Q Bank Unit 11
Which of the following would NOT be eligible for a tax-sheltered 403(b) annuity? A) Student at a private college. B) Professor at a land grant college. C) Custodian at a municipal public school. D) Employee of a county high school.
Answer: A All of the individuals listed meet the requirement of being a school system employee except for the student, who is a client, rather than an employee, of the school system.
If an employee makes a withdrawal from her IRA at age 52, she pays no penalty tax if she: A) is disabled. B) has retired. C) had no earned income that year. D) used the funds for her nephew's college tuition.
Answer: A An employee may withdraw from an IRA before the age of 59½ without a penalty tax in the case of death or disability. Funds may be withdrawn without penalty for qualified education expenses for immediate family members, but that does not include nieces and nephews.
Sally is the named beneficiary of her grandmother's IRA. After the death of her grandmother who was 80 years old, what would Sally's options be regarding the IRA? A) Take minimum required distributions based on Sally's life expectancy. B) Wait until age 59½ to begin taking distributions, to avoid the 10% tax penalty. C) Wait until age 70½, to maximize tax deferral, and then begin required minimum distributions. D) Roll over her grandmother's money into Sally's own IRA.
Answer: A Before age 80, Sally's grandmother would have already begun mandatory distributions. When someone inherits an IRA for which the initial owner has begun mandatory distributions, payout must continue but is now based on the life expectancy of the new owner.
All of the following are true regarding Section 529 college savings plans EXCEPT: A) tax-deductible contributions at the federal level. B) high contribution limits. C) tax-free withdrawal at the federal level for qualified education expenses. D) not subject to income limitations.
Answer: A Contributions are made with after-tax dollars and are not deductible.
What is the latest date that an IRA participant may make an IRA deposit for the current year? A) April 15 of the following year. B) December 31 of the current year. C) April 15 of the current year. D) July 15 of the following year, if extensions have been filed.
Answer: A Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.
Which of the following statements about a Coverdell Education Savings Account (ESA) is NOT true? A) Contributions are tax deductible, subject to a modified AGI phaseout. B) Contributions of $2,000 per child per year are allowed. C) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free. D) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary.
Answer: A Contributions to an ESA are not tax deductible.
Which of the following statements regarding Coverdell ESAs is TRUE? A) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses. B) Contributions are tax deductible, and distributions for any reason are tax free. C) Contributions are not tax deductible, and distributions for any reason are tax free. D) Contributions are tax deductible, and distributions are always taxable.
Answer: A Coverdell ESAs offer after-tax contributions of up to $2,000 per student per year for children under age 18. Distributions are tax free as long as the funds are used for education.
Which of the following individuals are eligible to participate in a tax-sheltered annuity? Maintenance engineer at a state university. Student in a public school system. Minister. Office clerk at a small corporation. A) I and III. B) I and II. C) II and IV. D) III and IV.
Answer: A Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs).
Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year? A) 1000. B) 100. C) 500. D) 2000.
Answer: A Full time employment is defined as 1,000 hours or more per year, regardless of the number of days, weeks, or months worked.
If a self-employed attorney earns $110,000 per year and he has no other retirement plans and contributes $4,000 to his IRA, his contribution is: A) fully tax deductible. B) partially tax deductible. C) not tax deductible. D) not permitted.
Answer: A IRA contributions are fully deductible, regardless of income, if the taxpayer is not covered by any other qualified plans.
Each of the following individuals is eligible to participate in a Keogh plan EXCEPT: A) an executive of a corporation who receives $5,000 in stock options from his company. B) a self-employed doctor in private practice. C) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time. D) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time.
Answer: A Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.
Your client is a self-employed physician who makes annual contributions to his Keogh plan. If he also receives additional income from making speeches at medical conventions, this income is: A) eligible for inclusion in both his Keogh and IRA. B) not eligible when computing his Keogh contribution. C) not eligible for inclusion in an IRA. D) not eligible for inclusion in either his Keogh or IRA.
Answer: A Keogh plans are designed for persons with self-employment income. The additional income received from making speeches is self-employment income and therefore eligible when computing the maximum allowable contribution. Self-employment income is earned income and therefore also eligible for inclusion in an IRA.
Minimum distributions from a traditional IRA must begin: A) by April 1, the year after the owner turns 70½. B) once the owner retires. C) a year after the owner turns 59½. D) as soon as the owner turns 70½.
Answer: A Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 70½.
Your customer has a Coverdell Education Savings Account for each of four preteen daughters. What is the maximum amount of pretax contributions that he can make to each ESA? A) 0. B) 500. C) 2000. D) 8000.
