Retirements

A person can start withdrawing from his or her Individual Retirement Account without penalty at age: A. 50 1/2 B. 59 1/2 C. 60 1/2 D. 70 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.

Which statement is FALSE about a SIMPLE IRA? A. The maximum contribution amount is the same as for a SEP IRA B. The contribution is made by the employee, who gets a salary reduction for the amount contributed C. The plan is only available to smaller employers D. The employer must make a matching contribution

The best answer is A. 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 administrate than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $13,000 (in 2019) 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. Finally, SEP IRAs allow for a maximum contribution that is much larger than a SIMPLE IRA. In a SEP IRA, a contribution of up to 25% of salary (statutory rate; actual contribution rate is 20%), capped at $56,000 in 2019 is permitted.

Which of the following statements are TRUE regarding contributions to 401(k) plans and the distributions from these plans after age 59 1/2? I Contributions are made with before tax dollars II Contributions are made with after tax dollars III Distributions are 100% taxable IV Distributions are tax free A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Contributions to tax qualified plans such as 401(k) plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

Distributions from Section 403(b) tax deferred annuities are: A. 100% taxable B. partial tax free return of capital and partial taxable income C. 100% tax free D. 100% tax deferred

The best answer is A. Contributions to tax qualified plans such as 403(b) tax deferred annuities for non-profit organization employees 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.

All of the following statements are true about SEP IRAs EXCEPT: A. the plan is established by the employer B. the plan is only available to companies with 100 or fewer employees C. the annual contribution percentage can be changed D. the maximum annual contribution is significantly greater than for a Traditional or Roth IRA

The best answer is B. 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 $56,000 in 2019). 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. Also note that this type of plan is available to any size business - in contrast, SIMPLE IRAs are only available to business with 100 or fewer employees.

A person can start withdrawing from his or her Keogh Plan without penalty at age: A. 50 1/2 B. 59 1/2 C. 60 1/2 D. 70 1/2

The best answer is B. 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.

A 55-year old customer works as an auto mechanic. He has no intention of retiring until at least age 75 and wants to put extra money away for his retirement at that time. He wants to make contributions over the 20-year time horizon until he reaches age 75 and does not want to be forced to take distributions starting at age 70 1/2. The BEST type of retirement plan for this individual is a: A. Traditional IRA B. Roth IRA C. Coverdell ESA D. 401(k) Plan

The best answer is B. Only a Roth IRA permits contributions to continue after age 70 1/2 if one is still working and only a Roth IRA does not require that distributions start at age 70 1/2. Roth IRA contributions are not deductible; the account grows tax deferred; and when distributions are taken, no tax is due. These are great from a tax standpoint, but they are not available to high-earning individuals. Distributions from Traditional IRAs and 401(k) accounts must start at age 70 1/2 and are taxable. Coverdell ESAs (Education Savings Accounts) are not retirement plans.

Which statements are TRUE when comparing a Roth IRA to a Traditional IRA? I Traditional IRAs are available to anyone who has earned income II Roth IRAs are available to anyone who has earned income III Traditional IRAs are not available to high-earning individuals IV Roth IRAs are not available to high-earning individuals A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. 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 $137,000 and couples that earn over $203,000, in 2019, cannot open Roth IRAs. They can open Traditional IRAs, however.

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? A. Purchase a non-qualified variable annuity by making $5,000 a year payments B. Increase the 401(k) contributions by $5,000 per year C. Use the $5,000 annual increase to purchase a fixed annuity contract under a contractual plan D. Roll the 401(k) into a variable annuity contract and then re-roll the variable annuity into an IRA

The best answer is B. 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, capped to $19,000 in 2019, 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.

In 2019, a self-employed individual earns $180,000 for the year, and contributes the maximum amount to an HR10 plan. If this individual wished to make a contribution to a self-directed Individual Retirement Account for this year, which statement is TRUE? A. A contribution is prohibited because this person is already covered under a qualified retirement plan B. A maximum contribution of $6,000 is permitted, which is an adjustment to that year's taxable income C. A maximum contribution of $6,000 is permitted, but no adjustment is allowed to that year's taxable income for that amount D. A contribution is permitted only if the HR10 contribution is reduced by the same amount

The best answer is C. Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $74,000 in 2019 for an individual) and that person is covered by another qualified retirement plan, the contribution is not tax deductible. This person makes $180,000 per year and contributes to a Keogh plan, so the IRA contribution is not tax deductible.

