Unit 2- Retirement Accounts

A customer who has just started an IRA will be vested: A)immediately. B)at age 70. C)in five years. D)in two years.

A)immediately. Investors are always vested immediately in their IRAs.

All of the following are benefits of owning a traditional IRA EXCEPT: A)earnings accumulate on a tax-deferred basis. B)funds withdrawn after age 70½ are tax free. C)funds may be withdrawn without penalty because of permanent disability. D)contributions may be tax-deductible.

B)funds withdrawn after age 70½ are tax free. IRA withdrawals must begin in the year after the account owner reaches 70½, or the investor is subject to a penalty of 50% of what he should have withdrawn but did not, in addition to taxes owed.

Your customer, who owns a small business, would like to make provision for his retirement. You might suggest to him any of the following EXCEPT: A)a variable annuity. B)a Roth IRA. C)a self-employed 401(k) plan. D)a Section 457 plan.

D)a Section 457 plan The only choice that is firmly eliminated is the Section 457 plan. That type of retirement plan is open only to state and local governments and tax-exempt employers.

All of the following are true regarding nonqualified deferred compensation plans EXCEPT: A)IRS approval is not needed for deferred compensation plans. B)income taxes on compensation are not due until constructive receipt. C)the plans need not be offered to all employees. D)employees may use accumulated funds as collateral for a bank loan.

D)employees may use accumulated funds as collateral for a bank loan. Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary (that he or she will receive) upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.

If your customer invests in a tax-sheltered variable annuity, what is the tax treatment of the distributions he receives? A)All ordinary income. B)Partially tax-free, partially ordinary income. C)Partially tax-free, partially capital gains. D)All capital gains.

A)All ordinary income. In a tax-sheltered variable annuity, contributions are made with pre-tax dollars with all distributions taxed as ordinary income.

At what minimum age could retirement payments be made from a Keogh plan without a penalty? A)60 years old B)65 years old. C)59½ years old. D)62 years old.

C)59½ years old. The minimum age to withdraw funds from a tax-qualified plan without penalty is 59½. Before that age, withdrawals are subject to a 10% penalty on growth withdrawn, unless an exclusion applies.

Which of the following statements describing traditional IRAs is NOT true of 403(b) qualified plans? A)Distributions must begin by age 70½. B)Contributions are tax deductible. C)A self-employed person may participate. D)Distributions after age 59½ are taxed as ordinary income.

C)A self-employed person may participate. Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in 403(b) plans.

Which of the following permits the highest annual contributions? A)A Coverdell Education Savings Account. B)A traditional spousal IRA for which the contribution has been deducted. C)A traditional nondeductible IRA. D)A SEP IRA.

D)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.

All of the following statements concerning IRA contributions are true EXCEPT: A)you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis. B)if you file your tax on January 15, you may deduct your IRA contribution even if it is not made until April 15. C)between January 1 and April 15, you may make contributions for the current year, the past year, or both . D)you may contribute to this year's IRA from January 1 of this year until April 15 of next year.

A)you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis. You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension.

What is the latest date that an IRA participant may make an IRA deposit for the current year? A)April 15 of the current year. B)April 15 of the following year. C)July 15 of the following year, if extensions have been filed. D)December 31 of the current year.

B)April 15 of the following year. Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.

Which of the following statements correctly describe a Roth IRA? I-The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater. II-The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. III-Contributions are tax deductible. IV-Contributions are not tax deductible. A)I and III. B)II and IV. C)I and IV. D)II and III.

B)II and IV. The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. Contributions are made with after-tax dollars.

A 45 year-old investor is in the highest tax-bracket and wants to save over the next 20 years for a retirement income. Which of the following recommendations is least appropriate? A)Purchase a variable annuity. B)Open an IRA and fund it with municipal bonds. C)Maximize contributions to your 401(k). D)Buy blue-chip stocks.

B)Open an IRA and fund it with municipal bonds. IRAs are tax favored accounts. Funding tax favored accounts with municipal securities that already offer tax free interest negates the advantage of the tax free IRA account and therefore would not be considered an appropriate recommendation. Each of the remaining answer choices offer advantages to a high income individual with a long term retirement objective and are therefore more appropriate / suitable recommendations.

Each of the following is a defined contribution plan EXCEPT A)a 401(k) plan B)a stock option plan C)a profit-sharing plan (qualified) D)a money-purchase plan

B)a stock option plan Money-purchase plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans.