Answer: A Pretax contributions cannot be made to Coverdell ESAs. The customer is allowed to make a $2,000 after-tax contribution annually for each student until their 18th birthday.
A 45-year-old employment counselor has a Keogh plan for himself and three 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 contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. B) He may invest any amount up to 100% of his earned income. C) He may have an IRA but may not make a contribution for this year. D) He may not have an IRA.
Answer: A 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
A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 60. B) 30. C) 45. D) 90.
Answer: A Rollovers from pension plans into IRAs must be accomplished within 60 days in order to retain tax-deferred status.
All of the following statements about SEP IRAs are true EXCEPT: A) catch-up contributions for those age 50 or older are not permitted with SEPs. B) SEP IRAs are established for small-businessowners and their employees. C) the retirement account is usually set up at a bank or other financial institution. D) SEP IRAs allow employers to make contributions.
Answer: A SEPs allow a small business owner to contribute to IRAs set up at banks or other financial institutions for themselves and their employees. For those age 50 and older catch-up contributions are permitted.
Which of the following statements regarding both traditional and Roth IRAs is TRUE? A) Contribution limits are the same. B) Contributions are tax deductible. C) Withdrawals at retirement are tax free. D) Distributions must begin in the year after the owner reaches age 70½.
Answer: A The common factor for both traditional and Roth IRAs is that contribution limits are identical.
A 61-year-old wanting to take a lump-sum distribution from his Keogh will: A) be taxed at ordinary income rates. B) be taxed at long-term capital gains rates. C) incur a 10% penalty. D) incur a 50% penalty.
Answer: A The distribution described here would be taxed as ordinary income. A 10% penalty would apply if the individual were under age 59½.
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 59½ are normally subject to penalty. D) mutual funds and CDs are available investment vehicles.
Answer: A The employee 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, stocks, bonds, and CDs in addition to annuity contracts.
Distribution from a traditional IRA can begin at age 59½ and must begin no later than: A) age 70½. B) age 65. C) an age as determined by IRS life expectancy tables using the account holders year of birth. D) 15 years from the individual's date of retirement.
Answer: A The owner of a traditional IRA has until April 1 of the year after the year in which he turns age 70½ to begin withdrawing from the account.
One of your customers set up a Section 529 plan for a child of one of his neighbors and contributed to it for some years. When the child reached age 17, it was obvious that he had no plans to pursue higher education and your customer decided to redesignate the account. Which of the following would be a permissible new beneficiary? A) The original beneficiary's younger sister. B) One of the donor's own grandchildren. C) One of the children of another of your customer's neighbors. D) The winner of an informal essay contest to be held among high-school aged children in the neighborhood.
Answer: A There are few restrictions on who may be the first beneficiary of a Section 529 plan. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first.
All of the following statements regarding 529 plans are true EXCEPT: A) the income level of the contributor can affect the annual contribution amount. B) contributions to a 529 plan may be subject to gift taxation. C) states impose very high overall contribution limits. D) the assets in the account are controlled by the account owner, not the child.
Answer: A Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.
Which of the following investments is the least appropriate for a qualified pension or profit sharing plan? A) Municipal bonds. B) Treasury bonds. C) Zero-coupon bonds. D) Corporate AAA bonds.
Answer: A When advising qualified plans, it is not a good investment practice to buy tax-free income. The yield on municipal bonds is typically lower than that on other bonds of comparable quality due to the tax-exempt status of their income payments. Any assets in the retirement plan are free of current taxation so the usual municipal security benefit is lost, and the portfolio contains assets that produce less income. A second problem arises because as participants in the plan begin withdrawing assets, the withdrawal is usually 100% taxable, thus turning what is inherently tax free into something taxable. It makes more sense to buy higher yielding taxable income and to shelter the income within the tax-exempt plan trust.
All of the following are true concerning a Section 529 prepaid tuition plan EXCEPT: A) prepaid tuition plans can be used to cover qualified tuition and room and board costs for the beneficiary of the plan. B) monies distributed from the plan can only be used in a state-funded higher education institution. C) eligibility to participate is specific to the state which regulates the plan. D) the plan is used to lock in future tuition costs at current rates.
Answer: B 529 prepaid tuition plans are used to lock in higher education costs at current tuition rates. Eligibility for the plans is state specific. Monies distributed from the plan may be used to pay for tuition in a state funded institution in that state or you can use those monies to pay for a portion of an in-state private school or any out of state school. In these instances the amount available for use in tuition payments will be determined by the tuition that an in-state publicly funded college would charge.
