Series 65 - Unit 20
Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is....
A - 100% of earned income or the maximum allowable limit, whichever is less.
Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year?
A - 1000 Full time employment is defined as 1,000 hours or more per year, regardless of the number of days, weeks, or months worked.
To be eligible for a SEP IRA, an employee must be...
A - 21 years of age AND must have performed services for the employer during at least 3 of the previous 5 years. SEP rules require the employer to allow all eligible employees to participate in the plan.
Deferred compensation plans are a popular choice for offering special benefits to retain key employees. Why?
A - It allows them to discriminate to retain key employees.
Probably the most significant benefit of saving for retirement using a Roth IRA is....
A - Tax-free treatment at withdrawal If certain conditions are met, withdrawals are totally free of income tax.
All qualified retirement plans must be established under a .....
A - Trust agreement
Pension plans must have a uniform nondiscriminatory eligibility program. All employees must be covered when they become eligible, which means....
A - reaching 1 year of service working full-time and age 21.
A defined benefit pension is one that promises....
A - to pay employees a certain specified benefit at retirement.
A hardship distribution made from a Section 401(k) plan is...
A - NOT an eligible rollover distribution under law and is therefore taxable in full as ordinary income.
What are some general principles of the prudent investor standard?
A - using skill and caution to achieve diversification, liquidity, and the goal of obtaining a reasonable return based on a reasonable amount of risk.
List out the big differences between a Coverdell ESA and a Section 529 plan...
- Contributions to a CESA are limited to $2,000/beneficiary per year while Section 529 contributions can be as as high as $250,000 and above in some states. - A married couple cannot make a Coverdell contribution if their income exceeds $220,000 while there is NO earnings limit to contribute to a 529. - CESAs have an advantage over the 529 plan in that the funds may be used for any level of education; it is not limited to post-secondary as in the 529. - In neither case is the contribution tax-deductible on the federal level.
Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be:
A - $0 There is no penalty if a participant withdraws more than the required minimum distribution.
What is the maximum amount a taxpayer may contribute each year to a Coverdell Education Savings Account (ESA) for one student?
A - $2,000 No limit on how many children you donate for but limit on the amount as above.
The total annual contribution limit for a Roth IRA is...
A - $5,500 with a $1,000 catch-up (when over 50)
What is the tax penalty for the withdrawal of money from an IRA prior to age 59 - 1/2?
A - 10%
The type of tax-favored retirement plan that is available to nonprofit entities such as schools and hospitals and that is sometimes called a tax-sheltered annuity is a....
A - 403 (b) plan This is a special type of tax-favored retirement allowed for nonprofit entities. Amounts contributed to 403(b) plans are often invested in annuity contracts, so these plans are sometimes referred to as tax-sheltered annuities.
A 40-year old schoolteacher would find her retirement needs best served by contributing to a....
A - 403(b) plan.
What type of plan is specific to employees of that state and local governments?
A - 457 (b) plan.
As a general rule, loans from a 401(k) plan must be repaid within how many years?
A - 5 years. This rule does not apply to loans taken for a home purchase.
A customer who is changing jobs has how many days to roll over a lump sum from a qualified pension plan into an IRA?
A - 60 days Rollovers must be completed within 60 days of the distribution date to avoid unfavorable tax consequences.
Which type of IRA permits the highest annual contributions?
A - A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.
In Section 529 plans, contributions are made with...
A - After-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.
In terms of being considered compensation for determining the allowable contribution to an IRA, receipt of this would be included?
A - Alimony Court ordered alimony is taxable to the payee (and tax deductible to the payor). Therefore, receiving it is considered compensation for purposes of an IRA contribution.
Contributions can be made to an IRA only until the first tax filing deadline...
A - April 15 Regardless of having filed an extension
Who is obligated for the payment of taxes in an UTMA account?
A - Child Although in practice the taxes are usually paid by the parent/legal guardian, they are the responsibility of the beneficial minor (child).
Anyone with earned income may open an IRA. However, what is an example of not earned income?
A - Child Support.
What is the common factor for both traditional and Roth IRAs?
A - Contribution limits are identical; are the same.
Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans is....
