CFP module 4 quizzes

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Assume that in January 2020, Martha's uncle, Stirling, age 67, dies and Martha is the designated beneficiary of his $1 million IRA. Which of the following statements regarding designated beneficiaries of an IRA is CORRECT? Because Martha was the designated beneficiary on the IRA, she may roll over the account into an inherited IRA via a direct transfer and designate her own beneficiary to the IRA. As the IRA beneficiary, Martha must take distributions over Uncle Stirling's remaining lifetime expectancy. A) I only B) Both I and II C) II only D) Neither I nor II Explanation Only Statement I is correct. As the IRA beneficiary taking distributions after the required beginning date for minimum distributions, Martha can either take the distributions over Uncle Stirling's remaining life expectancy or roll over the IRA into an inherited IRA via a direct transfer and take distributions over her life expectancy.

Guy and Dotty, who are both age 42, are married and file a joint tax return. Their modified adjusted gross income (MAGI) for 2020 is $130,000. Dotty has already made a $6,000 contribution to her traditional IRA and has also made a $2,000 contribution to their son's Coverdell Education Savings Account this year. What is the maximum amount that may be contributed, if any, to a Roth IRA for Guy and Dotty this year given these facts? A) $6,000 B) $0 C) $11,000 D) $2,000 Explanation For 2020, the maximum combined contribution to traditional and Roth IRAs (for an owner younger than age 50) is $6,000 per person annually. Dotty has already contributed the maximum amount for her traditional IRA, but they can make a further contribution of $6,000 to a Roth IRA for Guy. The $2,000 Coverdell contribution is never relevant to any retirement account contribution. Their AGI is below the Roth IRA phaseout range for a married couple ($196,000-$206,000) in 2020.

Jackie turns 70 years old on March 15, 2020. When must she begin taking distributions from her Section 401(k) plan, assuming she no longer works for the employer-sponsor of the plan? A) April 1, 2021 B) April 1, 2020 C) December 31, 2020 D) December 31, 2021 Explanation Generally, the first required minimum distribution (RMD) 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, 2020, so she must begin taking distributions by April 1, 2021. Even though all or part of the first RMD distribution could be taken in 2021, it is still the 2020 RMD (until April 2, 2021). Also, the 2020 RMD will be based on the account balance at the end of 2019.

Joe, age 52, has just started a consulting company. He currently employs six people, who range in age from 22 to 31 years old. Joe estimates the average employment period for his employees will be approximately three years and would like to implement a retirement plan that will favor older participants while including an appropriate vesting schedule. In addition, Joe would like the employees to bear the risk of investment performance within the plan. Which of the following plans is most appropriate for Joe's company? A) Target benefit pension plan B) SIMPLE 401(k) C) Cash balance pension plan D) SEP plan Explanation A target benefit pension plan is likely most appropriate. It would permit Joe to favor older participants and allow for a vesting schedule. A cash balance pension plan does not favor older participants and provides employees with a guaranteed rate of return on investments (thus, not transferring the risk of investment performance to the employees). SEP plans and SIMPLE 401(k) plans both provide for 100% immediate vesting of employer contributions.

Marilyn has a $100,000 balance in her IRA on December 31, 2019. Over the years, she made $30,000 in nondeductible contributions to this IRA. If Marilyn receives a $20,000 distribution from her IRA on May 15, 2020, and doesn't take any other distributions during 2020, how much of the distribution will be taxable? A) $14,000 B) $20,000 C) $30,000 D) $6,000

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? A) Name the estate as beneficiary. B) Designate his child as the beneficiary of the IRA. C) Name his wife as the beneficiary of the IRA. D) Designate a qualifying charity as the beneficiary of the IRA. Explanation Benefits payable to the estate have to be distributed under the 5-year rule (either as a single lump sum or in installments, but fully distributed before the end of the 5th year following the year of the participant-owner's death) if death occurs before the required beginning date. If death occurs after the required beginning date, a single lump-sum distribution is still available, but any installment payments must continue over the deceased participant's remaining distribution period, reduced by 1 each year. The application of either of these rules (as compared to the stretching-out effect possible with a nonspouse designated beneficiary) is usually not advantageous. A qualifying charity does not recognize taxable income from the IRA. A nonspouse beneficiary is permitted to use a direct trustee-to-trustee transfer of the IRA into an inherited IRA. A spouse beneficiary has flexibility when taking distributions from a deceased spouse's IRA.

Sharon plans to retire next year and begin taking distributions from her traditional IRA. Her investment objectives are low risk, safety of principal, and liquidity. She is content with minimal rates of return. Which of the following investments is most suitable for her IRA? A) Money market instruments B) Corporate bonds C) Dividend-paying common stock D) Nondividend-paying common stock Explanation Money market instruments provide the low risk, safety, and liquidity Sharon is seeking for her IRA. Corporate bonds and stocks do not provide safety of principal.

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? A) A traditional defined benefit pension plan B) An IRA C) An employee stock ownership plan (ESOP) D) An age-weighted profit-sharing plan Explanation The qualified joint and survivor annuity (QJSA) requirements apply to all types of pension plans. It does not apply to an IRA or a defined contribution profit-sharing type of plan in most instances. LO 6.5.1

Which of the following are basic provisions of an IRC Section 401(k) plan? Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes. An employer's deduction for a vested contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees' elective deferrals. A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year. Employee elective deferrals may be made from salary or bonuses. A) II and IV B) II, III, and IV C) I and III D) I and IV Explanation Options II and IV correctly describe the 25% employer deduction limitation, eligibility requirement, and potential sources of employee elective deferrals for Section 401(k) plans. Option I is incorrect because employee elective deferrals (i.e., salary deferrals) are subject to FICA and FUTA taxes. Option III is incorrect because there can be a two-year period of service requirement if the participants are 100% immediately vested.

Which of the following is subject to the required minimum distribution (RMD) requirements after the account owner/plan participant dies? Traditional IRAs Roth IRAs Qualified plans A) I, II, and III B) I only C) II and III D) I and II Explanation All of these retirement accounts are subject to RMD requirements after the account owner/plan participant dies. However, RMD requirements do not apply to Roth IRAs while the owner is alive.

Which of the following is the most favorable as a choice for the beneficiary of a qualified plan participant if stretching benefits is desired? A) Relatively younger adult child of the participant B) Political party C) Trust for the benefit of the surviving spouse D) The participant's estate Explanation If the designated beneficiary of a qualified plan is a younger adult child of the participant, the beneficiary can stretch the required minimum distribution under current tables. A political party is not a qualified charity, and a trust for the benefit of the surviving spouse and/or the beneficiary's estate is also not preferable.

Which of the following reasons for an early distribution from a qualified retirement plan is NOT an exception to the 10% penalty? A) It is a distribution for higher-education costs. B) The plan owner becomes totally and permanently disabled. C) The distribution is made to a beneficiary of the account due to the owner's death. D) It is made after separation from service from an employer-sponsor of the plan after age 55. Explanation The exception from the 10% early distribution penalty for distributions for higher-education costs only applies to IRA distributions.

Which of the following statements is(are) CORRECT regarding rollovers from qualified plans or IRAs? 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. A taxpayer is limited to one rollover in a one-year period (on a 365-day basis) unless the rollover is a trustee-to-trustee direct transfer. A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan. If a qualified plan participant has an outstanding loan from a qualified plan upon separation from service, the participant may roll over the loan into a rollover IRA as long as loan repayments continue at least quarterly. A) II only B) I and II C) III and IV D) I, II, III, and IV Explanation Statement I is incorrect because IRA distributions do not require 20% mandatory federal income tax withholding. Statement III is incorrect because a rollover is permitted from a qualified plan to a governmental Section 457 plan. Statement IV is incorrect because loans are not permitted from an IRA and may not be rolled over from an IRA to a qualified plan.

Which of the following statements regarding Section 403(b) plans is CORRECT? Section 403(b) plans are eligible for rollover treatment to IRAs. Section 403(b) plans permit investment in individual securities. Employer-matching contributions to a Section 403(b) plan must be immediately 100% vested to the employee. A) I only B) I and III C) I and II D) II only Explanation Only Statement I is correct. Funding options for a TSA include mutual funds and annuities, not individual securities. Employer-matching contributions may be subject to a vesting schedule.

Which one of the following requirements is a possible disadvantage of a simplified employee pension (SEP) for an employer? A) The vesting requirements for a SEP prohibit forfeitures. B) The SEP's trustee is subject to ERISA's prohibited transaction excise tax penalties. C) Employer contributions to a SEP are subject to payroll taxes. D) A SEP must have a fixed contribution formula that is nondiscriminatory. Explanation SEP contributions must be 100% vested (i.e., nonforfeitable). SEPs consist of individual IRAs; there is no trustee for a SEP plan. The contribution formula of a SEP is not required to be fixed. Employer contributions to a SEP are not subject to payroll taxes.

Assume that Mike, age 38, earns $62,000 at his job with the state and qualifies for participation in a Section 457 plan. He also works part time with a firm that offers a SIMPLE IRA. Mike will be contributing the maximum into the SIMPLE IRA in 2020. How much can Mike contribute to the Section 457 plan? A) $6,500 B) $19,500 C) $13,500 D) $3,000 Explanation Mike could contribute $19,500 to the Section 457 plan in addition to the $13,500 contributed to the SIMPLE plan in 2020. Since the 457 plan is not aggregated with other plans, a participant could contribute $19,500 to a 457 plan and, if also participating in a SIMPLE plan, contribute an additional $13,500 to that plan—or, if participating in a 403(b) or 401(k), contribute up to $19,500 to one of those plans.

John, age 56 and single, took an early retirement package from his employer last year and is receiving a monthly pension of $5,000 from the company's qualified pension plan. John wants to contribute the maximum amount possible to a Roth IRA for 2020, which is A) $7,000. B) $0. C) $6,000. D) $4,000. Explanation Contributions to Roth IRAs, like traditional IRAs, are limited to the lesser of earned income, or $7,000 for 2020 for someone age 50 and older. John has no earned income, so he cannot make a contribution to a Roth IRA.

A planner may use a before-tax rate of return in making projections regarding the preretirement investment returns for all of the following assets except A) Section 401(k) plan. B) mutual fund held outside a qualified retirement plan. C) Roth IRA. D) traditional IRA. Explanation Using a before-tax rate of return to project investment performance is appropriate for tax-advantaged assets, such as qualified plans and IRAs, because the earnings on these assets are not taxed each year as they accumulate.

George was born in 1962. His full retirement age (FRA) for Social Security purposes is A) 62. B) 67. C) 70. D) 65. Explanation The FRA for individuals born in 1960 and later is 67.

Patricia designated the following individuals as beneficiaries of her traditional IRA. If Patricia dies and the IRA is not divided into separate accounts, which beneficiary's life expectancy will be used to determine the distribution period for the IRA? A) Jill, age 40 B) Julie, age 60 C) Janet, age 26 D) Juanita, age 14 Explanation When there is more than one designated beneficiary, the beneficiary with the shortest life expectancy is used as the measuring life for purposes of determining the distribution period. In this case, Julie, age 60, is the beneficiary with the shortest life expectancy.

Tom's ex-spouse, Dorinda, wants to save for her retirement years. What is the amount Dorinda can contribute to a Roth IRA for 2020? (She received $3,600 of alimony from her 2018 divorce.) A) $7,000 B) $3,600 C) $6,000 D) $0 Explanation Of the money Dorinda receives, only $3,600—the portion of the payments that can be attributed to alimony from a pre-2019 divorce settlement—qualifies as earned income for the purposes of a Roth IRA contribution. The definition for earned income is the same as for a traditional IRA. Please note that divorces finalized during and after 2019 will fall under the new rules, which will not include alimony as tax deductible to the payer and taxable to the receiver. As such, this will not be considered earned income. This divorce happened before this Tax Reform Act, and thus follows the old rules.

Which of the following investments can be included in an IRA without penalty? A mutual fund that invests exclusively in gold mining stock An international stock mutual fund An investment-grade piece of art Gold coins minted in the United States by the U.S. Treasury A) I, II, III, and IV B) I, II, and IV C) II and III D) II and IV Explanation Collectibles (art) are prohibited as an IRA investment. Such investments result in penalties because they are treated as a taxable IRA distribution. Gold coins are an exception to the collectibles rule and are permitted as an investment, as are stock mutual funds.

Which of the following is the most favorable as a choice for the beneficiary of a qualified plan participant if stretching benefits is desired? A) Trust for the benefit of the surviving spouse B) Relatively younger adult child of the participant C) The participant's estate D) Political party Explanation If the designated beneficiary of a qualified plan is a younger adult child of the participant, the beneficiary can stretch the required minimum distribution under current tables. A political party is not a qualified charity, and a trust for the benefit of the surviving spouse and/or the beneficiary's estate is also not preferable.

Which of the following statements best describes the definition of disability in qualifying for disability benefits under Social Security? A) An individual must be able to engage in work as specified by a Social Security Administration examiner. B) An individual must not be able to engage in any substantial, gainful activity, and the impairment must be expected to last at least 12 months or result in death. C) An individual must not be able to engage in the work associated with his last employment position. D) An individual must not be able to engage in the work of any occupation for which she is trained. Explanation Disability, for the purpose of Social Security, means an individual is so severely physically or mentally disabled that the person cannot engage in any substantial, gainful activity, which must be expected to last at least 12 months or result in death.

Which of the following statements regarding a top-heavy plan is CORRECT? A top-heavy defined benefit pension plan must provide accelerated vesting. A top-heavy plan is one that provides more than 70% of its aggregate accrued benefits or account balances to key employees. A top-heavy defined pension benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service (up to 20%). For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees' percentage. A) I, II, and IV B) I, III, and IV C) I, II, III, and IV D) II, III, and IV Explanation Only Statement II is incorrect. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.

A businessowner-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 A) I, II, and III B) I and III C) I, II, III and IV D) III and IV Explanation All of the factors listed should be considered in selecting a retirement plan for the business.

A client, age 60, is electing to take early retirement this year. She participates in a profit-sharing plan sponsored by her employer that will provide her with a lump-sum distribution. She has been a participant in the plan for the past 12 years and has always invested her account 100% in stock mutual funds. If the distribution is made in a lump sum this year, what is an available option for the client? A) Execute the lump-sum distribution as a tax-free loan and repay the loan over a 5-year period. B) Because 100% of her account is invested in equities, she may make a net unrealized appreciation (NUA) election and receive favorable tax treatment for the distribution. C) Roll over the lump-sum distribution to an IRA. D) Elect to treat a portion of the distribution as long-term capital gain income. Explanation The client's only available option (from the given choices) is to roll over the lump-sum distribution to an IRA. The account is invested 100% in a mutual fund and does not qualify for an NUA election. NUA tax treatment is available only for a distribution of employer securities. The client does not have an option of executing the lump-sum distribution as a loan.

Blake, age 72, is required to take substantial required minimum distributions (RMDs) from his qualified retirement plan. He has no current need for the cash and has established traditional IRAs with his children as beneficiaries and wishes to deposit the distributions in equal amounts to each IRA within 60 days of the distributions to eventually benefit his children. Which of the following statements regarding Blake's rollover of the RMDs is CORRECT? A) A good plan is for Blake to roll over the distribution within 60 days after receipt. B) Required minimum distributions may not be rolled over, but Blake may make equivalent contributions within 60 days of his RMD to the traditional IRAs. C) Required minimum distributions may not be rolled over. D) Because Blake is over age 70½, he may not roll over the RMDs to a traditional IRA, but he may roll over the RMDs to a Roth IRA. Explanation While Blake may not roll over the distributions, if he has earned income, he may make contributions of the lesser of $7,000 ($6,000 regular contribution and $1,000 catch-up in 2020) annually, or 100% of his earned income to a Roth IRA (or split the contribution over multiple Roth IRAs).

Fully insured status generally requires a measure of employment covered by Social Security (OASDI) that is 40 A) calendar quarters. B) months. C) credits of coverage. D) years. Explanation To qualify for most benefits under Social Security, an individual must be in fully insured status. This is defined as one credit per year since age 21 with a minimum of 6 and a maximum of 40 credits of covered employment, where an individual has earned above a specified dollar amount.

Generally, for SIMPLE contributions, A) employer contributions are not deductible business expenses. B) contributions to the account are after-tax dollars for the employee. C) earnings within the account are tax deferred. D) only the first $3,000 contributed is tax deferred. Explanation Earnings within the account are tax deferred. Contributions by the employee are made with pretax dollars, and the employer may deduct its contributions as an ordinary business expense.

Jeanette uses the serial payment approach to calculate the amount she must save each year to accumulate her desired retirement income fund. She assumes an annual inflation rate of 4%, and an annual investment rate of return of 7%. If she determines that she must save $10,000 in the first year, how much must she save in the second year to meet her goal? A) $10,700 B) $10,288 C) $10,400 D) $10,000 Explanation Under the serial payment approach, the first-year savings amount is computed and then increased each year by the inflation rate. In this example, the amount in the second year is $10,000 × 1.04, or $10,400.

John and Mary, both age 49, are married and file a joint income tax return for 2020. John is self-employed as an engineering consultant and reports $120,000 of Schedule C net income. Mary is a full-time homemaker and is not employed outside the home. What is the maximum deductible IRA contribution John and Mary can make this year? A) $0 B) $8,000 C) $12,000 D) $6,000 Explanation Neither John nor Mary is an active participant in an employer-sponsored retirement plan. They can contribute and deduct $6,000 each for 2020. While Mary has no earned income, a spousal IRA may be established and funded on the basis of John's compensation.

Life insurance may be a suitable investment for all of the following retirement plans except A) money purchase pension plans. B) age-weighted profit-sharing plans. C) simplified employee pension (SEP) plans. D) traditional defined benefit pension plans. Explanation Life insurance cannot be held in any type of IRA, including SEP plans. Qualified retirement plans can purchase life insurance if they comply with the incidental benefit rules.

Life insurance may be a suitable investment for all of the following retirement plans except A) money purchase pension plans. B) defined benefit pension plans. C) SEP plans. D) profit-sharing plans. Explanation Life insurance cannot be held in any type of IRA, including SEPs. Qualified retirement plans and Section 403(b) plans can purchase life insurance if they comply with the incidental benefit rules.

Rudy attained age 70½ in March 2020. Rudy will be 71 years old on December 31, 2020. His distribution period is 27.4 years for age 70 and 26.5 years for age 71. If Rudy's IRA balance is $500,000 on December 31, 2019, what is his required minimum distribution (RMD) for 2020? A) $18,248 B) $18,938 C) $18,868 D) $19,023 Explanation Rudy's RMD is $18,868 ($500,000 ÷ 26.5). Rudy's age for RMD calculations is his age on December 31 of that year and not his age on the last day the first RMD is due.

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 called A) a collateral assignment. B) a judicial pension split. C) a qualified domestic relations order (QDRO). D) a qualified domestic trust (QDOT). Explanation A qualified domestic relations order (QDRO) is a court order that assigns some or all of a qualified plan participant's benefit to an alternate payee.

What amount is used to determine a participant's actual Social Security retirement benefit? A) Covered compensation limit B) QJSA C) Primary insurance amount (PIA) D) Permitted disparity limit Explanation The PIA is used to determine a participant's actual Social Security retirement benefit. The PIA is derived from the worker's average indexed monthly earnings (AIME), which is based on lifetime earnings history.

Which of the following are characteristics of a Roth IRA? Qualified distributions are tax free. Contributions are not tax deductible. Maximum individual annual contributions are $10,000. Contributions are tax deductible. A) II and III B) I, III, and IV C) I and II D) I, II, and III Explanation Taxpayers may not deduct Roth IRA contributions from their current taxable income; however, qualified distributions are received tax free by the owner. The maximum individual annual contribution to a Roth IRA is $6,000 (2020) or $7,000 for taxpayers over age 50.

Which of the following groups would NOT benefit from using Roth IRAs? A) Low-income wage earners who are active participants in their employers' plans and are not eligible to make deductible IRA contributions B) High-income wage earners who have exhausted the tax benefits of other tax-favored vehicles C) Low-income wage earners who need current deductions D) Taxpayers who anticipate being in a higher tax bracket in their retirement years Explanation Roth IRAs offer no current deductions. Low-income wage earners needing current deductions are better served by traditional IRAs.

Which of the following regarding a SIMPLE is CORRECT? A SIMPLE requires ADP testing of employee elective deferral contributions. SIMPLE IRAs are subject to top-heavy rules. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in the SIMPLE IRA plan. The maximum annual elective deferral contribution to a SIMPLE 401(k) is $19,500 (2020) for an employee who has not attained age 50. A) II and III B) I, II, III, and IV C) III only D) I, II, and IV Explanation Neither a SIMPLE IRA nor a SIMPLE 401(k) requires ADP testing. A SIMPLE is not subject to top-heavy rules. Statement III is correct. The early withdrawal penalty is 25% for distributions taken within the first two years of participation in a SIMPLE IRA. The maximum elective deferral to a SIMPLE is $13,500 (2020). Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up contribution of $3,000.

Which of the following statements regarding traditional IRA required minimum distribution (RMD) rules are CORRECT? The entire account balance may be taken as a lump sum. The account balance may be distributed over the life expectancy of the owner under the uniform distribution table. The account balance may be distributed over the actual joint life expectancy of the owner and the spouse beneficiary if the spouse is more than 10 years younger than the owner. In the case of multiple IRAs, the minimum distribution must only be calculated for and received from one account. A) I and II B) II and III C) I, II, and III D) I, II, III, and IV Explanation Traditional IRA required minimum distribution (RMD) rules allow the account balance to be distributed either as a lump sum or over the life expectancy of the owner determined by the uniform distribution table—Table 3. This table uses the life expectancy of the owner and someone 10 years younger than the owner (regardless of the beneficiary's actual age). Table 3 is used in all cases for living original owners except when the IRA owner's spouse is the beneficiary and the spouse is actually more than 10 years younger than the owner. In these cases, the IRS has Table 1 and it will be used to calculate the required minimum distribution for the owner with a spouse more than 10 years younger. In the case of multiple IRAs, the required minimum distribution is calculated based on the aggregate account balances, but the RMD can be received from one or more than one IRA.

Any amount converted from a traditional IRA to a Roth IRA is A) not included in gross income. B) included in taxable income if it is a return of basis. C) subject to the 10% early withdrawal penalty at the time of conversion. D) not subject to the 10% early withdrawal penalty at the time of conversion. Explanation Any amount converted from a traditional IRA to a Roth IRA is not subject to the 10% early withdrawal penalty at the time of conversion and is not included in taxable income only to the extent it is a return of basis. All other amounts in the distribution are included in gross income for the year in which the distribution occurs.

As a beneficiary, who is the primary user of the stretch IRA rules? A) Surviving spouse B) Qualified charity C) Decedent's estate D) Adult child Explanation A nonspouse beneficiary, such as an adult child, is the primary user of the stretch IRA rules and concept.

Assume that a worker's Social Security full retirement age (FRA) is 67, and the worker retires and starts drawing Social Security early at age 64. What are the consequences? A) The worker's retirement benefit will not receive cost-of-living increases until the year the person reaches FRA. B) The worker receives a reduced benefit starting at age 64 but will receive the full benefit starting at age 67. C) The worker receives the full benefit at age 64 but receives a reduced benefit starting at age 70. D) The worker receives a reduced benefit for the rest of his life. Explanation A worker who starts Social Security retirement benefits early (as early as age 62 is allowed) will receive a reduced benefit, which will continue for life. This reduced benefit will be adjusted for inflation each year.

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. A) Neither I nor II B) Both I and II C) II only D) I only Explanation 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.

Christopher works for the Ex-March Company, a small business with 75 employees. Ex-March has decided to establish a SIMPLE IRA plan for all of its employees and will make a 2% nonelective contribution for each of its eligible employees. Christopher's annual salary is $40,000, and he has determined that he cannot afford to make an elective deferral to his SIMPLE IRA. Which of the following statements regarding Christopher's SIMPLE IRA contribution is CORRECT? A) Ex-March must make a nonelective contribution of $1,200 for Christopher. B) Christopher must make a 2% minimum contribution this year. C) Ex-March is not required to make a contribution for Christopher. D) Ex-March Company must make a nonelective contribution of $800 for Christopher. Explanation Ex-March must make a nonelective contribution of $800 for Christopher. Though Christopher does not make a contribution this year, Ex-March must make a nonelective contribution of $800 (2% × $40,000) on his behalf. Under the employer contribution election Ex-March has selected, even if an eligible employee does not contribute to the SIMPLE IRA, that employee would still receive an employer nonelective contribution to his SIMPLE IRA equal to 2% of compensation.

Ellen participates in a SIMPLE 401(k) maintained by her employer. If she has completed two years of service, to what extent is she vested in the employer contributions to her account? A) 40% B) 0% C) 20% D) 100% Explanation Vesting schedules are not permitted in SIMPLE 401(k)s. Employees are always 100% vested in employer contributions.

Frank is age 54 and married. Frank and his wife, Helen, have a daughter named Meredith attending college. Frank has been making salary-reduction contributions to his employer-sponsored 401(k) plan for the past four years and is considered a highly compensated employee. The current balance of his 401(k) account (nonforfeitable accrued benefit) of $21,500, which includes $3,500 account earnings. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. Frank needs to use some of his plan assets to pay college tuition. Which of the following is a correct statement about how Frank could meet Meredith's college expenses? A) Frank would not have to pay a premature distribution penalty tax if he made the maximum hardship withdrawal. B) Frank could withdraw the full $21,500 from his 401(k) account under the hardship provisions. C) Frank is not allowed to take a loan from the plan because he is a highly compensated employee. D) The maximum plan loan Frank could take is $10,750. Explanation Frank can borrow up to 50% of the nonforfeitable accrued benefit of $21,500—i.e., $10,750. A hardship withdrawal from a 401(k) account cannot include the $3,500 account earnings. As long as loans are available to all plan participants on an equal basis, highly compensated employees may take loans. A hardship distribution from a 401(k) plan for education expenses would be subject to the 10% premature distribution penalty.

George and Mabel each put $6,000 into their respective IRAs. George's employer does not provide a qualified retirement plan. Mabel participates in a 401(k) plan at work. Their AGI is $199,000 in 2020, and they file jointly. How much of their IRA contributions will be deductible? A) $6,000 B) $0 C) $12,000 D) $4,200 Explanation The IRA rules allow an IRA deduction for individuals who are not active participants but whose spouses are, in some cases. However, that option is phased out if the couple's AGI is between $196,000 and $206,000 in 2020. With a combined AGI of $199,000, George would be able to deduct $206,000 − $199,000 = $7,000; ($7,000 ÷ $10,000) × $6,000 = $4,200.

Gordon is the fiduciary for a traditional IRA. He has several different investments available to him to invest the IRA assets. All of the following investments are permitted investments for a traditional IRA except A) corporate bonds. B) mutual funds. C) a real estate investment trust (REIT). D) stock in Bottle, Inc., which is an S corporation. Explanation Traditional IRAs cannot own S corporation stock, as an IRA is not a permissible shareholder under the S corporation rules. All of the other choices are permitted investments.

If an employer had the objective of maximizing discretionary retirement contributions from any source, which plan would be most appropriate? A) Traditional IRA B) Roth IRA C) SIMPLE IRA D) SEP IRA Explanation Employers can make discretionary contributions to a SEP IRA of up to $57,000 in 2020. Employees cannot contribute to a SEP IRA. Employers cannot make discretionary contributions to a Traditional IRA or Roth IRA. The normal salary deferral limit in a SIMPLE IRA is $13,500. An employer can make either a 3% matching contribution or 2% nonelective contribution to a SIMPLE IRA. No other types of contributions may be made to a SIMPLE IRA.

If the client's business objectives are to reduce income tax, reward executive employees, retain and recruit employees, and reduce employee turnover, which plan selection approach is the client using? A) Pension plan only approach B) Profit-sharing only approach C) None of these D) A pension plan or a profit-sharing plan Explanation A pension plan or a profit-sharing plan can address each of these objectives.

Janice is the self-employed owner of an unincorporated business. She has hired the following family members to work in her business. Which family member(s) is(are) covered by Social Security? Her husband Her daughter, age 16 Her son, age 19 A) II and III B) I, II, and III C) I only D) I and III Explanation A child under the age of 18 who is employed in the parent's unincorporated business is not covered by Social Security.

Jill and Mark are celebrating their 20th wedding anniversary, receiving 20-year watches from their employers, and reaching full retirement age (FRA), all on the same day. Which of the following statements correctly describe the Social Security benefit Jill is eligible to receive? A) 75% of Mark's benefit B) 85% of her own benefit C) 100% of Mark's benefit D) 100% of her own benefit Explanation Currently, the spouse of a Social Security recipient is entitled to 50% of the recipient's primary insurance amount (PIA), subject to a family maximum, as long as the spouse is of full retirement age (FRA) or between age 62 and FRA for reduced benefits. The spouse will take the greater of either 100% of their own benefit or 50% of their spouse's benefit.

Joe is 75 years old. The required minimum distribution from his Section 401(k) plan this year was $10,000, but he withdrew only $4,000 from the plan. As a result, he will owe an excise tax of A) $4,000. B) $2,000. C) $5,000. D) $3,000. Explanation The excise tax is 50% of the difference between the amount that should have been distributed ($10,000), and the amount that was actually distributed ($4,000). In this case, the excise tax is 50% of $6,000, or $3,000.

Max, age 47, has been participating in his employer's SIMPLE IRA for one year. If he withdraws $1,000 from this plan this year and the withdrawal is not covered by an exception to the penalty tax on premature withdrawals, he will owe a penalty tax of A) $400. B) $100. C) $0. D) $250. Explanation Premature withdrawals made from a SIMPLE IRA within two years of initial participation are subject to a penalty tax of 25%. Max's penalty would be $250.

Paul estimates he will need a $75,000 annual income in today's dollars when he retires 10 years from now. He assumes a 3% annual rate of inflation, a 5% after-tax rate of return on his investments, and a 20-year retirement period. What lump-sum amount should Paul have accumulated over the next 10 years to support his retirement income need? A) $1,257,227 B) $2,015,880 C) $1,657,429 D) $1,689,612 Explanation His total retirement fund needed to support his standard of living is $1,689,612, calculated as follows: The client's first-year retirement income need is $100,794. PV = -$75,000 i = 3 n = 10 FV = $100,794 The total capital required to support this need for 20 years is $1,689,612. In BEGIN mode (the client will make annual withdrawals at the beginning of each year) PMT = $100,794 n = 20 i = 1.9417 [(1.05 ÷ 1.03) - 1] × 100 PVAD = -$1,689,612

Social Security provides individuals with protection against which of the following risks? A) Inflation risk B) Market risk C) Longevity risk D) All of these Explanation Social Security, for many retirees, is their only source of income that protects against inflation risk, market risk, and longevity risk.

Sherry, who is currently age 50, made only one contribution during her lifetime to her Roth IRA in the amount of $5,000 in 2014. If she were to receive a total distribution of $6,500 from her Roth IRA in 2020 to take a vacation, how would she be taxed? A) Because Sherry waited five years, the distribution will be classified as a qualified distribution and will not be taxable or subject to the 10% early distribution penalty. B) Although Sherry waited five years, the distribution will not be classified as a qualified distribution and will be fully taxable and will be subject to the 10% early distribution penalty. C) Because Sherry waited five years, the distribution will be classified as a qualified distribution and will not be taxable, but will be subject to the 10% early distribution penalty. D) Although Sherry waited five years, the distribution will not be classified as a qualified distribution, it will be taxable to the extent of earnings, and it will be subject to the 10% early distribution penalty on the taxable amount. Explanation A distribution from a Roth IRA is not subject to taxation if it is a qualified distribution or to the extent that it is a return of the owner's contributions or conversions to the Roth IRA. A qualified distribution is one that meets both of the following tests: The distribution was made after a five-year holding period. The distribution was made for one of the following reasons:Owner has attained age 59½Distribution was made to a beneficiary or the estate of the owner on or after the date of the owner's deathDistribution was attributable to the owner's disabilityDistribution was for a first-time homebuyer expense purchase The 10% early withdrawal penalty only applies to a distribution from a Roth IRA that is includable in gross income. The 10% early withdrawal penalty also applies to a nonqualified distribution, even if it is not then includable in gross income, to the extent it is allocable to a conversion contribution made within the five-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.