Each of the following are permitted to open an IRA EXCEPT: A) a corporate officer covered by a 401(k) plan. B) an individual whose sole income consists of dividends and capital gains. C) a divorced mother whose sole income is alimony and child support. D) a self-employed attorney who has a Keogh plan.
Answer: B An IRA contribution can be made only from earned income. Dividends and interest are investment income, but alimony is considered compensation for purposes of an IRA by the IRS even though it is not deemed to be earned income. Individuals can contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. However, although a contribution can be made, it may or may not be deductible depending on the individual's income.
If your 50-year-old client wants to withdraw funds from his traditional IRA, the early withdrawal will be taxed as: A) capital gains plus a 10% penalty. B) ordinary income plus a 10% penalty. C) ordinary income. D) capital gains.
Answer: B An early withdrawal from an IRA is taxed as ordinary income plus a 10% penalty.
Which of the following investors are eligible to establish an IRA? Independently wealthy individual whose sole source of income is $125,000 per year in dividends and interest. Law student who earned $1,200 in a part-time job. An individual who earned $3,500 last year selling encyclopedias but whose spouse is covered by a company profit-sharing plan. Property owner whose income is solely from rent charged on family dwellings he owns. A) II and IV. B) II and III. C) I and III. D) I and IV.
Answer: B An individual may contribute 100% of earned income up to a maximum allowable dollar limit, whichever is less . Interest and dividend income is portfolio income and rent is passive income, not earned income.
Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) nontaxable to either party B) taxable to the niece, the beneficiary of the plan C) taxable to the uncle, the donor to the plan D) automatically reinvested back into the plan
Answer: B Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.
Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A) If specifically approved by the SEC B) If this strategy is consistent with the objectives of the plan C) Under no circumstances D) If specifically approved by the covered employees
Answer: B As covered calls are not considered to be a speculative option strategy they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.
Which of the following can be rolled over into an IRA? Another IRA. Corporate pension plan. Corporate profit-sharing plan. Keogh plan. A) III and IV. B) I, II, III and IV. C) I and IV. D) II and III.
Answer: B Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.
A married couple in their late 50s (both employed) but neither covered under an employer sponsored retirement plan wish to open traditional IRAs and make the maximum tax-deductible contribution. If their combined income is $78,000 which of the following would apply? A) Neither is eligible to contribute to a traditional IRA. B) Each is eligible to make a catch-up contribution. C) One IRA must be designated as a spousal IRA. D) Neither is eligible to make a tax-deductible contribution.
Answer: B Because both spouses are employed and not covered by other retirement plans, they are eligible for traditional IRAs with tax-deductible contributions up to specified limits. Each being older than age 50 is eligible to make a catch-up contribution. Spousal IRAs are for a non-working spouse and therefore neither is eligible in this instance.
IRAs and Keogh plans are similar in each of the following ways EXCEPT: A) rollovers are allowed once every 12 months and must be completed within 60 days. B) the maximum allowable cash contribution is the same. C) taxes on earnings are deferred. D) distributions without penalty may begin as early as age 59-½.
Answer: B Both IRAs and Keogh plans have maximum annual allowable contribution limits but they are significantly higher in a Keogh Plan
When operating a Keogh plan, a self-employed individual must make contributions for: A) all employees. B) full-time employees who are at 21 years old and have worked for the company for 1 or more years. C) part-time employees who have worked for the company for 3 or more years. D) all employees scheduled to work for 1,000 hours per year or more.
Answer: B Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1 year, and work full-time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 or have just started working with the employer.
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) 25%. B) 10%. C) 5%. D) 15%.
Answer: B Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn in addition to ordinary income taxes.
In an IRA, a 6% penalty will be levied if the account owner: A) changes the beneficiary designation more than once during any calendar year. B) makes an excess contribution. C) fails to make a contribution by April 15. D) makes a premature withdrawal.
Answer: B Excess contributions to an IRA are subject to a 6% penalty tax.
How often will the IRS allow a Health Savings Account (HSA) to be funded via an IRA distribution without paying federal taxes or penalties on the distribution? A) There are no funding limits when HSAs are funded from another qualified account. B) One time. C) Never, taxes and penalties for early distributions are always due. D) Once each calendar year.
Answer: B Health Savings Accounts (HSAs) are qualified employer sponsored plans. The IRS allows a one time funding distribution from an IRA to a qualified HSA without paying federal taxes or penalties on the IRA distribution.
Qualified distributions from Roth IRAs are: A) tax deferred. B) tax free. C) 100% taxable. D) taxable only to the extent of earnings.
Answer: B If a withdrawal from a Roth IRA is a qualified distribution, the withdrawal is tax free. A qualified distribution is made after a 5-year holding period and after the taxpayer has reached age 59½.
