Quiz 9/2: TAXATION OF QUALIFIED AND NONQUALIFIED

All of the following are false regarding the taxation of nonqualified annuities, EXCEPT:

During the annuity pay-in period, premiums are not tax-deductible, but interest is tax-deferred until withdrawn. The correct answer is: Premiums are made with taxed dollars; however, interest is tax-deferred.

Which of the following correctly describes taxation of Roth IRAs?

Contributions to Roth IRAs are not tax-deductible, but distribution benefits are tax-free. The correct answer is: Contributions are not tax-deductible, but benefits are received tax-free.

Distribution of funds from a traditional IRA must begin by the age of _______ to avoid the tax penalty.

Distribution of funds from a traditional IRA must begin by April 1st of the year after the individual reaches age 70 1/2. The correct answer is: 70 1/2

Which of the following is true regarding federal taxes on qualified plans?

Employer and employee contributions to qualified plans are tax-deductible, and accumulated earnings of the plan are tax-deferred until withdrawal. The correct answer is: Employer and employee contributions are tax-deductible, and interest earnings are tax-deferred.

Bob's IRA funds were invested in an annuity. Which of the following is not true about taxation of his benefits?

If a beneficiary was named, interest must be paid to the beneficiary in annual payments, beginning no later than the end of the year following his death. The correct answer is: If a beneficiary was named, interest must be paid to the beneficiary in monthly payments.

Which of the following is true regarding taxes on nonqualified annuities?

During the annuity pay-in period, premiums are not tax-deductible, but interest is tax-deferred until withdrawn. The correct answer is: Premiums are not tax-deductible, but interest is tax-deferred.

All of the following statements are true regarding the IRS early withdrawal penalty for nonqualified annuities, EXCEPT:

The IRS early withdrawal penalty is 10%. The correct answer is: The IRS early withdrawal penalty is 20%.

The ________ is used to determine what portion of the annuity payment is taxable.

The exclusion ratio is used to determine what portion of annuity payments is taxable. The correct answer is: Exclusion ratio

What is a section 1035 exchange?

The gains on exchanges of property, including life insurance policies, endowment, or annuities, are in most cases subject to taxation. Section 1035 of the Internal Revenue Code allows for certain exchanges without recognizing a gain or loss for tax purposes. The following exchanges may occur without tax consequences: 1.) life insurance policies may be exchanged for another life insurance policy, endowment, or annuity; 2.) endowments may be exchanged for another endowment or annuity; and 3.) annuities may be exchanged for another annuity. The correct answer is: Contract exchange without tax consequences

Which of the following is true regarding the taxation of traditional IRAs?

Contributions to a traditional IRA are tax-deductible and interest is tax-deferred until withdrawal. The correct answer is: Contributions are made with pre-tax dollars and interest earned is tax-deferred.

All of the following are false regarding federal taxation of qualified plans, EXCEPT:

Employer and employee contributions to qualified plans are tax-deductible, and accumulated earnings of the plan are tax-deferred until withdrawal. The correct answer is: Contributions made by both the employer and the employee are tax-deductible; interest is tax-deferred.

Which federal law allows a person exchanging one life insurance policy for another to defer tax on the gains?

Section 1035 of the Internal Revenue Code allows for tax-free exchanges of certain contracts. The correct answer is: Section 1035 exchange

All of the following are false regarding taxes imposed on traditional IRAs, EXCEPT:

Contributions to a traditional IRA are tax-deductible and interest is tax-deferred until withdrawal. The correct answer is: Contributions are made with pre-tax dollars and interest earned is tax-deferred.

Which of the following is false regarding taxation of distributions from qualified plans?

Qualified plan benefits are taxable as income upon withdrawal from the account. Distributions prior to age 59 1/2are subject to an additional 10% IRS penalty. If the participant dies, becomes disabled, or divorces, the participant may make early withdrawals, subject to tax, without penalty. The participant may also elect to take a series of equal annual payments over the remaining life expectancy. The payments are subject to taxes, but not the 10% penalty. Plan loans and rollovers also constitute withdrawals not subject to the 10% penalty. The correct answer is: Distributions prior to 62 are subject to an additional 10% IRS penalty.

Within how many days must Samantha roll over the funds from her IRA to avoid the 20% withholding tax penalty?

Samantha must roll over her IRA funds within 60 days to a new IRA in order to avoid the tax penalty. The correct answer is: 60 days

Which of the following is true regarding the taxation of Roth IRAs?

Roth IRAs have qualified tax-free distributions that may be made before the plan participant is 59 1/2, and all distributions made after the age of 59 1/2 are tax-free. The correct answer is: Contributions are not tax-deductible, but interest grows tax-free.

