Retirement Savings Practice test

Which of the following qualified plan distributions is subject to the 10% penalty for early withdrawal?

The answer is an in-service hardship distribution from a Section 401(k) plan to an employee-participant, age 55. Even if the distribution is a hardship withdrawal, the penalty applies unless the employee-participant has attained the age of 59½ (or one of the other 10% penalty exceptions applies).

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

The answer is expected to last at least 12 months or result in death. To qualify for Social Security disability income benefits, a person must suffer an impairment that is expected to last at least 12 months or result in death. The disability also must have lasted at least 5 months before Social Security disability benefits can be paid.

Adam, age 48, and Mary, age 47, were married for 15 years when they divorced last year. Adam died this year. They have two young children, ages 10 and 12, who are cared for by Mary. Adam's 70-year-old mother, Sarah, also survived him. At the time of Adam's death, he was currently, but not fully, insured under Social Security. What benefits are Adam's survivors entitled to under the Social Security program?

A lump-sum death benefit of $255 A children's benefit based on a percentage of Adam's primary insurance amount (PIA) A surviving spouse benefit to take care of a dependent child

ABC Company would like to establish a retirement plan incorporating the following objectives: Attract and retain employees. The employer will make all contributions to the plan with company stock. The plan must integrate with Social Security. What type of retirement plan best suits ABC's objectives?

The answer is stock bonus plan. A stock bonus plan would accomplish ABC Company's objectives. The others are not the best plan for these reasons: Money purchase pension plans only allow for 10% company stock. ESOPs cannot be integrated with Social Security.

If a covered worker were to become disabled for Social Security benefit purposes, which of the following individuals would be eligible to also receive a benefit from Social Security based on the disabled worker's record?

The disabled worker, age 62 or over The spouse of the disabled worker An unmarried dependent child of the disabled worker, under age 19 and still in high school

Which of the following legal requirements apply to money purchase pension plans?

The plan must provide a definite and nondiscretionary employer contribution formula. Forfeitures can be reallocated to the remaining participants' accounts in a nondiscriminatory manner or be used to reduce employer contributions. A separate employer contribution account must be maintained for each participant. Statements II, III, and IV correctly state the employer contribution formula rule, the forfeiture reallocation rule, and the separate account rule for money purchase pension plans. The first option states a requirement that applies to defined benefit pension plans but not to money purchase plans.

What is the maximum annual contribution by an employer to a plan participant's money purchase pension plan account in 2020?

Lesser of 100% of employee compensation, or $57,000 The maximum annual contribution to the participant's account under the plan is the lesser of 100% of the eligible employee's compensation, or $57,000 (for 2020). The deduction for employer contributions to a defined contribution plan is limited to 25% of aggregate covered compensation.

Pension Benefit Guaranty Corporation (PBGC) insurance coverage is required for which of the following plans?

Traditional defined benefit pension plan

Roderick Manufacturing maintains a qualified defined benefit pension plan. There are 100 eligible employees working for the company. What is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test?

40

Which of the following are basic provisions of an IRC Section 401(k) plan?

An employer's deduction for a vested contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees' elective deferrals. Employee elective deferrals may be made from salary or bonuses. Options II and IV correctly describe the 25% employer deduction limitation, eligibility requirement, and potential sources of employee elective deferrals for Section 401(k) plans. Option I is incorrect because employee elective deferrals (i.e., salary deferrals) are subject to FICA and FUTA taxes. Option III is incorrect because there can be a two-year period of service requirement if the participants are 100% immediately vested.

Which of the following are minimum coverage tests for qualified retirement plans?

Average benefits percentage test Ratio test

Which of the following statements regarding TSAs and Section 457 plans is CORRECT?

Both plans may be funded entirely by participant contributions. Both plans allow net unrealized appreciation tax treatment for lump-sum distributions. Both plans must meet minimum distribution requirements that apply to qualified plans.

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)?

ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts. ESOPs cannot be integrated with Social Security. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP. Options I and II correctly state the diversification rule and the rule that prohibits integrated ESOPs. There is no limit on amounts used to pay interest on ESOP debt. ESOP distributions of employer stock only are not subject to the 20% income tax withholding requirement.

