4270 Test 1

a

1 All of the following are differences between a nonqualified and qualified retirement plan EXCEPT Answers: a qualified plan provides for tax-free distributions at a participant's normal retirement age a nonqualified plan may be exempt from some ERISA reporting and disclosure provisions a qualified plan provides for an employer deduction in the year of plan contribution a nonqualified plan may discriminate in favor of highly compensated employees

c (This is an example of a prohibited transaction under ERISA and the Internal Revenue Code. The lending of money between a qualified plan and a disqualified person, such as the plan trustee/bank here, is prohibited and subject to a potential 100% tax penalty on the amount of the transaction)

1 Big Bucks Bank, as the plan trustee for the XYZ Corporation profit-sharing plan, has entered into a loan with the plan secured by the individual account balances of the plan participants. What has just occurred? Answers: A disqualified loan A contribution to the plan consistent with the annual additions limit A prohibited transaction A financial obligation incurred in the ordinary course of business

d

1 ERISA requires reporting and disclosure of plan information to all of the following EXCEPT Answers: Internal Revenue Service (IRS) plan participants Department of Labor (DOL) plan sponsors

b

1 If a defined benefit pension plan is determined to be top heavy, what is one practical significance of this determination? Answers: Different coverage requirements and nondiscrimination tests apply. One of two accelerated vesting schedules must be used. Different eligibility requirements come into effect. One of two maximum contribution and benefit formulas must be used.

d (Under the permitted disparity rules, the maximum permitted excess contribution percentage is the lesser of: 2 times the base percentage; the base percentage plus 5.7%. This results in a total excess contribution percentage of 10% (2 × 5%).)

1 In a profit-sharing plan that is integrated with Social Security and provides a 5% base contribution, what is the maximum excess contribution percentage that may be applied? Answers: 5.7% 55% 10.7% 10%

c ( As a condition of participation in a qualified plan, the general rule is that an employer may require an employee to perform 1 year of service and attain age 21. Therefore, the longest period of service is the period to the latest of these events. (For example, an employee hired at age 19 would actually have 2 years of service prior to satisfying the age 21 requirement.) Alternatively, if a qualified plan provides 100% immediate vesting, a 2-year service requirement is permissible.)

1 In general, a qualified plan cannot require, as a condition of participation, an employee to complete a periodof service with the employer extending beyond the later of the date on which the employee completes 1 yearof service or reaches age Answers: 25 years 18 years 21 years 30 years

d (A qualified plan will pass the ratio test if the percentage of nonhighly compensated employees covered under the plan is at least 70% of the percentage of highly compensated employees who are covered.)

1 In the ratio test used to determine whether a qualified plan is nondiscriminatory, what is the minimumpercentage of nonhighly compensated employees who must be covered (as compared to the percentage ofcovered highly compensated employees)? Answers: 51% 75% 60% 70%

d ( A plan's annual financial report is filed on Form 5500 and must be filed with the IRS within 7 months after the close of each plan year. The report is designed to provide a complete disclosure of all financial information relevant to plan operation.)

1 What is the IRS form that also serves as a qualified plan's annual financial report? Answers: Form 1120 Form 1040 Form 5200 Form 5500

a

1 Which of the following is a disclosure item relating to a qualified defined benefit pension plan that must be automatically distributed to employee-participants? Answers: A Summary Plan Description (SPD) A quarterly personal benefits statement A copy of the plan's annual full financial report Any supporting plan documents

a (Plan benefits attributable to employer contributions for a defined benefit pension plan must be vested (or nonforfeitable) at least as rapidly as 100% after 5 years of service. An alternative 3- to 7-year graded vesting schedule may also be used.)

1 Which of the following vesting schedules may be used to accrue qualified defined benefit pension plan benefitsattributable to regular (non-top-heavy) employer contributions? Answers: 100% cliff vesting after 5 years of service 100% cliff vesting after 7 years of service 30% vesting after 4 years of service and 100% vesting after 12 years 20% vesting after 3 years of service and 100% vesting after 10 years

d

10 Which type of assumed annual rate of return is frequently used in retirement planning calculations? Answers: Black-Scholes model Consumer Price Index (CPI) Quantum simulation A flat annual return based on past performance

b

10 All of the following are alternatives to compensate for a retirement savings deficiency EXCEPT Answers: the client can reduce his anticipated standard of living during retirement the client can retire earlier the client can restructure her portfolio to achieve a greater before-tax annual return the client can save more

d

10 All of the following are primary assumptions that are made in any retirement needs analysis calculation EXCEPT Answers: the client's age at retirement and anticipated life expectancy the anticipated annual rate of inflation the projected total rate of annual investment return the type of retirement plan used by the client

d (The annual level end-of-year deposit required is $38,159, calculated as follows:In END mode FV = $1,157,140 n = 16 i = 8 PMT = −38,158.8576)

10 Caitlin has determined she has a future value of retirement savings need of $1,157,140. If she retires in 16 years and achieves an 8% after-tax annual return on her investments, what amount of level end-of-year annual deposit is required to fund this need? Answers: $20,285 $23,878 $35,332 $38,159

b

10 David has been calculating his retirement savings needs and determines he has $250,000 of assets set aside in today's dollars to fund a total retirement savings need of $800,000 15 years from now. How much more does he need to save, assuming a 7% annual after-tax rate of return throughout this period? (Round to the nearest dollar.) Answers: $689,758 $110,242 $550,000 $289,957

c (The lump-sum retirement fund needed at the beginning of retirement is $1,842,297, calculated as follows:In BEGIN mode: PMT = −$90,000 n = 30 i = 2.8846, or [(1.07 ÷ 1.04) - 1] × 100 PVAD = $1,842,297)

