Unit 24 Test
********You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be A) no tax. B) ordinary income tax on the $500 that exceeds the original cost. C) ordinary income tax on the $1,000 growth because the account has not been open for 5 years. D) ordinary income tax on the entire amount because the account has not been open for 5 years.
**********A An individual can always withdraw the initial principal in a Roth without tax or penalty - it is only the earnings that will be subject to tax if not meeting the requirements of the Internal Revenue Code.In order for withdrawals of earnings from a Roth IRA to be free of any tax, there are two primary requirements: The first is that the owner be at least 59½ years of age. The second is that it is at least 5 years since the first deposit to a Roth IRA in the individual's name. Both of those conditions are met here. The client is 62 and the initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years.
*******Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) A percentage of food expense B) The cost to attend a summer camp C) A percentage of housing expenses, such as the utilities for his bedroom D) Clothing expense for child who has gone thru a growth spurt
********B You cannot use UTMA (or UGMA) money for the basics of food, clothing and shelter; those are the responsibility of the parent.An optional expense, such as summer camp, vacation, sports league registration, would be permitted.
All of the following statements regarding 529 plans are true EXCEPT A) states impose very high overall contribution limits B) contributions to a 529 plan may be subject to gift taxation C) the assets in the account are controlled by the account owner, not the child D) eligibility is affected by the income level of the contributor
******D you know this Unlike Coverdell ESAs, the income level of the contributor will not affect eligibility to contribute to a Section 529 plan.
****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) Nondeductible traditional IRA C) Roth IRA D) Nonqualified variable annuity
****A 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 statements regarding IRAs are CORRECT?I One may have both a Roth IRA and a traditional IRA, contributing the maximum to each one.II One may have both a Roth IRA and a Roth 401(k) contributing the maximum to each one.III Both traditional IRAs and Roth 401(k) plans have RMDs at age 72.IV If one is a participant in a Roth 401(k) plan, the earnings limits are waived for opening a Roth IRA. A) I and IV B) I and II C) II and III D) III and IV
****C A Roth IRA and Roth 401(k) are 2 separate items, and maximum allowable contributions may be made to both. This is unlike the IRAs, where one can maintain both but the total contribution is the annual limit (currently $6,000 with a $1,000 catch-up). One of the things about a Roth 401(k) that is different from the Roth IRA is that RMDs must start at the same time as with traditional IRAs. *Although one may participate in a Roth 401(k) without regard to AGI limits, that is not so with the Roth IRA.*
****A 45-year-old employment counselor has a Keogh plan for himself and 3 full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA? A) He may invest any amount up to 100% of his earned income. B) He may not have an IRA. C) He may have an IRA but may not make a contribution for this year. D) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less.
****D 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 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible. IRAs allow a maximum of $6,000 per individual or $12,000 per couple per year (with a catch-up of $1,000 for each individual aged 50 or older),whereas Keogh plans allow substantially more (Defined Contribution plans have the same high contribution limit)
***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 employees are guaranteed the ability to consult an investment adviser B) The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. C) The plan is free from the top-heavy testing requirements. D) It guarantees that highly compensated employees do not get more of an employer match than non-highly compensated employees.
***B 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.
***Which of the following has a "use it or lose" it provision? A) HSA B) FSA C) IRA D) ESA
***B 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).
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 permitted to use those funds to acquire company assets in an amount beyond the allowable limits C) encouraged to use plan funds to assist the employer when there is a cash flow crisis D) not considered to have a fiduciary responsibility
B 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).
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) with defined benefit plans, the employee bears the investment risk C) all qualified retirement plans are either defined contribution or defined benefit plans D) all corporate pension and profit-sharing plans must be established under a trust agreement
B With defined benefit plans, the employer (not the employee) bears the investment risk. Defined contribution plans have the same contribution limits as Keogh plans.
Which of the following is NOT an example of a non-qualified retirement plan? A) A deferred compensation plan B) A SERP C) A SIMPLE plan D) A payroll deduction plan
C 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. - supplemental executive retirement plan (SERP), A deferred compensation plan, A payroll deduction plan
Which of the following offers the benefit of tax-deductible contributions? A) Payroll deduction plan B) Coverdell Education Savings Account (ESA) C) Health savings account (HSA) D) Roth IRA
C 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) Traditional IRA B) Non-qualified variable annuity C) Roth IRA D) 403(b) plan
C 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). But Qualified variable annuities have the most tax 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.
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 certain medical expenses C) under a QDRO D) for a first-time home purchase
C 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.
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 a Section 1035 exchange into an annuity. B) Jerome should use the 5-year cash-out option. C) Jerome should use the 10-year cash-out option. D) Jerome should take the cash now and use the money to fund a new IRA.
C 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.
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) No tax will occur, provided the rollover is completed within 60 days. B) Rolling over a traditional IRA to a Roth IRA will negate the tax-free status of future withdrawals. C) The amount attributable to growth must be declared as income. D) The entire amount rolled over must be declared as income.
D 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 made pursuant to a qualified domestic relations order C) Distribution to pay certain medical expenses D) Distribution of up to $10,000 made to purchase a principal residence
D 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.
Which of the following retirement plans would be appropriate for a highly compensated government employee? A) 403(b) B) IRA C) 401(k) D) 457(b)
D 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.
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) contributions are made with pretax dollars B) distributions before age 59½ are normally subject to penalty C) mutual funds and annuities are available investment vehicles D) she is not eligible to participate
D 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.
For which of the following employer-sponsored qualified plans is it mandatory that annual contributions be made? A) Deferred compensation plan B) Defined benefit plan C) Profit-sharing plan D) Money purchase pension plan
D 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. Note: 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.