Which of the following is NOT correct regarding qualified preretirement survivor annuities (QPSAs)? A) QPSA payments must be the actuarial equivalent of not less than half of the participant's vested account balance as of the date of the participant's death. B) To waive the QPSA benefit for a married participant's spouse, the participant and the spouse must consent on a notarized written form. C) QPSA payments are to begin no later than the month in which the participant would have reached the earliest retirement age under the plan. D) The QPSA payable to the surviving spouse must be equal to the benefit that would have been payable to the participant. Explanation QPSA payments are not required to equal the benefit that would have been payable to the participant at retirement but must be the actuarial equivalent of not less than half of the participant's vested account balance as of the date of the participant's death.

Which of the following is considered an active participant for determining the deductibility of traditional IRA contributions this year? A participant in a defined benefit pension plan who has just satisfied the eligibility requirements and entered the plan in the past six months A participant in a traditional Section 401(k) plan who is currently not making elective deferrals but has $100 of forfeitures reallocated to her account this year A highly compensated employee with a $500,000 account balance in a profit-sharing plan for which the plan earnings this year are $35,000 but no employer contributions, employee contributions, or reallocated forfeitures were added this year A self-employed professional with no employees maintaining a simplified employee pension (SEP) with a $10,000 account balance funded by a 20% contribution two years ago plus earnings A) II and III B) I and IV C) I, II, III, and IV D) I and II Explanation Active participation for purposes of determining deductibility of IRA contributions differs from being covered under a qualified plan. Specifically, an employee must be contributing to the plan, having employer contributions or forfeitures reallocated on his behalf, or accruing a defined benefit before he is considered an active participant in a qualified plan for IRA purposes. The participant in Statement I has begun to accrue a benefit in the pension plan. The participant in Statement II is considered an active participant because of the forfeiture relocation. The taxpayers in Statements III and IV are not considered active participants this year because no contributions were made on their behalf this year.

Which of the following statements regarding the Section 72(t) early distribution penalty is NOT correct? A) A 10% penalty is imposed on the taxable amount of a distribution made to a participant that has not yet attained age 59½, unless a specific exception applies. B) The 10% penalty applies to distributions that are made from a qualified plan, a Section 403(b) plan, a traditional IRA, or a simplified employee pension (SEP) plan. C) The 10% tax applies only to the taxable portion of the distribution. D) The tax does not apply to any distribution from a Roth IRA. Explanation The tax does apply to certain nonqualifying distributions from a Roth IRA or to a Roth IRA distribution attributable to a conversion within five years.

A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. All of the following statements about the safe harbor provisions are correct except A) mandatory employer contributions under the safe harbor provisions may be subject to a three-year cliff vesting requirement. B) an employer may satisfy the safe harbor provisions by making non-elective contributions for all eligible employees. C) an employer may satisfy the safe harbor provisions by making certain matching contributions for non-highly compensated employees who participate in the plan. D) a plan that satisfies the safe harbor provisions is not subject to the top-heavy rules. Explanation Employees must be immediately 100% vested in mandatory employer contributions that are made under the safe harbor provisions. The mandatory contributions can take the form of either a non-elective contribution to all eligible employees or matching contributions to participating non-highly compensated employees who participate in the plan.

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? A) Surviving child's (dependent) benefit B) Surviving spouse not caring for dependent child benefit C) The worker's own retirement benefits D) Spousal retirement benefits Explanation An individual who is only currently insured under Social Security (6 credits of coverage in preceding 13-quarter period) is entitled to a surviving child's benefit. This is the case provided the child is under age 18, over age 18 and disabled by a disability that began before age 22, or under age 19 and a full-time elementary or secondary school student who is not married and was dependent on the deceased parent.

Which of the following statements is CORRECT in describing a SIMPLE IRA? A) SIMPLE IRAs may include loan provisions for participants who have satisfied a two-year participation period. B) Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax. C) To offer a SIMPLE IRA, an employer can have no more than 50 employees earning a minimum of $5,000. D) Employee deferrals are limited to $13,000, and employer contributions are limited to 15% of compensation. Explanation Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax.

Which of the following retirement plans, maintained by an employer, would also permit an eligible employer to establish a SIMPLE? A) SEP plan B) Section 457 plan C) Section 403(b) plan D) Section 401(k) plan Explanation To establish a SIMPLE, an employer cannot maintain another plan. However, a Section 457 plan is a nonqualified deferred compensation plan; therefore, it does not constitute a plan for purposes of establishing a SIMPLE.

Which of the following statements is CORRECT regarding Section 403(b) plans? It is possible that a Section 403(b) participant age 50 or older with 15 years of service can contribute $29,000 in 2020. If an employee is eligible for both the age-50-and-older 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-and-older catch-up deferral. A) I only B) Both I and II C) Neither I nor II D) II only Explanation Both statements are correct.

Social Security began as a program to provide retirement income but has been expanded to provide all of the following income except A) survivor benefits to spouses at age 60‒61. B) disability. C) survivor benefits to children under age 19. D) survivor benefits to spouse caring for a child under 19. Explanation Survivor benefits are provided to a spouse caring for a child under 16 or disabled. Age 16 is not "sweet 16" for the surviving spouse because when the youngest child turns 16, the survivor benefits ceased for the widow(er) caring for the deceased's child.

Angela has received a sizable inheritance. She makes $12,000 a year working part time. She has been deferring 5% into her 401(k) at work even though there is no match. What is the maximum she can defer into the 401(k) in 2020? A) $12,000 B) $6,000 C) $57,000 D) $19,500 Explanation The maximum annual addition for 2020 is the lesser of 100% of compensation, or $57,000. Thus, Angela is limited to $12,000.

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? A) A prohibited transaction B) A disqualified loan C) A financial obligation incurred in the ordinary course of business D) A contribution to the plan consistent with the annual additions limit Explanation 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 an initial 15% prohibited transaction penalty. If the transaction is not corrected, there is an additional 100% penalty for the amount of the prohibited transaction. Also, the party at interest is personally liable for the penalty if the plan assets are not sufficient to pay the penalty.

Great Benx Corporation provides both a defined benefit plan and a money purchase plan for its employees. The defined benefit plan is covered by the PBGC. All employees participate in each plan. If the Section 415 limits apply, how do they apply? A) The Section 415 limits are applied separately for each plan. The annual additions limit for the money purchase plan in 2020 is 100% of the participant's compensation or $57,000, whichever is less. The participant's benefit in the defined benefit plan is limited in 2020 to 100% of the participant's compensation or $230,000, whichever is less. B) Each participant could receive a maximum contribution of 25% of the participant's compensation for the money purchase plan and a maximum contribution of 100% of the participant's compensation for the defined benefit plan. C) The Section 415 limits no longer apply. These limits were repealed by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) for qualified plan application. D) Under the Section 415 limits, the total contributions to both accounts of a participant are limited to 25% of the participant's compensation. Explanation The annual additions limit for the money purchase plan in 2020 is 100% of the participant's compensation or $57,000, whichever is less. The participant's benefit in the defined benefit plan is limited in 2020 to 100% of the participant's compensation or $230,000, whichever is less. The Section 415 limits are applied separately for each plan.

If a defined benefit pension plan is determined to be top heavy, what is one practical significance of this determination? A) One of two accelerated vesting schedules must be used. B) Different coverage requirements and nondiscrimination tests apply. C) Different eligibility requirements come into effect. D) One of two maximum contribution and benefit formulas must be used. Explanation If a defined benefit pension plan is top heavy, one of two accelerated vesting schedules must be used: either 100% vesting after three years of service or graded two- to six-year vesting. The same eligibility and nondiscrimination tests apply as for qualified plans that are not top heavy.

In which of the following ways are target benefit pension plans similar to money purchase pension plans? Pension Benefit Guaranty Corporation (PBGC) insurance is required. The actual dollar retirement benefit is guaranteed. The employee bears the investment risk. Each employee has an individual account. A) III and IV B) I, II, III, and IV C) I and II D) I, II, and III Explanation Statements III and IV are correct. PBGC insurance is not available for target benefit or money purchase pension plans. Also, the actual dollar retirement benefit is not guaranteed in either of these plans.

Joe, age 46, has owned his company for 18 years and wishes to retire at age 70. All of Joe's employees are older than he is and have an average length of service with the company of eight years. Joe would like to adopt a qualified retirement plan that would favor him and reward employees who have rendered long service. Joe has selected a traditional defined benefit pension plan with a unit benefit formula. Which of the following statements regarding Joe's traditional defined benefit pension plan is CORRECT? Increased profitability would increase both Joe's and his employees' pension contributions. A unit benefit formula allows for higher levels of integration than other defined benefit plans. A unit benefit formula rewards older employees hired in their 50s or 60s. A traditional defined benefit pension plan will maximize Joe's benefits and reward long-term employees based on length of service. A) IV only B) II and III C) I, II, and IV D) I and III Explanation Statement I is incorrect. Contributions to defined benefit pension plans are not dependent on the profitability of a company. Statement II is incorrect, because a unit benefit formula plan will not allow higher integration levels. Statement III is incorrect because a unit benefit formula favors workers with longevity. Employees hired in their 50s or 60s will not have significant years of service in the formula at retirement.

Max is the finance director for Bland Foods, Inc. He is trying to implement a new qualified retirement plan for the company. There are numerous federal guidelines with which the company must comply. Which of the following federal agencies is tasked with supervising the creation of new, qualified retirement plans? A) IRS B) FINRA C) PBGC D) ERISA Explanation The Internal Revenue Service (IRS) carries out the task of supervising the creation of new, qualified retirement plans. LO 1.1.1

Nigel's employer, Alpha, Inc., maintains a qualified defined benefit pension plan. There are 100 eligible employees working for Alpha, Inc. What is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test? A) 40 B) 100 C) 80 D) 50 Explanation 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 individuals who work for the employer.

Qualified retirement plans should do which of the following? They must meet specific vesting requirements. They have special tax advantages over nonqualified plans. They must provide definitely determinable benefits. They require an annual profit to allow funding for the plan. A) I, II, and III B) II and III C) II, III, and IV D) I and IV Explanation Qualified plans must meet specific vesting schedules. Qualified plans are preferred to nonqualified plans because of the special tax advantages enjoyed by qualified plans. Qualified retirement plans must offer definitely determinable benefits. An annual profit is not required for a qualified plan to be funded.

Qualified retirement plans should do which of the following? They must meet specific vesting requirements. They have special tax advantages over nonqualified plans. They must provide infinitely determinable benefits. They require an annual profit to allow funding for the plan. A) I and II B) II, III, and IV C) I, II, and III D) II and III Explanation Qualified plans must meet specific vesting schedules. Qualified plans are preferred to nonqualified plans because of the special tax advantages enjoyed by qualified plans. Qualified retirement plans must offer definitely determinable benefits (not infinitely determinable benefits). An annual profit is not required for a qualified plan to be funded.

RQZ Company employs 200 nonexcludible employees, 20 of whom are highly compensated. Sixteen of the 20 highly compensated and 125 of the non-highly compensated employees benefit from the RQZ qualified pension plan. The average benefits accrued for the highly compensated is 8%. The ratio test for the plan just listed is A) 86.8%. B) 80.0%. C) 69.4%. D) 70.0%. Explanation The ratio test is 86.8%, calculated as follows: NHC coverage = 125 ÷ 180 = 69.44% HC coverage = 16 ÷ 20 = 80% 69.44% ÷ 80% = 86.8% (satisfies the ratio coverage test)

Three common formulas for determining annual retirement benefits from a defined benefit plan include all of the following except A) the dollar percentage matrix. B) the percentage of earnings per year of service (unit credit). C) the flat percentage of earnings. D) the flat dollar amount. Explanation The dollar percentage matrix formula does not exist.

Under a profit-sharing plan A) the company has flexibility regarding annual funding. B) the employer bears investment risk. C) the company must make annual contributions. D) up to 25% of the plan's assets can be invested in the employer's stock. Explanation The company has funding flexibility. Pension plans can invest only up to 10% 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. They must make substantial and recurring employer contributions, or the IRS will remove the plan's qualified status. The employee bears investment risk.

Which of the following are included in the annual additions limit for defined contribution plans? Investment gain Employee elective deferral contributions Employer contributions Forfeitures reallocated to the remaining participants in the plan A) II, III, and IV B) I, II, III, and IV C) II and III D) I and IV Explanation Only Statement I is incorrect. Investment gain is not considered in the calculation of annu

Which of the following are minimum coverage tests for qualified retirement plans? Nondiscrimination test Average benefits percentage test Ratio test Maximum compensation test A) II and III B) I and II C) II, III, and IV D) I, II, and III Explanation The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. 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.

Which of the following is CORRECT about the permitted disparity (Social Security integration) rules for defined benefit plans? A plan that provides a benefit for wages up to the integration level, plus a higher benefit for wages that exceed the integration level, is an integrated defined benefit excess plan. A plan that provides that an employee's benefit otherwise computed under the plan formula is reduced by a fixed amount or formula amount in relationship with the person's Social Security benefit is an integrated defined benefit offset plan. Covered compensation is the average of the participant's compensation not in excess of the taxable wage base for the three-consecutive-year period ending with or within the plan year. The base benefit percentage is determined by calculating the benefits provided by the plan based on compensation below the integration level, and expressing these benefits as a percentage of compensation below the integration level. A) I, II, and IV B) I and III C) II and III D) II and IV Explanation Statements I, II, and IV are correct statements about the definition of integrated defined benefit excess plans, the definition of integrated defined benefit offset plans, and how to determine the base benefit percentage. Option III is incorrect because covered compensation means the average Social Security taxable wage base over the last 35 years.

Which of the following statements is CORRECT in describing the integration of a 5% money purchase plan? A) The maximum excess contribution percentage is 10.0%. B) The permitted disparity is 5.7%. C) The maximum excess contribution percentage is 15.7%. D) The offset integration method may be used. Explanation A money purchase plan with a base contribution percentage of 5% will have a 5% permitted disparity (lesser of the 5% base or 5.7%); therefore, the excess contribution percentage will be 10% (5% base + 5% permitted disparity).

Which of the following statements regarding fully insured Section 412(e)(3) plans is CORRECT? A fully insured Section 412(e)(3) plan is a type of defined benefit plan. All fully insured Section 412(e)(3) plans must meet minimum funding standards each plan year. This type of plan is not required to be certified by an enrolled or licensed actuary. A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments. A) I, III, and IV B) II and III C) IV only D) I and III Explanation Statements I, III, and IV are correct. Section 412(e)(3) plans are a type of defined benefit plan. This type of plan is not required to be certified by an enrolled or licensed actuary. A fully insured plan is inappropriate for an employer who cannot commit to regular premium payments. Statement II is incorrect. Fully insured Section 412(e)(3) plans must only meet minimum funding standards if there is a loan outstanding against the insurance policy funding the plan.

Which of the following statements regarding profit-sharing plans is NOT correct? A) A company that adopts a profit-sharing plan must make contributions each year. B) The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of total (aggregate) eligible employee covered compensation. C) Profit-sharing plans are types of qualified defined contribution plans. D) Profit-sharing plans are best suited for companies that have fluctuating cash flows. Explanation Profit-sharing plans are not required to make contributions each year.

Which of the following statements regarding target benefit pension plans is NOT correct? A) The ultimate account balance for the employee's account is guaranteed by the plan. B) Target benefit pension plans favor older participants. C) Each plan participant has an individual account in the plan. D) Target benefit pension plans are a type of defined contribution plan. Explanation A target benefit pension plan is a type of defined contribution plan and, as in all other defined contribution plans, there is no guaranteed ultimate account balance. The plan favors older participants by making a larger contribution for an older plan entrant than for a younger plan entrant with exactly the same salary.

ax implications of cash balance pension plans include which of these? Employer contributions on behalf of employees grow tax deferred. Employer contributions to the plan are deductible when made. Annual retirement benefits are limited to $285,000 (2020). There are no penalties for distributions before age 59½. A) I and II B) III and IV C) I, II, III, and IV D) I, II, and III Explanation Statements I and II are correct. Section 415(b) limits the benefits provided under the plan to the lesser of $230,000 per year (2020) or 100% of the participant's highest consecutive three-year average compensation. Distributions from the plan must follow the rules for qualified plan distributions and may be subject to penalty for early distribution.

A client's employer has recently implemented a traditional Section 401(k) plan as part of its profit-sharing plan. Which of the following is CORRECT regarding the client's participation in the plan? A) The client will not pay Social Security (FICA) taxes on amounts paid into the plan. B) The client is immediately vested in all elective deferrals and their accrued earnings. C) The client will not pay current federal income taxes on amounts distributed from the plan. D) The client is always immediately vested in all employer-matching contributions and their accrued benefits. Explanation 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.

A money purchase pension plan is a defined contribution plan in which A) the final retirement benefit amount is guaranteed. B) the employer typically contributes a fixed percentage of participant compensation each year. C) the employer receives no tax deduction for the contribution. D) the employer must contribute 25% of participant compensation each year. Explanation In a money purchase pension plan, the employer typically contributes a fixed percentage of each participant's compensation. The employer does receive a tax deduction for the amount of contribution to the plan. No guaranteed retirement benefit is provided in a defined contribution plan. The contribution is defined, not the benefit. Only defined benefit pension plans provide guaranteed retirement benefits.

Dorban Products, Inc., has an annual payroll of $800,000. John, the president, wishes to make the maximum contribution to the integrated profit-sharing plan this year. What is the amount? A) $120,000 B) $200,000 C) 25% of base compensation plus 30.7% of excess compensation totaling $245,600 D) $80,000 Explanation The maximum contribution is 25% of covered payroll, or $200,000.

ERISA requires reporting and disclosure of defined benefit plan information to the PBGC. plan participants. the IRS. the DOL. A) I and II B) I, II, III, and IV C) I, II, and III D) III and IV Explanation All of these statements are correct.

Jack, age 51, is the owner of an architectural firm with 23 employees, most of whom are younger than 40. The company's cash flow varies from year to year, depending on their contracts. Jack wants to implement a qualified plan that is easy for employees to understand and that is administratively cost-effective. He also wants a plan with an incentive feature by which an employee's account balance increases with company profits. Which of the following plans would be most appropriate for Jack's firm? A) Defined benefit pension plan B) Traditional profit-sharing plan C) Money purchase pension plan D) Section 403(b) plan Explanation A traditional profit-sharing plan may be appropriate when an employer's profits, or cash flow, fluctuate from year to year; an employer wishes to implement a qualified plan with an incentive feature by which an employee's account balance increases with employer profits; or most employees are young (under age 50) and have substantial time to accumulate retirement savings, and the employees are, most likely, willing to accept a degree of investment risk in their individual accounts. Jack's company is not eligible to implement a Section 403(b) plan, as it is not a nonprofit organization. A defined benefit plan is not appropriate for the company's employee demographics, requires stable cash flows, and can be expensive to administer. Money purchase plans also require a mandatory contribution each year and do not provide the incentive feature regarding company profits.

Jeff wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of the following plans is a qualified plan? Profit-sharing plan Simplified employee pension (SEP) plan SIMPLE IRA Top-Hat plan A) II and III B) I only C) IV only D) I, II, III, and IV Explanation Of the plans listed, only the profit-sharing plan is a qualified plan. The SIMPLE IRA and the SEP plan are tax-advantaged plans, and the Section 457 plan is a nonqualified plan.

Qualified retirement plans have which of the following characteristics? They are subject to ERISA requirements. They offer tax-deferred earnings to employees. They can discriminate in favor of highly compensated employees. They provide tax deduction for the employer only when the employee is income taxed on the money. A) III and IV B) I and II C) I, II, III, and IV D) I, II, and III Explanation Statements I and II are correct. Qualified retirement plans are subject to ERISA requirements and provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot "discriminate in favor of highly compensated employees" in the sense that there is a legal limit to the amount of the difference. As long as the difference is inside the legal limits, the plan is not discriminatory (by definition). Qualified retirement plans provide an immediate tax deduction on employer contributions.

Susan makes $400,000 working for Great Grapes, Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2020? A) $19,500 B) $22,800 C) $32,000 D) $16,000 Explanation Only the first $285,000 of compensation may be used to determine contributions to qualified retirement plans in 2020. Thus, she contributes 4% of $285,000 in 2020. This amount is matched, so $285,000 × 0.08 = $22,800.

This year, its pension actuary informed Gear-It-Up Bicycles, Inc., that its required annual contribution to the company defined benefit pension plan needs to be significantly higher than last year. Which of the following factors could be responsible for this increase in annual contributions? A) Higher-than-expected forfeitures B) Lower-than-expected earnings on plan investments C) Lower-than-expected number of employees nearing normal retirement age D) Higher-than-expected employee turnover Explanation Earnings on investment plans, which were lower than anticipated, will result in an increase to the required annual employer contributions to a defined benefit pension plan. The other factors noted may result in a decrease in plan contributions.

Under which of the following circumstances is a target benefit plan the most appropriate choice for small-business owners? To simplify and reduce the cost of eliminating a defined benefit plan (without termination) by amending it into a target plan Where the employer wants to provide larger retirement benefits for key employees who are significantly older than the other employees To meet the employer's goal of maximizing deductible contributions to provide benefits for older, highly compensated employees Where the employer is opposed to assuming the investment risk and prefers the simplicity of a separate account plan A) II, III, and IV B) II and IV C) I and III D) I, II, and IV Explanation Statements II and IV are correct for the following reasons. Target benefit plans have benefit formulas similar to those of defined benefit plans, which favor employees who are significantly older and higher paid than the average employee of the employee group. Because target benefit plans use separate accounts, the participants bear the risk of the plan's investment performance. Statement I is incorrect because amending a defined benefit plan into a target plan will result in termination of the defined benefit plan. Statement III is not true since a DC plan is limited to 25%, and a DB plan is not limited by a set percentage. Therefore, the DB plan will usually provide a greater tax deduction if an age-weighted plan works best. The key word to Statement III is "maximizing."

Which of the following are agencies that administer and ensure compliance with the federal laws that apply to qualified retirement plans? Department of Labor (DOL) Employee Retirement Income Security Agency (ERISA) Internal Revenue Service (IRS) Pension Benefit Guaranty Corporation (PBGC) A) II and IV B) I, III, and IV C) I and III D) I, II, and III Explanation Under the reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974 (ERISA), annual reports and summary plan descriptions are filed with the IRS (which provides copies to the DOL). An annual premium payment form is filed with the PBGC. If the defined benefit plan is not in compliance with funding requirements, the PBGC can terminate the plan. If the defined benefit plan is not in compliance with funding requirements, the PBGC can terminate the plan.

Which of the following is CORRECT regarding IRS Form 5500? A) The IRS 5500 is known as the employer's annual return/report to the IRS of an employee benefit plan. B) All of these statements are correct. C) A simplified version, Form 5500-EZ, is available for certain small employers. D) Filing an IRS 5500 is an ERISA requirement. Explanation All of these statements are correct regarding IRS Form 5500.

Which of the following is a retirement plan that isn't easily understood by employees, the employee assumes the investment risk, favors older plan participants, and does NOT permit elective deferrals? A) Target benefit pension plan B) Traditional defined benefit plan C) Traditional profit-sharing plan D) Money purchase pension plan Explanation The question is describing a target benefit pension plan.

Which of the following legal requirements apply to money purchase pension plans? The normal retirement benefit must be specified in the plan. The plan must provide a definite and nondiscretionary employer contribution formula. Forfeitures can be reallocated to the remaining participants' accounts in a nondiscriminatory manner or be used to reduce employer contributions. A separate employer contribution account must be maintained for each participant. A) I, II, and IV B) II, III, and IV C) I and II D) I, II, and III Explanation Statements II, III, and IV correctly state the employer contribution formula rule, the forfeiture reallocation rule, and the separate account rule for money purchase pension plans. The first option states a requirement that applies to defined benefit pension plans but not to money purchase plans.

Which of the following statements regarding Social Security integration and defined contribution plans is CORRECT? The integration level can be less than the taxable Social Security wage base. The maximum permitted disparity will depend on whether the integration level is equal to the taxable wage base or below it. Integration can be used to enhance an owner's contribution to the plan if the owner's compensation is in excess of the Social Security wage base. The integration level cannot be greater than the Social Security taxable wage base. A) I and IV B) I, II, III, and IV C) II, II, and IV D) I, II, and III Explanation If the integration level is less than the taxable wage base, the permitted disparity amount may be reduced. Integration can enhance an owner's and/or key employee's contribution rate if the compensation is in excess of the Social Security wage base. A defined contribution plan cannot have integration levels greater than the taxable wage base.

Which of the following statements regarding Social Security plan integration is NOT correct? Because there is a disparity in the Social Security system, all retirement plans are allowed to integrate with Social Security. Only the excess method can be used by a defined benefit pension plan. Under the offset method of integration, a fixed or formula amount reduces the plan formula. The maximum increase in benefits for earnings above covered compensation level is 5.7% for a defined benefit pension plan. A) II and III B) I, II, and IV C) II and IV D) I and III Explanation Statement I is incorrect because not all retirement plans are allowed to integrate with Social Security. For example, ESOPs and SARSEPs are not permitted to use integration. Statement II is incorrect because the defined benefit pension plan can use either the excess or offset method in integrating with Social Security. Only the excess method can be used with defined contribution plans. Statement IV is incorrect because the permitted disparity limit for a defined benefit pension plan is 26.25% above the covered compensation level (0.75% per year for up to 35 years).

Which of the following statements regarding a top-heavy plan is CORRECT? A top-heavy plan is one that provides more than 50% of its aggregate accrued benefits or account balances to key employees. A top-heavy defined pension benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service (up to 20%). For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees' percentage. A top-heavy defined benefit pension plan must provide accelerated vesting. A) II and IV B) II, III, and IV C) I and III D) I, II, III, and IV Explanation Only Statement I is incorrect. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.

Which of the following transactions between a qualified plan and a disqualified person are prohibited transactions, as defined by ERISA? The employer's purchase of a mortgage note in default from the plan for more than fair market value The sale of undeveloped land to a qualified plan for a bargain price The acquisition of employer stock by a profit-sharing plan for full and adequate consideration A loan to a 100% shareholder-participant in an amount proportionate to the amounts available to other plan participants, as specified in the plan documents A) II and III B) I and II C) I, II, and III D) II, III, and IV

Which of the following would NOT be a permitted disparity for a defined benefit plan that uses Social Security integration? A) An excess benefit percentage of 20%, if the base percentage is 15% B) An excess benefit percentage of 60%, if the base percentage is 30% C) An excess benefit percentage of 10% if the base percentage is 5% D) An excess benefit percentage of 40%, if the base percentage is 20% Explanation Base percentage + permitted disparity = excess benefit percentage. The permitted disparity is the base percentage, up to a maximum of 26.25% (0.75% per year for up to 35 years).

Able Company is considering various types of qualified plans and seeks your advice. You are asked how a plan participant's benefits at retirement are determined in a defined benefit plan with a flat benefit formula that uses the offset method of integration. Which of these statements would best answer the company's question? A) The benefit paid from the employer plan is based only on employee compensation above the Social Security wage base. B) The employee's Social Security benefit is reduced by a specific percentage of the retired employee's retirement plan benefit. C) The percentage of pay benefit specified by the plan is reduced by a specific percentage of the retired employee's Social Security benefit. D) The benefit paid from the employer plan is reduced by the amount the employer pays into Social Security on behalf of the employee. Explanation The percentage of pay benefit specified by the plan is reduced by a specific percentage of the retired employee's Social Security benefit. Offset integration reduces the defined benefit received due to the retiree also getting Social Security benefits.

An employer's annual contributions to a qualified defined contribution plan must be within statutory limits regarding the allowable amount. An employer's annual contribution to a defined contribution plan is limited to ____% of the firm's covered payroll. A) 15 B) 20 C) 25 D) 10 Explanation An employer's annual contributions to a qualified defined contribution plan must be within statutory limits regarding the allowable amount. An employer's annual contribution to a defined contribution plan is limited to 25% of the firm's covered payroll.

An increase in which of the following factors will increase plan costs for a defined benefit pension plan? A) Mortality B) Employee turnover C) Life expectancies D) Investment returns Explanation An increase in employee life expectancies will increase the potential costs of the plan, so life expectancies have a direct impact on costs.

Brad Elberly has been the sole owner and operator of Woodmasters Inc. for the past 15 years. Brad is age 45, and his salary from the business is $130,000. Brad and his wife, Laura, want to retire when Brad is age 65. Relevant information regarding the business is summarized below: Financial performance fluctuated over the first 10 years. Cash flow and profits have stabilized during the past five years and are expected to show modest but consistent growth in the future. Excess cash flow of approximately $150,000 is expected to be available this year. Future years should be about the same. Brad has expressed some concern about the company's outdated equipment and is considering renovating the plant and replacing the outdated equipment over the next five years. The total cost should be about $300,000. Total compensation for all employees (including Brad) is $245,000. The four full-time rank-and-file employees range from age 19 to age 38, and have been with Woodmasters for periods ranging from four months to six years. Age and service information is shown below: EmployeeAgeCompleted Years of ServiceCompensationBrad4515 years$130,000Beth386 years$40,000Todd276 months$25,000Carol302 years$28,000Jim194 months$22,000 Assume that Brad installs a 10% money purchase plan at Woodmasters this year. The plan provides for a graded vesting schedule. Which of the following statements will be true regarding this money purchase plan? The plan will be top-heavy. The plan will not be top-heavy. An additional 3% must be contributed for the non-key employees. The plan will be discriminatory due to the ratio of Brad's salary to the other employees' salaries. A) I, III, and IV only B) I and III only C) I only D) II and IV only Explanation In the first year of a qualified plan that uses a compensation-based allocation formula (as a money purchase plan does), it is possible to determine whether the plan will be top-heavy based on the key employees' compensation as a percentage of covered payroll. Brad's salary of $130,000 is 65% of the $198,000 covered payroll; since this exceeds 60%, the plan is top-heavy. However, since the plan already contributes 10% no additional contribution is required and vesting need not be accelerated since defined contribution plans must use top heavy vesting.

ERISA requirements for qualified plans include A) participation and fiduciary requirements. B) coverage and vesting. C) all of these. D) reporting and disclosure. Explanation All of these are ERISA requirements for qualified plans.

Gary is employed by the city of Great Rapids, and his sister, Julie, works for Big Toys, Inc. Gary participates in a 457 plan and Julie participates in a Section 403(b) plan. Which of the following statements is CORRECT in indicating how their respective plans compare to each other? Both plans are based on contracts with the employer. Both plans allow for the deferral of salary into the plans. Neither plan is a qualified plan. Both plans are subject to limits on the amount that can be contributed to the plan. A) I, II, and IV B) I and III C) I, II, III, and IV D) I and II Explanation Both the Section 403(b) plan (TSA) and the Section 457 plan are based on contracts with the employer (the salary deferral agreement). Both plans allow workers to contribute to the plan, and there are annual limits for the contributions to each plan. Neither plan is a qualified plan

Gene wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of the following plans is a qualified plan? Profit-sharing plan Simplified employee pension (SEP) plan SIMPLE IRA SARSEP plan A) II and III B) I, II, III, and IV C) I only D) IV only Explanation Of the plans listed, only the profit-sharing plan is a qualified plan. The SIMPLE IRA and the SEP plan are tax-advantaged plans, and the Section 457 plan is a nonqualified plan.

