Retirement & Estate Planning Final exam

Which of the following are factors that a financial planner should monitor for every client? Changes in the client's objectives Changes in the client's marital status Changes in property laws Changes in the amount of lifetime gifts made by the client

All of these are factors that a financial planner should monitor for every client.

Lauren and Roger are spouses. Lauren has assets with a market value of $50 million titled in her name alone. Roger has assets valued at less than $1 million. Lauren drafts a will making an outright bequest of all of her assets to Roger. Which of the following are potential disadvantages of Lauren's approach? Lauren will not use her estate tax applicable exclusion amount when she dies. Roger may become legally incapacitated and not be able to manage the property. When Roger dies, the property must be included in Roger's gross estate to the extent Roger has not spent it or consumed it during his lifetime. The DSUE amount may not be available in some circumstances.

All of these are potential disadvantages of leaving all property outright to the surviving spouse.

Paul and Cheryl are husband and wife who initially lived in a community property state. Soon after their marriage they began establishing an emergency fund using money that each earned from their respective jobs. This fund was used to meet unexpected expenses as they arose. Three years ago, Cheryl liquidated stock that she had purchased prior to her marriage, and placed the proceeds in the emergency fund. There have been many deposits and withdrawals from the fund since that time. Last year, Paul filed for divorce. Cheryl is seeking to recover the full value of the stock proceeds that she placed in the emergency fund as her sole and separate property, and half of the remaining emergency fund. Paul claims he is entitled to half of the entire emergency fund. Which one of the following statements is CORRECT regarding Paul's and Cheryl's rights in the emergency fund?

Because Cheryl commingled separate property with community property, the stock proceeds lost their separate property status and because community property.

Which one of the following statements describes a basic feature of one of the special valuation rules under IRC Chapter 14?

Chapter 14 rules are best remembered as a set of "anti-shenanigans" laws requiring intrafamily transfers to meet certain restrictions. Unrelated partners would not fall under Chapter 14 rules.

Assuming that the special valuation rules under IRC Chapter 14 apply to each of the following situations, which one of the following statements is CORRECT?

Chapter 14 rules do not negate other regulations. A retained interest will reduce the value of the gift because the done is not receiving the entire gift. The retention of an annuity or unitrust interest by the grantor is deemed to be a qualified interest.

The premature distribution penalty does not apply to which of the following IRA distributions? A distribution paid to a beneficiary after the death of the IRA owner who had not begun receiving minimum distributions A distribution made after the owner is age 55 and after separation from service A distribution made for purpose of paying qualified higher education costs A) I and III B) III only C) I only D) I and II

Explanation The answer is I and III. A distribution made after the owner is age 55 and after separation from service is only an exception for distributions from qualified plans, not from IRAs.

Which of the following are the tax implications of a 10-year term charitable lead trust with the donor's children as the remainder beneficiaries? The donor's charitable gift tax deduction is determined by the present value of the charity's right to receive trust assets at the end of the 10-year term. The donor is liable for gift tax based on the entire value of the gift to the children as discounted to the date of the gift. The entire value of the assets gifted to the trust will be removed from the donor's gross estate only if he or she outlives the 10-year term. Each year, as the trust pays income to the charity, the donor receives a charitable income tax deduction for that amount.

In a charitable lead trust, the charity receives the income with the remainder to a noncharitable beneficiary. The present value of this remainder interest is taxable. Therefore, the charitable gift tax deduction I is the present value of the income interest. III is incorrect as the entire value of the trust assets is removed from the grantor's gross estate no matter when the grantor dies. IV is incorrect as the amount of the charitable income tax deduction is based on the value of the gift to the charity in the year the gift is made, not on income earned.

Which one of the following statements regarding Henry, who recently married for the first time, is CORRECT?

In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. Income earned after marriage is considered community property.

All of the following items of property would be considered community property in a community property state except

In a community property state, property acquired by one of the spouses by gift or inheritance during their marriage is considered to be separate property. Items owned prior to the marriage can also be separate property. real estate received by one spouse during marriage as an inheritance from her mother.

Your client has made the following lifetime cash gifts: Total Gifts to DaughterTotal Gifts to Son2018$35,000$75,0002021$90,000$55,000 How much of your client's applicable credit is gone on December 31, 2021?

Remember the cumulative nature of the gift tax and the annual exclusion amount for present value gifts. The total gifts to the daughter and the son in 2018 are reduced by the $15,000 annual exclusion to arrive at a net taxable gift total of $80,000 ($35,000 − $15,000 + $75,000 − $15,000). The same applies to the 2021 gifts resulting in a net gift totaling $115,000 ($90,000 − $15,000 + $55,000 − $15,000). To calculate the tax you need to first figure the tax on the total of the gifts from both 2018 and 2021 ($80,000 + $115,000 = $195,000). Tax on $195,000 would be $38,800 + 32% of $45,000 (the amount over $150,000), which is $14,400. $14,400 + $38,800 = $53,200.

Rolando owned a parcel of real estate as an equal tenant in common (TIC) with his wife, Liz, and his brother, Sam. Rolando and Liz each contributed $50,000 to the original purchase price, and Sam contributed $20,000. Rolando recently died and is survived by Liz and Sam. Which of the following statements are CORRECT concerning a tax implication of this form of property ownership? Rolando's estate must include one-third of the property's fair market value (FMV) as of the date of death. When they took title as TIC, both Rolando and Liz made a gift to Sam. Rolando's estate must include 41.66% of the property's FMV at the date of death, unless his personal representative can prove contribution by Sam. After Rolando's death, Liz will be entitled to receive 83.33% of the income from the property because she will receive Rolando's interest by right of survivorship.

Rolando's estate must include one third of the date of death FMV of the property because that is his percentage share of ownership. Contribution by the parties would be relevant only if the property were owned in joint tenancy. Sam obtained a one-third ownership interest, but paid less than one-third of the purchase price; thus, Rolando and Liz each have made a gift to Sam. Liz will not automatically receive Rolando's interest, as tenancy in common has no right of survivorship feature.

Rollie plans on purchasing some U.S. savings bonds with his son, Steven. He has been told that he can title the bonds either as "Rollie or Steven" or "Rollie payable on death to Steven." Which of the following statements are CORRECT regarding advantages and disadvantages of these two methods of titling? "Rollie or Steven" would not avoid probate of the bonds. "Rollie payable on death to Steven" would give Rollie sole control of the bonds during his life. "Rollie payable on death to Steven" would allow Rollie to remove Steven as beneficiary. "Rollie or Steven" would allow the survivor to become the sole owner of the bonds without the bonds going through probate.

Rollie would avoid probate using a joint tenancy with right of survivorship (JTWROS) or payable on death (P.O.D.) designation because these are will substitutes.

