retirement plans

In 2020, a customer earns $500,000 as a self-employed doctor. The maximum contribution to a Keogh planis:

$57,000 The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $57,000 in 2020, whichever is less. 20% of $500,000 = $100,000. However, only the $57,000 maximum can be contributed in 2020. (Note that this amount is adjusted each year for inflation.)

Roth IRA:

a type of Individual Retirement Account that allows an individual to contribute up to $6,000 for the year 2020; but no tax deduction is available. If the account is open for at least 5 years; and if the person is at least age 59 1/2, distributions are not taxable.

A company has decided to terminate its retirement plan and is going to make lump sum distributions to its employees. In order to defer taxation on the distribution, the employee may:

roll over the funds into an Individual Retirement Account within 60 days Lump sum distributions from qualified plans can be "rolled over" into an IRA without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.

All of the following are allowed investments into an Individual Retirement Account EXCEPT: Preferred Stock U.S. Government Bonds U.S. Government Gold Coins Antiques, Art, and Other Collectibles

Antiques, Art, and Other Collectibles Collectibles are not allowed as an investment in an IRA account. Securities are allowed; so are gold coins minted by the U.S. Government, and precious metals bullion.

Which of the following statements are TRUE about Individual Retirement Accounts?

Contributions are allowed based solely upon personal service income Contributions may be made if the individual is covered by another type of retirement plan to remain tax deferred, distributions from other retirement plans must be rolled over within 60 days

Which of the following investments are permitted for 403(b) plans? I Corporate stocks II Certificates of deposit III Fixed annuities IV Variable annuities

III and IV only 403(b) retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager.

Distributions from Roth IRAs:

can commence at any time after reaching age 59 1/2 without being penalized Unlike Traditional IRAs that require distributions to start on April 1st of the year after reaching age 72, there is no mandatory distribution age for Roth IRAs.

A 50-year old becomes disabled and wishes to withdraw money from his IRA. With regard to the withdrawal, how will it be taxed?

The withdrawal is subject to income tax only If an individual becomes disabled before age 59 1/2, distributions can be taken without penalty tax. However, since income tax has never been taken on the withdrawal, it will be subject to regular income tax.

For a qualified retirement plan contribution to be deductible from that year's tax return, the contribution must be made by no later than: April 15th of that year December 31st of that year April 15th of following year the tax filing date of the following year

the tax filing date of the following year Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.

A self-employed individual purchases variable annuity units with funds contributed to a Keogh Account. Once the contract is annuitized, the payments are:

100% taxable Keogh contributions are tax deductible (up to $57,000 in 2020), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that person's income tax bracket.

The penalty for making an excess contribution to an Individual Retirement Account is:

6% of the excess contribution Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.

A divorced woman with 2 young children has just re-entered the workforce part time and earns $3,000 from this work. She collects another $2,400 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE?

A contribution can be made based only on the income earned from part-time work

A married couple earning over $124,000 in year 2020, where both are covered by pension plans, wishes to contribute to an IRA. Which statement is TRUE?

Annual $12,000 contributions to the IRA can be made, but they are not tax deductible Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2020 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $124,000 in year 2020 (the deduction phases out between $104,000 - $124,000 of income).

Which of the following statements are TRUE regarding a defined benefit plan? I The smallest contributions are for those individuals who are far away from retirement II The smallest contributions are for those individuals who are nearing retirement III The largest benefits will be paid to high salaried employees nearing retirement IV The largest benefits will be paid to low salaried employees the furthest away from retirement

I and III Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions.

Which of the following statements about 403(b) Plans are TRUE? I Contributions are tax deductible to the employee II Employees of any organization can contribute to this type of plan III Employees make voluntary contributions through their employers IV Earnings on contributions by employees are tax deferred

I, III and IV

In 2020, a self-employed individual has an adjusted gross income of $100,000 per year. This person has no other retirement plan and contributes $6,000 to an Individual Retirement Account. Which statement is TRUE?

The contribution is fully tax deductible if a person is not covered by another retirement plan, contributions to an IRA are tax deductible, without any income limitation. If the person is covered by another plan, as that person's income rises, the tax deduction for the IRA contribution phases out.