In a profit-sharing plan that is integrated with Social Security and uses a 4% base contribution rate, what is the maximum excess contribution percentage that may be applied? A) 5.7% B) 9.7% C) 8.0% D) 5.5% Explanation Under the permitted disparity rules, the maximum permitted excess contribution percentage is the lesser of two times the base percentage; and the base percentage plus 5.7%,, resulting in a total excess contribution percentage of 8.0% (2 × 4%).

In the administration of a qualified retirement plan, which of the following individuals is considered to be a fiduciary? A) A CPA who prepares the plan's Form 5500 B) A highly compensated employee who participates in the plan C) A financial planner handling the investment of plan assets D) The marketing director of the plan sponsor Explanation A person or corporation is considered a fiduciary under ERISA if that person or entity renders investment advice or services to the plan for direct or indirect compensation. Clearly, the financial planner-investment manager is within this definition.

In which of the following ways is a target benefit pension plan similar to a traditional defined benefit pension plan? A) Investment returns have no bearing on benefit B) Employer contribution is flexible C) Benefits older employees D) Employee assumes the investment risk Explanation A target benefit pension plan is similar to a traditional defined benefit plan in that they are both designed to benefit older employees. The employer bears the risk in the defined benefit plan only, and the employer contribution is not flexible in either plan. In a target benefit pension plan, the investment returns do affect the final benefit.

Jim, the president of East Dover Construction Company, has requested your advice in setting up a defined benefit pension plan for eligible employees in the company. Jim founded the company 17 years ago and now has 200 employees, most of whom are under 35 years of age. Due to the nature of the work and ongoing management difficulties, tenure among the employees has averaged under two years. Jim has just fired the managers who were creating problems, but turnover is likely to remain high due to ongoing morale problems. Jim's current salary is $300,000, and he wants the plan to provide him with annual retirement income of $100,000 per year. He expects to retire in 13 years, at age 64. Which of the following statements describes information you need to convey to Jim about factors that could affect the amount of his retirement benefit? A) One method of increasing the retirement benefit paid to him is by integrating the plan using the offset method. B) Using a flat benefit formula will always provide Jim a larger benefit than would a unit benefit formula. C) The excess integration method could be used to increase the amount of his plan benefit in retirement. D) If the plan investments outperform expectations, he will receive the largest allocation of the excess earnings. Explanation The excess integration method increases the retirement benefit for compensation above the integration level. The offset integration method reduces the retirement benefit due to the receipt of Social Security benefits. With a defined benefit plan, excess investment performance reduces the subsequent employer contributions. A flat benefit formula versus a unit benefit formula would depend on the details of the flat benefit versus the unit benefit formula, so more information would be required to determine which would give a larger benefit.

Mac, age 39, works for the SLH Company. He has a salary of $28,000 and a 401(k) there. Mac also has another job with AKH, Inc., making $65,000. SLH and AKH are not related. Mac is deferring $9,500 into the 401(k) at SLH. How much can he defer into the 401(k) at AKH? A) $19,500 B) $47,500 C) $10,000 D) $57,000 Explanation Mac can defer $10,000 into his 401(k) at AKH, Inc. The total he can contribute to employer retirement plans in 2020 is $19,500. Since he is already doing $9,500 at one employer, he is limited to $10,000 at the other. The fact that the two employers are unrelated does not matter for how much a worker can defer into the two plans. However, when it comes to unrelated organizations, each would have an independent annual additions limit. In other words, the law expects workers to know how much they are contributing to various employer retirement plans and to stay below the limit. The same would be true for related employers. However, unrelated employers are not held responsible for the employee or employer contributions to the other

Prohibited transactions are those that are not in the best interest of plan participants and include which of these? A loan between the plan and any party in interest The acquisition of employer securities or real property in excess of legal limits A transfer of plan assets to or use of plan assets for the benefit of a party in interest The sale, exchange, or lease of any property between the plan and a party in interest A) I and II B) I, II, and III C) I, II, III, and IV D) III and IV Explanation All of the statements are prohibited transactions. Self-dealing is also a prohibited transaction.

Ross, age 75, works for Financial Strategies, Inc. The company has a long-established retirement plan. The plan does not require an actuary or Pension Benefit Guaranty Corporation (PBGC) insurance, but the employer is required to make annual mandatory contributions to each employee's account. What type of retirement plan was established by Financial Strategies? A) Traditional defined benefit pension plan B) Target benefit pension plan C) Money purchase pension plan D) Cash balance pension plan Explanation A money purchase pension plan requires annual mandatory employer contributions to each employee's account, does not require an actuary, and does not require PBGC insurance. The other choices are incorrect: A cash balance pension plan requires an actuary and PBGC insurance. A target benefit pension plan requires an actuary at the inception of the plan, but not on an annual basis. A traditional defined benefit pension plan requires the services of an actuary annually as well as PBGC insurance.

Scott is the fiduciary of the BSB retirement plan. The entity responsible for monitoring his actions as a fiduciary is A) the PBGC. B) the ERISA. C) the DOL. D) the SPD. Explanation The Department of Labor (DOL) governs the actions of plan fiduciaries and ensures compliance with the ERISA plan reporting and disclosure requirements.

The Jones Corporation has a profit-sharing plan with a 401(k) provision. The company matches dollar-for-dollar up to 5%. Pedro makes $150,000 and defers 5% into the 401(k) for 2020. The Jones Corporation has had a banner year and is considering a large contribution to the profit-sharing plan. What is the most that could be contributed to Pedro's profit-sharing account this year? A) $57,000 B) $49,500 C) $42,000 D) $19,500 Explanation The maximum allowed contribution for 2020 is $42,000. The section annual additions limit for 2020 is $57,000. However, Pedro has already contributed $7,500, and this amount has been matched. Thus, $15,000 has already gone toward the $57,000 annual additions limit for 2020.

Velvet Lawns, Inc., employs 26 full-time workers and provides a money purchase pension plan for eligible employees. All 26 employees are plan participants this year. Jack, the owner of the company, has an account balance of $134,000. The total of the account balances of all plan participants amounts to $215,000. Which of the following statements apply to this plan? The plan would not pass the required coverage test and is therefore discriminatory. The plan is top heavy. The plan may use either a five-year cliff or three- to seven-year graded vesting schedule. The plan must comply with requirements for minimum contributions to non-key employees. A) I and III B) II, III, and IV C) II and IV D) I, II, and IV Explanation If all 26 employees are participating in the plan, the coverage and nondiscrimination tests would be passed. The plan would, however, be top heavy (Jack's $134,000 account balance is 62% of the $215,000 total of all account balances). Top-heavy plans must comply with minimum contribution requirements for non-key employees and use a top-heavy vesting schedule. All defined contribution plans are now required to vest no less rapidly than three-year cliff or two- to six-year graded.

What are the requirements and effect of an eligible investment advice arrangement under the Pension Protection Act? An eligible investment advice arrangement allows a plan fiduciary to give advice including recommending their own proprietary funds without violating fiduciary rules. The investment advisor's fees must be neutral. An unbiased computer model certified by an independent expert to create a recommended portfolio for the client's consideration is used. Investment advisors for IRAs may only use the unbiased computer model option when providing eligible investment advice. A) I and II B) II and III C) I, II, and III D) I, II, III, and IV Explanation Statements I, II, and III are correct. Investment advisors for IRAs may only use the neutral fee option and not the computer model option when providing eligible investment advice.

Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan? IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment. A) Neither I nor II B) II only C) Both I and II D) I only Explanation Both statements are correct. IRA-funded employer-sponsored tax-advantaged plans are SEPs, SARSEPs, and SIMPLE IRAs.

Which of the following is CORRECT about contributions made to a cash balance pension plan? A) Neither the employer nor the employee make contributions. Cash balance plans are funded entirely by payroll taxes. B) Both the employer and the employee make contributions. C) All contributions are made by the employer. D) All contributions are made by the employee. Explanation All contributions to the account-based cash balance plan come from the employer and must reflect a uniform allocation formula based on compensation.

Which of the following is NOT an example of a qualified retirement plan? A) Employee stock ownership plan (ESOP) B) New comparability plan C) Section 403(b) plan D) Section 401(k) plan Explanation 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 NUA treatment. NUA is covered later in the course. 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.

Which of the following is a defined benefit pension plan that promises a benefit based on a hypothetical account balance versus a traditional defined benefit pension plan, which promises a monthly retirement benefit for life? A) Target benefit pension plan B) Cross-tested plan C) Cash balance pension plan D) Age-weighted plan Explanation The plan described is a cash balance pension plan. Age-weighted plans allocate contributions to participants in such a way that when contributions are converted to equivalent benefit accruals (stated as a percentage of compensation), each participant receives the same rate of benefit accrual. Cross-tested plans are defined contribution plans that test whether the contribution formula discriminates in favor of the highly compensated employee by converting contributions made for each participant into equivalent benefit accruals. Target benefit pension plans are hybrid retirement plans that use a benefit formula like that of a defined benefit pension plan and the individual accounts like a defined contribution plan.

Which of the following plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made? Traditional profit-sharing plan Simplified employee pension (SEP) plan Individual retirement account (IRA) Section 403(b) tax-deferred annuity A) I and IV B) I, II, III, and IV C) I only D) II and III Explanation Only lump-sum distributions from qualified plans may be eligible for 10-year forward averaging. SEP plans, IRAs, and tax-deferred annuities—also known as Section 403(b) plans—are not qualified plans and, therefore, are not eligible for 10-year forward averaging. Remember, to be eligible for 10-year forward averaging, a person must be born before Jan 2, 1936. Thus, only people working into their 80s can today qualify for 10-year forward averaging. Even then, they would have to take a lump-sum distribution to meet another rule to qualify for 10-year forward averaging.

Which of the following statements are advantages for the employer-sponsor of a cash balance pension plan? A certain level of plan benefit is guaranteed by the PBGC. The employer bears the investment risk in the plan. Cash balance pension plans are less expensive to administer for the employer than traditional defined benefit pension plans. Retirement benefits may be inadequate for older plan entrants. A) III and IV B) II and IV C) I and III D) I and II Explanation Statements I and III are correct. A cash balance pension plan has several advantages and disadvantages. Advantages include the following: A certain level of plan benefits is guaranteed by the PBGC. There are significant cost savings for the employer as compared to the traditional defined benefit pension plan. Disadvantages include the following: The employer bears the risk of poor investment performance. The retirement benefits may be inadequate for older plan entrants. If the plan is a converted traditional defined benefit plan, the lump-sum payout at the employee's retirement date may be considerably less under the cash balance pension formula.

Which of the following statements are disadvantages for the employer-sponsor of a cash balance pension plan? A certain level of plan benefit is guaranteed by the PBGC. The employer bears the investment risk in the plan. Cash balance pension plans are less expensive for the employer than a traditional defined benefit pension plan. Retirement benefits may be inadequate for older plan entrants. A) III and IV B) I and II C) II and IV D) I and III Explanation Statements II and IV are correct. A cash balance pension plan has several advantages and disadvantages. Advantages include the following: A certain level of plan benefits is guaranteed by the PBGC. There are significant cost savings for the employer as compared to the traditional defined benefit pension plan. Disadvantages include the following: The employer bears the risk of poor investment performance. The retirement benefits may be inadequate for older plan entrants. If the plan is a converted traditional defined benefit pension plan, the lump-sum payout at the employee's retirement date may be considerably less under the cash balance formula. This is a disadvantage to workers and an advantage to employers.

Which of the following statements is CORRECT in describing the effects of actuarial methods or assumptions on contributions to a defined benefit pension plan? A) The higher the interest rate assumed by the actuary, the higher the required employer contribution for the year. B) Using salary scales tends to reduce the cost for funding younger employees' benefits. C) The higher the turnover rate assumed by the actuary, the lower the required employer contribution for the year. D) The lower the projected investment earnings on plan assets over the life of the plan, the lower the required employer contribution for the year. Explanation Because defined benefit plans must apply forfeitures to reduce the employer contribution, an actuarial assumption of high turnover in a plan year will result in a lower required employer contribution.

Which of the following statements regarding prohibited transactions is NOT correct? A) One category of prohibited transactions involves the investment in the sponsoring employer's stock or real property. B) 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. C) The lending of money or other extension of credit between the plan and a party in interest is a prohibited transaction exemption. D) One category of prohibited transactions involves the sale, lease, or exchange of any property between the plan and a party in interest. Explanation Loans between the plan and a party in interest are prohibited transactions.

Which of the following statements regarding the characteristics or use of a profit-sharing plan is CORRECT? A) The maximum tax-deductible employer contribution to a profit-sharing plan is 15% of covered payroll. B) Profit-sharing plans require a fixed, mandatory, annual contribution by the employer to the plan. C) Profit-sharing plans are best suited for companies that experience fluctuating cash flow. D) A company with a great number of older employees will find the implementation of a traditional profit-sharing plan to be the most beneficial for the older employee-participants. Explanation A profit-sharing plan does not require a mandatory, annual employer contribution. Therefore, they are best suited for companies that experience fluctuating cash flow and would like the flexibility of a discretionary (though substantial and recurring) contribution. The maximum tax-deductible contribution is 25% of covered payroll. Because there is less time to accrue a retirement benefit by retirement age, a profit-sharing plan is not the best choice for a plan with a great number older employee-participants.

Which of the following statements regarding top-heavy plans is CORRECT? An accelerated vesting schedule is used when a defined benefit pension plan is top heavy. A qualified plan is considered top heavy if it provides more than 50% of its aggregate accrued benefits or account balances to key employees. Top-heavy defined benefit plans must provide a minimum benefit of 2% per year of service for up to 10 years (20%) for all non-key employees. For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer with compensation greater than $125,000 (2020). A) II and IV B) I and II C) I and III D) II and III Explanation An accelerated vesting schedule is used when a defined pension benefit plan is top heavy. A defined contribution plan always requires an accelerated vesting schedule. A qualified plan is considered top heavy if it provides more than 60% of its aggregate accrued benefits or account balances to key employees. A key employee is an employee who, at any time during the plan year, is the following: greater than a 5% owner; a greater than 1% owner with compensation greater than $150,000 (not indexed); or an officer of the employer with compensation greater than $185,000 in 2020.

With an integrated defined contribution plan, what is the maximum permitted disparity? A) The maximum permitted disparity is 25%, so if the base benefit percentage is greater than 25% then the permitted disparity would be capped at 25%. B) In an integrated defined contribution plan, if the base contribution percentage is 5% then the permitted disparity is 5.7%. C) For an integrated defined contribution plan, the permitted disparity is the lower of the base amount, or 5.7%. D) The permitted disparity is 0.75% per year for up to 35 years. Explanation The permitted disparity is the lower of the base amount, or 5.7%. Thus, the maximum permitted disparity is 5.7% for integrated defined contribution plans. The number 5.7% is the percentage of an employee's compensation that goes toward his Social Security retirement benefit for compensation below the taxable wage base ($137,700 in 2020). LO 1.3.3

Your client, the chief financial officer of a new company, wishes to install a retirement plan in the company in which the pension benefits to employees are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). Identify the plan(s) that must meet this requirement. (CFP® Certification Examination, released 12/96) Profit-sharing plan Money purchase plan Target benefit plan Defined benefit plan A) III and IV B) I and II C) IV only D) I and III Explanation Only two defined benefit pension plans (defined benefit and cash balance) have PBGC insurance. Note: In the online version of Kaplan Schweser's QBank, the letters preceding the answer choices that appear in the original CFP Board question have been eliminated. The answer choices may not be in the same order as in the original CFP Board-released questions.

ERISA requires reporting and disclosure of plan information to all of the following except A) the Internal Revenue Service (IRS). B) plan participants. C) plan sponsors. D) the Department of Labor (DOL).

c ERISA requires reporting and disclosure of plan information by plan sponsors to the IRS, DOL, Pension Benefit Guaranty Corporation (PBGC), and plan participants.

An employer must comply with restrictions on the use of more than one qualified retirement plan where employees participate in both plans. Which of the following are CORRECT about some of these limitations? If a target benefit plan is a fully insured plan and covered under the PBGC, then the target benefit plan is not taken into account in applying the overall limit on deductions. When an employer has more than one plan, the overall contribution limit will be the lesser of 25% of total participants' compensations or the amount required to meet the minimum funding standard of the defined benefit plan. This limit applies only to the extent that the employer contribution to the defined contribution plan or plans is greater than 6%. If an employer sponsors both a defined benefit plan and a defined contribution plan (and the defined benefit plan is exempt from the PBGC), the overall employer limit is the amount necessary to meet the minimum funding requirement of the defined benefit plan. A contribution of up to 6% of compensation is also allowed into the defined contribution plan. Under current law, if a defined benefit plan is covered under the PBGC, then the defined benefit plan is not taken into account in applying the overall limit on employer deductions. A) I and III B) II and IV C) I and II D) III and IV Explanation One exception to the overall deduction limit is for defined benefit plans that are covered by the PBGC. Under current law, if a defined benefit plan is covered under the PBGC, then the defined benefit plan is not taken into account in applying the overall limit on employer deductions.

Assume a company's goal is to maximize retirement benefits to the highly compensated employees, who also happen to be the oldest employees. Which of the following best accomplishes this goal if the company is installing a new plan? A) An age-weighted profit-sharing plan B) A target benefit pension plan C) A money purchase pension plan D) A defined benefit pension plan Explanation The defined benefit pension plan favors older participants and generally allows larger contributions than other plans. Age-based profit-sharing plans and target benefit pension plans also favor older participants. However, age-based profit-sharing plans and target benefit pension plans are both defined contribution plans that are subject to the annual additions limit (for 2020 a maximum contribution of no more than the lesser of 100% of an employee's compensation or $57,000).

Brad has been the sole owner and operator of Woodmasters, Inc., for the past 15 years. Brad is age 45, and his salary from the business is $130,000. Brad and his spouse, Laura, want to retire when Brad is age 65. Relevant information regarding the business is summarized as follows: Financial performance fluctuated over the first 10 years. Cash flow and profits have stabilized during the past five years and are expected to show modest but consistent growth in the future. Excess cash flow of approximately $150,000 is expected to be available this year. Future years should be about the same. Brad has expressed some concern about the company's outdated equipment and is considering renovating the plant and replacing the outdated equipment over the next five years. The total cost should be about $300,000. Total compensation for all employees (including Brad) is $245,000. The four full-time rank-and-file employees range from age 19 to age 38, and have been with Woodmasters for periods ranging from four months to six years. Age and service information is shown as follows: EmployeeAgeCompleted Years of ServiceCompensationBrad4515 years$130,000Beth386 years$40,000Todd276 months$25,000Carol302 years$28,000Jim194 months$22,000 Which of the following statements can be made regarding any qualified plan that Brad installs at Woodmasters? (Assume that the plan admits any employee who is eligible under the ERISA age and one-year service requirements and that all eligible employees are participating.) The plan passes the ratio percentage test. Three employees (in addition to Brad) will be eligible to participate. The plan passes the participation (50/40) test, although it may not be required to do so. Information is insufficient to perform coverage and participation tests. A) I, II, and III B) II and IV C) II and III D) I and III Explanation Since the plan admits all ERISA-eligible employees, relevant percentages for the coverage and participation tests will be 100%; the plan will pass the ratio percentage test. Since the lesser of 50 participants or 40% of the ERISA-eligible employees is two and because three (100%) actually participate, the plan passes the 50/40 test. The 50/40 test only applies to defined benefit plans.

ERISA requires reporting and disclosure of plan information to all of the following except A) plan participants. B) the Department of Labor (DOL). C) the Internal Revenue Service (IRS). D) the Securities and Exchange Commission (SEC) Explanation ERISA requires reporting and disclosure of plan information by plan sponsors to the IRS, DOL, Pension Benefit Guaranty Corporation (PBGC), and plan participants.

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? A) A flat benefit formula B) A discretionary formula C) A flat percentage of earnings formula D) A unit benefit formula Explanation Because this formula considers both compensation and years of service, the defined benefit plan is using a unit benefit formula. This type of formula is frequently used to reward continued service with the same employer.

Frank and his daughter, Joan, own and operate a gravel pit. Frank is age 55 and hopes to retire when he reaches age 65. Joan is age 33 and plans to continue operating the business after Frank retires. Currently, Frank owns 70% of the corporation and Joan owns the remaining 30%. Frank's current income from the corporation is $72,000. They have established a target benefit plan; Frank's account has been earning 8%, and the balance is currently $67,590. Based upon an analysis of Frank's cash flow, you and he have determined that he will need annual retirement income of $54,000 in today's dollars. With this information, which of the following best describes how the target benefit plan will provide for Frank and Joan's retirement? Considering Joan's age, a money purchase plan would be more beneficial to her. Frank can anticipate that the age-weighted nature of the target benefit plan will provide the bulk of his needed retirement income. Based upon the present investment return, the target benefit plan may provide Frank with less than 40% of the income that he will need at retirement. For Frank, a target benefit plan will not provide adequate retirement income for him to meet his retirement income objective because of the 25% limit on deductions for employer contributions; additional methods of saving for retirement need to be explored. A) I and III B) I, III, and IV C) I and II D) II only Explanation Even if the company contribution is 25% of participant compensation, the current account balance and future contributions will not be adequate to meet his retirement income objective. Because of Joan's age, the annual contributions into her account may be under 6%. Although she has time to accumulate savings, the level of the contribution will provide less retirement fund accumulation for her than a regular money purchase plan could.

George is an executive with the MAH Company. For 2020, the maximum annual contribution under a money purchase pension plan on behalf of a participant is the lesser of 100% of the employee's covered compensation, or A) $19,500. B) $225,000. C) $285,000. D) $57,000. Explanation The maximum annual contribution for a money purchase pension plan on behalf of a participant is subject to the annual additions limit, which is the lesser of 100% of the participant's covered compensation, or $57,000 (2020).

How are target benefit pension plans similar to money purchase pension plans? The participant's final account balance determines the actual retirement benefit. The maximum annual additions limitations are the same. The employer bears the investment risk. An actuary determines the employer contribution each year. A) III and IV B) II and IV C) I, II, and III D) I and II Explanation A target benefit pension plan is a type of defined contribution plan and is similar to a money purchase pension plan in that the participant's account balance determines the actual retirement benefit, the maximum annual additions limitation is the same, and the employee bears the investment risk. An actuary is used only at inception of the target benefit pension plan, not annually.

In a Section 401(k) plan, which of the following must be considered in complying with the maximum annual additions limit? Employee contributions Catch-up contributions for an employee age 50 or older Dividends paid on employer stock held in the Section 401(k) plan Employer contributions A) II and IV B) I, II, and V C) I and II D) I and IV Explanation Statement I is correct. Employee contributions are counted against the annual additions limit. Statement II is incorrect. Catch-up contributions for an employee age 50 or older are not counted against the annual additions limit. Statement III is incorrect. Earnings on plan investments are not taken into account when computing the maximum annual additions limit. Statement IV is correct. For 2020, the annual additions limit is the lesser of 100% of the employee's compensation, or $57,000.

In a defined contribution plan, if the integration level is less than the Social Security taxable wage base, what occurs? Larger contributions will be made on behalf of employees whose compensation is above the lower integration level. The plan's cost to the employer increases as the integration level is reduced. The permitted disparity between the maximum excess contribution percentage and the base contribution percentage is reduced. Employer contributions must be adjusted to an integration level of $137,700 (2020) to achieve optimum integration. A) III, and IV B) I and III C) II and IV D) I, II, and III Explanation Only Statement IV is incorrect. An integration level below the Social Security taxable wage base allows larger contributions for higher-paid workers and costs the employer more money. Optimum integration is generally just above the compensation level of the highest-paid nonowner employee.

In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons: Purchase of a primary residence Payment of unreimbursed medical expenses Payment necessary to prevent foreclosure on the participant's primary residence Payment of higher education expenses for the participant, spouse, or dependent children A) III and IV B) I, II, and III C) I and II D) I, II, III, and IV Explanation All of the statements regarding hardship withdrawal requirements are correct.

Jerry wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of the following plans is a qualified plan? Profit-sharing plan Simplified employee pension (SEP) plan SIMPLE IRA Section 457 plan A) IV only B) I only C) I, II, III, and IV D) II and III Explanation Of the plans listed, only the profit-sharing plan is a qualified plan. The SIMPLE IRA and the SEP plan are tax-advantaged plans, and the Section 457 plan is a nonqualified plan.

Joe has worked for XYZ Co. for 30 years and is a participant in his employer's traditional defined benefit pension plan. He is retiring this year. The plan formula provides a pension equal to the average of the participant's final three years of compensation. Joe's final three years of compensation were $200,000, $230,000, and $290,000. What will be the amount of Joe's pension under the plan in 2020? A) $221,000 B) $238,333 C) $240,000 D) $230,000 Explanation Applying the 2020 covered compensation limit of $285,000, Joe's final three years of compensation averages to $238,333. However, the maximum defined benefit pension payable from a traditional defined benefit pension plan is $230,000 (2020).

Max is the finance director for Bland Foods, Inc. He is trying to implement a new qualified retirement plan for the company. There are numerous federal guidelines with which the company must comply. Which of the following federal agencies is tasked with supervising the creation of new, qualified retirement plans? A) ERISA B) DOL C) PBGC D) IRS Explanation The Internal Revenue Service (IRS) carries out the task of supervising the creation of new, qualified retirement plans

Qualified retirement plans are which of these? They are subject to ERISA requirements. They offer tax-deferred earnings to employees. They can discriminate in favor of highly compensated employees. They provide a deferred tax deduction for employer funding. A) I, II, III, and IV B) III and IV C) I, II, and III D) I and II Explanation Statements I and II are correct. Qualified retirement plans are subject to ERISA requirements and provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot "discriminate in favor of highly compensated employees" in the sense that there is a legal limit to the amount of the difference. As long as the difference is inside the legal limits, the plan is not discriminatory (by definition). Qualified retirement plans provide an immediate tax deduction on employer contributions—not a deferred tax deduction, like a nonqualified deferred compensation plan.

The Acme Corporation has six owners, ranging in age from 30 to 60 years old, and 25 rank-and-file employees. The owners want to adopt a qualified retirement plan that will allow them to maximize the contributions to the owners' accounts and minimize the contributions to the accounts of the rank-and-file employees. Which of the following plans would best meet the owners' needs? A) Section 401(k) plan B) Self-employed Keogh plan C) Age-based profit-sharing plan D) New comparability plan Explanation A new comparability plan would allow the owners to divide the participants into two classes based on their compensation levels and allocate different contribution levels to the classes. An age-based profit-sharing plan wouldn't meet their objectives because the owners' ages are significantly different. Section 401(k) plans are subject to discrimination testing, and a self-employed Keogh plan is inappropriate because the owners aren't self-employed.

Valerie earns $290,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2020? A) $230,000 B) $100,000 C) $71,250 D) $57,000 Explanation Valerie earns $290,000 annually in 2020. The plan provides for a contribution of 25% of participants' compensation. However, the maximum compensation that can be taken into consideration is $285,000. Twenty-five percent of $285,000 is $71,250. Finally, the maximum annual additions limit is $57,000, making the maximum company contribution for Valerie $57,000.

What is the maximum annual contribution by an employer to a plan participant's money purchase pension plan account in 2020? A) 25% of the employee's compensation B) The amount required to pay the benefit promised without limit C) $19,500 D) Lesser of 100% of employee compensation, or $57,000 Explanation The maximum annual contribution to the participant's account under the plan is the lesser of 100% of the eligible employee's compensation, or $57,000 (for 2020). The deduction for employer contributions to a defined contribution plan is limited to 25% of aggregate covered compensation.

What is the permitted disparity for a defined contribution plan with a current base contribution percentage of 6%? A) 12.0% B) 6.0% C) 11.7% D) 5.7% Explanation The permitted disparity is the extra amount reached above the integration level. For an integrated defined contribution plan, the permitted disparity is the lesser of 5.7% and the base contribution percentage. Since the base benefit percentage is 6%, the permitted disparity is limited to 5.7%. That would mean the excess benefit percentage is 11.7% (6% + 5.7%).

Which of the following is NOT required to be distributed to qualified plan participants on an annual basis? Summary Plan Description (SPD) Form 5500 Summary Annual Report (SAR) Summary of Material Modification (SMM) A) IV only B) I and II C) III and IV D) I, II, and IV Explanation Only a SAR, summarizing the basic information included in the Form 5500 series, must be provided to plan participants each year within nine months of the end of the plan year. An SPD must be provided automatically to all plan participants within 120 days after the plan is established or 90 days after a new participant enters an existing plan, not annually. Form 5500 must be filed with the IRS and DOL annually, but is not required to be provided annually to plan participants; however, participants have a right to see the full Form 5500 if needed and requested. An SMM, explaining any substantive changes that occurred to the SPD within the past year, must be issued as needed.

Which of the following is a hybrid retirement plan that uses an actuarially designed benefit formula like that of a traditional defined benefit plan and individual accounts like that of a defined contribution plan? A) Cash balance pension plan B) Money purchase pension plan C) Age-weighted profit-sharing plan D) Target benefit pension plan Explanation The plan described is a target benefit pension plan. The contribution is derived from an actuarially designed benefit formula in a target benefit pension plan, but once determined, the plan resembles a money purchase pension plan in all other ways. Cash balance pension plans are defined benefit pension plans that promise a benefit based on a hypothetical account balance versus a traditional defined benefit plan, which promises a monthly retirement benefit for life. Age-weighted profit-sharing plans are defined contribution plans that allocate contributions to participants in such a way that when contributions are converted to equivalent benefit accruals (stated as a percentage of compensation), each participant receives the same rate of benefit accrual. A money purchase pension plan does not use an actuarially designed benefit formula.

Which of the following is a type of traditional defined benefit pension plan? A) An employee stock ownership plan (ESOP) B) A money purchase pension plan C) A target benefit pension plan D) A fully insured Section 412 (e)(3) pension plan Explanation 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.

Which of the following is an example of a qualified retirement plan? A) Deferred compensation plan B) Section 403(b) plan C) SEP plan D) Section 401(k) plan Explanation A Section 401(k) plan is a qualified plan. 403(b) plans and SEP plans are tax-advantaged plans, but are not ERISA-qualified retirement plans. A deferred compensation plan is a nonqualified plan. While tax-advantaged plans are very similar to qualified plans, there are some minor differences.

Which of the following is the easiest type of retirement plan for an employer to adopt? A) An individually designed plan B) A Pension Benefit Guaranty Corporation (PBGC) plan C) A custom plan D) A prototype plan Explanation Master plans and prototype plans are easier to use than individually designed plans or custom plans because they are standardized plans approved as qualified in concept by the IRS. The PBGC is the governmental body that insures pension benefits; it is not a type of plan.

Which of the following penalties apply to prohibited transactions? A tax equal to 15% of the amount involved applies unless it can be demonstrated that the transaction satisfies ERISA's fiduciary standards. The transaction must be corrected and the plan placed in a financial position no worse than if the transaction had never occurred. Plan participants who engage in prohibited transactions are subject to income tax on a judicially determined amount. Transactions that continue uncorrected into subsequent years are subject to additional penalties. A) I and III B) I, II, and IV C) I and II D) II and IV

Window Washers, Inc., is establishing a profit-sharing plan using Social Security integration. The base contribution percentage for the profit-sharing plan will be 5%, and the owners have come to you with some questions about Social Security integration. Which one of the following statements is CORRECT? A) The excess contribution percentage for the plan could be as high as 26.25%. B) The permitted disparity for the plan is 5.7%. C) The permitted disparity for the plan is 3%. D) The excess contribution percentage for the plan could be as high as 10%. Explanation The excess contribution percentage for the plan could be as high as 10%. The excess contribution percentage is the base contribution percentage plus the permitted disparity. The permitted disparity for the defined contribution plan is the lesser of the base benefit percentage and 5.7%. Thus, in this case, the permitted disparity is 5% and the maximum the excess benefit percentage could be would be 10%.

