Unit 18

Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be A) $0 B) $2,000 C) $1,500 D) $2,500

A) $0 There is no penalty if a participant withdraws more than the required minimum distribution.

Money in an UTMA may be used to pay for certain expenses relating to the minor. Which of the following would be permitted usage of funds in an UTMA? A) A vacation trip to Orlando B) Paying for the minor's share of the heating and lighting expenses C) Milk, bread, and eggs D) A new suit

A) A vacation trip to Orlando Although the custodian has wide latitude in how money in this account may be spent, in general, it is not permitted to use it for the basic necessities, such as food, clothing, and shelter.

Withdrawals during retirement from which of the following accounts would most likely be subject to the greatest amount of taxation? A) Nonqualified variable annuity B) Qualified variable annuity C) Roth IRA D) Nondeductible traditional IRA

B) Qualified variable annuity The entire amount of the distribution from a qualified annuity will be subject to taxation at ordinary income rates. No tax is due on the Roth IRA, and only the earnings on the nonqualified annuity or nondeductible IRA will be subject to tax.

Those individuals who are considered parties in interest due to handling the assets of a corporate retirement plans are A) able to sell personal securities to the plan if that will benefit plan participants. B) not permitted to use those funds to acquire company assets in an amount beyond the allowable limits. C) encouraged to use plan funds to assist the employer when there is a cash flow crisis. D) not considered to have a fiduciary responsibility.

B) not permitted to use those funds to acquire company assets in an amount beyond the allowable limits. The Employee Retirement Income Security Act of 1974 (ERISA) does permit an employee benefit plan to acquire certain company assets subject to statutory limits, generally a maximum of 10% of the plan's assets.

With respect to a qualified retirement plan, fiduciaries must act in all of the following ways except A) to diversify investments to minimize the risk of large losses, unless doing so is clearly not prudent under the circumstances. B) solely in the interest of the sponsoring employer. C) solely in the interest of plan participants and beneficiaries. D) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use.

B) solely in the interest of the sponsoring employer. ERISA's rules dealing with qualified plans require that the plan's fiduciaries place the interest of the plan participants and their beneficiaries first, not the employer.

Probably the most significant benefit of saving for retirement using a Roth IRA is A) larger contributions than a traditional IRA B) tax-free treatment at withdrawal C) tax-deductible contributions D) tax-deferred accumulation

B) tax-free treatment at withdrawal Although Roth IRA contributions grow without current taxation, that doesn't make them unique. What is truly special about the Roth is that, if certain conditions are met, withdrawals are totally free of income tax.

Your client, Jane, died, and her 35-year-old son, Patrick, is the beneficiary of her IRA account. There was $750,000 in the account at the time of her death. All contributions were made with pre-tax dollars. Ten years later, the account had grown to $1.2 million, and Patrick distributed all of the money during that year. The distributions will be A) 100% taxable on the amount over $1 million. B) taxed on the amount withdrawn in a given year. C) taxable on the growth and earning since Jane's death. D) tax free because the estate paid the taxes at the time of Jane's death.

B) taxed on the amount withdrawn in a given year. The account beneficiary is responsible for the taxes due on the funds that are withdrawn. One hundred percent of the distribution is taxable in the tax year the withdrawal is made. In general, non-spouse beneficiaries must withdraw all of the funds by December 31 of the year ending 10 years after the account owner's death.

One of your customers passed away recently. The customer had an IRA with you and had his sister listed as the beneficiary. Other assets included the home and furnishings and a brokerage account at another firm. The titling on that brokerage account was the customer and his son, JTWROS. The customer's will specified that 100% of his assets should pass to his daughter. Based on this information, the estate settlement will have A) the daughter receiving everything as stated in the will. B) the daughter getting the home and furnishings and the IRA, with the son receiving the brokerage account. C) the daughter getting the home and furnishings, the son receiving the brokerage account, and the sister getting the IRA. D) the daughter getting the home and furnishings and the brokerage account, with the sister receiving the IRA.

C) the daughter getting the home and furnishings, the son receiving the brokerage account, and the sister getting the IRA. A will can designate the disposition of an estate's assets only to the extent that they are not previously assigned. A joint tenants with right of survivorship (JTWROS) account specifies that the assets go to the survivor, and that overrules any will. An IRA (or any qualified retirement plan) always has a designated beneficiary, and that supersedes any will. Anything other than the assets in the JTWROS account or the IRA will go to the daughter.

