CFP Retirement savings and income planning

Ellen participates in a SIMPLE 401(k) maintained by her employer. If she has completed two years of service, to what extent is she vested in the employer contributions to her account?

100%

Which of the following vesting schedules may be used to accrue qualified defined benefit pension plan benefits attributable to regular (non-top-heavy) employer contributions?

100% cliff vesting after 5 years of service

Under the IRA minimum distribution rules, if the IRA account owner dies before distribution payments begin, what occurs?

The beneficiary can begin receiving distributions.

In a traditional defined benefit pension plan, what is the maximum annual pension benefit allowable under the law during 2022?

The lesser of 100% of the participant's average compensation in the highest three years of consecutive service with the employer, or $245,000 annually

Assume that a worker's Social Security full retirement age (FRA) is 67, and the worker retires and starts drawing Social Security early at age 64. What are the consequences?

The worker receives a reduced benefit for the rest of his life.

Which of the following best describes the purpose of establishing a stretch IRA?

To extend the period of tax-deferred earnings beyond the original owner's lifetime

How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan?

Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized.

Myra, age 35, converted an $80,000 traditional IRA to a Roth IRA last year. Her adjusted basis in the traditional IRA is $20,000. She also made a contribution of $5,000 to the same Roth IRA last year. Myra is in a combined 30% marginal tax rate. If Myra takes a $4,000 distribution from her Roth IRA this year, how much total federal tax, including penalties, is due as a result of the distribution?

$0; Although the distribution is not a qualified distribution, it will not be taxable income because it is treated as a distribution from the Roth IRA regular contributions first. Because the $4,000 distribution is not includible in gross income, nor does it relate to a conversion within the last five years, the distribution is not subject to regular income tax or the 10% early withdrawal penalty.

Mary is 66 years old and receives full old-age benefits from Social Security—in her case, $1,200 per month. Her husband, Ralph, age 67, who has not worked enough quarters outside the home to be covered in his own right, receives 50% of what Mary receives each month ($600). Assume that Mary dies tomorrow. What will Ralph's Social Security benefit be?

$1,200

Assuming the account holder is age 40, which of these withdrawals from a traditional IRA is subject to the 10% early withdrawal penalty?

$10,000 donated directly to a qualified 501(c)(3) charity

John and Mary, both age 49, are married and file a joint income tax return for the current year (2022). John is self-employed as an engineering consultant and reports $120,000 of Schedule C net income and pays $16,955 in self-employment tax. Mary is not employed outside the home. What is the maximum deductible IRA contribution John and Mary can make this year?

$12,000

Scott and Gayle, who are both age 45, are married and file a joint income tax return for the current year. Scott is a self-employed architect who earns $140,000 of Schedule C income and pays $19,782 in self-employment tax. Gayle is not employed outside the home. What is the maximum deductible IRA contribution Scott and Gayle can make, if any, for 2022?

$12,000

What is the taxable wage base for 2022 subject to full Social Security taxation?

$147,000

Bernie is a participant in his employer's noncontributory employee stock ownership plan (ESOP). Two years ago, his employer contributed stock with a fair market value of $30,000 into Bernie's account. Bernie retired one year later and took distribution of the stock when its fair market value was $40,000. Two years after his retirement, Bernie sold the stock for $50,000. What is the appropriate tax treatment available to Bernie upon sale of the stock?

$20,000 long-term capital gain

In 2022, what is the maximum amount an employee under the age of 50 may contribute to a traditional Section 401(k) plan as an elective deferral?

$20,500

What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2022, assuming no catch-up provisions apply?

$20,500

Cheryl is an executive with Chandler Corporation where she has been employed for the past 24 years. Her current salary is $400,000. Chandler's defined benefit plan provides participants with 25 years of service an 85% of salary annual retirement benefit. Assuming Cheryl's salary remains at $400,000, what will be the amount of her annual retirement benefit if she retires this year?

$245,000; On the basis of years of service and salary, Cheryl would be entitled to a retirement benefit of $259,250 using only the first $305,000 of employee compensation; however, the defined benefit pension plan benefit limit for 2022 is $245,000.