Distributions from a Roth IRA are qualified distributions if the five-year holding period has been met as well as what else? If the distributions are due to the owner's death or disability If the distributions are used for buying, building, or rebuilding a first-time home (up to $10,000 lifetime maximum) If the owner has attained the age of 59½ If the distributions are used for college tuition costs A) II and III B) I, II, and III C) I and IV D) I, II, III, and IV Explanation Only Statement IV is incorrect. A qualified distribution from a Roth IRA is a distribution after the five-year holding period has been met and the distribution satisfies one of the following four requirements: attainment of the age of 59½; death; disability; or first-time home purchase up to $10,000. College tuition is not a qualified special purpose distribution. However, it is an exception for the 10% early withdrawal penalty. Thus, with a Roth distribution for college costs, only the earnings would be subject to income tax after all contribution and conversion amounts were withdrawn.

A financial planner's client has an IRA with a balance of $140,000 as of January 1. On April 15 of the same year, the client withdraws the entire amount from the IRA and places it in a non-IRA CD for 60 days, earning 9% interest. On the 60th day, the client promptly and timely reinvests the principal of the CD in an IRA containing an aggressive growth fund. On September 15 of the same year, the client becomes dissatisfied with the return and the variability of the investment. The client wants a less risky investment and wants assurance that any IRA distribution will not be taxed at the time of the change. Which of the following are acceptable alternatives for the client? (CFP® Certification Examination, released 01/99) Withdraw the funds and reinvest them within 60 days in an IRA that invests exclusively in Treasury instruments. Direct the trustee of the IRA to transfer the funds to another IRA that invests exclusively in Treasury instruments. Withdraw the funds and reinvest within 60 days in an IRA that is an index mutual fund holding common stocks with portfolio risk equal to the S&P 500. A) II only B) II and III C) I, II, and III D) I only Explanation The client has already made a nondirect withdrawal (60-day rollover) this year; therefore, Statement I is incorrect, because he is not permitted to have another 60-day rollover during the same year. Statement II is a permitted alternative. Statement III is not permitted without the proceeds being included in taxable income.

A stretch IRA extends or stretches the period of tax-deferred earnings within an IRA, possibly over several generations. extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the original owner. allows the IRA owner's beneficiary to name his own beneficiary upon the owner's death. A) I, II, and III B) II and III C) I and II D) III only Explanation All the statements are correct.

ABC Corporation is a closely held company that wants to establish a qualified retirement plan for its employees. Also, the company wants to improve the marketability of its stock and give the employees an ownership stake in the company. Which of the following plans would help ABC meet all of these objectives? A) Employee stock ownership plan (ESOP) B) SIMPLE 401(k) C) Keogh (self-employed) plan D) Target benefit pension plan Explanation An ESOP could help ABC meet all of these objectives.

All of the following are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA except A) the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion. B) any portion of an IRA can be converted to a Roth IRA. C) the Roth IRA conversion becomes more appropriate the longer the period of distributions. D) one advantage of a conversion to the Roth IRA is that the Roth IRA will not be subject to required minimum distributions (RMD) during the life of the original owner. Explanation The Roth IRA conversion is more appropriate when the income tax rate is the same or higher at the time of distribution than at the time of conversion.

All of the following retirement plans permit employees to make elective deferrals except A) SEP plans. B) profit-sharing plans with Section 401(k) provisions. C) Section 401(k) plans. D) SIMPLE 401(k)s. Explanation Employee elective deferrals are permitted in Section 401(k) plans, profit-sharing plans with Section 401(k) provisions, and SIMPLEs, but not in SEP plans.

An employee stock ownership plan (ESOP) is a defined contribution plan that may provide the employer with which of the following advantages? Increased corporate cash flow The ability to borrow money to purchase corporate stock A market for employer stock Financial resources to expand the business A) I, II, III, and IV B) III and IV C) I and II D) I, II, and III Explanation All of these statements are ESOP advantages to the employer.

Based on IRS regulations, the minimum distribution rules for IRAs and qualified retirement plans do what? They impose a 10% excise tax on the amount by which a distribution falls short of the required minimum distribution (RMD). They have a required beginning date of age 59½. They make it easier to calculate the minimum distribution amount based on the participant's life expectancy. They require the participant to determine a beneficiary by the required minimum distribution (RMD) beginning date. A) III only B) I and II C) I and IV D) I, II, and III Explanation Based on IRS regulations, minimum distribution rules have been simplified by providing a uniform table that can be used by all participants (except when a spouse is more than 10 years younger) to determine the minimum distribution required during their lifetimes. This makes it easier to calculate the RMD because participants would neither need to determine their beneficiary by the required minimum distribution beginning date, nor would they have to decide whether to recalculate their life expectancies each year. The excise tax is 50%, not 10%. The required beginning date is age 72 for IRAs and qualified plan participant owners of 5% or more of the company. The required beginning date for Section 403(b) plans, Section 457 plans, and qualified plans is April 1 of the year after the employee reaches 72. It is advisable for the owner of an IRA or qualified plan account to name an individual as beneficiary, but there is no requirement that such a beneficiary be determined before the owner attains age 72.

Bernie and Tim, both age 53, are partners in a computer software consulting firm. They have 20 employees whose average age is 25 and average length of employment is three years. The firm is highly profitable and enjoys stable cash flows. Of the following retirement plan options, which is best suited to the partners' business? A) Traditional defined benefit pension plan B) Section 403(b) plan C) A stock bonus plan D) An eligible Section 457 plan Explanation Of the listed plans, only a traditional defined benefit pension plan is available to Bernie and Tim's business. A Section 403(b) plan may only be adopted by a Section 501(c)(3) organization. An eligible Section 457 plan may only be adopted by a private, tax-exempt organization or a state or local governmental organization. A partnership cannot use a stock bonus plan because this form of business does not issue stock. Notice how subtlety the form of business was introduced in the question. The form of business is very important in selecting a retirement plan.

Bernie is a participant in his employer's noncontributory employee stock ownership plan (ESOP). Two years ago, his employer contributed stock with a fair market value of $30,000 into Bernie's account. Bernie retired one year later and took distribution of the stock when its fair market value was $40,000. Two years after his retirement, Bernie sold the stock for $50,000. What is the appropriate tax treatment available to Bernie upon sale of the stock? A) $20,000 long-term capital gain B) $50,000 ordinary income C) $10,000 long-term capital gain D) $20,000 ordinary income Explanation Employees are not taxed on stock in an ESOP until the stock is distributed. Upon distribution, the employee must pay ordinary income taxes on the fair market value of the stock when it was contributed to the plan on his behalf. Any net unrealized appreciation (NUA) at that time can be deferred until the stock's subsequent sale. Upon the sale, the NUA portion will be treated as long-term capital gain. Additionally, the growth of the stock subsequent to the distribution will receive long-term capital gain treatment because Bernie held the stock longer than one year after distribution. Therefore, the appropriate tax treatment available to Bernie upon sale of the stock is a $20,000 long-term capital gain.

Blake and Margaret are married, file their income taxes separately, and are both age 59½. Blake makes elective deferrals into his employer's Section 401(k) plan. Margaret works for a nonprofit and makes elective deferrals to her employer's Section 403(b) plan. In 2020, Blake has a MAGI of $45,000 and Margaret has a MAGI of $40,000. Which of the following statements regarding Blake and Margaret and their retirement planning is false? A) Blake and Margaret may make a deductible contribution to an IRA in 2020. B) Blake is an active participant. C) Because Margaret participates in a Section 403(b) plan, she is considered an active participant. D) Blake and Margaret cannot make a deductible contribution to an IRA in 2020. Explanation If both spouses are active participants in an employer-sponsored retirement plan, contributions to an IRA are phased out when married and filing separately if the individual's MAGI exceeds $10,000 (in 2020).

Brad Elberly has been the sole owner and operator of Woodmasters Inc. for the past 15 years. Brad is age 45, and his salary from the business is $130,000. Brad and his wife, Laura, want to retire when Brad is age 65. Relevant information regarding the business is summarized below: Financial performance fluctuated over the first 10 years. Cash flow and profits have stabilized during the past five years and are expected to show modest but consistent growth in the future. Excess cash flow of approximately $150,000 is expected to be available this year. Future years should be about the same. Brad has expressed some concern about the company's outdated equipment and is considering renovating the plant and replacing the outdated equipment over the next five years. The total cost should be about $300,000. Total compensation for all employees (including Brad) is $245,000. The four full-time rank-and-file employees range from age 19 to age 38 and have been with Woodmasters for periods ranging from four months to six years. Age and service information is shown below: EmployeeAgeCompleted Years of ServiceCompensationBrad4515 years$130,000Beth386 years$40,000Todd276 months$25,000Carol302 years$28,000Jim194 months$22,000 Assuming that Brad and Laura need to start saving approximately 17% of Brad's salary to build their retirement fund, which one of the following statements describes the most appropriate qualified plan(s) for Woodmasters, assuming Brad wants to minimize the plan cost? A) A safe harbor 401(k) plan would be appropriate. B) A money purchase plan that maximizes the allowable contribution limits would be appropriate. C) Any type of qualified plan, either defined contribution or defined benefit, would be appropriate. D) An integrated, age-weighted profit sharing plan would be appropriate. Explanation Selecting a plan means selecting the best plan for the owner (i.e., the owner gets the desired or needed amount at the minimum cost for the other employees). Any retirement plan installed by the company would have to be affordable, considering the need for large cash outlays to update company equipment. The safe harbor 401(k) plan is the best choice since it not only fits within the contribution requirements with flexibility, but also meets the objective of minimizing cost. By increasing his compensation and using the increase as his deferral, Brad will get a disproportionate share of the contribution, and because of his much higher compensation, the nonelective contribution will be skewed in his favor. Thus, he can meet his personal contribution requirement while paying significantly less for the other participants. A 401(k) safe harbor plan will allow Brad to defer $19,500 in 2020. The required matching contribution is dollar-for-dollar of the first 3% of deferral and $.50 on the dollar for the next 2%. Brad needs only 17% of his current compensation, so we would choose the safe harbor 401(k), and not a defined benefit plan, since we can achieve the desired savings with a contribution that is less than 25%. (This calculation is not required, but knowledge of the safe harbor plan is.)

Brent and Carol have an adjusted gross income (AGI) of $40,000, and they receive a combined Social Security benefit of $15,000. They have no tax-exempt income. What percentage of their Social Security benefit will be subject to taxation? A) 85% B) 0% C) 100% D) 50% Explanation Provisional income = $47,500. This is over the $44,000 threshold, so 85% of their Social Security benefit will be subject to taxation.

Carol has been researching IRAs and learning of the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of the following statements regarding an IRA is CORRECT? A) Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account. B) When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available. C) Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA but not for a Roth IRA. D) In 2020, eligible individuals may contribute up to $6,000 to an IRA and an additional $1,000 when age 59½ or older. Explanation Earnings on assets held in an IRA are not subject to federal income tax until they are withdrawn from the account. Net unrealized appreciation (NUA) treatment of a lump-sum distribution is not available for IRA investments. Eligible individuals may contribute up to $6,000 to an IRA and an additional $1,000 when age 50 or over in 2020. Certain low- and moderate-income taxpayers may be eligible for an income tax credit for contributions to either a traditional IRA or a Roth IRA.

Harry, age 34, contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal? A) Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only age 34. B) Harry must pay tax on the $2,000, but there is no penalty. C) This would be a prohibited transaction. D) Harry must pay tax and a $200 penalty. Explanation All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax free, then earnings. Also, the IRC rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to taxable income.

David, who turned age 70½ on June 30, 2020, owns 10% of BCB Company. He has accumulated $5 million in BCB's stock bonus plan as of December 31, 2019, and $5.5 million as of December 31, 2020. The uniform lifetime table distribution factor for age 71 is 26.5. If David receives a distribution of $180,000 during 2020, how much in penalties will he be required to pay for 2020? A) $0 B) $4,340 C) $868 D) $8,679 Explanation David does not have to begin taking required minimum distributions until April 1, 2021. There is no penalty imposed on the $180,000 distribution during 2020. He will need to distribute the balance of the 2020 RMD by April 1, 2021, to avoid the penalty. One issue when delaying some or all of the first distribution into the next year is that there will be two RMD distributions for that year. In this case, the first distribution is by April 1. The second is due by December 31, 2021. Because David owns more than 5% of the company, he is not allowed to delay the start of RMDs, even if he continued to work at the BCB Company.

Elaine is currently age 76 and scheduled to take another distribution from her former company's qualified retirement plan later this year. 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 (RMD) from this plan for this year? A) $14,545 B) $0, because Elaine is over age 70½ C) $20,000 D) $53,333 Explanation 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 using 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). This is actually advantageous for the owner because the original owner's RMD is usually based on the owner's age and the age of someone 10 years younger than the owner. This is true even if the account owner is not married. The only time the assumed life expectancy in a RMD calculation for the original account owner is different than this is when the original owner is actually married to someone who is more than 10 years younger. In that case, the RMD is based on the actual ages of the married couple.

Fred has been researching IRAs and learning of the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of the following statements regarding an IRA is CORRECT? When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available. In 2020, eligible individuals may contribute up to $6,000 to an IRA and an additional $1,000 when age 50 or over. Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA but not a Roth IRA. Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account. A) II and IV B) I and III C) I, II, III, and IV D) II only Explanation Statements II and IV are correct. Statement I is incorrect. NUA treatment of a lump-sum distribution is not available for IRA investments. Statement III is incorrect. Certain taxpayers may be eligible for an income tax credit for contributions to both a traditional IRA and a Roth IRA.

George, age 62, has worked for the Green Rivers Irrigation District for the last 16 years. He began participating in the 457 plan lately. This year, he will be eligible for the final three-year catch-up. What is his maximum deferral for 2020? A) $39,000 B) $19,500 C) $26,000 D) $45,500 Explanation George's 2020 maximum is twice the regular deferral limit for the year, $39,000. He cannot take advantage of the age 50 catch-up in his final three-year period if he chooses to double his annual amount.

Geraldine participates in a Section 403(b) plan at work. Three years ago, she borrowed $5,000 from the plan. She has had an outstanding loan balance of $1,000 the past year, and 6 months ago she made the final payment of $1,000 to pay off that loan. Her vested account balance is currently $300,000. What is the maximum allowable loan amount she can take from the plan this year? A) $49,000 B) $150,000 C) $50,000 D) $145,000 Explanation Generally, the limit on loans from qualified plans is 50% of the vested account balance, up to a maximum loan of $50,000. The maximum loan must be reduced by any loan balance the participant had in the 1-year period preceding the loan. Geraldine's maximum allowable loan is $49,000.

Given her uncle's failing health, Martha has been thinking about the decisions she will need to make as the sole beneficiary of his $1 million IRA. She is a little overwhelmed at the amount and wants to ensure she ultimately uses these funds wisely for her retirement. Which of the following will be an option for Martha upon her uncle's death? A) She can use a direct trustee-to-trustee transfer into an inherited IRA but must begin to take distributions over her remaining life expectancy. B) She can take a tax-free lump-sum distribution. C) 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. D) She can use a direct trustee-to-trustee transfer into an IRA and defer any minimum distributions until she is age 72. Explanation A nonspouse beneficiary can use a direct trustee-to-trustee transfer of an IRA to an inherited IRA but must begin to take distributions over her remaining life expectancy. While she can take a lump-sum distribution under the five-year payout rule, the distribution would be taxable. Nonspouse beneficiaries may not defer distributions until age 72. There is no early distribution penalty for distributions due to the death of the owner of an IRA, and the 59½ age limit does not apply.

If a retiree's annual Social Security benefit is $9,000 at age 62 and $9,600 at age 63, how many years would it take to equal the benefit of forgoing a year of payments (waiting one more year to receive a larger payment), not including inflation? A) 15 years B) 8 years C) 11 years D) 13 years Explanation $9,000 divided by the extra amount ($600) equals 15 years to equal the same benefit taking the larger amount the next year. ($9,000 ÷ $600 = 15 years)

In 2020, 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? A) $19,500 B) The lesser of 100% of compensation or $57,000 annually C) $13,500 D) $26,000 Explanation The maximum amount of elective deferrals possible in 2020 to a traditional profit-sharing Section 401(k) plan for an individual under age 50 is $19,500 (it is $26,000 for an individual age 50 or older). The lesser amount of $13,500 applies to the SIMPLE 401(k) form.

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

Jerry and Barbara recently filed for divorce after 25 years of marriage. The property settlement approved by the court included an award to Barbara of half of Jerry's vested benefit in his defined benefit pension plan. This was done via the drafting and implementation of a qualified domestic relations order (QDRO). Which of the following is an implication of the QDRO for Jerry and Barbara? A) When Jerry retires, Barbara's benefit is taxable to her. B) Barbara's benefit is subject to an additional 10% penalty if received before her age 59½. C) Under QDRO rules, Barbara is not eligible to roll over the distribution to an IRA. D) Barbara's benefit upon receipt is not subject to income tax. Explanation A distribution by a qualified retirement plan to an alternate payee who is a spouse or former spouse of the participant is taxable to the spouse, if it is made pursuant to a QDRO. The distribution to Barbara pursuant to a QDRO is not subject to the 10% penalty for early distribution. Barbara may roll over the distribution to an IRA.

Jerry and Cindy are divorced, and Cindy obtained a qualified domestic relations order (QDRO) assigning her 50% of Jerry's qualified retirement plan benefit. How will the QDRO affect the benefits received from the plan? If Cindy receives an early distribution from the plan pursuant to the QDRO, the distribution is tax exempt. If Cindy receives an early distribution from the plan pursuant to the QDRO, the distribution is exempt from the 10% early distribution penalty. Jerry becomes an alternate payee of the plan under the QDRO. The QDRO may specify when Cindy receives the plan benefit. A) II and IV B) I, II, III, and IV C) II and III D) I and III Explanation Statement I is incorrect. Cindy will be required to pay income taxes on the distribution to the extent the distribution would have ordinarily been taxable. Statement II is correct. An early distribution from the plan that Cindy receives pursuant to the QDRO is exempt from the 10% early distribution penalty. Statement III is incorrect. Cindy becomes an alternate payee of the plan under the QDRO. Statement IV is correct. The QDRO may specify when Cindy may receive the plan benefit.

John and Mary, both age 49, are married and file a joint income tax return for the current year (2020). John is self-employed as an engineering consultant and reports $120,000 of Schedule C net income and pays $16,955 in self-employment tax. Mary is not employed outside the home. What is the maximum deductible IRA contribution John and Mary can make this year? A) $12,000 B) $0 C) $7,000 D) $6,000 Explanation Neither John nor Mary is an active participant in an employer-sponsored retirement plan, qualified retirement plan, SEP plan, SIMPLE, or Section 403(b) plan; therefore, they can contribute and deduct $12,000 ($6,000 each) to traditional IRAs for the current year (2020).

Julie attained age 70½ on November 1, 2020, and will correctly take her first required minimum distribution (RMD) from her qualified plan by April 1, 2021. Her qualified plan balance for which year is used to calculate the RMD she must receive by December 31, 2021? A) The plan balance at the end of 2020 B) The plan balance at the end of 2019 C) The plan balance at the end of 2021 D) The plan balance minus the April 1 distribution she receives in 2021 Explanation The postponed 1st-year RMD is based on the participant's plan or IRA account balance as of the end of the year preceding the first distribution year. Her first distribution year is 2020 because she turned 70½ in 2020. The RMD for each year is based on the balance at the end of the previous year. Because the first distribution year is 2020, the balance for the 2020 RMD calculation is the account balance at the end of 2019. The second RMD, which will be for the year 2021, is based on the account balance at the end of 2020. This is the year in question.

Marian, age 62, converts $30,000 from a traditional IRA to a Roth IRA in 2014. In 2016, she converts another traditional IRA with a fair market value of $35,000 to a Roth IRA. She makes no other IRA contributions. In 2020, Marian takes a $40,000 distribution from her Roth IRA. This distribution is treated as $30,000 from the 2014 conversion contribution and $10,000 from the 2016 conversion contribution, both of which were includable in her gross income when converted. As a result, for 2020, A) the $10,000 withdrawal from the 2016 conversion is not subject to the 10% penalty tax. B) $10,000 is includable in Marian's gross income. C) $20,000 is includable in Marian's gross income. D) the $10,000 from the 2016 conversion is subject to the 10% penalty tax. Explanation The conversion amounts were already included in Marian's gross income when converted. Therefore, they will not be subject to income taxes again when withdrawn. The distribution allocable to the $10,000 conversion contribution made in 2016 (less than five taxable years ago) starts out as being subject to the early distribution penalty because it was withdrawn less than five years after the conversion. However, it is not subject to the 10% penalty tax under Section 72(t) in this case because Marian is over age 59½, which is one of the exceptions to the 10% penalty. The withdrawal of the conversion amount from the first conversion is not subject to the 10% early withdrawal penalty because the conversion is more than five years old. Thus, if the owner would have been younger than age 59½, the withdrawal of that money would not have been subject to the early withdrawal penalty.

Maryellen, age 63, is receiving Social Security retirement benefits. She also works part time, and her earnings are $10,000 more than the earnings limit. Her Social Security retirement benefits this year will be reduced by A) $5,000. B) $7,500. C) $0. D) $10,000. Explanation Maryellen has not reached full retirement age, so she is subject to the retirement earnings test. Her Social Security benefits will be reduced by $1 for every $2 in earnings over the applicable limit.

Myra, age 35, converted an $80,000 traditional IRA to a Roth IRA last year. Her adjusted basis in the traditional IRA is $20,000. She also makes a contribution of $5,000 to the same Roth IRA last year. Myra is in a combined 30% marginal tax rate. If Myra takes a $4,000 distribution from her Roth IRA this year, 2020, how much total federal tax, including penalties, is due as a result of the distribution? A) $0 B) $1,200 C) $400 D) $1,600 Explanation Although the distribution is not a qualified distribution, it will not be taxable income because it is treated as a distribution from the Roth IRA regular contributions first. Because the $4,000 distribution is not includible in gross income, nor does it relate to a conversion within the last five years, the distribution is not subject to regular income tax or the 10% early withdrawal penalty.

Northwest Instruments Corp. made matching contributions to its SIMPLE 401(k) in the last three years. Assume all eligible employees earn at least the maximum includible compensation limit and all defer the maximum amount allowed. Due to extensive capital expenses anticipated this year, the company is considering how to reduce expenses. It will not be able to continue to make the 3% matching contribution and has called you to discuss their options. Which of the following could you recommend? A) By providing adequate notice, Northwest Instruments Corp. could move to the 2% non-elective contribution this year, although the savings would be minimal. B) Because they have satisfied the 3% matching contribution for three years, Northwest Instruments Corp. could reduce the matching contribution to 1%. C) With SIMPLE 401(k) plans, employers who begin using the 3% matching contribution do not have any option available to modify the company's contribution. D) Employer contributions under a SIMPLE plan are discretionary, and Northwest Instruments Corp. could provide notice that they will not provide any contribution this year. Explanation Under a SIMPLE 401(k), an employer does not have the option to change the percentage used for the matching contribution. However, the employer can use the 2% non-elective contribution instead of the 3% matching contribution. Under the scenario described, however, the savings would be minimal.

The simplified employee pension (SEP) IRA is one of the easiest plans to set up and maintain. A SEP IRA eliminates which of these? The administrative complexity found in many retirement plans Lengthy and detailed government reporting Numerous nondiscrimination tests Complicated restrictive contribution formulas associated with many retirement plans A) I, II, III, and IV B) III and IV C) I, II, and III D) I and II Explanation All statements are correct.

The trustee for Debra Bennett's qualified retirement plan is calculating her required minimum distribution for 2020. The trustee should use the plan balance for A) December 31, 2019. B) December 31, 2018. C) December 31, 2021. D) December 31, 2020. Explanation The trustee should use the plan balance for December 31 of the year preceding the distribution year—in this case, December 31, 2019.

Tom, age 54, is the sole proprietor of a small business. He is interested in adopting a retirement plan for the business. His primary goals are to make large contributions to his own retirement account and to minimize the expense and paperwork associated with the plan. Which of the following retirement plans would you recommend for Tom's business? (He makes $50,000 of self-employment income and has three part-time employees who earn $15,000 each.) A) SIMPLE IRA B) SEP plan C) Section 401(k) plan funded by employee elective deferrals D) Traditional defined benefit pension plan Explanation Qualified plans require a significant amount of expense and paperwork. Because Tom's business is small, a SEP or SIMPLE IRA is preferred. Tom can, however, defer more in a SIMPLE than in a SEP. Based on 2020 plan contribution limits, in the SIMPLE, he can defer $16,500 ($13,500 salary deferral, plus $3,000 as a catch-up contribution) plus receive a 3% match. In a SEP, he would be limited to $9,293 as follows: $50,000Schedule C income− 3,533deductible half of self-employment tax (SECA)$46,467net Schedule C SE income× 20%(the 20% is calculated by 0.25 ÷ 1.25 = 20%)$9,293

Under the IRA minimum distribution rules, if the IRA account owner dies before distribution payments begin, what occurs? A) The beneficiary can begin receiving distributions based on the beneficiary's individual life expectancy. B) All of these occur. C) The funds revert to the government if no beneficiary is named. D) If the beneficiary is a named individual who is not the spouse, the beneficiary must distribute the entire account over a period not exceeding five years. Explanation If no beneficiary is named, the funds revert to the account owner's estate and are distributed according to the will or the state's intestacy laws. The spouse has the option of rolling over the IRA to the beneficiary-spouse's own account, and a nonspouse beneficiary may use a direct trustee-to-trustee transfer of the IRA into an inherited IRA. A nonspouse named beneficiary is not required to distribute the entire IRA balance within five years.

Using the Uniform Lifetime Table to calculate the required minimum distributions (RMDs) from a qualified plan is mandatory unless A) the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. B) there is more than 1 designated beneficiary. C) the designated beneficiary is a child under the age of 16. D) there is no designated beneficiary. Explanation The Uniform Lifetime Table must be used to calculate required minimum distributions (RMDs) 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.

What is the earliest age at which a currently insured worker may claim Social Security retirement benefits based on her own work history? A) Retirement benefits are not available for a currently insured worker B) Age 67 C) Any age over age 59½, but benefits will be reduced D) Age 62 Explanation The worker must be fully insured to qualify for retirement benefits based on her own work history. Reduced spousal retirement benefits are available as early as age 62. Reduced survivor benefits are available as early as age 60 unless the surviving spouse is disabled, then reduced survivor benefits are available as early as age 50.

What is the first year in which a taxpayer, age 53 in 2020, may receive a qualified distribution from a Roth IRA, if he makes a $2,000 contribution to a Roth IRA on April 1, 2020, for the tax year 2019? A) 2024 B) 2019 C) 2025 D) 2020 Explanation A qualified distribution can occur only after five years have elapsed and must be made for one of the following reasons: The owner has attained age 59½ The distribution is made to a beneficiary or the estate of the owner on or after the date of the owner's death The owner has become disabled The distribution is made for a first-time home purchase The five-year period starts at the beginning of the taxable year for which the initial contribution to the Roth IRA is made. In this question, though the contribution was made on April 1, 2020, the contribution was for tax year 2019. The five-year holding period, therefore, begins January 1, 2019. As a result, the first year in which a qualified distribution may occur is 2024. In this case, the taxpayer will be age 57 in 2024. Thus, a qualified distribution could only be taken due to death, disability, or a qualified first-time homebuyer expense. Notice that a qualified distribution could not be taken for a qualified higher education expense. These expenses are an exception to the 10% penalty, but they are not eligible for a qualified distribution. That means distributions of earnings (not contributions or conversions) for college expenses before age 59½ would be taxable income.

What is the maximum contribution an employer may make to a SEP plan account in 2020 for an employee whose compensation is $285,000? A) $57,000 B) $19,500 C) $13,500 D) $71,250 Explanation The limits for SEP contributions are higher than those of traditional IRAs and are similar to those of the qualified plans. Specifically, SEP contributions are limited to the lesser of 25% of employee compensation (limited to the covered compensation amount of $285,000 for 2020); or $57,000 (2020). For an employee with a compensation of $285,000, the limit would be the lesser of $71,250 (25% × $285,000), or $57,000 in 2020

What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2020, assuming no catch-up provisions apply? A) $19,500 B) $13,500 C) $6,000 D) $57,000. Explanation The elective deferral limit for 2020 to a Section 401(k) is $19,500. The maximum annual additions limit is $57,000.

When she retired at age 64, Lauren received a lump-sum distribution from her employer's qualified stock bonus plan. The fair market value of the employer stock contributed to her account was $200,000. At the time of the distribution, Lauren received $300,000 of her employer's stock. Six months later, Lauren sold the stock for $310,000. Which of the following statements regarding the sale of Lauren's stock is NOT correct? A) The $300,000 distribution is taxed at the long-term capital gain rate. B) The net unrealized appreciation on the stock was $100,000. C) There was no income tax liability incurred when the stock was contributed to the plan. D) Lauren has a $10,000 short-term capital gain when the stock is sold. Explanation Of the $300,000 Lauren received as a lump-sum distribution from the stock bonus plan, $100,000 is net unrealized appreciation (NUA) and is taxed at the long-term capital gain rate when the stock is subsequently sold. The remaining $200,000 is taxed at Lauren's ordinary income tax rate in the year of the distribution. Because Lauren sold the stock within six months, the $10,000 post-distribution appreciation is taxed as short-term capital gain.

Which of the following are CORRECT statements pertaining to IRA rollover requirements? If an IRA account is distributed directly to the IRA participant, the original IRA custodian must withhold 20% from the proceeds. An IRA rollover must be completed within 60 days following the distribution date. An IRA account may be rolled over to another IRA once a year. Direct trustee-to-trustee IRA transfers may be made as often as the IRA owner wishes. A) II, III, and IV B) I, III, and IV C) I, II, and III D) II and IV Explanation Once a year, an IRA owner may roll over his account to a new IRA within 60 days after distribution from the original IRA. Direct trustee-to-trustee transfers may be made as often as desired. The 20% withholding requirement does not apply to IRA distributions; the 20% mandatory withholding applies to eligible rollover distributions made directly to the plan participant from employer-sponsored qualified retirement plans or TSAs.

Which of the following can be used as a funding vehicle for tax-sheltered annuities (TSAs)? Stocks Bonds Annuities Regulated investment company shares held within a custodial account A) III and IV B) I, II, III, and IV C) I and II D) II, III, and IV Explanation The primary investment vehicles for Section 403(b) plans are annuities or mutual funds held in a custodial account, although funds can also be used to purchase life insurance. Section 403(b) accounts can be invested in annuities or mutual funds held in a custodial account. Funds also can be used to purchase life insurance. Neither stocks nor bonds can be used as an investment for a Section 403(b) plan.

Which of the following constitutes an exception to the imposition of the 10% premature distribution penalty for distributions made from an IRA owned by an individual who is currently age 40? A) A distribution in payment of qualified higher education expenses B) A distribution paid as a series of substantially equal payments over a five-year period C) A distribution following separation from service at age 56 D) A distribution taken after demonstration of a financial hardship Explanation IRA distributions are exempt from the early distribution penalty if made in payment of qualified higher education expenses. The other distributions are either exempt only if made from a qualified plan or not exempt, regardless of the source. The exception for a distribution paid as a series of substantially equal payments must extend over the greater of five years or age 59½.

Which of the following descriptions of a regular rollover from a qualified plan to a traditional IRA is CORRECT? A) A 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. B) The rollover amount to the IRA is limited to $6,000 (2020). C) Amounts rolled over are taxable according to rules governing the source of contribution. D) It generally must be completed within 90 days of the date of distribution from the previous plan. Explanation The answer is a 20% withholding tax applies in the event of the employee-participant's physical possession of the amount rolled over. In a regular rollover, the recipient physically receives a check, made payable to the recipient, 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.

Which of the following employers is eligible to establish a Section 403(b) retirement plan? A) A public school system B) All hospitals C) The federal government D) An S corporation Explanation 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.