Which of the following are allowed investments in an Individual Retirement Account? I Preferred Stock II U.S. Government Gold Coins III Antiques, Art, and Other Collectibles IV U.S. Government Bonds A. IV only B. I and IV C. I, II, and IV D. II, III, and IV

The best answer is C. 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.

A 45-year old man earns $150,000 per year and is covered by his employer's 401(k) Plan. He quits his job and moves to a new company that has no retirement plan, but will also pay him $150,000 per year. He should be advised to: A. continue to make maximum annual contributions to his 401(k) Plan B. roll his 401(k) Plan into a Roth IRA and continue to make annual contributions to the Roth IRA C. roll his 401(k) Plan into a Traditional IRA and continue to make annual contributions to the Traditional IRA D. request a distribution of the 401(k) and use the proceeds to buy a variable annuity

The best answer is C. The 401(k) Plan was at this customer's ex-employer - he can no longer make contributions to it. His new employer does not have a 401(k) plan. He can roll over the 401(k) amount into an IRA account without dollar limit and continue to make annual contributions to the IRA. It must be a Traditional IRA - this guy earns too much to have a Roth IRA (complete phase-out for Roth eligibility occurs if an individual earns over $137,000 in 2019). Any funds rolled-over stay tax deferred. If he requests a distribution and uses the funds to buy a variable annuity, tax will be due, so this is not a good choice.

In 2019, a self-employed person earning $300,000 wishes to open a Keogh Plan. The maximum yearly contribution is: A. $6,000 B. $46,000 C. $56,000 D. $66,000

The best answer is C. The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $56,000 in 2019, whichever is less. 20% of $300,000 = $60,000. However, only the $56,000 maximum can be contributed in 2019. (Note that this amount is adjusted each year for inflation.)

An individual who maintains a Keogh Plan is approaching the age of 70 1/2. Which statement is TRUE? A. Distributions from the plan must commence on the date that the individual reaches the age of 70 1/2 B. Distributions from the plan must commence on April 1st prior to the year the individual reaches the age of 70 1/2 C. Distributions from the plan must commence on April 1st following the year the individual reaches the age of 70 1/2 D. Distributions are not required, but may be taken at the discretion of the individual

The best answer is C. Under the Keogh rules, any distributions from a Keogh Plan must start no later than the April 1st following the year that the individual reaches the age of 70 1/2.

403(b) Plans are permitted to invest in which of the following? I Common stocks II Mutual Funds III Fixed Annuities IV Variable Annuities A. I only B. I and II only C. III and IV only D. II, III, IV

The best answer is D. 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. Such plans allow for a tax deductible contribution of 25% of income, up to $19,000 for 2019. 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.

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

The best answer is D. 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.

In 2019, a doctor has earned $300,000 from her practice and another $200,000 from investments. Their maximum contribution to an HR 10 plan is: A. $46,000 B. $56,000 C. $66,000 D. $112,000

The best answer is B. Keogh (HR10) contributions are based only on personal service income - not investment income. $300,000 of personal service income x 20% effective contribution rate = $60,000, however the maximum contribution allowed is $56,000 in 2019.

A company has decided to terminate its retirement plan. In order to defer taxation on the distribution, the employee must roll over the funds into an Individual Retirement Account within how many days of the distribution? A. 30 B. 60 C. 90 D. 120

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

Which of the following statements about 403(b) Plans are TRUE? I Contributions are tax deductible to the employee II Contributions are not tax deductible to the employee III These plans are available to employees of any organization IV These plans are available to non-profit organization employees only A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income as taken.

Distributions from an Individual Retirement Account must commence: A. by April 1st of the year preceding that person reaching age 70 1/2 B. by April 1st of the year following that person reaching age 70 1/2 C. upon reaching age 70 1/2 D. upon reaching retirement

The best answer is B. Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 70 1/2.

What is the penalty imposed for excess contributions to an IRA? A. 6% of the excess contribution B. 8 1/2% of the excess contribution C. 10% of the excess contribution D. no penalties are imposed

The best answer is A. 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.

