Ch. 12 Retirement Plans

What is a defined contribution plan?

Both employers and employees contribute to the employees account - 401k plans - Roth 401k plans - profit sharing plans

A registered representative who recommends investments for an account subject to ERISA (pension plan), should first consider which of the following? [A]The tax status of the investment. [B]Liquidity. [C]The risk associated with the investment. [D]The amount of current income generated.

The risk associated with the investment.

What are defined as qualified distributions in Roth IRAs?

- 5 year holding period and one of the following - made after 59 1/2 - made after death/disability of owner - used for first time home purchase expense - used for educational expenses - used for medical insurance premiums

equired minimum distributions (RMDs) must begin no later than April 1st following the calendar year in which the owner reaches age 72 for which of the following retirement plans? I. Traditional IRA II. Roth IRA III.401 (k) Plan IV. 403 (b) Plan

1, 3, 4

A single taxpayer with an existing IRA elects to participate in his company's newly formed pension plan. His adjusted gross income is $200,000. Which of the following is true? [A]No contributions of any kind can be made to an IRA.[B]Contributions can continue as before on a tax deductible basis.[C]After-tax contributions may be made to an IRA by the taxpayer.[D]The IRA must be closed and the entire amount withdrawn immediately.

After-tax contributions may be made to an IRA by the taxpayer.

When do you have to take distributions?

By age 70 1/2, if you do not than your late distributions are subject to a 50% tax

A client at the firm has a birthday of January 1st. The client has a Traditional IRA and he is concerned about required minimum distributions (RMDs) and the penalties associated with not taking RMDs. The client turns 72 this year. Which of the following is TRUE in this scenario? [A]If the client still works in a part-time capacity at any employer, then RMDs are waived and no penalty would apply. [B]Given that the client turns 72 this year, RMDs are required beginning on April 1st of the same year. [C]Given that the client turns 72 this year, RMDs are not required until April 1st of the following year. [D]If the client wishes to avoid RMDs, the client can simply roll this Traditional IRA over into another Traditional IRA.

Given that the client turns 72 this year, RMDs are not required until April 1st of the following year.

Are distributions of contributed Roth IRA dollars subject to penalties when withdrawn early?

No

Of the following, which is a characteristic of a non-qualified deferred compensation plan? [A]These plans are designed for the benefit of low-salaried employees [B]Pursuant to ERISA, participants may elect to reduce or defer their salaries [C]The assets of the plan can be subject to company creditor's claims [D]All qualified employees of the company must be offered such a plan

The assets of the plan can be subject to company creditor's claims

How do you deduct when your spouse is unemployed?

You can make max deductions for yourself, and your partner can also deduct based on your income

What are the requirements to contribute to a traditional ira?

You have to have earned income and can not exceed 70 1/2

A 45-year-old customer leaves his employer and takes payout on their 401(k) Plan assets with the intent to roll the plan into a Traditional IRA. The client fails to do so within the required time period. The client will have to pay [A]a 10% penalty on the amount paid out with no other tax consequences. [B]ordinary income tax on the amount paid out with no other tax consequences. [C]both a 10% penalty on the amount paid out and ordinary income tax on the amount paid out. [D]no taxes associated with the 401(k) Plan payout, because he left his employer.

both a 10% penalty on the amount paid out and ordinary income tax on the amount paid out.

What is the mandatory age that Roth distributions must take place?

There is no mandatory age for distributions

What is a SEP IRA?

- Made for small business owners&employees - Low cost for administration - Tax deductible like a traditional IRA - Employees 100% vested in contributions

When must a distribution from a Keogh Plan begin? [A]No later than in the month of April of the year in which the plan holder turns 70 1/2 [B]No later than in the month of January of the year in which the plan holder turns 72. [C]No later than in the month of April of the year following the year in which the plan holder turns 72. [D]No later than in the month of January of the year following the year in which the plan holder turns 70 1/2

No later than in the month of April of the year following the year in which the plan holder turns 72.

All of the following are true regarding IRA contributions EXCEPT: [A]Although a tax return is filed prior to April 15th, the IRA contribution may be delayed until April 15th. [B]Contributions may be made at any time between January 1st and April 15th of the following year. [C]If an extension for a tax return is obtained, the IRA contribution may be delayed until the date the tax return is filed. [D]Persons not participating in any other type of retirement plan may deduct their IRA contributions up to certain limits.

If an extension for a tax return is obtained, the IRA contribution may be delayed until the date the tax return is filed.

How does a SIMPLE IRA work?

- similar to 401k - made for small employers with 100 or less employees -

Which of the following characteristics would be beneficial for an employer if the employer decided to use a non-qualified deferred compensation retirement plan for employees? [A]The vesting periods for this type of plan are typically faster than for other types of plans. [B]In the event that an employee is terminated, benefits earned up to that point may be forfeited. [C]Such plans require inclusion of all employees. [D]These plans place fiduciary responsibilities on employers and come along with disclosure and reporting requirements.

In the event that an employee is terminated, benefits earned up to that point may be forfeited.

What is an investment policy statement?

- required by ERISA for fiduciaries that described - clients investment goals/objectives - purpose of responsibilities - guidelines for review - risk tolerance - allocation recommended expected returns time horizon

Whats a Keogh plan?

- self employed qualified, tax deferred retirement plan - more complex than SEPS and allow higher contributions - distributions start at 59.5 and mandatory by 70.5

When can you inherit ownership on an IRA?

- surviving spouse - trust

What are the contribution characteristics?