Which statement is FALSE about a SIMPLE IRA? The maximum annual contribution is the same as for a Traditional IRA The contribution is made by the employee, who gets a salary reduction for the amount contributed The plan is only available to small employers The employer must make a matching contribution

The maximum annual contribution is the same as for a Traditional IRA SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administer than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $13,500 (in 2020) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.

SIMPLE IRA:

a for-profit employer sponsored salary reduction retirement plan only available to small businesses. It allows each employee to contribute up to $13,500 (in 2020) as a salary reduction. The employer must make an annual matching contribution of either 2% or 3% of the employee's salary.

Which statements are TRUE regarding RMDs (Required Minimum Distributions) from IRA accounts?

The RMD is based on the life expectancy of the account owner & If the RMD is not taken, a penalty tax of 50% is applied The penalty applied for not taking required minimum distributions from a qualified plan starting at age 72 is 50% of the under-distribution. There is an incentive to take the money out (and pay tax on it, which is what the Treasury is really looking for)! The IRS creates tables that lay out the required minimum distribution amount each year; and these are based on life expectancy.

Catch-up IRA contributions are permitted for individuals who are at least age:

50 or older For the year 2020, the maximum contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000.

A pension plan maintained by a not-for profit corporation is known as a (n) :

403(b) plan Not-for-profit institutions such as hospitals and universities can sponsor 403(b) (tax deferred annuity) plans for their employees. 401(k) plans, and SEP IRA plans are sponsored by for-profit corporations. HR 10 plans (Keogh) are only available to self-employed individuals, based on their self-employed income.

Which of the following statements are TRUE regarding the transfer of Individual Retirement Accounts from one trustee to another? I Each transfer is considered to be an "IRA Rollover" and thus is permitted only once per year II The funds can be transferred by having the trustee or custodian make a check payable to the account holder; who will then deposit the check with the new trustee or custodian III The transfer can be effected by wiring the funds directly between trustees or custodians IV The transfer can be effected by having the predecessor trustee or custodian make a check payable to the successor trustee or custodian

III and IV only IRA transfers between trustees must be made directly from trustee to trustee. There is no limit on the number of transfers that can be made each year. If the transfer is effected by having the check made out to the account holder, this is considered to be an IRA rollover, which must be completed within 60 days and only 1 rollover per year is permitted. Thus, transfers cannot be effected by having the check made out to the account holders - the funds must go directly from trustee to trustee.

If an individual, aged 69, takes a withdrawal from his IRA, which statement is TRUE?

The amount withdrawn is subject to regular income tax only Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

If an individual, aged 69, takes a withdrawal from his Keogh Plan, which statement is TRUE?

The amount withdrawn is subject to regular income tax only Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

Which statements are TRUE when comparing a Roth IRA to a Traditional IRA?

Traditional IRAs are available to anyone who has earned income Roth IRAs are not available to high-earning individuals Roth IRAs allow for the same contribution amounts as Traditional IRAs, but the contribution is never tax-deductible (which is usually the case with a Traditional IRA). Earnings build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, it is not available for high-earners. Individuals that earn over $139,000 and couples that earn over $206,000, in 2020, cannot open Roth IRAs. They can open Traditional IRAs, however.

Which of the following statements are TRUE regarding contributions to, and distributions from, non-tax qualified retirement plans? I Contributions are made with before tax dollars II Contributions are made with after tax dollars III Distributions are 100% taxable IV Distributions are partially tax free, with the amount above the original cost basis being taxed

II and IV Contributions to non-tax qualified plans are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital contributions made with after-tax dollars is not taxed. Only the tax deferred "build-up" in the account above what was originally contributed is taxed.

A person, age 55, wishes to withdraw $25,000 from a Keogh plan. The tax will be:

ordinary income tax + 10% penalty tax on the amount withdrawn

If a corporation has an unfunded pension liability which of the following statements are TRUE? I The expected payments from the retirement plan are in excess of the expected future assets in the plan II The expected payments from the retirement plan are lower than the expected future assets in the plan III The plan is in default and must be liquidated by the trustee IV The trustee must ensure that future funding is adequate

I and IV An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.