Which of the following statements regarding Section 457 plans is (are) CORRECT?

Earnings on assets in a Section 457 plan grow tax-deferred until withdrawn. A Section 457 plan is a nonqualified deferred compensation plan.

Several years ago, Greener Grass Company implemented a traditional defined benefit plan. According to the plan document, the employer must contribute an annual amount that will provide the employees with a specified benefit at retirement. Which of the following events would be expected to decrease the employer's annual contribution to a traditional defined benefit pension plan using a percentage for each year of service benefit formula?

Forfeitures are higher than anticipated. The investment returns of the plan are greater than expected. The answer is III and IV. Defined benefit pension plan contributions decrease because of the events described in statements III and IV. Statements I and II are incorrect. Inflation would likely cause salaries and plan expenses to increase, thereby causing contributions to increase. Likewise, benefits that are adjusted for the cost of living would result in greater employer contributions, not less.

An employer must comply with restrictions on the use of more than one qualified retirement plan where employees participate in both plans. Which of the following are CORRECT about some of these limitations?

If an employer sponsors both a defined benefit plan and a defined contribution plan (and the defined benefit plan is exempt from the PBGC), the overall employer limit is the amount necessary to meet the minimum funding requirement of the defined benefit plan. A contribution of up to 6% of compensation is also allowed into the defined contribution plan. Under current law, if a defined benefit plan is covered under the PBGC, then the defined benefit plan is not taken into account in applying the overall limit on employer deductions.

Which of the following regarding Social Security funding is (are) CORRECT?

Social Security is funded through a series of taxes paid by the participant and the participant's employer. Social Security is funded through a Federal Insurance Contributions Act (FICA) tax and the self-employment (SECA) tax.

If you are unable to obtain sufficient and relevant quantitative information and documents from the Bernards to form a basis for recommendations, which of the following could you, a CFP® professional, do to follow the Code of Ethics and Standards of Conduct?

Terminate the engagement. Restrict the scope of the engagement. The answer is both I and II. According to the Code and Standards, "if the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the practitioner shall either restrict the scope of the engagement to those matters for which sufficient information is available; or terminate the engagement." LO 9.3.2

In which of the following ways are target benefit pension plans similar to money purchase pension plans?

The employee bears the investment risk. Each employee has an individual account. Statements III and IV are correct. PBGC insurance is not available for target benefit or money purchase pension plans. Also, the actual dollar retirement benefit is not guaranteed in either of these plans.

Because a simplified employee pension (SEP) plan is not a qualified plan, it is not subject to all the same rules as qualified plans; however, it is subject to many of the same rules. Which of the following statements when comparing or contrasting a SEP plan to a qualified plan is CORRECT?

The maximum contribution possible on behalf of an individual participant is $57,000 (2020). The answer is the maximum contribution possible on behalf of an individual participant is $57,000 (2020). Both SEP plans and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution possible on behalf of an individual participant is $57,000 (2020). Qualified plans are protected under ERISA and federal bankruptcy law. SEPs share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.

Which of the following plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made?

Traditional profit-sharing plan Only lump-sum distributions from qualified plans may be eligible for 10-year forward averaging. SEP plans, IRAs, and tax-deferred annuities—also known as Section 403(b) plans—are not qualified plans and, therefore, are not eligible for 10-year forward averaging. Remember, to be eligible for 10-year forward averaging, a person must be born before Jan 2, 1936. Thus, only people working into their 80s can today qualify for 10-year forward averaging. Even then, they would have to take a lump-sum distribution to meet another rule to qualify for 10-year forward averaging.

Which of the following retirement plans, maintained by an eligible employer, would also permit the employer to establish a SIMPLE IRA?

Union plan bargained in good faith

Under a profit-sharing plan,

the company has flexibility as to annual funding.

Which of the following statements regarding the coverage rules for qualified plans is (are) CORRECT? (F)The coverage tests for qualified plans include the percentage test, the ratio test, and the average contribution percentage test. (T)A retirement plan can cover any portion of the workforce, provided it satisfies one of the three coverage tests under Section 410(b).

A retirement plan can cover any portion of the workforce, provided it satisfies one of the three coverage tests under Section 410(b).