Jerry is required to make a $5,000 distribution from his traditional IRA. If he only makes a $3,000 distribution, how much will he be penalized?

Distribution of funds must begin by April 1st of the year after the individual reaches age 70 1/2. Failure to distribute or inadequate distributions at the required age may result in penalties of 50% of the lacking required amounts. Fifty percent of $2,000 ($5,000 - $3,000) lacking required amount is $1,000. Jerry will be penalized $1,000. The correct answer is: $1,000

At what age must distributions from a traditional IRA begin to prevent adverse taxation?

Distribution of funds from a traditional IRA must begin by April 1st of the year after the individual reaches age 70 1/2. The correct answer is: 70 1/2

All of the following are false regarding the taxation of traditional IRAs, EXCEPT:

Distributions made prior to age 59 1/2 are subject to an additional 10% IRS penalty. Contributions to traditional IRAs are tax-deductible, and the gains earned are tax-deferred until withdrawal. Traditional IRAs are ideal for individuals who expect to have lower tax margins in retirement as compared to when the contribution is made. The correct answer is: Distributions that are made before age 59 are subject to the IRS 10% early withdrawal penalty.

All of the following statements are true regarding taxation of qualified plans, EXCEPT:

Employer and employee contributions to qualified plans are tax-deductible, and accumulated earnings of the plan are tax-deferred until withdrawal. Additionally, taxation of lump-sum distributions are designed to be more favorable to employees. The correct answer is: Employee contributions to a qualified plan are not tax-deductible.

All of the following are false regarding the tax consequences of Roth IRAs, EXCEPT:

Roth IRAs have qualified tax-free distributions that may be made before the plan participant is 59 1/2, and all distributions made after the age of 59 1/2 are tax-free. The correct answer is: Contributions are made with taxed dollars; however, interest grows tax-free.

Which of the following terms describes the portion of the periodic annuity benefit that is taxed?

The exclusion ratio is used to determine what portion of annuity payments is taxable. The correct answer is: Exclusion ratio

How much withholding tax is assessed when funds from one qualified plan are not deposited into another qualified plan within 60 days?

A rollover occurs when the owner of the plan or account withdraws funds and deposits them into another qualified plan or account. If the funds are paid to the individual rather than another plan or account, a 20% withholding tax is assessed. The deposit of funds for rollovers must occur within 60 days of disbursement or they will be subject to additional tax and penalties. The correct answer is: 20%

The exclusion ratio identifies and segregates the annuity payments between principal ( ______ ) and interest ( _______ ).

The exclusion ratio identifies and segregates the annuity payments between principal (cost base) and interest (tax base). The correct answer is: Cost base; tax base

What is the maximum number of days a person has to rollover IRA funds to prevent the 20% tax penalty for withholding funds?

Funds must be rolled over within 60 days to the new IRA in order to avoid the tax penalty. The correct answer is: 60 days

What is the earliest age that distributions from a nonqualified individual annuity may be made without incurring the 10% IRS early withdrawal penalty?

If early withdrawals are made prior to the individual reaching age 59 1/2, the IRS assesses a 10% penalty, along with ordinary taxes, on the taxable portion. The correct answer is: 59 1/2

Which of the following statements is false regarding taxation of non-living entity owned nonqualified annuities?

Interest accumulated on annuities that are owned by corporations is not tax-deferred. Rather, interest earned on corporate-owned annuities are taxed on a current basis. The annuitant must be a human in order for the interest to be tax-deferred. The correct answer is: Interest earned on the principal is tax-deferred.

A nonqualified annuity:

Interest earned in a nonqualified annuity is tax-deferred until distributions are made. The correct answer is: Has tax-deferred growth on the cost base

All of the following statements are true regarding the taxation of nonqualified annuities, EXCEPT:

Premium payments into a nonqualified annuity are made with after-tax dollars (are not tax-deductible). The correct answer is: Premiums are made with pre-tax dollars.

Qualified distributions from a Roth IRA are:

Qualified distributions from Roth IRAs are tax-free. Individuals may begin tax-free distributions once the annuitant reaches age 59 1/2 and has held the account for at least five years. In the event of the annuitant's death or disability, tax-free distributions may occur once the account has been held at least five years. Individuals may also receive tax-free distributions after holding the account at least five years for a first-time home purchase or post-secondary education expenses for the annuitant, spouse, children, or grandchildren. Any other distribution is subject to taxation and an additional IRS penalty of 10% if the withdrawal is made prematurely. The correct answer is: Tax-free