A - Contributions are NOT exempt from current income tax; AND they need NOT comply with nondiscrimination rules that apply to qualified plans.
What are the annual contribution limits for a Coverdell ESA and a Section 529 plan?
A - Coverdell ESAs currently permit up to $2,000 in annual contributions. QTPs (529) allow large contributions reaching as high as $250,000 and above.
what type of plan does NOT have to set standards for vesting, eligibility, and funding?
A - Deferred compensation plans. They are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.
What type of plan is it where the retiree receives a specified amount with the sponsor bearing the investment risk?
A - Defined Benefit Plan.
The Uniform Prudent Investors Act of 1994 allows a fiduciary to delegate the investment decisions to a qualified third party.... What is the one thing they cannot make decisions on?
A - Determining distribution amounts and timing is NOT part of portfolio management and can only be done by the fiduciary (trustee).
ERISA, a Federal Retirement Act, was created to protect....
A - Employees in the private sector. Private sector means corporate employees; public sector means government employees.
What are some appropriate investments for a qualified plan?
A - GIC (Guaranteed Investment Contract) and investment grade corporate bonds (A or higher rated bonds). A municipal bond fund will potentially convert tax-free income into ordinary income and using leveraged investments in retirement plans is generally prohibited.
A basic feature of a nonqualified plan is that the benefits are not....
A - Guaranteed. If they were, the tax characteristics of the plan would change.
What kind of withdrawal may be permitted in a 401(k) plan but not in an IRA?
A - Hardship withdrawals
If someone is employed and covered by a qualified plan, what is their eligibility for a Roth IRA?
A - It is not affected by participation in a qualified plan. Effective January 2008, distributions may be rolled over into a Roth.
What does the safe harbor requirements of Section 404(c) of ERISA do for a trustee of a 401(k)} plan?
A - It relieves the trustee of liability if the plan participants have the ability to select from at least 3 different investments and are allowed to make selection changes no less frequently than quarterly.
A fiduciary of an ERISA plan is preparing an Investment Policy Statement, included would probably be...
A - Methods of performance measurement (if it is meeting objectives; and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased but will include the types that may be placed in the portfolio.
Under the Uniform Transfer to Minors Act, the beneficial owner of the securities held in the account is the....
A - Minor The minor is the beneficial owner of the securities in an UTMA account, although the securities are held in the custodian's name as owner of record.
When it comes to Coverdell ESA and a 529 College savings plan, a single individual earning $250,000 a year may...
A - NOT open a Coverdell ESA; Open a 529 college savings plan (QTP) There are income limits that apply to Coverdell ESAs. Single individuals earning more than $110,000 per year are not permitted to open a Coverdell account, and married couples lose the ability to contribute when earnings exceed $220,000. However, there are NO income limits restricting who is eligible to open and contribute to a Section 529 college savings plan.
What are some investments that are not allowed in an IRA?>
A - No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited.
What needs to be done to open an UTMA or UGMA account?
A - No special documentation is required. The account is opened in the name of the minor with the minor's Social Security number and the name of the adult listed as custodian.
Under a defined contribution Keogh account, what is used to determine the basis for a participant's deposit?
A - One earned income may be included in determining the income eligible for Keogh contributions.
Who is eligible to participate in 403(b) plans?
A - Only employees of schools, church organizations, and nonprofit organizations.
When can you claim a loss in a Roth IRA on your tax return?
A - Only if the proceeds upon liquidation are less than the cost basis, you itemize deductions, and the loss is above 2% of the AGI. When one has an unrealized loss in a Roth IRA, that loss can have tax benefits under very specific conditions. First, the account (and any other Roth IRAs) must be liquidated. Then, the proceeds from all of the accounts must be less than the cost basis. The loss may be claimed as a miscellaneous deduction, but only for those who itemize, and only to the extent that it exceeds 2% of the adjusted gross income (AGI).
ERISA rules only apply to...
A - Private sector plans Government or public sector plans are not subject to the ERISA.
Individuals with income from self-employment may participate in Keogh plans. What may not be considered income earned from self-employment?
A - Stock Options, dividends, capital gains, and interest.