10 Jason has determined he will have an annual retirement income deficit. The deficit for the first year of retirement, 10 years from now, is $90,000. He expects to be in retirement for 30 years, and believes he can earn a 7% after-tax annual return on invested dollars. Inflation is expected to average 4% annually over this same period. What is the amount of lump-sum retirement funds needed by Jason at the beginning of retirement to fund his additional retirement income needs? (Round to the nearest dollar.) Answers: $1,816,961 $1,392,409 $1,842,297 $1,790,644

b

10 The primary reason inflation rates for retirees/senior citizens may exceed historical averages is that Answers: federal and state income taxes are often higher during retirement health care costs may increase during retirement vacation travel costs may increase during retirement many people adopt luxurious lifestyles during retirement

a

10 What is a reasonable assumption of an annual inflation rate to apply in the preretirement planning period? Answers: 4% 8% 6% 2%

a

10 Which of the following events should trigger a recalculation of the retirement needs analysis? 1. Marriage 2. Employment change 3. Change in FICA rate 4. Significant income change Answers: 1, 2 and 4 1 and 2 3 only 3 and 4

d

10 Which of the following is(are) a method for easing into retirement by a client? 1. Obtaining a bridge job 2. Reducing the hours worked at the preretirement job 3. Volunteering 4. Starting a second career Answers: 1 and 3 2 and 4 1 only 1, 2, 3 and 4

b

2 Fernando, age 45, participates in his employer's defined benefit pension plan. This plan provides for a retirement benefit of 2% of earnings for each of his years of service with the company and, given Fernando's projected service of 20 years, will provide him with a benefit of 40% of final average pay at age 65. What type of benefit formula is this plan using? Answers: A discretionary formula A unit benefit formula A flat percentage of earnings formula A flat benefit formula

b

2 In a cash balance pension plan, which of the following provisions is guaranteed by the employer-sponsor? Answers: A specific monthly pension at normal retirement age The interest rate credit The plan costs The medium of stock as a funding vehicle

c

2 In a traditional defined benefit pension plan, what is the maximum annual pension benefit allowable under the law during 2018? Answers: The lesser of 100% of the participant's annual compensation or $275,000 annually The greater of 100% of the participant's annual compensation or $55,000 annually The lesser of 100% of the participant's average compensation in the highest 3 years of consecutive service with the employer or $220,000 annually The greater of 100% of the participant's average compensation in the 5 years immediately preceding normal retirement age or $100,000 annually

d (An employer's maximum annual deduction for contributions made to a traditional defined benefit plan is generally the amount required to meet the minimum funding standards. This characteristic is unique to a defined benefit pension plan. The defined contribution plan employer deduction is limited to 25% of aggregate covered compensation, with a covered compensation limit of $275,000 annually per participant (2018).)

2 What is the limit on the maximum annual deduction that may be taken for employer contributions to a traditional defined benefit pension plan in 2018? Answers: The deduction for employer contributions is limited to 25% of aggregate covered compensation, up to $275,000 per participant The amount necessary to provide the present value of a lump-sum benefit at age 62 The lesser of 100% of employee compensation or $55,000 annually The amount required to meet minimum funding standards

a

2 When is a cash balance pension plan most often used? Answers: When an employer already has a well-funded traditional defined benefit pension plan and is desirous of cost savings with respect to its sponsored retirement plans When an employer has a simplified plan and wishes to increase complexity and requirements of plan administration When a self-employed individual wishes to avoid limitations on plan benefits and contributions that otherwise apply to common law employees When an employer has an existing defined contribution plan and wishes to benefit primarily younger employee-participants

b

2 Which of the following descriptions of the effect of using an actuarial method or assumption in the funding of a defined benefit pension plan is CORRECT? Answers: The greater the assumed rate of return used by the actuary, the greater the projected total cost of the plan. The higher the turnover rate assumed by the actuary, the lower the required annual employer contribution and cost. If the average age of new employees goes down, the required employer contribution will go up. If the actual cost of living increase in a year is the same as the plan assumption, the required employer contribution will decrease.

a (A basic difference between the target benefit pension plan and the money purchase pension plan is that the target benefit pension plan tends to favor older employees, whereas the money purchase pension plan benefits younger employees with more time to accumulate a greater account balance. For example, 2 new employees join the company and have the same salaries. One is 50 years old and the other is 30. With a money purchase plan, they will both receive the same contribution based on the plan contribution rate. This is better for the 30-year-old because there is more time for the set amount of money to grow. With a target benefit plan, however, the contribution for the 50-year-old might be $44,000 and the contribution for the 30-year-old might be $7,000 (even though their current salaries are exactly the same). In the target benefit plan, both employees are assumed to get the same benefit at retirement, but the older employee has less time to fund the benefit.)