Gordon and Maribel each put $6,000 into their respective IRAs. Gordon's employer does not provide a qualified retirement plan. Maribel participates in a 401(k) plan at work. Their AGI is $207,000 in 2022, and they file jointly. How much of their IRA contributions will be deductible?

$4,200; The IRA rules allow an IRA deduction for individuals who are not active participants but whose spouses are, in some cases. However, that option is phased out if the couple's AGI is between $204,000 and $214,000 in 2022. With a combined AGI of $207,000, Gordon would be able to deduct $214,000 − $207,000 = $7,000; ($7,000 ÷ $10,000) × $6,000 = $4,200.

Stewart and Abby, both age 35, plan to contribute a total of $12,000 to their IRAs for this tax year. They both work outside the home, and they file a joint income tax return. Stewart is a teacher at the local high school and participates in a 403(b) plan. Abby's employer does not provide a retirement plan. They expect that their MAGI in 2022 will be $145,000. What amount, if any, can they deduct for their IRA contributions?

$6,000; An individual is not denied a deduction for his IRA contribution simply because of the other spouse's active participation, unless the couple's combined AGI exceeds $214,000 (2022). Based on their AGI, Abby will be able to deduct a contribution of up to $6,000 to an IRA. Since their combined AGI is too high for Stewart to make a deductible IRA contribution, he should consider contributing to a Roth IRA.

Guy and Dotty, who are both age 42, are married and file a joint tax return. Their modified adjusted gross income (MAGI) for 2022 is $130,000. Dotty has already made a $6,000 contribution to her traditional IRA and has also made a $2,000 contribution to their son's Coverdell Education Savings Account this year. What is the maximum amount that may be contributed, if any, to a Roth IRA for Guy and Dotty this year given these facts?

$6,000; For 2022, the maximum combined contribution to traditional and Roth IRAs (for an owner younger than age 50) is $6,000 per person annually. Dotty has already contributed the maximum amount for her traditional IRA, but they can make a further contribution of $6,000 to a Roth IRA for Guy. The $2,000 Coverdell contribution is never relevant to any retirement account contribution. Their AGI is below the Roth IRA phaseout range for a married couple ($204,000-$214,000) in 2022.

Valerie earns $320,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2022?

$61,000

For 2022, the maximum annual contribution under a money purchase pension plan on behalf of a participant is the lesser of 100% of the employee's covered compensation, or

$61,000.

Which of the following are minimum coverage tests for qualified retirement plans? I.Nondiscrimination test II.Average benefits percentage test III.Ratio test IV. Maximum compensation test

II and III

Jill and Mark are celebrating their 20th wedding anniversary, receiving 20-year watches from their employers, and reaching full retirement age (FRA), all on the same day. Which of the following statements correctly describe the Social Security benefit Jill is eligible to receive?

100% of her own benefit

If a retiree's annual Social Security benefit is $9,000 at age 62 and $9,600 at age 63, how many years would it take to equal the benefit of forgoing a year of payments (waiting one more year to receive a larger payment), not including inflation?

15 years

Apollo Company sponsors a money purchase pension plan that provides a base contribution of 12.3%. Assuming the integration level equals the Social Security taxable wage base, what is the maximum excess percentage?

18.0% : (12.3% + 5.7%).

In 2022, James earned $7,000 from employment subject to Social Security taxation between January 1 and March 15th. He was then unemployed for the remainder of the year. How many credits of coverage did James earn for 2022?

4

Roderick Manufacturing maintains a qualified defined benefit plan. There are 100 eligible employees working for the company. What is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test?

40

George was born in 1962. His full retirement age (FRA) for Social Security purposes is

67.

The employer portion of the payroll tax rate, including the portion dedicated to Social Security (OASDI) and the portion dedicated to Medicare funding, on a covered worker's earnings up to the Social Security taxable wage base is

7.65%.

Distributions from IRAs must begin by April 1 of the year following the year in which an individual reaches age

72.

Brent and Cara have an adjusted gross income (AGI) of $80,000, and they receive a combined Social Security benefit of $15,000. They have no tax-exempt income. What percentage of their Social Security benefit will be subject to taxation?

85%

What is the maximum amount of Social Security benefits that may be subject to income taxation?