All of the following statements relating to a deferred compensation plan are correct EXCEPT: A)these plans may discriminate in favor of highly paid employees. B)the covered employee must receive reports on the status of the plan no less frequently than annually. C)corporate financial difficulties could lead to no benefits being paid. D)it will be of greatest benefit if the employee's tax bracket is at a reduced level when the benefits are paid.

B)the covered employee must receive reports on the status of the plan no less frequently than annually. Deferred compensation plans are not qualified plans. They may discriminate among employees, and no reporting is necessary. The benefits of the deferral will be best realized if the employee's tax rates are lower upon receipt of the money. Since the benefits are scheduled to be paid out of the corporation's cash flow at the time of the employee's retirement, corporate financial difficulties may preclude any payout.

Under a qualified defined contribution plan, which of the following statements are TRUE? I-The participant is guaranteed a contribution based on an agreed-upon percentage or rate. II-The participant's retirement benefits are based on the balance in his individual account. III-The employer may discriminate among employees as to participation. IV-Employer contributions remain the property of the company until retirement. A)I and III. B)III and IV. C)I and II. D)II and IV.

C)I and II. Under a defined contribution plan, contributions may depend on years of service or, more frequently, salary. Benefits are based on what the accumulated contributions will provide at retirement. Since the plan is qualified, it may not discriminate and has vesting requirements.

Which of the following regarding SEP IRAs is TRUE? A)They are used primarily by large corporations. B)They cannot be set up by self-employed persons. C)They are used primarily by small businesses. D)The accounts are held at the corporation.

C)They are used primarily by small businesses. SEP IRAs are used primarily by small businesses because they are easier and less expensive to set up than other plans. They are also used by self-employed persons. The employer sets up and administers the SEP IRA through an account held by a bank or another financial institution.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT: A)Keogh plans. B)corporate pension plans. C)deferred compensation plans. D)profit-sharing plans.

C)deferred compensation plans. Deferred compensation plans 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.

When pension plan proceeds (employer contributions only) are rolled into a Roth IRA, what portion is taxable? A)Employee contributions. B)20% of the total. C)Anything in excess of $5,000. D)Employer contributions.

D)Employer contributions. In a Roth IRA, contributions are made with after-tax dollars, but distributions are tax free. Employer contributions into pension plans are made with pretax dollars. To allow a future tax-free distribution from the Roth IRA, employer contributions from a rollover are taxed at the time the rollover takes place.

Which of the following investors are eligible to establish an IRA? I-Independently wealthy individual whose sole source of income is $125,000 per year in dividends and interest. II-Law student who earned $1,200 in a part-time job. III-An individual who earned $3,500 last year selling encyclopedias but whose spouse is covered by a company profit-sharing plan. IV-Property owner whose income is solely from rent charged on family dwellings he owns. A)I and IV. B)I and III. C)II and IV. D)II and III.

D)II and III. An individual may contribute 100% of earned income up to a maximum allowable dollar limit, whichever is less . Interest and dividend income is portfolio income and rent is passive income, not earned income.

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A)She will pay no income taxes because the estate taxes have already been paid. B)She will pay income taxes only on a portion of the withdrawals that exceed $1 million. C)She will pay income taxes on the full $1 million immediately. D)She will pay income taxes on the full amount she withdraws each year.

D)She will pay income taxes on the full amount she withdraws each year. An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner.

The rules for ensuring that money will be available in a retirement plan (for paying out to participants during their retirement) are covered by which of the following types of requirements? A)Funding. B)Participation. C)Beneficiary. D)Vesting.

A)Funding. ERISA mandates minimum funding standards for plans. These minimums ensure that benefits will be available for payment upon retirement of the participants.

If a customer works as a nurse in a public school, each of the following statements regarding his school's TSA plan are true EXCEPT: A)he is not eligible to participate. B)his contributions are before tax. C)distributions before age 59½ are normally subject to penalty tax. D)mutual funds and CDs are available investment vehicles.

A)he is not eligible to participate. Because he is employed by a public school system, your customer is eligible to participate in the tax-sheltered annuity plan.

Which of the following statements regarding both traditional and Roth IRAs is TRUE? A)Contribution limits are the same. B)Withdrawals at retirement are tax free. C)Distributions must begin in the year after the owner reaches age 70½. D)Contributions are tax deductible.

A)Contribution limits are the same. The common factor for both traditional and Roth IRAs is that contribution limits are identical.