When a corporation establishes a qualified money purchase plan...
A - The corporation is obligated to make annual contributions at the rate stated in the plan. Money purchase plans have required contributions.
The tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement is....
A - The income is taxable as ordinary income. The employer has been making all of the contributions to the pension plan (noncontributory means employee has made no contributions). IRS says the income to the retiree is ordinary income
Who is the beneficial owner of securities in an UTMA account?
A - The minor The minor is always the beneficial owner under an UTMA account. The custodian merely exercises his best judgement in handling investment decisions on the minor's behalf.
What kind of individuals are eligible to make a catch-up contribution?
A - They are allowed to participants who are age 50 and over.
Both IRAs and Keogh plans have maximum annual allowable contribution limits, but what is the difference in those limits?
A - They are significantly higher in a Keogh Plan.
What kind of retirement plan would have a mandatory withdrawal requirement once you are past age 701/2?
A - Traditional IRA The same is true for qualified plans (401(k), pension, etc.) except when the employee is still employed with the sponsor.
Between an UTMA and an UGMA, when is ownership transferred?
A - UGMA, ownership is transferred at the state's age of majority; UTMA, some states permit delaying the transfer until as late as age 25. In both accounts, control is vested in the custodian, not the donor, and neither account is in the minor's name. The UTMA has greater flexibility, not the UGMA.
What is an example of a circumstance where a premature distrbution from a traditional IRA can be exempt from the premature distribution penalty?
A - When the distribution is paid in equal annual amounts over the owner's life. This is not subject to the 10% premature distribution penalty even if started before age 59 1/2. The exception for Qualified Domestic Relations Orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.
In a qualified plan, if the employer makes all of the contributions, the employee's cost basis is...
A - ZERO, because the employee has NOT made any contributions.
A money purchase Pension plan is...
A - a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional.
Which one of the following is not a defined contribution plan? money-purchased pension plan a stock option plan a profit-sharing plan (qualified) a 401(k) plan
A - a stock option plan
In order to have matching contributions, participants in a Roth 401(k) plan must actually have two....
A - accounts. The Roth and a regular 401(K)
Coverdell Education Savings Accounts allow....
A - after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If accumulated value in account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled into a different Coverdell ESA for another family member.
A nonqualified, single-premium variable annuity differs from a Keogh plan in that...
A - all payouts are fully taxable in a Keogh plan.
This type of IRA will be subject to income taxes to t he beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner...
A - an inherited IRA Beneficiary was left the IRA
Minimum distributions from a traditional IRA must begin....
A - by April 1, the year after the owner turns 70 - 1/2.
The IPS (Investment Policy Statement), although not required under Department of Labor (DOL) rules, is generally found in....
A - corporate qualified plans These include defined benefit or defined contribution plans.
The penalty for withdrawals from a 401(K) plan taken before age 59 1/2 is waived only in the cases of
A - death, disability, qualified domestic relations orders (QDROs), medical expenses, certain period payments, and corrections of excess contributions. Withdrawals for a principal residence can only be made from an IRA not a 401(k)
An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is a....
A - defined benefit plan. A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age as specified by the plan document.
When one wishes to refuse the receipt of an IRA, the procedure is know as....
A - disclaiming the IRA.
The IRS nondiscrimination rules are primarily intended to ensure that qualified retirement plans....
A - do NOT discriminate in FAVOR of owners, executives, and key employees at the expense of rank-and-file workers. A retirement plan that excessively benefits key employees is said to be top-heavy and must meet additional special requirements.
What are some reasons that a deferred compensation plans benefits can be forfeited?
A - employees leaving before a certain period of time, going to the competition, or being terminated for cause.
Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be....
A - employees who leave the company prior to retirement would not receive benefits. They are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving.
Funds withdrawn from a Section 529 plan, that are used to pay for qualifying expenses (like tuition), are...
A - exempt from federal and state tax. If student is resident of state where plan is held, no taxes due at state level.
Section 529 Plan withdrawals are exempt from...
A - federal income tax if used for the right expenses. If the plan is one operated by your state of residience, it will be exempt from your state's income tax. But, if you elect to contribute to a plan operated by another state, withdrawals may be subject to your state's income tax.