2 Which of the following is a basic difference between a target benefit pension plan and a money purchase pension plan? Answers: The target benefit pension plan favors older participant-employees. The investment risk is borne by the employee. The money purchase pension plan requires lower annual employer contributions. Loans are available from the respective plans.

d

2 Which of the following is a basic provision of a money purchase pension plan? Answers: Forfeitures from a nonvested participant's account must be reallocated proportionately among remaining plan participants. Forfeitures from a nonvested participant's account must be applied to reduce the employer contribution to the plan. Before-tax salary reductions or elective deferrals are subject to prescribed limitations on amounts. In establishing such a plan, the employer typically agrees to make an annual contribution for each eligible employee as a fixed percentage of compensation.

a (A fully insured Section 412(e)(3) pension plan is a type of traditional defined benefit pension plan. The other types of plans noted are defined contribution plans, including the money purchase pension plan.)

2 Which of the following is a type of traditional defined benefit pension plan? Answers: A fully insured Section 412 (e)(3) pension plan A money purchase pension plan A target benefit pension plan An ESOP

a

2 Which of the following types of retirement plans is insured by the Pension Benefit Guaranty Corporation (PBGC)? Answers: A traditional defined benefit pension plan A target benefit pension plan An ESOP A money purchase pension plan

c (Because a Section 401(k) plan is a qualified defined contribution plan, the employee is immediately vested (100%) in all elective deferrals and their accrued benefits. Such deferrals are, however, subject to FICA taxes. Vesting schedules may be used with employer matching contributions.)

3 A client's employer has recently implemented a traditional Section 401(k) plan as part of its profit-sharing plan. The client has been advised by a financial planner not to elect to receive bonuses in cash but to instead contribute them to the Section 401(k) plan. Why is this good advice? Answers: The client will not pay Social Security (FICA) taxes on amounts paid into the Section 401(k) plan. The client is immediately vested in all employer matching contributions and their accrued benefits. The client is immediately vested in all elective deferrals and their accrued benefits. The client will not pay current federal income taxes on amounts distributed from the Section 401(k) plan.

d (It is partially taxable because Grant was not age 59½, disabled, or the distribution was not made to a beneficiary or Grant's estate after his death. Although Grant took the distribution after 5 years from the date of initial contribution, he did not meet 1 of the other requirements for a qualified distribution (made after the individual attained age 59½, attributed to being disabled, or made to a beneficiary or estate of an individual on or after the individual's death).)

3 Grant is age 51 and made an initial contribution of $10,000 to a Roth 401(k) during 2011. He made subsequent contributions of $6,000 annually for the next 4 years. In 2018, Grant took a $50,000 distribution from his Roth 401(k). Which of the following statements regarding this distribution is CORRECT? Answers: It is income tax free because it was made after 5 years, and Grant is over age 50. It is income tax free because it was made after 5 years from the date of initial contribution. It is taxable because it was within 10 years from the date of initial contribution. It is partially taxable because Grant was not age 59½, disabled, or the distribution was not made to a beneficiary or Grant's estate after his death.

d

3 In 2018, what is the maximum amount an employee under the age of 50 may contribute to a traditional Section 401(k) plan as an elective deferral? Answers: The lesser of 100% of compensation or $55,000 annually $24,500 $12,500 $18,500

a (In a qualified stock bonus plan, in which a portion of the employer contributions to the plan are made in employer securities, taxation of the net unrealized appreciation of these securities may be deferred until their subsequent sale. As a defined contribution type of plan, a stock bonus plan tends to favor younger employee-participants. As a profit-sharing plan, employer contributions are made on a discretionary basis and may be invested primarily in employer securities, not subject to a 10% limit at the time of the contribution.)

3 In a qualified stock bonus plan: Answers: taxation of the net unrealized appreciation in employer stock may be deferred until sale of the stock older employees are favored at the expense of younger employee-participants annual contributions of employer stock are mandatory no more than 10% of plan assets may be invested in employer securities

b

3 Kelly operates a business as a sole proprietor and maintains a Keogh profit-sharing plan. The contribution rate to this plan is 25%. If Kelly's net Schedule C income for the business for the year is $100,000 and his deductible self-employment tax is $7,065, what is the amount of Kelly's deductible contribution to the profit-sharing Keogh plan for the year 2018? Answers: $17,174 $18,587 $20,000 $25,000

b (Because the ADP of nonhighly compensated employees is greater than 8%, the maximum ADP for HCEs is 10% × 1.25 = 12.5%.)

3 The actual deferral percentage (ADP) test is a special nondiscrimination test that must be met by a traditional Section 401(k) plan. What is the maximum allowable deferral percentage for the highly compensated employees group under this test, if the nonhighly compensated employees' ADP is 10%? Answers: 7% 12.5% 20% 10%

c

3 Which of the following is a unique provision of a Keogh (self-employed) plan? Answers: A Keogh plan may only cover the self-employed owner-employee. For Keogh profit-sharing plans, there is a promised benefit available to a common-law employee. The deduction available for an owner-employee of the business is based on a specified definition of net income. A Keogh is required to be adopted as a defined contribution plan.

c (A defined contribution plan generally benefits younger employees who accumulate earnings in individual accounts. Most retirement plans that have been instituted recently are defined contribution type plans. While it is true that the account balance of participants in a defined contribution plan may be insufficient for the employee's retirement needs, this is a disadvantage of the plan, not an advantage.)

3 Which of the following is an advantage of the defined contribution category of qualified plans? Answers: A retirement benefit is promised by the employer and is subject to required funding standards. The employee's individual account balance may not sufficiently meet his retirement needs. Younger employees generally benefit through the accumulation of earnings in individual accounts. The investment risk is borne by the employer.

d (ESOP assets may be invested primarily in employer securities. This is an exception to the normal rule prohibiting more than 10% of qualified plan assets to be held in employer stock or securities. In an ESOP, stock is not sold to the public, but, rather, the plan trustee purchases stock from the employer. A lump-sum distribution of employer securities may be eligible for NUA treatment and LTCG taxation on the NUA portion, rather than ordinary income taxes on the entire distribution.)

