SIE Qbank Unit 23

Individual retirement accounts allow a catch-up contribution of $1,000 to be made into the account for those who are A) 50 years old or over. B) over 50 years old. C) 59½ years old or over. D) over 72 years old.

50 years old or over. Catch-up contributions are for those ages 50 and over (not over 50).

Who benefits most from a defined benefit plan? A) Older employees B) All benefit the same C) Younger employees D) Employees with more years until retirement

Older employees Because the older employee has fewer years left to work, the contribution made by the company will be higher.

All of the following are true of Roth IRAs except A) contributions may be deductible depending on income limits. B) withdrawals are not required at age 72. C) contributions are made after tax. D) contributions may be able to be made after 72.

contributions may be deductible depending on income limits. Contributions are not deductible, they are made with after tax dollars and may continue past 72 if still working. Roth IRAs are not subject to required minimum distributions (RMDs).

In a defined contribution plan the the benefit amount is fixed. the benefit amount is variable. the contribution amount is fixed. the contribution amount can vary.

II and III In a defined contribution plan the amount that the employer is depositing is fixed by the employer, but the employee chooses the investments so the benefit varies.

Which of the following are true of Roth IRAs but not Traditional IRAs? A) Distributions are not required after reaching 72. B) Distributions are required after reaching 72. C) Anyone with income may contribute. D) Contributions are typically deductible.

Distributions are not required after reaching 72. Because distributions are not taxable on Roth IRAs, there are no required distributions. Roth IRAs have income limits and contributions to Roth IRAs are not deductible. Contributions to IRAs must come from earned income.

What is the penalty for not taking the required minimum distribution (RMD) for the year? A) 10% of the amount that should have been taken B) 10% of the annual contribution limit C) 50% of the amount short of what should have been taken D) 50% of the annual contribution limit

50% of the amount short of what should have been taken There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 50% of the amount missed.

What is the penalty, if any, for overcontribution to an IRA? A) 10% B) 50% C) No penalty D) 6%

6% There is a 10% penalty is for early withdrawal. There is a 50% penalty is for failure to make the minimum required distribution for the year. Contribution of more than the maximum amount in a year carries a 6% penalty.

Which of these features does the Roth IRA include? There are no minimum required distributions after age 70½ with a Roth IRA. There are higher contribution limits to a Roth IRA than to a traditional IRA. Withdrawal of earnings in the Roth IRA may be made without any taxation as long as a Roth IRA has been open for a minimum of one year and the participant is age 59. There is the ability to contribute to both a Roth IRA and a traditional IRA.

I and IV One of the primary benefits to the Roth IRA is that reaching age 70½ does not trigger the required minimum distributions found in other retirement plans. Probably the biggest benefit is that all earnings grow tax deferred, and may be withdrawn free of any tax, as long as there has been an open Roth IRA for at least 5 years AND the participant is at least 59½. One may contribute to both types of IRA, but the combined contribution may not exceed that annual maximum for a single plan.

Which of the following are true of nonqualified plans but not true of qualified plans? Contributions are not tax deductible. Contributions are tax deductible. Plan needs IRS approval. Plan does not need IRS approval.

I and IV Qualified plans require IRS approval and the contributions are tax deductible. Because nonqualified plans' contributions are not deductible they do not require IRS approval.

A 73-year old client in the 25% income tax bracket withdraws $20,000 from her traditional IRA. Based on her life expectancy, the withdrawal should have been $30,000. How much tax will she owe? A) $5,000 B) $12,500 C) $10,000 D) $7,500

$12,500 Failure to meet the required minimum distribution results in a 50% penalty on the shortfall. In this case, she took $20,000 when she should have taken $30,000 so there will be a 50% tax on the $10,000 difference ($5,000 penalty). In addition to that $5,000 penalty, the ordinary income tax on the total amount that should have been withdrawn must also be paid (25% × $30,000 = $7,500). Total tax liability on the withdrawal equals $12,500 ($5,000 penalty tax plus $7,500 ordinary income tax).

Which of the following are available to participants in a 401(k) plan that are not available to IRA holders? Tax deferral on the earnings Hardship withdrawals The catch-up provision for those who are age 50 and older Loans against the vested balance

II and IV IRAs have no provisions for either hardship withdrawals or loans. Both IRAs and 401(k) plans offer tax deferral on the earnings, and although the amount is larger with the 401(k), they both offer the catch-up provision for those who are age 50 or older.

Each of the following investments and practices are deemed ineligible for an IRA or any other retirement plan except A) collectible fine art. B) variable annuities. C) margin account trading. D) life insurance.

variable annuities. Annuities, variable or fixed, are in most cases acceptable investments appropriate for IRAs.

A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to a traditional IRA this year? A) The current maximum allowed by the IRS, and none of the contribution will be deductible. B) The current maximum allowed by the IRS plus the catch-up amount, and none of the contribution will be deductible. C) Nothing, because this individual has no retirement plan at work. D) The current maximum allowed by the IRS, which will all be deductible.

The current maximum allowed by the IRS, which will all be deductible. While the exact annual contribution limit numbers are not likely to be tested, students should know that for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one's tax return. The deduction, however, would be phased out above a certain income level for those who do have a retirement plan at work. The catch-up provision only applies to those age 50 or older.

Who is responsible for meeting the desired returns on a defined contribution plan? A) The sponsor B) The custodian C) The employee D) The Pension Benefit Guaranty Corporation

The employee The employee chooses how the money is invested so the employee takes responsibility for the returns.

Who benefits more from a defined contribution plan? A) Employees with fewer years left to work B) All benefit the same C) Older employees D) Younger employees

Younger employees Younger employees have longer for the money to grow.

Your customer retired two years ago at age 70. He recently took a job with a retailer greeting customers. He would like to contribute to a retirement plan to accumulate additional money with the view to leave something to his grandchildren. You would most likely advise him to open A) a traditional IRA. B) a mutual fund. C) an annuity. D) a Roth IRA.

a Roth IRA. The Roth IRA would require after-tax (nondeductible) contributions but would allow earnings to accumulate tax deferred as in any retirement plan. Roth IRA distributions need not begin at age 72, and if holding period requirements are satisfied, all distributions are tax free.

Andrea recently began working for the Seabird Coffee Company as a barista. She tells you that her company has two retirement plans she can participate in. In one plan, she contributes a portion of her salary into an account where she can choose from a set of investments. The contributions reduce her taxable income. The money grows and when she retires, or leaves the company, she can take the balance. In the other program, she does not contribute to the plan; the company pays into the plan and invests the money. When she retires, and if she qualifies, she will receive a retirement income for life from the plan based on her working income. You explain that Seabird Coffee has A) two different defined contribution plans. B) a defined contribution and a defined benefit plan. C) a defined benefit and a nonqualified-deferred compensation plan. D) two different defined benefit plans.

a defined contribution and a defined benefit plan. The plan she contributes into on a pretax basis is a defined contribution plan. The other plan promises an income for and is a defined benefit plan. Both are types of qualified plans.

Another term for a defined benefit plan is A) a traditional term plan. B) a defined withdrawal plan. C) a pension plan. D) an annuity.

a pension plan. Though an annuity acts much like a defined benefit plan, it does not require sponsorship by an employer. The other two responses are just made up.