CH. 9-11 Book Questions FIN-4970

Which of the following are correct? 1. SIMPLEs provide incentives to small employers to adopt retirement plans for employees with less administrative costs and fewer set-up procedures than qualified plans. 2. SIMPLE IRAs can permit loans to employees. 3. SIMPLE IRAs require the employer either to match the employee contributions of those who participate or to provide nonelective contributions to all eligible employees.

1 and 3.

Which of the following people can make a deductible contribution to a traditional IRA for 2020? Person AGI Covered by Qualified Plan Marital Status 1.Dianne $100,000 Yes Married 2.Joy $50,000 Yes Single 3.Kim $280,000 No Single 4.Loretta $79,000 Yes Single

1, 2, and 3. Rationale All but Loretta may deduct a contribution made to a traditional IRA. Dianne and Joy are below the phaseout range and Kim is not covered by a qualified plan so there is no income limit. Loretta is single and covered by a plan and her AGI is above the top end of the phaseout for singles ($65,000 - $75,000) for 2020.

All of the following statements concerning the Social Security system are correct except:

A special one-time payment of $1,000 may be made to a deceased worker's spouse or minor children upon death. Rationale A special one-time payment of $255 may be made to a deceased worker's spouse or minor children upon death.

An employer may reduce the three percent matching contribution requirement for a calendar year in a SIMPLE, IRA, but only under which of the following circumstances? 1. The limit is reduced to no less than one percent. 2. The limit is not reduced for more than two years out of the five year period that ends with (and includes) the year for which the election is effective. 3. Employees are notified of the reduced limit within a reasonable period of time before the 60 day election period for a salary reduction agreement.

All of the above must be present.

Which of the following statements are true for the PIA of individuals who first become eligible for retirement benefits in 2020? 1. Their PIA is 90% of the first $960 of their AIME, plus other amounts. 2. Their PIA is 32% of their AIME over $960 up to $5,785, plus other amounts. 3. Their PIA is 15% of their AIME that exceeds $5,785, plus other amounts.

All of the above statements are true.

A worker's AIME:

All of the above. A)Must be determined by converting actual earnings into current dollars through an indexing factor. B) Is determined from wage information over prior years' work. C) Uses the highest 35 years of indexed earnings (for workers that worked at least that long). D) Yields an average amount of monthly earnings for all indexed years.

Which statements are generally correct regarding penalties associated with IRA accounts? 1. Distributions made prior to 59½ are subject to the 10% premature distribution penalty. 2. There is a 50% excise tax on a required minimum distribution not made by April 1 of the year following the year in which age 70½ is attained (or age 72 if age 70½ is attained after December 31, 2019).

both 1 and 2

Which of the following statements is/are correct regarding 403(b) plans? 1. 403(b) plans are eligible for rollover treatment to IRAs, qualified plans, and other 403(b) plans. 2. Investments in stocks, bonds, and money markets are available. 3. Assets in a 403(b) plan are generally 100% vested.

1 and 3

Which of the following concerning the Social Security system is correct?

SSI benefits are funded by the Treasury, not Social Security taxes, as are the other benefits.

A person receiving Social Security benefits under full retirement age can receive earned income up to a maximum threshold without reducing Social Security benefits by the earnings test. Which of the following count against the earnings threshold?

Self-employment income. Rationale Earnings that count against the earnings threshold include W-2 wages and net self-employment income. All the others are not earned income for Social Security purposes

Which of the following cannot be held in an IRA account as an investment?

Variable life insurance. Rationale Life insurance is not permitted in IRA accounts. All of the other choices are permissible.

Jim, who is age 39, converts a $74,500 Traditional IRA to a Roth IRA in 2020. Jim's adjusted basis in the Traditional IRA is $10,000. He also makes a contribution of $6,000 to a Roth IRA in 2020 for the tax year 2020. If Jim takes a $4,000 distribution from his Roth IRA in 2021 when the account is worth $100,000, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2021 federal income tax rate is 24 percent?

$0. Rationale 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; • From conversion contributions, on a first-in-first-out basis; and • From earnings. Jim's $4,000 distribution comes from the "contribution" layer, and is therefore, not subject to tax or penalty. All distributions from all of an individual's Roth IRAs made during a taxable year are aggregated. The 10% additional tax under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10% additional tax under IRC §72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution and if the distribution is made within the five-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.