A 60-year old customer asks about the tax consequence of taking distributions from his Traditional 401(k) plan. You should tell him that:

all withdrawals are taxable at ordinary income tax rates Contributions to tax qualified plans such as corporate 401(k) plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

Under the provisions of ERISA (Employee Retirement Income Security Act), the use of index options is:

allowed only if the strategies followed are in compliance with the objectives and restrictions of the plan Index options can be a useful tool for portfolio managers to hedge in a declining market (by purchasing index puts) or to enhance income from the portfolio (by writing index calls). ERISA does not prohibit their use in portfolios that fund retirement plans. However, any strategies that are used must be in compliance with any restrictions set in the plan documents.

KEOGH Plan:

also called an HR-10, a retirement plan for self-employed individuals, based upon their self-employed income. Contributions to a Keogh are fully deductible from the employer's gross income. Yearly employer contributions are limited to 25% of pre-deduction income (which results in a 20% effective contribution rate), capped at a maximum of $57,000 in 2020.

In an Individual Retirement Account or Keogh Plan, a 10% penalty tax will be imposed for:

premature distributions from an Individual Retirement Account or Keogh Plan Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax. Do not confuse this penalty with that imposed on excess contributions to these plans. Excess contributions to an Individual Retirement Account or Keogh Plan are subject to a 6% penalty tax.

For the year 2020, the maximum contribution that a married couple, both under age 50, can make to an IRA is:

$12,000. For the year 2020, the maximum contribution to a spousal IRA is the lesser of 100% of income or $6,000 each in 2 accounts; for a total of $12,000.

In 2020, a self-employed person earning $100,000, who also has $100,000 of investment income, wishes to open a Keogh Plan. Their maximum permitted contribution is:

$20,000 Keogh (HR10) contributions are based only on personal service income - not investment income. $100,000 of personal service income x 20% effective contribution rate = $20,000. Note that this is less than the maximum contribution allowed of $57,000 in 2020.

IRA rollover:

(spousal beneficiaries only) a provision in the rules of Individual Retirement Accounts that allows an individual to "roll over" a distribution from any tax-qualified pension plan into an IRA within 60 days in order to avoid taxation. While a distribution can only be rolled over into an IRA once a year, there is no limit on the dollar amount that can be rolled over. Another type of rollover is permitted if a husband or wife inherits an IRA upon their spouse's death. This also avoids taxation until the beneficiary takes distributions from the account.

In 2020, the maximum contribution that an individual who earns $1,000 can make to an IRA is:

1,000$ For the year 2020, the maximum individual contribution to an IRA is the lesser of 100% of income or $6,000. Since this person earns $1,000, the maximum permitted contribution is $1,000. Of course, if someone only earns $1,000 per year, they probably don't have enough money to eat and the probably don't have any excess funds to put into an IRA - but that is not part of the question!

Defined benefit plan:

a tax-qualified pension plan in which the employer promises to provide each covered person with a pre-set benefit amount upon retirement. Since this type of plan must pay the pre-set amount at retirement, larger contributions must be made on behalf of older employees that are close to retirement to fund their benefit; while much smaller contributions are required for younger employees who have a long time to retirement. The employer hires an actuary to determine the annual contribution that must be made to the plan in order to provide this benefit. The employer must contribute to this plan regardless of the profitability of the company.

All of the following statements are true regarding defined benefit plans EXCEPT: contributions made to the plan can vary from year to year employees with the highest salaries and the fewest years to retirement benefit the most benefits paid to employees consists of a tax free return of capital and a taxable return of earnings actuarial tables are used to determine contribution rates for each employee

benefits paid to employees consists of a tax free return of capital and a taxable return of earnings Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.

In 2020, a customer earns $300,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $30,000 per year. The contribution to be made for the nurse is:

$7,500 (30,000 *0.25 = 7,500) If an employer earns $285,000 or more and contributes the maximum of $57,000 to a Keogh in 2020, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $300,000 and contributes $57,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $285,000. $285,000 - $57,000= $228,000 of "after Keogh deduction" income. $57,000/$228,000 = 25%. Thus, for the nurse, $30,000 of income x 25% = $7,500 contribution.

