Retirement Planning Midterm Chapters 1 - 8

Going Higher Construction sponsors a 401(k) profit sharing plan. In the current year, Going Higher Construction contributed 25% of each employees' compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Bob, age 57, earns $100,000 and is a 6% owner, what is the maximum amount that he may defer into the 401(k) plan for this year?

$13,000 Bob is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 5.5% (3.5% + 2%) and because he is over 50, he can defer the additional $7,500 (2023) as a catch-up contribution. Bob can defer $5,500 (5.5% × $100,000) and $7,500 (the catch-up) for a total of $13,000.

Jared, age 45, earns $300,000 per year and is a participant in his employer's 401(k) plan. Ignoring the ADP Test requirements, what is the maximum amount that Jared can defer under the 401(k) plan in 2023?

$22,500 The deferral limitation for 2023 is $22,500, and Jared could defer an additional $7,500 as a catch-up contribution if he was over 50.

Jared, age 54, earns $300,000 per year and is a participant in his employer's 401(k) plan. Ignoring the ADP Test requirements, what is the maximum amount that Jared can defer under the 401(k) plan in 2023?

$30,000 The general employee elective deferral limitation for 2023 is $22,500, and Jared can defer an additional $7,500 (2023) as a catch-up contribution because he is over 50

Jason turned 72 in November of 2022 and is retired. He was a participant in his employer's profit sharing plan. His profit sharing plan had an account balance of $250,000 on December 31, 2023 and $200,000 on December 31, 2022. According to the Uniform Lifetime Table the factors for ages 72, 73, and 74 are 27.4, 26.5, and 25.5 respectively. What is Jason's approximate required minimum distribution due by December 31, 2023?

$7,547 $200,000 / 26.5 = $7,547 The RMD required to distribute by December 31,2023 is for tax year 2023, when Jason is age 73. The profit sharing balance is used from prior year, December 21, 2022. Although Jason turns 72 in 2022 and can delay the first RMD until the next year, it will have to be taken by April 1, 2023 SECURE Act 2.0 revised the Required Begin Date for Required Minimum Distributions to age 73 for anyone turning 72 after 12/31/22.

A company's defined benefit pension plan utilizes a funding formula that considers years of service and average compensation to determine the pension benefit payable to the plan participants. If Kim is a participant in this defined benefit pension plan and she has 30 years of service with the company and average compensation of $75,000, what is the maximum pension benefit that can be payable to Kim at her retirement?

$75,000 The maximum amount payable from a defined benefit pension plan is the lesser of $265,000 (2023) or 100% of the average of the employee's three highest consecutive years of compensation. Because the average of Kim's compensation is $75,000, she would be limited to receiving a pension benefit at her retirement of $75,000.

Which of the following qualified plans require mandatory funding? 1. Defined benefit pension plans 2. 401(k) plans with an employer match organized as a profit sharing plan 3. Cash balance pension plans 4. Money purchase pension plans

1, 3, and 4 401(k) plans do not require mandatory funding. The other three require mandatory funding.

When calculating the Wage Replacement Ratio (WRR), what percentage of income is subtracted for a self-employed individual, under the Social Security wage base, for Social Security and Medicare Taxes excluding the Additional Medicare Tax?

15.30%

Which of the following statements concerning the use of life insurance as an incidental benefit provided by a qualified retirement plan is (are) correct? 1. The premiums paid for the life insurance policy within the qualified plan are taxable to the participant at the time of payment. 2. Under the 25 percent test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25 percent of the employer's aggregate contributions to the participant's account. If a whole life policy is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50 percent of the employer's aggregate contributions to the participant's account. In either case, the entire value of the life insurance contract must be converted into cash or periodic income, or the policy distributed to the participant, at or before retirement.

2 only

Which of the following employees is a key employee for 2023? 1. Matt, an officer of the company, who earns $100,000 per year and owns 2% of the company. 2. Missy, who earns $13,000 per year and owns 5% of the company. 3. Tara, an officer of the company who earns $220,000. 4. Julie, a 10% owner of the company who earns $4,000 per year as a secretary

3 and 4 Only Tara and Julie are considered key employees. A key employee is anyone who is any one or more of the following (1) a greater than five percent owner, or (2) a greater than one percent owner with compensation in excess of $150,000, or (3) an officer with compensation in excess of $215,000 (2023).

Packlite company has a defined benefit plan with 200 nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC?

50 The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.

Jon, age 48, earns $65,000 gross per year from his employer. Jon saves $15,000 per year for retirement and pays $12,000 per year for his home mortgage. Given this information and considering that Jon will have eliminated his mortgage debt before retirement, what is Jon's expected wage replacement ratio during retirement?

50.81% Item Amount Percentage Salary $65,000.00 100.00% Payroll Taxes < $4,972.50 > 7.65% Savings < $15,000.00 > 23.08% Mortgage Paid-off < $12,000.00 > 18.46% $33,027.50 50.81%

Which of the following entities is not permitted to establish a 401(k) plan?

A Government entity. A government entity can no longer establish a 401(k) plan. The remaining entities may establish a 401(k) plan.

Which of the following is true regarding QDROs?

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's IRA or qualified plan.

Match the following statement with the type of retirement plan which it most completely describes: "A qualified plan which allows employee elective deferrals of 100% of includible salary and has a mandatory employer match" is...

A SIMPLE 401(k).

Company A has been capitalized by MJBJ Vulture Capital, a venture capital company. Company A's cash flows are expected to fluctuate significantly from year to year, due to phenomenal growth. They expect to go public within three years. Which of the following would be the best qualified plan for them to consider adopting?