3 Which of the following qualification requirements applies to an employee stock ownership plan (ESOP)? Answers: No more than 50% of plan assets may be invested in employer securities. At retirement, a lump-sum distribution of employer securities is subject to ordinary income tax on the fair market value of the securities. Stock is sold via a public offering and the cash received on the sale is contributed to the qualified plan by the employer. Assets may be invested primarily in qualifying employer securities.

c

3 Which of the following types of defined contribution plans may borrow money in the name of the plan? Answers: A safe harbor Section 401(k) plan A traditional profit-sharing plan with Section 401(k) provisions A leveraged ESOP An age-weighted traditional profit-sharing plan

c

4 A state or local government would choose to establish a Section 457 plan for all of the following reasons EXCEPT Answers: tax-deferred growth of assets no early withdrawal penalty on distributions tax deductibility of employer contributions the ability of a participant to make elective deferrals

c (The amount of elective deferrals to a Section 403(b) and Section 401(k) plan are aggregated for a combined maximum. In 2018, this maximum is $18,500 for a participant currently under age 50. Accordingly, Harry may contribute only $9,500 ($18,500 − $9,000) to the Section 401(k) plan. (Note that aggregation of contributions does not apply when a Section 457 plan is used in conjunction with either a Section 401(k) plan or a Section 403(b) plan.))

4 Harry, age 45, works for a nonprofit organization that has adopted both a Section 403(b) and Section 401(k) plan. In 2018, he contributes $9,000 to the Section 403(b) plan in before-tax elective deferrals. How much, if any, can Harry now contribute to the Section 401(k) plan in 2018? Answers: $18,500 $46,000 $9,500 $0

b (Both governmental and church-sponsored Section 403(b) and Section 401(k) plans permit investment in mutual funds. Only Section 401(k) plans are subject to the special ADP test. Both plans are subject to certain ERISA's reporting requirements. Only Section 403(b) plans permit special catch-up contributions in addition to an over-age 50 catch-up provision. Participants in a Section 403(b) plan may not elect special lump-sum distribution tax treatment.)

4 In comparing a governmental or church-sponsored Section 403(b) plan to a Section 401(k), which of the following provisions are shared? Answers: Both share special catch-up contributions in addition to an over-age 50 catch-up provision. Both may invest in mutual funds. Both may allow a participant to elect special lump-sum distribution tax treatment. Both must satisfy special ADP tests.

b

4 What is the maximum annual amount that may be contributed to a simplified employee pension (SEP) plan on behalf of an employee during 2018? Answers: $12,500 The lesser of 25% of compensation or $55,000 annually The lesser of 100% of compensation or $275,000 annually $18,500

b (Among the specified employers, only a public school system is eligible to establish a Section 403(b) retirement plan. Although a hospital is also an eligible employer, it must be a not-for-profit entity.)

4 Which of the following employers is eligible to establish a Section 403(b) retirement plan? Answers: All hospitals Public school systems The federal government An S corporation

d

4 Which of the following statements describes a basic provision or use of a savings incentive match plan for employees (SIMPLE) IRA? Answers: A SIMPLE IRA is primarily suitable for large, corporate-type employers. A SIMPLE IRA must satisfy special nondiscrimination tests in addition to general rules. Only employers that average fewer than 200 employees can establish a SIMPLE IRA. One contribution formula an employer can use in a SIMPLE IRA is to make a 2% nonelective contribution on behalf of eligible employees.

d

4 Which of the following statements is(are) correct regarding Section 403(b) contributions? I. It is possible that a Section 403(b) participant age 50 or older with 15 years of service can contribute $27,500 in 2018. II. If an employee is eligible for both the age 50+ catch-up and the special catch-up, catch-up deferrals will first be considered special catch-up deferrals (until the lifetime maximum is exhausted) before applying a catch-up deferral as an age 50+ catch-up deferral. Answers: II only Neither I nor II I only Both I and II

c

4 Which of the following statements regarding both a SEP plan and a qualified profit-sharing plan is CORRECT? Answers: Immediate 100% vesting of all contributions is required. The investment risk is borne by the employer. The employer's tax-deductible contributions are limited to 25% of aggregate covered compensation. Annual employer contributions are mandatory.

b

4 Which of the following statements regarding the basic provisions of Section 403(b) plans is(are) CORRECT? 1. A special catch-up provision is available to employees of Section 501(c)(3) organization employers who have at least 1 year of service. 2. Section 403(b) plans must comply with many of the same reporting and auditing requirements that apply to Section 401(k) plans. 3. TSAs are available to all eligible employees of Section 501(c)(3) organizations who adopt such a plan. 4. If an employee has at least 15 years of service with an eligible employer, an additional catch-up contribution may be permitted. Answers: 1, 2 and 3 2, 3 and 4 1 and 2 2 only

b

4 Which of these potential employers is most likely to implement a simplified employee pension (SEP) plan? Answers: A large, publicly held company A small, closely held business A nonprofit organization A state or local government

c

5 A single taxpayer, age 54, retired 2 years ago and is receiving a pension of $600 per month from her previous employer's qualified pension plan. She has recently taken an employment position in a small CPA firm that has no pension plan. She will receive $80,000 annually in compensation from the CPA firm as well as $7,200 from her pension plan each year. How much can she contribute, if any, to a deductible traditional IRA in the year 2018? Answers: $0 $5,500 $6,500 $4,000

d

5 In 2018, Nina and Bob are married and reported the following items of income at the end of the tax year: pic on Quiz, question 8 Selected Answer: Correct $11,000 Answers: $5,500 $0 $6,500 Correct $11,000

b (The Roth IRA yields greater after-tax benefits than a traditional deductible IRA if the front-end tax due upon conversion is paid from funds outside the Roth IRA and an equivalent amount of funds is, thereby, available for investment. )