Payments received by the owner of a tax qualified variable annuity are: 100% taxable as investment income only taxable to the extent of earnings above the holder's cost basis only taxable to the extent of the holder's cost basis non-taxable

100% taxable as investment income Funds paid into "tax qualified" retirement plans were never subject to tax, since the contribution amount was deductible from income at the time it was made. Earnings build up tax deferred in the plan. When distributions are taken, since all of the dollars in the plan were never taxed, all of the distribution is taxable. Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed; while the portion that represents the tax deferred earnings buildup is taxable.

Distributions from qualified retirement plans that are not rolled over into an IRA or other qualified plan are subject to:

20% withholding tax Distributions from qualified retirement plans, unless they are rolled over into an IRA, are taxable. To ensure that the tax will be paid, the tax code requires that 20% of the distribution amount be withheld as a credit against taxes due. No withholding tax is imposed if a trustee to trustee transfer is made - with the assets being transferred directly into another IRA or qualified retirement plan.

A 55-year old individual has just retired after working for the same employer for 20 years. She will collect an annual pension benefit of $55,000, but is not yet ready to stop working.She has lined up a part-time job that will pay $4,000 this coming year. How much can she contribute to a Traditional Individual Retirement Account for her first year in retirement?

4,000 Because this individual is not yet age 70 ½, she can still contribute to a Traditional IRA - but only based on earned income - not on her pension income. The maximum contribution in 2020 is 100% of earned income, capped at $6,000. Because she only has $4,000 of earned income, this is the maximum IRA contribution for this year.

Which retirement plan is corporate sponsored and permits employees to make the greatest pre-tax contribution? Roth IRA SIMPLE IRA 401(k) 403(b)

401(k) 401(k) Plans are corporate-sponsored "salary reduction" plans that allow an individual to contribute a dollar amount annually that is tax deductible. $19,500 can be contributed for tax year 2020). In contrast, 403(b) Plans are salary reduction plans for the not-for-profit sector. Roth IRAs are established by individuals, not corporations, and only allow for a maximum non-deductible contribution of $6,000 for an individual (who is under age 50). SIMPLE IRAs are corporate-sponsored salary reduction plans for small companies, but the maximum contribution in 2020 is $13,500.

To avoid penalties, funds cannot be withdrawn from tax qualified retirement plans before age:

59 1/2 Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

Contributions to Keogh Plans must be made by:

August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.

For an Individual Retirement Account contribution to be deductible from that year's tax return, the contribution must be made by no later than:

April 15th of following year (next year's tax day) IRA contributions must be made by April 15th of the following year - no extensions are permitted.

A client who owns a Traditional IRA and who is age 72 or older: A) must take RMDs in cash with the amount distributed taxable at capital gains rates B) must take RMDs in cash with the amount distributed taxable at ordinary income tax rates C) can take RMDs in securities from the account, with their cost basis being "0" and the sales proceeds being the market value at the distribution date, with the resulting gain taxable at capital gains rates D) can take RMDs in securities from the account, with their cost basis being "0" and the sales proceeds being the market value at the distribution date, with the resulting gain taxable at ordinary income tax rates

D) can take RMDs in securities from the account, with their cost basis being "0" and the sales proceeds being the market value at the distribution date, with the resulting gain taxable at ordinary income tax rates While RMDs from Traditional IRAs are typically taken in cash, they can be taken as securities from the account. The cost basis of the securities is "0," and the market value as of the distribution date is the sales proceeds, so the entire value is taxable. The entire gain is taxable as ordinary income - it does not receive long-term capital gains rates . Clients have requested this in years when the market has declined steeply because they don't want to liquidate positions at a loss. The client is hoping that the securities taken for the distribution recover over the long term. However, note that the client must have the available cash to pay the tax bill!

An individual who maintains a Keogh Planis approaching the age of 72. Which statement is TRUE?

Distributions from the plan must commence on April 1st following the year the individual reaches the age of 72

Distributions after age 59 ½ from non-tax qualified retirement plans are: 100% taxable partial tax free return of capital and partial taxable income 100% tax free 100% tax deferred

partial tax free return of capital and partial taxable income Contributions to non-tax qualified plans, such as most variable annuities, are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital is not taxed; the earnings are taxed.