Which of the following statements are TRUE about Keogh Plans? I Contributions are 100% deductible II Contributions are not deductible III Distributions are 100% taxable IV Distributions are partially taxed, with only the amount above what was contributed being taxed A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Keogh contributions are tax deductible (up to $56,000 in 2019), 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 individual's tax bracket.

When comparing Roth IRAs to Traditional IRAs, which statements are TRUE? I Traditional IRA contributions can be deductible; Roth IRA contributions are never deductible II Traditional IRA contributions are never deductible; Roth IRA contributions can be deductible III After age 59 1/2, distributions from Traditional IRAs can be taxable; distributions from Roth IRAs are never taxable IV After age 59 1/2, distributions from Traditional IRAs are never taxable; distributions from Roth IRAs can be taxable A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Roth IRAs, unlike Traditional IRAs, do not permit a tax deduction for the amount contributed. On the other hand, when distributions are taken, unlike a Traditional IRA, the distributions are not taxable (given that the investment has been held for at least 5 years).

Which statements are TRUE about SEP IRAs? I The plan is established by the employer II The plan is established by each employee III The maximum annual contribution is the same as for a Traditional or Roth IRA IV The maximum annual contribution is significantly greater than for a Traditional or Roth IRA A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. 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 $56,000 in 2019). 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 small business that has variable cash flow. Also, any size business can establish a SEP IRA.

A couple earning $70,000 in 2019 makes a contribution of $6,000 to a Traditional IRA. Which statement is TRUE? A. This couple can contribute a maximum of $3,000 to a Roth IRA B. This couple can contribute a maximum of $6,000 to a Roth IRA C. This couple can contribute a maximum of $12,000 to a Roth IRA D. This couple is prohibited from contributing to a Traditional Individual Retirement Account in that year

The best answer is B. The maximum permitted annual contribution to a Traditional IRA or Roth IRA for a couple is $12,000 total in 2019. 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 $193,000 and $203,000 for couples in 2019).

In 2019, a self-employed doctor contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $60,000 per year. The contribution to be made for the nurse is: A. $5,500 B. $12,000 C. $15,000 D. $17,500

The best answer is C. If an employer contributes the maximum of $56,000 to a Keogh in 2019, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. Thus, for the nurse, $60,000 of income x 25% = $15,000 contribution. Note that this contribution is an added benefit for the nurse and will be deductible to the doctor making it.

Which statement is FALSE about 401(k) plans? A. The plan is established by the corporate employer B. The corporate employer can make matching contributions into the plan based on the contribution made by the employee C. All corporate employees must participate in the plan D. All contributions into the plan are made with pre-tax dollars

The best answer is C. 401(k) plans are corporate-sponsored salary reduction plans allow employees to contribute up to $19,000 in 2019 as a salary reduction, so these are pre-tax dollars going into the plan. The account grows tax-deferred and all distributions at retirement age are 100% taxable. Participation in the plan is voluntary, and employers can make matching contributions for employees that contribute.

Distributions from Roth IRAs are subject to a penalty if withdrawals are made within: A. 1 year of original contribution B. 3 years of original contribution C. 5 years of original contribution D. 10 years of original contribution

The best answer is C. Contributions to Roth IRAs are not tax deductible. If the monies remain invested in the Roth IRA for at least 5 years, they can be withdrawn with no tax due (assuming that the beneficiary is at least age 59 1/2 when distributions commence).

A 50-year old man becomes totally disabled. He wishes to take a lump sum distribution from his Individual Retirement Account to pay for medical and living expenses. Which statement is TRUE? A. The distribution is not subject to any tax B. The distribution is subject solely to a penalty tax of 10% C. The distribution is subject solely to regular income tax D. The distribution is subject to regular income tax plus a 10% penalty tax

The best answer is C. Distributions from tax qualified pension plans such as IRA's and Keogh's prior to age 59 1/2 are subject to regular tax plus a 10% penalty unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax, but are not subject to the 10% penalty tax.