For the year 2020, Katy (age 35) and Stefen (age 38), a married couple, reported the following items of income: Katy Stefen Total Wages $50,000 - $50,000 Dividend Income $2,000 $1,200 $3,200 Cash won from lottery - $500 $500 TOTAL $52,000 $1,700 $53,700 Katy is covered by a qualified plan. Stefen does not work; he makes his own wine and samples it most of the day. Assuming a joint return was filed for 2020, what is the maximum tax deductible amount that they can contribute to their IRAs?

$12,000. Rationale Because their income is less than the limit for joint income tax filers ($104,000 for 2020), they can contribute and deduct $12,000 for 2020.

Bob works for New Orleans Museum of Art, which sponsors a 403(b) plan. If Bob is 45 years old and has worked at the museum for the last 20 years, what is his maximum elective deferral for 2020?

$19,500. Rationale The salary reduction for 2020 is $19,500. An additional catch-up contribution of $6,500 is allowed for individuals who have attained age 50. The other type of catch-up contribution is not available to employees of employers such as museums.

Kathy (age 55) is single and was divorced from her husband in 2017. She has received the following items of income this year: Pension annuity income from QDRO $21,000 Interest and dividends $5,000 Alimony $1,000 W-2 Income $1,200 What is the most that Kathy can contribute to a Roth IRA for 2020?

$2,200. Rationale Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $6,000 for 2020. Kathy has earned income of $2,200 from the alimony and W-2 income she received. Thus, she is limited to a contribution of $2,200. The other $26,000 of income is not earned income and therefore is unavailable for contributions to any IRA. An additional catch-up contribution of $1,000 for 2020 is permitted for individuals who have attained age 50 by the close of the tax year. Her total remains at $2,200 because that is all the earned income she has. Note: Alimony resulting from divorce agreements after 2018 is not income or earned income (TCJA 2017).

Henry Hobbs, age 57, has compensation of $72,000. The normal retirement age for his 457(b) plan is age 62. Henry has unused deferrals totaling $22,500 as of January 1, 2020. How much can Henry defer into his 457(b) public plan for the current year?

$26,000. Rationale Henry is not within three years of the plan's normal retirement age and therefore can only defer the normal $19,500 available plus the $6,500 catch-up for those participants age 50 and over.

What is the maximum elective deferral contribution to an eligible governmental 457(b) plan for 2020?

$26,000. Rationale The maximum deferral is $19,500 for 2020. The maximum catch-up contribution is $6,500 for those participants age 50 and over. Therefore, the maximum elective deferral contribution including the catch-up is $26,000.

Ben Reynolds, age 63 in 2020, is planning for retirement at normal retirement age of 65 from the Salt Lake City coroner's office, which has a 457(b) plan. Ben has an unused deferral amount of $9,000. Ben has compensation of $128,000 per year as a mortician/autopsy specialist. Ben wants to know the maximum amount he can defer in 2020 in the 457(b) plan.

$28,500. Rationale He can defer $19,500 + $9,000, the unused deferral, for a total of $28,500. He cannot combine the three-year rule and the age 50 and over rule.

James, age 58, has compensation of $150,000 and wants to defer the maximum to his public 457(b) plan. The normal retirement age for his plan is age 60. How much can he defer in 2020 if he has an unused deferral amount of $60,000 from age 40 to age 49?

$39,000. Rationale He can contribute $39,000 (2 x $19,500). He must be within three years of retirement and have unused deferral. Note that since he used the final 3-year catch-up, he cannot use the age 50 and over catch-up.

Diggs is a 47-year-old executive who earns $315,000 from his job at Acme Arrows (AA) and contributes the maximum amount to the AA 401(k) plan. He wants to make a contribution to a Roth IRA for the current year, but his compensation is over the income limit. He decides he wants to fund a Roth IRA by using the backdoor Roth technique. Assume that Diggs has a traditional IRA with a balance of $24,000 that was funded entirely with pre-tax contributions. If Diggs contributes $6,000 to a traditional IRA and then converts $6,000 to a Roth IRA, how much income will he have to pick up as a result of the conversion?

$4,800. Rationale The backdoor Roth technique is less effective when the taxpayer has funds in a traditional IRA as all IRA amounts must be aggregated. Thus, Diggs must pick up $4,800 into income [1 - ($6,000 / ($6,000 + $24,000))] x $6,000.