A stock bonus plan.

The following statements concerning retirement plan service requirements for qualified plans are correct EXCEPT:

According to the Internal Revenue Code, if an employee hired on October 5, 20X1 has worked at least 1,000 hours or more by October 4, 20X2, he has acquired a year of service the day after he worked his 1,000th hour. Option B is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours

Which of the following factors may affect a person's individual retirement planning? 1. Work life expectancy 2. Retirement life expectancy 3. Inflation 4. Savings rate

All of the above

Which of the following retirement capital needs analysis methods liquidates a lump amount to zero during retirement?

Annuity Method.

Wilber receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $15. Wilber exercises these options 3 years from the date of the grant when the FMV of the stock is $35. Wilber then sells the stock 3 years after exercising for $45. Which of the following statements is (are) true?

At the date of sale, Wilber will have long-term capital gain of $30. Choice a is not correct as there is no income at the date of grant because the strike price equals the FMV. Choice b is not correct as there is no regular tax for ISOs. Choice d is not correct because the employer will not have an income tax deduction. Grant 15 Exercise @35 (AMT adjustment of $20) Sale $45 $10 LTCG from gain (exercise to sale) $20 LTCG from exercise Total $30 LTCG

Which of the following clauses in a 401(k) plan can assist the plan in meeting the requirements of the ADP test?

Automatic election clause. A negative election clause can assist a 401(k) plan in meeting the ADP test because it automatically deems that an employee defers a specific amount unless he elects out of the automatic deferral amount. Options A and D do not exist and Option B is a clause commonly found in a will.

Tracy, age 46, is a self-employed financial planner and has Schedule C income from self-employment of $56,000. He has failed to save for retirement until now. Therefore, he would like to make the maximum contribution to his profit sharing plan. How much can he contribute to his profit sharing plan account?

B.$10,409 $56,000 Schedule C net income -3,956 (less ½ self-employment taxes at 15.3% × 0.9235) $52,044 Net self-employment income × 0.20 (which comes from 0.25/1.25) $10,409 Keogh profit sharing contribution amount

Which of the following statements concerning choosing the most appropriate type of vesting schedule for a qualified plan --restrictive vs. generous--is (are) correct? I. Two advantages of choosing a restrictive vesting schedule are (1) to reduce costs attributable to employee turnover and (2) to help retain employees. II. Three advantages of choosing a liberal vesting schedule in which there is immediate and full vesting are (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family."

Both I and II.

Which of the following people is definitely considered highly compensated for 2023?

Conrad, a 20 percent owner who earns $40,000 per year

Which of the following statements is true?

Distributions from qualified plans are usually subject to ordinary income tax, but some may also be eligible for the reduced capital gains rates. Distributions from qualified plans are usually subject to ordinary income tax, but some lump sum distributions may be eligible for capital gains tax treatment. Statement a is incorrect because profit sharing plans are more commonly established than pension plans. Pension plans are not established because the employer must bear the risk of plan investments. Statement b is incorrect as the earnings within a qualified plan are nontaxable. Statement c is incorrect - payroll taxes are not payable on non contributory plan allocations. Payroll taxes are due on employee deferral contributions.

All of the following plans may integrate with Social Security EXCEPT:

ESOP

Which of the following will be subject to a 10% early withdrawal penalty?

Edward, age 40, takes a $40,000 distribution from his profit-sharing plan to pay for his son's college tuition.

Which of the following would reduce the amount needed to be saved on an annual basis in order to accumulate sufficient retirement assets?

Excess returns on investments over projections.

Fixed-income securities generally provide the best long-term hedge against inflation and loss of purchasing power.

False

Distributions from qualified plans are always treated as ordinary income.

False Basis can be part of a qualified plan. Basis would be established if an employee makes an after tax contribution to an eligible plan. Watch questions that uses a definitive such as always or never. Ensure that statement is 100% true if you are selecting it.

Which of the following individuals are "key employees" as defined by the Internal Revenue Code? I. A more-than-5% owner of the employer business. II. An employee who received compensation of more than $140,000 from the employer. III. An officer of the employer who received compensation of more than $220,000. IV. A 1% owner of the employer business having annual compensation from the employer of more than $55,000.

I and III only. A key employee is an individual who (1) owns more than 5% of the business, (2) is an officer with compensation greater than $215,000 (2023), or (3) owns at least 1% of the business and has compensation greater than $150,000. I. and III. are defined key employees. II. defines a highly compensated employee, not a key employee. IV. should state that compensation was more than $150,000.

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

I and III only. Statement II is an exception for distributions from IRAs, not qualified plans. Statements I and III are exceptions to the 10% penalty for qualified plan distributions.

Generally, which of the following plans favor older entrants? I. Defined Benefit Plan II. Cash Balance Pension Plan III. 401 (k) Plan with a Profit Sharing Plan IV. Profit Sharing Plan

I only.

Which of the following statements accurately reflect the characteristics of a Section 457 plan? I. Benefits taken as periodic payments are treated as ordinary income for taxation. II. Lump-sum distributions are eligible for 5-year and/or 10-year averaging. III. Deferred amounts are subject to Social Security and Medicare taxes at the later of: performance of services or employee becomes vested in the benefits. IV. Income tax withholding is not required until funds are actually received, not constructively received. V. Cannot exceed the smaller of $22,500 or 100% includible compensation in 2023.

I, III and V only. There are no special tax advantages provided for 457 plans distributed in a lump-sum. Income tax withholding is required once the benefits are constructively received, even if not actually received.