85%

Which of the following constitutes an exception to the imposition of the 10% premature distribution penalty for distributions made from an IRA owned by an individual who is currently age 40?

A distribution in payment of qualified higher education expenses

Which of these reasons for an early distribution from an IRA is NOT an exception to the 10% penalty?

A distribution made after age 55 and separation from service with an employer

A covered individual or his survivor is entitled to which of the following benefits under Social Security if the worker is only in a currently insured status?

Surviving child's (dependent) benefit

James, a pilot, founded an airline, Margaritaville Airways, as a sole proprietorship 15 years ago. Six years ago, he hired six employees. Now the business has grown, and he decides to incorporate. The new successor entity, Margaritaville Airways, Inc., offers a defined benefit plan. If a unit benefit formula is used, James wants to know if employees will receive credit for past years of service. Which of the following is CORRECT?

All employees will receive credit for 5 years of past service.Under IRS safe harbor rules, a successor entity may recognize up to five years of service when establishing a defined benefit plan. The plan may not discriminate in favor of the highly compensated employee-owner(s).

Sherry, who is currently age 50, made only one contribution to her Roth IRA in the amount of $5,000 six years ago. If she were to receive a total distribution of $6,500 from her Roth IRA this year to take a vacation, how would she be taxed?

Although Sherry waited more than five years, the distribution will not be classified as a qualified distribution, it will be taxable to the extent of earnings, and it will be subject to the 10% early distribution penalty on the taxable amount.

An employer is permitted to make what level of contributions to an employee stock ownership plan (ESOP)?

An ESOP is a defined contribution plan that limits employer contributions to 25% of covered payroll.

ane Paschal, age 45. has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $500 on December 31st five years ago. She wants to know when the soonest she could begin making qualified distributions. Which one of the following statements represent what you should tell her?

Any distribution she takes after January 1st this year, will meet the five-year requirement.

Which of the following statements best describes the definition of disability in qualifying for disability benefits under Social Security? A) An individual must not be able to engage in the work associated with his last employment position. B) An individual must not be able to engage in any substantial, gainful activity, and the impairment must be expected to last at least 12 months or result in death. C) An individual must be able to engage in work as specified by a Social Security Administration examiner. D) An individual must not be able to engage in the work of any occupation for which she is trained.

B.) An individual must not be able to engage in any substantial, gainful activity, and the impairment must be expected to last at least 12 months or result in death.

Which of the following statements regarding plan forfeitures in a money purchase pension plan is CORRECT? I.Plan forfeitures may be used to reduce future employer contributions. II.An employer may reallocate the plan forfeitures among the remaining plan participants, increasing their potential individual account balances but only up to the annual additions limit for each participant.

Both I and II

Northwest Instruments Corp. made matching contributions to its SIMPLE 401(k) in the last three years. Assume all eligible employees earn at least the maximum includible compensation limit and all defer the maximum amount allowed. Due to extensive capital expenses anticipated this year, the company is considering how to reduce expenses. It will not be able to continue to make the 3% matching contribution and has called you to discuss their options. Which of these could you recommend?

By providing adequate notice, Northwest Instruments Corp. could move to the 2% non-elective contribution this year, although the savings would be minimal.

ABC Corporation is a closely held company that wants to establish a qualified retirement plan for its employees. Also, the company wants to improve the marketability of its stock and give the employees an ownership stake in the company. Which of the following plans would help ABC meet all of these objectives?

Employee stock ownership plan (ESOP)

Maria has a traditional IRA. She named her daughter, Faith, as beneficiary of the account. Faith was disabled in an accident five years ago. If Maria dies at age 75 (when Faith was 50), which of these statements are CORRECT?I. Faith inherits the IRA. II. Faith can transfer the inherited funds to an inherited IRA via a direct trustee-to-trustee transfer and name her own beneficiary.III. Because Faith is an eligible designated beneficiary (EDB), she is allowed to roll the IRA to her own name and circumstances. IV. Faith can make new contributions to the inherited IRA after the money is transferred into the inherited account. Since she is disabled and has no earned income, the source of these new annual contributions would have to be spousal IRA contributions or money rolled into the inherited IRA from a retirement account Faith owned previously.