Dr. Means has taught accounting at FAU for the last 30 years and is expected to retire next year, at age 65. FAU sponsors a 403(b) plan and a 457(b) governmental plan. She has been diligent and has always contributed the maximum amounts to each of the plans. If her salary is $100,000, how much can she contribute in total to both plans in 2020?

$52,000. Rationale She can defer the maximum of $19,500 to each plan and the additional age 50 or over catch up of $6,500 for both plans, which totals $52,000. She cannot use the other catch up provisions for 403(b) plans or 457 plans since she has maximized her deferrals in the past.

For 2020, what is the maximum amount that can be contributed to a SEP?

$57,000. Rationale For 2020, the maximum contribution for an individual to a SEP is the lesser of: 25% of compensation (compensation maximum is $285,000), or $57,000. Therefore, the maximum contribution to a SEP for 2020 is $57,000 ($285,000 maximum compensation x 25%, limited to $57,000).

Robin and Robbie, both age 45, are married and filed a joint return for 2020. Robbie earned a salary of $100,000 in 2020 and is covered by his employer's 401(k) plan. Robbie and Robin earned interest of $30,000 in 2020 from a joint savings account. Robin is not employed, and the couple had no other income. On April 15, 2021, Robbie contributed $6,000 to an IRA for himself and $6,000 to an IRA for Robin. The maximum allowable IRA deduction on the 2020 joint return is:

$6,000. Rationale The ability to deduct the IRA contribution depends on the individual's income and whether the individual has a qualified plan. Based on the information provided in the problem, Robin and Robbie have an AGI of $130,000 ($100,000 salary + $30,000 interest income). Since Robbie has a qualified plan, they cannot deduct the contribution for him because his income exceeds the AGI phaseout of $104,000 - $124,000 for 2020. Robin, on the other hand, can deduct her contribution because she does not have a qualified plan and their joint income is less than the $196,000 to $206,000 phaseout. Therefore, Robin's deduction is $6,000. She can use Robbie's earned income as her own.

Jack and Jill, both age 43, are married, made $20,000 each, and file a joint tax return. Jill has made a $6,000 contribution to her Traditional IRA account and has made a contribution of $2,000 to a Coverdell Education Savings Account for 2020. What is the most that can be contributed to a Roth IRA for Jack for 2020?

$6,000. Rationale The maximum combined contribution to traditional and Roth IRAs is $6,000 per person (who has not attained age 50) for 2020. Therefore, Jack and Jill would have a total of $12,000 to allocate between traditional and Roth IRAs. Jill has already contributed the maximum amount; however, Jack could still contribute $6,000 for himself. The Coverdell Education Savings Account (formerly known as an Education IRA) is not included in the $6,000 limit.

Delores, age 62, single, and retired, receives a defined benefit pension annuity of $1,200 per month from Bertancinni Corporation. She is currently working part time for Deanna's Interior Design and will be paid $18,000 this year (2020). Deanna's Interior has a 401(k) plan, but Delores has made no contribution to the plan and neither will Deanna this year. Can Delores contribute to a traditional IRA or a Roth IRA for the year and what is the maximum contribution for 2020?

$7,000 to a traditional IRA or $7,000 to a Roth IRA. Rationale Delores has earned income and is over age 50. She is not an active participant in a retirement plan and even if she were, her AGI is below the income limits.

Amy, divorced and age 55, received taxable alimony of $50,000 in 2020. In addition, she received $1,800 in earnings from a part-time job. Amy is not covered by a qualified plan. What was the maximum deductible IRA contribution that Amy could have made for 2020?

$7,000. Rationale The deductible IRA contribution limit is $6,000 for 2020. The additional catch-up amount, for over age 50, is $1,000 for 2020. Alimony counts as earned income for IRA purposes for any divorce or separation agreement executed prior to 2019 (2017 TCJA). For divorces after 2018, alimony received us not taxable income. Since the question states that her alimony is taxable, we can deduce that the divorce occurred prior to 2019. She is not covered by a qualified plan and therefore is not subject to AGI phase-outs. Therefore the total is $7,000 for 2020.

Emile is single and received $28,000 of dividend income during the year. He also received $18,000 of Social Security benefits. What portion of his Social Security benefits are taxable?

