Retirement Plans Quiz
Maximum income limits that reduce permitted contributions do NOT apply to: A IRAs B Spousal Roth IRAs C Roth IRAs D Coverdell Education Savings Accounts
The best answer is A. As one's income increases, permitted contributions to Roth IRAs and Coverdell Education Savings Accounts are phased out (so high earning persons cannot contribute to these accounts). However, there is no income limit for making a contribution to a Traditional IRA or spousal IRA (however, if the contributor is covered by another qualified retirement plan and earns too much, the permitted contribution may not be tax deductible). Note: If you see the term IRA on your exam and it does not specify type; assume the question relates to a Traditional IRA.
Which of the following annuity payment options will continue payments to another person for their life after the annuitant dies? A Life Annuity B Life Annuity with Period Certain C Joint and Last Survivor Annuity D Unit Refund Annuity
The best answer is C. A joint and last survivor annuity pays another person (usually a spouse) when the annuitant dies.
Which statement is FALSE about a SIMPLE IRA? A The maximum annual contribution is the same as for a Traditional IRA B The contribution is made by the employee, who gets a salary reduction for the amount contributed C The plan is only available to small employers D The employer must make a matching contribution
The best answer is A. SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administer than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $13,500 (in 2020) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.
In the year 2020, a divorced woman under age 50 collects $50,000 of alimony and child support as her sole source of income. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A No contribution can be made because the woman does not have earned income B A contribution of up to $6,000 is permitted, but the contribution is not tax deductible. C A tax deductible contribution of up to $7,000 is permitted D A tax deductible contribution of up to $9,000 is permitted
The best answer is A. Alimony and child support payments are not considered to be "earned income" for purposes of making IRA contributions. Thus, a woman whose sole support stems from these payments cannot make an IRA contribution.
Distributions after age 59 ½ from tax qualified retirement plans are: A 100% taxable B partial tax free return of capital and partial taxable income C 100% tax free D 100% tax deferred
The best answer is A. Contributions to tax qualified plans such as Keogh Plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.
All of the following statements are true regarding the annuitization of a variable annuity contract EXCEPT: A variable annuity contracts require the holder to select a Life Annuity - Period Certain payout option B the variable annuity payout may vary depending on the performance of the underlying securities C the number of variable annuity units is fixed D the holder may not change the payout option after it is elected
The best answer is A. Variable annuity contracts allow the holder to elect a payout option that meets that person's individual requirements. The choice of payout method depends on the needs of the annuitant; and cannot be changed once elected. Once the contract is annuitized, the number of annuity units is fixed. However, the value of each unit varies with the performance of the underlying securities, hence the monthly annuity payment may vary.
Monies that have accumulated in a Coverdell Education Savings Account that are not used by the beneficiary to pay for qualified educational expenses: A may be rolled over into a conventional IRA without any tax liability B may be transferred to a Coverdell Education Savings Account for a sibling that so qualifies without any tax liability C are 100% tax free D are tax-deferred until a Traditional IRA is established by the beneficiary
The best answer is B. Coverdell Education Savings Accounts permit a maximum annual non-deductible contribution of $2,000 to pay for qualified education expenses. Contributions must cease at age 18. The monies in the account must be used by age 30. Any unexpended funds in the account can be transferred to another family member for their qualified education expenses (like a younger brother or sister).
Which statement is TRUE about Roth IRAs? A Contributions are tax deductible; distributions after age 59 1/2 are not taxed B Contributions are not tax deductible; distributions after age 59 1/2 are not taxed C Contributions are tax deductible; distributions after age 59 1/2 are taxed D Contributions are not tax deductible; distributions after age 59 1/2 are taxed
The best answer is B. Roth IRAs, unlike Traditional IRAs, do not permit a tax deduction for the amount contributed. On the other hand, when distributions are taken, unlike a Traditional IRA, the distributions are not taxable (given that the investment has been held for at least 5 years).
The maximum permitted annual contribution to a Coverdell Education Savings Account for a single beneficiary is: A $2,000 in a single account B $2,000 total in any number of accounts C $4,000 in a single account D $4,000 total in any number of accounts
The best answer is B. The maximum permitted annual contribution is $2,000 per beneficiary per year for Coverdell Education Savings Accounts.
Which statement is TRUE when comparing a Roth IRA to a Traditional IRA? A Anyone with earned income can open a Roth IRA B Anyone with investment income can open a Traditional IRA C Roth IRAs are not available to high-earning individuals D Traditional IRAs are not available to high-earning individuals
The best answer is C. Clients who have only investment income are not eligible to make IRA contributions. Roth IRAs allow for the same contribution amounts as Traditional IRAs, but the contribution is never tax-deductible (which is usually the case with a Traditional IRA). Earnings build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, the Roth IRA is not available for high-earners. Individuals who earn over $139,000 and couples who earn over $206,000, in 2020, cannot open Roth IRAs. They can open Traditional IRAs, however.