Qualified retirement plans have which of the following characteristics? I. Employees with one year of service and attained age 21 must be participants in the plan. II. Fund earnings are usually not taxed until distributions are received by the employee. III. All lump-sum distributions are eligible for five-year forward averaging tax treatment. IV. Employer contributions to the plan are deductible in the year they are made (or deemed made), subject to IRC Section 415 limits.

II and IV only. Maximum waiting period for qualified plans is two years (except for SEPs [employer sponsored tax advantaged plan] which can have a 3-year waiting period). No lump sum distributions are eligible for 5-year averaging after December 31, 1999.

Which of the following employees is a key employee for 2023? 1. Matt, an officer of the company, who earns $100,000 per year and owns 2% of the company. II. Missy, who earns $13,000 per year and owns 5% of the company. III. Tara, an officer of the company who earns $220,000. IV. Julie, a 10% owner of the company who earns $4,000 per year as a secretary

III and IV only.

The following statements concerning retirement plan service requirements for most qualified plans are correct EXCEPT:

If an employee hired on October 5, 20X1 has worked at least 1,000 hours or more by October 4, 20X2, he has acquired a year of service the day after he worked his 1,000th hour.

Which of the following is true regarding Sensitivity Analysis?

It is the changing of variable assumptions to determine the effects to the retirement plan

Meb, the owner of Meb's Hardware, is considering establishing a stock bonus plan. She recently talked with her financial planner, Don Kia. Don Kia never studied when he took his certificate program, therefore he gave Meb incorrect information about stock bonus plans. Which of the following statements given to Meb was correct?

Meb can establish a stock bonus plan for the previous year anytime before the due date (plus extensions) of Meb's Hardware's tax return

In August of this year, Paul is turning 72. He is currently a participant in his employer's profit sharing plan. His profit sharing plan had an account balance of $600,000 on December 31 of this year, and $450,000 on December 31 of last year. According to the Uniform Lifetime Table the factors for ages 72, 73, and 74 are 27.4, 26.5, and 25.5 respectively. What is the amount of Paul's required minimum distribution for this year?

Paul does not need to take an RMD. The SECURE Act 2.0 revised the RMD age to begin distributions to age 73. If Paul retires by age 73, he will begin RMDs. If he continues working, he can continue to defer this RMDs.

Andrea died this year (2023) at the age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 70½ and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account. Which of the following is correct?

Reese must distribute the entire account balance within ten years of Andrea's death. SECURE Act 2019 changed distribution rules for beneficiaries of account owners that died after 12/31/19. Whether the account owner died before RBD (Required Begin Date) or after, the distribution rules are now the same. All Designated Beneficiaries must withdraw the account balance within 10 years of the owner's death. Eligible Designated Beneficiaries may distribute over their life expectancy in the year following owner's death. Eligible Designated Beneficiaries are: •Surviving spouse for the employee or IRA owner •Child of employee or IRA owner who has not reached majority •At age of majority becomes a designated beneficiary •Chronically ill individual •Any other individual who is not more than ten years younger than the employee or IRA owner Non-Designated Beneficiaries (no listed Beneficiary) rules are pending clarification from the IRS but we believe must be distributed within 5 years of the account owner's death. The new rules were not clear if the difference for before or after RBD were still applicable. Reese is more than 10 years younger than Andrea, which makes her a Designated Beneficiary.

Mary Anne has AGI of $1,000,000 (which is all comprised of earned income). She is single and age 55. She is not an active participant in her employer's qualified plan. Which of the following statements best describes her options?

She can contribute to a Traditional IRA and deduct her contribution. She can contribute and deduct her contribution to a Traditional IRA since she is not an active participant and therefore not subject to an AGI limitation. She is unable to contribute to a Roth IRA because she is above the AGI limitation of $138,000 - $153,000 (2023).

Which of the following plan documents provides details of your plan, what the plan provides and how it operates?

Summary Plan Description.

Which of the following is not a requirement for the owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment?

The ESOP must own at least 55% of the corporation's stock immediately after the sale. The ESOP must own at least 30% of the corporation's stock immediately after the sale. All of the other statements are true.

All of the following statements concerning cash balance pension plans are correct EXCEPT:

The cash balance plan has no guaranteed annual earnings to participants.

Which of the following is a characteristic of a defined benefit retirement plan:

The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $265,000 (2023) per year currently.

Pander's Box, a shop that specializes in custom trinket and storage boxes, has a 401(k) plan. The plan permits loans up to the legal limit allowed by law and they may be repaid under the most generous repayment schedule available by law. The plan has the following employee information:

The maximum Justin can borrow from his account is $10,000. Justin can borrow one half of his account balance up to $50,000. Since the balance is below $20,000, he can borrow a full $10,000. State law does not require the repayment of the loan within a specified time; however, the plan can require that Teddy repay the loan immediately. Karen can only borrow one-half of her account balance up to $50,000, thus she can only borrow $50,000. Josh will not have to repay the loan in five years because the loan proceeds are being used for a home purchase and an extended period is available.

Which of the following is not true regarding profit sharing plans?

The plan is established and maintained by the individual employee.

Maximum Performance, Inc.'s defined contribution plan has been determined to be top heavy. Which one of the following statements is NOT a requirement that applies to the plan?

The plan must use a vesting schedule that does not exceed either a 2-year cliff or 6-year graded vesting schedule.

The Third Party Administrator (TPA) of the Flying Trapeze Manufacturing Incorporated's Defined Contribution Plan has just informed you, its administrator, that the plan is top heavy. Which one of the following statements is NOT a requirement that applies to your plan?

