joined Axcel, Inc. 4 years ago. After 3 months with the company, he became eligible for the 401(k). The company does not make a match but does make a profit sharing contribution with a 1 through 5 year vesting schedule. How much of his account is vested? (ignore earnings) Deferral Company Contribution 1 $10,000 $15,000 2 $12,000 $20,000 3 $13,000 $12,500 4 $15,000 $22,500 TOTAL $50,000 $70,000 A. $56,000 B. $92,000 C. $96,000 D. $106,000 E. $120,000
D First, the deferrals are never subject to vesting ($50,000 deferrals). Second, the company contributions ($70,000) are 80% vested: Year 1 20%; Year 2 40%; Year 3 60%; Year 4 80% $70,000 x 80% = $56,000 $50,000 + $56,000 = $106,000 NOTE: This is a 1-5 year vesting not a 2-6 year vesting. 2-6 is the maximum, but it can be less.
Which of the following plans would be least appealing to an employer looking to 1) maximize benefits for older employees, 2) give long-term employees a secure and specified retirement income, and 3) tie employees to the company through the benefit program? A. Defined benefit pension plan B. Cash balance pension plan C. Target benefit pension plan D. Profit sharing
D For meeting the three listed objectives, A is the best answer, followed by Answer B (also a DB plan), and finally by Answer C (a DC plan that shares some of the characteristics of a DB plan).
Tony's, a specialty deli, has a SIMPLE plan. They would like to provide more retirement benefits to their employees. Which plan can they adopt in addition to the SIMPLE plan? A. Money purchase plan B. SEP C. 403(b) D. None of the above
D Having a SIMPLE precludes Tony from having another plan. The SIMPLE stands alone.
Joe Langford, age 45, ended a nasty divorce. Although Joe and his ex-wife did not have any children, she hired a top-notch divorce attorney. Joe's wife never completed high school and never worked. So based on her lack of skills to make a living, she took most of their assets. Now Joe only feels he has 15 good years to build his retirement funds up. Joe has a good job at a company that has a 401(k) plan with a 50% match. He is deferring almost $1,700 a month. With no plans to get remarried, he is considering a second job. He has specialized skills and a couple of companies feel they can use him at least 20-30 hours a week. Besides salary considerations, what kind of retirement plan would work best for him? A. A profit sharing 401(k) with at least a 3% match B. 401(k) SIMPLE with a 3% match C. 457 with no match D. A money purchase plan
D He is already almost at the maximum deferral. The question says "almost $1,700" ($1,700 x 12 = $20,400). Answers A and B will eliminate any additional deferral and the match. With a money purchase plan the company will make a contribution. He will get the contribution because the employers are not related. There is no indication that his employer is a governmental or a non-governmental entity. He cannot do a 457 deferral. A profit sharing plan without a 401(k) feature also would have been a good answer.
Julia, a widow age 68, decides to go back to work. She has been collecting Social Security payments of $1,000 per month. She expects to make $35,000 in salary. She receives $2,000 in dividends, $3,000 in CD interest, and $5,000 in municipal bond interest. Will her Social Security payments become taxable if she goes back to work? A. No, she is over NRA. B. Her benefits will no longer be reduced by $1 for every $2 earned over a threshold. C. $6,000 of Social Security income will be taxable income. D. $10,200 of Social Security income will be taxable income.
D If her modified AGI (including municipal bond interest) exceeds $25,000, up to 50% of the Social Security benefits will be included in income (Answer C). If her modified AGI exceeds $34,000, up to 85% of the Social Security benefits are included ($12,000* x .85 = $10,200). Answer B is true, but her provisional income is $51,000. (Do not forget to add in ½ of her Social Security benefits when calculating MAGI.) Answer D is the best answer. *$12,000 is her Social Security payment of $1,000 per month times 12.
Which of the following qualified plan distributions would be exempt from the 10% early withdrawal penalty? A. Hardship withdrawal B. Distribution due to a husband and wife legal separation C. Distribution for purchase of principal residence D. Distribution due to separation from service at age 55
D Legal separation, even a divorce, does not prevent the penalty. A QDRO is necessary to avoid the 10% early withdrawal penalty. Principal residence distributions are not exempt from the penalty. For IRAs, it is first home not primary residence. You must know the difference between IRA and Qualified Plan 10% exceptions for the CFP Board exam.
When may a SEP or SARSEP account balance be withdrawn by a participant? A. Upon separation of service B. At normal retirement age C. At age 59½ D. All of the above
D Participants must be given the opportunity to withdraw the account balance at any time (for any reason). Of course, there may be a 10% penalty in some situations. These are IRAs, no hardship is needed.