Under a Keogh plan, which of the following is NOT an acceptable investment? A) U.S. government bond. B) Rare oil painting. C) Unit investment trust. D) International bond fund.
Answer: B Investments not permitted in Keogh plans are commodities, collectibles and antiques, precious metals (other than U.S. government-issued gold and silver coins), and uncovered options.
If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? A) Only the higher wage earner may contribute to an IRA. B) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. C) They may not contribute because their combined income is too high. D) They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts.
Answer: B No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.
A nonqualified deferred compensation plan: A) must be offered to all employees. B) does not guarantee that the employer will fulfill the obligation. C) guarantees payment to the employee even if the company becomes insolvent. D) must be approved by the IRS.
Answer: B Nonqualified deferred compensation plans are agreements between an employer and an employee in which the employee agrees to defer receipt of part of their salary. Nonqualified deferred compensation plans do not require IRS approval and may discriminate (need not be offered to all employees). In fact, they are generally offered only to officers and other high-ranking executives. In the event of a business failure, there is no guarantee that deferred amounts will be paid.
Which of the following statements describing traditional IRAs is NOT true of 403(b) qualified plans? A) Distributions after age 59½ are taxed as ordinary income. B) A self-employed person may participate. C) Contributions are tax deductible. D) Distributions must begin by age 70½.
Answer: B Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in 403(b) plans.
A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal? A) He will not owe taxes because the annuity was nonqualified. B) 6,000. C) 10,000. D) 16,000.
Answer: B Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.
All of the following are benefits of a traditional IRA EXCEPT that: A) funds may be withdrawn without penalty for certain exemptions. B) no penalty is charged for failing to withdraw funds after age 70½. C) earnings accumulate on a tax-deferred basis. D) contributions may be tax deductible.
Answer: B Required minimum distributions must begin the year after the account owner reaches age 70½.
To avoid penalty, a rollover of an IRA may occur no more frequently than: A) every 5 years. B) annually. C) quarterly. D) semiannually.
Answer: B Securities or funds may be rolled over by the account holder from one IRA to another only once every year. Direct transfers from one account to another, where the account holder does not receive the funds during the transfer, are not restricted in frequency.
Which statements are TRUE regarding contribution limits? The contribution limit to a Coverdell ESA can be reduced or eliminated for high-income individuals. The contribution limit to a Coverdell ESA cannot be reduced or eliminated for high-income individuals. The contribution limit to a Section 529 plan can be reduced or eliminated for high-income individuals. The contribution limit to a Section 529 plan cannot be reduced or eliminated for high-income individuals. A) II and IV. B) I and IV. C) I and III. D) II and III.
Answer: B The after-tax contribution limit of $2,000 can be reduced or eliminated for high-income taxpayers. However, there are no income limitations placed on individuals opening Section 529 plans.
Which of the following is (are) TRUE concerning a Coverdell Education Savings Account (ESA)? A) A beneficiary's unused balance may be rolled over to an ESA account for another child. B) All of these. C) The maximum annual contribution is $2,000 per beneficiary. D) The beneficiary may be the contributor's child or grandchild or child of a friend of the contributor.
Answer: B The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESA accounts may be rolled over to change investment vehicles or to change beneficiaries.
One of your customers, age 52, wishes to open an IRA. His annual income is over $200,000 and consists entirely of income from rental real estate and income from a trust fund. What amount may your customer contribute this year to his IRA? A) 5000. B) 0. C) 3500. D) 4000.
Answer: B To open an IRA, a person needs earned income. Income from rental real estate is passive income while income from a trust fund is portfolio income. This customer has no earned income.
Which of the following permits the highest annual contributions? A) A Coverdell Education Savings Account. B) A SEP IRA. C) A traditional nondeductible IRA. D) A traditional spousal IRA for which the contribution has been deducted.
Answer: B Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.
A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $150,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct? A) Neither is eligible to make a contribution in any amount (deductible or not). B) They are ineligible to deduct any contribution made. C) Both may deduct the entire contribution. D) One spouse only is eligible to deduct their entire contribution.
Answer: B While each are eligible to make the maximum contribution, at this income level, neither spouse, both covered under employer sponsored plans, would be eligible to deduct their contributions to their respective IRAs.
Which of the following option strategies is the most suitable for a qualified retirement account? A) No option strategies are permissible investments for qualified retirement plans under ERISA. B) Covered call writing C) A short straddle D) Purchases and sales of naked calls and puts
Answer: B While the use of options in qualified retirement accounts is not prohibited by ERISA, some strategies (those which involve undo risk) are considered to be highly inappropriate and therefore not suitable. Of those listed, only covered calls would be considered suitable as a way to hedge risk in long securities positions. Short straddles have unlimited risk and the buying and selling of naked option contracts is generally considered speculative.