5 In considering whether to convert a traditional IRA to the Roth IRA form, which of the following is a valid consideration? Answers: It is generally advantageous if the converted assets will remain in the Roth IRA for a relatively short period of time before withdrawal. If the source of payment for taxes due upon conversion comes from an outside source, it generally is advantageous to convert. If the taxpayer files as married filing separately and thereby splits income, it generally makes sense to convert. If the taxpayer anticipates being in a lower tax bracket at date of distribution from the Roth IRA, it generally makes sense to convert.

a

5 Terry and Nancy are both age 39 and each plan to contribute $5,500 to their traditional IRAs for the 2018 tax year. They are both employed and file a joint income tax return. However, only Terry is eligible for and participates in his employer's qualified retirement plan. Terry and Nancy's modified AGI and earned income for the year 2018 is $99,000. What amount, if any, can Nancy deduct for her IRA contribution? Answers: $5,500 $2,500 $200 $4,400

a

5 What is the taxable character of distributions that are made from a Roth IRA? Answers: Tax-free income if the distribution meets the holding period and qualified distribution requirements Tax-deferred income when converted to a traditional IRA Capital gain income if the distribution meets the required holding period Ordinary income if the taxpayer fails to make required minimum distributions

b (Although the penalty would generally apply, there are exceptions under IRC Section 72(t) that may exclude the distribution of earnings from the penalty.)

5 Which of following statements regarding a nonqualified distribution from a Roth IRA is NOT correct? Answers: A distribution that consists of earnings will always be subject to income taxation. A distribution that consists of earnings will always be subject to the 10% penalty for that portion of the distribution. A distribution that consists of conversion amounts may avoid the 10% penalty for the conversion portion. A distribution made before the 5-year period may avoid the 10% penalty if other conditions are met.

d

5 Which of the following investments may be held in an IRA account? Answers: German silver coin Canadian gold coin South African Krugerrand U.S. gold coin

a

5 Which of the following statements is NOT correct regarding the conversion of a traditional IRA to a Roth IRA? Answers: The IRA owner's modified adjusted gross income (MAGI) cannot exceed $100,000 in the year of the conversion. An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days of the distribution. An amount in a traditional IRA may be transferred to a Roth IRA maintained by the same trustee. An amount in a traditional IRA may be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA.

a (A taxpayer with sufficient compensation (earned income) may contribute the maximum amount to a traditional IRA even if the taxpayer is an active participant in an employer-sponsored retirement plan. The deductible amount of the contribution, if any, will depend on applicable phaseout thresholds.)

5 Which of the following statements regarding contributions to a traditional IRA is CORRECT? Answers: A taxpayer who is considered an active participant in an employer-sponsored retirement plan may also be eligible to contribute the maximum amount to a traditional IRA. Deductible contributions to an employed individual's IRA and an unemployed spouse's spousal IRA are limited to the lesser of 100% of earned income or $3,000. Alimony and rental income are considered earned income for the purposes of making a deductible contribution to a traditional IRA. There are no restrictions on the deductibility of contributions provided the individual is an active participant in an employer-sponsored retirement plan.

d (Statements 1 and 2 correctly describe prohibited transactions. Statement 3 is incorrect. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. Statement 4 is incorrect. The individual may have to pay the 10% additional tax on premature distributions.)

5 Which of the following statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT? 1. Generally, if an individual or the individual's beneficiary engages in a prohibited transaction with the individual's IRA account at any time during the year, it will not be treated as an IRA as of the 1st day of the year. 2. If an individual borrows money against an IRA annuity contract, the individual must include in gross income the fair market value of the annuity contract as of the 1st day of the tax year. 3. Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited. 4. A 50% penalty will be assessed against an IRA owner who borrows money against her IRA. Answers: 2 and 3 1, 3 and 4 1, 2 and 3 1 and 2

d

6 After the required beginning date (RBD), what is the amount of penalty that applies to a required minimum distribution (RMD) from a qualified plan or IRA that is insufficient in amount? Answers: 25% of the remaining account balance 15% of the required minimum distribution 10% of the earnings distributed 50% of the difference between the required minimum distribution and the amount actually distributed

a

6 If a loan is to be provided from a Section 401(k) profit-sharing plan and is NOT to be considered a taxable distribution, it must be: Answers: generally repaid within 5 years available to all owners over age 59½ an amount no greater than $100,000 adequately secured with negotiable collateral

b (Generally, the first required distribution from a qualified plan must be taken by April 1 of the year following the year in which the participant reaches age 70½. Jackie reaches age 70½ on September 15, 2018, so she must begin taking distributions by April 1, 2019.)