Frank and his daughter, Joan, own and operate a gravel pit. Frank is age 55 and hopes to retire when he reaches age 65. Joan is age 33 and plans to continue operating the business after Frank retires. Currently, Frank owns 70% of the corporation and Joan owns the remaining 30%. Frank's current income from the corporation is $72,000. They have established a target benefit plan; Frank's account has been earning 8%, and the balance is currently $67,590. Based upon an analysis of Frank's cash flow, you and he have determined that he will need annual retirement income of $54,000 in today's dollars. With this information, which of the following best describes how the target benefit plan will provide for Frank and Joan's retirement?

Frank can anticipate that the age-weighted nature of the target benefit plan will provide the bulk of his needed retirement income.

Which of the following retirement plans can be integrated with Social Security?

Profit-sharing plan Simplified employee pension (SEP) plan Money purchase pension plan Defined benefit pension plan

Assuming Chris Bernard's income increases by 3% per year between now and age 62, what lump sum will be necessary at the date of retirement to provide Chris's goal of 80% of preretirement income for 25 years in retirement without considering Social Security? Assume the Bernards' required rate of return in the calculation.

The answer is $1,388,038. The lump sum needed at the date of retirement to support Chris's goal (without considering Social Security) is $1,388,038. Step 1: $70,000 × 80% = $56,000 $56,000 +/− PV 17 N 3 I/YR Solve FV $92,559 Step 2: BEG mode $92,559 PMT 25 N [(1.08 ÷ 1.03) − 1 × 100] = 4.8544 I/YR 0 FV Solve PV −$1,388,038

If Chris died today, what is the total lump-sum death benefit that would be paid by Social Security to his family?

The answer is $255. It is the total amount paid, regardless of the number of Social Security beneficiaries.

What is the amount of the compensation earned by a taxpayer in 2020 that is subject to Medicare taxation?

Unlimited

A fully insured Section 412(e)(3) pension plan is funded exclusively by

cash value life insurance or annuity contracts.

Which of the following are reasons a small business might choose the SIMPLE over a Section 401(k) plan?

A Section 401(k) plan would be top heavy (benefits for key employees will exceed 60% of total benefits), and the employer wants to minimize employer contributions. Because a SIMPLE is less costly to operate, it is generally the better choice if the employer is not concerned about the design constraints of the plan. The employer expects that it could not satisfy the Section 401(k) nondiscrimination test.

Which of the following statements regarding fully insured Section 412(e)(3) plans is CORRECT?

A fully insured Section 412(e)(3) plan is a type of defined benefit plan. This type of plan is not required to be certified by an enrolled or licensed actuary. A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments.

Which of the following is one of the differences between defined benefit pension plans and defined contribution plans?

Investment risk is borne by the employer in a defined benefit pension plan, whereas the employee bears the risk in a defined contribution plan.

Which of the following statements regarding prohibited transactions is CORRECT?

One category of prohibited transactions involves self-dealing. One category of prohibited transactions bars a fiduciary from causing the plan to engage in a transaction if the fiduciary knows or should know that such a transaction constitutes a direct or indirect involvement between the plan and the parties in interest. One category of prohibited transactions involves the investment in the sponsoring employer's stock or real property above certain limits.

Which of the following workers are covered by Social Security?

Persons who are in the military Self-employed individuals Domestic employees

Required minimum distributions from a traditional IRA must begin no later than

The answer is April 1 of the year following the year in which the IRA owner attains age 70½. The Internal Revenue Code provides that minimum distributions from a traditional IRA must begin no later than April 1 of the year following the year in which the IRA owner attains age 70½.

A business owner-client approaches a financial planner for advice on selecting a retirement plan for the business. What factors should guide the financial planner's recommendations?

The owner's retirement savings need The owner's current age The amount of risk the client is comfortable assuming The financial stability of the business.

Build Corporation communicated several goals to its financial adviser when it decided to implement a qualified retirement plan for the company. After reviewing these goals, the adviser recommended that Build Corporation implement a defined benefit pension plan. Which of the following statements regarding employers who are candidates for a defined benefit pension plan are CORRECT?

They indicate that the desire to provide a tax shelter for key employees outweighs the need for an administratively convenient plan. They want benefit levels guaranteed.

