CRPC | Designing Optimal Retirement Income Streams

TSA

Tax Sheltered Annuity. A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed. Eligible employers are a: public school, college, or university, church; or charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code

Alicia has contributed $8,000 to a Roth IRA over the past four years. The account has grown to $10,000 with investment earnings. She is facing a financial bind and needs to withdraw $9,000. She will have to pay income tax and a 10% penalty on

$1,000. Since the Roth contributions were made with after-tax dollars, Alicia can withdraw her contributions first. She could withdraw the entire $8,000 that she has contributed without any tax or penalty. Only $1,000 of her withdrawal will be subject to income tax or penalty.

A trustee-to-trustee transfer is an example of a A) indirect rollover. B) direct rollover. C) conduit rollover. D) 60-day rollover.

-- B direct rollover. A trustee-to-trustee transfer is an example of a direct rollover. A 60-day rollover would be an example of an indirect rollover. A conduit IRA is used to shift assets from the qualified plan of one employer to the qualified plan of another employer using the conduit IRA as an intermediate step.

Which of the following is the penalty imposed for failing to take the required minimum distribution (RMD)? A) 50% B) 20% C) 10% D) 100%

--A The penalty for failing to take the RMD is 50% of the difference between what should have been taken and what was taken.

The distribution strategy that strives to mitigate sequence of returns risk by segmenting a portfolio according to when the funds will be needed is referred to as: A) the bucket strategy. B) the Monte Carlo strategy. C) the floor and upside strategy. D) systematic withdrawals.

Answer A: The bucket strategy strives to mitigate sequence of returns risk by segmenting a portfolio according to when the funds will be needed.

Periodic distributions from a qualified plan that take place over _____ years may not be rolled over into an IRA.

Answer: 10 years. Periodic distributions from a qualified plan that take place over nine years or less may be rolled over into an IRA. However, periodic distributions from a qualified plan that take place over a period of 10 years or more cannot be rolled over into an IRA.

Jeffrey died after beginning his required minimum distribution payments. He has named his daughter, age 48, as the sole beneficiary of his IRA. Which one of the following statements is correct regarding her options for this IRA according to the SECURE Act? A) She can roll over the proceeds to an IRA in her own name. B) As a designated beneficiary she must distribute the full account balance within 10 years. C) She must calculate her annual minimum distribution requirement using the fixed-term method. D) She can calculate her annual minimum distribution requirement using the Uniform Life Expectancy table.

Answer: B Under the SECURE Act, a healthy adult child of the deceased owner is always under the 10-year rule regardless of when the original owner dies relative the his or her RBD.

Which of the following is the penalty imposed for failing to take the required minimum distribution (RMD)?

The penalty for failing to take the RMD is 50% of the difference between what should have been taken and what was taken.

Participant loans are permitted from A) qualified retirement plans and IRAs. B) qualified plans and 403(b)s. C) IRAs and 403(b)s. D) SEPs and qualified plans.

--B Participant loans are permitted from qualified plans and 403(b)s but they are not permitted from IRAs, including SEPS.

Distributions from IRAs and SEPs must begin A) by April 1 of the year following the year in which participants attain age 72. B) by April 1 of the year following the year in which the participant retires. C) by an individual's 72nd birthday. D) at the same time as distributions from Roth IRAs.

--A Distributions from qualified plans, TSAs, and 457 plans must begin by this date or April 1 of the year following the year of retirement, whichever is later. Roth IRAs are exempt from the minimum distribution rule.

All of the following are disadvantages to performing an indirect rollover from a qualified plan to an existing IRA except A) 20% of the gross distribution will be withheld for taxes. B) the rollover must be completed within a 60-day period to avoid being taxed. C) the amount being rolled over might have a delay in processing that took the rollover over the 60-day limit. D) the entire distribution will be subject to immediate taxation.

--D By rolling over assets to an existing IRA, the plan assets less the amount withheld escape immediate taxation. Taxes are deferred until the participant begins withdrawing money. A mandatory 20% withholding is imposed on a qualified plan distribution if the plan issues a check to the participant. Finally, if an indirect rollover is not completed within 60-days the full distribution amount will be taxed.

When using the floor-and-upside strategy, all of the following are ideal for establishing the floor except A) Social Security income. B) a defined benefit pension plan income. C) bond portfolio that meets client's cash flow needs. D) a municipal bond portfolio.

--D Municipal bonds are not ideal for creating an income floor because they have default risk. All of the other options would be suitable.

To remain qualified, pension plans must prohibit in-service withdrawals until employees reach age A) 72. B) 55. C) 59. D) 62.

--D 62. Pension plans cannot keep qualified status if they permit in-service withdrawals to employees younger than age 62. Once employees reach age 62, pension plans can allow withdrawals.

Qualified plan:

A qualified plan is simply one that is described in Section 401(a) of the Tax Code. The most common types of qualified plans are profit sharing plans (including 401(k) plans), defined benefit plans, and money purchase pension plans. In general, your contributions are not taxed until you withdraw money from the plan.