Of the following actions taken last year by Joan, which transfers must be included in calculating her total gifts for last year? Purchase of a certificate of deposit (CD) that is payable to her daughter on Joan's death Writing a check to her mother for $3,600 to assist her in paying for recent surgery Placement of her brother's name jointly with her own on the deed to a commercial office building that she purchased Cancellation of an $25,000 debt owed to her by her best friend

Statement I is false because the gift has not been completed. The daughter only has a future interest in the CD.

Which of the following are important characteristics of the gift tax marital deduction? It enables the donor to avoid gift tax liability by transferring the entire liability for gift taxes to the donee spouse. It allows the donor to avoid gift tax liability on up to one-half of the value of the gifted property that is received by the donee spouse. It allows the donor to avoid gift tax liability on the amount of the gift in excess of the annual exclusion amount. It allows the donor to avoid gift tax liability on a gift to a donee spouse.

Statement I is false because there would be no gift tax liability for the spouse. The marital deduction would transfer estate tax liability, but not gift tax liability. Statement II is false because it allows the donor to avoid gift tax on 100% of the value.

Which of the following are CORRECT statements about the filing requirements and/or the responsibility for payment as they relate to federal transfer taxes? A donee can be held responsible for paying the gift tax on a transfer that she has received if the IRS cannot collect from the donor. A federal estate tax return need not be filed unless an estate owes estate taxes in excess of the unified credit. The beneficiary is responsible for paying the generation-skipping transfer tax on a distribution from a trust and must file a tax form. A federal gift tax return need not be filed for a gift that is split with the donor's spouse.

Statement II is false as an estate tax return is always required. Statement IV is false because the exact opposite is true: A gift tax return, while not always required, is required when gift splitting is used.

Your client has an estate valued at $3 million. Two months ago, his wife died. He and his deceased wife did not have any children together, but she had two children from a prior marriage. His will, drafted in 2007, leaves everything to his wife. Nocontingent beneficiary is named in the will, and it does not contain a residuary clause. Included in the client's estate are real estate holdings in three other states. He wants to retain lifetime ownership of these properties because of the income they provide him. He would like the real estate holdings to pass to his wife's children in equal shares upon his death. He would like the remainder of his estate to go to his brother. Which of the following are serious estate planning pitfalls that can be avoided if your client amends his will to carry out his objectives? Having the estate pass under the laws of intestacy Having the estate assets distributed through probate Having the estate pay any estate tax Having part of the estate pass to unintended beneficiaries

Statement II is false because amending a will has no effect on whether probate can be avoided. Wills are probated. Statement III is false because amending a will has no effect on the estate tax calculation.

Which of the following are characteristics of a gift-leaseback? The property involved in the transaction usually is a business-related asset. The property involved in the transaction usually is gifted to a donee in a lower marginal income tax bracket. The donor retains security in the gifted property. The lease payments made by the donor to the donee are considered additional gifts.

Statement II is false because in a gift-leaseback the donor relinquishes security and control of the gifted property. Statement IV is false because lease payments are income to the donee, not additional gifts.

Which of the following statements correctly identify estate planning activities that can be performed by a financial planner who is not also a licensed attorney? Advise a client as to who would receive property under the state intestacy statutes Estimate a client's potential federal gift tax liability Advise a client that he or she needs a new will Draft a living will for a client to execute

Statements I and IV are actions only a licensed attorney can perform. Planners can certainly estimate gift tax liability and determine if a current will meets client estate planning goals.

Section 403(b) plan (tax-sheltered annuity plan or TSA) employer contributions must abide by the annual additions limit. must not discriminate in favor of highly compensated employees. are based on a maximum annual covered compensation of $230,000 in 2020. are subject to FICA (Social Security and Medicare) and FUTA (federal unemployment) payroll taxes.

The answer I and II. A Section 403(b) or TSA plan is subject to the annual additions limit of the lesser of 100% of compensation or $57,000 for 2020. Contributions must not discriminate in favor of highly compensated employees. Employer contributions are based on a maximum annual covered compensation of $230,000 and are not subject to FICA and FUTA payroll taxes (employee deferrals are subject to FICA and FUTA).

Reed, age 45, has come to you for help in planning his retirement. He works for a manufacturing company, where he earns a salary of $75,000. Reed would like to retire at age 65. He feels this is a realistic goal because he has consistently earned 9% on his investments and inflation has only averaged 3%. Assuming he is expected to live until age 90 and he has a wage replacement ratio of 80%, how much will Reed need to have accumulated on the day that he retires to adequately provide for his retirement lifestyle?

The answer is $1,490,649. Step 1: Determine the present value of capital needs: Current income$75,000Wage replacement ratio× 80%Present value of capital needs$60,000 Step 2: Determine the future value of the capital needs in the first year of retirement: PV of capital needs($60,000)n (number of years until retirement)20i (use inflation rate)3FV (required income in the first year of retirement)$108,366.6741 Step 3: Determine the amount of savings (capital) needed at retirement to fund expenses throughout remainder of life expectancy: PMTAD(annuity due)($108,366.6741)n (retirement life expectancy)25 (90 − 65)i (use real rate of return)5.8252 [(1.09 ÷ 1.03) − 1] × 100PV (capital needed at retirement)$1,490,649 LO 8.3.2

Reed, age 45, has come to you for help in planning his retirement. He works for a manufacturing company, where he earns a salary of $75,000. Reed would like to retire at age 65. He feels this is a realistic goal because he has consistently earned 9% on his investments and inflation has averaged 3%. If Reed expects to live until age 90 and he has a wage replacement ratio of 80%, assuming a capital preservation approach, how much will Reed need to have accumulated on the day that he retires to adequately provide for his retirement lifestyle?

The answer is $1,663,516. Step 1: Determine the present value of capital needs: Current income$75,000Wage replacement ratio× 80%Present value of capital needs$60,000 Step 2: Determine the future value of the capital needs in the first year of retirement: PV of capital needs($60,000)n (number of years until retirement)20i (use inflation rate)3%FV (required income in the first year of retirement)$108,366.6741 Step 3: Determine the amount of savings (capital) needed at retirement to fund expenses throughout remainder of life expectancy using a capital utilization approach: PMTAD(annuity due) ($108,366.6741) n (retirement life expectancy)25 (90 − 65)i (use real rate of return)5.8252 [(1.09 ÷ 1.03) − 1] × 100PV (capital needed at retirement)$1,490,649 Step 4: For capital preservation, calculate the additional capital needed at retirement to generate the desired retirement income and leave a balance at life expectancy equal to the original capital utilization value: FV = $1,490,649 n = 25 i = 9 Solve PV = (172,867) Add to previous step: $1,490,649 + $172,867 = $1,663,516 LO 8.3.2

Richard participates in a traditional defined benefit pension plan at work. His projected monthly benefit under the plan is $1,000. If the plan provides life insurance for Richard, the death benefit payable under the policy is limited to

The answer is $100,000. Defined benefit plans use the 100 times test for determining whether they comply with the incidental benefit rules. Under this test, the death benefit cannot exceed 100 times the participant's projected monthly benefit (in this instance, $100,000).