The plan's vesting schedule must be 100% vested upon participation.

Kipton is an executive with BigRock. As part of his compensation, he receives 10,000 shares of restricted stock today worth $20 per share. The shares vest two years from today, at which point the stock is worth $30 per share. The vesting schedule is a 2-year cliff schedule. Kipton holds the stock for an additional 18 months and sells at $45 per share. Which of the following is correct?

The value of the shares is taxable to Kipton when the stock vests.

As retirement life expectancy increases, there is an increased need to finance the retirement life expectancy and a shortened work life expectancy in which to save and accumulate assets.

True

Angelo's Bakery has 105 employees. 90 of the employees are nonexcludable and 15 of those are highly compensated (75 are nonhighly compensated). The company's qualified profit sharing plan benefits 8 of the highly compensated employees and 40 of the nonhighly compensated employees. Does the profit sharing plan sponsored by Angelo's Bakery meet the coverage test?

Yes, the plan meets the ratio percentage test. The plan meets the ratio percentage test. The percentage of NHC employees covered by the plan is 53.33% and the percentage of HC employees covered by the plan is 53.33%. The ratio percentage of the NHC employees covered by the plan compared to the ratio percentage of the HC employees covered by the plan is 100% (53.33% / 53.33%) which is greater than the ratio requirement of at least 70%.

Gerry is 72 on April 1, 2023 and has an account balance of $423,598 as of the end of last year. If Gerry takes a $15,000 distribution in December 2023, what is the amount of the minimum distribution tax penalty?

$0 SECURE Act 2.0 revised Required Minimum Distributions to age 73 as a start date for those that turn 72 after 12/31/19. Gerry will not need to begin RMDs for another year. Any distributions prior to that will not count towards the RMD. Choice A is incorrect. The insufficient withdrawal penalty was 50% of the amount not taken prior to 2023. Choice B is incorrect. The insufficient withdrawal penalty is 25% of the amount not taken as of 2023 and may be reduced to 10% if corrective action is taken within specific time limits. Choice D is incorrect. The penalty for over contribution is 6%.

An individual has determined utilizing the annuity method of capital needs analysis that he needs $1,045,656 at the beginning of his retirement to meet his retirement life expectancy goals. If this individual would like to be more conservative in his retirement planning forecast and maintain this capital balance throughout his retirement life expectancy of 32 years, given an expected earnings rate of 6%, and an inflation rate of 3% during the period, how much more would he need to have at the beginning of his retirement?

$162,032

Jeff wants to retire in 15 years when he turns 65. Jeff wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. He expects to receive $20,000 per year from Social Security in today's dollars. Jeff is conservative and wants to assume a 6% annual investment rate of return and assumes that inflation will be 4% per year. Based on his family history, Jeff expects that he will live to be 95 years old. If Jeff currently earns $100,000 per year and he expects his raises to equal the inflation rate, approximately how much does he need at retirement to fulfill his retirement goals?

$2,285,172 10BII Keystrokes Step #1 - NPV at Time Period Zero 0 Cfj 0 CFj 14 orange shift Nj 55,000 CFj 30 orange shift Nj 1.06 divide 1.04 = - 1 × 100 = i Orange shift NPV Answer: 953,522.61 Step #2 - FV of Account at Retirement 15 N 6 I/YR 953,522.61 PV 0 PMT FV Answer: 2,285,172.41

Ernest converted his Traditional IRA to a Roth IRA on Dec 15, 2020. He was 35 years of age at the time and had never made a contribution to a Roth IRA. The conversion was in the amount of $60,000 ($10,000 of contributions and $50,000 of earnings). Over the years he has also made $15,000 in contributions. On May 15, 2023 he withdrew the entire account balance of $100,000 to pay for a 1 year trip around the world. Which of the following statements is true?

$25,000 of the distribution will be subject to income tax and $85,000 of the distribution will be subject to the 10% early withdrawal penalty. Roth distributions are tax free if they are made after 5 years and because of 1)Death, 2)Disability, 3) 59.5 years of age, and 4)First time home purchase. He does not meet the five year holding period or one of the exceptions. His distribution does not received tax free treatment. The treatment for a non-qualifying distribution allows the distributions to be made from basis first, then conversions, then earnings. His basis will be tax free. The conversion is also tax free since we paid tax at the time of the conversion on those earnings. The remaining earnings since establishment of the Roth are $25,000 (100,000 - $15,000 in basis - $60,000 in conversions) and will be taxed. The 10% penalty does apply to this distribution since he does not qualify for any of the exceptions to the penalty. The contributions escapes penalty but the conversions and earnings of $85,000 are subject to the 10% early withdrawal penalty. Remember that in order for the conversions to escape the 10% early withdrawal penalty the distribution must occur after a 5 year holding period beginning Jan 1 in the year of conversion or meet one of the 10% early withdrawal exceptions. Summary: $60,000 paid tax at conversion. Subject to penalty $15,000 in contributions no tax, no penalty $25,000 earnings. Taxable and subject to penalty Distribution of 100,000; $25,000 is taxable, $85,000 subject to penalty

Marilyn Hayward is the sole proprietor and only employee of unincorporated Graphics for Green Promotions. Last year, Marilyn established a profit sharing Keogh plan with a 25% contribution formula. As of the end of this year, Marilyn has $140,000 of Schedule C net earnings. Assume for this problem that her self-employment tax is $19,781. What is the maximum allowable Keogh contribution that Marilyn can make for this year?