I and II

Which of these is considered an active participant for determining the deductibility of traditional IRA contributions this year? I.A participant in a defined benefit pension plan who has just satisfied the eligibility requirements and entered the plan in the past six months II.A participant in a traditional Section 401(k) plan who is currently not making elective deferrals but has $100 of forfeitures reallocated to their account this year III.A highly compensated employee with a $500,000 account balance in a profit-sharing plan for which the plan earnings this year are $35,000 but no employer contributions, employee contributions, or reallocated forfeitures were added this year IVA self-employed professional with no employees maintaining a simplified employee pension (SEP) with a $10,000 account balance funded by a 20% contribution two years ago plus earnings

I and II

Which of these statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT? I.Generally, if an individual or the individual's beneficiary engages in a prohibited transaction with the individual's IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year. II.If an individual borrows money against an IRA annuity contract, the individual must include in gross income the fair market value of the annuity contract as of the first day of the tax year. III.Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited. IV. A 50% penalty will be assessed against an IRA owner who borrows money against their IRA.

I and II

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of these is a rule that applies to Section 401(k) plan elective deferrals? I.Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. II.In-service withdrawals are to be made only if an individual has attained age 62. III. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts.

I and III

Janice is the self-employed owner of an unincorporated business. She has hired the following family members to work in her business. Which family member(s) is(are) covered by Social Security? I. Her husband II. Her daughter, age 16 III. Her son, age 19

I and III

Which of the following plans is a cross-tested plan? I.New comparability plan II.Employee stock ownership plan (ESOP) III.Age-based profit-sharing plan Stock bonus plan

I and III

Which of the following are factors that would be expected to reduce the amount of the retirement benefit from a defined benefit pension plan? (Assume that the plan meets the minimum funding requirements each year.) I. Less than 10 years of plan participation II.Investment earnings that are lower than expected III.Use of a flat-benefit formula rather than a unit benefit formula IV. Participant's retirement before age 62

I and IV. Retiring before age 62 or with less than 10 years of plan participation generally will reduce a participant's retirement benefit from a defined benefit plan. The reduction is usually 10% for each year of service less than 10. While this seems like a very big reduction for these people (and it is), without this provision the cost of hiring someone within ten years of retirement age would be prohibitive and thus people in this situation would rarely be hired. However starting benefits at age 65 or later often means no reduction for having less than 10 years of service. The ​employer is obligated to provide the plan-specified benefit, regardless of whether investments perform as expected. The benefit formula—flat benefit or unit benefit—does not result in a generally lower or higher benefit, as it will depend on the individual participant's circumstances.

Charles (age 38) has just died. He has been credited with the last 30 consecutive credits of Social Security coverage in the last 30 quarters since he left school and began full-time employment. He had never worked before leaving school. Which of the following persons are eligible to receive Social Security survivor benefits as a result of Charles's death? I. Charles's child, Bill, age 16 II. Charles's child, Dawn, age 19 III. Charles's widow, Maggie, age 38 IV. Charles's dependent mother, Betty, age 60

I only

Pension Benefit Guaranty Corporation (PBGC) insurance coverage is required for which of the following plans? I.Traditional defined benefit pension plan II.Target benefit pension plan III.Money purchase pension plan IV.Profit-sharing plan

I only

An employee stock ownership plan (ESOP) is a defined contribution plan that may provide the employer with which of the following advantages? I.Increased corporate cash flow II.The ability to borrow money to purchase corporate stock III.A market for employer stock IV. Financial resources to expand the business

I, II, III, and IV

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses such as I.vacation costs. II.medical expenses. III.college tuition costs. IV. insurance premiums.

II and III

In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons: I.Purchase of a primary residence IIPayment of unreimbursed medical expenses III.Payment necessary to prevent foreclosure on the participant's primary residence IV.Payment of higher education expenses for the participant, spouse, or dependent children

I, II, III, and IV

Under the Social Security system, immediate survivor income benefits based on a deceased worker's primary insurance amount and coverage are available to which of the following persons? I. A surviving spouse, age 55, caring for the worker's 13-year-old child II. Unmarried, dependent children under age 18 III. Unmarried children who become disabled before age 22 IV. A surviving divorced spouse, age 62, who has not remarried and was married to the decedent for more than 10 years

I, II, III, and IV

Which of the following are eligibility requirements that a defined benefit plan must satisfy to qualify for tax-favored status? i.The plan must include employees who have attained 21 years of age. ii.The plan must include employees who have given one year of service to the employer during which they have worked a minimum of 1,000 hours. iiiIf the employer uses the two-year 100% rule, participation requirements may be based on completion of two years of service. iv. An employee's service with a predecessor must count toward years of service in a successor's plan.