A qualified plan is

a tax-efficient way to save for retirement. The answer is II only. ERISA does not guarantee plan benefits; the Pension Benefit Guaranty Corporation (PBGC) guarantees benefits in defined benefit pension plans. A qualified plan is a tax-efficient way to save for retirement. Qualified plans may be established for firms with as few as one employee. Qualified plans also benefit non-highly compensated employees.

Which of the following statements regarding fully insured Section 412(e)(3) plans is(are) CORRECT?

A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments. This type of plan is not required to be certified by an enrolled or licensed actuary. A Section 412(e)(3) plan is a type of defined benefit pension plan. Statement III is incorrect. Section 412(e)(3) plans must only meet minimum funding standards if there is a loan outstanding against the insurance policy funding the plan.

Which of the following plans is a cross-tested plan?

New comparability plan Age-based profit-sharing plan I and III Of the plans listed, only the new comparability plan and the age-based profit-sharing plan are cross-tested plans. Cross-testing means a defined contribution plan is tested for nondiscrimination based on benefits rather than contributions.

Which of the following statements regarding integrating a plan with Social Security are NOT correct?

Only the excess method can be used by a defined benefit pension plan. Because there is a disparity in the Social Security system, all retirement plans are allowed integration with Social Security. The answer is I and III. Statement I is incorrect because the excess method may only be used by a defined contribution plan. A defined benefit pension plan may use either the excess method or the offset method for Social Security integration. Statement III is incorrect because not all retirement plans may be integrated with Social Security.

Which of the following qualified plans can an S corporation implement?

Profit-sharing plan Stock bonus plan Money purchase pension plan Employee stock ownership plan (ESOP)

Richard participates in a traditional defined benefit pension plan at work. His projected monthly benefit under the plan is $1,000. If the plan provides life insurance for Richard, the death benefit payable under the policy is limited to

The answer is $100,000. Defined benefit plans use the 100 times test for determining whether they comply with the incidental benefit rules. Under this test, the death benefit cannot exceed 100 times the participant's projected monthly benefit (in this instance, $100,000).

Sally, age 37, works for two employers, ABC Corporation and XYZ Corporation, both of which maintain Section 401(k) plans. If Sally defers $6,000 to ABC's Section 401(k) plan in 2020, how much can she then defer to XYZ's plan this year?

The answer is $13,500. The maximum allowable elective deferral for 2020 is $19,500. If Sally contributes $6,000 to ABC's plan, then she can only contribute up to $13,500 to XYZ's plan ($19,500 − $6,000 = $13,500).

Chris's employer, Gilmore Glass Company, is considering making an additional profit-sharing contribution to the company's Section 401(k) plan for 2020. What is the maximum amount of additional profit-sharing contribution the company could make on behalf of Chris for 2020?

The answer is $52,800. Chris contributes 3% of his salary ($70,000 × 3% = $2,100) and the employer matches employee deferrals up to that amount. The maximum that can be contributed to Chris' profit-sharing account is the lesser of 100% of his compensation, or $57,000. Because $2,100 is going in as an elective deferral from Chris's salary and another $2,100 is the match, that leaves $52,800 the employer could contribute.

Jack is a single taxpayer who retired at age 62 and receives a qualified plan pension of $1,500 each month. He has begun working as a consultant to various firms and is projecting he will earn $70,000 in 2020. What is the maximum deductible contribution Jack may make to a traditional IRA for 2020?

The answer is $7,000. Jack is not currently an active participant in a qualified plan, is age 50 or older, under 70½, and has earned income in 2020. Jack may make a deductible IRA contribution of $7,000 (6,000 + $1,000 catch-up) for 2020.

Martha has been impressed with the appreciation of the coin collection she received as a gift from her mother and would like to take advantage of this by using coins as an investment in the IRAs. Which of the following statements regarding coins as investments in IRAs is CORRECT?

The answer is American Eagle gold coins are permitted IRA assets. Only permissible collectible that an IRA may invest in is certain U.S. coins, such as the American Eagle gold coin.

Why would a qualified retirement plan include real estate among its portfolio of investment assets?

