9 - Retirement Plans

In an individual retirement account (IRA), rollover contributions are

not limited by dollar amount Rollover contributions to an individual retirement account are unlimited by dollar amount.

Who is normally considered to be the owner of a 403(b) tax-sheltered annuity?

The employee The participating employee normally applies for and owns a 403(b) tax-sheltered annuity.

Tom has a qualified retirement plan with his employer that is currently considered to be 80% "vested". How can this be interpreted?

The correct answer is "If Tom's employment is terminated, 20% of the funds would be forfeited". In this situation, 80% "vested" means that 20% of the funds could be forfeited if Tom's employment is terminated.

Which tax would an IRA participant be subjected to on distributions received prior to age 59 1/2?

The correct answer is "Ordinary income tax and a 10% tax penalty for early withdrawal". Income tax and a penalty tax are generally assessed when a participant receives retirement savings from an IRA before reaching age 59 1/2.

Premature IRA distributions are assessed a penalty tax of

10% Premature distributions from an IRA are subject to a 10% penalty tax.

A qualified profit-sharing plan is designed to

allow employees to participate in the profits of the company One of the purposes of a qualified profit-sharing plan is to distribute a portion of company earnings to employees.

All of the following statements about traditional individual retirement accounts are false EXCEPT

10% penalty is applied to withdrawals before age 59 1/2 Because an IRA is a qualified plan, it has the same rules for early withdrawal.

What is the maximum number of employees (earning at least $5,000) that an employer can have in order to start a SIMPLE retirement plan?

100 An employer can have a maximum of 100 employees earning at least $5,000 to be eligible for a SIMPLE retirement plan.

An individual participant personally received eligible rollover funds from a profit-sharing plan. What is the income tax withholding requirements for this transaction?

20% is withheld for income taxes A plan sponsor must withhold 20% of the distribution in federal taxes on a rollover. Once the rollover takes place to a new custodian, the remainder of the distribution is made.

What is the excise tax rate the IRS imposes on individuals aged 70 1/2 or older who do not take the required minimum distributions from their qualified retirement plan?

50% Distributions must be made by April 1 following the year the participant turns age 70 1/2 or a 50% excise tax will be assessed on the amount that should have been withdrawn.

How are Roth IRA distributions normally taxed?

Distributions are received tax-free Qualified distributions are received income tax-free in a Roth IRA.

Which plan is intended to be used by a sole proprietor and the employees of that business?

The correct answer is "Keogh Plan". A Keogh Plan may be used by a sole proprietor only if the employees of the business are included.

An employer that offers a qualified retirement plan to its employees is eligible to

make tax-deductible contributions to the plan The advantage gained by providing a qualified retirement plan is the employer's contributions to the plan are tax deductible.

An employee requested that the balance of her 401(k) account be sent directly to her in one lump sum. Upon receipt of the distribution, she immediately has the funds rolled over into an IRA. What is the tax consequence of the distribution sent to this employee?

Distribution is subject to federal income tax withholding A participant must complete a rollover to another qualified plan within 60 days or the distribution is considered a nonqualified distribution and is subject to taxes and penalties. A plan sponsor must withhold 20% of the distribution for federal taxes on a rollover. Once the rollover takes place to the new custodian, the remainder of the distribution is released.

An individual working part-time has an annual income of $25,000. If this individual has an IRA, what is the maximum deductible IRA contribution allowable?

$25,000 In this situation, the maximum allowable IRA contribution is $25,000.

When funds are shifted straight from one IRA to another IRA, what percentage of the tax is withheld?

None. There is no tax withheld on an IRA transfer.

Post-tax dollar contributions are found in

Roth IRA investments No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn.

What does a 401(k) plan generally provide its participants?

Salary-deferral contributions A 401(k) plan normally provides participants with a salary-deferral option for contributions to the plan.

Which of the following is TRUE if the owner of an IRA names their spouse as beneficiary, but then dies before any distributions are made?

The account can be rolled into the surviving spouse's IRA A surviving spouse who inherits IRA benefits or benefits from the deceased spouse's qualified plan is eligible to establish a rollover IRA in the surviving spouse's own name.

In a qualified retirement plan, the yearly contributions to an employee's account

are restricted to maximum levels set by the IRS Annual limits to an employee's qualified retirement plan are based on maximum limits set by the IRS.

Which of the following is TRUE about a qualified retirement that is "top heavy"?

More than 60% of plan assets are in key employee accounts A plan is considered to be top heavy if more than 60% of plan assets are attributable to "key employees" as of the last day of the prior plan year.

A trustee-to-trustee transfer of rollover funds in a qualified plan allows a participant to avoid

mandatory income tax withholding on the transfer amount There is no federal tax withholding involved in a transfer of funds from one qualified plan into another. Rollovers, however, involve a 20% withholding. Once the rollover takes place to the new custodian, the remainder of the distribution is made.

Rick recently died and left behind an individual IRA account in his name. His widow was forwarded the balance of the IRA. The widow qualifies for the

marital deduction The transfer of a decedent's IRA account balance to a surviving spouse qualifies for the Unlimited Marital Deduction, which generally exempts the transfer from estate taxes.

A retirement plan that sets aside part of the company's net income for distributions to qualified employees is called a

profit-sharing plan Profit-sharing plans set aside a portion of a company's net income for distributions to qualified employees.

An IRA owner can start making withdrawals and NOT be subjected to a tax penalty beginning at what age?

59 1/2 Traditional Individual Retirement Account (IRA) withdrawals are normally subject to a tax penalty if they are made before the owner reaches age 59 1/2.

How long does an individual have to "rollover" funds from an IRA or qualified plan?

60 days In IRA's and qualified plans, the time limit for rollover funds is 60 days, or the funds could be subjected to income taxes and a penalty tax.

Which product would best serve a retired individual looking to invest a lump-sum of money through an insurance company?

Annuity In this situation, an annuity would be recommended.

What type of employee welfare plans are not subject to ERISA regulations?

Church plans Church plans are exempt from ERISA regulations.

Traditional individual retirement annuity (IRA) distributions must start by

Distributions from a traditional IRA must be made by April 1 following the year the participant turns age 70 1/2 or an excise tax will be assessed.

At the age of 45, an individual withdraws $50,000 from his Qualified Profit-Sharing Plan and then deposits this amount into a personal savings account. This action would result in

Income tax and a 10% penalty assessed upon funds withdrawn from the Qualified Plan The IRS says that withdrawals of funds from a profit sharing plan may be subject to a 10% tax penalty in addition to income taxes if they are made before the age of 59 1/2. This same early withdrawal penalty applies to funds taken out of 401k plans and traditional individual retirement accounts.

A 55 year old recently received a $30,000 distribution from a previous employer's 401k plan, minus $6,000 withholding. Which federal taxes apply if none of the funds were rolled over?

Income taxes plus a 10% penalty tax on $30,000 All withdrawals from a qualified retirement plan are taxable as current income. In addition, any withdrawals made before age 59 1/2 is subject to an additional tax penalty of 10% of the amount withdrawn.

Which of these retirement plans can be started by an employee, even if another plan is in existence?

Individual Retirement Account (IRA) An IRA may be established by an employee, regardless of any other retirement plan.