A couple, earning over $124,000 in year 2020, where both are covered by qualified retirement plans, wishes to contribute to an IRA. The contributions are: I permitted II not permitted III tax deductible IV not tax deductible

I and IV (BOTH are covered) Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2020 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $124,000 in year 2020 (the deduction phases out between $104,000 - $124,000 of income).

For an investor who has a Keogh Plan, which of the following statements are TRUE? I The plan is a tax qualified II The plan is non-tax qualified III Once distributions commence at age 59 1/2 or later, only the tax deferred build-up is taxed IV Once distributions commence at age 59 1/2 or later, both the original investment and the build-up are taxed

I and IV Keoghs are tax qualified retirement plans for self employed individuals. The investment in a Keogh plan is tax deductible; and the earnings in the plan "build-up" tax deferred. Since none of the dollars were ever taxed, 100% of all distributions from Keoghs are taxable.

Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II Annual contribution amounts will vary III The benefit amount to be received is fixed IV The benefit amount to be received will vary

I and IV Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.

Which statements are TRUE regarding a Roth IRA? I Roth IRAs allow a greater contribution than Traditional IRAs II Roth IRA contributions are not tax deductible III Distributions from a Roth IRA are not taxable if the investment is held for at least 5 years IV The legal maximum contribution amount can be made to both a Roth IRA and a Traditional IRA annually

II and III Roth IRAs, introduced in 1998, are an alternate to the Traditional IRA. Both allow the same contribution amount - a maximum of $6,000 per person in 2020 for individuals under age 50. If one contributes the maximum to a Traditional IRA, a contribution cannot be made to a Roth IRA; and vice-versa. Roth IRA contributions are not tax deductible. However, all distributions from a Roth IRA made after age 59 1/2are 100% excluded from taxation as long as the investment has been held for 5 years. Compared to a Traditional IRA which allows a tax deduction for the contribution, a Roth contribution is not tax deductible. The benefit is that when distributions commence from a Roth IRA, there is no tax due (in contrast, distributions from Traditional IRAs are taxable).

An individual, age 40, earns $60,000 per year. He has no family and has $200,000 of life insurance. He contributes 6% of his salary to his company sponsored 401(k) annually. He informs his registered representative that he is getting a $5,000 raise. What should you recommend that the customer do with the raise? Purchase a non-qualified variable annuity by making $5,000 a year payments Increase the 401(k) contributions by $5,000 per year Use the $5,000 annual increase to purchase a fixed annuity contract under a contractual plan Roll the 401(k) into a variable annuity contract and then re-roll the variable annuity into an IRA

Increase the 401(k) contributions by $5,000 per year Since any permitted 401(k) contribution is deductible, it is best to recommend that the customer max out his 401(k). Remember, he can contribute up to 25% of salary (statutory rate), capped to $19,500 in 2020, and this is a salary reduction. The purchase of either a variable annuity or a fixed annuity will not permit a salary reduction - these are non-qualified plans. Choice D is utter nonsense.

A divorced woman with 2 young children has a small trust fund that gives her $2,500 a year in income. She collects another $2,500 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? No contribution can be made based on either the alimony payments or the trust fund income A contribution can be made based only on the income received from the trust fund A contribution can be made based only on the alimony payments received A contribution can be made based on both the income received from the trust fund and the alimony payments received

No contribution can be made based on either the alimony payments or the trust fund income IRA contributions can only be made based on earned income - meaning income from one's work. Portfolio income does not count, since it is not earned income. Alimony and child support payments, starting in 2019, also do not count. (Of course, the big question here is: "If this person only has total income of $5,000 a year, how would she be able to make an IRA contribution since she doesn't even have enough money to eat?!")

A self-employed individual makes $95,000 per year. To which type of retirement plan can the maximum contribution be made?

SEP IRA A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the recordkeeping associated with retirement plans. Contribution amounts made by the employer cannot exceed 25% of the employee's income (statutory rate - the effective rate is 20%), up to a maximum of $57,000 in 2020. In contrast, the maximum contribution to either a Traditional or Roth IRA in 2020 is $6,000 (plus an extra $1,000 catch-up contribution for individuals age 50 or older), while the maximum contribution for a SIMPLE IRA in 2020 is $13,500.

A small business owner of a firm that has 25 employees wants to establish a retirement plan and make contributions for her employees. What type of plan can the employer establish?