6 Jackie turns 70 years old on March 15, 2018. When must she begin taking distributions from her Section 401(k) plan, assuming she no longer works for the employer-sponsor of the plan? Answers: December 31, 2018 April 1, 2019 April 1, 2018 December 31, 2019

d (Only statement 2 is correct. Statement 1 is incorrect because IRA distributions do not require 20% mandatory federal income tax withholding. Statement 3 is incorrect because a rollover is permitted from a qualified plan to a governmental Section 457 plan. Statement 4 is incorrect because loans are not permitted from an IRA and may not be rolled over from an IRA to a qualified plan.)

6 Which of the following statements is(are) CORRECT regarding rollovers from qualified plans or IRAs? 1. Distributions from qualified plans and IRAs require 20% mandatory withholding for federal income taxes if a trustee-to-trustee direct transfer is not used to execute a rollover. 2. A taxpayer is limited to 1 rollover in a 1-year period (on a 365 day basis) unless the rollover is a trustee-to-trustee direct transfer. 3. A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan. 4. If a qualified plan participant has an outstanding loan from her qualified plan upon separation from service, the participant may rollover the loan into a rollover IRA as long as loan repayments continue at least quarterly. Answers: 1 and 2 3 and 4 1, 2, 3, and 4 2 only

c (Elaine's required minimum distribution this year is $14,545, calculated as follows: $320,000 ÷ 22.0 = $14,545. She must calculate her required distribution with use of the Uniform Lifetime Table and not her actual life expectancy (nor by using the difference between projected and actual life expectancy as the applicable divisor).)

6 Elaine is currently age 76 and is scheduled to take another distribution from her former company's qualified retirement plan later this year (2018). Her account balance in the plan as of December 31 last year was $320,000. Under the Uniform Lifetime Table, the divisor is 22. However, Elaine's actual life expectancy is only 16 years. What is the amount, if any, of Elaine's required minimum distribution from this plan in the year 2018? Answers: $20,000 $0, because Elaine is over age 70½ $14,545 $53,333

b

6 Upon retirement at age 65, Thomas begins receiving a $1,000 per month joint and 50% survivor annuity benefit from his employer's traditional defined benefit pension plan. The annuity is to be paid over the joint lives of Thomas and his wife, Amy, age 64. Thomas's annuity starting date is January 1. Over the past 20 years, Thomas contributed $62,000 in after-tax contributions to the plan. The expected number of annuity payments for their joint life expectancy is 310. What is the amount of the tax-free portion of each monthly payment? Answers: $310 $200 $620 $500

b

6 When must an individual commence distributions from a traditional IRA? Answers: No later than as specified in IRS life expectancy tables for the year of the individual's birth No later than April 1 of the calendar year following the year in which the individual attains age 70½ No later than April 1 of the calendar year in which the individual attains age 59½ No later than April 1 of the calendar year in which the individual attains age 70½

c (In a regular rollover, the recipient physically receives a check for the eligible rollover distribution from the plan trustee. Under this method of distribution, the issuer must withhold 20% of the proceeds for federal income tax.)

6 Which of the following descriptions of a regular rollover from a qualified plan to a traditional IRA is CORRECT? Selected Answer: Incorrect Amounts rolled over are taxable according to rules governing the source of contribution. Answers: Amounts rolled over are taxable according to rules governing the source of contribution. It generally must be completed within 90 days of the date of distribution from the previous plan. Mandatory withholding of 20% for federal income tax applies in the event of the employee-participant's physical possession of the amount rolled over. The rollover amount to the IRA is limited to $5,500 (2018).

b

6 Which of the following supports the decision to take a lump-sum distribution payment from a qualified retirement plan at an individual's date of retirement rather than a fixed annuity payout? Answers: The expectation of a lower marginal tax bracket in the future The ability to roll over the distribution and manage the investments Distribution is always tax free at age 59½ The probability of a long life or actuarial expectancy

a

6 Which of the following will exempt a qualified plan distribution from the 10% premature distribution penalty? Answers: Part of a series of substantially equal periodic payments to be paid over the life expectancy of the individual As a result of the individual incurring financial hardship, as that term is separately defined in IRS Regulations Separation from service under a plan provision at age 50 Used to pay qualified higher education expenses

a (A spouse beneficiary can roll the distribution over into an IRA and treat it as the spouse's own; a nonspouse beneficiary can use a direct trustee-to-trustee transfer of the distribution into a specially titled inherited IRA.)

7 Which of the following beneficiaries is entitled to roll over a post-death distribution from a qualified plan into an IRA? Answers: All 3 choices are correct The oldest surviving child of the participant The surviving spouse of the participant The surviving mother of the participant

b

7 Harry has an IRA that he wishes to leave to his grandchildren, Mary (age 25), John (age 10), and Abigail (age 2). Harry would like to designate the beneficiaries in such a way as to provide as much tax-free wealth accumulation as possible. Assuming all of the grandchildren are alive at the time of Harry's death, which beneficiary designation will provide the greatest benefit? Answers: Designating 100% of the IRA assets to Mary In separate accounts for each of the grandchildren—25% to Mary, 35% to John, and 40% to Abigail Designating all grandchildren as equal beneficiaries of the IRA In trust for the benefit of the grandchildren

c

7 Normally, a qualified plan must prohibit the assignment or alienation of benefits to anyone other than the plan participant. What is one notable exception to this prohibition? Answers: An agreement with the plan trustee to provide start-up funds for a participant's new business A distribution from the plan used for payment to the participant's creditors A qualified domestic relations order (QDRO) in the event of a participant's legal separation A de minimis assignment of up to 20% of any benefit payment due to the participant

a

7 On October 31 of this year, John died leaving an IRA account balance of $5 million. Which of the following beneficiary designations is the least favorable to the beneficiary of the IRA? Answers: Name the estate as beneficiary. Designate a qualifying charity as the beneficiary of the IRA. Designate his child as the beneficiary of the IRA. Name his wife as the beneficiary of the IRA.

