Unit 24- Retirement Plans and Special Types of Accounts

Withdrawals during retirement from which of the following accounts would most likely be subject to the greatest amount of taxation? A)Qualified variable annuity B)Nonqualified variable annuity C)Roth IRA D)Nondeductible traditional IRA

A)Qualified variable annuity The entire amount of the distribution from a qualified annuity will be subject to taxation at ordinary income rates. No tax is due on the Roth, and only the earnings on the nonqualified annuity or nondeductible IRA will be subject to tax.

Which of the following may be purchased in an UTMA, but not an UGMA? A)Real estate B)Individual stocks C)Bank CDs D)Mutual funds

A)Real estate UTMA has a wider range of investment opportunities than UGMA. One of the most often examples is the purchase of real estate.

All of the following statements regarding 529 plans are true EXCEPT A)states impose very high overall contribution limits B)eligibility is affected by the income level of the contributor C)contributions to a 529 plan may be subject to gift taxation D)the assets in the account are controlled by the account owner, not the child

B)eligibility is affected by the income level of the contributor Unlike Coverdell ESAs, the income level of the contributor will not affect eligibility to contribute to a Section 529 plan.

All of the following statements regarding 529 plans are true EXCEPT A)anyone can make a contribution on behalf of a beneficiary B)earnings accumulate tax free if the money is used for qualified educational purposes C)contributions are made with pretax dollars at the federal level D)a beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account

C)contributions are made with pretax dollars at the federal level Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified education expenses with a limit of $10,000 per year for K-12 tuition expenditures.

In many cases, the exceptions from the early distribution tax penalty of 10% are the same for both IRAs and qualified plans. However, a specific exception granted to those with qualified plans that is not available to IRA owners is distributions A)used for higher education expenses B)for a first-time home purchase C)under a QDRO D)for certain medical expenses

C)under a QDRO Only in the case of a qualified (employer sponsored) plan are distributions from a qualified domestic relations order (QDRO) exempt from the 10% early distribution penalty. The home purchase and higher education exception applies only to IRAs, and certain medical expenses qualify for the exemption under both.

What term is used to describe which employees will be covered by a pension plan? A)Party in interest B)Funding C)Vesting D)Eligibility

D)Eligibility Pension plans must have a uniform nondiscriminatory eligibility program. All employees must be covered when they become eligible, which means reaching 1 year of service working full-time and age 21.

Under the Uniform Gift to Minors Act, all of the following are permissible EXCEPT A)gifts of cash to a minor B)gifts of securities to a minor C)the donor and the custodian are the same person D)the purchase of securities on margin

D)the purchase of securities on margin UGMA accounts may never be opened as margin accounts.

Those individuals who are considered parties in interest due to handling the assets of a corporate retirement plans are A)able to sell personal securities to the plan if that will benefit plan participants B)not considered to have a fiduciary responsibility C)encouraged to use plan funds to assist the employer when there is a cash flow crisis D)not permitted to use those funds to acquire company assets in an amount beyond the allowable limits

D)not permitted to use those funds to acquire company assets in an amount beyond the allowable limits ERISA does permit an employee benefit plan to acquire certain company assets subject to statutory limits, (generally, a maximum of 10% of the plan's assets).

Which of the following is NOT true concerning a Coverdell Education Savings Account (ESA)? A)The beneficiary may be the contributor's child or grandchild or child of a friend of the contributor. B)A beneficiary's unused balance may be rolled over to an ESA account for another child. C)The maximum contribution is $2,000 per beneficiary. D)In order for the withdrawal to be considered qualified, it may only be used for post-secondary education expenses.

D)In order for the withdrawal to be considered qualified, it may only be used for post-secondary education expenses. An ESA may be used to fund education at any level. The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESAs may be rolled over to change investment vehicles or to change beneficiaries. Unlike the Section 529 plan, the contribution limits for an ESA are set by the federal government and are considerably less than those for 529 plans.