SEP IRA A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $57,000 in 2020). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a smaller business that has variable cash flow. A Traditional or Roth IRA can only be set up by the individual who is employed - it cannot be set up by the employer. A 403(b) plan can only be established by a not-for-profit entity. It cannot be set up by a for-profit company.

Which statement is TRUE regarding a 28-year old woman who inherits her grandfather's IRA? She may delay distributions until she reaches age 59 1/2 She may roll over the amount inherited into her own IRA She must take distributions that deplete the account over the next 10 years She must start taking distributions upon reaching age 59 1/2

She must take distributions that deplete the account over the next 10 years The best deal if one inherits an IRA is to inherit it from your spouse. In that case, the funds can stay in the IRA with no tax due until the spouse starts taking distributions - which must start by age 72. In this example, a granddaughter inherits the IRA. Her only option, other than giving away the IRA funds, is to transfer the IRA into a "Beneficiary Distribution Account." Distributions must occur to deplete the account over 10 years. And, of course, each annual distribution is taxable.

Two years ago, a client of a representative rolled over his 401(k) into a Traditional IRA because he was terminated by his company at age 45. Since then, the customer has been upset by the fact that his permitted annual IRA contribution is so much lower than what he was able to contribute annually into the 401(k). He directs the representative to roll over his IRA into a variable annuity contract, which was completed by setting up an IRA account at the insurance company to hold the variable annuity. Now, a few months after all these transactions, the client is not happy with the variable annuity and wants to roll it back into another Traditional IRA account. What is the most important action for the representative to take?

The client should be told that this would require cashing out the annuity, possibly subjecting the client to high surrender fees A client can roll the proceeds of a Traditional IRA into a variable annuity tax-free. The insurance company creates an IRA holding account that purchases the variable annuity. It is similar to moving IRA assets from one trustee to another. The cost basis in the separate account would be any non-deductible contributions that were made into the IRA. The IRS does not allow a "non-qualified" annuity to be rolled over into an IRA - only qualified plan assets can be rolled over into an IRA. However, in this case, the variable annuity is purchased within an IRA account established by the insurance company, so it can be rolled back into a Traditional IRA without penalty - it is treated as an IRA trustee-to-trustee transfer. The big issue is that the insurance company that sold the variable annuity usually imposes high surrender fees for early termination of the annuity. This is the most important thing to be explained to the client.

In 2020, a self-employed individual has an adjusted gross income of $100,000 per year. This person has another qualified plan and contributes $6,000 to an Individual Retirement Account. Which statement is TRUE? The contribution is fully tax deductible The contribution is partially tax deductible The contribution is not tax deductible The contribution is prohibited because income limitations are exceeded

The contribution is not tax deductible (they're covered by another plan) If a person is not covered by another retirement plan, contributions to an IRA are tax deductible, without any income limitation. If the person is covered by another plan, as that person's income rises, the tax deduction for the IRA contribution phases out (this occurs between $65,000 and $75,000 of income in year 2020). Because this individual's gross income is $100,000 per year and he contributes to another plan, his contribution to an IRA is not tax deductible.

Contributions to qualified retirement plans, other than IRAs, must be made by: December 31st of the calendar year in which the contribution may be claimed on that person's tax return April 15th of the calendar year in which the contribution may be claimed on that person's tax return April 15th of the calendar year after which the contribution may be claimed on that person's tax return The date on which the tax return is filed with the Internal Revenue Service

The date on which the tax return is filed with the Internal Revenue Service

A couple earning $70,000 in 2020 makes an annual contribution of $6,000 to a Traditional IRA. Which statement is TRUE (about their roth)?

This couple can contribute a maximum of $6,000 to a Roth IRA The maximum permitted contribution to a Traditional IRA or Roth IRA for a couple is $12,000 total in 2020. This can be divided between the 2 types of accounts. In this case, since $6,000 was contributed to the Traditional IRA, another $6,000 can be contributed to a Roth IRA for that tax year. Also note that this couple's income is too low for the Roth IRA phase-out (which occurs between $196,000 and $206,000 for couples in 2020).