Which of the following events should trigger a recalculation of the retirement needs analysis? Marriage Employment change Change in FICA rate Significant income change A) I, II, and IV B) III only C) III and IV D) I and II Explanation The retirement needs analysis should be recalculated any time there is a change in the client's life such as marriage, divorce, births, deaths, employment and income, or health. Temporary changes in tax laws will not impact the retirement needs over the long term.

Which of the following investments would be the least suitable for a qualified retirement plan? A) Municipal bond fund B) Real estate investment trust (REIT) C) Guaranteed investment contract (GIC) D) Equity mutual fund Explanation The tax-exempt nature of qualified retirement plans must be considered in determining if a specific type of investment is appropriate. Municipal bonds are tax-free investments. Because a qualified plan is already tax exempt, there would be no reason to utilize them in plan assets.

Which of the following is CORRECT about an inherited IRA? A) A nonspouse beneficiary could take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59½. B) The new owner of the inherited IRA may make contributions into the account if they have earned income. C) If the deceased was under age 72, a nonspouse beneficiary could retitle the account "Mary Jones as beneficiary of Tom Jones," and use the life expectancy of the beneficiary with RMDs starting no later than December 31 following the date of death. D) Any beneficiary of an IRA account can now roll over the account into an IRA in their own name. Explanation A nonspouse beneficiary could take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59½. If the deceased was under age 72, a nonspouse beneficiary could retitle the account "Mary Jones as beneficiary of Tom Jones," and begin distributions by the later of December 31 of the year following the original owner's date of death. The beneficiary can also take advantage of the five-year rule and defer receipt of the proceeds until the fifth year following death; however, the account must be liquidated at that time. New contributions cannot be added to an inherited IRA.

Which of the following reasons for an early distribution from an IRA is NOT an exception to the 10% penalty? A) A distribution made after age 55 and separation from service with an employer B) Early distributions made for qualifying medical expenses exceeding 10% of the account owner's AGI C) The plan owner becomes totally and permanently disabled D) Made on or after the account owner attains age 59½ Explanation A distribution made after age 55 and separation from service with an employer is not a qualified retirement plan early distribution penalty exception.

Which of the following retirement plans, maintained by an eligible employer, would also permit the employer to establish a SIMPLE IRA? A) Union plan bargained in good faith B) Traditional Section 401(k) plan C) Section 403(b) plan D) Money purchase pension plan Explanation To establish a SIMPLE (IRA or Section 401(k)), an employer cannot generally maintain another retirement plan. However, a plan bargained in good faith with a union is allowed because Congress is more worried about powerful businessowners using a retirement plan in a discriminatory manner.

Which of the following should a businessowner accomplish before considering the adoption of a retirement plan? Purchase personal and business liability insurance. Establish cash reserves sufficient to cover potential emergencies. Ensure the business has sufficient cash flow to support ongoing funding of the plan. A) I, II, and III B) I only C) II only D) III only Explanation A businessowner (or a person planning for his own retirement) should accomplish all of these objectives before considering the adoption of a retirement plan.

Which of the following statements describing how qualified plans are similar to SEP plans and SIMPLEs is CORRECT? Qualified plans, SEP plans, and SIMPLEs all provide for deferred compensation. Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan. A) Both I and II B) II only C) Neither I nor II D) I only Explanation Statements I and II are both correct.

Which of the following statements is CORRECT regarding a nondeductible IRA? A) A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead. B) If a person is an active participant, qualification for contributions to nondeductible IRAs would depend upon AGI and filing status of the taxpayer. C) To qualify for a nondeductible IRA, a person's AGI must be below a specified amount. If the AGI is within the phaseout range, they may make a partial contribution. If the AGI is above certain limits, which vary depending upon the filing status of the taxpayer, contributions to a nondeductible IRA are prohibited. Explanation A person may always choose not to deduct her IRA contribution, regardless of AGI or whether or not the person is an active participant.

Which of the following statements is NOT a requirement for the beneficiaries of a trust to be treated as a designated beneficiary of a qualified plan or an IRA? A) The beneficiary of the trust is named on the decedent's retirement account as a named beneficiary. B) The trust is irrevocable at the participant's death. C) The appropriate documentation is provided to the plan administrator. D) The trust is valid under state law. Explanation The beneficiaries of the trust must be named (identified) in the trust instrument. Only the trust needs to be named as a beneficiary on the account.

Which of the following statements regarding the basic provisions of tax-sheltered annuities (TSAs)/Section 403(b) plans is NOT correct? A) The special catch-up provision for eligible Section 403(b) participants allows up to a $39,000 (2 × $19,500 in 2020) elective deferral in the last 3 years of employment before retirement. B) TSAs are available to all eligible employees of Section 501(c)(3) organizations who adopt such a plan. C) An eligible employee may be able to use both a special catch-up provision and an over-age-50 catch-up provision in the same year. D) If an employee has at least 15 years of service with an eligible employer, an additional catch-up contribution may be permitted. Explanation The special catch-up provision for eligible Section 403(b) participants allows a maximum additional $3,000 per year elective deferral until a lifetime maximum catch-up is reached. The ability to double the worker contribution in the last three years before the retirement plan document's normal retirement age applies to governmental 457 plans.

Which of the following statements regarding the disadvantages for employees participating in SEP plans is NOT correct? A) The employer bears the investment risk under the plan. B) If an employer maintains a SEP plan and a qualified plan, contributions to the SEP plan reduce the amount that may be deducted for contributions to the qualified plan. C) The special rule for calculating deductible contributions on behalf of an owner-employee also applies to a SEP plan. D) Employees cannot rely on a SEP plan alone to provide an adequate retirement benefit. Explanation The employee bears the investment risk under the plan, which is a disadvantage to the employee. All of the other choices are disadvantages of a SEP plan.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution by a plan participant is CORRECT? A) The NUA portion of the stock value is taxed at the capital gains rate when the stock is sold. B) The NUA on the employer stock is taxed as ordinary income in the year of the distribution. C) The portion of the fair market value on the date of distribution that is NUA is tax free to the plan participant. D) When the taxpayer receives the employer stock, the stock is taxed as ordinary income when sold. Explanation The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution is CORRECT? The NUA portion is A) taxed at the capital gains rate when the stock is sold. B) received tax free. C) taxed as ordinary income when the stock is sold. D) taxed as ordinary income in the year of the distribution. Explanation The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.

Which of the following retirement plans would be appropriate for a general partnership with stable cash flows? A) Section 403(b) plan (TSA) B) Age-weighted profit-sharing plan C) Stock bonus plan D) Employee stock ownership plan (ESOP) Explanation An ESOP and stock bonus plan may only be established by an S or C corporation. A Section 403(b) plan (TSA) is only available to certain tax-exempt organizations. An age-weighted profit-sharing plan is the only plan appropriate for a general partnership from the choices given.

Which of the following statements regarding the tax effects of converting a traditional IRA to a Roth IRA is CORRECT? A) The converted amount is treated as a taxable distribution from the IRA to the extent the distribution does not represent a return of basis. B) The 20% premature distribution penalty applies if the owner is less than age 59½. C) The 10% premature distribution penalty applies if the owner is less than age 59½. D) The amount converted is not considered a taxable distribution from the IRA to the extent the distribution does not represent a return of basis. Explanation When a traditional IRA is converted to a Roth IRA, the converted amount is treated as a taxable distribution to the extent the distribution does not represent a return of basis and is included in the owner's gross income. A penalty does not apply for amounts converted from a traditional IRA to a Roth IRA, regardless of the owner's age. However, the amount that was taxable at the conversion will be subject to the 10% early distribution penalty if it is withdrawn within five years of the conversion and the withdrawal does not qualify for an exception to the 10% early withdrawal penalty. This rule protects against people converting to a Roth and then taking a distribution as a way of escaping the 10% early withdrawal penalty.

Which of the following statements with respect to simplified employee pension (SEP) contributions made by an employer is CORRECT? A) Contributions are currently excludible from the employee's gross income. B) Contributions are capped at $19,500 for 2020. C) Contributions are subject to income tax withholding. D) Contributions are subject to FICA and FUTA. Explanation Contributions are currently excludible from the employee's gross income. Employer contributions to a SEP are not subject to FICA, FUTA, or income tax withholding. The SEP contribution limit for 2020 is the lesser of 25% of covered compensation or $57,000.

Which one of the following is a CORRECT about a Roth IRA? A) Withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home are tax free and penalty free if the withdrawals are made at least five years after the first contribution to the Roth IRA. B) As with conventional IRAs, distributions must begin from a Roth IRA by April 1 of the year following the year the participant reaches age 72. C) An individual could contribute $6,000 to a regular IRA and $6,000 to a Roth IRA in 2020. D) If a nonqualifying distribution is made before age 59½, the principal is subject to the 10% penalty but is not considered taxable income. Explanation An individual is limited to contributing $6,000 to both IRAs—for example, the contributions could be $3,000 to a Roth and $3,000 to a conventional IRA. If a nonqualified distribution is made, the tax and penalty apply only to the earnings of the Roth IRA. The tax never applies to withdrawals of contributions or conversions, but the withdrawal of conversion money is subject to the 10% EWP rules for five years from the conversion. The minimum distribution rules that require distributions from IRAs beginning at age 72 do not apply to Roth IRAs, but the minimum distribution requirement for payments after the death of the participant does apply to Roth IRAs.

Which one of the following is subject to the 10% penalty tax on premature distributions from an IRA? A) A distribution to a 55-year-old employee following separation from service B) A distribution following the owner's death C) A series of substantially equal periodic payments D) A distribution following disability Explanation This type of distribution is subject to the 10% penalty for an IRA. However, the exemption from the premature distribution penalty does apply to qualified plan distributions. LO 5.3.1

Whose Social Security benefit is included in the calculation of the maximum family benefit for those eligible for benefits based on a retired worker's fully insured status? The retired worker's benefit The retired worker's former spouse A dependent child's benefit A caregiver spouse's benefit for caring for a qualified disabled child A) I, III, and IV B) I and II C) I, II, III, and IV D) III and IV Explanation Only Statement II is incorrect. Benefits paid to a former spouse of a covered worker are not considered in the application of the family maximum benefit limit.

XYZ Inc. has 80 employees in the current year and is expected to employ the same number next year. They are considering the adoption of a retirement plan next year. The objectives are to use elective deferrals by employees with an appropriate match and immediate vesting. Which of the following plans would be appropriate? Traditional defined benefit pension plan Section 403(b) plan SIMPLE 401(k) SIMPLE IRA A) III and IV B) I and III C) I, II, III and IV D) I only Explanation Traditional defined benefit pension plans do not permit employee contributions through elective deferrals. Section 403(b) plans are for 501(c)(3) tax-exempt organizations, and there is no indication that this is a tax-exempt organization. SIMPLE plans permit employee contributions through elective deferrals, matching, and immediate vesting.

Social Security payments are A) taxed only if you are still employed. B) taxed only if received prior to full retirement age (FRA). C) taxable if your provisional income exceeds the applicable threshold. D) never included in income for purposes of taxation. Explanation This is the case regardless of your age or if you are still employed.

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 an IRA that is insufficient in amount? A) 10% of the earnings distributed B) 50% of the difference between the required minimum distribution and the amount actually distributed C) 15% of the required minimum distribution D) 25% of the remaining account balance Explanation The nondeductible penalty tax amount on an insufficient required minimum distribution is 50%. This penalty is assessed on the amount of the deficiency and not on the entire amount of the distribution.

All of the following retirement plans permit employees to make elective deferrals except A) SIMPLE 401(k)s. B) SEP plans. C) profit-sharing plans with Section 401(k) provisions. D) Section 401(k) plans. Explanation Employee elective deferrals are permitted in Section 401(k) plans, profit-sharing plans with a Section 401(k) provisions, and SIMPLEs, but not in SEP plans.

All of the following statements regarding simplified employee pension (SEP) plans are correct except A) employer contributions are discretionary. B) all part-time employees can be excluded. C) the major advantage is the simplicity of the plan. D) SEP plans can be established by any form of business entity. Explanation A SEP plan must cover any employee who is at least 21 years old and who worked for the employer, even on a part-time basis, for three of the preceding five years. In addition, contributions must be made on behalf of any eligible employee whose compensation for the year is at least $600 (2020). These provisions make most part-time employees eligible to participate.

Annual additions to qualified retirement plans include which of these? Employer contributions Employee contributions Interest and dividend income Forfeitures reallocated to plan participants A) I and II B) I, II, and IV C) I, II, and III D) II, III, and IV Explanation Only Statement III is incorrect. Investment earnings, such as interest and dividends, are not included as annual additions.

Assuming the account holder is age 40, which of the following withdrawals from a traditional IRA is subject to the 10% early withdrawal penalty? A) $10,000 to pay for a qualified first-time home purchase B) $10,000 donated directly to a qualified 501(c)(3) charity C) $10,000 to pay for college tuition for either the account holder or a dependent D) $10,000 to pay for medical expenses in excess of the 10% (2020) of AGI threshold Explanation For tax purposes, the account holder must be at least age 72 to make a qualified charitable distribution from an IRA. The other answer options are expressly exempt from the 10% early withdrawal penalty, regardless of the account holder's age.

Bob has an IRA at Mutual Fund Company A with a balance of $115,000 as of December 31, last year. On August 15 of this year, Bob withdrew the entire amount from the IRA and placed it in his stock account for 60 days, earning a 6.5% increase in the account. On October 14, the 60th day, Bob promptly reinvested the principal from his IRA into Mutual Fund Company B, as an IRA account. Then, on October 19, he became dissatisfied with the fund and their lack of service. Bob now wants less risk for his IRA and plans to move it to another company. He wants your assurance that any IRA distribution will not be taxed if he does so. Which of the following transactions meet Bob's requirement? Bob may withdraw his balance from Company B and deposit it within 60 days in a mutual fund IRA that invests exclusively in Treasury instruments. Bob should withdraw from the Company B fund and reinvest within 60 days in an index mutual fund holding common stocks with portfolio risk equal to the S&P 500. Bob should direct the trustee of his Company B IRA to transfer his funds to another mutual fund IRA that invests more conservatively. A) I only B) III only C) I, II, and III D) II and III Explanation The other two choices are not possible since he has already rolled his IRA once via an indirect rollover in the current 12-month period.

Bonnet Company has 50 employees, of which 40 earned at least $5,000 in the prior year and are expected to earn at least that much in the current year. Bonnet Company does not currently maintain a retirement plan. If Bonnet implements a SIMPLE IRA, which of the following statements is NOT correct? A) The effective covered compensation limit for workers younger than age 50 for SIMPLE IRAs is $450,000 for 2020 when the employer elects the 3% match. B) All of the employees of Bonnet Company are eligible to participate in the plan. C) Employees may make elective deferrals into the SIMPLE IRA as a percentage of compensation of up to at least $13,500 in 2020. D) The covered compensation limit is $285,000 if Bonnet Company decides on the 2% nonelective employer contribution. Explanation Only the employees of Bonnet Company who earned at least $5,000 in the prior year and expect to earn at least that amount in the current year are eligible to participate in the plan (40 employees). Employees may make an elective deferral into the SIMPLE IRA as a percentage of compensation of up to at least $13,500 in 2020. Those age 50 and above can add an additional $3,000. The unofficial, but mathematically set, effective covered compensation limit for SIMPLE IRAs for employees under age 50 is $450,000 in 2020 when the employer elects the 3% match ($13,500 divided by 0.03). The covered compensation limit is $285,000 if Bonnet Company decides on the 2% nonelective employer contribution.

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? Charles's child, Bill, age 16 Charles's child, Dawn, age 19 Charles's widow, Maggie, age 38 Charles's dependent mother, Betty, age 60 A) I, II, and IV B) I only C) I and II D) II, III, and IV Explanation Dawn is too old under the rules, Maggie does not have a child under age 16 for whom she is caring, and Betty is not eligible because she is not age 62 or older. Only Bill is eligible to receive a dependent or surviving child's benefit.

Charles and Lucy Brown each had $100,000 in their respective IRAs on December 31 of last year. Each has named the other as beneficiary. They need to determine the amount each must withdraw once withdrawals are required. This year, Charles turned age 70 on January 2 and Lucy turned age 70 on March 4. What is the required minimum distribution (RMD) for each? (Assume the IRS RMD Joint Life Table expected return for two individuals age 70 is 20.6, and when both are age 71, it is 19.8. The Uniform Table factor is 26.2 at age 70 and 25.3 at age 71.) A) $3,750 B) $3,817 C) $4,854 D) $5,284 Explanation $100,000 ÷ 26.2 = $3,817 (The first distribution year results in the same amount for each.)

Chester is 50 years old. Ten years ago he opened a Roth IRA by converting $10,000. Over the years he has contributed another $20,000 to his Roth IRA. His first Roth IRA contribution was eight years ago. Today his Roth IRA is worth $45,000. Which of the following are true concerning his Roth IRA and distributions from it? His five-year Roth IRA clock started with his first contribution eight years ago. The most he could withdraw for a distribution that was not a qualified distribution without paying income tax is $30,000. Distributions from a Roth IRA are accounted for as coming from the oldest investment first and then following in chronological order. The most he could withdraw from his Roth IRA this year to pay off debts without paying the 10% early withdrawal penalty (EWP) is $30,000. A) I and IV B) II and IV C) I and II D) II and III Explanation Statements II and IV are correct. His five-year Roth IRA clock started 10 years ago when he opened his Roth IRA with a conversion—not eight years ago with a contribution. Distributions from a Roth IRA are accounted for as coming from contributions first. After all contributions are withdrawn, further withdrawals are accounted for as coming from conversions. The oldest conversion amount is the first conversion amount to be withdrawn. Thus, Chester has the ability to withdraw $30,000 from his Roth IRA for any reason without being subject to income tax. The first $20,000 withdrawn would come from his contributions. This contribution money will never be subject to income taxes or the 10% EWP. The next $10,000 would come from his conversion 10 years ago. This money would not be subject to income taxes because the income tax on the $10,000 was paid when the money was converted to the Roth IRA 10 years ago. Because the conversion is more than five years old, withdrawals on this $10,000 of conversion money are also free of any early withdrawal penalty. LO 5.4.2

For tax-exempt employers that do not want to implement a Section 457 plan and desire a plan funded strictly by employee elective deferrals, a good alternative would be A) a SEP plan. B) a Section 403(b) plan. C) a profit-sharing plan. D) a SARSEP plan. Explanation The 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.

For which of the following plans does the employee bear the investment risk in the plan? SIMPLE 401(k) Traditional profit-sharing plan SEP IRA SIMPLE IRA A) I, III, and IV B) I, II, III, and IV C) I and II D) II only Explanation The employee bears the investment risk for all of these plans.

Gary was just hired by an employer that maintains a SIMPLE IRA for its employees. Which of the following statements regarding Gary's participation in the SIMPLE IRA is CORRECT? A) Gary may only defer $6,000 into the SIMPLE IRA if he is younger than age 50. B) When Gary participates in the plan, he will be 100% vested in his employer's contributions. C) Covered compensation is limited to $285,000 for a SIMPLE IRA in 2020 if the employer elects a 3% match. D) The annual employer match may be limited to 1% of employee compensation each year. Explanation Gary will be 100% vested in his employer contributions to his account. He may defer up to $13,500 (2020) into the SIMPLE IRA if he is younger than age 50. An employer may only limit the matching contribution to 1% of employee compensation in no more than two out of every five years. Effective covered compensation for employees under age 50 is limited to $450,000 ($13,500 ÷ 0.03) for a SIMPLE IRA (2020) in which the employer elects to make 3% matching contributions. The covered compensation limit of $285,000 (2020) does not apply in this instance because there is a special rule for SIMPLE IRAs.

George is a plumbing contractor and has implemented a retirement plan for his employees. The plan must cover all employees who are at least age 21 and have worked for George for three of the last five years (including part-time employees). Contributions must be made for employees who earned at least $600 in the prior year. The plan can exclude union members if they have their own retirement plan. Which type of plan has George selected? A) SIMPLE IRA B) Simplified employee pension (SEP) plan C) SARSEP plan D) Section 403(b) plan Explanation The requirement that contributions must be made for employees who earned at least $600 in the prior years identifies the plan as a SEP plan.

Jane Paschal has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $500 on December 31, 2015. She wants to know when she can begin making qualified distributions. Which one of the following statements represent what you should tell her? A) Qualified higher education expenses are one of the reasons a withdrawal may be a qualified distribution. B) Any distribution she takes after January 1, 2020, will meet the five-year requirement. C) Any distributions for medical expenses in excess of 10% would qualify as a tax-free distribution after satisfying the five-year holding period even if she has not attained age 59½. D) After December 31, 2019, the five years will have elapsed, and she could begin making qualified distributions as soon as she attains age 59½. Explanation The clock started on January 1, 2015, so five years will have elapsed on January 1, 2020. A Roth IRA owner is required to hold the account for a minimum of five years to qualify for tax-free distributions. In addition, the owner must be at least age 59½, dead, disabled, or withdrawing up to $10,000 of Roth IRA earnings for qualified first-time homebuyer expenses

Grant, age 51 today, made an initial contribution of $10,000 to a Roth 401(k) during 2013. He made subsequent contributions of $6,000 annually for the next four years. In 2020, Grant took a $50,000 distribution from his Roth 401(k) to purchase a boat. There were no deductible employer or employee contributions to his 401(k). Which of the following statements regarding this distribution is CORRECT? A) It is taxable because it was within 10 taxable years from the date of initial contribution. B) It is partially taxable because Grant was not age 59½, disabled, the distribution was not made to a beneficiary or Grant's estate after his death, or used for a first-time home purchase. C) It is income tax free because it was made after 5 taxable years, and Grant is over age 50. D) It is income tax free because it was made after 5 taxable years from the date of initial contribution. Explanation Although Grant took the distribution after five taxable years from the date of initial contribution, he did not meet one of the other requirements for a qualified distribution (made after the individual attained age 59½, attributed to being disabled, made to a beneficiary or estate of an individual on or after the individual's death, or used for a first-time home purchase). In this case, the first $34,000 is counted against his contributions. Thus, there is no tax or penalty on $34,000. There are no conversions, so the rest of the distribution is earnings and thus subject to income tax and the 10% early distribution rules.

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses such as vacation costs. medical expenses. college tuition costs. insurance premiums. A) I and II B) II and III C) II, III, and IV D) I and III Explanation Hardship withdrawals are typically allowed for medical expenses, college tuition and fees, to purchase a principal residence, burial expenses for spouse or dependents, and to prevent eviction from one's principal residence or foreclosure on the mortgage of such residence.

Higher-income earners will have a Social Security retirement income replacement ratio that is A) higher than low-income earners. B) lower than low-income earners. C) the same as low-income earners. D) There is no relationship between the Social Security income replacement ratios of high and low earners. Explanation Replacement rates, or the amount of one's paycheck that is replaced by Social Security retirement benefits, favor lower-income earners by replacing about 90% of their (very low) earnings. Higher earners will see only a 26% replacement.

How does simplified employee pension (SEP) plan participation affect an employee's IRA contributions? The deductibility of an active participant's IRA contribution depends upon his MAGI. SEP plan participation does not reduce or eliminate an employee's ability to fund an IRA. Employees who participate in a SEP plan are considered active participants in an employer-sponsored retirement plan for the tax year in which an employer contribution is made. Employees who participate in a SEP plan are not considered active participants in an employer retirement plan for the tax year in which an employer contribution is made. A) II and III B) I, II, and III C) I and II D) I, II, and IV Explanation Statements I, II, and III are correct. Employees who participate in a SEP plan are considered active participants in an employer retirement plan for the tax year in which an employer contribution is made. The deductibility of an active participant's IRA contribution depends upon his MAGI and can be phased out or eliminated at certain income levels. SEP plan participation does not reduce or eliminate an employee's ability to fund an IRA. The IRA can be funded, but not necessarily deducted from gross income.

If nondeductible contributions have been made to an IRA, then distributions from the IRA A) The nondeductible portion of the IRA is treated as a Roth IRA. B) are only partially taxable. C) would be based upon first-in first-out to determine if any of the distribution would be taxable. D) would be tax free up to the amount of the nondeductible contributions. Explanation A portion of these distributions is considered to be a nontaxable return of contribution.

In the allocation of assets to determine the best portfolio composition for a qualified plan, what is a major factor to be considered? A) The reputation and experience of the plan sponsor B) The type of plan and who bears the investment risk C) The administration requirements associated with the plan D) The maximum deductible contribution amount permitted under the plan Explanation A major factor to be considered in the asset allocation process of qualified plans is the type of plan (defined contribution or defined benefit) and who bears the investment risk (the employee or employer). Very broadly, a more conservative allocation is appropriate for a defined benefit plan than in the defined contribution approach.

Jake has named a trust as the beneficiary of his qualified retirement plan. The trust beneficiaries include his four children, ages 4 through 18, and his nephew, age 30. For the trust beneficiaries to be treated as the designated beneficiaries of the plan, the trust must meet all of the following requirements except A) the appropriate documentation has been provided to the plan administrator. B) the trust beneficiaries must not be identifiable from the trust instrument. C) the trust must be valid under state law. D) the trust must be irrevocable or become irrevocable when Jake dies. Explanation For the trust beneficiaries to be treated as designated beneficiaries, the beneficiaries must be identifiable from the trust instrument.

Jean, age 38, earns $200,000 annually as an employee for Waste Distributors. Her employer sponsors a SIMPLE, and matches all employee contributions to the plan dollar for dollar, up to 3% of compensation. What is the maximum contribution (employer and employee) that can be made to Jean's SIMPLE account in 2020? A) $26,000 B) $19,500 C) $57,000 D) $13,500 Explanation The maximum total contribution is $19,500 ($13,500 maximum employee contribution for 2020 + $6,000 employer match). The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum). Therefore, the employer can make a contribution of up to $6,000 ($200,000 compensation × 3%).

Jennifer recently separated from service with Acme, Inc., at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began to work for a new employer who provides a profit-sharing plan for employees. Jennifer will be eligible to participate in her new employer's profit-sharing plan in June of next year. Which one of the following statements describes an option that will be to Jennifer's benefit? A) Jennifer should leave the rollover funds in the IRA for three more years; at age 55, she can distribute the account and benefit from lump-sum forward-averaging treatment. B) Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit-sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. C) Jennifer should leave the rollover funds in the rollover IRA until she is age 65; then she can distribute the IRA and benefit from lump-sum forward-averaging treatment. D) If Jennifer had Acme stock in her IRA, she could retain net unrealized appreciation (NUA) tax treatment. Explanation If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Having the money in a qualified plan could also provide her more flexibility than an IRA when she begins to receive distributions. Forward-averaging treatment is not available on any distribution from an IRA. Jennifer would not qualify for forward averaging because she was not born in 1935 or earlier. Taking a current distribution from the IRA would result in a current tax liability.

Jill has decided to offer a retirement plan to her employees. She wants to implement a 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 savings incentive match plan for employees (SIMPLE) plans except A) employer contributions are not subject to payroll taxes (FICA and FUTA). B) there is a 25% penalty for early distributions from a participant's account within two years of entry into the plan. C) SIMPLEs are not subject to the top-heavy rules that apply to qualified plans. D) SIMPLE assets may only be rolled over into another SIMPLE within the first two years of initial participation in the plan by a participant. Explanation 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.

Margaret is a 29-year-old attorney with her own law practice. She has hired four part-time employees over the past five years to assist her. Each of these employees works approximately 200 hours per year, earning an average annual salary of $4,000. Margaret would like to establish a retirement plan that would allow her to begin saving for her own retirement, with little administrative costs. Which one of the following plans would be most appropriate for Margaret? A) SEP plan B) SIMPLE IRA C) Section 457 plan D) Traditional Section 401(k) plan Explanation A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Margaret's retirement plan goals. Notice the workers are making more than $600 and less than $5,000. If a SEP would be chosen, she would have to contribute for employees who made more than $600; are at least age 21; and who have worked for her for three of the preceding five years.

Mark attained age 70½ this year. He does not plan to retire from his position with Big Trucks, Inc., until his birthday on December 1, when he is 72. Mark is a 3% shareholder in Big Trucks. When must Mark begin to receive required minimum distributions (RMDs) from his qualified retirement plan at Big Trucks? A) Mark is not required to receive his first RMD until December 31 of the year following his actual retirement date from Big Trucks. B) Mark is not required to begin his RMDs until April 1 of the year following his actual retirement from Big Trucks. C) Because Mark is a shareholder in Big Trucks, he must receive his first RMD by April 1 of next year. D) Because Mark is still employed by Big Trucks, he is not required to take his first RMD until December 31 of the year he actually retires from Big Trucks. Explanation Participants in qualified plans, Section 403(b) plans, and governmental Section 457 plans may defer the required beginning date until April 1 following the year of retirement, if the participant continues to work after attaining age 70½. If the employee-participant owns more than 5% of the business sponsoring the retirement plan, the RMD may not be deferred but must be taken by April 1 of the year after the employee attains age 70½.

Mark's financial planner has recommended a retirement plan for implementation at Mark's business in 2020. He tells Mark that the plan must cover all employees who are at least age 21 and have worked for Mark for three of the last five years (part-time counts). Contributions must be made for employees who earned at least $600 (2020) in the prior year. The plan can exclude union members if they have their own retirement plan. Which type of plan has Mark's planner recommended? A) SARSEP plan B) Simplified employee pension (SEP) plan C) SIMPLE IRA plan D) Profit-sharing plan Explanation The requirements listed are elements of a SEP plan.

Scott and Gayle, who are both age 45, are married and file a joint income tax return for the current year. Scott is a self-employed architect who earns $110,000 of Schedule C income and pays $15,543 in self-employment tax. Gayle is not employed outside the home. What is the maximum deductible IRA contribution Scott and Gayle can make, if any, for 2020? A) $14,000 B) $12,000 C) $0 D) $6,000 Explanation Neither Scott nor Gayle is an active participant in an employer-sponsored retirement plan. Therefore, they can establish a traditional IRA for Scott and a spousal IRA for Gayle and contribute a deductible total of $12,000 ($6,000 each) to traditional IRAs for 2020.

Martha has inherited a traditional IRA that contained no after-tax contributions. She would rather not take the required minimum distributions but instead roll the distributions over into her own IRA to save for her own retirement and avoid paying income tax. Which of the following statements is CORRECT? Martha should direct the IRA trustee to make an annual direct transfer to her own traditional IRA of the required minimum distributions so the distributions remain nontaxable. To minimize current taxation, Martha should execute a direct transfer of the entire IRA into an inherited IRA. A) Both I and II B) II only C) I only D) Neither I nor II Explanation Only Statement II is correct. Required minimum distributions may not be rolled over. To decrease current taxation, Martha should execute a direct transfer to an inherited IRA. She, will, however, be required to begin required minimum distributions from the inherited IRA.

Mary is 66 years old and receives full old-age benefits from Social Security—in her case, $1,200 per month. Her husband, Ralph, age 67, who has not worked enough quarters outside the home to be covered in his own right, receives 50% of what Mary receives each month ($600). Assume that Mary dies tomorrow. What will Ralph's Social Security benefit be? A) $600 B) $1,200 C) $600 + $1,200, or $1,800 Explanation The $600 spousal benefit stops, and Ralph will begin receiving 100% of Mary's old-age Social Security benefit. This survivor benefit is not reduced because Ralph has reached his full retirement age (FRA) when his wife died.

Maryellen is considering naming her estate as the beneficiary of her traditional IRA. Which of the following is(are) a disadvantage of this approach? Her estate cannot be treated as a designated beneficiary for purposes of determining the distribution period after she dies. The estate will probably pay more income tax on the IRA distributions than would an individual beneficiary. A) I only B) Both I and II C) II only D) Neither I nor II Explanation These are both potential disadvantages of naming one's estate as beneficiary. The estate cannot be treated as a designated beneficiary for purposes of determining required minimum distributions, and the estate will begin paying income tax at the maximum rate at a much lower level than an individual beneficiary would.