$7,050. Rationale The lesser of: 85% of $18,000 = $15,300 or 0.85 [$28,000 + 0.5 ($18,000) - $34,000] = $2,550 plus $4,500 = $7,050

Antoine immigrated from Italy last century, became a citizen and has worked the better part of his life in the United States, for which he is truly thankful. His full retirement age (normal retirement age) for Social Security benefits is age 66, but after a hard life working he wants to retire at age 63 and travel throughout America and back to his homeland. If his benefit at age 66 is $1,000 per month, how much will he receive in Social Security retirement benefits if he begins receiving benefits at age 63?

$800.00. Rationale The benefit reduction for early retirement is 5/9ths of 1% for the first 36 months. If Antoine retires 3 years early at age 63, then his retirement benefit will be reduced by 20% to $800 per month.

A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements? 1. SEPs and qualified plans have the same funding deadlines. 2. The contribution limit for SEPs and qualified plans (defined contribution) is $57,000 for the year 2020 .3. SEPs and qualified plans have the same ERISA protection from creditors .4. SEPs and qualified plans have different nondiscriminatory and top-heavy rules.

1 and 2.

Which of the following are permitted investments in a 403(b) TSA (TDA) plan? 1. An annuity contract from an insurance company .2. An international gold stock mutual fund. 3. A self-directed brokerage account consisting solely of U.S. stocks, bonds and mutual funds.

1 and 2.

Which of the following is/are correct regarding SIMPLE plans? 1. A SIMPLE plan does not require annual testing. 2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top-heavy. 3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan. 4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $19,500 for 2020 and $26,000 for 2020 for an employee who has attained the age of 50.

1 and 3.

Which of the following statements is/are correct regarding TSAs and 457(b) deferred compensation plans? 1. Both plans require contracts between an employer and an employee. 2. Participation in either a TSA or a 457 plan will cause an individual to be considered an "active participant for purposes of phasing out the deductibility of Traditional IRA contributions. 3. Both plans allow a special "final 3-year" catch-up contribution. 4. Both plans must meet minimum distribution requirements that apply to qualified plans.

1 and 4.

All of the following statements is/are correct regarding tax-sheltered annuities (403(b) plans) except? 1. The non-age-based catch-up provision is available to employees of all 501(c)(3) organization employers that sponsor a TSA. 2. Active employees who take withdrawals from TSAs prior to 59½ are subject to a 10% penalty tax. 3. TSAs are available to all employees of 501(c)(3) organizations who adopt such a plan. 4. If an employee has had at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed.

1 only.

Which of the following are true regarding 457(f) plans? 1. IRC Sec. 457(f) plans are referred to as ineligible plans. 2. 457(f) plans are nonqualified deferred compensation plans for state and local governmental employers and for tax exempt employers. 3. 457(f) plans are also called "top-hat" plans. 4. There is no limit on the amount of deferral with 457(f) plans.

1, 2, 3, and 4.

Which of the following are true concerning 457 plans? 1. Contributions to 457(b) plans may be either pre-tax or Roth. 2. An employee may contribute the maximum amount to a 401(k) plan, 403(b) plan, SARSEP, or SIMPLE IRA, in addition to the deferral limits for 457(b)s. 3. An employee in 2020 may contribute up to $19,500 to a 457(b) plan and up to $19,500 to a 403(b) or 401(k) plan if available. 4. Deferrals to the 457 plan of one employer are not aggregated with deferrals to the 457 plan of a different employer.

1, 2, and 3.

Which of the following characteristics accurately describes a 403(b) plan? 1. A self-reliant employee elective deferral plan. 2. The retirement benefit is dependent on the investment results. 3. The plan generally permits loans.

1, 2, and 3.

Taylor, age 25, works for Swim America. Swim America adopted a SIMPLE plan six months ago. Taylor made an elective deferral contribution to the plan of $8,000, and Swim America made a matching contribution of $2,400. Which of the following statements is/are correct? 1. Taylor can withdraw his entire account balance without terminating employment. 2. Taylor can roll his SIMPLE IRA into his Traditional IRA. 3. Taylor will be subject to ordinary income taxes on withdrawals from the SIMPLE. 4. Taylor may be subject to a 25% early withdrawal penalty on amounts withdrawn from the SIMPLE.