c

7 Sam recently died at age 63, leaving an IRA with a FMV of $200,000 to his wife, Susan (age 55), who was the only designated beneficiary. Susan has no IRA of her own. Which of the following statements regarding Sam's IRA is CORRECT? Answers: Susan must receive the entire account balance within 5 years of Sam's death. Susan must begin taking distributions over Sam's remaining single-life expectancy. Susan can receive distributions over her remaining single-life expectancy, recalculated each year. Susan can receive a distribution from the IRA now but will be subject to a 10% early withdrawal penalty.

d

7 The qualified joint and survivor annuity (QJSA) form of payment is a requirement for a vested participant in which of the following types of retirement plans? Answers: An age-weighted profit sharing plan An IRA An ESOP A traditional defined benefit pension plan

c

7 Under a divorce agreement, the assignment of rights to receive benefits from a qualified retirement plan by a court to the former spouse of a participant is referred to as Answers: a collateral assignment a judicial pension split a qualified domestic relations order (QDRO) a qualified domestic trust (QDOT)

b

7 Under the minimum distribution regulations, in cases in which the designated beneficiary is not the surviving spouse, over what timeframe must benefits from a qualified retirement plan or IRA generally be distributed subsequent to the death of a participant who has not yet begun receiving required minimum distributions? Answers: Over whatever time period is assigned the distribution per probate court order Over the beneficiary's life expectancy as of the requisite beginning date At least as rapidly as distributions were being made prior to the participant's death By December 31 of the 3rd year after the participant's death

a

7 Which of the following is the most favorable as a choice for the beneficiary of a qualified plan participant if stretching benefits is desired? Answers: Relatively younger adult child of the participant Trust for the benefit of the surviving spouse Political party The participant's estate

a

7 Which of the following statements regarding distributions from retirement plans where death has occurred before the required beginning date (RBD) of required minimum distributions is NOT correct? Answers: A spouse must take distributions over the spouse's remaining single life expectancy, beginning in the year following the year of death. A nonspouse beneficiary in a qualified plan, Section 403(b) plan, governmental Section 457 plan, or IRA also may use a direct trustee-to-trustee transfer of an inherited amount to create an inherited IRA. An estate beneficiary must take distribution from the plan using the 5-year rule. A spouse beneficiary may roll the distribution over into her own IRA and is not required to take a distribution until the year following the year the spouse attains 70½.

d

8 In 2018, James earned $6,000 from employment subject to Social Security taxation between January 1 and September 30. He was then unemployed for the remainder of the year. How many credits of coverage did James earn for the year? Answers: 2 1 3 4

a

8 A covered individual or his survivor is entitled to which of the following benefits under Social Security if the worker is only in a currently insured status? Answers: Surviving child's (dependent) benefit Spousal retirement benefits The worker's own retirement benefits Surviving spouse not caring for dependent child benefit

d

8 Charles (age 38) has just died. He has been credited with the last 30 consecutive credits of Social Security coverage in the last 30 quarters since he left school and began full-time employment. He had never worked before leaving school. Which of the following persons are eligible to receive Social Security survivor benefits as a result of Charles's death? 1. Charles's child, Bill, age 16 2. Charles's child, Dawn, age 19 3. Charles's widow, Maggie, age 38 4. Charles's dependent mother, Betty, age 60 Answers: 1 and 2 1, 2 and 4 2, 3 and 4 1 only

c

8 Fully insured status generally requires a measure of employment covered by Social Security (OASDI) that is 40' Answers: years months credits of coverage calendar quarters

c

8 Under the Social Security system, immediate survivor income benefits based on a deceased worker's primary insurance amount and coverage are available to which of the following persons? 1. A surviving spouse, age 55, caring for the worker's 13-year-old child 2. Unmarried, dependent children under age 18 3. Unmarried children who become disabled before age 22 4. A surviving divorced spouse, age 62, who has not remarried and was married to the decedent for more than 10 years Answers: 3 and 4 1 only 1, 2, 3 and 4 2 and 3

c

8 What amount is used to determine a participant's actual Social Security retirement benefit? Answers: Covered compensation limit Permitted disparity limit PIA QJSA

d (If the participant has provisional income in excess of $32,000 for unmarried taxpayers and $44,000 for married taxpayers, up to 85% of Social Security benefits may be subject to income taxation. Also, the threshold is $0 for people who are married filing separately if they do not live apart.)

8 What is the maximum amount of Social Security benefits that may be subject to income taxation? Answers: 35% 50% 0% 85%

d (The maximum family benefit limitation does not apply when both the husband and wife receive a retirement benefit based on their own (or each) employment record. It does apply to reduce total Social Security benefits payable in the other situations.)

