Unit 4 - 403(b) Plans (Tax Exempt Organizations)

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) contributions are made with pretax dollars C) distributions before age 59-½ are normally subject to penalty D) mutual funds and CDs are available investment vehicles

Answer: A 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 59-½. A 403(b) plan may invest in various instruments, including mutual funds, stocks, bonds, and CDs in addition to annuity contracts.

A 40-year-old schoolteacher would find her retirement needs best served by contributing to a: A) traditional IRA. B) 401(k). C) 403(b). D) Roth IRA.

Answer: C Employees of the public school system are eligible to participate in a 403(b) retirement plan. This plan offers the opportunity to contribute far more than could be contributed to an IRA.

Qualified annuity plans offered under Section 403(b) of the Internal Revenue Code, referred to as tax-sheltered annuities (TSAs), are not available to a: A) nurse at a nonprofit hospital. B) student at a nonprofit college. C) public school custodian. D) church minister.

Answer: B 403(b) plans are available to employees of 501(c)(3) nonprofit organizations and schools, not to students.

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

Answer: B 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 describing traditional IRAs is NOT true of 403(b) qualified plans? A) Distributions must begin by age 70-½. B) Distributions after age 59-½ are taxed as ordinary income. C) A self-employed person may participate. D) Contributions are tax deductible.

Answer: C Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in 403(b) plans.

All of the following are advantages of a 401(k) plan EXCEPT: A) the employer may make unlimited contributions, which generate unlimited tax deductions for the business. B) tax deferral on the plan earnings is advantageous to employees. C) the owner of the business may participate in the plan. D) employees and the business may reduce current taxes.

Answer: A Contributions are deductible by the employer but are not unlimited because contributions to a 401(k) are subject to a number of limits. Tax deferral on plan earnings is advantageous to employees. The owner of the business may participate in the plan.

You have a new client who has just been made head of the Engineering Department at the local state university. With the new position comes a substantial increase in pay and she would like to discuss the various options available in her 403(b) plan. You would tell her that choices in her plan could include all of the following investments EXCEPT A) commercial paper B) annuity contracts C) CDs D) mutual funds

Answer: A Historically, 403(b) plans were known as TSA (tax-sheltered annuity, not the folks who check us over at the airport) plans because they were almost exclusively invested in annuities, both fixed and variable. However, as time went on, the investment options expanded to mutual funds and CDs. Specific money market instruments, like commercial paper, are not allowable investments (although a money market mutual fund would be).

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) simplified employee pension (SEP). B) 403(b) plan. C) 401(k) plan. D) SIMPLE retirement plan.

Answer: B A 403(b) plan is a special type of tax-favored retirement plan 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.