Thad and Debra, both age 48, are married and will file a joint return. Their 2020 modified adjusted gross income is $120,000, (including Thad's $95,000 salary). Debra had no earned income of her own. Neither spouse was covered by an employer-sponsored retirement plan. What is the total maximum deductible contribution Thad and Debra may make to a traditional IRA this year?

The answer is $12,000. Because neither Thad nor Debra participates in an employer-sponsored retirement plan, they can contribute and deduct $6,000 each for 2020. While Debra has no earned income, a spousal IRA may be established and funded based on Thad's compensation.

Sally, age 37, works for two employers, ABC Corporation and XYZ Corporation, both of which maintain Section 401(k) plans. If Sally defers $6,000 to ABC's Section 401(k) plan in 2020, how much can she then defer to XYZ's plan this year?

The answer is $13,500. The maximum allowable elective deferral for 2020 is $19,500. If Sally contributes $6,000 to ABC's plan, then she can only contribute up to $13,500 to XYZ's plan ($19,500 − $6,000 = $13,500).

John Irving, the 55-year old owner of ABC Corporation, wants to implement a new comparability plan. John's salary is $150,000. The remaining eligible participant census is as follows: AgeSalaryEmployee A35$50,000Employee B33$45,000Employee C54$60,000Employee D41$35,000Employee E43$36,000 If John wants to contribute an aggregate total of $41,300 to the plan this year, what is the maximum amount John can contribute to the comparability plan for himself?

The answer is $30,000. A new comparability plan will only satisfy the nondiscrimination rules if the plan design satisfies one of either of these: Each eligible non-highly compensated employee (HCE) must receive an allocation of at least 5% of compensation. If the plan provides for an allocation rate of less than 5%, the minimum allocation rate for the non-HCEs is one-third of the highest allocation rate under the plan. John can contribute a maximum $30,000 (20%) of his salary to the plan while limiting his other employees to as little as 5% of salary. In this example, the total compensation of the eligible employees is $226,000. A 5% contribution for this group totals $11,300, leaving $30,000 of the total $41,300 for John's benefit. LO 3.2.1

Jack is a single taxpayer who retired at age 62 and receives a qualified plan pension of $1,500 each month. He has begun working as a consultant to various firms and is projecting he will earn $70,000 in 2020. What is the maximum deductible contribution Jack may make to a traditional IRA for 2020?

The answer is $7,000. Jack is not currently an active participant in a qualified plan, is age 50 or older, under 70½, and has earned income in 2020. Jack may make a deductible IRA contribution of $7,000 (6,000 + $1,000 catch-up) for 2020.

Steve retired from ABC Corporation this year and received a lump-sum distribution from ABC's qualified retirement plan. The distribution consisted entirely of ABC stock valued at $200,000 on the date of distribution. The fair market value of the stock at the time of contribution to the plan was $80,000. Assuming Steve does not sell the stock this year, what amount is included in Steve's gross income this year as a result of the distribution?

The answer is $80,000. Because the distribution is a lump-sum distribution of employer stock, the net unrealized appreciation (NUA) concept applies. Under the NUA rules, the adjusted basis of the stock to the plan trust ($80,000) is included in Steve's gross income in the year of the distribution and is treated as ordinary income. When Steve later sells the stock, he will have an $80,000 basis in it.

To be eligible to adopt a SIMPLE 401(k), an employer may have no more than

The answer is 100 employees who earned at least $5,000 last year. An employer with 100 or fewer employees who earned $5,000 or more during the preceding year may adopt a SIMPLE 401(k).

Roderick Manufacturing maintains a qualified defined benefit pension 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?

The answer is 40. Under the 50/40 test, a defined benefit plan must cover the lesser of 50 employees or 40% of all eligible employees. In this case, the lesser of 50 employees or 40% of all eligible employees (100) is 40 employees. One way to remember the 50/40 test is the phrase "people before percentages" (50 people or 40%). Also, note that there are no qualifiers to the types of people. It is not 50 non-highly compensated people. It is just 50 employees who work for Roderick Manufacturing.

Ross Company has a traditional Section 401(k) plan. The actual deferral percentage (ADP) for all eligible non-highly compensated employees (non-HCEs) is 4%. What is the maximum ADP for the highly compensated employees (HCEs) group at Ross Company?

The answer is 6%. The maximum ADP for HCEs at the Ross Company is 6%. To satisfy the ADP test, a traditional 401(k) plan must meet one of the following two tests. The ADP for eligible HCEs must not be more than the ADP of all other eligible employees multiplied by 1.25. In this case, the non-HCEs averaged 4%. (4% × 1.25 = 5%) The ADP for eligible HCEs must not exceed the ADP for other eligible employees by more than 2% (4% + 2% = 6%), and the ADP for eligible HCEs must not be more than the ADP of all other eligible employees multiplied by 2 (4% × 2 = 8%). This second test is a lesser-than test. The lesser number is 6%. Thus, 6% is the second test answer. Thus, the two test answers are 5% and 6%. The plan only must pass one of these tests, and the HCEs want to know how much they can contribute, so the higher number always wins. That is 6% in this case. LO 3.3.2

Martha has been impressed with the appreciation of the coin collection she received as a gift from her mother and would like to take advantage of this by using coins as an investment in the IRAs. Which of the following statements regarding coins as investments in IRAs is CORRECT?

The answer is American Eagle gold coins are permitted IRA assets. Only permissible collectible that an IRA may invest in is certain U.S. coins, such as the American Eagle gold coin.

Required minimum distributions from a traditional IRA must begin no later than

The answer is April 1 of the year following the year in which the IRA owner attains age 70½. The Internal Revenue Code provides that minimum distributions from a traditional IRA must begin no later than April 1 of the year following the year in which the IRA owner attains age 70½.

While Section 403(b) (tax-sheltered annuity plan or TSA) plans are an excellent source of retirement savings, they do have some disadvantages, such as investments are limited to mutual funds and annuities. Section 403(b) plans must comply with the actual contribution percentage (ACP) test for employer matching contributions. actual deferral percentage (ADP) testing causes Section 403(b)/TSA plans to be relatively costly and complex to administer. account balances at retirement age are guaranteed to be sufficient to provide adequate retirement amounts for employees who entered the plan at later ages.

The answer is I and II. Section 403(b)/TSA plan investments are limited to mutual funds and annuities. Although the ADP test does not apply, Section 403(b)/TSA plans must comply with the ACP test for matching contributions. One way to remember that Section 403(b) plans must pass ACP testing and not ADP testing is that Section 403(b) plans are for 501(c)(3) organizations. The (c) in 501(c)(3) is like the "C" in ACP testing. Nondiscrimination testing causes Section 403(b)/TSA plans to be relatively costly and complex to administer. Account balances at retirement age may not be sufficient to provide adequate retirement amounts for employees who entered the plan at later ages.