The answer is as an inflation hedge. The inclusion of real estate among a retirement plan's investment portfolio is most suitable as a hedge against future inflation. Otherwise, it is generally nonliquid, is not stable enough to fund fixed obligations, and is not always considered a very low risk holding.

Required minimum distributions from a qualified plan to a plan participant must be calculated using the Uniform Lifetime Table in all cases Except

The answer is when the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. The Uniform Lifetime Table must be used to calculate required minimum distributions under a qualified plan or IRA unless the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant, in which case the actual joint life expectancy is used.

How are target benefit pension plans similar to money purchase pension plans?

The participant's final account balance determines the actual retirement benefit. The maximum annual additions limitations are the same. A target benefit pension plan is a type of defined contribution plan and is similar to a money purchase pension plan in that the participant's account balance determines the actual retirement benefit, the maximum annual additions limitation is the same, and the employee bears the investment risk. An actuary is used only at inception of the target benefit pension plan, not annually.

Section 403(b) plan (tax-sheltered annuity plan or TSA) employer contributions

must abide by the annual additions limit. must not discriminate in favor of highly compensated employees.

Under a profit-sharing plan

the company must make annual contributions.

A simplified employee pension (SEP) plan

requires employer contributions on a nondiscriminatory basis. can be integrated with Social Security. cannot deny participation to any employee 21 years of age or older based on age.

Which of the following are examples of qualified retirement plans?

Cash balance plan Section 401(k) plan Employee stock ownership plan (ESOP) The answer is I, II, and IV. A Section 403(b) plan is a tax-advantaged plan but not an ERISA-qualified retirement plan. While tax-advantaged plans are very similar to qualified plans, there are some minor differences. For example, a tax-advantaged plan is not allowed to have net unrealized appreciation (NUA) treatment. They are also not allowed to offer 10-year forward averaging or special pre-1974 capital gains treatment. Tax-advantaged plans also have less restrictive nondiscrimination rules. Otherwise they are very similar to qualified plans.

Chris and Allison Bernard are dedicated to reducing living expenses to be able to save more for retirement. The couple is not counting any possible income from any potential part-time earnings for Allison because that income is not yet realized. Assuming they create the necessary discretionary income, what is the total maximum deductible contribution they can make to a traditional IRA together for 2020?

The answer is $12,000. The maximum deductible contribution for the Bernards to a traditional IRA for 2020 is $12,000 ($6,000 each). Chris is an active participant in a qualified plan, but his AGI is below the married filing jointly (MFJ) phaseout of $104,000. If Allison has no earned income in 2020, she can make an IRA contribution based on Chris's earned income, and her AGI for these purposes is below the nonparticipant spouse AGI limit of $196,000.

Larry is a sole proprietor of a business with 15 employees. He would like to implement a formal retirement plan for his business. Larry is 55 years old and is planning to retire in 10 years at age 65. His company currently has a strong cash flow, which is expected to continue. Larry's own personal savings retirement need is $85,000 per year, and he pays himself $95,000 annually. The company can afford to contribute $100,000 this year for Larry's account to any retirement plan that is implemented. Larry will also commit to an annual contribution necessary to fund the retirement plan if needed. Based on limited information, which of the following types of qualified retirement plans would you recommend for Larry and his business?

The answer is traditional defined benefit pension plan. This type of plan is most appropriate for Larry and his business. The business has favorable cash flow and can commit to the annual contribution required by the defined benefit approach. Additionally, Larry's savings need as a percentage of his compensation exceeds anything possible in a defined contribution plan. Finally, Larry is currently age 55 with only 10 years until retirement.

Under which of the following circumstances is a target benefit plan the most appropriate choice for small-business owners?

Where the employer wants to provide larger retirement benefits for key employees who are significantly older than the other employees Where the employer is opposed to assuming the investment risk and prefers the simplicity of a separate account plan Statements II and IV are correct for the following reasons. Target benefit plans have benefit formulas similar to those of defined benefit plans, which favor employees who are significantly older and higher paid than the average employee of the employee group. Because target benefit plans use separate accounts, the participants bear the risk of the plan's investment performance. Statement I is incorrect because amending a defined benefit plan into a target plan will result in termination of the defined benefit plan. Statement III is not true since a DC plan is limited to 25%, and a DB plan is not limited by a set percentage. Therefore, the DB plan will usually provide a greater tax deduction if an age-weighted plan works best. The key word to Statement III is "maximizing."

