Retirement Plans: Retirement Plans
In 2022, a customer earns $500,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $25,000 per year. The contribution to be made for the nurse is:
The best answer is D. If an employer earns $305,000 or more and contributes the maximum of $61,000 to a Keogh in 2022, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $500,000 and contributes $61,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $305,000. $305,000 - $61,000 = $244,000 of "after Keogh deduction" income. $61,000/$244,000 = 25%. Thus, for the nurse, $25,000 of income x 25% = $6,250 contribution.
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.
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.
For an Individual Retirement Account contribution to be deductible from that year's tax return, the contribution must be made by no later than: A April 15th of that year B December 31st of that year C April 15th of following year D December 31st of the following year
The best answer is C IRA contributions must be made by April 15th of the following year - no extensions are permitted.
The penalty tax applied for not taking required minimum distribution from a qualified retirement plan in a given year is: A 6% of the shortfall B 10% of the shortfall C 15% of the shortfall D 50% of the shortfall
The best answer is D. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 72 is 50% of the under-distribution. There is an incentive to take the money out and pay tax on it, which is what the Treasury is really looking for!
Individual Retirement Account contributions can be made with: A Cash B Exempt Securities C Non-Exempt Securities D Money Market Fund Shares
The best answer is A Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).
A married couple earning over $129,000 in year 2022, where both are covered by pension plans, wishes to contribute to an IRA. Which statement is TRUE? A Annual tax deductible contributions of $12,000 can be made to an IRA B Annual $12,000 contributions to the IRA can be made, but they are not tax deductible C Annual tax deductible contributions of $6,000 can be made to an IRA D No contributions can be made
The best answer is B. Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2022 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $129,000 in year 2022 (the deduction phases out between $109,000 - $129,000 of income).
In 2022, 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 $61,000 to a Keogh in 2022, 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.
Contributions to Individual Retirement Accounts must be made by: A December 31st of the calendar year in which the contribution may be claimed on that person's tax return B December 31st of the calendar year after which the contribution may be claimed on that person's tax return C April 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return D August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return
The best answer is C. Contributions to Individual Retirement Accounts must be made by April 15th (tax filing date) of the year after the tax filing year. For example, a contribution for tax year 2022 must be made by April 15th, 2023. No extensions are permitted.
The maximum contribution in the year 2022 into an IRA for an individual, age 50 or older, is: A $1,000 B $6,000 C $7,000 D $9,000
The best answer is C. For the year 2022, the maximum annual contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000.
In 2022, a self-employed person earning $100,000, who also has $100,000 of investment income, wishes to open a Keogh Plan. Their maximum permitted contribution is: A $20,000 B $40,000 C $61,000 D $70,000
The best answer is A. Keogh (HR10) contributions are based only on personal service income - not investment income. $100,000 of personal service income x 20% effective contribution rate = $20,000. Note that this is less than the maximum contribution allowed of $61,000 in 2022.
An unmarried person, earning $100,000 a year, is not covered by a pension plan. This person makes the maximum tax deductible Individual retirement account contribution for this year. If that individual joins a corporation at the same salary, and is included in that company's pension plan, which statement is TRUE? A Annual contributions to the IRA can continue but will not be tax deductible B Annual contributions to the IRA can continue and continue to be tax deductible C Annual contributions to the IRA must cease D The IRA must be closed and the balance transferred to the pension plan
The best answer is A Anyone who has earned income can contribute to an IRA, whether covered by a pension plan or not. However, the contribution is not tax deductible for individual employees covered by a pension plan who earn over $78,000 in year 2022.
Which statement is TRUE regarding a Roth IRA? A Contributions are tax deductible and qualifying distributions are tax free B Contributions are not tax deductible and distributions above contributions are taxable as income C Contributions are not tax deductible and the entire distribution is taxable as income D Contributions are not tax deductible and qualifying distributions are not taxable
The best answer is D 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).
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.
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 $20,500 for 2022. 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.
Under ERISA provisions, a pension fund manager that wishes to write naked call options: A can only do so if explicitly allowed in the plan document B can do so if the plan document allows for options transactions C can do so without restriction D is prohibited under ERISA requirements
The best answer is A ERISA does not specify securities strategies that are prohibited. It does state that all investments must meet both "fiduciary responsibility" tests and "prudent man" rule tests. Selling naked call options exposes the writer to unlimited risk, but is not explicitly prohibited. If the plan document specifically authorizes such a strategy, it would be permitted. However, the plan trustee bears unlimited liability, if this action is deemed to be imprudent.
A self-employed individual purchases variable annuity units with funds contributed to a Keogh Account. Once the contract is annuitized, the payments are: A 100% taxable B partially taxable and a partial tax free return of capital C 100% tax free return of capital D tax deferred until the annuitant reaches the age of 72
The best answer is A Keogh contributions are tax deductible (up to $61,000 in 2022), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that person's income tax bracket.
n the year 2022, 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.