Jack inherited his father's Section 401(k) plan account. Which of the following statements regarding Jack's options is (are) CORRECT? Jack is permitted to use a direct trustee-to-trustee transfer of the plan balance into an inherited IRA account. If Jack creates an inherited IRA with the benefit, he can designate his own beneficiary to the account. The payout of the benefit in an inherited IRA is over the lifetime of the original account holder, Jack's father.

The answer is I and II. Statement III is incorrect. As a non-spouse beneficiary, Jack is required to receive distributions over his own remaining life expectancy, reduced by 1 each year.

Which of the following statements regarding integrating a plan with Social Security are NOT correct? Only the excess method can be used by a defined benefit pension plan. The maximum increase in benefits for earnings above the covered compensation level is 26.25% for a defined benefit pension plan. Because there is a disparity in the Social Security system, all retirement plans are allowed integration with Social Security. Under the offset method, a fixed or formula amount approximates the existence of Social Security benefits and reduces the plan formula.

The answer is I and III. Statement I is incorrect because the excess method may only be used by a defined contribution plan. A defined benefit pension plan may use either the excess method or the offset method for Social Security integration. Statement III is incorrect because not all retirement plans may be integrated with Social Security.

Blake, age 72, is required to take substantial required minimum distributions (RMDs) from his qualified retirement plan. He has no current need for the income and wants to decrease the amount of the distributions without incurring a penalty. Blake is not interested in a lump-sum distribution from the plan at this time. Which of the following statements regarding Blake's options is CORRECT? Blake may take a distribution in addition to his RMD from his qualified plan and convert the additional distribution to a Roth IRA within 60 days. Blake cannot roll over retirement plan proceeds to a traditional IRA after age 70½.

The answer is I only. If Blake takes a distribution that is in addition to his RMD, he can pay the required income tax on this distribution and convert it to a Roth IRA. Because there are no required minimum distributions for Roth IRAs, Blake will have effectively reduced the amount of his pretax retirement plan account against which he must calculate subsequent RMD. Statement II is incorrect. A direct transfer or rollover may occur after age 70½ but no new contributions can be made after age 70½.

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

The answer is I only. Money purchase pension plans, profit-sharing plans, and target benefit pension plans do not require PBGC insurance because they are forms of defined contribution plans. Only defined benefit pension plans (traditional defined benefit plans and cash balance plans) require the payment of PBGC insurance premiums.

Which of the following statements describing how qualified pension plans differ from SEP and SIMPLE plans is(are) CORRECT? Qualified plan rules provide greater flexibility in the number and makeup of the employees covered by the plan than do the rules pertaining to SEP and SIMPLE plans. Participants must be fully and immediately vested in the contributions to qualified plans, but SEP and SIMPLE plans are permitted to have vesting schedules.

The answer is I only. Statement II is incorrect because participants must be fully and immediately vested in the contributions to SEPs and SIMPLEs. Qualified plans can include vesting schedules.

Which of the following statements regarding the tax effects of converting a traditional IRA to a Roth IRA is (are) CORRECT? The converted amount is treated as a taxable distribution from the traditional IRA. The 10% premature penalty applies if the owner is not at least 59½ years old.

The answer is I only. When a traditional IRA is converted to a Roth IRA, the converted amount is treated as a taxable distribution and is included in the owner's gross income. The 10% penalty does not apply to the conversion amount when converted, regardless of the owner's age. However, if the taxable portion of the converted amount is withdrawn within five years of the conversion, then the taxable portion of the conversion is treated as coming out first when the converted amount is withdrawn. This taxable amount would be subject to the early withdrawal rules and penalized 10% unless an exception applies. The point of this rule is to protect Roth conversions from being sham transactions intended to get around the 10% early withdrawal penalty. The law treats withdrawals of converted amounts that are more than five years past the conversion date the same as contributions.

Which of the following are considered profit-sharing plans? Stock bonus plan Traditional Section 401(k) plan New comparability plan Employee stock option plan (ESOP)

The answer is I, II, III, and IV. All of these are considered profit-sharing plans. They don't require fixed annual employer contributions and are not affected by the minimum funding standard requirements.

Which of the following are true of the actual contribution percentage test (ACP) test for 401(k) plans? The ACP test is not used unless a 401(k) plan has a match or allows employee after-tax contributions. The ACP test uses the same two test structure and percentage rules as the ADP test. The ADP test accounts only for employee deferrals. The ACP test accounts for employer matching and after-tax contributions, but not pretax contributions and elective deferrals. If the ADP of the non-highly compensated employees is greater than 2% but less than or equal to 8%, then the maximum ADP of the highly compensated employees is 2% more than the ADP of the non-highly compensated employees.

The answer is I, II, III, and IV. All statements are true.

A business owner-client approaches a financial planner for advice on selecting a retirement plan for the business. What factors should guide the financial planner's recommendations? The owner's retirement savings need The owner's current age The amount of risk the client is comfortable assuming The financial stability of the business.

The answer is I, II, III, and IV. All the factors listed should be considered in selecting a retirement plan for the business.

Which of the following retirement plans can be integrated with Social Security? Profit-sharing plan Simplified employee pension (SEP) plan Money purchase pension plan Defined benefit pension plan

The answer is I, II, III, and IV. All these plans may be integrated with Social Security. Employee stock ownership plans (ESOPs), savings incentive match plan for employees (SIMPLEs), and salary reduction SEPs (SARSEPs) are not permitted to use integration. Also, employee elective deferrals and employer matching contributions cannot be integrated.

When is an employee stock ownership plan (ESOP) an appropriate choice for an employer to implement? The employer is either a C or an S corporation. Creating a market for the employer stock helps diversify the employer-owner's stock portfolio. The employer wishes to increase the company's liquidity by pledging the stock for a loan in the name of the ESOP. The employer wishes to transfer ownership of the business to the employees.

The answer is I, II, III, and IV. All these statements regarding ESOPs are correct.

Section 401(k) plans must have automatic survivor benefits (QJSAs and QPSAs) unless the plan provides that, upon the participant's death, the vested account balance will be paid in full to the surviving spouse. the plan is not a direct or indirect transferee of a plan to which the automatic survivor annuity requirements apply. the participant elects to receive payment as a lump-sum distribution. the participant does not elect payments in the form of a life annuity.

The answer is I, II, III, and IV. For a participant to have elected to receive a lump-sum distribution, the spouse must sign a spousal consent form in front of a notary or an authorized plan representative.

Which of the following may be eligible for rollover treatment? A total distribution from a Section 401(k) plan A distribution from an IRA The nontaxable portion of qualified plan distribution A required minimum distribution payment

The answer is I, II, and III. All IRA and qualified plan distributions are eligible for rollover treatment except distributions made to satisfy the minimum distribution rules and distributions made as part of a series of substantially equal periodic payments. Required minimum distributions are not eligible for rollover treatment. The law states a nontaxable portion of a qualified plan distribution must be made using a trustee-to-trustee transfer because that is the only reliable way to provide documentation that this money was actually nontaxable.