Regarding assumptions used in retirement needs analysis calculations, which of the following is (are) CORRECT? Both are false!!

(False)All other things being equal, increasing the life expectancy of the retiree will lower the amount of capital needed on the first day of retirement to support the assumed retirement income. (FALSE)All other things being equal, changing the assumed rate of return from 6% to 8% and the assumed inflation rate from 2% to 4%, will lower the amount of capital needed on the first day of retirement to support the assumed retirement income. The answer is neither I nor II. Increasing the life expectancy of the retiree increases the amount of capital needed on the first day of retirement to support the assumed retirement income because the retiree will draw on the capital fund for a longer period. Statement II is incorrect because an 8% investment return and 4% inflation rate produces a lower inflation-adjusted rate of return, and thus increases the amount of capital needed on the first day of retirement to support the assumed retirement income. [(1.06 ÷ 1.02) − 1] × 100 = 3.9216%; [(1.08 ÷ 1.04) − 1] × 100 = 3.8462%

Ross, age 75, works for Financial Strategies, Inc. The company has a long-established retirement plan. The plan does not require an actuary or Pension Benefit Guaranty Corporation (PBGC) insurance, but the employer is required to make annual mandatory contributions to each employee's account. What type of retirement plan was established by Financial Strategies?

Money purchase pension plan A money purchase pension plan requires annual mandatory employer contributions to each employee's account, does not require an actuary, and does not require PBGC insurance. The other choices are incorrect: A cash balance pension plan requires an actuary and PBGC insurance. A target benefit pension plan requires an actuary at the inception of the plan, but not on an annual basis. A traditional defined benefit pension plan requires the services of an actuary annually as well as PBGC insurance.

Which of the following describes a basic provision of a SIMPLE IRA?

One contribution formula an employer can use under a SIMPLE IRA is to make a 2% nonelective contribution on behalf of each eligible employee with at least $5,000 in current compensation.

Reed, age 45, has come to you for help in planning his retirement. He works for a manufacturing company, where he earns a salary of $75,000. Reed would like to retire at age 65. He feels this is a realistic goal because he has consistently earned 9% on his investments and inflation has only averaged 3%. Assuming he is expected to live until age 90 and he has a wage replacement ratio of 80%, how much will Reed need to have accumulated on the day that he retires to adequately provide for his retirement lifestyle?

The answer is $1,490,649. Step 1: Determine the present value of capital needs: Current income$75,000Wage replacement ratio× 80%Present value of capital needs$60,000 Step 2: Determine the future value of the capital needs in the first year of retirement: PV of capital needs($60,000)n (number of years until retirement)20i (use inflation rate)3FV (required income in the first year of retirement)$108,366.6741 Step 3: Determine the amount of savings (capital) needed at retirement to fund expenses throughout remainder of life expectancy: PMTAD(annuity due)($108,366.6741)n (retirement life expectancy)25 (90 − 65)i (use real rate of return)5.8252 [(1.09 ÷ 1.03) − 1] × 100PV (capital needed at retirement)$1,490,649

Reed, age 45, has come to you for help in planning his retirement. He works for a manufacturing company, where he earns a salary of $75,000. Reed would like to retire at age 65. He feels this is a realistic goal because he has consistently earned 9% on his investments and inflation has averaged 3%. If Reed expects to live until age 90 and he has a wage replacement ratio of 80%, assuming a capital preservation approach, how much will Reed need to have accumulated on the day that he retires to adequately provide for his retirement lifestyle?