Which of the following statements regarding deferred compensation plans are TRUE? I-They are available to employees selected by the employer. II-They must be nondiscriminatory. III-Under no circumstances may officers or directors be included. IV-The employer does not receive a tax deduction for the deferred payment until actually made. A)I and IV. B)I and III. C)II and IV. D)II and III.

A)I and IV. Deferred compensation plans are not tax qualified and therefore may be discriminatory. Officers and directors who are also employees may be covered. Because these plans are not required to be funded in advance, the employer will only receive a tax deduction for benefit payments when they are actually paid to the employee.

If a company starts a pension plan for an employee who already has an IRA, this employee: A)may continue to contribute to his IRA, but the contributions may not be 100% deductible, depending on his level of compensation. B)may continue to make 100% deductible contributions up to the indexed maximum per year to his IRA. C)must roll over his IRA into the company pension plan. D)must stop contributing to the IRA, which will continue to accumulate on a tax-deferred basis.

A)may continue to contribute to his IRA, but the contributions may not be 100% deductible, depending on his level of compensation. The employee is still allowed contributions to an IRA up to the indexed maximum per year. However, because the employee is covered by another qualified plan, the contributions may or may not be deductible depending on his adjusted gross income.

Which of the following statements regarding a qualified profit-sharing retirement plan is NOT true? A)It must be nondiscriminatory. B)They operate under a trust agreement. C)Benefits are not paid until the employee reaches age 65. D)Contributions are required only when the company makes a profit.

C)Benefits are not paid until the employee reaches age 65. Qualified profit-sharing plans require contributions only in profitable years. Qualified profit-sharing plans must be in writing and nondiscriminatory.

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A)60 days. B)90 days. C)30 days. D)45 days.

A)60 days. Rollovers from pension plans into IRAs must be accomplished within 60 days in order to retain tax-deferred status.

Which of the following individuals may make an early withdrawal from a traditional IRA without penalty? A)A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. B)A parent withdraws funds from her IRA to pay for the education of a nephew. C)A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses. D)A parent supplements a home equity loan with funds from her IRA to pay for a vacation home.

A)A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. The financial status of an IRA participant is not relevant when determining exemption from penalties. A wealthy individual who withdraws $10,000 from his IRA to purchase his first principal residence is not subject to early withdrawal penalties.

An investor who works for the city is ready to retire. The city has operated a Section 457 plan for its employees, in which he has participated. What portion of his withdrawals will be taxable? A)Cost base only B)None C)The entire amount D)Growth and earnings only

C)The entire amount Although nonqualified, a 457 plan is a type of deferred compensation plan for state and local governments and tax-exempt employers for their employees. As such, the money in the plan has never been taxed, therefore all of the distributions will be taxed as ordinary income.

If an individual makes a withdrawal from her IRA at age 52, she pays no penalty tax if she: A)transferred her account to another custodian. B)has retired. C)is disabled. D)had no earned income that year.

C)is disabled. An individual may withdraw from an IRA before the age of 59½ without a penalty tax in the case of disability, death, first-time home purchase, education, medical premiums when unemployed, medical expenses, and Rule 72t.

All of the following securities would be suitable investments for a traditional IRA EXCEPT: A)Blue chip common stocks. B)AAA U.S. government agency bonds. C)A corporate bonds. D)AAA municipal bonds.

D)AAA municipal bonds. Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.

At what age is an individual required to begin taking distributions from a Roth IRA? A)59½ years old. B)65 years old. C)70½ years old. D)There is no age at which distributions are required.

D)There is no age at which distributions are required. Unlike traditional IRAs that require distributions to begin at 70½, there is no age at which distributions are required in a Roth IRA. Distributions may begin, tax-free, at age 59½ if the money has been in the account for at least five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual.

Your customer is 61 years old. He would like to take a lump-sum distribution from his SIMPLE plan. What is the tax treatment of this distribution? A)50% penalty B)Taxed at long-term capital gains rates C)Taxed as ordinary income D)10% penalty

C)Taxed as ordinary income The distribution is taxed as ordinary income. A 10% penalty would apply if the customer were younger than age 59½.

ERISA allows the fiduciary of a corporate retirement plan to write covered calls on the securities in the portfolio: A)if specifically approved by the SEC. B)under no circumstances. C)if this strategy is consistent with the objectives of the plan. D)if specifically approved by the covered employees.

C)if this strategy is consistent with the objectives of the plan. ERISA allows the fiduciary of a corporate retirement plan to write covered calls on securities in the portfolio if the strategy is prudent and is consistent with the objectives of the plan.