If a person receives a lump-sum distribution from a 401(k) plan....
A - he may either roll the money into an IRA account WITHIN 60 days, or retain the money and pain income tax (and possibly a penalty) on it.
What are two ways in which a Section 529 plan differs from a Coverdell ESA?
A - higher contribution limits AND no earnings limitations.
Participants in SEP plans are vested....
A - immediately. Not after 1 year in the plan
How does making gifts to an open UTMA account work?
A - in a custodial account for a minor, any adult, whether related or unrelated, can make gifts. However, all gifts are irrevocable.
Roth contributions are... (2)
A - made with after-tax dollars into plan AND are non-dedudictble
The first piece of advice to offer a customer eligible for a 401(k) plan is to....
A - make regular contributions to the plan, particularly when the employer makes matching contributions.
UGMA accounts may never be opened as....
A - margin accounts. The UGMA allows: gifts of cash to a minor, gifts of securities to a minor, and that the donor and custodian can be the same person.
One of the distinguishing characteristics of the Roth IRA is that contributions....
A - may be continued past age 70 1/2 as long as the participant has earned income.
What are some characteristics of a deferred compensation plan?
A - no current tax deductions, the plans discriminate, and because they are nonqualified, there is no IRS approval.
When does the IRS require that RMDs commence?
A - no later than April 1 of the year following the year that the owner turned 70 1/2 years old.
Under ERISA Section 404(c), plan participants must be able to reallocate plan assets....
A - once every 3 months. This is done through internet trading or other methods.
Who is allowed to participate in a Keogh plan?
A - participants MUST work for the business. This may include a sole proprietor, a partner who works in the business, or an employee, BUT NOT a limited partner who contributes no personal services (meaning there is no compensation paid).
Employee contributions are excluded from taxable income at the time of contributions, which exempts them from income tax, but not from....
A - payroll taxes. These include Social Security taxes and federal unemployment taxes.
Under UTMA, a custodian is...
A - required Any adult can be the custodian and thee are no other specific requirements, nor does the custodian have to be a member of the family.
An IAR recommending investments for an IRA should give primary consideration to....
A - risk Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return.
DPPs, IPOs of small companies, and options on large-cap common stock are...
A - riskier investments and are generally considered inappropriate for IRAs.
A Keogh plan is based off of...
A - self-employment income This is the cost basis for a Keogh plan
Unlike Roth IRAs, Roth 401(k)s are different because RMDs....
A - start at same time as traditional 401(K)s.
When examining an IRA, although not illegal, it is generally considered inappropriate to include this in a tax-deferred retirement plan....
A - tax-exempt securities, such as municipal bonds (whether individual bonds or in a fund)
In a Coverdell ESA, any excess distribution representing earnings that is not used to meet qualified education expenses is....
A - taxable to the beneficiary who took the distribution.
One of the advantages of QTPs (Qualified Tuition Programs, better known as Section 529 Plans) is that....
A - that the owner-contributor is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12 month period.
A spousal IRA is an arrangement that allows...
A - the contributions of a total of $11,000 to the two accounts and no more than $5,500 in either account. Selecting separate accounts totaling $11,000 could imply that one account could exceed $5,500 while the other would be less. The spousal IRA allows contributions on behalf of a nonworking spouse.
The maximum contribution to an IRA is...
A - the lesser of 100% earned income or $5,500.
To comply with Section 404(c) of ERISA...
A - the plan must offer at least 3 different investment choices, including a stable value option, an income option, and a conservative growth option.
In order to qualify for the safe harbor under 404 (c)...
A - the portfolio selections must include at least three (3) different asset classes, such as equity, debt, and cash equivalent. All equities or all debt won't qualify.
Among the ways in which UGMA accounts differ from UTMA accounts is that...
A - the transfer of assets in a UTMA account can be deferred until the beneficial owner reaches as late as age 25; in a UGMA account, assets are transferred when the minor reaches the age of majority.
The following characteristics are common of what? hardship withdrawals ; a choice of investment options ; employer matching
A - traditional 401(k) plans