If an individual, aged 69, takes a withdrawal from her Keogh Plan, which statement is TRUE? A The amount withdrawn is subject to regular income tax only B The amount withdrawn is subject to a 10% penalty tax only C The amount withdrawn is subject to regular income tax plus a 10% penalty tax D The amount withdrawn is not subject to any tax
The best answer is A Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.
What is the penalty imposed for excess contributions to an IRA? A 6% of the excess contribution B 8 1/2% of the excess contribution C 10% of the excess contribution D no penalties are imposed
The best answer is A Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.
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 $14,000 (in 2022) 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.
Which statement about 403(b) Plans is TRUE? A Contributions grow tax free B Contributions are tax deductible to the employee C These plans are available to employees of any organization D These plans are available to for-profit organization employees only
The best answer is B 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income as taken.
Employees of non-profit organizations are permitted to make salary reduction retirement plan contributions to a: A 401(k) plan B Tax sheltered annuity C Profit Sharing Plan D Defined Benefit Plan
The best answer is B 403(b) retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.
If a corporation has an unfunded pension liability which statement is TRUE? A The expected payments from the retirement plan are lower than the expected future assets in the plan B The expected payments from the retirement plan are in excess of the expected future assets in the plan C The plan is in default and must be liquidated by the trustee D The trustee must ensure that the funding gap is met by year's end.
The best answer is B An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded (sometimes for many years in a row), but the plan trustee is responsible to ensure that future funding is adequate as needed.
Payments received by the owner of a non-tax qualified variable annuity are: A 100% taxable as investment income B only taxable to the extent of earnings above the holder's cost basis C only taxable to the extent of the holder's cost basis D non-taxable
The best answer is B Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed (it is the investor's cost basis); while the portion that represents the tax deferred earnings buildup is taxable.
In 2022, a self-employed person earning $200,000 also has $100,000 of investment income. This person wishes to open a Keogh Plan. Their maximum permitted contribution is: A $20,000 B $40,000 C $61,000 D $68,000
The best answer is B Keogh (HR10) contributions are based only on personal service income - not investment income. $200,000 of personal service income x 20% effective contribution rate = $40,000. Note that this is less than the maximum contribution allowed of $61,000 in 2022.
In 2022, a self-employed individual earns $350,000 for the year. The maximum contribution that can be made to an HR10 plan for this year is: A $6,000 B $61,000 C $68,000 D $70,000
The best answer is B The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $61,000 in 2022, whichever is less. 20% of $350,000 = $70,000. However, only the $61,000 maximum can be contributed in 2022. (Note that this amount is adjusted each year for inflation.)
Under the provisions of ERISA (Employee Retirement Income Security Act), the use of index options is: A prohibited because of the speculative nature of these instruments B allowed only if the strategies followed are in compliance with the objectives and restrictions of the plan C allowed only if the plan trustee maintains physical possession of the underlying securities D allowed without restriction as long as the investment manager acts in a prudent manner
The best answer is B Index options can be a useful tool for portfolio managers to hedge in a declining market (by purchasing index puts) or to enhance income from the portfolio (by writing index calls). ERISA does not prohibit their use in portfolios that fund retirement plans. However, any strategies that are used must be in compliance with any restrictions set in the plan documents.
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).
A 65-year old individual has just retired after working for the same employer for 20 years. He will collect an annual pension benefit of $50,000, but is not yet ready to stop working. He has lined up a part-time job that will pay $3,000 this coming year. How much can he contribute to a Traditional Individual Retirement Account for his first year in retirement? A 0 B $3,000 C $6,000 D $9,000
The best answer is B. Because this individual is not yet age 72, he can still contribute to a Traditional IRA - but only based on earned income - not on his pension income. The maximum contribution in 2022 is 100% of earned income, capped at $6,000. Because he only has $3,000 of earned income, this is the maximum IRA contribution for this year.
If a person under the age of 59 1/2 becomes disabled and wishes to withdraw money from her IRA, which statement is TRUE? A The withdrawal is tax free B The withdrawal is subject to income tax but no penalty C The withdrawal is subject to income tax plus a 10% penalty tax D The withdrawal is not subject to income tax but will incur a 10% penalty tax
The best answer is B. Distributions from tax qualified pension plans such as IRAs and Keoghs prior to age 59 1/2 are subject to regular tax plus a 10% penalty tax, unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax but are not subject to the 10% penalty tax.
Distributions from an Individual Retirement Account must commence: A by April 1st of the year preceding that person reaching age 72 B by April 1st of the year following that person reaching age 72 C upon reaching age 72 D upon reaching retirement
The best answer is B. Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 72.
