Retirement Plans

The penalty for premature withdrawal of funds from a traditional IRA is

10% of the taxable amount withdrawn

An employer may require an employee to be at least what age to be eligible to participate in a Keogh plan?

21

Contributions to a simplified employee pension (SEP) are not included in the employee's taxable income for the year as long as the contribution does not exceed

25% of the employee's income up to a specified maximum amount

Which of the following best describes the concept of vesting, with respect to qualified retirement plans?

An employee's right to funds or benefits contributed by an employer

Acme Corporation has established a nonqualified deferred compensation plan with life insurance as the funding vehicle. Acme currently has 100 employees, 90 of whom work full time. Which of the following individuals must be covered by the plan?

Any employee, officer, or executive that Acme selects

Oliver, age 48, and Lucia, age 46, are married and file a joint tax return. Both are covered by their companies' pension plans. Which of the following statements regarding contributions they could make to a traditional IRA is NOT correct?

Both can take advantage of the catch-up provision and contribute the catch-up amount in addition to the base amount.

Which of the following federal acts governs the funding, vesting, administration, and termination of private pension plans?

ERISA

Lee, who is a CPA, would like to open up a traditional IRA as a savings vehicle for retirement. He will be 62 on his next birthday. Lee is currently interviewing with a Fortune 500 company. He was at his last job for over 15 years but is not currently working. Which of the following statements is TRUE?

Lee is currently not eligible to open an IRA because he does not have earned income.

Employees of which of the following generally may participate in a tax-sheltered annuity (TSA) plan?

Public school systems

Scott, who recently married JoEllyn, wants to start saving money for their retirement. He is an engineer for a small company that does not have an employer-sponsored retirement plan, and he earns an annual salary of $65,000. Which of the following statements is TRUE?

Scott could set up 2 individual accounts (1 for himself and 1 for JoEllyn).

Susan, age 52, withdrew $5,000 from her traditional individual retirement account, which consisted entirely of pretax contributions, to purchase her first home. What are the tax consequences?

Susan will not be assessed the 10% penalty on her early withdrawal.

Which of the following statements pertaining to tax-sheltered annuities (TSAs) is CORRECT?

TSAs are available to employees of certain nonprofit organizations.

To enroll in an employer's qualified retirement plan, employees must

be at least 21 years old and complete 1 year of service

Under a Keogh (HR-10) plan, employers

must contribute the same percentage to their eligible employees as they contribute to their own plans

All of the following events are allowable reasons to take an early withdrawal from an IRA and not pay a tax penalty EXCEPT

purchase of a vacation home

A primary difference between a SEP and an IRA is that

the limit of money an employer is permitted to contribute to a SEP each year is higher than the limit for an IRA

Taxpayers are able to withdraw IRA funds without penalty for all of the following reasons EXCEPT

travel necessitated by medical reasons

Interest earned and distributions made are tax-free if a Roth IRA is maintained for at least how many years?

5 years

Which of the following scenarios regarding individual retirement accounts (IRAs) is NOT correct?

Peter is currently employed, but his spouse, Karina, is not. Since Karina has no earned income that she can contribute to a traditional IRA, Peter can set up a joint IRA account for the two of them.

For tax purposes, retirement plans can be divided into which of the following 2 categories?

Qualified and nonqualified

At a certain point in time, an employee will have a nonforfeitable right to the money contributed to a pension plan by the employer. This right is known as

a vested interest

Which of the following statements about a Roth IRA is CORRECT?

Contributions are not tax deductible.

Last year Wendell, age 57, withdrew $1,500 from his IRA, which consists entirely of pretax contributions. In addition to including that amount in his taxable income, he has to pay a penalty of

$150

Cynthia is scheduled to receive a $36,000 lump-sum distribution from her former employer's qualified pension plan and wishes to establish a rollover IRA to avoid paying taxes on the money that year. Within how many days must the rollover be completed for Cynthia to avoid paying taxes?

60 days

Which of the following statements concerning qualified retirement plans is NOT correct?

Employer contributions to a qualified plan on behalf of its employees are taxable income to the employees when they are made.