Nicholas is a 45-year-old single taxpayer with MAGI of $90,000 in 2020. Nicholas participates in his employer's Section 457 plan and has deferred $19,500 of his salary to the plan this year. How much of a tax-deductible traditional IRA contribution can Nicholas make this year? A) $2,500 B) $6,000 C) $0 D) $5,000 Explanation A participant in a Section 457 plan is not considered an active participant for IRA tax deductibility purposes. Because Nicholas is not an active participant, he can make a fully deductible $6,000 contribution to a traditional IRA in 2020. If Nicholas were an active participant in a qualified plan, SEP, SARSEP, SIMPLE, or Section 403(b) plan, his deduction would be fully phased out at his MAGI level. However, his MAGI would still be low enough to allow contributions to a Roth IRA. Contributions to a Roth IRA begin to be phased out at $124,000 for unmarried individuals in 2020.

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? A) A de minimis assignment of up to 20% of any benefit payment due to the participant B) A qualified domestic relations order (QDRO) in the event of a participant's legal separation or divorce C) An agreement with the plan trustee to provide start-up funds for a participant's new business D) A distribution from the plan used for payment to the participant's creditors Explanation A payment from a qualified plan may be made to an alternate payee (such as a former spouse) pursuant to a qualified domestic relations order (QDRO) without violating the prohibition on assignment of benefits.

Paul designated the following individuals as beneficiaries of his traditional IRA. If Paul dies and the IRA is not divided into separate accounts, which beneficiary's life expectancy will be used to determine the distribution period for the IRA? A) Juanita, age 14 B) Julie, age 60 C) Janet, age 26 D) Jill, age 40 Explanation When there is more than one designated beneficiary, the beneficiary with the shortest life expectancy is used as the measuring life for purposes of determining the distribution period. In this case, Julie, age 60, is the beneficiary with the shortest life expectancy. LO 6.4.1

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 (RMD) by April 1 of next year. Robert can no longer make contributions to the Roth IRA. A) I only B) Neither I nor II C) II only D) Both I and II Explanation The original owner of a Roth IRA is never subject to a RMD requirement during his lifetime and can continue making contributions after he reaches age 70½.

Ronald, age 44, works for two private tax-exempt employers. One has a Section 403(b) plan and one maintains a nongovernmental Section 457 plan. If Ronald defers $10,000 into the Section 403(b) plan in 2020, what is the maximum amount he may defer into the Section 457 plan? A) $47,000 B) $19,500 C) $13,500 D) $9,000 Explanation Ronald can separately defer the maximum of $19,500 (2020) into the Section 457 plan because Section 457 plan limits are not aggregated with the Section 403(b) plan limits.

Sam has a Roth IRA valued at $100,000 on December 31, 2019. His original contribution was nine years ago. If Sam dies in 2020, when is the distribution to his beneficiary considered a qualified distribution? A) 2021 B) 2020 C) 2024 D) 2025 Explanation The beneficiary can take a qualified distribution immediately. The five-taxable-year period is not restarted when the owner of a Roth IRA dies. Thus, the beneficiary of the Roth IRA would have to wait only until the end of the original five-taxable-year period for the distribution to be a qualified distribution. The five-year period was satisfied for this Roth IRA four years ago.

Stewart and Abby, both age 35, plan to contribute a total of $12,000 to their IRAs for this tax year. They both work outside the home, and they file a joint income tax return. Stewart is a teacher at the local high school and participates in a 403(b) plan. Abby's employer does not provide a retirement plan. They expect that their MAGI in 2020 will be $129,000. What amount, if any, can they deduct for their IRA contributions? A) $0 B) $6,000 C) $7,000 D) $12,000 Explanation An individual is not denied a deduction for his IRA contribution simply because of the other spouse's active participation, unless the couple's combined AGI exceeds $206,000 (2020). Based on their AGI, Abby will be able to deduct a contribution of up to $6,000 to an IRA. Since their combined AGI is too high for Stewart to make a deductible IRA contribution, he should consider contributing to a Roth IRA.

The 20% mandatory withholding requirement applies to distributions from all of the following except A) qualified plans. B) IRAs. C) Section 457 plans. D) Section 403(b) plans. Explanation The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs. LO 6.3.2

This year, Martin received a lump-sum distribution from his qualified retirement plan. The distribution consisted entirely of his employer's stock, which has a fair market value of $100,000 on the date of distribution to Martin. The adjusted basis of the stock to the trustee of the plan was $70,000. Assuming Martin does not sell the stock this year, what amount is included in Martin's gross income as a result of the distribution? A) $0 B) $70,000 C) $100,000 D) $30,000 Explanation Because the distribution is a lump-sum distribution of employer stock, the net unrealized appreciation (NUA) rules apply. Under the NUA rules, the adjusted basis of the stock to the trust ($70,000) is included in Martin's gross income in the year of the distribution and is treated as ordinary income.

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? A surviving spouse, age 55, caring for the worker's 13-year-old child Unmarried, dependent children under age 18 Unmarried children who become disabled before age 22 A surviving divorced spouse, age 62, who has not remarried and was married to the decedent for more than 10 years A) III and IV B) I, II, III, and IV C) I only D) II and III Explanation Each of these persons is eligible for survivor's benefits

Under the minimum distribution regulations, in cases in which the designated beneficiary is not the surviving spouse, over what time span 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? A) At least as rapidly as distributions were being made before the participant's death B) Over the beneficiary's life expectancy as of the requisite beginning date, reduced by 1 each subsequent year C) By December 31 of the third year after the participant's death D) Over whatever time period is assigned the distribution per probate court order Explanation Under the regulations for post-death distributions to a nonspousal beneficiary, the applicable distribution period is generally the life expectancy of the beneficiary reduced by 1 for each subsequent year. The distribution may also be made in accordance with the 5-year rule where the participant died before the required beginning date (RBD) for distributions if plan

Which of the following constitutes unrelated business taxable income (UBTI) to a qualified plan trust? A) Interest payments from corporate bonds B) Dividends from common stock purchased on margin C) Reinvested dividends from mutual funds D) Rents from real property investments Explanation Unrelated business taxable income (UBTI) is gross income generated by a qualified plan trust that is not related to the function that is the basis for the trust's income tax exemption. In addition, the trust is generally prohibited from incurring debt. Therefore, dividends declared on common stock purchased on margin are treated as UBTI.

Use the information below about Ted Ridge to answer the question that follows. Ted is age 54 and married. He and his wife, Beth, have a college-age daughter named Meredith. Ted has been making salary-reduction contributions to his employer-sponsored 401(k) plan for the last four years. The company does not have a match and has not made any contributions. Ted is considered a highly compensated employee. The current 401(k) account balance (nonforfeitable accrued benefit) is $21,500. This total includes account earnings of $3,500. The plan allows for both hardship withdrawals and plan loans. Plan loans are available to all plan participants on an equal basis. Meredith is just starting college, and Ted needs to use some of his plan assets to pay college tuition. Which one of the following is a correct statement about how Ted could meet Meredith's college expenses? A) Ted is not allowed to take a loan from the plan because he is a highly compensated employee. B) The maximum plan loan Ted could take is $10,750. C) Ted would not have to pay a premature distribution penalty tax if he made the maximum hardship withdrawal. D) Ted could withdraw the full $21,500 from his 401(k) account if he made a withdrawal under the hardship provisions. Explanation The maximum loan amount is the lesser of $50,000 or half of the nonforfeitable accrued benefit of $21,500 (i.e., $10,750). Ted could not withdraw the full amount of $21,500 because plan earnings are not available for hardship withdrawal; thus, only $18,000 is available (i.e., $21,500 less $3,500). As long as loans are available to all employees on an equal basis, highly compensated employees may take loans. Finally, hardship withdrawals from 401(k) plans are subject to the 10% premature distribution tax.

What is the maximum amount of Social Security benefits that may be subject to income taxation? A) 50% B) 85% C) 35% D) 0% Explanation If someone 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. These numbers are not indexed. Also, the threshold is $0 for people who file their return as married filing separately (MFS) if they are not living apart.

What may be the client's personal retirement plan objective if he selects a qualified defined benefit pension plan as the retirement plan for his company? An approaching retirement need A desire to maximize tax benefits to the business Selectively choose participants in the plan Maximize retirement contributions for older workers A) II and III B) I, II, and IV C) I and IV D) I, II, III and IV Explanation Only Statement III is incorrect. A qualified pension plan is subject to nondiscrimination rules and the client would not be able to cover only select participants.

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

Which of the following are exceptions to the imposition of the 10% early distribution penalty for IRA withdrawals? A) Attainment of age 55 B) Owner's death C) Partial disability D) As a part of substantially equal periodic payments over at least one year Explanation The main exceptions to the 10% penalty are as follows: Owner's death. Total and permanent disability. Attainment of age 59½. As part of substantially equal periodic payments annually over the life expectancy of the owner, or the owner and a designated beneficiary; in addition, these payments, once begun, must continue for the greater of five years or until the owner attains the age of 59½. For medical expenses exceeding 10% of the owner's AGI. To pay higher-education costs for the taxpayer, spouse, child, or grandchild. To pay acquisition costs of a first home for the participant, spouse, child, or grandchild of the participant or spouse, up to a $10,000 lifetime maximum. To pay health insurance premiums if the owner is unemployed (the participant must file for unemployment before this exception applies).

Which of the following are permitted investments in tax-sheltered annuity (TSA) plans? Individual stocks Group or individual annuity contracts Custodial accounts invested in mutual funds A) I, II, and III B) II and III C) I and II D) I only Explanation Investments in TSAs are limited to annuity contracts, either group or individual, and custodial accounts invested in mutual funds. Individual stocks and bonds are not permitted.

Which of the following are prohibited transactions for an IRA? Purchasing plan assets Pledging the IRA as security for a loan Buying property for personal use with IRA funds Receiving unreasonable compensation for managing the plan A) I and II B) I, II, III, and IV C) III and IV D) I, II, and III Explanation All statements are prohibited transactions. Prohibited transactions for IRA assets include purchasing plan assets, pledging the IRA as security for a loan, buying property for personal use with IRA funds, receiving unreasonable compensation for managing the plan, borrowing money from an IRA, selling property to the plan, and using IRA assets to buy personal-use property.

Which of the following beneficiaries is entitled to roll over a post-death distribution from a qualified plan into an IRA? A) The surviving mother of the participant B) All three choices are correct C) The surviving spouse of the participant D) The oldest surviving child of the participant Explanation 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.

Which of the following describes a basic provision of a SIMPLE IRA? A) An employer may add a SIMPLE IRA plan to an existing defined benefit plan to allow employees to make elective deferrals. B) One contribution formula an employer can use under a SIMPLE IRA is to make a 2% nonelective contribution on behalf of each eligible employee with at least $5,000 in current compensation. C) Only employers that average fewer than 20 employees can establish a SIMPLE IRA. D) SIMPLE IRA plans can be arranged to allow for in-service loans for up to 50% of the account balance, but not to exceed $50,000. E) A SIMPLE IRA must satisfy both the ADP and ACP nondiscrimination tests. Explanation SIMPLE IRA plans are available to employers with 100 or fewer employees and with no other qualified retirement plan. The employer contribution requirement may be satisfied by either a 3% matching contribution formula or a 2% nonelective contribution for each employee with current-year compensation of $5,000 or more.

Which of the following employers might be eligible to maintain a SIMPLE? A) An employer that also maintains a Section 403(b) plan B) An employer that also maintains a Section 457 plan C) An employer that also maintains a SEP plan D) An employer that also maintains a Section 401(k) plan Explanation An employer cannot maintain a SIMPLE if it maintains any other qualified retirement plan, SEP plan, SARSEP plan, or Section 403(b) plan. However, an employer that maintains a Section 457 plan can also maintain a SIMPLE.

Which of the following is CORRECT about a Roth IRA? A) If a nonqualifying distribution is made before age 59½, the principal is subject to the 10% penalty, but it is not considered to be taxable income. B) Withdrawals of earnings up to $10,000 from a Roth IRA for the purchase of a first home can be penalty free if the five-year holding period has been met. C) As with conventional IRAs, distributions from a Roth IRA must begin by April 1 of the year following the year the participant reaches age 72. D) An individual can contribute $6,000 annually to a regular IRA and $6,000 annually to a Roth IRA. Explanation Withdrawals of earnings from a Roth IRA are not penalized under these circumstances if the five-year holding period has been met.

Which of the following is CORRECT in relation to a nonqualified distribution from a Roth IRA? A) A nonqualified distribution will always incur a penalty. B) Regular contributions will be deemed the first distributed and will never be subject to income tax or an early withdrawal penalty. C) A nonqualified distribution attributable to a conversion within five years will be subject to ordinary income tax and an early withdrawal penalty. D) A nonqualified distribution from a Roth IRA held for five years will not be subject to ordinary income tax or an early withdrawal penalty because the holding period requirement has been satisfied. Explanation A distribution from a Roth IRA, qualified or nonqualified, will be attributed as first coming from regular contributions, and that amount will never be subject to income tax or an early withdrawal penalty. A nonqualified distribution will only be subject to penalty if the distribution is attributable to earnings or to a conversion within five years. A distribution attributed to a conversion within five years is subject to an early withdrawal penalty, but is not subject to regular income tax. A distribution from a Roth IRA must meet both the five year-holding period requirement and one of the other qualified circumstances (death, disability, first-time home purchase, age 59½).

Which of the following is correct regarding qualified joint and survivor annuities (QJSA) provided for in qualified pension plans? A) QJSA provisions may never be waived. B) The QJSA amount payable to the surviving spouse may not be less than 50% of the amount of the annuity payable during the life of the participant. C) QJSA provisions are never applicable to a Section 401(k) plan. D) The maximum QJSA payable to a surviving spouse may not exceed 150% of the amount of the annuity payable during the life of the participant. Explanation The QJSA amount payable to the surviving spouse may not be less than 50% (nor greater than 100%) of the amount of the annuity payable during the life of the participant. The QJSA may be waived with written notarized consent of the participant's spouse. A Section 401(k) plan may be subject to QJSA requirements unless certain requirements are met.

Which of the following plans is a nonqualified deferred compensation plan established by a private, tax- exempt employer, or a state or local government? A) SIMPLE B) Section 457 plan C) TSA D) SEP plan Explanation Section 457 plans are nonqualified deferred compensation plans that can be established by private, tax-exempt employers (other than churches) and state and local governments.

Which of the following reasons for an early distribution from an IRA is NOT an exception to the 10% penalty? A) Early distributions made for qualifying medical expenses exceeding 10% of the account owner's adjusted gross income (AGI) B) A distribution made after age 55 and separation from service with an employer C) The plan owner becomes totally and permanently disabled D) Made on or after the account owner attains age 59½ Explanation A distribution made after age 55 and separation from service with an employer is only a qualified retirement plan early distribution penalty exception.

Which of the following statements is CORRECT regarding rollovers from qualified plans or IRAs? 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. A taxpayer is limited to one rollover in a one-year period (on a 365-day basis) unless the rollover is a trustee-to-trustee direct transfer. A distribution from a qualified plan may not be rolled over to a governmental Section 457 plan. If a qualified plan participant has an outstanding loan from her qualified plan upon separation from service, the participant may roll over the loan into a rollover IRA as long as loan repayments continue at least quarterly. A) III and IV B) II only C) I, II, III, and IV D) I and II Explanation Only Statement II is correct. Statement I is incorrect because IRA distributions do not require 20% mandatory federal income tax withholding. Statement III is incorrect because a rollover is permitted from a qualified plan to a governmental Section 457 plan. Statement IV is incorrect because loans are not permitted from an IRA and may not be rolled over from an IRA to a qualified plan. LO 5.2.1

Which of the following statements is NOT correct about Roth 401(k) accounts? A) A Roth 401(k) has a larger age 50 catch-up than a Roth IRA. B) Just as with any Roth IRA account, there are no required minimum distributions (RMDs) that must be made from a Roth 401(k) account. C) Even if a Roth 401(k) participant already has a Roth IRA account, a new five-year clock is required for the Roth 401(k). D) Unlike traditional Roth IRA accounts that have phaseouts based upon income, there are no income restrictions applicable to participation in a Roth 401(k). Explanation Roth 401(k) accounts, just as with traditional 401(k) accounts, have RMD rules that apply—meaning that distributions must start in the year the participant reaches age 72 (unless they are still working). This can be avoided by rolling the Roth 401(k) over into a Roth IRA since there are no RMDs with Roth IRAs. There is a new clock that is started for a Roth 401(k) account, even if the participant already has a Roth IRA account. However, if a participant transfers the Roth 401(k) into a Roth IRA, then the Roth IRA clock will be the one that applies, not the Roth 401(k) clock.

Which of the following statements is NOT correct about Roth 401(k) accounts? A) Unlike traditional Roth IRA accounts that have phaseouts based upon income, there are no income restrictions applicable to participation in a Roth 401(k). B) Just as with any Roth IRA account, there are no required minimum distributions (RMDs) that must be made from a Roth 401(k) account. C) Even if a Roth 401(k) participant already has a Roth IRA account, a new five-year clock is required for the Roth 401(k). D) Roth 401(k) accounts allow larger contributions than Roth IRAs. Explanation Roth 401(k) accounts, just as with traditional 401(k) accounts, have RMD rules that apply, meaning that distributions must start in the year the participant reaches age 72 (unless they are still working). This can be avoided by rolling the Roth 401(k) over into a Roth IRA since there are no RMDs with Roth IRAs. There is a new clock that is started for a Roth 401(k) account, even if the participant already has a Roth IRA account. However, if a participant transfers the Roth 401(k) into a Roth IRA, then the Roth IRA clock will be the one that applies, not the Roth 401(k) clock.

Which of the following statements is(are) CORRECT regarding tax-free rollovers of qualified plan distributions pursuant a qualified domestic order (QDRO)? The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into another qualified plan. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a SEP. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a Section 403(b) plan. The recipient of a distribution from a qualified plan pursuant a QDRO may execute a tax-free rollover into a Section 457 plan. A) I only B) I, II, III, and IV C) I and II only D) None of these Explanation All of these statements are correct.

Which of the following statements is(are) CORRECT regarding the Social Security Windfall Elimination Provision (WEP)? The WEP is designed to reduce Social Security retirement benefits for any worker who is eligible for retirement benefits from multiple employers. An example of a worker who may be subject to the WEP is one who works for a government agency or a foreign employer. The WEP applies to all Social Security benefits for which a family member or dependent of a covered worker may qualify. In the case of a worker subject to the WEP, the provision is applied by reducing the formula used to calculate a worker's primary insurance amount (PIA), resulting in a lower benefit. A) I only B) II and IV C) I and III D) II, III, and IV Explanation The WEP does not apply simply if a worker is eligible for retirement benefits from multiple employers. It may apply to a worker who qualifies for a Social Security retirement or disability benefit but who also earns a pension from an employer who does not withhold Social Security taxes. An example of such an employer could be a state or local government agency that had opted out of the Social Security retirement system; a public school employee is some states; or an employer in a foreign country. Under this provision, the formula used to calculate a worker's PIA is reduced, resulting in a lower benefit. Social Security benefits are designed to pay a higher percentage of career average earnings for lower-paid workers than are paid to higher earning workers. Statement III is incorrect because the WEP does not apply to spousal or survivors benefits under Social Security. The Government Pension Offset would apply to Social Security spousal or survivor benefits when the non-Social Security worker is the spouse or the survivor of a fully covered retired or deceased worker.

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? Contributions are made with pretax dollars. A withdrawal from the account will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first-time home purchase. Distributions are not taxable if they are attributable to disability and the account has been established for at least five years. If the account has been open for at least five years and the account owner is age 59½, distributions are penalty free and income tax free. A) I only B) III and IV C) I, II, and III D) II, III, and IV Explanation Contributions to a Roth IRA are made with after-tax dollars. Distributions from a Roth IRA are income tax and penalty free if the owner has maintained the account for at least five years and the distribution is attributed to one of the following: Death Disability First-time home purchase ($10,000 lifetime maximum) Attainment of age 59½

Which of the following statements regarding IRA distributions is CORRECT? A) Distributions from an IRA following separation from service after age 54 but before age 59½ are exempt from the 10% early withdrawal penalty. B) Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. C) Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty and taxation. D) A withdrawal of earnings from an IRA to reduce mortgage indebtedness is exempt from the 10% EWP. Explanation Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty.

Which of the following statements regarding Roth IRAs is CORRECT? A) Amounts in a traditional IRA can be converted to a Roth IRA. B) All of these are correct. C) Funds from qualified pension, profit-sharing, stock bonus, Section 401(k), Section 403(b), and Section 457 plans can be converted to a Roth IRA. D) Distributions from one Roth IRA can be rolled over tax free to another Roth IRA. Explanation All of these statements regarding rollovers of and conversions to Roth IRA funds are correct.

Which of the following statements regarding Section 401(k) plans is CORRECT? Employer contributions and their accrued earnings are always immediately 100% vested in the plan. A Section 401(k) plan is a qualified profit-sharing or stock bonus plan. The maximum pretax elective deferral for a participant age 35 is $19,500 in 2020. Elective deferrals in a cash or deferred arrangement (CODA) are not subject to FICA and FUTA taxes. A) III only B) II and III C) I and IV D) I, II, III, and IV Explanation Statements II and III are correct. Statement I is incorrect. Employee contributions and investment earnings are always 100% vested, not the employer contributions. Statement IV is incorrect. Elective deferrals in a CODA are subject to FICA and FUTA taxes.

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? A) 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. B) A spouse must take distributions over the spouse's remaining single life expectancy, beginning in the year following the year of death. C) 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. D) An estate beneficiary must take distribution from the plan using the 5-year rule. Explanation A surviving spouse is not required to commence distributions in the year following the death of the owner. A spouse beneficiary may elect to treat the IRA as his own and defer distributions until attainment of age 70½.

Which of the following statements regarding money purchase pension plans is CORRECT? Generally, employer securities held by the plan cannot exceed 25% of the FMV of the plan assets at the times the securities are purchased. The plan participant can easily understand the plan's simple design, and contributions are based on the participant's salary for each year of his career, rather than on salary at retirement. A) Both I and II B) II only C) Neither I nor II D) I only Explanation Statement I is incorrect. Generally, employer securities held by the plan cannot exceed 10% of the FMV of the plan assets at the times the securities are purchased.

Which of the following statements regarding the basic provisions of Section 403(b) plans is CORRECT? A special catch-up provision is available to employees of Section 501(c)(3) organization employers who have at least 1 year of service. An eligible employee may be able to use both a special catch-up provision and an over-age-50 catch-up provision in the same year. TSAs are available to all eligible employees of Section 501(c)(3) organizations who adopt such a plan. If an employee has at least 15 years of service with an eligible employer, an additional catch-up contribution may be permitted. A) II only B) II, III, and IV C) I, II, and III D) I and II Explanation Statement I is incorrect. The special or additional catch-up provision requires at least 15 service years.

Which of the following types of plans is typically used by religious, charitable, educational, and other Section 501(c)(3) entities or public school systems? A) Section 457 plan B) Section 403(b) plan/TSA C) SIMPLE D) SEP plan Explanation A Section 403(b) plan/TSA (tax-sheltered annuity) is a tax-deferred employee retirement plan that is adopted only by certain tax-exempt organizations and certain public schools and colleges. Employees have individual accounts to which employers contribute (or employees contribute through salary reductions).

Which one of the following would not be exempt from the 10% early withdrawal penalty that applies to qualified plans? A) A distribution following separation from service after age 55 B) A distribution for educational expenses C) A distribution of employee stock ownership plan (ESOP) dividends D) A distribution made to reduce excess 401(k) plan contributions Explanation Distributions from IRAs for certain education expenses are exempt from the 10% early withdrawal penalty, but not distributions from qualified plans. Distributions from qualified plans following separation from service after age 55 may be exempt from the 10% early withdrawal penalty. Distributions made to reduce excess 401(k) plan contributions are exempt from the 10% early withdrawal penalty. Distributions of ESOP dividends are exempt from the 10% early withdrawal penalty.

Which type of assumed annual rate of return is frequently used in retirement planning calculations? A) Consumer Price Index (CPI) B) A flat annual return based on past performance C) Quantum simulation D) Black-Scholes model Explanation Most planners use a flat annual rate of return based on past performance. The Black-Scholes model is a stock option valuation model. The Consumer Price Index (CPI) measures inflation.

A preretirement distribution from a qualified retirement plan can escape the 10% penalty in each of the following situations except A) the distributions must be made to cover medical expenses deductible for the year (medical expenses that exceed 10% of adjusted gross income). B) the distributions must be made as part of a series of substantially equal periodic payments made at least annually over the life or life expectancy of the employee or the joint lives or life expectancies of the employee and beneficiary. C) the distributions must be made after a separation from service for early retirement at any age. D) the distributions must be made to a beneficiary or to an employee's estate on or after the employee's death. Explanation For a preretirement distribution to escape the 10% penalty for early distribution, the distribution must be made after a separation from service for early retirement after age 55. This exception is not applicable to IRAs.

A single taxpayer, age 58, retired two years ago and is receiving a pension in 2020 of $2,000 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 retirement plan. She will receive $12,000 annually in compensation from the CPA firm as well as the $24,000 from her pension plan each year. What is the maximum amount of deductible contributions, if any, that she may make to a traditional IRA for 2020? A) $6,000 B) $4,000 C) $7,000 D) $0 Explanation She is not currently covered by an employer-sponsored retirement plan and, therefore, can contribute the lesser of earned income ($12,000) or $7,000 ($6,000 + $1,000 catch-up) for 2020.

All of the following statements regarding Roth IRAs for 2020 are correct except A) nondeductible contributions of up to $6,000 per eligible individual may be contributed. B) eligible individuals age 50 and older may make additional catch-up contributions of $1,000. C) only taxpayers with income above certain MAGI limits are permitted to make contributions to a Roth IRA. D) contributions to a Roth IRA are not restricted by age. Explanation There is no age restriction for Roth IRA contributions.

All of the following statements regarding qualified domestic relations orders (QDROs) are correct except A) an alternate payee who is the former spouse of the participant, and who receives a distribution by reason of a QDRO or other court order, may roll over the distribution in the same manner as if she were the participant (including to her own IRA). B) a QDRO may specify the time at which the alternate payee will receive the plan benefit. C) distributions made to an alternate payee under a QDRO are subject to the 10% premature distribution penalty. D) distributions made to an alternate payee under a QDRO are subject to income tax. Explanation Distributions made to an alternate payee under a QDRO are not subject to the 10% penalty on premature distributions. All the other statements are correct.

All of the following workers are covered by the Social Security system except A) members of the armed services. B) employees of tax-exempt organizations. C) railroad workers covered under the federal Railroad Retirement Act. D) self-employed workers. Explanation Railroad workers covered under the federal Railroad Retirement Act are not covered by Social Security but are covered by Medicare if they meet those rules separately.

Carol has an additional retirement need of $30,000 annually in today's dollars. She will retire in 15 years and projects a retirement period of 20 years. Carol believes she can achieve a 6% after-tax rate of return and is assuming a 4% annual rate of inflation. Using the level payment approach, how much will Carol need to save in a single annual payment at the end of each year to fund her retirement need? A) $30,000.00 B) $36,767.56 C) $38,973.65 D) $34,044.67 Explanation Carol will need to make 15 level annual payments of $38,973.65 at the end of each year. Here is how to work this problem using the regular TVM keystrokes. What will it take to have $30,000 of today's purchasing power in 15 years? $30,000, +/-, PV 4, I 15, N 0, PMT FV Answer: $54,028.3052 How much needs to be in the account at retirement to fund 20 years of serial payments at the first of each year? +/-, +/-, PMT (Hitting the +/- button twice before PMT allows the entire FV of 54,028.3052 to be entered as the PMT quickly and to nine decimal places, The second +/- makes the value positive again) Shift, MAR (To get into the Begin Mode) 0, FV [(1.06 ÷ 1.04) -1] × 100 = 1.9231, I 20, N PV Answer: -$907,149.5440 How much needs to be saved at the end of each year to have $907,149.5440? +/-, $907,149.5440, FV (Hitting the +/- here allows the calculator to take the answer and turns the number positive) 15, N 6, I 0, PV Shift MAR (To be in the End Mode.) PMT Answer: $38,973.65

Carol has been researching IRAs and learning of the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of the following statements regarding an IRA is CORRECT? A) When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available. B) Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA, but not for a Roth IRA. C) Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account. D) In 2020, eligible individuals may contribute up to $6,000 to an IRA and an additional $1,000 when age 59½ or older. Explanation NUA treatment of a lump-sum distribution is not available for IRA investments. Eligible individuals may contribute up to $6,000 to an IRA, and an additional $1,000 when age 50 or over in 2020. Certain low- and moderate-income taxpayers may be eligible for an income tax credit for contributions to either a traditional IRA or a Roth IRA.

Carol has been researching IRAs to learn the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of the following statements regarding an IRA is CORRECT? When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available. In 2020, eligible individuals may contribute up to $6,000 to an IRA and an additional $1,000 when age 50 or over. Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA but not a Roth IRA. Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account. A) I, II, III, and IV B) I and III C) II and IV D) II only Explanation Statements II and IV are correct. Statement I is incorrect. NUA treatment of a lump-sum distribution is not available for IRA investments. Statement III is incorrect. Certain taxpayers may be eligible for an income tax credit for contributions to both a traditional IRA and a Roth IRA.

Carrie retired last week and received a lump-sum distribution of her employer's stock from the company's stock bonus plan. The value of the shares at the time of contribution varied. The first contribution was 2,500 shares at $10 per share. The second consisted of 2,500 shares at $13 per share, and the last 2,500 shares were valued at $15 per share. All stock was contributed by the employer, and the current value of the stock on the date of her retirement is $22 per share. Because she is only 63 years old today, she wants to wait to sell the shares until she is 66. How much of the lump-sum distribution should Carrie report on her income tax return in the year of her retirement? A) Carrie must report $95,000 of ordinary income and $70,000 of capital gain. B) Carrie has held the stock long term and must report $165,000 in capital gains. C) Carrie has net unrealized appreciation (NUA) of $70,000 in the stock and must report $95,000 as ordinary income. D) Carrie has no basis in the shares and must report $165,000 in ordinary income. Explanation The stock has a basis to the trust of $95,000, and the basis is taxed as ordinary income in the year of the lump-sum distribution, which now becomes her basis in the stock. The NUA will be taxed at the long-term capital gains rate when the stock is subsequently sold. If Carrie keeps the stock until age 66 as planned, the subsequent growth after the lump-sum distribution will also be taxed as long-term capital gain. The holding period for any subsequent growth after the lump-sum distribution begins on the date of distribution.

Charlie contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year? A) He cannot make any withdrawals, because the money has not been in the Roth IRA for five years or longer. B) He only pays ordinary taxes, because Roth IRA distributions are not subject to a penalty. C) He will pay neither taxes nor a penalty. D) He must pay taxes and a penalty on the full distribution. Explanation The distribution is not qualified because Charlie is under age 59½, and he is withdrawing the money before the waiting period of five tax years. None of the withdrawal, however, is included in Charlie's taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). No penalty applies since the withdrawal is not taxable.

Claudia's simplified employee pension (SEP) plan balance is $60,000. She wants to know her options for taking a loan from her SEP plan to pay some college expenses for her daughter, Caroline. Which of the following statements is CORRECT? A) SEP plan loan repayments must be in level installments payable at least quarterly over a 5-year period. B) Because Claudia is 100% vested in the SEP plan, she may borrow up to $50,000 from the plan. C) Claudia may not make a loan from her SEP plan account. D) Claudia may borrow up to 50% of her SEP account balance to pay for Caroline's college expenses because she is 100% vested in the account contributions. Explanation A SEP plan is a type of IRA. A participant is not permitted to borrow from a SEP plan.