All of the following are disadvantages to performing an indirect rollover from a qualified plan to an existing IRA except: A) 20% of the gross distribution will be withheld for taxes. B) the rollover must be completed within a 60-day period to avoid being taxed. C) the amount being rolled over might have a delay in processing that took the rollover over the 60-day limit. D) the entire distribution will be subject to immediate taxation.

Answer D: By rolling over assets to an existing IRA, the plan assets less the amount withheld escape immediate taxation. Taxes are deferred until the participant begins withdrawing money. A mandatory 20% withholding is imposed on a qualified plan distribution if the plan issues a check to the participant. Finally, if an indirect rollover is not completed within 60-days the full distribution amount will be taxed.

The increase in value in the shares of stock distributed from a qualified stock bonus plan is known as: A) net unrealized appreciation. B) long-term capital gain. C) return of excess capital. D) net capital appreciation.

Answer: A The increase in value in the shares of stock distributed from a qualified stock bonus plan is known as net unrealized appreciation.

A qualified plan must withhold 20% of any distribution that is: A) part of a trustee-to-trustee transfer. B) going to be rolled over to another qualified plan within 60-days. C) part of a lifetime annuity. D) rolled to a conduit IRA.

Answer: B The 20% withholding rule does not apply to direct rollover distributions or trustee-to-trustee transfers; the 20% withholding rule does apply to indirect rollover distributions, such as a 60-day rollover.

When using the floor-and-upside strategy, all of the following are ideal for establishing the floor except: A) Social Security income. B) a defined benefit pension plan income. C) bond portfolio that meets client's cash flow needs. D) a municipal bond portfolio.

Answer: D Municipal bonds are not ideal for creating an income floor because they have default risk. All of the other options would be suitable.

Once selected, beneficiaries of a qualified profit sharing plan can be changed A) during open enrollment. B) once a year. C) never; this is an irrevocable decision. D) at any time.

--D Any time. Beneficiaries of a qualified profit sharing plan, normally, can be changed at any time.

When must the designated beneficiary be determined in order to avoid having to distribute the full IRA balance under the five-year rule? A) December 31 of the year following the participant's death. B) April 1 of the year following the participant's death. C) December 31 of the year of the participant's death. D) September 30 of the year following the participant's death.

--D September 30 of the year following the participant's death. The designated beneficiary must be determined by September 30 of the year following the participant's death in order to avoid having to distribute the full IRA balance under the five-year rule.

Ted died in a car accident on January 31st of this year shortly after celebrating his 67th birthday. He had not started taking distributions from his IRA. His 37-year-old wife, Heather, is the sole beneficiary. She does not need income from this IRA. Her best distribution option would be to: A) roll the funds into an IRA in her name and begin distributions when she reaches age 72. B) take distributions under the 10-year rule. C) begin distributions from the IRA by December 31st of next year. D) begin distributions from the IRA by December 31st of the calendar year Ted would have attained age 72.

Answer: A If Heather elected to roll over to an IRA in her own name, she would achieve tax deferral until she reached age 72 and would have the option of using the uniform table rather than the single life table (which will further stretch out the payments and allow increased tax deferral). The other options are available but are not the best options available to Heather.

Distributions from qualified plans, 403(b) plans, SEPs, SIMPLEs, and IRAs are assessed a 10% penalty if they are taken before age 59. There are exceptions to this rule. Which of the following is not an exception to this penalty? A) The distribution is made to pay homeowners insurance. B) The plan participant dies prior to age 59 and the distribution goes to the participant's beneficiary. C) Distributions are made as a series of substantially equal periodic payments over the participant's life expectancy. D) The distribution is attributed to a permanent disability.

Answer: A Distributions for the purpose of paying homeowners insurance would be assessed the 10% penalty. Distributions for the other stated reasons would be exempt from the 10% early withdrawal penalty.

All of the following are characteristics of a qualified longevity annuity contracts (QLACs) except: A) the participant can elect either a fixed or variable annuity. B) receipt of income payments is typically deferred until age 85. C) up to 25% of a qualified plan (or IRA) balance can be used to purchase a QLAC and be exempted from RMD requirements. D) they are a means of transferring longevity risk to an insurance company.

Answer: A QLACs must be fixed (not variable) annuities. The other statements are true regarding QLACs.

The optimal withdrawal rate when taking systematic withdrawals depends on all of the following except: A) historic inflation rates. B) the portfolio's asset allocation. C) the participant's age. D) a client's risk tolerance.

Answer: A The optimal withdrawal rate when taking systematic withdrawals depends on the inflation adjustments that will be made going forward, not on historic rates of inflation. It also is impacted by the participant's age, risk tolerance and asset allocation.