8 When does the maximum family benefit limitation NOT apply to reduce total Social Security benefits payable? Answers: When the husband receives a spousal benefit based on the wife's employment record When the wife receives a spousal benefit based on the husband's employment record When a divorced spouse qualifies for benefits because she is caring for a dependent child of the worker-participant When both the husband and wife receive a retirement benefit based on their own employment record

b

8 Which of the following individuals would NOT qualify for the receipt of Social Security retirement benefits in the current year? Answers: A worker, age 62, with fully insured status A never-before-employed spouse, age 40, married to a covered worker A never-before-employed spouse, age 65, married to a covered worker A worker, age 68, who earns $300,000 annually

b

8 Which of the following statements best describes the definition of disability in qualifying for disability benefits under Social Security? Answers: An individual must be able to engage in work as specified by a Social Security Administration examiner An individual must not be able to engage in any substantial, gainful activity and this impairment must be expected to last at least 12 months or result in death. An individual must not be able to engage in the work of any occupation for which she is trained. An individual must not be able to engage in the work associated with his last employment position.

a

CS As a beneficiary, who is the primary user of the stretch IRA rules? Answers: Adult child Qualified charity Surviving spouse Decedent's estate

a

CS Assume the Holts make a $13,000 contribution ($6,500 each) to their traditional IRA accounts for 2018. What is the maximum amount of their deductible IRA contributions for 2018? Answers: $6,500 $13,000 $5,500 $11,000

d

CS Given Uncle Stirling's failing health, Martha has been thinking about the decisions she will need to make as the sole beneficiary of Stirling's $1 million IRA. She is a little overwhelmed at the amount and wants to ensure she ultimately uses these funds wisely for her and Tom's retirement. Which of the following will be an option for Martha upon Stirling's death? Answers: She can use a direct trustee-to-trustee transfer into an IRA but may not begin taking distributions without a penalty until she is age 59½. If Uncle Stirling's IRA is funded with individual stocks, she may elect NUA tax treatment. She can use a direct trustee-to-trustee transfer into an IRA and defer any minimum distributions until she is age 70½ She can use a direct trustee-to-trustee transfer into an inherited IRA but must begin to take distributions over her remaining life expectancy.

c

CS 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? Answers: No more than 25% of Martha's IRA assets may be invested in coins. Any government-issued gold coins, such as Krugerrands and American Eagles, are appropriate for IRA investment. American Eagle gold coins are permitted IRA assets. Martha should approach her coin dealer and ask that a collection similar to the collection her mother gave her be created as an investment for the IRAs.

a

CS Tom has decided to open a 2nd coat store in a nearby suburb. He has decided to offer a Section 401(k) profit-sharing plan to employees at the original store, but not at the 2nd store. The purpose of the retirement plan is to fund Tom's retirement, not to retain employees. Which of the following statements is(are) CORRECT? 1. This is allowed under the permitted disparity rules. 2. This is not allowed because the 2 stores are affiliated through common ownership. 3. This is allowed because it is a personal retirement savings vehicle. 4. Tom is required to offer the plan to all employees who meet the eligibility rules for the qualified plan. Answers: 2 and 4 1 and 3 2 only 1 only

a

CS Tom is interested in adopting a retirement plan for his business. His primary goals are to contribute the maximum amount allowable to his tax-deferred savings and to minimize the expense and paperwork associated with the plan. Which of the following retirement plans would you recommend for Tom's business? Answers: SIMPLE IRA Simplified employee pension (SEP) plan Traditional defined benefit pension plan Profit-sharing plan

c

CS Tom's ex-wife, Dorinda, finds she doesn't really need the money she gets from Tom as part of the divorce agreement. She wants to save the alimony for her retirement years. What is the amount that Dorinda can contribute to a traditional IRA? Answers: $2,400 $5,500 $3,600 $0

c

CS What is the minimum number of employees that a defined benefit pension plan must benefit to conform to IRS regulations? Answers: The lesser of 50 employees or 50% of all employees 50 employees The lesser of 50 employees or 40% of all eligible employees The lesser of 40 employees or 50% of all employees

d (For 2018, employee elective deferral contributions to a Section 403(b) is $18,500. Employees over age 50 would be allowed to defer an additional $6,000 (2018) as a catch-up contribution. An employee who has worked for the plan sponsor for at least 15 years and has not maximized deferrals to the Section 403(b) plan in past years is also eligible for an additional $3,000 catch-up contribution. ■■Rollovers are allowable. ■■NUA tax treatment is not permitted for Section 403(b) plans.)

CS Which of the following (is)are characteristics of Martha's Section 403(b) plan (TSA)? 1. Martha's maximum contribution is $18,500 in 2018. 2. Lump-sum distributions from a TSA may qualify for NUA tax treatment if equity mutual funds are used to fund the plan. 3. Rollovers to IRAs are permitted. Answers: 1 and 2 1 and 3 2 and 3 3 only

d (The defined benefit pension plan requires annual funding. The SEP and the profit-sharing plans both limit contributions to 25% of earned income (converts to 20% because he is self-employed).Although a SEP or profit-sharing plan provides tremendous flexibility, a Section 401(k) plan could provide the same flexibility and provide a significantly higher benefit.Tom is self-employed and, therefore, must first reduce his Schedule C net income by the deductible portion of his self-employment tax and multiply the result by 20% to determine the maximum profit-sharing contribution.)

CS Which of the following retirement plan alternatives would allow Tom the greatest deductible contribution while providing him with only a small cash flow commitment each year based on 2018 plan contribution limits? Answers: SEP plan Defined benefit pension plan Profit-sharing plan Section 401(k) plan