$26,022 One-half of self-employment tax is subtracted from the net income subject to self-employment tax that is the $140,000. $140,000 x 92.35% = $129,290 x 15.3% (amount is under the SS wage base) = $19,781.37, then divide by 2 = $9,890.68, subtract that from the schedule C amount of $140,000-$9,890.68 and multiply the resulting $130,109.32 by 20%. The contribution of $26,021.88 is 25% of the Keogh base ($130,109 MINUS the Keogh contribution of $26,021 = $104,088 x 25% = $26,022. Incorrect answer A is the maximum 401(k) deferral amount in 2023. Incorrect answer B is $140,000 × 92.35% × 20%. Incorrect answer D is 25% of $140,000.

You have been hired to analyze the retirement prospects of Tom and Jerri Ruhn. It has been determined they need a retirement capital account of $2,750,000 at retirement which will occur in 30 years. They expect to live in retirement for 35 years. They are anxious to start a savings program to meet this goal. They anticipate an average after-tax rate of return equal to 7%. They are planning on 5% annual inflation. What level of savings put away at the end of each year will provide the Ruhn family with their desired retirement fund?

$29,113 The client has given us the capital account they want at retirement in 30 years. If it said in today's dollars or the equivalent, then you would account for inflation. That information was a distractor in this question. N = 30 I = 7 PV = 0 PMT=29,113 FV = 2,750,000

Kyle is 56 and would like to retire in 11 years. He would like to live the "high" life and would like to generate 90% of his current income. He currently makes $150,000 and expects $24,000 (in today's dollars) in Social Security. Kyle is relatively conservative. He expects to make 8% on his investments, that inflation will be 4% and that he will live until 104. How much does Kyle need at retirement?

$3,471,896 Salary = 111,000 (150,000* 90%) - 24,000 = 111,000 N = 11 years to retirement I = 4% inflation PV = 111,000 in salary Solve for FV Answer = 170,879.4003 Beg mode (retirement dollars are needed at the beginning of the month to spend during the month) PMT = 170,879.40 N = 37 (104 - 67) I = 3.8462 Inflation adjusted rate of return = (1.08/1.04) - 1 * 100 Solve for PV Answer = 3,471,896.38

Larry, age 55, is employed by BB Trucking Company as a tire repair specialist. He earns $62,000 per year. He received an allocation of $32,000 to his employer-provided profit sharing plan for the year. If BB Trucking does not match employee deferrals, what is the maximum amount Larry can defer to his 401(k) plan for the 2023 plan year?

$30,000 The maximum deferral to a 401(k) plan for a participant who is over 50 years old in 2023 is $30,000 ($22,500 plus catch-up of $7,500). The deferral is also included in the maximum defined contribution limit of $66,000 ($73,500 if 50 and over with catch-up). Since Larry has received an allocation from the profit sharing plan of $32,000, he is able to defer $22,500 plus the $7,500 catch up deferral for participants who are 50 years and older to maximize his defined contribution plan limit for the year. Note that Larry does not attain the section 415 maximum at $73,500, but does have total contributions of $62,000.

A client, age 74, must receive a minimum distribution from his IRA account for this year, which had a value (at the end of the prior year) of $48,000. His spouse, age 73, is the beneficiary of the IRA account. Assume that the life expectancy according to IRS tables is 14.1 years. If the client takes a $2,000 distribution on December 31st, what will be the tax penalty if any?

$351 The $48,000 is subject to a 14.1 year life expectancy of the client, thus minimum distribution is $3,404 per year. If the client takes only $2,000, the balance ($1,404) is subject to a 25% excise tax or $351 penalty. SECURE 2.0 Act revised the excise tax on RMDs to 25%.

Taylor, age 65, retires from Tickle Tile corporation and receives 25,000 shares of Tickle Tile stock with a fair market value of $500,000. Taylor recognized $48,000 of ordinary income upon the distribution. What is Taylor's NUA immediately after the distribution?

$452,000 The NUA immediately after the distribution is $452,000 ($500,000 - $48,000). The FMV less the ordinary income recognized.

Cavin sells stock several years after he received it as a distribution from a qualified stock bonus plan. When the stock was distributed, he had a net unrealized appreciation of $7,500. Cavin also had ordinary income from the distribution of $29,000. The fair market value of the stock and the sales price at the time of sale was $81,000. How much of the sale price will be subject to long-term capital gain treatment?

$52,000 Sale Price - Adjusted Basis. $81,000 - $29,000 = $52,000 long-term capital gain.

Jim, age 32, earns $65,000 per year. When he retires at age 62 he believes his wage replacement ratio will be 80% and Social Security will pay him $12,000 in today's dollars. How much must Jim save at the end of each year and make the last payment at 62, if he can earn 10% on his investments, inflation is 3% and he expects to live until age 100?

$8,513 Step #1 N = 30 (62-32) I = 3 PV = (65,000 × .80) - 12,000 = 40,000 PMT = 0 FV = ? = 97,090.50 Step #2 - BEGIN MODE N = 38 (100 - 62) I = (1.10) / (1.03) - 1 × 100 = 6.7961 PV = ? = 1,400,288.69 PMT = 97,090.50 FV = 0 Step #3 - END MODE N = 30 (62-32) I = 10 PV = 0 PMT = ? = 8,512.70 FV = 1,400,288.69

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use?

1 to 5 year graduated As a result of the PPA 2006, qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan. Options B, C, and D all vest less rapidly than the required schedule.