I, II, III, and IV

Which of these statements regarding the safe harbor rules for Section 401(k) plans is CORRECT? I.The employer can avoid ACP and ADP testing if it matches 100% up to 4% of compensation for nonhighly compensated employees. II.The employer can avoid ACP and ADP testing if it makes contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, whether or not the employee chooses to participate. III.To meet the safe harbor requirements, the matching and non-elective contributions must be immediately 100% vested. IV. The employer must provide notice to each eligible employee about rights and obligations under the plan.

I, II, III, and IV

Jeff and Julie, both age 50, are married and are both fully insured under Social Security. They have two children. Amy is 24 and was injured in an auto accident when she was 21 leaving her disabled and dependent on her parents for her care. Brad is 17 and a senior in high school. Jeff's mother, Lisa, is age 66 and lives with the couple but is not a dependent for tax purposes. If Julie dies, who may receive a survivor benefit under Social Security based upon her fully insured status? I. Amy II. Brad III. Jeff IV. Lisa

I, II, and III

Which of the following is subject to the required minimum distribution (RMD) requirements after the account owner/plan participant dies? I.Traditional IRAs II.Roth IRAs III.Qualified plans

I, II, and III

Which of the following statements regarding money purchase pension plans are CORRECT? I.The employer makes annual mandatory contributions to each employee's individual account. IIThe plan is relatively straightforward and easy to explain to participants. IIIAnnual additions to each employee's account are limited to the lesser of 100% of compensation, or $61,000 (for 2022). IVGenerally, employer securities held by the plan cannot exceed 25% of the fair market value (FMV) of the plan assets at the times the securities are purchased.

I, II, and III

Which of the following are examples of qualified retirement plans? I.Cash balance plan II.Section 401(k) plan III.Section 403(b) plan IV. Employee stock ownership plan (ESOP)

I, II, and IV

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)? I.ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts. IIESOPs cannot be integrated with Social Security. III.An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participants' payroll. IV. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP.

I, II, and IV

Which of the following statements regarding employer contributions to money purchase pension plans are CORRECT? I.Aggregate employer deductible contributions may not exceed 25% of covered compensation. II.Money purchase pension plans are not subject to a minimum funding standard. III.Plan investment earnings and losses do not affect employer contributions. IV. Forfeitures may be reallocated to remaining participants.

I, III, and IV

Whose Social Security benefit is included in the calculation of the maximum family benefit for those eligible for benefits based on a retired worker's fully insured status? I. The retired worker's benefit II. The retired worker's former spouse III. A dependent child's benefit IV. A caregiver spouse's benefit for caring for a qualified disabled child

I, III, and IV

Which of these statements regarding Section 401(k) plans is CORRECT? I.Employer contributions and their accrued earnings are always immediately 100% vested in the plan. II.A Section 401(k) plan is a qualified profit-sharing or stock bonus plan. III.The maximum pretax elective deferral for a participant age 35 is $20,500 in 2022. IV. Elective deferrals in a cash or deferred arrangement (CODA) are not subject to FICA and FUTA taxes.

II and III

Which of the following plans is NOT a cross-tested plan? I.New comparability plan II.Employer stock ownership plan III.Age-based profit-sharing plan IV. Stock bonus plan

II and IV

Which of the following statements is(are) CORRECT regarding the Social Security Windfall Elimination Provision (WEP)? I. The WEP is designed to reduce Social Security retirement benefits for any worker who is eligible for retirement benefits from multiple employers. II. An example of a worker who may be subject to the WEP is one who works for a government agency or a foreign employer. III. The WEP applies to all Social Security benefits for which a family member or dependent of a covered worker may qualify. IV. In the case of a worker subject to the WEP, the provision is applied by reducing the formula used to calculate a worker's primary insurance amount (PIA), resulting in a lower benefit.