David is age 47 and qualifies for a Section 457 plan through his job with the state. David's salary is $37,500. What is the maximum salary deferral that David can contribute to the Section 457 plan in 2020? A) $6,500 B) $13,500 C) $19,500 D) $9,375 Explanation The dollar limit applicable to Section 403(b), 457, and 401(k) plans is $19,500 in 2020.

David, a 63-year-old investor, wants to know which of the following penalties he might be subject to at some point if he continues tax deductible contributions to his traditional IRA. The applicable penalties are a 10% early distribution penalty. a 50% minimum distribution penalty. a 6% penalty on excess contributions. a 6% penalty on excess withdrawals. A) I and III B) I, II, and IV C) II and III D) II, III, and IV Explanation Statement I is incorrect. Because David is over age 59½, he will not be subject to the early withdrawal penalty. Statement II is correct. If David does not begin taking minimum distributions by the required beginning date (typically April 1 following the year in which the participant attains age 70½), he will be subject to the 50% minimum distribution penalty. Statement III is correct. If David contributes more than the permitted amount to an IRA, he will be subject to a 6% penalty on the excess contribution. Statement IV is incorrect. There is no penalty for excess withdrawals.

Distributions from IRAs must begin by April 1 of the year following the year in which an individual reaches age A) 75. B) 59½. C) 72. D) 65. Explanation Penalties are imposed upon distributions that commence before age 59½ or after April 1 following the year the account owner turns age 72.

Dorothy is a 36-year-old jewelry designer who owns her own small gallery. For most of the year, she works alone, handling the designing and sales herself. However, during the busy holiday season, she hires Yvonne and Mirabelle, two part-time sales clerks to help her. Each of these employees works approximately 300 hours, earning an average salary of $4,000. Dorothy would like to establish a retirement plan that would allow her to save for her own retirement, but not require her to cover the part-time employees. She also doesn't want to pay expensive administrative costs. Which one of the following plans would be most appropriate for Dorothy? A) Traditional Section 401(k) plan B) Section 457 plan C) SIMPLE IRA D) SEP plan Explanation A SEP plan would not be appropriate because it would require coverage of Dorothy's part-time employees. A traditional Section 401(k) is not appropriate because it would involve special nondiscrimination testing and annual filing of the Form 5500 series. A Section 457 plan is not appropriate because it is available only for certain, private tax-exempt organizations. A SIMPLE IRA would be the most appropriate plan because it involves little administrative costs and would meet Dorothy's retirement planning goals.

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 A) a SIMPLE. B) a SARSEP plan. C) a Section 403(b) plan. D) a SEP plan. Explanation The 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. A SEP plan is funded by employer contributions. A new SARSEP can no longer be established. A SIMPLE requires mandatory employer contributions.

Grant, age 51, made an initial contribution of $10,000 to a Roth 401(k) in 2013. He made subsequent contributions of $6,000 annually for the next four years. In 2020, Grant took a $50,000 distribution from his Roth 401(k) to purchase a boat. Which of the following statements regarding this distribution is CORRECT? A) It is income tax free because it was made after five taxable years, and Grant is over age 50. B) It is income tax free because it was made after five taxable years from the date of initial contribution. C) It is partially taxable because Grant was not age 59½, disabled, the distribution was not made to a beneficiary or Grant's estate after his death, or used for a first-time home purchase. D) It is taxable because it was within 10 taxable years from the date of initial contribution. Explanation Although Grant took the distribution after five taxable years from the date of initial contribution, he did not meet one of the other requirements for a qualified distribution (it must be made after the individual attained age 59½, the individual must be disabled, the distribution must be made to a beneficiary or estate of an individual on or after the individual's death, or it must be used for a first-time home purchase). In this case, the first $34,000 is counted against his contributions. Thus, there is no tax or penalty on $34,000. There are no conversions, so the rest of the distribution is earnings and thus subject to income tax and the 10% early distribution rules.

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 the grandchildren are alive at the time of Harry's death, which beneficiary designation will provide the greatest benefit? A) Designating all grandchildren as equal beneficiaries of the IRA B) In trust for the benefit of the grandchildren C) In separate accounts for each of the grandchildren—25% to Mary, 35% to John, and 40% to Abigail D) Designating 100% of the IRA assets to Mary Explanation Creating separate accounts will allow distributions to be taken over the lifetimes of each grandchild. Because Mary is considerably older than John and Abigail, this will maximize the wealth accumulation provided by Harry's IRA. The other beneficiary designations outlined will result in the same maximum distribution schedule: Mary's life expectancy reduced by 1 for each subsequent year.

How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan? A) Minimum vesting schedules are more liberal than in other types of plans. B) Employer contributions are flexible from one year to another and, if resources are not available, the employer may choose not to contribute to the plan. C) Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized. D) Retirement benefits are determined by the participant's final account balance. Explanation Contribution formulas for both age-weighted profit-sharing plans and traditional defined benefit pension plans favor older employees. Retirement benefits are determined by the participant's final account balance in defined contribution plans. Employer contributions can be flexible in an age-weighted profit-sharing plan, but not in a defined benefit pension plan. Vesting is not more liberal in these plans than in other types of plans.

If the owner's death occurs before the required beginning date, nonspouse beneficiaries of qualified plans or IRAs may take distributions from the inherited plan accounts over the longer of which of the following? The beneficiary's life expectancy, beginning in the year following the participant-owner's death, reduced by 1 for each subsequent year The 5-year rule, if the plan allows A) Neither I nor II B) I only C) Both I and II D) II only Explanation The answer is both I and II.

In 2020, 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 2020? A) 3 B) 2 C) 4 D) 1 Explanation For 2020, a worker receives 1 credit for each $1,410 in annual earnings on which Social Security taxes are withheld up to a maximum of 4 credits annually. All 4 credits may be earned in the same calendar quarter.

In July of this year, George Moore, who will be age 56, plans to retire from Metro College. He will then have in excess of 20 years of service with the college. He wants to know what the consequences will be if he begins to make withdrawals from his 403(b) account. Which of the following statements would be an accurate response? A) A 403(b) is not a qualified plan and does not qualify for the exception to the 10% early distribution tax due to being over age 55 and separating from service. B) It would be to George's advantage to roll the account into his IRA and then begin making distributions from the IRA. C) A 403(b) plan participant is subject to the 10% early distribution tax, but an exception applies if the participant is at least age 55 and separates from service. D) Because he is not yet 59½, the distributions will have to be based upon substantially equal payments based upon George's life expectancy, or the joint life expectancy of George and the beneficiary George names to avoid being subject to the 10% early distribution tax. Explanation Although a 403(b) plan may not be a "qualified plan," it is subject to many of the same rules. A 403(b) plan is subject to the 10% early distribution tax and also qualifies for the exception to the penalty if the participant is at least age 55 and separates from service. LO 6.3.1

Jane, age 56, has $500,000 in a traditional IRA rollover account from her previous employer's profit-sharing plan. She also receives a monthly retirement pension from her previous employer's qualified plan of $30,000 per year. Jane needs an extra $20,000 per year from her IRA to meet her living expenses until her Social Security payments begin at age 62. Which of the following is CORRECT? Since Jane is under age 59½, she cannot avoid having to pay a mandatory 10% penalty tax on any amounts withdrawn from her IRA. Jane will have to report the $20,000 withdrawal as ordinary income on her personal income tax return. Jane can avoid the 10% penalty tax if she bases her withdrawal on the "substantially equal payment" method available to individuals under age 59½. The $20,000 per year withdrawal from Jane's IRA will be subject to the 15% excise tax on "excess distributions" from qualified plans. A) I and IV B) I only C) II and III D) II only Explanation While taxpayers under age 59½ may pay a penalty tax on IRA distributions, there are methods of avoiding the penalty, as is accurately stated in Statement III. The income from the IRA would be fully taxable as ordinary income on her return. There is no 15% excise tax on "excess distributions."

Jeff and Julie, both age 50, are married and are both fully insured under Social Security. They have two children. Amy is 24 and was injured in an auto accident when she was 21 leaving her disabled and dependent on her parents for her care. Brad is 17 and a senior in high school. Jeff's mother, Lisa, is age 66 and lives with the couple but is not a dependent for tax purposes. If Julie dies, who may receive a survivor benefit under Social Security based upon her fully insured status? Amy Brad Jeff Lisa A) I, II, III, and IV B) III and IV C) I, II, and III D) I only Explanation Amy, Jeff, and Brad will receive benefits. Amy became disabled before age 22 and will receive a benefit, as will Jeff, who is now her caregiver. Brad will receive a benefit because he is an unmarried child under age 19 and still in high school. Because Lisa is not a dependent, she is not eligible for a benefit.

Jerry died on July 17, 2020, and he owned a traditional IRA. The designated beneficiaries for his IRA will be determined as of what date? A) July 17, 2021 B) July 17, 2020 C) September 30, 2021 D) December 31, 2020 Explanation The designated beneficiaries are determined as of September 30 of the year following the IRA owner's death. In this instance, the date is September 30, 2021.

Lisa has accumulated assets of $350,000 that she wishes to dedicate to her retirement. Inflation is anticipated to average 2% over the next 20 years. She plans on retiring in 15 years. What would be the value of her fund at retirement if Lisa can average a 5% after-tax rate of return on her accumulated assets? A) $467,035 B) $520,082 C) $727,625 D) $928,654 Explanation This is a future value calculation. PV = -$350,000 i = 5 (after-tax rate of return) n = 15 (years to retirement) FV = $727,625

Shawn, age 32, needs $10,000 for the purchase of a primary residence. She has no other source of funds at her disposal. Her Section 401(k) plan allows participant loans. The current value of Shawn's deferral account is $14,000, of which $9,500 is her aggregate vested balance. What is the maximum loan Shawn can take from the Section 401(k) plan? A) $7,000 B) $14,000 C) $9,500 D) $10,000 Explanation The maximum amount of loan Shawn can take is $9,500, which represents her aggregate vested balance. When the vested account balance is less than $20,000, loans up to $10,000 are available without regard to the half the vested balance rule.

On December 31 of last year, Samuel Herman had $360,000 in his IRA (a five-year CD earning 6.5%). He has named Trudy Herman, his wife, as beneficiary. He wants you to determine the amount he must withdraw and the date by which the withdrawal must be made. This year, he turned age 70 on October 17, and Trudy turned age 35 on January 8. (Assume the IRS RMD Joint Life Table expected return for two individuals ages 70 and 35 is 47.5; ages 71 and 36 is 46.6, and ages 72 and 37 is 45.6. The IRS RMD Single Table for an individual age 70 is 16.0, age 71 is 15.3, and age 72 is 14.6. The Uniform Table factor is 26.2 at age 70 and 25.3 at age 71.) What is the smallest required minimum distribution (RMD) that Samuel can take, and when must distributions begin? A) He must begin distributions on April 1 of next year in the amount of $8,072. B) He must begin distributions on April 1 of this year in the amount of $14,229. C) He must begin distributions on April 1 of the year after next in the amount of $8,227. D) He must begin distributions on April 1of next year in the amount of $15,154. Explanation A single distribution is calculated as follows: ($360,000 × 1.065) ÷ 25.3 = $15,154 using the Uniform Table factor at age 71. Because their ages differ by more than 10 years, though, the joint life factor results in a larger life expectancy and smaller required distributions, the joint life factor may be used. A joint distribution is calculated as follows: $383,400 ÷ 46.6 = $8,227. (The next payment, due on December 31 of the same year in the amount of $8,954, is obtained when the year-end balance of year 3 is divided by 45.6.) The first payment is due on or before April 1 of the year following the year Samuel attains age 70½, and the next is due by December 31 of that same year.

On December 31 of last year, Samuel Herman had $360,000 in his IRA (a five-year CD earning 6.5%). He has named Trudy Herman, his wife, as beneficiary. He wants you to determine the amount he must withdraw and the date by which the withdrawal must be made. This year, he turned age 70 on October 17, and Trudy turned age 35 on January 8. (Assume the IRS RMD Joint Life Table expected return for two individuals ages 70 and 35 is 47.5; ages 71 and 36 is 46.6, and ages 72 and 37 is 45.6. The IRS RMD Single Table for an individual age 70 is 16.0, age 71 is 15.3, and age 72 is 14.6. The Uniform Table factor is 26.2 at age 70 and 25.3 at age 71.) What is the smallest required minimum distribution (RMD) that Samuel can take, and when must distributions begin? A) He must begin distributions on April 1 of next year in the amount of $8,072. B) He must begin distributions on April 1of next year in the amount of $15,154. C) He must begin distributions on April 1 of the year after next in the amount of $8,227. D) He must begin distributions on April 1 of this year in the amount of $14,229. Explanation A single distribution is calculated as follows: ($360,000 × 1.065) ÷ 25.3 = $15,154 using the Uniform Table factor at age 71. Because their ages differ by more than 10 years, though, the joint life factor results in a larger life expectancy and smaller required distributions; the joint life factor may be used. A joint distribution is calculated as follows: $383,400 ÷ 46.6 = $8,227. (The next payment, due on December 31 of the same year in the amount of $8,954, is obtained when the year-end balance of year 3 is divided by 45.6.) The first payment is due on or before April 1 of the year following the year Samuel attains age 70½, and the next is due by December 31 of that same year.

Paul, age 64, is retiring next year. He participates in an eligible Section 457 plan through his governmental employer. His employer's plan has a normal retirement age of 65. Which of the following statements regarding Paul's governmental Section 457 plan is NOT correct? A) During the last three years of employment before the plan's normal retirement age, Paul's elective deferral may be increased up to $39,000 (2020). B) Section 457 plan distributions are not eligible for net unrealized appreciation treatment. C) Because he is over age 50 and within the last three years of employment before retirement, Paul can defer the maximum amount under a special catch-up provision and an additional amount under the over-age-50 catch-up provision this year. D) A lump-sum distribution from a governmental Section 457 plan may be rolled over to a qualified plan. Explanation A participant in a governmental Section 457 plan may not use both the special catch-up allowance and the over-age-50 catch-up allowance in the same tax year.

Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA at his local banking institution. Which of the following statements regarding his transfer is(are) CORRECT? The distribution from the SIMPLE 401(k) plan is not subject to mandatory 20% withholding. A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement. A) I only B) Both I and II C) II only D) Neither I nor II Explanation The answer is II only. Statement I is incorrect. SIMPLE 401(k) plans are qualified plans and are subject to mandatory 20% income tax withholding for a distribution that is not a direct trustee-to-trustee transfer. When there is a direct transfer of a distribution from a qualified plan to an IRA, the mandatory 20% withholding rule does not apply.

Susan participates in a Section 403(b) plan at work that includes loan provisions. Susan has recently enrolled in college and has inquired about the possible consequences of borrowing from the Section 403(b) plan to help pay for her education. As her financial planner, what is your advice to her? A) The loan will statutorily be treated as a taxable distribution from the plan. B) The loan is not being made for reasons of an unforeseeable emergency and, thus, is not possible. C) The loan must be repayable within five years at a reasonable rate of interest. D) The Section 403(b) plan cannot make loans to participants as loans are only available from a qualified plan. Explanation For a loan not to be treated as a taxable distribution for tax purposes, it must be repayable within five years at a reasonable rate of interest. A Section 403(b) may include loan provisions similar to that of a qualified plan.

Target benefit pension plans are defined contribution plans that do which of these? They require a fixed contribution formula. They provide a guaranteed retirement benefit. A) II only B) Both I and II C) I only D) Neither I nor II Explanation Target benefit pension plans have a fixed contribution formula that is based on an actuarial calculation and the participant's age at plan inception or plan entrance. Statement II is incorrect. Although the plan is technically a defined contribution plan, its intention is to fund for a targeted benefit at retirement, based on the participant's age and number of years to retirement. The actual contributions may or may not achieve the targeted benefit; therefore, the retirement benefit is not guaranteed.

The 20% mandatory withholding requirement applies to distributions from all of the following except A) qualified plans. B) Section 457 plans. C) IRAs. D) Section 403(b) plans. Explanation The 20% mandatory withholding requirement does not apply to distributions from traditional IRAs, SIMPLE IRAs, or SEP IRAs.

Todd has made total contributions of $75,000 to his traditional IRA, of which $15,000 were nondeductible contributions. Todd is age 60 and is considering taking a $20,000 distribution from his IRA, which currently has a fair market value of $175,000. This will be the only distribution from his IRA this year. How much of the distribution will be taxable to Todd? A) $20,000 B) $16,000 C) $18,286 D) $5,000 Explanation Distributions from a traditional IRA that include nondeductible contributions are subject to tax on a pro rata basis according to the following formula: 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=[($15,000+$0)($175,000+$0)]×$20,000=[$15,000$175,000]×$20,000=0.0857×$20,000=$1,714nontaxable 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=[($15,000+$0)($175,000+$0)]×$20,000=[$15,000$175,000]×$20,000=0.0857×$20,000=$1,714 $20,000 − $1,714 = $18,286 taxable portion

Tony, age 65, is a nonowner employee of Widget, Inc. He wants to defer his retirement from Widget, Inc., until age 75 and continue to work. Tony contributes 6% of his pay to the Section 401(k) plan, and his employer matches 100%. Which of the following statements regarding Tony's distribution options is CORRECT? A) Tony cannot contribute to his Section 401(k) plan after age 70½. B) Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he attains age 70½. C) Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he retires if he does retire after age 70½. D) Tony will be subject to a 10% early withdrawal penalty on distributions received from his Section 401(k) plan. Explanation Generally, an individual must receive his first minimum distribution by April 1 following the year the individual attains age 70½. However, if the individual remains employed beyond age 70½, he may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer's qualified plan (not IRAs). Therefore, the other choices are incorrect. Also, this exception is not available if the individual is a greater-than-5% owner of the company sponsoring the retirement plan.

Under the required minimum distribution (RMD) rules for IRAs, a penalty tax of A) 10% is assessed on excess distributions. B) 50% is assessed on excess distributions. C) 50% is assessed on the amount of required minimum distribution not taken before the required date. D) 10% is assessed on the amount of required minimum distribution not taken before the required beginning date. Explanation The IRS requires the owner to take minimum distributions from a traditional IRA no later than April 1 of the year following the owner's attaining age 70½. If the amount distributed is less than the required minimum, a 50% excise tax is assessed on the amount of the shortage. The minimum distribution is determined by dividing the IRA account balance (or aggregate account balances) on December 31 of the prior year by the owner's remaining life expectancy (or joint life expectancy of the owner and beneficiary) shown in the table. The required distribution may be taken from one IRA, but the calculation must be based on the totals in all IRAs.

What is the first year in which a taxpayer, age 52 in 2020, may receive a qualified distribution from a Roth IRA, if he makes a $2,000 contribution to a Roth IRA on April 1, 2020, for the tax year 2019? A) 2023 B) 2025 C) 2024 D) 2020 Explanation A qualified distribution can occur only after five years have elapsed, and it also must be made for one of the following reasons: (1) on or after the date on which the owner attains age 59½, (2) it must be made to a beneficiary or the estate of the owner on or after the date of the owner's death, (3) because the owner has become disabled, or (4) it can be made for a first-time home purchase. The five-year period starts at the beginning of the taxable year for which the initial contribution to the Roth IRA is made. In this question, though the contribution was made on April 1, 2020, the contribution was for tax year 2019. The five-year holding period, therefore, begins January 1, 2019. As a result, the first year in which a qualified distribution may occur is 2024. Note that in 2024, the person will be age 56. Thus, the qualified distribution would be limited to the other qualifying events (death, disability, and first-time homebuyer/builder/rebuilder).

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)? ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts. ESOPs cannot be integrated with Social Security. An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participants' payroll. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP. A) I, II, and III B) II and III C) I, II, and IV D) I and II E) II, III, and IV only Explanation Options I and II correctly state the diversification rule and the rule that prohibits integrated ESOPs. There is no limit on amounts used to pay interest on ESOP debt. ESOP distributions of employer stock only are not subject to the 20% income tax withholding requirement.

Which of the following statements accurately describes a reason for the suitability of an asset class in a qualified retirement plan portfolio? A) Common stocks offer capital appreciation and are relatively low risk. B) Money market investments provide liquidity and a high real rate of return. C) Mutual funds provide diversification and offer a competitive rate of return. D) Bonds are useful for funding future fixed obligations and offer protection against inflationary pressures. Explanation In determining the suitability of an asset class in a retirement plan portfolio, mutual funds provide diversification and provide a comparable historical rate of return to that of equities (of course, depending on the investment objective and composition of the particular fund).

Which of the following statements describes a basic provision or use of a savings incentive match plan for a SIMPLE IRA? A) A SIMPLE IRA must satisfy special nondiscrimination tests in addition to general rules. B) Only employers that average fewer than 200 employees can establish a SIMPLE IRA. C) One contribution formula an employer can use in a SIMPLE IRA is to make a 2% nonelective contribution on behalf of eligible employees. D) A SIMPLE IRA is primarily suitable for large, corporate-type employers. Explanation A 2% nonelective contribution formula on behalf of eligible employees is one of two formulas an employer may use in making contributions to a SIMPLE IRA. A 3% match is the other. For a SIMPLE IRA only, the 3% match can be lowered to 1% for two out of five years.

Which of the following statements regarding TSAs and Section 457 plans is CORRECT? Both plans may be funded entirely by participant contributions. Participation in either a TSA or a Section 457 plan will cause an individual to be considered an active participant for purposes of phasing out the deductibility of traditional IRA contributions. Both plans allow net unrealized appreciation tax treatment for lump-sum distributions. Both plans must meet minimum distribution requirements that apply to qualified plans. A) II, III, and IV B) I, III, and IV C) I and IV D) I only Explanation Statements I and IV are correct. Statement II is incorrect because a Section 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an active participant. Statement III is incorrect because net unrealized appreciation (NUA) tax treatment is not permitted for distributions from either plan.

Which of the following statements regarding TSAs/Section 403(b) plans is CORRECT? The sponsor must be a tax-exempt organization that meets the requirements of Section 501(c)(3), a governmental organization, or public educational organization. Lump-sum distributions may be eligible for special long-term capital gain treatment. In-service withdrawals may be permitted. The plan can invest in individual stocks and bonds, but not options or futures. A) I, III, and IV B) I, II, and III C) I and III D) II, III, and IV Explanation Statement II is incorrect because distributions from a TSA are treated as ordinary income. Statement IV is incorrect. Only annuities and mutual funds are permitted investments in a TSA.

Which of the following statements regarding a nonspouse designated beneficiary of an IRA is CORRECT? A) The nonspouse beneficiary may rollover the IRA into his own IRA and defer distribution until attaining age 72. B) The nonspouse beneficiary must take a lump-sum distribution in the year following the death of the participant-owner. C) The nonspouse beneficiary may elect to distribute the IRA over the remaining life expectancy of the beneficiary commencing the year following the year of death, reduced by one for each subsequent year. D) The nonspouse beneficiary must follow the five-year payout rule. Explanation The nonspouse beneficiary may not rollover the IRA into his own IRA. While a lump-sum distribution or the five-year payout are options for the nonspouse beneficiary, they are not mandatory.

Which of the following statements regarding beneficiary designations for qualified plans and IRAs is NOT correct? A) For deaths occurring before the required beginning date for distributions from the IRA or qualified plan, the benefits to the estate must be distributed using the 5-year rule. B) If the decedent had already begun receiving required minimum distributions before death, any installment payout must be over the remaining distribution period of the deceased, reduced by 1 each year. C) An advantage when designating the estate as the beneficiary is that the taxation of the benefit is more favorable at the estate income tax rate than at the individual tax rate. D) An estate cannot be treated as a designated beneficiary even if the beneficiary designation is also named in the account owner's will. Explanation Estate income tax rates reach the highest marginal tax rate at a much lower taxable income amount compared with an individual's rate. Therefore, having the benefit taxed to the estate is a disadvantage.

Which of the following statements regarding plan requirements for SIMPLE IRAs is NOT correct? A) All eligible employees with sufficient compensation have the opportunity to make elective pretax contributions of up to $13,500 for 2020 or $16,500 if age 50 or older. B) The employer must notify participants that they have a 60-day election period just before the calendar year-end to make a salary deferral election or modify a previous election for the following year. C) Unlike traditional IRAs, assets can be invested in life insurance. D) To establish a SIMPLE IRA plan, a business cannot have more than 100 employees (only counting those who earned $5,000 or more of compensation). Explanation SIMPLE IRAs, like SEP plans, are funded with IRAs. Assets in IRAs cannot be invested in life insurance or collectibles.

Which of the following statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts is CORRECT? 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 first day of the year. 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 first day of the tax year. Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited. A 50% penalty will be assessed against an IRA owner who borrows money against her IRA. A) II and III B) I, II, and III C) I and II D) I, III, and IV Explanation Statements I and II correctly describe prohibited transactions. Statement III is incorrect. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. Statement IV is incorrect. The individual may have to pay the 10% additional tax on premature distributions.

Which of the following statements regarding the conversion of a traditional IRA consisting entirely of deductible contributions and earnings to a Roth IRA is 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. Taxpayers who are age 72 and older may not convert a traditional IRA to a Roth IRA. If the converted assets from the traditional IRA will not remain in the Roth IRA for a relatively long time, conversion is generally advisable. A) I, II, and IV B) I, III, and IV C) I only D) II and III Explanation Only Statement I is correct. When a traditional IRA is converted to a Roth IRA, the converted amount from an IRA consisting entirely of deductible contributions and earnings is treated as a taxable distribution and is included in the owner's gross income. Statement II is incorrect. The 10% penalty does not apply, regardless of the owner's age. Statement III is incorrect. There is no age limitation that applies to conversion of a traditional IRA to a Roth IRA. Statement IV is incorrect. If the converted assets from the traditional IRA will remain in the Roth IRA for a relatively long time, conversion is generally advisable.

Which of the following statements regarding the differences between traditional IRAs and Roth IRAs is CORRECT? Traditional IRAs are tax-favored retirement savings plans that encourage the accumulation of savings for retirement because they allow earnings to be tax deferred until retirement. Roth IRA contributions are made on an after-tax basis, but earnings are not currently taxed, and qualifying distributions are tax free. A) Neither I nor II B) II only C) Both I and II D) I only Explanation Statements I and II are both correct.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump-sum distribution is CORRECT? The NUA portion is A) taxed as ordinary income when the stock is sold. B) taxed as ordinary income in the year of the distribution. C) taxed at the capital gains rate when the stock is sold. D) received tax free. Explanation The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.

Which of the following statements regarding the tax effects of converting a traditional IRA to a Roth IRA is 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. A) Both I and II B) II only C) I only D) Neither I nor II Explanation Only Statement I is correct. 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.

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following is a rule that applies to Section 401(k) plan elective deferrals? Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. In-service withdrawals are to be made only if an individual has attained age 62. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts. A) I and II B) III only C) I only D) I and III Explanation Statement II is incorrect. A Section 401(k) plan may allow in-service distributions before age 62.

A government employer would choose to establish a Section 457 plan for all of the following reasons except A) tax-deferred growth. B) no early withdrawal penalty on distributions. C) income tax credit for certain taxpayers regarding elective contributions. D) tax deductibility of contributions. Explanation Because Section 457 plans are sponsored by tax-exempt entities, deductibility of plan contributions is not an issue.

Delaying receipt of benefits (for example until age 70) will result in all of the following except A) larger survivor benefits for the surviving spouse. B) higher annual cost-of-living adjustments. C) receipt of delayed retirement credits. D) permanently reduced benefit amount. Explanation Delaying receipt of benefits will allow you to earn delayed retirement credits, and your future cost-of-living adjustments will be higher because they will be based on a higher base. Also, the increased base will ultimately be used to determine survivor benefits.

A savings incentive match plan for employees (SIMPLE) can be which of these? It can be established as an IRA. It can be established as a Section 401(k) plan. It can be established as a Section 403(b) plan. It can be offered by employers who have 100 or fewer employees. A) II and IV B) I and II C) I, II, and III D) I, II, and IV Explanation Employers with more than 100 employees (who earn more than $5,000) may not offer a SIMPLE. In addition, the employer may not usually offer any other type of qualified retirement plan in conjunction with a SIMPLE. Union plans and governmental 457 plans are the exceptions to the employer having a second active plan. However, this is not to be applied to a test question unless specifically mentioned in the question. Basically, can a SIMPLE have a second active plan for its workers? No, because that is as far as the test is going. What about a union plan or a 457 for qualified state and local government employers? Well, okay, for those rare exceptions, but the question would have to bring up one of these rare exceptions. The point is that SIMPLEs were intended to be the only active plan for the small employer. Congress was afraid the employer would try to be discriminatory with the other retirement plan, so the rules was made that there could not be another retirement plan. Then governmental 457 plans and union plans snuck in, but these rare exceptions are not a part of the question unless specifically mentioned.

Alice died five years ago. Joe, age 46, Alice's surviving spouse, has been raising their three children (John, Mary, and Susan). Joe earns over $95,000 a year and receives $900 per month from Social Security. Alice was insured under Social Security when she died. Which of the following relatives will be eligible for a survivor benefit this year? John, age 20, qualifies for the monthly child benefit because he is a full-time college student. Mary, who will be 19 in September, will continue to qualify until she graduates from high school in June. As the surviving spouse, Joe qualifies for the father's benefit while he is caring for a child under age 16, but the benefit is reduced to zero because of his earnings. Susan, who is age 15, qualifies for the child's monthly benefit. A) I and II B) I, II, and III C) I, II, III, and IV D) II, III, and IV Explanation To qualify for the child's benefit, the child must be under age 18, or a full-time student at an elementary or secondary school if under age 19. A child may also qualify if the child became disabled before reaching age 22. Joe qualifies for the father's benefit, but that benefit is reduced by $1 for each $2 of earned income in excess of the limit for persons under full retirement age (FRA). Joe's income would reduce the benefit to zero. At John's age, he would only qualify for a benefit if he were disabled.

Alice participates in a qualified retirement plan at work. The plan provides Alice with life insurance. If Alice dies, which of the following statements correctly describes the income tax treatment of the life insurance death benefit paid to Alice's beneficiary? A) The beneficiary must pay income tax plus a 10% penalty on the entire death benefit. B) The beneficiary must pay income tax on the entire death benefit. C) The entire death benefit is income tax free to the beneficiary. D) The pure insurance element of the death benefit is income tax free to the beneficiary. Explanation The beneficiary receives the pure insurance element of the death benefit income tax free.

All of the following are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA except A) one advantage of a conversion to the Roth IRA is that the Roth IRA will not be subject to required minimum distributions (RMD) during the life of the original owner. B) any portion of an IRA can be converted to a Roth IRA. C) the Roth IRA conversion becomes more and more appropriate the longer the period of distributions. D) the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion. Explanation The Roth IRA conversion is more appropriate when the income tax rate is the same or higher at the time of distribution than at the time of conversion.

All of the following statements regarding interest charged to a plan participant for a loan from the participant's qualified retirement plan account are correct except A) Interest on all qualified plan loans made to key employees for the purpose of securing a primary residence is always nondeductible by the key employee. B) Interest on qualified plan loans secured by the participant's principal residence is deductible by taxpayers who claim itemized deductions on their tax return if the entire loan is due to employer contributions only. C) Generally, interest on a loan from a qualified plan is nondeductible consumer interest for the participant-borrower. D) Generally, loans from qualified plans must be repaid within 10 years, unless the loan is used to acquire a primary residence. Explanation Generally, loans from qualified plans must be repaid within 5 years, unless the loan is used to acquire a primary residence.

All of the following statements regarding the basic provisions of a Section 457 plan are correct except A) distributions from a Section 457 plan are not subject to an early withdrawal penalty. B) the contribution limit is doubled in the 3 years before an individual's retirement. C) in 2020, an individual who has attained age 50 may make additional catch-up contributions of up to $6,500. D) a Section 457 plan is a qualified plan of governmental units or agencies, and non-church-controlled, tax-exempt organizations. Explanation A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and non-church-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules.