Which of the following retirement plans would be appropriate for a highly compensated government employee? A)457(b) B)401(k) C)IRA D)403(b)

A)457(b) Section 457 of the Internal Revenue Code establishes 457(b) plans for, among others, employees of state and local governments. One can have both a 457 and a 401(k), or both a 457 and a 403(b), but it is the 457 that is specific to a governmental employee.

Which of the following is a benefit to an employee of a business offering a safe harbor 401(k) using a non-elective formula? A)The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. B)It guarantees that highly compensated employees do not get more of an employer match than non-highly compensated employees. C)The employees are guaranteed the ability to consult an investment adviser D)The plan is free from the top-heavy testing requirements.

A)The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. A safe harbor 401(k) with a non-elective formula is one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan. Furthermore, those contributions are immediately vested. As a result, these plans offer a safe harbor from being tested for being top heavy, but this is a benefit for the employer, not the employee.

Your client who has not yet attained the age of 59 ½ wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal you explain that the amount taken will be subject to a penalty of A)50% B)10% C)6% D)15%

B)10% Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to a penalty of 10% of the gross amounts withdrawn in addition to ordinary income taxes.

Which of the following is NOT an example of a non-qualified retirement plan? A)A SERP B)A SIMPLE plan C)A payroll deduction plan D)A deferred compensation plan

B)A SIMPLE plan A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plan is a qualified retirement plan designed for small businesses (100 or fewer employees). The others are all non-qualified plans.

Which of the following offers the benefit of tax-deductible contributions? A)Roth IRA B)Payroll deduction plan C)Coverdell Education Savings Account (ESA) D)Health savings account (HSA)

D)Health savings account (HSA) An HSA permits eligible participants to claim a tax deduction for contributions made to the plan. In the ESA and Roth IRA, contributions are made with after-tax funds, but growth and, if qualified, ultimate distribution, are tax free.

Assuming all withdrawals are equal, which of the following would subject a 60-year-old investor to the least amount of tax? A)403(b) plan B)Roth IRA C)Traditional IRA D)Non-qualified variable annuity

B)Roth IRA As long as the Roth has been opened a minimum of 5 years, once the investor has reached 59 ½, withdrawals are free of any tax. Generally, the most tax would be with the traditional IRA (assuming it was funded exclusively with pretax funds) and the 403(b). Because the non-qualified VA is funded with post-tax funds, a portion of the amount withdrawn might be the original principal and there is no tax due on that.

Which of the following has a "use it or lose" it provision? A)IRA B)FSA C)ESA D)HSA

B)FSA The flexible spending account (FSA) offers employees the opportunity to use pre-tax money, primarily for medical expenses. If the money is not used, it is forfeited. HSA money remains and, in many cases, winds up being a supplemental retirement program. ESA funds can either be transferred to another family member, or if not used, withdrawn (although this will incur taxes and penalties).

If your customer works as a nurse in a public school and wants to know more about participating in the school's 403(b) plan, it would be accurate to make each of the following statements EXCEPT A)she is not eligible to participate B)distributions before age 59½ are normally subject to penalty C)contributions are made with pretax dollars D)mutual funds and annuities are available investment vehicles

A)she is not eligible to participate The nurse must be informed that because she is employed by a public school system, she is eligible to participate in the tax-sheltered annuity plan. As in other retirement plans, a penalty is assessed on distributions taken before age 59½. A 403(b) plan may invest in various instruments, including mutual funds, and GICs in addition to annuity contracts.

Jill's bank, where she has her traditional deductible contributory IRA, is recommending that she roll over her contributory IRA into a Roth IRA to benefit from the tax-free status of the withdrawals when she retires. (Jill is now 32 years old.) Which of the following is a consequence if Jill follows the bank's recommendations? A)The entire amount rolled over must be declared as income. B)No tax will occur, provided the rollover is completed within 60 days. C)Rolling over a traditional IRA to a Roth IRA will negate the tax-free status of future withdrawals. D)The amount attributable to growth must be declared as income.