Which of the following qualified plans would allocate a higher percentage of the plan's current contributions to a certain class or group of eligible employees? I. A profit sharing plan that uses permitted disparity 2. An age-based profit sharing plan 3. A defined benefit pension plan 4. A target benefit pension plan

1, 2, 3, and 4 All of the listed plans would allocate a higher percentage of a plans current cost to a certain class of eligible employees.

Patrick and Kevin own Irisha Corporation and plan to retire. They would like to leave their assets to their children; therefore, they transfer 70 percent of the stock to a trust for the benefit of their 10 children pro rata. Patrick and Kevin then plan to sell the remaining Irisha shares to a qualified ESOP plan. Which of the following is correct? 1. The stock transfer to the ESOP is not a 50 percent transfer and therefore will not qualify for non-recognition of capital gains. 2. Any transfer to an ESOP of less than 50 percent ownership may be subject to a minority discount on valuation.

2 only There must have been a sale of at least 30% (not 50%) to the ESOP to qualify for non-recognition of capital gain treatment. In addition, any transfer that is less than 50% of the stock of the corporation might be subject to a minority discount on valuation.

Which of the following vesting schedules may a top-heavy qualified profit sharing plan use?

2 to 4 year graduated. As a result of the PPA 2006, qualified profit sharing plans must use a vesting schedule that provides participants with vested benefits at least as rapidly as either a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule. This requirement applies without regard to whether the profit sharing plan is a top-heavy plan. Employers can be more generous, never less. Options a, b, and d all vest less rapidly than the required schedule.

In July of last year (2022) Paul turned 72. He retired years ago and was a participant in his former employer's profit sharing plan. His profit sharing plan had an account balance $600,000 on December 31, 2021 and $450,000 on December 31, 2022. According to the Uniform Lifetime Table the factors for ages 72, and 73 are 27.4 and 26.5 respectively. What is the amount of Paul's first required minimum distribution that he must take by the deadline?

21,898 $600,000/27.4 = $21,898 is his RMD. Paul turned age 72 last year and he will be required to take his first distribution for the 2022 tax year. The RMD for the first year may be delayed until April 1 of the next year but is still based on the year the taxpayer turns 72. If they delay the first RMD until April 1 of the next year, they will then be required to take two RMDs, the RMD for age 72 that was delayed and the RMD for age 73. SECURE Act 2.0 revised distributions for those reaching 72 after 12/31/22.

Generally, which of the following are contributory plans?

401(k) and thrift plans. Employers generally contribute to Money Purchase Pension Plans, ESOPs, and Profit Sharing Plans. Employees contribute (thus contributory plans) to 401(k)s and Thrift Plans.

Generally, which of the following are contributory plans?

401(k) and thrift plans. Employers generally contribute to money purchase pension plans, ESOPs, and profit sharing plans. Employees contribute (thus contributory plans) to 401(k)s and thrift plans.

Which of the following is not a qualified retirement plan?

403(b) plan. A 403(b) plan is a tax-advantaged plan, not a qualified plan. All of the others are qualified plans.

Marcus has been employed by GCD Enterprises for 15 years, and currently earns $60,000 per year. Marcus saves $15,000 per year. He plans to pay off his home at retirement and live debt free. He currently spends $12,000 per year on his mortgage. What do you expect Marcus' wage replacement ratio to be based on the above information?

47.35% Calculate the Wage Replacement Ratio: Item Amount % Salary $60,000 100% Payroll Taxes ($4,590) 7.65% Savings ($15,000) 25% Mortgage Paid-off ($12,000) 20% Costs in Retirement $28,410 47.35%

Packlite company has a defined benefit plan with 200 non-excludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the 50/40 test?

50 The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees . Here 40% would be 80, so 50 is less than 80. This would be the absolute minimum number of covered employees.

Which of the following is true regarding QDROs?

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's IRA or qualified plan. The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form.

Which of the following factors may affect a person's individual retirement planning? I. Work life expectancy. II. Retirement life expectancy. III. Inflation. IV. Savings rate.

All of the above.

Which of the following statements regarding an age-based profit sharing plan is correct?

An age-based profit sharing plan provides greater benefits to older plan participants. An age-based profit sharing plan provides a greater benefit to older plan participants as the allocation of the plan contribution is based upon the age of the participants. Options A and B are false statements without any merit. Option D is incorrect because OLDER plan participants in an age-based profit sharing plan usually receive the majority of the profit sharing plan allocation.

Which of the following statements are reasons to delay eligibility of employees to participate in a retirement plan? 1. Employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service). 2. Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay their eligibility

Both 1 and 2

Which of the following statements concerning choosing the most appropriate type of vesting schedule for a qualified plan --restrictive vs. generous--is (are) correct? I. Two advantages of choosing a restrictive vesting schedule are (1) to reduce costs attributable to employee turnover and (2) to help retain employees. 2. Three advantages of choosing a liberal vesting schedule in which there is immediate and full vesting are (1) to foster employee morale (2) keep the plan competitive in attracting employees, and (3) to meet the designs of the small employer who desires few encumbrances to participation for the "employee family."

Both 1 and 2

XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are nonexcludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.5% benefit and the HC receive 6.5%. Which of the following statements is (are) correct? 1. The XYZ company plan meets the ratio percentage test. 2. The XYZ company plan fails the average benefits test. 3. The plan must and does meet the ADP test.