In 2020, a self-employed doctor contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $60,000 per year. The contribution to be made for the nurse is: A $5,500 B $12,000 C $15,000 D $17,500
The best answer is C. If an employer contributes the maximum of $57,000 to a Keogh in 2020, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. Thus, for the nurse, $60,000 of income x 25% = $15,000 contribution. Note that this contribution is an added benefit for the nurse and will be deductible to the doctor making it
A husband and wife are self-employed and have 3 children, ages 4, 7, and 9. They have a combined income of $300,000. They wish to open Coverdell ESAs for each of their children to pay for qualified education expenses. Which statement is TRUE? A They can open the account for each child and make an annual $2,000 tax-deductible contribution for each B They can open the account for each child and make an annual $2,000 non tax-deductible contribution for each C They are prohibited from opening an account for each child because they earn too much D They are prohibited from opening an account for each child because Coverdell ESAs cannot be opened by self-employed individuals
The best answer is C. Both Roth IRAs and Coverdell ESAs are not available to high-earning individuals. There is an income phase-out range, above which contributions are prohibited to either of these. For 2020, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000
All of the following are allowed investments in an Individual Retirement Account EXCEPT: A Preferred Stock B U.S. Government Gold Coins C Antiques, Art, and Other Collectibles D U.S. Government Bonds
The best answer is C. Collectibles are not allowed as an investment in an IRA account. Securities are allowed; so are gold coins minted by the U.S. Government and precious metals bullion.
Which is the BEST definition of an "annuity unit"? A An accounting measure used to determine the number of units the contract holder may purchase in the separate account B An accounting measure used to establish the contract holder's ownership interest C An accounting measure upon which the amount of pay out is determined D An accounting measure used to determine the contract holder's death benefit
The best answer is C. Once a variable annuity contract is annuitized, accumulation units are converted to annuity units. These determine the annuity payments to be made.
The "AIR" shown in a variable annuity prospectus is the: A minimum guaranteed rate of return on investment B maximum guaranteed rate of return on investment C benchmark rate used to calculate the initial payment. D historical rate of return on the contract over the past 5 years
The best answer is C. The AIR - Assumed Interest Rate - shown in a variable annuity prospectus illustrates the annuity that will be available if the separate account performs at that interest rate. It is conservatively estimated, but is no guarantee of a specific return.The AIR is a fixed rate used to calculate the initial annuity payment. These payments will then fluctuate based on actual separate account performance versus the AIR.
Under Keogh rules, any distributions from a Keogh Plan must start no later than: A April 1st of the year following the year the individual turns 59 1/2 B December 31st of the year following the year the individual turns 70 C April 1st of the year following the year the individual turns 72 D April 15th of the year following the year the individual turns 72
The best answer is C. Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 72.
403(b) Plans are permitted to invest in all of the following EXCEPT: A Variable Annuities B Mutual Funds C Fixed Annuities D Common stocks
The best answer is D. 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. Such plans allow for a tax deductible contribution of 25% of income, up to $19,500 for 2020. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager
LGIPs marketed by broker-dealers are investment vehicles offered to: A the general public B wealthy accredited investors C major institutional investors D local governmental entities in that state
The best answer is D. An LGIP is a "Local Government Investment Pool." It is an investment fund set up under state law that is only offered to local municipal governmental entities in that state. For example, if a town in a state has collected its real estate taxes, but has not yet spent those funds, it can put the balance in that state's LGIP. The LGIP is managed to provide a safe investment return. The MSRB takes the stance that if an LGIP retains a broker-dealer to market its offerings in that state, then it is a municipal fund security subject to MSRB rules. On the other hand, if the LGIP uses its own employees to market itself to local state governmental entities, then it is not subject to MSRB rules.
A 40 year old man wishes to remove monies from his IRA to fund his child's summer vacation. The customer has: A no tax liability B regular income tax liability only on the amount withdrawn C 10% penalty tax only on the amount withdrawn D both regular income tax liability and 10% penalty tax on the amount withdrawn
The best answer is D. Premature distributions from an IRA (before age 59 1/2), unless for reason of death, disability, to pay qualified education expenses, or to pay up to $10,000 of first-time home purchase expenses, incur normal income tax plus a 10% penalty tax on the amount withdrawn.
Growth in the separate account of a variable annuity is: A guaranteed to match the S&P 500 B guaranteed as to minimum rate C capped as to maximum rate equal to the S&P 500 D not capped as to maximum rate
The best answer is D. Variable annuity separate accounts are subject to investment risk - there is no minimum guaranteed growth rate and no cap on the growth rate. Also note that the insurance company selling the annuity can offer a rider called a GMIB - Guaranteed Minimum Income Benefit - that will give a minimum guaranteed growth rate for an additional cost. However, this is an optional feature, and is not part of the basic variable annuity contract.