A)The entire amount rolled over must be declared as income. A traditional IRA may be rolled over into a Roth IRA, and the 10% penalty may be avoided if the rollover is accomplished in 60 calendar days. However, there will be an immediate tax consequence regarding any sum that exceeds the participant's cost basis. Because Jill was taking deductions for her IRA contributions, she has a 0 basis, and the entire amount will be treated as taxable ordinary income in the year rolled over.

An individual has a substantial vested interest in his 401(k) plan at work. Which of the following is NOT an exception to the premature distribution penalty tax? A)Distribution because of an employee's death or disability B)Distribution of up to $10,000 made to purchase a principal residence C)Distribution to pay certain medical expenses D)Distribution made pursuant to a qualified domestic relations order

B)Distribution of up to $10,000 made to purchase a principal residence Although individuals can make penalty-free withdrawals from an IRA to purchase a principal residence, this exception does not apply to withdrawals from a 401(k) plan. The penalty for withdrawals from a 401(k) plan taken before age 59½ is waived only in the cases of death, disability, qualified domestic relations orders (QDROs), certain medical expenses, certain period payments, and corrections of excess contributions.

For which of the following employer-sponsored qualified plans is it mandatory that annual contributions be made? A)Defined benefit plan B)Money purchase pension plan C)Deferred compensation plan D)Profit-sharing plan

B)Money purchase pension plan When an employer sets up a type of defined contribution plan known as a money purchase pension plan, annual contributions are mandatory. Profit-sharing plan contributions are optional and largely depend on the company's profits. Deferred compensation plans carry no obligations. What about defined benefit plans? Because those are based on an actuarial computation, if the account over-performs expectations, it could result in a year when no contribution is necessary.

In almost all states, the UGMA account has given way to the UTMA account. Although there are more similarities than differences between them, one of those differences is that A)there is more investment flexibility in the UGMA account B)transfer of ownership may be delayed to as late as age 25 in some states' UTMA accounts C)the account is in the name of the minor in an UTMA account D)the donor retains control over the investments with an UTMA account

B)transfer of ownership may be delayed to as late as age 25 in some states' UTMA accounts In an UGMA account, ownership is transferred at the state's age of majority. In the case of an 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.

Martha passed away in November 2020 at the age of 87. Among the assets in her estate was an IRA with a value of $150,000. Martha's son, Jerome, a successful 52-year-old surgeon and a client of yours, was named as the beneficiary of the IRA. From a tax standpoint, which of the following options would you recommend to Jerome? A)Jerome should take the cash now and use the money to fund a new IRA. B)Jerome should use the 5-year cash-out option. C)Jerome should take the cash now and use a Section 1035 exchange into an annuity. D)Jerome should use the 10-year cash-out option.

D)Jerome should use the 10-year cash-out option. When an IRA is inherited by a nonspouse individual, there are several options available. Unless something in the question told us that Jerome is disabled, at his age, the only practical choice is to withdraw the funds over a 10-year period. After the SECURE ACT of 2019, there is no longer a 5-year option. The Section 1035 exchange right does not apply when moving funds from an IRA, and inherited money is not considered earned income for purposes of funding an IAR. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback

All of the following statements regarding qualified corporate retirement plans are true EXCEPT A)defined contribution plans have the same contribution limits as Keogh plans B)all qualified retirement plans are either defined contribution or defined benefit plans C)all corporate pension and profit-sharing plans must be established under a trust agreement D)with defined benefit plans, the employee bears the investment risk

D)with defined benefit plans, the employee bears the investment risk With defined benefit plans, the employer (not the employee) bears the investment risk. The employer must fund the defined benefits, regardless of the investment performance of funds set aside for this purpose. The retiree receives a defined benefit regardless of investment performance. All corporate pension and profit sharing plans must be established under a trust agreement. All qualified retirement plans are either defined contribution or defined benefit plans. Defined contribution plans have the same contribution limits as Keogh plans.