Both 1 and 2 The plan does not have to meet the ADP test because it is a noncontributory plan. The plan meets the ratio percentage test and fails the average benefits test. Safe Harbor = 72 ÷ 140 = 51% = Fail Ratio % = (72 ÷ 140) ÷ (29 ÷ 40) = 70.9% = Pass Average Benefit = 4.5 ÷ 6.5 = 69.2% = Fail

June and Bud, both 40 years old, are not covered by a qualified retirement plan. Bud, trying to maximize their IRA deduction, put $13,000 into an IRA with June as the beneficiary on December 15 of the current year. What best describes the result of this transaction?

Bud receives a tax deduction for $6,500 and may be subject to a 6% penalty for over-contribution on the other $6,500.

20.0% complete Question Which of the following capital needs analysis methods mitigates the risk of outliving retirement funds and assumes at life expectancy the same account balance as when the client enters retirement?

Capital Preservation Model

Which of the following will be subject to a 10% early withdrawal penalty?

Edward, age 40, takes a $40,000 distribution from his profit-sharing plan to pay for his son's college tuition. There is no provision for a distribution without penalty under this circumstance. Edward is only 40 and education withdrawals are allowed in IRAs, not from qualified plans. SECURE Act 2019 added penalty free withdrawals up to $5,000 taken within 12 months of birth or legal adoption.

Investment portfolio risk is generally borne by the participant/employee in all of the listed qualified plans, EXCEPT: I. Defined benefit pension plans. II. Cash balance pension plans. III. 401(k) plans. IV. Profit sharing plans.

I and II only.

Which of the following statements are correct regarding a retirement plan? I. Employees don't start earning benefits until they become plan participants (except in defined benefit plans, which may count prior service). II. Since turnover is generally highest for employees in their first few years of employment and for younger employees, it makes sense from an administrative standpoint to delay eligibility. III. A tax-exempt educational institution may delay eligibility to age 26 under certain circumstances.

I, II and III All statements are typical potential qualified plan provisions to delay eligibility of employees to participate in a retirement plan.

RCM Incorporated sponsors a qualified plan that requires employees to meet one year of service and to be 21 years old before being considered eligible to enter the plan. Which of the following employees are not eligible? I. Donald, age 18, who has worked full-time with the company for 3 years. II. Rachel, age 22, who has worked full-time with the company for 6 months. III. Randy, age 62, who has worked 500 hours per year for the past 6 years. IV. Theodore, age 35, who has worked full-time with the company for 10 years.

I, II and III only. RCM, Inc. cannot exclude anyone who has attained age 21 and has completed one year of service with the company with 1,000 hours during that year. Plan years beginning after December 31, 2020, SECURE Act provides for employee who have worked at least 500 hours per year with the employer for at least three consecutive years and has met the age requirement (age 21) by the end of the three consecutive year period. For determining whether the three-consecutive-year period has been met, the 12-month periods beginning before Jan. 1, 2021 will not be taken into account. Randy will be eligible in 2024 after three consecutive years.

Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan? I. Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax. II. Distributions used to pay medical expenses in excess of 7.5% of AGI (2021) for a tax filer who itemizes are exempt from the early withdrawal penalty. III. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the early withdrawal penalty.

I, II and III.

Which of the following plans require mandatory funding? I. Defined Benefit Plan II. Cash Balance Pension Plan III. ESOP IV. Target Benefit

I, II and IV only.

Qualified retirement plans that permit the employer unlimited investment in sponsor company stock are: I. 401(k) plans. II. Stock bonus plans. III. Profit sharing plans. IV. ESOPs.

I, II, III and IV.

Persons that are deemed to be a "disqualified person" include: I. Plan sponsor. II. Plan Fiduciary. III. Officers of plan sponsor. IV. Family members of owners.

I, II, III and IV. All are deemed disqualified person by law.

Which of the following qualified plans would permit allocating a higher percentage of the plan's current contributions to a certain class or group of eligible employees? I. A profit sharing plan with a 401(k) provision and, therefore, calculating permitted disparity. II. An age-based profit sharing plan. III. A defined benefit pension plan. IV. A target benefit pension plan.

I, II, III and IV. All of the listed plans would permit allocating a higher percentage of a plan's current cost to a certain class of eligible employees.

Which of the legal requirements apply to defined benefit pension plans? I. Each participant must have a separate account to hold assets. II. An actuary is needed to calculate the minimum funding level. III. Retirement benefits can be adjusted based on sponsor profits. IV. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

II and IV only. Statement "I" applies only to defined contribution plans. Statement "III" describes a profit-sharing plan.

A SEP-IRA is a form of defined contribution plan (although not a qualified plan). Which of the following apply to BOTH the SEP-IRA and a traditional defined contribution plan? I. Employer deductions limited to 15% of covered payroll. II. Requires a definite, written, non-discriminatory contribution allocation formula. III. Contributions cannot discriminate in favor of highly compensated employees. IV. Employer contributions subject to Medicare and Social Security taxes. V. Affiliated service group rules apply. VI. Top-heavy rules do NOT apply. VII. Permissible disparity or integration is NOT allowed.

II, III and V only. Defined contribution plans have an employer deductibility limit of 25% of covered payroll. All defined contribution plans must have a written allocation formula so assets can be distributed in the mandated individual accounts. Employer contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated. Employer contributions are not subject to any payroll related taxes. Top-heavy rules do apply to both. Both plans can integrate with Social Security (sometimes called permissible disparity). (Note: 5305-SEP does not allow permissible disparity.)