1, 3, and 4.

The early distribution penalty of 10 percent does not apply to IRA distributions: 1. Made after attainment of the age of 55 and separated from service. 2. Made for the purpose of paying qualified higher education costs. 3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

2 and 3.

David took a lump-sum distribution from his employer's qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David has met 10-year forward averaging requirements, which of the following is/are correct regarding tax treatment of the transaction? 1. If at age 59 he distributes the IRA, he benefits from 10-year forward averaging. 2. If he rolls the entire IRA to a new employer's qualified plan, he may be eligible for forward averaging treatment in the future. 3. If he rolls over a portion of the IRA to a new employer's qualified plan, he may preserve any eligibility for forward averaging on that portion that was rolled over. 4. If David immediately withdraws the entire amount from his IRA, he may benefit from 10-year forward averaging.

2 and 3. Rationale Statement 1 is incorrect because 10-year forward averaging is only permitted with qualified plans, not IRAs. Statements 2 and 3 are correct. His new employer's qualified plan may or may not allow him to roll previous distributions into it. Statement 4 is incorrect because 10-year forward averaging is only permitted coming from qualified plans, not distributions from IRAs.

Betty Sue, age 75, is a widow with no close relatives. She is very ill, unable to walk, and confined to a custodial nursing home. Which of the following programs is likely to pay benefits towards the cost of the nursing home? 1. Medicare may pay for up to 80 additional days of care after a 20-day deductible. 2. Medicaid may pay if the client has income and assets below state-mandated thresholds.

2 only.

Which of the following statements is/are correct regarding SEP contributions made by an employer? 1. Contributions are subject to FICA and FUTA. 2. Contributions are currently excludable from employee-participant's gross income. 3. Contributions are capped at $19,500 for 2020.

2 only. Rationale Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $19,500 for 2020. The SEP limit is 25% of covered compensation up to $57,000 for 2020.Note: The maximum compensation that may be taken into account in 2020 for purposes of SEP contributions is $285,000. Therefore, the maximum amount that can be contributed to a SEP in 2020 is $57,000 (25% x $285,000, limited to $57,000).

What is the first year in which a single taxpayer, age 54 in 2020, could receive a qualified distribution from a Roth IRA if he made his first $3,500 contribution to the Roth IRA on April 1, 2021, for the tax year 2020?

2025. Rationale A qualified distribution can only occur after a five-year period has occurred and is made on or after the date on which the owner attains age 59½, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled, or for a first-time home purchase. The five-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The five-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. Therefore, the first year in which a qualified distribution could occur is 2025.

Medicare Part A provides hospital coverage. Which of the following persons is not covered under Part A? A) A person 62 or older and receiving railroad retirement. B) Disabled beneficiaries regardless of age that have received Social Security for two years. C) Chronic kidney patients who require dialysis or a renal transplant. D) A person 65 or older entitled to a monthly Social Security check.

A person 62 or older and receiving railroad retirement.

All of the following statements concerning Social Security benefits are correct except: A) In order to obtain SSI benefits, an individual must be age 65 or older and must be disabled. B) The number of days that Medicare covers care in hospitals and skilled nursing facilities is measured in what is termed benefit periods. C) The definition of disability is that the individual is unable to engage in any substantial gainful activity due to a physical or mental problem expected to last at least a year or expected to result in death. D) Benefits are payable at any age to workers who have enough Social Security credits and who have a severe physical or mental impairment that is expected to prevent them from doing "substantial" work for a year or more or who have a condition that is expected to result in death.

A) In order to obtain SSI benefits, an individual must be age 65 or older and must be disabled. Rationale In order to obtain SSI benefits, an individual must either be age 65 or older OR must be disabled.

Which of the following statements is not correct about Form 8606? A) The form tracks basis for contributions and conversions to Roth IRAs. B) The form tracks in-plan Roth rollovers. C) The form is used for distributions from Roth IRAs. D) The form tracks basis for nondeductible traditional IRAs.

A) The form tracks basis for contributions and conversions to Roth IRAs.

Distributions may be paid from a 403(b) account after:

All of the above: Employee death or disability. Employee turns age 59½. Employee is separated from service.

Phillip, who is currently age 52, made his only contribution to his Roth IRA in 2020 in the amount of $6,000. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2025 to purchase a new car, how would he be taxed?