All of the following are true statements about Individual Retirement Accounts EXCEPT: A the earliest a taxpayer may make an annual contribution is January 1st of that tax year B the latest a taxpayer may make an annual contribution is April 15th of the following tax year C if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date D annual contributions may be made even if the person is covered by another qualified retirement plan
The best answer is C Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.
If an individual, aged 44, takes a withdrawal from his Individual Retirement Account, which statement is TRUE? A The amount withdrawn is subject to income tax only B The amount withdrawn is subject to a 10% penalty tax only C The amount withdrawn is subject to income tax plus a 10% penalty tax D The amount withdrawn is not subject to any tax
The best answer is C 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.
Which statement is TRUE when comparing a Roth IRA to a Traditional IRA? A Anyone with earned income can open a Roth IRA or a Traditional IRA B Traditional IRAs are not available to high-earning individuals; Roth IRAs are available to high-earning individuals C Roth IRAs are not available to high-earning individuals; Traditional IRAs are available to high-earning individuals D Only individuals with income below federal threshold levels can open either a Roth IRA or a Traditional IRA
The best answer is C. 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 in a Roth IRA build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, it is not available for high-earners. Individuals who earn over $144,000 and couples who earn over $214,000, in 2022, cannot open Roth IRAs. They can open Traditional IRAs, however.
Which retirement plan is corporate sponsored and permits employees to make the greatest pre-tax contribution? A Roth IRA B SIMPLE IRA C 401(k) D 403(b)
The best answer is C. 401(k) Plans are corporate-sponsored "salary reduction" plans that allow an individual to contribute a dollar amount annually that is tax deductible. $20,500 can be contributed for tax year 2022). In contrast, 403(b) Plans are salary reduction plans for the not-for-profit sector. Roth IRAs are established by individuals, not corporations, and only allow for a maximum non-deductible contribution of $6,000 for an individual (who is under age 50). SIMPLE IRAs are corporate-sponsored salary reduction plans for small companies, but the maximum contribution in 2022 is $14,000.
A small business owner of a firm that has 25 employees wants to establish a retirement plan and make contributions for her employees. What type of plan can the employer establish? A Traditional IRA B Roth IRA C SEP IRA D 403(b)
The best answer is C. A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $61,000 in 2022). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a smaller business that has variable cash flow. A Traditional or Roth IRA can only be set up by the individual who is employed - it cannot be set up by the employer. A 403(b) plan can only be established by a not-for-profit entity. It cannot be set up by a for-profit company.
A company has decided to terminate its retirement plan and is going to make lump sum distributions to its employees. In order to defer taxation on the distribution, the employee may: A buy tax exempt municipal bonds B buy a single premium deferred annuity C roll over the funds into an Individual Retirement Account within 60 days D establish a UGMA account within 60 day
The best answer is C. Lump sum distributions from qualified plans can be "rolled over" into an IRA without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.
Which of the following is a characteristic of Defined Contribution Plans? A If the corporation has an unprofitable year, the contribution may be omitted B The assets in the plan grow tax free C The annual benefit varies based on length of service D This type of plan is not subject to ERISA requirements
The best answer is C. Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan and the assets grow tax-deferred. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements.
For a qualified retirement plan contribution to be deductible from that year's tax return, the contribution must be made by no later than: A April 15th of that year B December 31st of that year C April 15th of following year D the tax filing date of the following year
The best answer is D Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
Which statement is TRUE about Roth IRAs? A Contributions must cease at age 72 B RMDs are required but are tax free C Distributions must start after age 72 and are taxable D Distributions are not required to start after age 72
The best answer is D Roth IRA contributions can continue after age 72, as long as that person has earned income (and this is the case for all retirement plans). Unlike Traditional IRAs, there are no required minimum distributions after age 72 for Roth IRAs (the IRS does not get to tax the distributions from a Roth, so the government does not care when distributions start!).
All of the following statements are true about non-contributory defined benefit retirement plans EXCEPT: A contribution amounts vary based upon the age of the person covered under the plan B larger contributions are made for older plan participants nearing retirement than for younger ones C once benefit payments start, the amount of the benefit is fixed D contribution amounts remain fixed based regardless of age
The best answer is D. In a "defined benefit" retirement plan, contribution amounts vary based upon the age of the person covered under the plan. Larger contributions are made for older plan participants nearing retirement than for younger plan participants who have many years left until retirement. Once benefit payments start, the amount of the benefit is fixed - since the plan funded a "defined" benefit. The other type of plan is a "defined contribution" plan. In this type, the contribution amount is fixed, typically as a percentage of salary. The longer a person is in the plan, the more that will have been contributed. The benefit payment depends on the investment results of the fixed contributions made, and hence can vary.