In a money purchase pension plan, forfeitures revert to the plan. may be used to reduce future employer contributions. can be reallocated among the remaining plan participants. do not count against remaining participants' annual additions limits.

The answer is I, II, and III. Forfeitures count against the remaining participants' annual additions limits.

A simplified employee pension (SEP) plan requires employer contributions on a nondiscriminatory basis. can be integrated with Social Security. cannot deny participation to any employee 21 years of age or older based on age. imposes mandatory employer contributions.

The answer is I, II, and III. Only statement IV is incorrect. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary.

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

The answer is I, II, and IV. A Section 403(b) plan is a tax-advantaged plan but not an ERISA-qualified retirement plan. While tax-advantaged plans are very similar to qualified plans, there are some minor differences. For example, a tax-advantaged plan is not allowed to have net unrealized appreciation (NUA) treatment. They are also not allowed to offer 10-year forward averaging or special pre-1974 capital gains treatment. Tax-advantaged plans also have less restrictive nondiscrimination rules. Otherwise they are very similar to qualified plans.

Henry works for an accounting firm that sponsors a Section 401(k) plan. Henry, who has a current salary of $35,000, was hesitant to contribute to the plan because in the past he felt as though he may need the money before retirement. At a recent employer-sponsored seminar, Henry learned that he could receive a loan from his Section 401(k) plan without paying any income tax. Henry is now considering making pre-tax elective deferrals to the Section 401(k) plan, but he wants to know more specific details regarding loan provisions. Which of the following statements regarding nonpenalized loans from qualified plans is (are) CORRECT? The limit on loans is generally one-half of the participant's vested account balance not to exceed $50,000. The limit on the term of any loan is generally five years. If an employee leaves the company, a retirement plan loan may be rolled over to an IRA and the participant may continue making the loan payments as planned. Loans to a 100% owner-employee are permissible.

The answer is I, II, and IV. Statement I is correct. Generally, loans are limited to one-half the vested account balance and cannot exceed $50,000. Note: When account balances are less than $20,000, however, loans up to $10,000 are available. Statement II is correct. The limit on the term of any loan is generally five years, unless the loan is for a principal residence. Loans for the purpose of buying a residence must be repaid over a reasonable period. Statement III is incorrect. A qualified plan loan may not be rolled over to an IRA. Any outstanding loan balance is treated as a distribution and thus is subject to income taxes and the early withdrawal penalty rules. Statement IV is correct. Loans from qualified plans to sole proprietors, partners, shareholders in S corporations and C corporations are permitted.

Which of the following statements regarding fully insured Section 412(e)(3) plans is(are) CORRECT? A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments. This type of plan is not required to be certified by an enrolled or licensed actuary. All Section 412(e)(3) plans must meet minimum funding standards each plan year. A Section 412(e)(3) plan is a type of defined benefit pension plan.

The answer is I, II, and IV. Statement III is incorrect. Section 412(e)(3) plans must only meet minimum funding standards if there is a loan outstanding against the insurance policy funding the plan.

Build Corporation communicated several goals to its financial adviser when it decided to implement a qualified retirement plan for the company. After reviewing these goals, the adviser recommended that Build Corporation implement a defined benefit pension plan. Which of the following statements regarding employers who are candidates for a defined benefit pension plan are CORRECT? Typically, they have the objective of instituting a plan with highly predictable costs. They indicate that the desire to provide a tax shelter for key employees outweighs the need for an administratively convenient plan. They want benefit levels guaranteed. They want a simple and inexpensive plan.

The answer is II and III. Employers who sponsor defined benefit pension plans typically do not have highly predictable costs, because funding is subject to an annual actuarial determination. Highly paid employees receive a tax shelter with a defined benefit plan in the sense that their compensation includes large contributions to the defined benefit and they are not subject to current income tax on this compensation. The Pension Benefit Guaranty Corporation (PBGC) and the employer guarantee benefit levels. Defined benefit pension plans are complex to design and expensive to install and maintain.

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

The answer is II and III. The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. In order to be qualified, a retirement plan must meet at least one of these tests if the plan does not meet the percentage (safe harbor) test.

Basic provisions of SIMPLE IRAs include which of the following? They are subject to actual deferral percentage test (ADP) nondiscrimination rules. Employees are 100% vested in their elective deferrals. Employees are not fully vested in employer contributions until completing five years of service. Employers with fewer than 100 employees who earned $5,000 during any two preceding years and are reasonably expected to earn at least $5,000 during the current year must be allowed to participate.

The answer is II and IV. Employees are 100% vested in their elective deferrals. Employers with fewer than 100 employees who earned $5,000 during any two preceding years and are reasonably expected to earn at least $5,000 during the current year must be allowed to participate. SIMPLE IRAs are not subject to the nondiscrimination rules generally applicable to qualified plans (including top-heavy rules). The employee is 100% vested in both his elective deferrals as well as any employer contributions.

Which of the following statements regarding Section 457 plans is (are) CORRECT? Deductibility of plan contributions is an important factor for employers choosing a Section 457 plan to consider. Earnings on assets in a Section 457 plan grow tax-deferred until withdrawn. Required minimum distribution rules do not apply. A Section 457 plan is a nonqualified deferred compensation plan.

The answer is II and IV. Statement I is incorrect. Deductibility of plan contributions is not a factor for employers choosing a Section 457 plan because these employers are tax-exempt. Statement II is correct. Earnings on assets in a Section 457 plan grow tax-deferred until withdrawn. Statement III is incorrect. Required minimum distribution rules apply. Statement IV is correct. A Section 457 plan is a nonqualified deferred compensation plan.

Which of the following persons could make tax-deductible contributions to a traditional IRA regardless of their modified adjusted gross income (MAGI)? A person who participates in a SEP IRA A person who participates in a Section 457 plan A person who participates in a Section 401(k) plan A person who participates in a Section 403(b) plan

The answer is II only. A person who participates in a qualified plan, SEP IRA, or Section 403(b) plan may not be able to make tax-deductible IRA contributions if the participant's MAGI exceeds certain limits. Participation in a Section 457 plan does not subject a person to these limitations.

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

The answer is II only. ERISA does not guarantee plan benefits; the Pension Benefit Guaranty Corporation (PBGC) guarantees benefits in defined benefit pension plans. A qualified plan is a tax-efficient way to save for retirement. Qualified plans may be established for firms with as few as one employee. Qualified plans also benefit non-highly compensated employees.

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

The answer is II only. Statement I should list the third coverage test as the average benefit percentage test, not the average contribution percentage test.