Which of the following employer-sponsored plans allows coverage to discriminate in favor of key employees? A) 403(b) plan B) 401(k) plan C) 457 plan D) Defined benefit pension plan

C) 457 plan Because the 457 plan is technically non-qualified, it does not come under the non-discrimination rules of ERISA.

​In terms of being considered compensation for determining the allowable contribution to an IRA, receipt of which of the following would be included? A) Taxable interest income B) Child support C) Alimony received as part of a divorce decree signed in 2018 D) Deferred compensation

C) Alimony received as part of a divorce decree signed in 2018 For divorce decrees entered into before January 1,2019, court-ordered alimony is taxable to the payee (and tax deductible to the payor). Therefore, receiving it is considered compensation for purposes of an IRA contribution. Please note: Effective January 1, 2019, there are changes to the tax treatment of alimony for all divorce agreements entered on and after that date (no changes to those already in existence).

Which of the following employer-sponsored plans would never be covered by ERISA? A) 401(k) B) Defined benefit pension C) Deferred compensation D) 403(b)

C) Deferred compensation Deferred compensation plans are never ERISA-covered plans; that is what gives them greater flexibility than a covered plan. Depending on the employer, some 403(b) plans are covered under ERISA while others are not.

An individual has a substantial vested interest in his 401(k) plan at work. Which of the following is not an exception to the premature distribution penalty tax? A) Distribution made pursuant to a qualified domestic relations order B) Distribution because of an employee's death or disability C) Distribution of up to $10,000 made to purchase a principal residence D) Distribution to pay certain medical expenses

C) Distribution of up to $10,000 made to purchase a principal residence Although individuals can make penalty-free withdrawals from an IRA to purchase a principal residence, this exception does not apply to withdrawals from a 401(k) plan. The penalty for withdrawals from a 401(k) plan taken before age 59½is waived only in the cases of death, disability, qualified domestic relations orders (QDROs), certain medical expenses, certain period payments, and corrections of excess contributions.

Which of these statements regarding nonqualified deferred compensation (NQDC) plans is correct? A) NQDC plans generally provide coverage for rank-and-file employees. B) NQDC plans are not flexible. C) NQDC plans can discriminate in favor of key executives. D) Although not covered by most ERISA rules, nonqualified deferred compensation plans must meet the vesting rules.

C) NQDC plans can discriminate in favor of key executives. The major advantage of a nonqualified plan is that it may discriminate in favor of executives. In addition, NQDC plans are not subject to the reporting and disclosure requirements that apply to qualified plans. Generally, nonqualified plans are used to benefit key executives, to the exclusion of rank-and-file employees. These plans do not have to meet specific vesting requirements.

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a defined contribution plan. B) a payroll deduction plan. C) a SERP. D) a defined benefit plan.

C) a SERP. A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.

A nonqualified, single premium variable annuity differs from a Keogh plan in that A) earnings are tax deferred B) it is open to self-employed persons C) all payouts are fully taxable in a Keogh plan D) both are subject to early withdrawal penalties

C) all payouts are fully taxable in a Keogh plan Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

Among the benefits of an HSA is A) funds may be used for various medical expenses once the low deductible has been met. B) up to $10,000 per year may be accumulated. C) funds not used for health expenses may be invested in mutual funds and other securities. D) the amount that may be contributed is based on the number of dependents.

C) funds not used for health expenses may be invested in mutual funds and other securities. Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high, not low, deductible. In 2023, the maximum contribution is $3,850 for an individual or $7,750 if family coverage, regardless of the number of dependents covered. These numbers are never tested and are included so that students get an idea of what a "high-deductible" plan means.

One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate. A) An asset allocation model would not have 10% in real estate. B) This is prohibited as qualified plans cannot own real estate. C) This would only be permitted if the home were for his personal use. D) This is not permitted because a prohibited party will benefit.

D) This is not permitted because a prohibited party will benefit. There are two problems here. First of all, any investment in a qualified plan (or IRA), must be for future use (or else it would be considered a distribution subject to tax). Second, real estate may be used prior to your retirement, but not by "related" parties. These are defined as your spouse and lineal members of your family (ancestor or descendant or their spouse). So, because the parents will be using the property, they are considered prohibited persons.