When must distributions commence from a Roth IRA? A When the owner reaches age 59 ½ B When the owner reaches age 72 C After 5 years elapse from the age of the owner's retirement D After the death of the owner
The best answer is D. Isn't this one special! There is no mandatory distribution age for a Roth IRA, because distributions are tax free, so the Treasury is not worried about collecting taxes before the owner dies! However, upon death, whoever inherits the account must start taking RMDs (Required Minimum Distributions), either over 5 years or the expected life of the beneficiary, to deplete the account. The nice thing is, because this was a Roth IRA that was inherited, the distributions are tax free.
An individual earning $60,000 in 2022 makes an annual contribution of $2,000 to a Traditional IRA. Which statement is TRUE? A This person can contribute a maximum of $4,000 to a Roth IRA B This person can contribute a maximum of $5,000 to a Roth IRA C This person can contribute a maximum of $6,000 to a Roth IRA D This person is prohibited from contributing to a Traditional Individual Retirement Account in that year
The best answer is A The maximum permitted annual contribution to a Traditional IRA or Roth IRA for an individual is $6,000 total in 2022. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $4,000 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $129,000 and $144,000 for individuals in 2022).
For the year 2022, the maximum annual contribution to an Individual Retirement Account for a single person is: A 100% of income or $6,000, whichever is less B 100% of income or $6,000, whichever is greater C 100% of income or $12,000, whichever is less D 100% of income or $12,000, whichever is greater
The best answer is A. For the year 2022, the maximum permitted contribution to an IRA is 100% of income or $6,000, whichever is less. If a person earns $1,000 per year, then the maximum permitted contribution would be only $1,000. (Of course, it is highly doubtful that this person would make a contribution, since he or she would probably prefer to eat instead!) Contributions are based on earned income only - dividend or interest income cannot be used as the basis for making a contribution.
All of the following statements are true regarding defined benefit plans EXCEPT: A contributions made to the plan can vary from year-to-year B employees with the highest salaries and the fewest years to retirement benefit the most C benefits paid to employees consists of a tax-free return of capital and a taxable return of earnings D actuarial tables are used to determine contribution rates for each employee
The best answer is C. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.
an 2022, a customer earns $500,000 as a self-employed doctor. The maximum annual contribution to a Keogh plan is: A $28,000 B $50,000 C $61,000 D $100,000
The best answer is C. The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $61,000 in 2022, whichever is less. 20% of $500,000 = $100,000. However, only the $61,000 maximum can be contributed in 2022. (Note that this amount is adjusted each year for inflation.)
A person, age 55, wishes to withdraw $25,000 from a Keogh plan. The tax will be: A 10% of the amount withdrawn B 10% of the amount in the plan C ordinary income tax + 10% penalty tax on the amount in excess of contributions D ordinary income tax + 10% penalty tax on the amount withdrawn
The best answer is D A Keogh plan is tax qualified, so all contributions are tax deductible. Thus, all of the dollars in the plan, including the tax deferred build-up, have never been taxed. When a distribution is taken, ordinary income tax is due on the entire distribution amount. In addition, if a premature distribution is taken (prior to age 59 1/2), an additional penalty tax of 10% is applied to the amount withdrawn.
Which statement is TRUE regarding a defined benefit plan? A The smallest contributions are made for those individuals who are far away from retirement B The smallest contributions are made for those individuals who are nearing retirement C The benefit amount to be paid increases the longer the individual remains employed at that firm D The benefit amount paid at retirement will vary from year to year
The best answer is A. Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement, so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions. The benefit amount to be paid is not based on years of service - rather, it is based on a formula, such as "50% of the employee's salary level over the 3 years preceding retirement." Once the benefit payments start, they are fixed in amount and do not change.
Payments received by the owner of a tax qualified variable annuity are: A 100% taxable as investment income B only taxable to the extent of earnings above the holder's cost basis C only taxable to the extent of the holder's cost basis D non-taxable
The best answer is A. Funds paid into "tax qualified" retirement plans were never subject to tax, since the contribution amount was deductible from income at the time it was made. Earnings build up tax deferred in the plan. When distributions are taken, since none of the dollars in the plan were ever taxed, all of the distribution is taxable (these plans have a "zero cost basis"). Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed; while the portion that represents the tax deferred earnings buildup is taxable.
A money purchase retirement plan would invest in all of the following securities EXCEPT: A Tax Free Municipal Bonds B U.S. Government Bonds C Equities D Variable Annuities
The best answer is A. A retirement plan would not invest in tax free municipal bonds because such instruments provide a lower yield than taxable bonds. Since the pension plan itself is a "tax free" envelope in which securities are held, the plan would invest in securities that yield a higher amount.
Contributions to qualified retirement plans, other than IRAs, must be made by: A December 31st of the calendar year in which the contribution may be claimed on that person's tax return B April 15th of the calendar year in which the contribution may be claimed on that person's tax return C April 15th of the calendar year after which the contribution may be claimed on that person's tax return D The date on which the tax return is filed with the Internal Revenue Service
The best answer is D. Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