Which statements are TRUE about Roth IRAs for tax year 2019? I The maximum permitted contribution for an individual is $3,000 II The maximum permitted contribution for an individual is $6,000 III If an individual contributes $6,000 to a Traditional IRA in that year, no additional contribution to a Roth IRA is permitted IV If an individual contributes $6,000 to a Traditional IRA in that year, an additional contribution to a Roth IRA is permitted A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. For 2019, the maximum permitted annual contribution to a Roth IRA is $6,000 for an individual. If the full $6,000 contribution is made to a Traditional IRA, no Roth contribution is permitted. If the full $6,000 contribution is made to a Roth IRA, no Traditional IRA contribution is permitted.

For an Individual Retirement Account contribution to be deductible from that year's tax return, the contribution must be made by no later than: A. April 15th of that year B. December 31st of that year C. April 15th of following year D. December 31st of the following year

The best answer is C. IRA contributions must be made by April 15th of the following year - no extensions are permitted.

In an Individual Retirement Account or Keogh Plan, a 10% penalty tax will be imposed for: A. failing to pay $5,500 to an Individual Retirement Account or Keogh Plan by April 15th B. the purchase of a mutual fund in an Individual Retirement Account or Keogh Plan C. premature distributions from an Individual Retirement Account or Keogh Plan D. excess contributions to an Individual Retirement Account or Keogh Plan

The best answer is C. 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.

All of the following statements are true about SEP IRAs EXCEPT: A. the plan is established by the employer B. the plan allows for flexible contribution amounts C. the amount that can be contributed is significantly greater than for a Traditional IRA D. the contributions made are not deductible

The best answer is D. 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 $56,000 in 2019). 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 small business that has variable cash flow.

Contributions to Keogh Plans must be made by: A. December 31st of the calendar year in which the contribution may be claimed on that person's tax return B. December 31st of the calendar year after which the contribution may be claimed on that person's tax return C. April 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return D. 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

The best answer is D. 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 a qualified retirement plan contribution to be deductible from that year's tax return, the contribution must be made by no later than: A. April 15th of that year B. December 31st of that year C. April 15th of following year D. the tax filing date of the following year

The best answer is D. 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.

Distributions from an Individual Retirement Account must commence by:

The best answer is D. Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 70 1/2.

What is the first age at which distributions must commence from a 401(k) Plan? A. 59 1/2 B. April 1st of the year after reaching age 59 1/2 C. 70 1/2 D. April 1st of the year after reaching age 70 1/2

The best answer is D. Just like IRA accounts, RMDs (Required Minimum Distributions) from 401(k) accounts must start by April 1st of the year after the beneficiary reaches the age of 70 ½. If the RMD is not taken each year thereafter, a penalty tax of 50% (ouch!) is applied to the under-distributed amount.

A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statement is TRUE? A. There will be no tax liability B. There will be regular tax liability, but no 10% penalty tax liability C. There will be a 10% penalty tax liability, but no regular tax liability D. There will be both regular tax liability and a 10% penalty tax liability

The best answer is D. Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.

Tax deferred annuities for employees of non-profit organizations are known as: A. SEP IRA Plans B. Defined Benefit Plans C. 401(k) Plans D. 403(b) Plans

The best answer is D. Tax deferred annuities for employees of non-profit organizations are 403(b) plans. These 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, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.

The penalty tax applied for not taking required minimum distribution from a qualified retirement plan in a given year is: A. 6% of the shortfall B. 10% of the shortfall C. 15% of the shortfall D. 50% of the shortfall

The best answer is D. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 70 1/2 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!

Distributions from Roth IRAs: A. must commence by April 1st of the year prior to reaching the age of 70 1/2 without being penalized B. must commence by April 1st of the year of reaching age 70 1/2 without being penalized C. must commence by April 1st of the year after reaching age 70 1/2 without being penalized D. can commence at any time after reaching age 59 1/2 without being penalized

The best answer is D. Unlike Traditional IRAs that require distributions to start on April 1st of the year after reaching age 70 1/2, there is no mandatory distribution age for Roth IRAs.

Which statements are TRUE about Roth IRAs? I Contributions must cease at age 70 1/2 II Contributions can continue after age 70 1/2 III Distributions must start after age 70 1/2 IV Distributions are not required to start after age 70 1/2 A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Unlike Traditional IRAs, Roth IRA contributions can continue after age 70 1/2, as long as that person has earned income. And unlike Traditional IRAs, there are no required minimum distributions after age 70 1/2 for Roth IRAs.