Sally, age 60, has received a $50,000 distribution from $100,000 she is to receive from her ex-husband's (who is age 55) qualified plan account under a qualified domestic relation order (QDRO). Which of the following statements is CORRECT regarding the QDRO and the distributed funds? Irrespective of the plan document, Sally may demand an immediate cash distribution of the remaining funds from the plan trustees. She may roll over the $50,000 distribution into an IRA. Sally's ex-husband is not subject to an early distribution penalty in the execution of the QDRO. Sally may be required to leave the remaining funds with the plan trustee until the earliest time for distributions under the plan.

The answer is II, III, and IV. A trustee may not be forced to distribute assets from a plan unless the plan document allows for it.

When she retired at age 64, Lauren received a lump-sum distribution from her employer's stock bonus plan. The fair market value of the employer stock contributed to her account was $200,000 at the time of contribution. At the time of the distribution, the employer stock in Lauren's account had a fair market value of $300,000. Six months later, Lauren sold the stock for $310,000. Which of the following statements regarding the sale of Lauren's stock is(are) CORRECT? The $300,000 distribution is taxed at the long-term capital gain rate. Lauren has a $10,000 short-term capital gain when the stock is sold. There was no income tax liability incurred when the stock was contributed to the plan. The net unrealized appreciation (NUA) on the stock is $100,000.

The answer is II, III, and IV. Of the $300,000 Lauren received as a lump-sum distribution from the stock bonus plan, $100,000 is net unrealized appreciation (NUA) and will be taxed at the long-term capital gain rate. The remaining $200,000 is taxed at Lauren's ordinary income tax rate in the year of the lump-sum distribution. Because Lauren sold the stock within six months of distribution, the $10,000 post-distribution appreciation is taxed as short-term capital gain.

Adam, age 48, and Mary, age 47, were married for 15 years when they divorced last year. Adam died this year. They have two young children, ages 10 and 12, who are cared for by Mary. Adam's 70-year-old mother, Sarah, also survived him. At the time of Adam's death, he was currently, but not fully, insured under Social Security. What benefits are Adam's survivors entitled to under the Social Security program? A dependent parent's benefit A lump-sum death benefit of $255 A children's benefit based on a percentage of Adam's primary insurance amount (PIA) A surviving spouse benefit to take care of a dependent child

The answer is II, III, and IV. One lump-sum death benefit of $255 is payable if he was fully or currently insured. The children's benefit is payable because Adam was currently insured. Adam's divorced spouse (the children's mother) is entitled to a caretaker's benefit for caring for his children under age 16. Adam's mother would only be entitled to a benefit if Adam was fully insured and he had been providing at least half of her support at the time of his death.

Which of the following retirement plans generally permit in-service withdrawals at any age? Money purchase pension plan Profit-sharing plan Section 401(k) plan SEP plan

The answer is II, III, and IV. Pension plans (traditional defined benefit, cash balance, target benefit, or money purchase) generally do not allow in-service withdrawals to participants under the age of 62. All the others listed allow for in-service withdrawals if the plan document permits.

Which of the following statements regarding prohibited transactions is CORRECT? The lending of money or other extension of credit between the plan and a party in interest (outside of nondiscriminatory retirement plan loans based on the participant's account balance) is not a prohibited transaction. One category of prohibited transactions involves self-dealing. One category of prohibited transactions bars a fiduciary from causing the plan to engage in a transaction if the fiduciary knows or should know that such a transaction constitutes a direct or indirect involvement between the plan and the parties in interest. One category of prohibited transactions involves the investment in the sponsoring employer's stock or real property above certain limits.

The answer is II, III, and IV. Statement I is incorrect. The sale, exchange, lending, or leasing of any property between the plan's assets and a party in interest is a prohibited transaction. A plan participant can take a retirement plan loan based on the participant's balance, but the plan cannot make a loan of the general plan assets to a party in interest.

If a covered worker were to become disabled for Social Security benefit purposes, which of the following individuals would be eligible to also receive a benefit from Social Security based on the disabled worker's record? A dependent parent of the disabled worker, age 62 or over The disabled worker, age 62 or over The spouse of the disabled worker An unmarried dependent child of the disabled worker, under age 19 and still in high school

The answer is II, III, and IV. The dependent parent of a disabled worker is not eligible for benefits under the disabled worker's employment record when the worker receives Social Security disability benefits.

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? Inflation is higher than expected. Benefits are cost of living adjusted. Forfeitures are higher than anticipated. The investment returns of the plan are greater than expected.

The answer is III and IV. Defined benefit pension plan contributions decrease because of the events described in statements III and IV. Statements I and II are incorrect. Inflation would likely cause salaries and plan expenses to increase, thereby causing contributions to increase. Likewise, benefits that are adjusted for the cost of living would result in greater employer contributions, not less.

Todd, age 60, has made contributions of $75,000 to his traditional IRA, of which $15,000 were nondeductible contributions. He is considering taking a $20,000 distribution from his IRA, which currently has a fair market value of $175,000. When calculating the nontaxable portion of his IRA, which of the following formulas is CORRECT? Nontaxable portion = nondeductible contributions ÷ [(IRA balance at the beginning of the year + the IRA balance at the end of the year) ÷ 2] × IRA distributions Nontaxable portion = nondeductible contributions ÷ (IRA balance at the beginning of the year + any distributions taken during the year) × IRA distributions Nontaxable portion = [(nondeductible contributions prior to current year + all contributions for current year) ÷ (balances at end of current year + distributions received in current year)] × total distributions during current year

The answer is III is only. The correct formula is: nontaxable portion = [(nondeductible contributions prior to current year + all contributions for current year) ÷ (balances at end of current year + distributions received in current year)] × total distributions during current year LO 5.3.1

Bill's employer maintains a target benefit pension plan. Bill is age 59. The plan was originally designed to benefit a 38-year-old key employee. There is also substantial turnover at Bill's company. Which of the following statements is (are) CORRECT? Bill knows exactly what retirement benefit to expect. Bill's retirement benefit is funded through elective deferrals. Forfeitures are likely to be allocated equally to Bill and the 38-year-old employee. Contributions to the plan are mandatory.

The answer is IV only. Benefits depend on such plan's account balances, and the final benefit amount is not guaranteed. Target benefit pension plans are funded by the employer, not through employee elective deferrals. Forfeitures in such plans are likely to be unequal as a result of unequal compensation.

Which of the following statements regarding profit-sharing plans is (are) CORRECT? Profit-sharing plans are only suited for companies with predictable cash flows. Company profits are required to make contributions to a profit-sharing plan. Companies adopting a profit-sharing plan are required to make annual contributions to the plan. The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of total covered employee compensation.

The answer is IV only. Statements I, II, and III are incorrect. Profits are not required to be able to make a contribution to a profit-sharing plan. A current contribution may be made from retained earnings or current cash flow. Annual contributions are not required in a profit-sharing plan. Profit-sharing plans are suitable for companies with unstable earnings given that they have discretion over contributions.

