Chapter 7 Qualified plan

What is the penalty for early withdrawal from a traditional IRA?

10%

For a retirement plan to be qualified, it must be dissented for whose benefit?

1. Employees

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called? A HR 10 plan B Profit sharing plan C 401(k) plan D Tax-sheltered account plan

Profit sharing plan - A profit sharing plan is one where the employer will contribute monies into an employee's retirement plan when the company shows a profit. The others are all qualified plans, but company profit isn't an issue with them.

All of the following employees may use a 403(b) plan for their retirement EXCEPT A The vice president of a charitable organization. B The CEO of a private corporation. C A school bus driver. D A part-time classroom aide.

The CEO of a private corporation. - Correct! Not all public employees are eligible for 403(b) plans, or tax-sheltered annuities, only employees of public education (local, state, or federal), as well as employees of charitable organizations.

An employer is sponsoring a qualified retirement plan for its employees where the employer contributes money whenever the business has profit. What is this type of plan called?

1. Profit-sharing plan

What is the penalty for excessive contribution to a traditional IRA?

6%

In what form of payment must the contributions to a traditional IRA be made?

In cash

Who qualifies for tax-sheltered annuities, or 403(b) plans?

Employees of nonprofit organizations under section 401(c)(3) and employees of public-school system

SIMPLE plans are available to group of how many employees?

No more than 100

In qualified plans, are employer contributions taxed as income to the employees

No, employer contributions are not taxed as income to the employees

If a retirement plan is qualified, what does that mean?

. The plan has favorable tax treatment

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n) A Keogh Plan. B Roth IRA C SEP. D 403(b) Plan (TSA).

03(b) Plan (TSA). - Under a 403(b) Plan, tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious and other 501c(3) organizations, including teachers in public schools systems. Such plans generally are not available to other kinds of employees.

Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer then makes a matching contribution up to an amount equal to what percent of the employee's annual wages? A 10 B 3 C 5 D 7

3% - SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer can then contribute up to an amount equal to 3% of the employees' annual compensation. Contributions and earnings are both tax-deferred until funds are withdrawn.

An individual has been contributing to a retirement account after taxes are taken out of his paycheck. His financial advisor told him that he will be allowed to make contributions after age 70½. The account owner does not have to pay taxes on the growth of his account. What type of retirement account is it? A Simplified Employee Pension Plan B Traditional IRA C Roth IRA D 403(b) plan

Roth IRA - Roth IRAs have several distinguishing features. Unlike traditional IRAs, the account owner can continue beyond age 70½, and distributions do not have to begin at age 70½. The contributions are not tax-deductible.

A tax-sheltered annuity is a special tax-favored retirement plan available to A Certain groups depending on factors such as race, gender, and age. B Certain groups of employees only. C Anyone. D Certain age groups only.

Certain groups of employees only. - A tax-sheltered annuity is a special tax-favored retirement plan available only to certain groups of employees (nonprofit charitable, educational, religious, and other 501c(3) organizations, including all employees in public education).

For a retirement plan to be qualified, it must be designed for the benefit of A Key employee. B Employer. C IRS. D Employees.

Employees.- Qualified plans are designed for the exclusive benefit of the employees and their beneficiaries.

What qualified plan is suitable for the self-employed?

HR-10 or Keogh

What are the income tax benefits of a qualified plan? Employer contributions are tax deductible and are not taxed as income to the employee

The earnings accumulate tax deferred

SIMPLE Plans require all of the following EXCEPT A Employees must receive a minimum of $5,000 in annual compensation. B At least 1,000 employees. C No other qualified plan can be used. D No more than 100 employees.

At least 1,000 employees. - A SIMPLE plan is available to small businesses that employ not more than 100 employees receiving at least $5,000 in compensation from the employer during the previous year.

What is required to qualify an individual to contribute to a traditional IRA?

Earned income

If a retirement plan or annuity is "qualified," this means A It accepts after-tax contributions. B It is noncancellable. C It is approved by the IRS. D It has a penalty for early withdrawal.

It is approved by the IRS. - A qualified retirement plan is approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth.

Which of the following statements concerning a Simplified Employee Pension plan (SEP) is INCORRECT? A Employer contributions are not included in the employee's gross income. B SEPs are suitable for large companies. C SEPs allow the employer to make annual tax deductible contributions up to 25% of an employee's earned income. D SEPs have a higher tax deductible contribution limit than an IRA.

SEPs are suitable for large companies. - An SEP is a benefit plan that is designed to be provided by a small employer for the benefit of the employees.

All of the following are general requirements of a qualified plan EXCEPT A The plan must be communicated to all employees. B The plan must be for the exclusive benefits of the employees and their beneficiaries. C The plan must be permanent, written and legally binding. D The plan must provide an offset for social security benefits.

The plan must provide an offset for social security benefits. - Plans must meet the general requirements established by IRS.

How are contributions to a tax-sheltered annuity treated with regards to taxation? A They are taxed as income for the employee, but are tax free upon withdrawal. B They are not included as income for the employee, but are taxable upon distribution. C They are never taxed. D They are taxed as income for the employee.

They are not included as income for the employee, but are taxable upon distribution. - Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal.

What is the primary purpose of a 401(k) plan? A Life insurance distribution B Retirement C Education funds D To receive dividends over a certain period

Retirement - Profit-sharing plans are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. A 401(k) qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also somehow match the employee's contribution, whether it is dollar for dollar or on a percentage basis.

Under the 401(k) bonus or thrift plan, the employer will contribute A 30% of what the employee contributes. B 75% of what the employee contributes. C An undetermined percentage for each dollar contributed by the employee. D All of the money to the plan.

An undetermined percentage for each dollar contributed by the employee. - Under the bonus or thrift plan, the employer will contribute certain amount or percentage for each dollar contributed by the employee. There is no specific rule as to how much the employer must contribute.

What are some examples of qualified plans?

IRA, 401k, HR-10 (Keogh), SEP, SIMPLE

Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings? A 75% of employee's contributions are taxed. B They are tax deferred until withdrawn. C Taxes must be paid in full. D Employer's matching contribution can be 50% of employee's salary.

They are tax deferred until withdrawn. - Taxation is deferred on both contributions and earnings until funds are withdrawn.

What type of plan is a 401k?

qualified profit-sharing plan

What is the primary purpose of a 401k plan?

Provide retirement income