II and IV

A qualified plan is I.a company-sponsored retirement plan with benefits guaranteed by the Employee Retirement Income Security Act (ERISA). II.a tax-efficient way to save for retirement. III.only applicable for firms with 50 or more employees. IV. considered a plan that benefits highly compensated employees only.

II only

Martha has inherited a traditional IRA from her mother last year that contained no after-tax contributions. She would rather not take the required minimum distributions but instead roll the distributions over into her own IRA to save for her own retirement and avoid paying income tax. Which of the following statements is CORRECT? Martha should direct the IRA trustee to make an annual direct transfer to her own traditional IRA of the required minimum distributions so the distributions remain nontaxable. To minimize current taxation, Martha should execute a direct transfer of the entire IRA into an inherited IRA.

II only

Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA. Which of these statements regarding his transfer is CORRECT? I.The distribution from the SIMPLE 401(k) plan is not subject to the mandatory 20% income tax withholding requirement. II.A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement.

II only

Which of the following statements regarding the coverage rules for qualified plans is (are) CORRECT? I.The coverage tests for qualified plans include the percentage test, the ratio test, and the average contribution percentage test. II. A retirement plan can cover any portion of the workforce, provided it satisfies one of the three coverage tests under Section 410(b).

II only

Which of these are basic provisions of an IRC Section 401(k) plan? I.Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes. II.An employer's deduction for contributions to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees' elective deferrals. III.A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year. IV. Employee elective deferrals may be made from salary or bonuses.

II, III, and IV

Several years ago, Greener Grass Company implemented a traditional defined benefit plan. According to the plan document, the employer must contribute an annual amount that will provide the employees with a specified benefit at retirement. Which of the following events would be expected to decrease the employer's annual contribution to a traditional defined benefit pension plan using a percentage for each year of service benefit formula? I.Inflation is higher than expected. II.Benefits are cost of living adjusted. III.Forfeitures are higher than anticipated. IV. The investment returns of the plan are greater than expected.

III and IV

Your client has a retirement plan with no PBGC coverage and 30% of covered compensation as a projected retirement benefit. Which of the following type of plans does your client most likely have?

Target benefit pension plan

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? i.Contributions are made with pretax dollars. ii.A withdrawal from the account will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first-time home purchase. iii.Distributions are not taxable if they are attributable to disability and the account has been established for at least five years. iv. If the account has been open for at least five years and the account owner is age 59½, distributions are penalty free and income tax free.

III and IV

Which of the following is true regarding the interest rate credit used in cash balance pension plans? i.The interest rate credited to a participant's hypothetical account is determined upon the establishment of the plan and cannot fluctuate. ii.If the underlying investments of the plan outperform the interest rate credit guarantee in a given year, the participant will receive a greater credit for that given year. iiiIf the underlying investments of the plan outperform the interest rate credit guarantee in a given year, the employer may reduce plan contributions for that given year. ivBecause of the hypothetical individual accounts, plan participants may choose among various fixed interest rate investments for their accounts.

III only

Your client, the chief financial officer of a new company, wishes to install a retirement plan in the company in which the pension benefits to employees are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). Identify the plan(s) which must meet this requirement. I.Profit-sharing plan II.Money purchase plan III.Target benefit plan IV Defined benefit plan

IV only

In a money purchase pension plan that utilizes plan forfeitures to reduce future employer plan contributions, which of the following components must be factored into the calculation of the maximum annual addition limit? (CFP® Certification Examination, released 11/94) I.Forfeitures that otherwise would have been reallocated II.Annual earnings on all employer and employee contributions III.Rollover contributions for the year IV. Employer and employee contributions to all defined contribution plans

IV. ONLY Because the forfeitures will be used to reduce future employer contributions, they will not count against the annual additions limit. Defined contribution plans do not consider earnings on investments when calculating contributions.

In considering whether to convert a traditional IRA to the Roth IRA form, which of the following is a valid consideration?

If the source of payment for taxes due upon conversion comes from an outside source, it generally is advantageous to convert.