For tax-exempt employers who do not want to implement a Section 457 plan and desire a plan funded strictly by employee elective deferrals, a good alternative would be

The answer is Section 403(b) plan. A Section 403(b) plan, like the Section 457 plan, can be used as an employee deferred-contribution plan. Certain tax-exempt employers can implement Section 403(b) plans. With a SEP plan or a profit-sharing plan, there are also employer contribution considerations. New SARSEP plans can no longer be established.

Armor Company has implemented an age-based profit-sharing plan. Under this plan,

The answer is allocations to participants are made in proportion to the participant's age-adjusted compensation. A participant's compensation is age-adjusted by multiplying the participant's actual compensation by a discount factor based on the participant's age and the interest rate elected by the plan sponsor. As a result, older employees generally receive the greatest allocation under an age-based profit-sharing plan. Nondiscrimination rules are tested in accordance with benefits rather than contributions. The final retirement benefit is not guaranteed in any type of profit-sharing plan.

All the following statements describe situations in which a target benefit pension plan would best suit the company except

The answer is an employee census showing young owners and young rank-and-file employees. A good candidate for a target benefit pension plan is a business that has an employee census showing older owners who are around 50 or older and younger rank-and-file employees. The other choices are additional characteristics that describe good candidates for target benefit pension plans.

Which of the following qualified plan distributions is subject to the 10% penalty for early withdrawal?

The answer is an in-service hardship distribution from a Section 401(k) plan to an employee-participant, age 55. Even if the distribution is a hardship withdrawal, the penalty applies unless the employee-participant has attained the age of 59½ (or one of the other 10% penalty exceptions applies).

Why would a qualified retirement plan include real estate among its portfolio of investment assets?

The answer is as an inflation hedge. The inclusion of real estate among a retirement plan's investment portfolio is most suitable as a hedge against future inflation. Otherwise, it is generally nonliquid, is not stable enough to fund fixed obligations, and is not always considered a very low risk holding.

Which of the following statements regarding a stretch IRA is CORRECT? It allows the IRA owner's beneficiary to name his own beneficiary upon the owner's death. It extends or stretches the period of tax-deferred earnings within an IRA possibly over several decades.

The answer is both I and II. A stretch IRA extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the original owner, possibly over several decades.

A traditional IRA is appropriate when it is considered an important supplement or alternative to a qualified pension or profit-sharing plan. sheltering current compensation or earned income from taxation is a taxpayer's goal.

The answer is both I and II. A traditional IRA is also suitable when a taxpayer wishes to accumulate assets for retirement or defer taxes on investment income.

Which of the following statements regarding plan forfeitures in a money purchase pension plan is(are) CORRECT? Plan forfeitures may be used to reduce future employer contributions. 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.

The answer is both I and II. Both of these statements are correct for money purchase pension plans.

Which of the following regarding Social Security funding is (are) CORRECT? Social Security is funded through a series of taxes paid by the participant and the participant's employer. Social Security is funded through a Federal Insurance Contributions Act (FICA) tax and the self-employment (SECA) tax.

The answer is both I and II. Social Security is funded through a series of taxes paid by both the participant and participant's employer, commonly called payroll taxes. A self-employed individual must pay both the employer and employee portions of the FICA tax, known as the self-employment (SECA) tax.

A fully insured Section 412(e)(3) pension plan is funded exclusively by

The answer is cash value life insurance or annuity contracts. A fully insured 412(e)(3) pension plan is funded exclusively by cash value life insurance or annuity contracts. Using insurance as a funding vehicle ensures the payment of a death benefit to plan beneficiaries.

A preretirement distribution from a qualified retirement plan can escape the 10% early withdrawal penalty in each of the following situations except

The answer is distributions made after a separation from service for early retirement after any age. For a preretirement distribution to escape the 10% penalty for early distribution, the distribution must be made after a separation from service in the year the worker turns age 55 or later. This exception is not applicable to IRAs.

Napoleon Enterprises sponsors a SIMPLE 401(k) for its employees. Under the plan, the company matches employee contributions up to 3% of compensation. Which of the following statements about Napoleon Enterprises' SIMPLE 401(k) is CORRECT?

The answer is employees cannot make after-tax contributions to the plan. Employee after-tax contributions are not allowed. All the other statements are incorrect: Unlike SIMPLE IRAs, employers that sponsor SIMPLE 401(k)s cannot reduce the matching percentage to below 3%. Employer contributions to a SIMPLE 401(k) are 100% vested. The 25% penalty applies only to SIMPLE IRAs.

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

The answer is expected to last at least 12 months or result in death. To qualify for Social Security disability income benefits, a person must suffer an impairment that is expected to last at least 12 months or result in death. The disability also must have lasted at least 5 months before Social Security disability benefits can be paid.

Which of the following is one of the differences between defined benefit pension plans and defined contribution plans?

The answer is investment risk is borne by the employer in a defined benefit pension plan, whereas the employee bears the risk in a defined contribution plan. A defined benefit pension plan has a benefit limit, whereas a defined contribution plan has a contribution limit. Investment risk is borne by the employer in a defined benefit pension plan, whereas the employee bears the risk in a defined contribution plan. Accounts are commingled in a defined benefit pension plan, and a defined contribution plan maintains separate accounts for each participant. A guaranteed retirement benefit is the goal of a defined benefit pension plan, while a guaranteed contribution is the focus of a defined contribution plan.

Which of the following statements regarding Roth IRAs and pre-tax 401(k) plans is (are) CORRECT? Roth IRAs require distributions no later than age 70 ½ while the participant is living. There is not an income limitation to participate in a pre-tax 401(k) plan or Roth IRA.

The answer is neither I nor II. Although there is not an income limitation to participate in a pre-tax 401(k) plan, there are income limits for Roth IRAs (2020 - modified AGI: $206,000 married/$139,000 single). For Roth IRAs, there is no requirement to start taking distributions while the participant is living. For pre-tax 401(k) plans, distributions must begin no later than age 70 ½, unless the participant is still working and not a 5% owner.

Regarding assumptions used in retirement needs analysis calculations, which of the following is (are) CORRECT? All other things being equal, increasing the life expectancy of the retiree will lower the amount of capital needed on the first day of retirement to support the assumed retirement income. All other things being equal, changing the assumed rate of return from 6% to 8% and the assumed inflation rate from 2% to 4%, will lower the amount of capital needed on the first day of retirement to support the assumed retirement income.

The answer is neither I nor II. Increasing the life expectancy of the retiree increases the amount of capital needed on the first day of retirement to support the assumed retirement income because the retiree will draw on the capital fund for a longer period. Statement II is incorrect because an 8% investment return and 4% inflation rate produces a lower inflation-adjusted rate of return, and thus increases the amount of capital needed on the first day of retirement to support the assumed retirement income. [(1.06 ÷ 1.02) − 1] × 100 = 3.9216%; [(1.08 ÷ 1.04) − 1] × 100 = 3.8462% LO 8.3.1

Robert established a Roth IRA. He turns age 70½ this year. Which of the following statements is (are) CORRECT? Robert must begin taking required minimum distributions (RMDs) by April 1 of next year. Robert can no longer make contributions to the Roth IRA.