- up to 100% of earned income but not exceed certain limits - income must be earned or alimony only - Contributions are aggregated - Can be cash, and can be filed up to april 15 for previous tax year regardless of extensions - At 50 you can catch up

What does safe harbor guidelines do?

-Allows plan participants to choose from at least 3 different categories of investements, with different risk levels, returns. and diversifications - provide clients with education and disclosures - allow clients to make changes quarterly

What is a qualified plan?

Established by a private employer (ERISA), which provide tax benefits aka 401k and profit sharing

An investor interested in obtaining an Official Statement for a particular state's 529 Plan would contact which of the following? [A]SEC - Securities Exchange Commission [B]FINRA - Financial Industry Regulatory Authority [C]MSIL - Municipal Securities Information Library [D]Governor of the State

MSIL - Municipal Securities Information Library

Are IRAs a qualified plan?

No bc not established/maintained by employer

What happens if you exceed the allowed contributions in a year?

- a 6% excise tax on excess amounts

What is defined as a non qualified distribution?

- anything that is not in the qualified category and will be subject as gross income and up to 10% taxed when distributed early

Roth IRA Contribution characteristics

- catch up period after 50 - contributions can continue after 70 1/2 - aggregate - individuals/couples exceeding a certain income can not particpate

What are the tax benefits for a qualified plan?

- employer tax deductions - employee tax deductions - contributions subject to ss, med, state/federal unemployment tax just not income tax - taxes paid when distributied

What is a fiduciary?

- person controls plan/pays fees/manages - must be responsible/accountable - show care, skill, prudence, diligence - creates diverse selection for investments

Whats a defined benefit plan?

- benefits given by predetermined formula on compensation, age, service - high salary employees near retirement benefit most - actuaries regularly review

How does eligibility work for IRAs?

- Employers must make contributions to eligible employees when contributing to their own plans - Employees are eligible when 21, worked 3 of preceding 5 years, and received 600 in wages

The Employee Retirement Income Security Act of 1974 (ERISA) covers which of the following? [A]Retirement accounts of public sector employees. [B]Retirement accounts of private sector employees. [C]Retirement accounts of public and private sector employees.[D]Retirement accounts of municipal employees only.

Retirement accounts of private sector employees.

All of the following are characteristics of an ERISA Sec.404(c) qualified plan EXCEPT: [A]The plan participants control the investment of the assets in their accounts. [B]The plan participants must be offered at least three core alternative investments. [C]Plan fiduciaries will not be held liable for losses where the plan participants have selected the investments. [D]Such a plan can include a defined benefit plan.

Such plan can include a defined benefit plan

What is a profit sharing plan?

a plan that gives employees a share in the profits of the company. Each employee receives a percentage of those profits based on the company's earnings.

A Keogh Plan may be referred to as all of the following EXCEPT: [A]A tax-deferred investment [B]An HR-10 Plan [C]A tax-free trust [D]A self-employed retirement plan

A tax-free trust

Albert works for ABC Corporation. He intends to contribute to the company's tax-qualified retirement plan. The company encourages this type of employee contribution, because on top of the employer contributions to the plan, the company also deducts employee contributions to the plan. Which of the following is true of this scenario? [A]ABC Corporation is correctly administering their retirement plans and is properly deducting contributions. [B]ABC Corporation may have issues related to their retirement plans, because though employee contributions are deductible for the company, employer contributions are not deductible for the company. [C]ABC Corporation may have issues related to their retirement plans, because though employer contributions are deductible for the company, employee contributions are not deductible for the company. [D]Without additional information, there is no way to determine what is or is not deductible for the company.

ABC Corporation may have issues related to their retirement plans, because though employer contributions are deductible for the company, employee contributions are not deductible for the company.

Under ERISA, which of the following is correct regarding covered call writing: [A]It should not be done because it is too risky [B]It may be used only if it fits in with the planned overall objectives.[C]There are no restrictions on covered call writing usage. [D]It may be utilized only if the option premiums are sufficiently large enough to cover the downside risk.

It may be used only if it fits in with the planned overall objectives.

All of the following statements about qualified defined benefit pension plans are true EXCEPT [A]They are employer sponsored plans [B]The employer bears the investment risk [C]High paid and long service employees are the primary beneficiaries of such plans [D]Small and mid-size employers are the primary sponsors of such plans

Small and mid-size employers are the primary sponsors of such plans

The federal income tax rules for a parent of elementary school student who has opened a Sec. 529 Education Savings Plan account to finance the college education of the child include all of the following EXCEPT [A]The contributions to the plan are tax deductible on the parent's tax return. [B]The earnings in the plan grow tax free. [C]Distributions from the plan to pay for qualified education expenses are tax free. [D]Refunds from the plan are taxable as ordinary income. They will also be subject to a 10% penalty tax unless the refund is the result of death, disability or the child receiving a scholarship.

The contributions to the plan are tax deductible on the parent's tax return.

Contributions to a Section 529 Education Savings Plan account may be subject to federal gift taxes. All of the following are true statements about the federal gift tax rules EXCEPT. [A]There is an annual tax exclusion for a donor. [B]A spouse of the donor may join in the contribution to the account increasing the exclusion. [C]Five years of future exclusions can be advanced into the current year thus permitting a larger initial exclusion as a joint gift. [D]The federal gift tax liability falls on the donee of the account, not the donor..

The federal gift tax liability falls on the donee of the account, not the donor..

Are deductions available if you're also contributing to a work plan?

Yes, you can deduct a contribution depending on your tax filing status and adjusted gross income