Employee participants in 403(b) plans are _______________ vested in their elective deferrals and all plan earnings that result from those reductions. A) usually gradually B) always gradually C) usually 100% D) always 100% Explanation Participants in both 403(b) and 401(k) plans are always 100% vested in their elective deferrals and the earnings from those contributions.

Clara, age 50, opened a Roth IRA in Year 1 and made a $5,000 contribution for that year. In Years 2, 3, and 4, she made additional annual contributions of $5,000. Clara died in Year 4 after making her contribution for that year. The beneficiary is her son, Josh, who has asked his financial planner when he may take a total distribution from Clara's Roth IRA penalty free and tax free. What should the planner tell him? A) A new five-year holding period began with the year of Clara's death (Year 4), and Josh must wait until January 1 of Year 9 for a tax-free and penalty-free distribution. B) Josh may roll over Clara's Roth IRA to his own Roth IRA and is not required to take distributions during his lifetime. C) Because the distribution is made to Josh as a beneficiary upon Clara's death, the distribution can be taken immediately without incurring a penalty or income taxes. D) The required five-year holding period that began in Year 1 with Clara's first contribution to the Roth IRA must be satisfied for a distribution to be penalty free and tax free. Explanation Any distribution must satisfy the five-year holding period that began in Year 1 with Clara's first contribution to the Roth IRA to be tax free and penalty free. A nonspouse beneficiary cannot roll over the inherited Roth IRA into his own Roth IRA and forego the required distributions.

Claude's ex-wife, Sara, has secured a qualified domestic relations order against his Section 401(k) plan. What are Sara's rollover options if she takes a lump-sum distribution of her share of Claude's retirement plan account? A) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, or an IRA, but not to a Section 457 plan. B) Sara may rollover the distribution to her own qualified plan, Section 457 plan, or an IRA, but not to a Section 403 (b) plan. C) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, or Section 457 plan, but not to an IRA. D) Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, Section 457 plan, or IRA. Explanation Sara may rollover the distribution to her own qualified plan, Section 403(b) plan, Section 457 plan, or IRA.

David, a 63-year-old investor, wants to know which of the following penalties he might be subject to at some point if he continues tax-deductible contributions to his traditional IRA. The applicable penalties are a 10% early distribution penalty. a 50% minimum distribution penalty. a 6% penalty on excess contributions. a 6% penalty on excess withdrawals. A) II, III, and IV B) I and III C) I, II, and IV D) II and III Explanation Statement I is incorrect. Because David is over age 59½, he will not be subject to the early withdrawal penalty. Statement II is correct. If David does not begin taking minimum distributions by the required beginning date, he will be subject to the 50% minimum distribution penalty. Statement III is correct. If David contributes more than the permitted amount to an IRA, he will be subject to a 6% penalty on the excess contribution. Statement IV is incorrect. There is no penalty for excess withdrawals.

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 pretax 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 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 continues making the loan payments as planned. Loans to a 100% owner-employee are permissible. A) II only B) I only C) I, II, III, and IV D) I, II, and IV Explanation Statement I is correct. Generally, loans are limited to 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 of time. 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.

Joyce has decided to offer a retirement plan to her employees. She has selected 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 SIMPLEs except there is a 25% penalty for early distributions from a participant's SIMPLE account within two years of entry into the plan. SIMPLE assets may only be rolled over into another SIMPLE within the first two years of initial participation in the plan by a participant. SIMPLEs are not subject to the top-heavy rules that apply to qualified plans. employer contributions to a SIMPLE are not subject to payroll taxes (FICA and FUTA). A) I, III, and IV B) II and IV C) II and III D) I only Explanation 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.

Karen, age 51, wishes to take distributions from her traditional IRA and avoid imposition of the 10% early distribution penalty. Which of the following distributions will allow Karen to avoid the penalty? Karen is totally and permanently disabled. Karen wants the distribution to pay medical expenses exceeding 10% of her adjusted gross income (AGI). Karen may take distributions under the substantially equal payments rule. Karen needs cash to pay for tuition for her child at State University. A) I and IV B) III only C) II and III D) I, II, III, and IV Explanation All of these statements are correct.

Maria has a traditional IRA valued at $500,000. She named her daughter, Faith, as beneficiary of the account. If Maria dies prematurely, which of the following statements is CORRECT? Faith inherits the IRA. Faith can transfer the inherited funds to an inherited IRA via a direct trustee-to-trustee transfer and name her own beneficiary. Because Faith is a nonspouse beneficiary, she is not allowed to roll over the IRA. Faith can roll over the IRA into her own Section 401(k) plan. A) III and IV B) I, II, and III C) I, II, III, and IV D) I and II Explanation Statements I and II are correct. A nonspouse beneficiary (such as an adult child) may use a trustee-to-trustee transfer of the decedent's balance from a qualified plan, Section 403(b) plan, governmental Section 457 plan, or IRA to her own inherited IRA. However, the nonspouse beneficiary must generally begin receiving the distributions from the deceased participant's IRA immediately, whereas a surviving spouse beneficiary may continue to defer payouts until she attains age 72.

Mark and Melissa, ages 43 and 39, are married and have a combined MAGI of $135,000. Melissa is an active participant in her company's Section 401(k) plan, but Mark's employer does not offer a retirement plan. Both Mark and Melissa each make $6,000 contributions to their traditional IRAs. How much of these IRA contributions can Mark and Melissa deduct on their 2020 MFJ tax return? A) Mark's contribution is not deductible B) $3,000 for Melissa's contribution C) $12,000 for both contributions D) $6,000 for Mark's contribution Explanation Because Melissa is an active participant in her employer's Section 401(k) plan and their combined MAGI exceeds $124,000 (the upper end of the married filing jointly phaseout range), Melissa's entire IRA contribution is nondeductible. Thus, she should make her IRA contribution to a Roth IRA instead of a nondeductible IRA. Because Mark is not an active participant, his deduction would be phased out starting at $196,000 of MAGI. Mark and Melissa's combined MAGI is only $135,000, and the couple will receive a full $6,000 deduction for Mark's IRA contribution.

Miguel and Barb file jointly. Both work, and their combined AGI is $105,000. This year, Miguel's profit-sharing account earned over $4,000, but the company made no contributions, Miguel made no contributions, and there were no forfeitures. Barb declined to participate in her company's defined benefit plan because she wants to accumulate and manage her own retirement money. (Her current accrued benefit at age 65 under the plan is $240 per month.) How much of their $12,000 IRA contribution can they deduct? A) $0 B) $6,000 C) $12,000 D) $11,400 Explanation Barb's status is active. She cannot decline active status, even if she declines participation in a defined benefit plan. Miguel's status is not active since he received no annual additions. His available IRA deduction is $6,000 and hers is $123,000 − $105,000 = $18,000; ($18,000 ÷ $20,000) × $6,000 = $5,400. The choice of $0 assumes that neither individual qualifies for a deduction.

Norman and Brenda are married taxpayers filing jointly. Norman earned $132 this year, and Brenda earned $100,000. Brenda is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for this tax year. How much, if any, can be contributed to a spousal IRA and deducted for Norman for this year? A) $0 B) $132 C) $5,190 D) $6,000 Explanation The maximum deductible contribution to a spousal IRA for Norman is $6,000, and the deductible amount phases out at AGI of $193,000-$203,000 for Norman, who is the nonactive participant spouse.

Sharon Bender, age 52, has been a teacher in the Lammer County School District for 18 years. Recently, she inherited a large sum of money and wants to minimize her income tax. What is her maximum 403(b) deferral in 2020? A) $57,000 B) $26,000 C) $19,500 D) $29,000 Explanation Sharon can defer the basic $19,500 allowed in 2020, plus $6,500 for the age 50 catch-up and $3,000 for the long service catch-up (15 years of service or more).

On December 31 of last year (year 1), Samuel Herman had an IRA. He has named Trudy Herman, his wife, as beneficiary. Samuel died in year 4, on April 15, after withdrawing the required minimum amount from his plan. Trudy is 37. Assume that Trudy elects to continue to receive distributions over her life expectancy. The balance of the IRA on December 31 of year 4 is $456,743. According to her insurance agent, her life expectancy is about 50 years. How much is to be distributed and when? Assume the RMD Single Life Table factors are age 37‒45.4, 38-44.4, 39-43.5. A) Trudy must begin distribution within 30 days of Samuel's death. The amount is $9,422. B) The distribution amount is $7,688 ($384,400 ÷ 50 = $7,688). According to her insurance agent, Trudy has a life expectancy of 50 years at her present age of 37. Payments must begin within 30 days of Samuel's death. C) She must continue distributions in the same amount. The recalculation is frozen upon death of the plan owner. Trudy's distribution amount is $8,227 each year for life. D) She must begin distributions by December 31 of the year following Samuel's death. The amount is $10,287 ($456,743 ÷ 44.4 = $10,287). The factors in the RMD Single Life Table must be used to determine her life expectancy at age 38. Explanation The amount is $10,287 ($456,743 ÷ 44.4 = $10,287). The factors in the RMD Single Life Table must be used to determine her life expectancy at age 38. According to the RMD Single Life Table, a person age 38 has a life expectancy factor of 44.4. Trudy is 38 in the year following the year of death when her distributions must begin.

Paul estimates he will need $75,000 of annual income in today's dollars when he retires 10 years from now. He assumes a 3% annual rate of inflation, a 5% after-tax rate of return on his investments, and a 20-year retirement period. Using the serial payment approach, how much will Paul need to save in a single annual payment at the end of the first year to fund his retirement need? A) $115,124.27 B) $100,794.00 C) $120,880.49 D) $118,578.00 Explanation Paul will need to make a serial payment of $118,578.00. Here is how to calculate this type of problem using the regular TVM keystrokes: What will it take in ten years to have $75,000 of today's purchasing power? 75,000, +/-, PV 3, I 10, N FV Answer: $100,793.7285 What does Paul need to have in his account when he retires to produce a serial payment of $100,793.7285 at the beginning of the year for 20 years? +/-, +/-, PMT (This enters $100,793.7285 into the PMT as a positive value. The first +/- allows the calculator to accept the number. The second +/- makes it a positive number.) Shift, MAR (To get into the Begin mode.) 20, N 0, FV [(1.05 ÷ 1.03) - 1] × 100 = 1.9417, I PV Answer: $1,689,607.5595 What is $1,689,607.5595 in 10 years with inflation taken out of it? This step is critical because it prepares for the serial payment from today to retirement by removing the inflation from the dollar goal in 10 years. Serial payments account for inflation by adjusting the interest rate. Without expressing the FV in today's dollars, inflation will be double counted for the investment period. +/- $1,689,607.5595, FV (Only one +/- is needed here because the first +/- allows the calculator to accept the value and the PV was negative so after one +/- the new value will for FV will be positive.) 10, N 0, PMT 3, I PV Answer: -$1,257,226.7036 What is the first serial payment required at the end of the first year to have $1,257,226.7036 in 10 years? +/-, FV (This enters the result from aboe and changes the sing to positive $1,257,226.7036 Shift, MAR (To get in the End mode.) [(1.05 ÷ 1.03) - 1] × 100 = 1.9417, I 0, PV 10, N PMT Answer: $115,124.2738 This answer is in today's dollars, but the first payment will be made in a year, so... $115,124.27 X 1.03 = $118,578

Richard participates in a defined benefit pension plan at his place of employment. 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 A) $25,000. B) $10,000. C) $1,000. D) $100,000. Explanation Defined benefit pension 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.

Roth IRA distributions are required to be treated as occurring in a specific order. What is the order in which distributions are made from a Roth IRA? A) Contributions, earnings, conversions B) Conversions, contributions, earnings C) Earnings, conversions, contributions D) Contributions, conversions, earnings Explanation Any amount distributed from an individual's Roth IRA is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category): From regular contributions (e.g., a $4,000 contribution in the current year) From conversion contributions, on a first-in, first-out basis From earnings All distributions from an individual's Roth IRA made during one taxable year are aggregated.

Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA at his local banking institution. Which of the following statements regarding his transfer is CORRECT? The distribution from the SIMPLE 401(k) plan is not subject to the mandatory 20% income tax withholding requirement. A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement. A) Neither I nor II B) Both I and II C) I only D) II only Explanation Statement I is incorrect. SIMPLE 401(k) plans are qualified plans and are subject to mandatory 20% income tax withholding for a distribution that is not a direct trustee-to-trustee transfer. When there is a direct transfer of a distribution from a qualified plan to an IRA, the mandatory 20% withholding rule does not apply.

Saul, age 55, has retired after 30 years of service with his employer. His Section 401(k) plan, including employer matching contributions, has a current balance of $350,000. On January 10, Saul plans to receive a lump-sum distribution of his entire account balance and keep $50,000 to take his family on a cruise to celebrate his retirement, rolling over the balance of the distribution on March 5 to his traditional IRA. Which of the following is correct regarding Saul's plan? Saul must report the entire $350,000 distribution as ordinary income because he did not roll over the entire balance. If Saul keeps the funds as planned for a family cruise and rolls over the balance of the lump-sum distribution as planned, he must report $120,000 as ordinary income. The distribution will result in a 10% premature distribution penalty. Saul will report $50,000 as ordinary income. A) III and IV B) IV only C) I and III D) II only Explanation Unless a rollover is executed as a trustee-to-trustee direct transfer, mandatory withholding of 20% of the distribution is required for federal income taxes, which is $70,000 (20% × $350,000). This amount is considered a taxable distribution if Saul does not replace the funds and deposit the entire $350,000 into his IRA within 60 days. The $70,000 withheld for taxes, together with the $50,000 retained for the cruise, results in ordinary income of $120,000. He does not report the entire $350,000 as ordinary income. Statement I is incorrect; a partial rollover is permitted. Statement III is incorrect. While Saul has not yet attained age 59½, he is not subject to a premature distribution penalty because he is taking a distribution from a qualified plan after attaining age 55 and separation from service. Statement IV is incorrect because Saul must report $120,000 as ordinary income. If he would have added the $70,000 withheld to the amount he rolled over to the IRA, he would not have been taxed on the $70,000. Because most people don't have $70,000 available, he needed to do a trustee-to-trustee transfer for all but the $50,000 and then take the $50,000 as a distribution from the Section 401(k) plan.

Susan participates in a Section 403(b) plan at work that includes loan provisions. Susan has recently enrolled in college and has inquired about the possible consequences of borrowing from the Section 403(b) plan to help pay for her education. As her financial planner, what is your advice to her? A) The loan will statutorily be treated as a taxable distribution from the plan. B) The loan is not being made for reasons of an unforeseeable emergency and, thus, is not possible. C) The Section 403(b) plan cannot make loans to participants because loans are only available from a qualified plan. D) The loan must be repayable within five years at a reasonable rate of interest. Explanation For a loan not to be treated as a taxable distribution for tax purposes, it must be repayable within five years at a reasonable rate of interest. A Section 403(b) may include loan provisions similar to that of a qualified plan.

The employee bears the investment risk in all of the following types of retirement plans except A) traditional profit-sharing plans. B) target benefit pension plans. C) money purchase pension plans. D) cash balance pension plans. Explanation Employees bear the investment risk in defined contribution plans, and employers bear the investment risk in defined benefit plans. Cash balance pension plans are defined benefit plans; all the other answer choices are defined contribution plans.

The employer portion of the payroll tax rate, including the portion dedicated to Social Security (OASDI) and the portion dedicated to Medicare funding, on a covered worker's earnings up to the Social Security taxable wage base is A) 15.3%. B) 6.2%. C) 1.45%. D) 7.65%. Explanation Employers must pay a combined Social Security (OASDI) and Medicare rate of 7.65%. Employers pay 6.2% for Social Security and 1.45% for Medicare. The Social Security portion is payable up to the Social Security wage base of $137,700 for 2020. The Medicare portion is paid without an income limit.

To qualify for disability income benefits under Social Security, a worker must have an impairment that A) is related solely to drug addiction. B) is expected to result in death within 6 months. C) is related solely to alcoholism. D) is expected to last at least 12 months or result in death. Explanation To qualify for Social Security disability benefits, a person must suffer an impairment that is expected to Medicare tax is assessed on an unlimited amount of compensation.

Tom, a sole proprietor, is interested in implementing a retirement plan. He may have employees in the future. He also wants a plan that is easily understood, where the employees bear the investment risk, does not favor older participants, and allows elective deferrals. Which of the following plans is best suited to Tom's goals? A) Age-weighted profit-sharing plan B) SEP plan C) Target benefit pension plan D) SIMPLE IRA Explanation Tom's goals describe attributes of a SIMPLE IRA. The SEP plan and the target benefit plan do not allow worker contributions. The age-weighted profit-sharing plan is not as easily understood. Also, the target benefit plan and the age-weighted profit-sharing plan favor older employees.

Using the Uniform Lifetime Table to calculate the required minimum distributions (RMDs) from a qualified plan is mandatory unless A) there is more than one designated beneficiary. B) there is no designated beneficiary. C) the designated beneficiary is a child under the age of 16. D) the designated beneficiary is the participant's spouse and the spouse is more than 10 years younger than the participant. Explanation The Uniform Lifetime Table must be used to calculate required minimum distributions (RMDs) 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.

What is the penalty for a prohibited transaction? A) 50% B) 25% C) 10% D) 15% Explanation The prohibited transaction penalty is 15%.

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. A) I, II, III, and IV B) IV only C) I and II D) II, III, and IV Explanation 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 6 months of distribution, the $10,000 post-distribution appreciation is taxed as short-term capital gain.

Which of the following are reasons a small business might choose the SIMPLE over a Section 401(k) plan? A) Because a SIMPLE is less costly to operate, it is generally the better choice if the employer is not concerned about the design constraints of the plan. B) A Section 401(k) plan would be top heavy (benefits for key employees will exceed 60% of total benefits), and the employer wants to minimize employer contributions. C) The employer expects that it could not satisfy the Section 401(k) nondiscrimination test. D) All of these are reasons. Explanation All of these statements are reasons a small business might choose the SIMPLE over a Section 401(k) plan.

Which of the following beneficiaries is entitled to roll over a post-death distribution from a qualified plan into an IRA? A) The surviving spouse of the participant B) The oldest surviving child of the participant C) The surviving mother of the participant D) All three choices are correct Explanation 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.

Which of the following best describes the purpose of establishing a stretch IRA? A) To enable the owner to take distributions before age 59½ without paying the 10% penalty B) To allow the owner to borrow money from the IRA without committing a prohibited transaction C) To allow the owner to continue making contributions to a traditional IRA beyond age 72 D) To extend the period of tax-deferred earnings beyond the original owner's lifetime Explanation A stretch IRA is used to stretch the period of tax-deferred earnings on the IRA beyond the lifetime of the original owner. The goal is to delay the distribution of assets from the IRA for as long as possible.

Which of the following can provide Section 403(b) plans (TSAs) for their employees? Chambers of commerce Public schools Public universities Humane societies A) II, III, and IV B) I and II C) I, II, and III D) I, II, III, and IV Explanation All of these institutions may provide Section 403(b) plans. Tax-exempt organizations are those qualifying under Section 501(c)(3) of the Internal Revenue Code. Other prospects for a Section 403(b) plan include hospitals, private nonprofit schools, charities, civic leagues, and tax-exempt organizations.

Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan? IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment. A) Neither I nor II B) I only C) II only D) Both I and II Explanation Both statements are correct. IRA-funded employer-sponsored tax-advantaged plans are SEPs, SAR-SEPs, and SIMPLE IRAs.

Which of the following describe features of a Section 403(b) plan (TSA)? Two different catch-up contribution provisions may apply for certain participants. In general, the nondiscrimination rules that apply to qualified plans also apply. The investment risk is borne by plan participants. Loans are never allowed. A) I and II B) III and IV C) II and III D) I, II, and III Explanation For eligible participants with 15 years of service with the sponsor-employer and who have attained age 50, two types of catch-up allowances may be available. In general, the nondiscrimination rules that apply to qualified plans also apply to Section 403(b) plans, and the plan can be designed to allow loans. Individual accounts allow employees to direct their own investments. As such, they bear the investment risk. Loans may be permissible, but are plan specific.

Which of the following is CORRECT in stating the rules regarding distributions from an IRA plan? The annuity rules govern an IRA distribution that includes nondeductible and deductible contributions. At the IRA owner's death, the account balance exceeding the greater of $150,000 is included in the decedent's gross estate. A distribution attributable to contributions to a Roth IRA is subject to the premature distribution penalty tax, if withdrawn before age 59½. Distributions related to the death of the IRA owner are exempt from the premature distribution penalty tax. A) I, II, and III B) II, III, and IV C) I, III, and IV D) I and IV Explanation Section 72 annuity rules relating to the recovery of the participant's cost basis still apply to an IRA distribution consisting of deductible and nondeductible contributions. (The Small Business Job Protection Act of 1996 provided a simplified method of cost basis recovery for qualified plans and TSA annuities; however, the provisions for IRAs were not affected.) Death is an exception to the premature distribution penalty. Option II is wrong because the total balance of an IRA will be included in the owner's gross estate; however, if the spouse is the beneficiary, the marital deduction may be available. Option III is wrong because this type of distribution is not subject to the premature distribution penalty (10%). With a Roth IRA, nonqualifying distribution amounts that exceed contributions or include earnings are subject to both income tax and the 10% penalty.

Which of the following is NOT an exception to the 10% premature distribution from a traditional IRA? A) To pay higher education costs for the taxpayer, spouse, child, or grandchild B) To pay health insurance premiums if the owner is unemployed (participant must file for unemployment compensation before this exception applies) C) To pay acquisition costs of a first home for the participant, spouse, child, or grandchild of the participant or spouse, up to a $10,000 lifetime maximum D) For medical expenses exceeding 2% of the IRA owner's AGI Explanation The exception is for medical expenses exceeding 10% of the owner's AGI (for taxpayers who have not attained age 59½).

Which of the following persons can make a deductible contribution to an IRA for 2020? PersonMarital StatusAGICovered by Pension Plan1. JaneSingle$61,000Yes2. JoeMarried$100,000No3. BettySingle$20,000Yes4. Mary SueMarried$40,000Yes A) II, III, and IV B) II only C) III and IV D) I, II, III, and IV Explanation Each of these persons can make deductible contributions to an IRA for 2020.

Which of the following plans is a cross-tested plan? New comparability plan Employee stock ownership plan (ESOP) Age-based profit-sharing plan Stock bonus plan A) I, II, III, and IV B) III and IV C) I only D) I and III Explanation Of the plans listed, only the new comparability plan and the age-based profit-sharing plan are cross-tested plans. Cross-testing means a defined contribution plan is tested for nondiscrimination based on benefits rather than contributions.

Which of the following qualified plans can an S corporation implement? Profit-sharing plan Stock bonus plan Money purchase pension plan Employee stock ownership plan (ESOP) A) I and II B) I, II, and III C) II, III, and IV D) I, II, III, and IV Explanation S corporations can establish stock bonus and ESOPs.

Which of the following retirement plans can be adopted only by private, tax-exempt organizations and state or local governments? A) ESOP B) Section 403(b) plan C) Stock bonus plans D) Section 457 plan Explanation A Section 457 plan can be adopted only by private, tax-exempt organizations and state and local government entities. Section 403(b) plans may be adopted by Section 501(c)(3) nonprofit organizations, and ESOPs and stock bonus plans may be adopted by corporations.

Which of the following statements is CORRECT regarding penalties related to IRAs? For contributions in excess of the annual limits, the IRS imposes a penalty of 10% of the excess amount until the excess is withdrawn. One of the exceptions from the 10% early withdrawal penalty (pre-59½) is a distribution to fund a first-time home purchase (subject to a lifetime maximum of $10,000). Income taxes still apply. The 10% early withdrawal penalty does not apply if withdrawals are made to pay for qualified higher education expenses. Failure to begin receiving distributions by December 31 of the year following the year the taxpayer attains age 72 will result in a penalty tax of 50%. A) II and IV B) I, II, III, and IV C) I only D) II and III Explanation The penalty for excess contributions to an IRA is 6%. The 10% penalty for distributions before age 59½ does not apply to withdrawals made for qualified higher education expenses or first-time home purchase ($10,000 lifetime max). The required beginning date for minimum distributions is April 1 of the following year following the year in which the account holder attains age 72, not December 31.

Which of the following statements is NOT correct regarding the conversion of a traditional IRA to a Roth IRA? A) An amount in a traditional IRA may be transferred to a Roth IRA maintained by the same trustee. B) 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. C) An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days of the distribution. D) The IRA owner's modified adjusted gross income (MAGI) cannot exceed $100,000 in the year of the conversion. Explanation There is no MAGI limit for a taxpayer in the year in which there is a conversion.

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? Contributions are made with pretax dollars. A withdrawal from the account before age 59½ will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first-time home purchase. Distributions before age 59½ are not taxable if they are attributable to disability and the account has been established for at least five years. If the account has been open for at least five years and the account owner is age 59½, distributions are penalty free and income tax free. A) I, II, and III B) II, III, and IV C) I only D) III and IV Explanation Contributions to a Roth IRA are made with after-tax dollars. Distributions are free of penalties and income taxes before age 59½, provided the account has been open for at least five years and the account holder is disabled. After age 59½, distributions are free of income taxes if the account has been open for at least five taxable years.

Which of the following statements regarding Section 403(b) plans is CORRECT? Section 403(b) plans must comply with many of the same reporting and auditing requirements that apply to Section 401(k) plans. Certain eligible participants in a Section 403(b) plan may defer as much as much as $29,000 into the plan in 2020. Section 403(b) plans may provide for plan loans to participants. Funding for Section 403(b) plans is limited to mutual funds and annuities. A) I and II B) III and IV C) I, II, and III D) I, II, III, and IV Explanation All of the statements are correct. The $29,000 maximum elective deferral for 2020 includes the $19,500 basic limit; the extra $3,000 per year for up to $15,000 lifetime for employees of not-for-profit health care, education, and church employers; and the $6,500 catch-up for those age 50 and older.

Which of the following statements regarding distributions from Roth IRAs is CORRECT? Qualified distributions from Roth IRAs are tax-free. To qualify for tax-free distributions, they must be made more than five years after the Roth IRA was established and distributed after the participant attains age 59½, becomes disabled, dies, or uses the withdrawal for a first-time home purchase with a $10,000 lifetime maximum. A) Neither I nor II B) I only C) II only D) Both I and II Explanation Statements I and II are both correct.

Which of the following statements regarding qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs) is(are) CORRECT? QPSAs and QJSAs must be offered to participants in target benefit pension plans. Section 401(k) plans are not required to offer QJSAs and QPSAs if certain provisions are met. Section 403(b) plans that match employee deferrals must meet the automatic survivor benefit rules. Automatic survivor benefit requirements may be waived by the plan participant with the written, notarized consent of the spouse. A) IV only B) I only C) II and III D) I, II, III, and IV Explanation All the statements are correct.

Which of the following statements regarding required minimum distributions (RMDs) from IRAs and qualified retirement plans are CORRECT? For lifetime distributions, all single participants will use a uniform life expectancy table. The amount is determined by dividing the participant's aggregate account balances as of December 31 of the preceding year by his life expectancy. RMD calculations no longer involve the annual calculation of life expectancies. To calculate RMD, divide the participant's aggregate account balance as of December 31 of the preceding year by the joint life expectancy of the participant and designated spouse beneficiary if the spouse is more than 10 years younger that the participant. A) II, III, and IV B) I, II, and III C) II and III D) I, II, III, and IV Explanation All of these statements are correct with regard to the required minimum distribution rules.

Which of the following statements regarding the anticipated effective income tax rate a planner should use for required retirement plan distributions is CORRECT? The projected rate should be based only on a blend of current federal and state marginal income tax rates. The projected rate should be based only on current federal marginal income tax rates. Precisely predicting future income taxes is not feasible. A planner should only use before-tax rate of return assumptions on retirement plan distributions. A) II only B) IV only C) II and III D) I and III Explanation Before retirement, the planner may use a before-tax rate of return in the assumptions, particularly if tax-advantaged savings vehicles (such as a traditional or Roth IRA) are used in the planning process. However, at the time of either optional or required retirement plan distributions, the client's anticipated effective income tax rate is very important. This rate should be a blend of the client's federal and state marginal income tax rates but should be projected based only on current rates because precisely predicting future income tax rates is not feasible.

Which of the following statements regarding the disadvantages to the employer of SEP plans is CORRECT? Employees cannot rely on a SEP plan alone to provide an adequate retirement benefit, which may hinder appreciation of the plan by employees. The employer bears the investment risk under the plan. If an employer maintains a SEP plan and a qualified plan, contributions to the SEP plan reduce the amount that may be deducted for contributions to the qualified plan. The special rule for calculating deductible contributions on behalf of an owner-participant in a qualified plan also applies to a SEP plan. A) III only B) II only C) I, II, III, and IV D) I, III, and IV Explanation Statements I, III, and IV are disadvantages of a SEP plan to an employer. Statement II is false. The employee bears the investment risk under the plan.

Which of the following statements regarding the safe harbor rules for Section 401(k) plans is CORRECT? The employer can avoid ACP and ADP testing if it matches 100% up to 4% of compensation for nonhighly compensated employees. The employer can avoid ACP and ADP testing if it makes contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, whether or not the employee chooses to participate. To meet the safe harbor requirements, the matching and non-elective contributions must be immediately 100% vested. The employer must provide notice to each eligible employee about rights and obligations under the plan. A) II and III B) IV only. C) III and IV D) I, II, III, and IV Explanation All of these statements regarding Section 401(k) plan safe harbor rules are correct.

Which of the following will exempt a qualified plan distribution from the 10% premature distribution penalty? A) Separation from service under a plan provision at age 50 B) Used to pay qualified higher-education expenses C) As a result of the individual incurring financial hardship, as that term is separately defined in IRS regulations D) Part of a series of substantially equal periodic payments to be paid over the life expectancy of the individual Explanation Of these choices, a qualified plan distribution is exempt from the 10% premature distribution penalty if it is made as part of substantially equal periodic payments. The exception for qualified higher-education expenses applies only to IRA distributions. The separation from service exception only applies if the qualified plan participant is at least age 55 at the time of distribution. Hardship withdrawals are subject to the 10% early distribution rules. That is part of the hardship. It is also why a withdrawal from an IRA is better than a hardship withdrawal from an employer-provided retirement account to pay eligible college costs. The IRA withdrawal for qualified college expenses is not subject to the 10% early withdrawal penalty (EWP).

Which one of the following statements is correct about the repayment of a loan to a qualified plan or 403(b) plan? A) Interest on retirement plan loans is generally deductible. B) Loans from a qualified plan or TSA must be repaid over a period no longer than 8 years, and payments must be made at least once per year until the balance is repaid. C) Loans from a qualified plan or TSA must be repaid over a period not to exceed 10 years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly by payroll deduction. D) Loans from a qualified plan or tax-sheltered annuity (TSA) must be repaid over a period not to exceed 5 years, unless the loan was for the purchase of a primary residence. Loan payments must be made at least quarterly by payroll deduction. Explanation Loan payments must be made at least quarterly by payroll deduction. Retirement plan loan interest is generally not deductible.

Which one of the following types of employers can offer either a 403(b) plan or a 457(b) plan? A) Churches and qualified church-controlled organizations may offer either or both a Section 403(b) and a Section 457(b) plan. B) Any employer with less than 1,000 employees can offer either or both a Section 403(b) and a Section 457(b) plan. C) Any employer that can offer a Section 403(b) plan could also sponsor a Section 457(b) plan. D) A state university or college could offer either or both a Section 403(b) and a Section 457(b) plan. Explanation State and local governments and organizations exempt from federal income tax are eligible to offer Section 457 deferred compensation plans, but churches and church-controlled organizations cannot. No for-profit organizations can offer either of these plans.

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