Grant, age 51, made an initial contribution of $10,000 to a Roth 401(k) six years ago. He made subsequent contributions of $6,000 annually for the next four years. Grant separated from service this year and took a $50,000 distribution from his Roth 401(k) to purchase a boat. Which of these statements regarding this distribution is CORRECT?

It is partially taxable because Grant was not age 59½ or older, disabled, or deceased.

Which of the following groups would NOT benefit from using Roth IRAs?

Low-income wage earners who need current deductions

A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. Which of these statements is FALSE?

Mandatory employer contributions under the safe harbor provisions may be subject to a three-year cliff vesting requirement.

The Acme Corporation has six owners, ranging in age from 30 to 60 years old, and 25 rank-and-file employees. The owners want to adopt a qualified retirement plan that will allow them to maximize the contributions to the owners' accounts and minimize the contributions to the accounts of the rank-and-file employees. Which of the following plans would best meet the owners' needs?

New comparability plan

What amount is used to determine a participant's actual Social Security retirement benefit?

Primary insurance amount (PIA)

Netcyber, Inc., is a 10-year-old C corporation that has experienced dramatic growth during three of the past five years. There are currently 168 employees. The two owners, who are 35 and 31 years old, wish to establish a retirement plan. Which plan would probably be the best for them?

Profit-sharing plan

What is the earliest age at which a currently insured worker may claim Social Security retirement benefits based on her own work history?

Retirement benefits are not available for a currently insured worker

Jack, age 51, is the owner of an architectural firm with 23 employees, most of whom are younger than 40. The company's cash flow varies from year to year, depending on their contracts. Jack wants to implement a qualified plan that is easy for employees to understand and that is administratively cost-effective. He also wants a plan with an incentive feature by which an employee's account balance increases with company profits. Which of the following plans would be most appropriate for Jack's firm?

Traditional profit-sharing plan

When does the maximum family benefit limitation NOT apply to reduce total Social Security benefits payable?

When both the husband and the wife receive a retirement benefit based on their own employment record

A cash balance pension plan is

a defined benefit pension plan

Fully insured status for Social Security retirement benefits requires a measure of employment covered by Social Security (OASDI) that is 40

credits of coverage.

To qualify for disability income benefits under Social Security, a worker must have an impairment that

is expected to last at least 12 months or result in death.

Higher-income earners will have a Social Security retirement income replacement ratio that is

lower than low-income earners.

Delaying receipt of benefits (for example until age 70) will result in all of the following except

permanently reduced benefit amount.

All of the following workers are covered by the Social Security system except

railroad workers covered under the federal Railroad Retirement Act.

Social Security began as a program to provide retirement income but has been expanded to provide all of the following income except

survivor benefits to spouse caring for a child under 19.

Social Security payments are

taxable if your provisional income exceeds the applicable threshold.

Marian, age 62, converted $30,000 from a traditional IRA to a Roth IRA seven years ago. Last year she converted another traditional IRA with a fair market value of $35,000 to a Roth IRA. She makes no other IRA contributions. This year she took a $40,000 distribution from her Roth IRA. This distribution is treated as $30,000 from the seven year old conversion contribution and $10,000 from last year's conversion contribution, both of which were includable in her gross income when converted. As a result for this year,

the $10,000 withdrawal from last year's conversion is not subject to the 10% penalty tax.First, this is a qualified distribution because the Roth IRA owner has had a Roth IRA for more than five years and she is older than 59½. Thus, there will be no tax or penalty on this distribution. Also, the conversion amounts were already included in Marian's gross income when converted. Therefore, they will not be subject to income taxes again when the converted dollars are withdrawn. The distribution allocable to the $10,000 con version contribution made last year (less than five taxable years ago) starts out as being subject to the early distribution penalty because it was withdrawn less than five years after the conversion. However, it is not subject to the 10% penalty tax under Section 72(t) in this case because Marian is over age 59½, which is one of the exceptions to the 10% penalty. The withdrawal of the conversion amount from the first conversion is not subject to the 10% early withdrawal penalty because the conversion is more than five years old. Thus, if the owner would have been younger than age 59½, the withdrawal of that money would not have been subject to the early withdrawal penalty.