Which of the following statements regarding qualified retirement plans are TRUE? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) II and IV. B) I and III. C) I and IV. D) II and III.
Answer: B With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.
All of the following statements concerning IRA contributions are true EXCEPT: A) you may contribute to this year's IRA from January 1 of this year until April 15 of next year. B) you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis. C) between January 1 and April 15, you may make contributions for the current year, the past year, or both. D) if you file your tax on January 15, you may deduct your IRA contribution even if it is not made until April 15.
Answer: B You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension.
A teacher has a 403(b) plan and the school system he works for has deposited $10,000 into his plan over a 12-year period. At retirement, if the teacher withdraws the total value of $16,000, on what amount does he pay tax? A) 8,000. B) 10,000. C) 16,000. D) 6,000.
Answer: C A 403(b) plan is a qualified retirement plan; contributions to the plan are made before taxes and the growth of the contract is tax-deferred. Any distribution from a 403(b) plan is fully taxable to the participant at the ordinary income tax rate.
Each of the following is an example of a qualified retirement plan EXCEPT a: A) profit-sharing plan. B) defined benefit plan. C) deferred compensation plan. D) Keogh plan.
Answer: C A deferred compensation plan is considered a nonqualified plan because IRS approval is not required to initiate such a plan for employees.
Two customers in their twenties, married only a few years, should select which investment for their IRAs? A) Oil and gas exploration limited partnerships. B) High-tech funds. C) Growth-oriented mutual funds. D) High yield bond funds.
Answer: C A growth mutual fund may be appropriate for a young couple's IRA account; all other selections incur high risk that is not appropriate for a retirement account.
If your 40-year-old client wants to withdraw funds from her Keogh, her withdrawal will be taxed as: A) capital gains. B) capital gains plus a 10% penalty. C) ordinary income plus 10% penalty. D) ordinary income.
Answer: C An early withdrawal from a Keogh is taxed in the same way as an early withdrawal from an IRA - as ordinary income plus a 10% penalty.
What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year? A) The current maximum per couple. B) The current maximum per family member. C) The current maximum per child. D) The current maximum per parent.
Answer: C An indexed maximum contribution may be invested in each child's Coverdell Education Savings Account every year. For instance, if a couple has 3 children, they may invest the current maximum into each of 3 accounts.
All of the following statements regarding 529 plans are true EXCEPT: A) a beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account. 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) anyone can make a contribution on behalf of a beneficiary.
Answer: C Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.
Which of the following statements regarding Roth IRAs are TRUE? Contributions are made with pretax dollars. Earnings can accumulate tax free. Distributions are not taxable if an age requirement and holding period are met. Distributions in excess of growth are always taxable. A) I and IV. B) II and IV. C) II and III. D) I and III.
Answer: C Contributions to Roth IRAs are made with after-tax dollars. Distributions are received tax free if the account holder is at least 59½ and has held the account for at least 5 years.
Which of the following plans is NOT required to meet the nondiscrimination provisions of ERISA? A) 403(b) plans. B) Keogh plans. C) Deferred compensation plans. D) 401(k) plans.
Answer: C Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to which persons may participate.
Excess IRA contributions are subject to a penalty of: A) 12%. B) 15%. C) 6%. D) 10%.
Answer: C Excess IRA contributions are subject to a yearly penalty of 6% until they are either withdrawn together with associated growth or applied to the following year's contribution limit.
For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 70 ½, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as required beginning date (RBD) required minimum distribution (RMD) lock-up provisions vesting A) II and IV B) III and IV C) I and II D) II and III
Answer: C For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 70 ½. This is known as the "required beginning date" (RBD). The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the "required minimum distribution" (RMD).
An individual, age 40, at a median income level and covered by an employer sponsored retirement plan wants to save more for retirement. Which of the following is the most suitable recommendation? A) An investment account utilizing only tax-free municipal bond mutual funds B) A hedge fund utilizing high risk, high potential yield strategies C) A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule) D) A traditional IRA as there will be no limit to the amount of the contribution that can be deducted
Answer: C Given the limited information the Roth IRA is the most suitable as long as the investor's income level does not limit via the phase-out schedule what can be contributed to the IRA. Dollars invested will grow and distributions will be tax free as long as the dollars have been in the account for five years once the IRA owner has reached age 59 1/2. Because the individual is covered by an employer-sponsored plan we know that the contribution to a traditional IRA may not be fully tax-deductible if at all and the earnings would be taxable when distributed. Growth in an investment account would be taxable and and the utilization of tax-free municipal bonds with low yields are unlikely to accommodate saving for retirement. Hedge funds utilizing high risk investment strategies are inappropriate for retirement saving.
Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should: A) explain that the potential federal tax benefits available to residents of New York may not be available when opening out-of-state plans. B) not open the plan. C) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. D) open the plan as instructed by your customer.
Answer: C Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened.
Which of the following securities is the least suitable recommendation for a qualified retirement account plan account? A) Treasury bill. B) A rated corporate bond. C) Investment-grade municipal bond. D) Blue-chip common stock.
Answer: C Municipal bonds provide tax-exempt interest payments and, consequently, offer lower yields. Because earnings in a qualified retirement plan account grow tax deferred, the municipal bond is not a suitable investment. In addition, they will be fully taxed on withdrawal.
An investment adviser representative recommending investments for an IRA should give primary consideration to: A) the beneficiary's tax status. B) liquidity. C) risk. D) maximum current income.
Answer: C Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return.
Which of the following investments would be most suitable for an IRA? A) Highly rated GO bond. B) Short sale of a stock which has just started what is expected to be a prolonged decrease in price. C) Technology company whose stock shows a high beta. D) Uncovered call on a stock whose price is extremely stable.
Answer: C Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts.
A member firm's customer is requesting that IRA contributions converted from a traditional IRA to a Roth IRA now be moved back to a traditional IRA. This is A) called a re-characterization and is permitted under all circumstances and within any time frame B) never allowed under any circumstances C) called a re-characterization and is allowed by the IRS so long as certain requirements are met D) called a rollover and allowed by the IRS as long all requirements are met
Answer: C The IRS allows an individual to re-characterize contributions made to one type of IRA as if they had been made to another type of IRA as long as the requirements as to when the re-characterization can occur have been met.
All of the following are true of an HR-10 Plan EXCEPT: A) this is a qualified plan subject to the requirement of having an IRS-approved plan document in place. B) the plan is subject to maximum contribution amounts. C) the plan does not require a sole proprietor making a contribution to his HR-10 plan to make contributions for eligible employees. D) the plan allows a self-employed person to create and maintain a retirement plan.
Answer: C This is a qualified form of retirement plan. A self-employed person must also make contributions on behalf of any eligible employees if he is making a contribution on his own behalf.
Which two statements are true regarding Section 529 college savings plans? Contributions are considered gifts under federal law. Contributions are tax deductible under federal law. Earnings generated are taxable each year. Earnings generated are tax deferred. A) II and III. B) II and IV. C) I and IV. D) I and III.
Answer: C Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level-if used for college-related expenses.
Payments received by the owner of a 403(b) plan are: A) taxable only to extent of the owner's cost basis . B) not taxable. C) 100% taxable. D) taxable only to extent of earnings.
Answer: C When TSA funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.
A grandchild inherits his grandfather's IRA from which mandatory distributions had already begun. With regard to future distributions, which option is allowed? A) The grandchild may wait until age 79½ and begin mandatory distributions. B) A lump sum distribution liquidating the account must be taken immediately upon inheritance. C) The grandchild must begin taking minimum required distributions based on his own life expectancy. D) The grandchild must wait until age 59½ to begin taking distributions.
Answer: C When a grandchild inherits an IRA from which mandatory distributions have already begun, payout must continue but is now based on the life expectancy of the new owner.
Which of the following regarding a Roth IRA are TRUE? The contributions are nondeductible. Contributions must cease at age 70½. Withdrawals must begin at age 70½. Withdrawals after age 59½ can be tax free. A) II and III. B) II and IV. C) I and IV. D) I and III.
Answer: C With a Roth IRA, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least 5 years. There is no age at which withdrawals must begin or contributions must cease.
Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Profit-sharing plan. B) Defined benefit pension plan. C) Keogh plan. D) Payroll deduction plan.
Answer: D A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards
One of your customers has maintained a traditional IRA for the past 15 years. Some of his annual contributions were not tax deductible due to his income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is TRUE? A) The entire withdrawal is taxable as ordinary income. B) The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. C) The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. D) The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income.
Answer: D All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income on withdrawal. Only the nondeductible contribution is returned tax free.
An employee not covered under his company's pension plan has been contributing to a traditional IRA for 5 years. If he leaves his current job, starts a new job, and is covered under the new corporation's pension plan, which of the following statements is TRUE? A) His traditional IRA must be closed. B) The money in his IRA must be combined with any money he will receive from the pension plan. C) Contributions to his IRA must stop; the money in the account will be frozen, but interest and dividends can accrue tax-free until he retires. D) Contributions to his traditional IRA may continue.