Although Phillip waited five years, the distribution will not be classified as a "qualified distribution" and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable. Rationale A distribution from a Roth IRA is not includible in the owner's gross income if it is a qualified distribution or to the extent that it is a return of the owner's contributions to the Roth IRA. A qualified distribution is one that meets BOTH of the following tests: The distribution was made after a five-taxable-year period, and the distribution was made for one of the following reasons: • Owner has attained age 59½. • Distribution was made to a beneficiary or the estate of the owner on or after the date of the owner's death. • Distribution was attributable to the owner's disability. • Distribution was for a first-time home purchase. The 10 percent early withdrawal penalty under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent early withdrawal penalty under IRC § 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, and if the distribution is made within the five-taxable-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.

Which term or phrase best completes the following sentence: "Employee contributions in 403(b) plans are ______."

Always fully vested.

Individual accounts in 403(b) plans may not be in one of the following forms?

An account invested in individual stocks in companies in the S&P 500.

All of the following statements concerning Social Security benefits are correct except: A) The maximum family benefit is determined through a formula based on the worker's PIA. B) If a worker applies for retirement or survivors' benefits before his 65th birthday, he must also file a separate application for Medicare. C) People who are disabled or have permanent kidney failure can get Medicare at any age. D) The Social Security Administration is concerned with beneficiaries' combined income, which, on the 1040 federal tax return, includes adjusted gross income and nontaxable interest income.

B) If a worker applies for retirement or survivors' benefits before his 65th birthday, he must also file a separate application for Medicare.

Which of the following entities cannot establish 457(b) plans?

Churches.

Dr. Wood has taught accounting at FSU (Florida Sate University) for the last 30 years and is expected to retire in a few years, at age 65. FSU sponsors a 403(b) plan and a 457(b) governmental plan. Both plans have Roth accounts available. She has been diligent and always contributed the maximum amounts to the traditional accounts in each of the plans. She is also a partner in an equipment business that has lost money the last several years and she has a net operating loss carry forward. Which of the following statements is true?

Dr. Wood is able to rollover amounts in the traditional deferral account for the 457 plan into the Roth account without terminating employment.

Roger has a small convenience store with three employees. Each of the employees earns $10 per hour and they each work approximately 1,500 hours per year. His business is very successful. He recently considered adopting a defined benefit plan, but felt it was too expensive. He looked into a 401(k) plan, but thought it was too complicated. Finally, a few of his friends recommended a SIMPLE plan and told him about the basics of the plan. Which of the following statements from his friends is the most incorrect?

Employers that sponsor SIMPLEs must provide a matching contribution to employees who defer money into the SIMPLE.

Antoine immigrated from Italy last century, became a citizen and has worked the better part of his life in the United States, for which he is truly thankful. His full retirement age for Social Security benefits is age 66, but after a hard life working he wants to retire at age 63 and travel in America and back to his homeland. He sold his restaurant for $150,000 and was retained by the acquiring company as a consultant for a one-year period. His consulting fee this year will be $50,000 and the benefit he expects to receive from Social Security is $2,000 per month. Which of the following statements is correct?

He would be better off beginning Social Security benefits next year.

Robin Elizabeth qualifies for a retirement benefit of $250 and a spouse's benefit of $400. At her full retirement age, she will receive which of the following?

Her benefit of $250 plus $150 from her spouse's benefit.

Mr. Reid was very active and loved to go skiing. Unfortunately, he was prone to skiing though the trees and did not believe in helmets. In March of 2020, he skied into a large pine tree that abruptly ended his life. At that time, his Roth IRA contained regular contributions of $10,000, first made in 2018, a conversion contribution of $40,000 that was made in 2017, and earnings of $10,000. He never made any distributions from his IRA. When he established this Roth IRA (his first) in 2017, he named each of his two children, Bill and Phil, as equal beneficiaries. Each child will receive one-half of each type of contribution and one-half of the earnings. Which of the following is true regarding a distribution after Mr. Reid dies?

If Bill immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty. Rationale The question first requires a determination of whether the distribution is a qualified distribution or not. While death is one of the two prongs, the five year rule as not been met. Thus, the distribution is not a qualified distribution. Each of the choices deals with a full distribution by the beneficiary, which makes the problem a bit easier. A full distribution will result in the earnings being taxable. The earnings represent 16.67% of the value of the account and thus, $5,000 will be taxable. No penalty is assessed after death of the owner.