Gina, age 66, has worked for the past 35 years as a dermatologist and has funded her defined contribution plan at the maximum allowed each year. She would like to delay taking income from the account for 3 years. Which of the following statements is TRUE?

Gina can delay taking income until age 69 even though she is retired, as she is not required to begin RMDs until age 72.

What are the tax consequences if Maksim makes a partial rollover of his 401(k) plan assets?

He must pay a 10% penalty plus income tax on the amount retained.

Jessica has a Roth IRA. Which of the following statements is TRUE?

Her IRA contributions are not tax deductible.

Which of the following statements regarding traditional IRAs is NOT correct?

Peter inherits $15,000 in traditional IRA benefits from his father who recently died. Peter can set up a tax-favored rollover traditional IRA with the money.

Rodney, age 35, earned $40,000 last year and did not participate in an employer retirement plan. Rodney has a nonworking spouse, with whom he filed a joint income tax return. Which of the following statements is TRUE?

Rodney could establish a separate IRA for himself and another for his spouse and could deduct a contribution of up to the current annual maximum, which is adjusted annually for cost of living.

The purpose of a 401(k) plan is to save for

retirement

The advantages of qualified retirement plans to employers include all of the following EXCEPT

rewarding a few employees rather than many

Many of the basic protections associated with qualified employer plans can be traced to

the Employee Retirement Income Security Act

Larry purchased a traditional IRA when he was 32 years old. Over the years he has contributed (and deducted from his taxes) $50,000 into the contract. Now, at age 62, Larry is retiring and plans to annuitize the contract. His life expectancy is 20 years, and he will receive $450 per month under a straight life annuity income option. Of the $5,400 he will receive annually from this annuity, how much will represent taxable income?

$5,400

Which of the following statements regarding a traditional individual retirement account (IRA) is NOT correct?

A 10% penalty is assessed on any distribution from an IRA before age 59½.

All of the following persons who have no employer retirement plan would be eligible to set up a traditional IRA EXCEPT

Edna, age 62, a retired nurse

Which act protects the interests of participants in employee benefit plans?

Employee Retirement Income Security Act

Which of the following statements regarding 401(k) plans is CORRECT?

Employees can make elective salary deferrals.

Which of the following employees would NOT be eligible for a 403(b) plan?

Employees of banks and credit unions

Which of the following statements best describes a Keogh (HR-10) plan?

It is a qualified retirement plan for self-employed individuals and their eligible employees.

Which of the following individuals is NOT eligible to contribute up to the maximum allowable limit to a traditional individual retirement account?

Joe, age 71, who is married, has unearned income, and is not covered under an employer-sponsored retirement plan

Max and Leah recently became grandparents. Max, age 71, is employed as an architect and earns an annual salary of $55,000. He has never set up an IRA, but he is thinking about it, now that he has grandchildren. His spouse, Leah, is covered by her company's corporate retirement plan. She has told him that he can contribute to her plan so that they can retire sooner. Which of the following statements is TRUE?

Max cannot contribute to Leah's company retirement plan.

What types of organizations are eligible for 403(b) plans to benefit their employees?

Nonprofit organizations such as public schools, churches, and hospitals

Which of the following statements regarding required minimum distributions is NOT correct?

Required minimum distributions must occur no later than age 59½.

Which of the following distributions from a Roth IRA would be qualified and, therefore, NOT taxable, assuming the account was established at least 5 years ago?

A distribution of $10,000 used to buy a first house

Which of the following statements about the tax advantages of a qualified retirement plan is NOT true?

Employees' contributions to retirement plans are included in ordinary income.

Which of the following statements pertaining to qualified pension plans is NOT correct?

The interest on the employer's contributions is included in the employee's gross income and is currently taxable.

Which of the following statements pertaining to SIMPLE plans is NOT correct?

These plans are reserved for employers with 500 or more employees.

All of the following individuals should be eligible to establish a Keogh (HR-10) retirement plan EXCEPT

a major stockholder-employee in a family corporation

The combination of current tax deduction for the employer plus tax deferral for the employee is possible with all of the following types of plans EXCEPT

a savings account