Distributions from an Individual Retirement Account must commence:

by April 1st of the year following that person reaching age 72

Individual Retirement Account contributions can ONLY be made with: stocks bonds mutual funds cash

cash Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).

A client, age 74 has $314,000 in her Traditional IRA. She is required to take an $11,000 RMD for this year. She does not need the cash and wants to maintain her investment portfolio. She asks her representative if she can take the RMD in shares into her cash account at the firm This action will result in a:

cost basis of "0" for the share distribution and a sale proceeds of $11,000, with $11,000 of ordinary income and a cost basis of $11,000 for the shares transferred into the cash account While RMDs from Traditional IRAs are typically taken in cash, they can be taken as securities from the account. The cost basis of the securities is "0," and the market value as of the distribution date is the sales proceeds, so the entire value is taxable. The entire gain is taxable as ordinary income - it does not receive long-term capital gains rates. The cost basis of the securities in the cash account is the market value at the date of transfer. Clients have requested this in years when the market has declined steeply because they don't want to liquidate positions at a loss. The client is hoping that the securities taken for the distribution recover over the long term. However, note that the client must have the available cash to pay the tax bill!

ERISA legislation was enacted to protect: employee retirement funds from employer mismanagement employee retirement funds from government mismanagement retirement fund accounts against broker-dealer mismanagement retirement fund accounts against investment adviser mismanagement

employee retirement funds from employer mismanagement

All of the following are characteristics of Defined Benefit Plans EXCEPT: annual contribution amounts may vary if the corporation has an unprofitable year, the contribution may be omitted the annual benefit amount is fixed at retirement the adoption of this type of plan benefits key employees who are nearing retirement

if the corporation has an unprofitable year, the contribution may be omitted Under a defined benefit plan, contributions are made by the employer on behalf of the employees, to fund a defined "future" benefit. With this plan type, less funds are contributed on behalf of younger employees, and more funds are contributed on behalf of the older employees. However, all of the pooled monies in the fund are used to pay out current benefits, and in effect, younger employees with many years to retirement, are paying for both the retirement benefits of older retired employees, and for the funding of the benefit of those older employees nearing retirement. Once a person retires, the benefit amount is fixed, based upon that person's last year's salary and years of plan participation. Annual contribution amounts are not fixed with this type of plan - the actual annual contribution amount is based upon actuarial assumptions about the plan participants. If the corporation has an unprofitable year, it must still make the contribution amount as determined by the actuary.

Payments received by the owner of a non-tax qualified variable annuity are: 100% taxable as investment income only taxable to the extent of earnings above the holder's cost basis only taxable to the extent of the holder's cost basis D non-taxable

only taxable to the extent of earnings above the holder's cost basis Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed; while the portion that represents the tax deferred earnings buildup is taxable.

Generally, in order to defer taxation on an IRA that is inherited from a deceased spouse for the longest time period, a much younger surviving spouse can:

roll over the IRAproceeds into an existing IRA owned for the benefit of the surviving spouse Roll over of an inherited IRA into either an existing IRA for the beneficiary or a new IRA for the beneficiary is only available to surviving spouses. It is not available for inherited IRAs where the beneficiary is a non-spouse. The big advantage is that the proceeds that are rolled over stay tax-deferred until the beneficiary takes distributions from the account (which must start at age 72).

Your customer, age 68, who has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his wife, age 62, who does not work. She needs current income and wishes to receive payments over the longest time frame possible. You should advise the spouse to: roll the funds over into a new IRA in the spouse's name transfer the IRA funds to a beneficiary distribution account cash out the inherited IRA account disclaim or give away the inherited IRA account

roll the funds over into a new IRA in the spouse's name If the spouse rolls over the IRA into a new account in her name, and begins to take distributions immediately (which is not required in a roll over), then she can take distributions over her remaining life expectancy - which is around age 80. Since she is age 62, the account would be depleted over 18 years. If the funds are transferred into an IRA beneficiary distribution account, then it is titled in the decedent's name "for the benefit of" the beneficiary. Distributions from inherited IRAs must be taken over 10 years. Immediate cash out of the account would subject the entire proceeds to ordinary income tax that year - not meeting the customer's goal of receiving payments over the longest time frame possible. Finally, the customer needs the income, so disclaiming (giving away) the account makes no sense.