The answer is neither I nor II. The original owner of a Roth IRA is never subject to an RMD requirement during his lifetime and can continue making contributions after he reaches age 70½.

The Department of Labor (DOL) issues

The answer is rulings including prohibited transaction exemptions (PTEs). The Department of Labor issues advisory opinions and rulings (including prohibited transaction exemptions) similar to private-letter rulings, which are issued by the IRS. The DOL does not issue guaranty insurance. The summary plan description is required by the DOL, but the DOL does not approve plan documents. The IRS approves plan documents.

ABC Company would like to establish a retirement plan incorporating the following objectives: Attract and retain employees. The employer will make all contributions to the plan with company stock. The plan must integrate with Social Security. What type of retirement plan best suits ABC's objectives?

The answer is stock bonus plan. A stock bonus plan would accomplish ABC Company's objectives. The others are not the best plan for these reasons: Money purchase pension plans only allow for 10% company stock. ESOPs cannot be integrated with Social Security. New SARSEPs can no longer be established.

A state or local government would choose to establish a Section 457 plan for all the following reasons except

The answer is tax deductibility of employer contributions. Because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue and would not be a reason to establish such a plan. A Section 457 plan is not a qualified plan and has no early withdrawal penalty on distributions.

What is the taxable character of distributions that are made from a Roth IRA?

The answer is tax-free income if the distribution meets the holding period and qualified distribution requirements. Distributions made from a Roth IRA are income tax free if the Roth IRA meets certain specified conditions. These conditions include meeting the 5-year holding period and 1 of the following: (1) the owner is age 59½ or older, (2) distribution upon disability of the owner, (3) distribution to a beneficiary upon the death of the owner, or (4) for a first-time home purchase (up to a $10,000 lifetime cap).

Which of the following statements is NOT correct regarding the conversion of a traditional IRA to a Roth IRA?

The answer is the IRA owner's modified adjusted gross income (MAGI) cannot exceed $100,000 in the year of the conversion. There is no MAGI limit for a taxpayer in the year in which there is a conversion.

Under a profit-sharing plan,

The answer is the company has flexibility as to annual funding. Pension plans can invest up to 10% only of plan assets in employer stock. Profit-sharing plans have no restrictions regarding investment in employer stock. The employer may deduct a contribution limited to only 25% of participating employees' covered compensation. The employer must make substantial and recurring employer contributions, or the IRS will remove the plan's qualified status. The employee bears investment risk.

Total annual contributions to an individual participant in a traditional Section 401(k) plan are limited in 2020 to

The answer is the lesser of 100% of compensation, or $57,000. Total annual contributions to a participant's account are limited to the lesser of 100% of employee compensation, or $57,000 (2020 with only the first $285,000 (2020) of employee compensation considered in the contribution formula. The total contribution is made up of the worker contribution, the employer contribution and reallocated forfeitures. The worker contribution alone is limited to $19,500 in 2020 for those 49 and younger.

Because a simplified employee pension (SEP) plan is not a qualified plan, it is not subject to all the same rules as qualified plans; however, it is subject to many of the same rules. Which of the following statements when comparing or contrasting a SEP plan to a qualified plan is CORRECT?

The answer is the maximum contribution possible on behalf of an individual participant is $57,000 (2020). Both SEP plans and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution possible on behalf of an individual participant is $57,000 (2020). Qualified plans are protected under ERISA and federal bankruptcy law. SEPs share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.

Jill has decided to offer a retirement plan to her employees. She wants to implement a savings incentive match plan for employees (SIMPLE) and is trying to decide between a SIMPLE IRA and a SIMPLE 401(k). All of the following statements apply to both types of SIMPLE plans except

The answer is there is a 25% penalty for early distributions from a participant's account within two years of entry into the plan. Only early distributions from a SIMPLE IRA within the first two years of initial participation in the plan are subject to the 25% early withdrawal penalty tax.

Larry is a sole proprietor of a business with 15 employees. He would like to implement a formal retirement plan for his business. Larry is 55 years old and is planning to retire in 10 years at age 65. His company currently has a strong cash flow, which is expected to continue. Larry's own personal savings retirement need is $85,000 per year, and he pays himself $95,000 annually. The company can afford to contribute $100,000 this year for Larry's account to any retirement plan that is implemented. Larry will also commit to an annual contribution necessary to fund the retirement plan if needed. Based on limited information, which of the following types of qualified retirement plans would you recommend for Larry and his business?

The answer is traditional defined benefit pension plan. This type of plan is most appropriate for Larry and his business. The business has favorable cash flow and can commit to the annual contribution required by the defined benefit approach. Additionally, Larry's savings need as a percentage of his compensation exceeds anything possible in a defined contribution plan. Finally, Larry is currently age 55 with only 10 years until retirement.

Required minimum distributions from a qualified plan to a plan participant must be calculated using the Uniform Lifetime Table in all cases except

The answer is when the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. The Uniform Lifetime Table must be used to calculate required minimum distributions under a qualified plan or IRA unless the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant, in which case the actual joint life expectancy is used.

Your client, a widow, has made the following lifetime gifts to her son in an effort to reduce the size of her gross estate: YearGiftTaxable Gift2012$323,000$310,0002016$254,000$240,0002021$465,000$450,000 If she used her applicable credit to offset gift tax liability on the gifts, what amount of applicable credit remains available to your client for gifts in 2021?

The total taxable gifts come to $1,000,000 and tax on the first $1,000,000 is $345,800. Subtract that from the 2021 applicable credit of $4,625,800 and the result is $4,280,000.

In 2018, Roland established an inter vivos irrevocable trust naming his wife as the sole income beneficiary of the trust. All income must be distributed annually. At his wife's death, the balance of the trust will be in her gross estate. The trust was funded with $3 million in cash and assets. Which one of the following most closely approximates Roland's taxable gift for this transfer?

The unlimited marital deduction eliminates any gift tax liability on such a transfer.

Cisero gifted 2,000 shares of his stock in a closely held corporation to his daughter. These shares constitute half of the total number of shares he owned in the corporation prior to the transfer. The value of Cisero's stock in this corporation prior to the transfer was $400,000. Which one of the following statements is CORRECT regarding the value of the stock transferred to his daughter?

This transfer would not qualify for a blockage discount as it is not publicly traded stock. It would not qualify for special use valuation either, but a reasonable lack of marketability discount is available and would not violate Chapter 14 rules.

Which of the following statements is CORRECT regarding a CFP® certificant's role in defining a client's financial goals, needs, and priorities? The role of the planner is to facilitate the goal-setting process. IThe role of the planner is to assist clients in recognizing the implications of unrealistic goals and objectives. The role of the planner is to make sure a client's goals and objectives are consistent with the client's values and attitudes. The role of the planner in this process will involve exploring a client's expectations and time horizons.

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