Roger has a small convenience store with three employees. Each of the employees earns $10 per hour and they each work approximately 1,500 hours per year. His business is very successful. He recently considered adopting a defined benefit plan, but felt it was too expensive. He looked into a 401(k) plan, but thought it was too complicated. Finally, a few of his friends recommended a SIMPLE plan and told him about the basics of the plan. Which of the following statements from his friends is the most correct?

If Roger's salary is $500,000 and the SIMPLE used a match, then his match would generally equal $13,500. Rationale Choice a is correct - the compensation limit for qualified plans is not considered if the SIMPLE has a matching contribution. Thus, 3% times $500,000 equals $15,000, but the match is limited to the annual limit of $13,500 (2020). Choice b is false - SIMPLEs have 100% vesting. Choice c is false - a non-elective benefit equals 2%. Thus, the employees would receive $300 each ($15,000 x 2%). Choice d is false - He could establish a SIMPLE 401(k), but most often a SIMPLE IRA is established.

Mary, age 50, has an IRA with an account balance of $165,000. Mary has recently been diagnosed with an unusual disease that will require treatment costing $50,000, which she will have to pay personally. Mary's AGI will be $100,000 this year. Which of the following statements are true? 1. Mary can immediately borrow up to $50,000 from her IRA account and repay the loan within five years. 2. Mary can distribute $50,000 subject to income tax but not subject to the 10% penalty because it will be used to pay medical expenses.

Neither 1 nor 2. Rationale Statement 1 is incorrect because loans are not permitted from IRAs. Statement 2 is incorrect because only the portion of the medical expense that exceeds 7.5% of AGI (for 2020) is exempt from the 10% penalty ($50,000 - $7,500 = $42,500). However, if it were classified as a disability, then she could avoid the penalty on the entire distribution.

Which of the following are correct? A) Surviving spouses are entitled to 100 percent of the worker's benefit amount after the worker dies. B) Divorced spouses can also claim benefits based on their ex-spouse's record if they were married 8 years or longer. C) For someone to delay benefits until age 70 based solely on payback or breakeven, the person would have to live to at least age 92, without considering the time value of money. D) All of the above are false.

Surviving spouses are entitled to 100 percent of the worker's benefit amount after the worker dies.

Roger converted all $100,000 in his traditional IRA to his Roth IRA on December 1, 2016 (his first Roth contribution or conversion). His Form 8606 from prior years shows that $20,000 of the amount converted is his basis. Roger included $80,000 ($100,000 - $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2020, Roger made a regular contribution of $5,000 to a Roth IRA for the 2019 year. Roger took a $10,000 distribution from his Roth IRA on July 31st of 2020 to purchase a ticket for a trip on a cruise ship for his 61st birthday present to himself. How is the distribution taxed if the value of the account just before the distribution equals $120,000?

The distribution is tax free and penalty free. RationaleThe question first requires a determination of whether the distribution is a qualified distribution or not. It is not a qualified distribution. Roger is over the age of 59½ but does not meet the five year rule. Therefore, the distribution first comes out of contributions, then conversions, then earnings ($5,000 from contribution and $5,000 from conversion). Since he is over the age of 59½, there is no penalty assessed. The entire distribution is tax free and not subject to a penalty.

Part B of Medicare is considered to be supplemental insurance and provides additional coverage to participants. Which of the following is true regarding Part B coverage?

The premiums for Part B are paid monthly through withholding from Social Security benefits.

Antoine immigrated from Italy last century, became a citizen and has worked the better part of his life in the United States, for which he is truly thankful. His full retirement age for Social Security benefits is age 66, but after a hard life working he wants to retire at age 63 and travel in America and back to his homeland. After contacting the Social Security administration, they informed him that his benefit at age 63 would be $1,200 per month. Just prior to retiring, he sold his business for $100,000. Which of the following statements is correct?

The sale of the business will not impact the amount of his retirement benefits from Social Security. and A worker who takes early retirement benefits will receive a reduced benefit because he will receive more monthly benefit payments as payments commence earlier than if the worker had waited and retired at full retirement age.

Social Security is funded through all of the following except:

sales tax