Answer: D An employee covered under a qualified retirement plan may continue to own and contribute to an IRA. The contributions to a traditional IRA may not be fully tax-deductible, depending on the amount of compensation earned, but the employee benefits from the tax deferral of IRA earnings.
The income level of a donor: may affect contributions into a Coverdell ESA. will NOT affect contributions into a Coverdell ESA. may affect contributions into a Section 529 plan. will NOT affect contributions into a Section 529 plan. A) I and III. B) II and III. C) II and IV. D) I and IV.
Answer: D Contributions into a Coverdell ESA are phased out at high income levels, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.
A registered representative (RR) is explaining the characteristics of a Coverdell ESA to a customer. Which of the following statements regarding this type of savings account is CORRECT? Contributions are tax deductible. Contributions are not tax deductible. When used for qualified educational expenses, withdrawals are taxable. When used for qualified educational expenses, withdrawals are not taxable. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: D Contributions to a Coverdell Education Saving Account (ESA) are made with after- tax dollars. Distributions used for qualified educational expenses are tax free.
A 52-year-old dentist has a balance of $150,000 in his Keogh plan, composed of $100,000 of contributions and $50,000 of earnings. If the dentist withdrew $100,000 from the Keogh plan, which of the following statements are TRUE? The entire withdrawal is taxable. The entire withdrawal is not taxable. The entire withdrawal is subject to a 10% penalty tax. A portion of the withdrawal is taxable. A) I and II. B) II and III. C) III and IV. D) I and III.
Answer: D Contributions to qualified plans are made with pretax dollars and earnings grow on a tax-deferred basis, so the cost basis is zero. Therefore, any distributions will be taxed as ordinary income. In addition, there is a 10% penalty on withdrawals made prior to reaching age 59-½.
Which of the following statements regarding Coverdell Education Savings Accounts are TRUE? After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) I and III. B) II and IV. C) III and IV. D) I and II.
Answer: D Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.
All of the following are true regarding nonqualified deferred compensation plans EXCEPT: A) IRS approval is not needed for deferred compensation plans. B) the plans need not be offered to all employees. C) income taxes on compensation are not due until constructive receipt. D) employees may use accumulated funds as collateral for a bank loan.
Answer: D Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.
If a corporation begins a nonqualified retirement plan, which of the following statements is TRUE? A) Employee contributions are tax deductible. B) Employer contributions are tax deductible. C) The employer must abide by all ERISA requirements. D) Employee contributions grow tax deferred if they are invested in an annuity.
Answer: D Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral, such as an annuity contract. Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements.
One of your customers, age 45, estimates that his annual earnings will be below the Roth IRA contribution ceiling limit and makes his Roth contribution early in the year. To his pleasant surprise, he receives a year-end bonus in December of that year, but, unfortunately, it puts his earnings over the Roth IRA earnings limit for allowing contributions. As the customer's registered representative, and given these circumstances, you could suggest that the customer A) take out the contribution in the form of a withdrawal B) roll over the Roth into a traditional IRA C) leave the contribution in the Roth because a bonus does not impact the allowable earnings limit for making contributions to a Roth IRA D) re-characterize the Roth contribution made into a traditional IRA
Answer: D Given the circumstances, the best suggestion would be to re-characterize the contribution to a traditional IRA so that the rules for contributing to a Roth IRA will not have been broken, as earnings applicable would include bonuses. Taking the money out in the form of a withdrawal would not have allowed the amount to be there for the required 5 years nor would the customer have reached the age of 59 ½ yet; therefore, the withdrawal would be taxable. A rollover allows retirement money to move from one qualified plan to another but does not address re-characterizing the contributions made.
To avoid tax and penalty, an IRA may be rolled over once each: A) quarter, by the end of the calendar quarter. B) 3 years, within 90 days. C) 5 years, by the end of the calendar year. D) year, within 60 days.
Answer: D IRA rollovers, which must be completed within 60 days, may be done no more often than once a year.
A distribution has been made from a Coverdell Education Savings account in the amount of $12,000 when the educational expenses were only $10,000. The amount distributed beyond the educational expenses will be: A) completely taxable to the donor. B) taxable to the donor on any portion of the excess representing earnings. C) a tax-free distribution. D) taxable to the beneficiary on any portion of the excess representing earnings.
Answer: D If a distribution exceeds education expenses, a portion representing earnings will be taxable to the beneficiary and may be subject to an additional 10% penalty tax.