Kent Reeder, age 52, works as the administrator and curator at the Museum of Antique Manuscripts, a not-for-profit organization in Metropolitan Center. He has worked there 18 years and began contributing to the 403(b) plan 12 years ago but skipped contributing last year. He earns $85,000 a year. He has asked you to maximize his contribution. Which of the following is/are TRUE? I. He may contribute $22,500 plus $7.500 for age 50+ catch-up, plus $3,000 long service catch-up. II. He may not contribute to the long-service catch-up this year due to omitting a contribution last year. III. He may contribute $22,500 plus $7,500 age 50+ catch-up. IV. He may not participate in both the long service catch-up and the age 50+ catchup the same year. V. He is not eligible for the long service catch-up.

III and V only. He is not eligible for the long service catch-up because the museum is not a Health, Education, Religious (HER) organization. The maximum contribution limits for 2023 are $22,500 plus the age 50+ catch-up of $7,500.

Carolyn Smart wanted to volunteer full-time and decided to retire from Lotsa Cash Corporation at the age 57, after 15 years of service. She requested a total distribution of her account in the Lotsa Cash Corporation's profit sharing plan to be made payable to her upon her retirement. Her account balance was $60,000 on her final day of employment. Which of the following statements describe the consequences of this distribution? I. Eligible for 10 year forward averaging. II. Subject to 10% penalty. III. Eligible for Rollover. IV. Subject to mandatory 20% withholding. V. Exempt from the 10% early withdrawal penalty.

III, IV and V only

Josh recently died on January 5, 2021 at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Josh was married to Kay, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct?

Kay can receive annual distributions over her remaining single-life expectancy, recalculated each year Kay can receive distributions over her remaining single-life expectancy. Kay qualifies as an eligible designated beneficiary as she is 10 years younger, not more than 10 years younger. Kay could roll the plan to her own IRA, but she would lose the 10% early withdrawal exception due to Josh's death. Given she is only 53, she would need to wait 6 1/2 years to make a penalty free withdrawal. Answer A is incorrect. She is not required to distribute the entire account within 5 years. Answer B is incorrect. Kay can wait (not must) until Josh would have been 72 to begin taking distributions over her recalculated life expectancy. Answer C is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death.

Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plan's current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to bear the investment risk of the plan's assets. Robbie is 32 and earns $700,000 per year. His employees are 25, 29, and 48 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Robbie establish?

Money purchase pension plan

Tom, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. His total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Tom is 100 percent vested. Which of the following statements is/are correct? 1. Tom may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years. 2. If Tom takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) he will be subject to income tax, but not the 10% penalty.

Neither 1 nor 2 Statement 1 is incorrect because he can take a loan equal to one-half of his total account balance up to $50,000. Statement 2 is incorrect because the exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Christine has been the owner of Chris' Antique Dolls for the past 15 years. She decided to establish a retirement plan for her corporation. She wants to make all initial contributions to the plan using company stock and she may integrate with social security. Which of the following would be the best qualified plan for them to consider adopting?

Profit sharing plan A profit sharing plan will allow a stock contribution and integration with social security. A stock bonus plan would also be an appropriate, but it's not one of the choices.

Robin began taking required minimum distributions from her profit sharing plan several years ago. Robin died after suffering a heart attack on January 2, 2021. She had named her twin sister Johanna as beneficiary of her profit sharing plan. Which of the following statements is false?

Robin's sister must take a distribution of the profit sharing plan account balance by the end of the fifth year after the year of her death. SECURE Act 2019 changed the distribution rules following the account owner's death. The new rules do not differentiate between death before or after RMDs start. Johanna is an Eligible Designated Beneficiary and will be able to distribute the account over her life expectancy. Any balance upon Johanna's death is subject to the 10 year rule for her beneficiary. Johanna could elect to take the distributions faster than her life expectancy if she wishes. She will not be subject to distribution within 5 years.

Brisco, age 51, is the Executive VP of sales at Doggie Daycare (DD). His base salary is $300,000 with a potential bonus of 50%. Brisco is a participant in his employer's 401(k) plan and always defers the maximum amount. The DD 401(k) plan has the following features and characteristics: Includes a Roth account that is not a safe harbor plan, but has a 50% match up to 4%. The ADP for the NHC is 4.5%. The plan has $3 million in assets that are managed by two asset management firms. DD also sponsors a defined benefit plan that provides a benefit based on years of service and final salary. The DD DB plan provides for 1.5 percent per year of service for the first 20 years and 2 percent for years above 20, up to a max of 35 years. On the weekends, Brisco paints murals. His entity, Wall Works LLC (WW), is a single owned LLC taxed as a disregarded entity. Brisco would like to establish a retirement plan for the income that he earns in WW. He expects to earn $60,000 ever year in WW and wants to know what the best retirement plan is for his business. Which plan would you recommend for him?

SEP Neither a SIMPLE nor a 401(k) plan will work because he is already deferring $21,450 (6.5% (4.5% + 2%) times $330,000) to his 401(k) plan. Therefore, the choices are a defined benefit plan (expensive) or a SEP, which is extremely easy to set up and one that he can contribute around $12,000 to annually. Instructor note: He is currently contributing 6.5% of salary capped at 330,000 for 2023, which is $21,450. The most he can contribute to multiple 401k plans is limited to $22,500. A 401k is rather expensive with ongoing filing for him to contribute $1,050 ($22,500 -$21,450). The most he can do is a match as the employer, the 401k did not state it had a Profit Sharing component (nor did it state it was a solo 401k). A SEP is much cheaper to set up and has no annual report requirements like the 401k. He will be able to contribute as an employer to the SEP, which will be based on 20% of net income, around the $12,000 amount (without doing the full self-employment calculation).

Each of the following are requirements imposed by law on qualified tax-advantaged retirement plans EXCEPT:

Selective employee participation