Unit 11: Retirement Plans Checkpoint Exam

All of the following statements about a nonqualified plan are correct EXCEPT A) these plans get favorable tax treatment B) employers can provide benefits to select employees and do not have to meet discrimination requirements C) these plans do not get favorable tax treatment D) employers can design these plans in any way they wish

A) these plans get favorable tax treatment Explanation: Employers who want to provide a benefit for select employees can use a nonqualified plan, a bonus plan, or a deferred compensation plan. These plans do not get the favorable tax treatment given to qualified plans. They do not need to meet the participation, nondiscrimination, and other general requirements of qualified plans. Employers can design these plans in any way they wish.

Kurt is a high school teacher at the local public school. Which of the following plans would he most likely invest in? A) 401(k) plan B) 403(b) plan C) Simplified employee pension (SEP) plan D) Keogh plan

B) 403(b) plan Explanation: 403(b) plans work much like 401(k) plans, but they are for employees for nonprofit organizations such as public school systems, churches, and hospitals. Employee and employer contribution limits are generally the same as those for 401(k) plans.

Which of the following is a defined contribution plan that does NOT require an employer to make a funding contribution every year? A) IRA B) Profit-sharing plans C) Pension plans D) Keogh plans

B) Profit-sharing plans Explanation: A profit-sharing plan is a defined contribution plan that does not require an employer to make a funding contribution every year. Rather, the amount and timing of contributions is at the employer's discretion. Contributions are dependent on the company making a profit. Pension plans do require the employer to make a contribution each year.

A premature withdrawal is a withdrawal taken from an IRA before the age of A) 70 1/2 years B) 45 1/2 years C) 72 years D) 59 1/2 years

D) 59 1/2 years Explanation: Earnings on IRA contributions are tax deferred. If the policyowner makes a premature withdrawal - before age 59 1/2 - he may incur a 10% penalty tax in addition to income tax due on the amount withdrawn.

Randy has an IRA in which the money from the original IRA or qualified plan is distributed directly to the new IRA carrier without coming into the owner's possession. This is an example of A) a deposit B) a rollover C) a withdrawal D) a transfer

D) a transfer Explanation: In a transfer, the money from the original IRA or qualified plan is distributed directly to the new IRA carrier without coming into the owner's possession. There are no limits on the number of transfers. With a rollover, the money is distributed to the owner, and he deposits it to the new IRA carrier. There is a limit of 1 rollover every 12 months.

The term "vesting" determines when employees own the money in their plan. For employer contributions, employees are generally 100% vested after A) 30 days B) 5 years C) 6 years D) 1 year

C) 6 years Explanation: The term "vesting" determines when employees own the money in their plan. Employees are always immediately 100% vested int heir own contributions. As for employer contributions, employees generally must become 100% vested after 6 years.

Which of the following is a type of product in which IRA funds may NOT be invested? A) Bank accounts B) Flexible premium annuities C) Life insurance D) Mutual funds

C) Life insurance Explanation: Life insurance, collectibles, and hard assets are products in which IRA funds may NOT be invested. Flexible premium annuities, bank accounts, brokerage accounts, and mutual funds are products in which IRA funds may be invested.

Which of the following is NOT a tax advantage of an employer-sponsored qualified plan? A) Employer contributions are tax deductible to the business. B) Employer contributions are not taxable as current income to employees. C) Employee contributions are tax deductible to the employee. D) Employee contributions are taxable as current income to employees.

D) Employee contributions are taxable as current income to employees. Explanation: All employer-sponsored qualified plans have the following tax advantages. -Employer contributions are tax deductible to the business. -Employee contributions are tax deductible to the employee. -Neither employer not employee contributions are taxable as current income to employees. -All (except for the Roth 401(k) feature) earnings inside the plan are tax deferred.

Joe's Print Shop has 50 employees, and he offers a retirement plan that allows employees to defer a portion of their compensation into the plan. This plan also requires the employer to match 1% and up to 3% of the employee's compensation into the plan. Which of the following plans does Joe's Print Shop offer to their employees? A) Profit-sharing plan B) 403(b) plan C) Simplified employee pension (SEP) plan D) Savings incentive match plan for employees (SIMPLE)

D) Savings incentive match plan for employees (SIMPLE) Explanation: A savings incentive match plan for employees (SIMPLE) is a simplified retirement plan for small employers with 100 or fewer employees. The employees must also not have another retirement plan. All employees earning at least $5,000 annually must be allowed to participate in the plan.

Which of the following statements about a Roth IRA is INCORRECT? A) Qualified distributions are tax free after age 59 1/2 due to death, disability, or being a first-time homebuyer. B) Qualified distributions are tax free if the IRA has been set up for at least 5 years. C) Contributions are deductible. D) Contributions are never deductible.

C) Contributions are deductible. Explanation: Roth IRAs follow rules similar to traditional IRAs except for the contributions are never deductible. The qualified distributions are tax-free if they meet these two requirements: the Roth IRA has been set up for at least 5 years, and a distribution is after age 59 1/2, or due to death, disability, or being a first-time homebuyer; and the first-time homebuyer is dubject to a $10,000 limit.

Nathan and Cheryl have a combined adjusted gross income that is under the minimum limit. For this reason, what portion of their contribution can be deducted? A) 75% of their contribution B) 25% of their contribution C) Their entire contribution D) No portion of their contribution

C) Their entire contribution Explanation: The entire contribution is deductible for incomes below the range. A portion of the contribution is deductible for incomes between the ranges. No portion is deductible for incomes above the range.

To establish an IRA, an individual must have earned an income. Which of the following is not earned income for IRA purposes? A) W-2 income received from an employer B) 1099 income received as an independent contractor C) income from rental properties D) income from self-employment

C) income from rental properties Explanation: An individual must have earned income from salary, wages, commissions, bonuses, or self-employment. Passive income from rental properties, dividends, pensions, or annuities cannot be used for IRA eligibility.

All of the following statements about the required minimum distributions (RMDs) of an IRA are correct EXCEPT A) there is a 50% penalty on taxed owed if a minimum distribution is not taken B) the first minimum withdrawal can be delayed until April 1 of the year following the year the owner turns 72 C) there is a 25% penalty on taxes owed if minimum distributions are not taken D) RMDs must start when the owner turns 72

C) there is a 25% penalty on taxes owed if minimum distributions are not taken Explanation: If minimum distributions are not taken, there is a 50% penalty, not 25%.

All of the following statements about annual IRA contribution limits are correct EXCEPT A) flat dollar limits in an IRA also apply to spousal IRAs B) individuals age 50 and under have a catch-up provision available to increase flat dollar amount C) annual IRA contributions are capped at the less of 100% of earned income or a flat dollar amount D) individuals age 50 and over have a catch-up provision available to increase the flat dollar amount

D) individuals age 50 and over have a catch-up provision available to increase the flat dollar amount Explanation: Individuals 50 and over have a catch-up provision available to increase the flat dollar amount.