The answer is $1,663,516. Step 1: Determine the present value of capital needs: Current income$75,000Wage replacement ratio× 80%Present value of capital needs$60,000 Step 2: Determine the future value of the capital needs in the first year of retirement: PV of capital needs($60,000)n (number of years until retirement)20i (use inflation rate)3%FV (required income in the first year of retirement)$108,366.6741 Step 3: Determine the amount of savings (capital) needed at retirement to fund expenses throughout remainder of life expectancy using a capital utilization approach: PMTAD(annuity due) ($108,366.6741) n (retirement life expectancy)25 (90 − 65)i (use real rate of return)5.8252 [(1.09 ÷ 1.03) − 1] × 100PV (capital needed at retirement)$1,490,649 Step 4: For capital preservation, calculate the additional capital needed at retirement to generate the desired retirement income and leave a balance at life expectancy equal to the original capital utilization value: FV = $1,490,649 n = 25 i = 9 Solve PV = (172,867) Add to previous step: $1,490,649 + $172,867 = $1,663,516

Henry works for an accounting firm that sponsors a Section 401(k) plan. Henry, who has a current salary of $35,000, was hesitant to contribute to the plan because in the past he felt as though he may need the money before retirement. At a recent employer-sponsored seminar, Henry learned that he could receive a loan from his Section 401(k) plan without paying any income tax. Henry is now considering making pre-tax elective deferrals to the Section 401(k) plan, but he wants to know more specific details regarding loan provisions. Which of the following statements regarding nonpenalized loans from qualified plans is (are) CORRECT?

The limit on loans is generally one-half of the participant's vested account balance not to exceed $50,000. The limit on the term of any loan is generally five years. Loans to a 100% owner-employee are permissible. Generally, loans are limited to one-half the vested account balance and cannot exceed $50,000. Note: When account balances are less than $20,000, however, loans up to $10,000 are available. Statement II is correct. The limit on the term of any loan is generally five years, unless the loan is for a principal residence. Loans for the purpose of buying a residence must be repaid over a reasonable period. Statement III is incorrect. A qualified plan loan may not be rolled over to an IRA. Any outstanding loan balance is treated as a distribution and thus is subject to income taxes and the early withdrawal penalty rules. Statement IV is correct. Loans from qualified plans to sole proprietors, partners, shareholders in S corporations and C corporations are permitted.

While Section 403(b) (tax-sheltered annuity plan or TSA) plans are an excellent source of retirement savings, they do have some disadvantages, such as

investments are limited to mutual funds and annuities. Section 403(b) plans must comply with the actual contribution percentage (ACP) test for employer matching contributions. Section 403(b)/TSA plan investments are limited to mutual funds and annuities. Although the ADP test does not apply, Section 403(b)/TSA plans must comply with the ACP test for matching contributions. One way to remember that Section 403(b) plans must pass ACP testing and not ADP testing is that Section 403(b) plans are for 501(c)(3) organizations. The (c) in 501(c)(3) is like the "C" in ACP testing. Nondiscrimination testing causes Section 403(b)/TSA plans to be relatively costly and complex to administer. Account balances at retirement age may not be sufficient to provide adequate retirement amounts for employees who entered the plan at later ages.

The Department of Labor (DOL) issues

rulings, including prohibited transaction exemptions (PTEs). The answer is rulings including prohibited transaction exemptions (PTEs). The Department of Labor issues advisory opinions and rulings (including prohibited transaction exemptions) similar to private-letter rulings, which are issued by the IRS. The DOL does not issue guaranty insurance. The summary plan description is required by the DOL, but the DOL does not approve plan documents. The IRS approves plan documents.

state or local government would choose to establish a Section 457 plan for all the following reasons except

tax deductibility of employer contributions. The answer is tax deductibility of employer contributions. Because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue and would not be a reason to establish such a plan. A Section 457 plan is not a qualified plan and has no early withdrawal penalty on distributions.

A money purchase pension plan is a defined contribution plan in which

the employer typically contributes a fixed percentage of participant compensation each year. In a money purchase pension plan, the employer typically contributes a fixed percentage of each participant's compensation. The employer does receive a tax deduction for the amount of contribution to the plan. No guaranteed retirement benefit is provided in a defined contribution plan. The contribution is defined, not the benefit. Only defined benefit pension plans provide guaranteed retirement benefits.

Section 401(k) plans must have automatic survivor benefits (QJSAs and QPSAs) unless

the plan provides that, upon the participant's death, the vested account balance will be paid in full to the surviving spouse. the plan is not a direct or indirect transferee of a plan to which the automatic survivor annuity requirements apply. the participant elects to receive payment as a lump-sum distribution. the participant does not elect payments in the form of a life annuity.