A customer who has just started an IRA will be vested: A) in 2 years. B) in 5 years. C) at age 70. D) immediately.
Answer: D Investors are always vested immediately in their IRAs.
A pension plan might invest in each of the following EXCEPT: A) equities. B) variable annuities. C) corporate bonds. D) tax-free municipal bonds.
Answer: D It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.
Your client wishes to convert a 401k plan administered by your broker/dealer into a Roth 401k plan. Which of the following statements regarding a 401k conversion is TRUE? A) In the new Roth 401k the funds will grow tax deferred. B) Taxes are due on the funds rolled over when distributions from the new Roth 401k are made. C) All taxes are waived by the IRS at the time of conversion. D) Taxes will be due on the funds when the rollover takes place.
Answer: D Like a traditional IRA to Roth IRA conversion, 401(k) account holders pay the taxes on the funds when they are rolled over into the Roth 401(k). There is no waiver from the IRS. In the Roth 401(k), the funds now grow tax free and they can be withdrawn without tax liability in the future.
Which of the following retirement plans permit individuals to make contributions to the plan, after the plan participant reaches age 70-½, as long as they have earned income? A) Traditional spousal IRA B) Keogh (HR-10) plan C) Traditional IRA D) Roth IRA
Answer: D Roth IRAs are not subject to minimum distributions at age 70-½ and therefore allow contributions to be made after age 70-½, provided the participant has earned income.
All of the following regarding savings incentive match plans for employees (SIMPLEs) are true EXCEPT A) SIMPLEs are retirement plans for small businesses with fewer than 100 employees B) employee contributions are pretax C) catch-up contributions for those age 50 and older are permitted D) employers can not make matching contributions for employees
Answer: D SIMPLEs are retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit which can include catch-up contributions for those age 50 and older. The employer is permitted to make matching contributions for employees.
Which of the following statements CORRECTLY describe a Roth IRA? The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater. The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. Contributions are tax deductible. Contributions are not tax deductible. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: D The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. Contributions are made with after-tax dollars.
A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is TRUE? A) The maximum contribution permitted is $3,000 annually. B) The customer may take a deduction for the amount contributed. C) The customer may make annual contributions until the grandson graduates from college. D) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.
Answer: D The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.
A schoolteacher has a 403(b) tax-qualified deferred retirement plan, into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income? A) 0. B) 100,000. C) 120,000. D) 220,000.
Answer: D The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.
A businessowner pays himself a salary of $80,000 per year. He employs his spouse and pays her $45,000 per year. What is the maximum contribution that they may make to their traditional IRAs? A) They cannot make contributions, because their joint incomes are too high. B) They can contribute 100% of the lower income to one IRA only. C) No traditional IRA contributions can be made by businessowners or their spouses. D) They can each contribute 100% of earned income or the maximum allowable limit, whichever is less, to their individual IRAs.
Answer: D They both may make annual contributions of 100% of earned income up to the maximum allowable limit, whichever is less, to their own respective IRAs.
Which statements are TRUE regarding funding for education? Distributions from a Coverdell ESA may be used for college only. Distributions from a Coverdell ESA may be used for both college and secondary education. Distributions from a Section 529 plan may be used for college only. Distributions from a Section 529 plan may be used for both college and secondary education. A) I and III. B) I and IV. C) II and IV. D) II and III.
Answer: D Under Coverdell rules, an eligible educational institution includes colleges as well as elementary or secondary schools. Distributions from Section 529 plans are limited to higher education only.
Which of the following is a tax-qualified retirement plan for employees of nonprofit organizations? A) 401(k) payroll deduction plan. B) Keogh plan. C) SEP IRA. D) 403(b).
Answer: D Under Section 403(b) of the Internal Revenue Code, employees of nonprofit organizations (such as hospitals and schools) may make tax-deductible contributions from their paychecks into a retirement plan operated through their employer.
A self-employed individual has 2 full-time employees and makes the maximum allowable contribution to his own Keogh (HR-10 plan). What percentage of each employee's earned income must he contribute to their plans as eligible employees? A) 10% B) 15% C) There is no requirement to contribute to the employees' plans D) 25%
Answer: D When a self-employed individual makes the maximum contribution to his own Keogh (HR-10 plan), he must contribute 25% of any eligible employees' earned income to their plans.
Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Common stock. B) Corporate bonds. C) Treasury notes. D) Variable annuities.
Answer: D Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.
Which of the following investment activities are suitable for an individual retirement account? Writing uncovered calls. Writing covered calls. Buying puts on stock held long. Writing naked puts. A) I and II. B) I and IV. C) II and IV. D) II and III.
Answer: D Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.