A woman, age 72, receives $500 in monthly Social Security payments and continues to be actively employed. What is the maximum that his Social Security could be taxed? A. $0 B. The benefit is reduced $1 for every $3 earned C. 50% of the Social Security payment could be subject to income tax D. 85% of the Social Security payment could be subject to income tax
D Remember, over $34,000 of MAGI (single) means that 85% of the benefits could be taxed. The $1 for every $3 rule only affects people under NRA (normal retirement age) 66. The key phrase is "could be."
Party Time, Inc. has a defined benefit plan. Due to a pandemic, the company cannot afford any type of pension plan. What should Party Time, Inc. do? A. Adopt a cash balance plan B. Adopt a money purchase plan C. Adopt a target benefit plan D. Freeze the defined benefit plan
D The company can no longer afford any type of pension plan.
Seth is age 42 and married. He is an active participant in his employer's governmental 457 plan. Seth and his spouse's joint AGI is $110,000 (before making the maximum allowable 457 deferral). How much can he contribute to his IRA (and deduct) this year (2022)? A. $0 B. $5,000 C. $5,500 D. $6,000 E. $12,000
D The phaseout for married plan participants is $109,000 to $129,000. If someone is an active participant, IRA deductibility depends on whether the MAGI is within the phase-out range. HOWEVER, a 457 plan (any type) does not count as active participation, so he can make a deductible contribution. It only asked about his contribution, not hers or both.
What is the maximum retirement benefit for a participant in a target benefit plan? A. $61,000 per year B. 100% of the participant's salary ($305,000 cap) C. The actuarial value D. The value of the participant's account at retirement
D The question asked for the retirement benefit not the contribution. The retirement value is the account value. This is a DC plan, the employee gets to keep what is in the account when they retire.
Todd wants to defer his pension distributions as long as possible. He works for RJ, Inc. RJ wants him to stay beyond the normal retirement age of 72. If he works beyond the normal retirement age, what is the latest he can take a distribution and not be penalized? A. 72 B. By April 1st of the year after he turns 72 C. When he retires D. By April 1st of the year after he retires
D There is no indication that he owns stock in RJ, Inc. Therefore, the best answer is "by April 1st of the year after he retires."
Ahmed's company normally earns about $200,000 of profit each year. This year he had a large contract come through and he made $3 million in profits. He wants to reward his employees for their efforts in earning the one-time windfall, but is concerned about funding a retirement program in the future when his profit reduces to its usual amount. Which plan should a CFP® professional advise? A. A profit sharing plan since it has flexible contributions. B. He should fund his employees' personal IRAs directly, since he will not be obligated to fund them again. C. He should start a DB plan and fully fund as many people's retirement as he can this year. D. A SEP since there is no funding requirement.
D A SEP is the only plan that can be funded once and never funded again. This would allow a higher contribution than Answer B.
What type of employee would most benefit from a target benefit plan? A. A younger well-paid employee B. An older lower paid employee C. A younger lower paid employee D. An older well-paid employee
D A target benefit plan targets a benefit no matter the age. An old employee would get a percentage of his/her salary (example 30%) as would a younger employee. However, an older employee would have to get a larger company contribution to achieve the ultimate benefit. He/she would benefit the most.
Which of the following is true about plan loans from a 401(k)? A. They are prohibited because the plan accepts employee elective deferrals. B. Interest is never deductible. C. If married, the spouse never needs to consent. D. They do not have to be secured. E. If a plan allows loans, they must be made available to all participants without discrimination.
E Interest paid on a plan loan for a principal residence may be deductible. If the plan is subject to QPSA/QJSA and if the loan is secured with plan assets, both spouses must sign off on the loan. In all cases, the loans must be adequately secured (with plan assets or other collateral acceptable to the plan administrator).
What is the maximum contribution amount to a defined benefit plan? A. $61,000 B. $245,000 C. $305,000 D. Average of 3 highest consecutive years of salary E. None of the above
E It is the amount necessary to fund the benefit. However, the benefit can only be based on compensation up to $305,000 (2022). How much has to be in an account to fund a benefit of $245,000 that will last for 25 years? Maybe $3,000,000 - $4,000,000. This means if there is only 10 years to fund the benefit, the contribution could easily be $300,000 - $400,000 a year or more.
Mr. Pope age 55 is a sole proprietor. He wants to establish a retirement plan to save the maximum allowable per year. He has no employees, and his net profit is always in excess of $250,000. Which type of plan should he adopt? A. SIMPLE 401(k) B. Profit sharing C. SIMPLE D. SEP E. Uni-401(k)
E With the uni-401(k) he can defer $20,500 plus add employer contributions to a cap of $61,000 plus catch-up of $6,500. The SIMPLE and SIMPLE 401(k) would only allow for $14,000 plus 3% of compensation. The profit sharing and SEP would allow him to do $61,000 but no catch-up.