Not all distributions from a qualified plan may be rolled over into a traditional IRA. Which one of the following distributions is an "eligible rollover distribution"? A) The vested cash balance in the plan B) Distributions that are part of substantially equal periodic payments for the life of the participant C) Dividends on employer securities held by the plan that are distributed in cash to participants D) The taxable cost of life insurance provided by the plan

Answer: A The participant's vested cash balance in the plan may be rolled over to an existing IRA. Distributions that are part of a series of substantially equal payments for the life of the participant or the joint lives of the participant and the participant's designated beneficiary are not eligible to be rolled over. Hence, such distributions are not eligible rollover distributions. Neither are dividends on employer securities held by the plan that are distributed in cash to participants or the taxable cost of life insurance provided by the plan.

The 10% penalty on early distributions from a qualified plan can be avoided if: A) the distribution is for a first-time home purchase up to $10,000. B) a plan loan is repaid on a timely basis. C) participants elect a fixed period annuity of 5-10 years. D) the distribution is for certain medical expenses in excess of 20% of AGI.

Answer: B A loan is not considered a distribution subject to taxation and possibly a 10% early withdrawal penalty if it is repaid on a timely basis and does not go into default. To avoid the 10% early withdrawal penalty, payments would need to be taken as substantially equal periodic payments over one's life expectancy. The exemption applies to certain medical expenses that are not reimbursed by insurance and exceed 7.5%of the participant's AGI in 2020. The first-time home purchase exclusion applies only to IRAs.

In-service withdrawals prior to age 62 are not permitted from which of the following? A) Profit sharing plans B) Cash balance plans C) Employee stock ownership plans (ESOPs) D) Stock bonus plans

Answer: B In-service withdrawals prior to age 62 are not permitted from any pension plan, including cash balance plans.

Taxes may be deferred on a qualified plan distribution if it is rolled over to an IRA, TSA, SEP, governmental 457 plan, or to another qualified plan. All are true regarding rollovers except: A) distributions must be transferred to a new account no later than 60 days after receipt. B) they generally result in less money for retirement. C) rolling/transferring the retirement account of a former employer into an IRA instead of spending the money reduces the leakage of retirement assets. D) funds rolled over may lose the potential for capital gains treatment upon distribution.

Answer: B Rollovers generally result in more money for retirement. Tax deferral enables the entire distribution to continue to earn tax-deferred money. Taking a lump-sum distribution results in immediate taxation. Amounts distributed from qualified plans must be transferred to a new account within 60 days of receipt to avoid taxation. All distributions from the named tax-deferred plans result in taxation as ordinary income; capital gains treatment is not available. Keeping retirement plan money in retirement accounts after leaving an employer reduces the leakage from retirement accounts.

Which of the following is not a step in determining the best plan distribution option? A) Calculate plan payments and tax implications under each available option B) Review the distribution options C) Compare the options to what the plan may offer in the future D) Project cash needs and sources of income

Answer: C (1)Reviewing the distribution options is the first step in determining the best plan distribution option. In order, the other steps are (2) project cash needs and sources of income, (3) calculate plan payments and tax implications, and (4) determine which option is most suitable. Comparing options that may be available in the future is not one of the steps.

A direct rollover is a transaction in which benefits from a qualified plan are rolled over directly to: A) a conduit IRA. B) a participant's checking or savings account. C) another eligible retirement plan. D) the individual with a check in their name.

Answer: C A direct rollover may be accomplished by any reasonable means of direct payment to an eligible retirement plan, including a wire transfer or mailing of a check negotiable only by the plan's trustee. Using a conduit IRA is a means of an indirect rollover.

Which of the following statements is correct about qualified joint survivor annuities (QJSAs)? A) All defined benefit and defined contribution plans must offer QJSAs. B) Only profit sharing plans must offer QJSAs. C) All pension plans must offer QJSAs. D) Only defined benefit plans must offer QJSAs.

Answer: C All pension plans, which include defined benefit, cash balance, money purchase, and target benefit plans, must offer QJSAs.

The funds from a 403(b) plan may be rolled over into all of the following except: A) a conduit IRA. B) an IRA. C) a nongovernmental 457 plan. D) another 403(b) plan, qualified plan, SEP, IRA, or 457 plan that accounts for rollovers separately.

Answer: C Funds from a 403(b) may not be rolled over into a nongovernmental 457 plan. They may be rolled into another 403(b) plan, an IRA, qualified plan, SEP, 457 plan that accounts for rollovers separately, or a conduit IRA.

Before rolling assets from an employer sponsored plan to an IRA, one should consider which of the following? A) The difference in RMD rules that apply to the two savings vehicles B) The difference in creditor protection between the two savings vehicles C) The difference in when the 10% penalty will apply to distributions D) All of the above.

Answer: D Prior to doing a rollover of assets from an employer plan to IRA, there are a number of factors that need to be considered and compared. These include an examination of fees, services offered, investment options, when penalty free withdrawals are available, when required minimum distributions may be required, and protection of assets from creditors.