S7-12: Retirement Plans and Education Savings Plans

Coverdall ESA is an account created as an incentive to help parents and students save for education expenses. The total contributions for an individual beneficiary of this type of account cannot be more than $___________ in any year, no matter how many accounts have been established for the beneficiary.

$2,000

Employees are eligible to participate if they receive $__________ or more in compensation from the employer during each of the last two caledar years and are reasonably expected to receive $___________ or more in compensation during the current calendar year.

$5,000

In 2021, a single individual who is not an active participant in a qualified retirement plan earned $18,000. The maximum tax deductible contribution that can be made to an IRA is (A)$2,000. (B)$2,250. (C)$6,000. (D)$7,000.

(C)$6,000. EXPLANATION The maximum tax deductible contribution to an IRA for a single individual who is not an active participant in a qualified plan at work is $6,000 per year (2021, unchanged from 2020), unless the individual is 50 years of age or older, in which case there is an additional $1,000 catch up contribution allowed. Because there is no indication in this question that the taxpayer is 50 or older, do not assume that the taxpayer is eligible for the extra catch up contribution.

A 45-year-old customer leaves his employer and takes payout on their 401(k) Plan assets with the intent to roll the plan into a Traditional IRA. The client fails to do so within the required time period. The client will have to pay (A)a 10% penalty on the amount paid out with no other tax consequences. (B)ordinary income tax on the amount paid out with no other tax consequences. (C)both a 10% penalty on the amount paid out and ordinary income tax on the amount paid out. (D)no taxes associated with the 401(k) Plan payout, because he left his employer.

(C)both a 10% penalty on the amount paid out and ordinary income tax on the amount paid out. EXPLANATION If assets are withdrawn or paid out of a retirement product such as a 401(k) or Traditional IRA prior to the plan holder reaching 59 1/2 and no exceptions apply, the plan holder will have to pay a 10% penalty for taking early distributions and will also owe ordinary income taxes on the total amount paid out because of the pre-tax status of contributions and earnings.

As of 2015 the IRS will only allow _____ rollover per year regardless of the number of IRAs that are owned by an individual.

1 rollover per year

Employers that want to utilize a SIMPLE plan will need to have _________ or fewer employees

100 or fewer

Tax-free rollovers are limited to once every ____ months if the rollover is an IRA to IRA 60 day rollover

12 months

How long do you have to be in a Simple plan before you will be able to roll it over?

2 years

The 10% penalty for early distributions from a SIMPLE IRA is a increased to ______% if the early distribution is made within the first two years

25%

__________________________________ - A tax sheltered Annuity Arrangement is a type of plan for use by certain tax exempt (non-profit) organizations to provide retirement benefits for their employees.

403(b) Plan / Tax-Sheltered Annuity Arrangement (TSA)

A _________________ is a type of deferred compensation plan for employees of a state or local government or a tax exempt organization. Different rules apply to Governmental vs Non-Governmental Plans.

457(B) plan (Private Non-Govermanetal 457 Plans for hospitals, unions, and charitable organizations generally limit participation to a select group of management or highly compensated employees)

Individuals who will be at least _____ years of age during the tax year may contribute an additional catch-up amount to an IRA

50

_____________________________ - established and maintained by a state government and allow individuals to set up to pay for a students qualified education expenses at any eligible educational institution. Although contributions to theses plans are not deductible for federal income tax purposes, these plans are tax advantaged because any annual earnings and qualified withdrawals are tax free at the federal level.

529 Education Savings Plans / Qualified Tuition Programs

At what age can distributions on a Traditional IRA start without 10% penalty tax?

59 1/2

Excess Contributions to an IRA above the limits which are not removed from the account are subject to a cumulative ____% excise tax

6% excise tax

A ___________ Plan is a qualified , tax-deferred retirement plan for self employed individuals that ca be set up as a defined contribution plan or a defined benefit plan.

A Keogh Plan

__________________________ - A program established under Section 529A of the Internal Revenue Code to permit a state, or an agency of a state to establish and maintain a tax-advantaged savings program to help support individuals with disabilities in maintaining health, independence, and quality of life.

ABLE Program

______________________________ is an account created as an incentive to help parents and students save for education expenses. The total contributions for an individual beneficiary of this type of account cannot be more than $2,000 in any year, no matter how many accounts have been established for the beneficiary.

Coverdall ESA

401ks and other like retirement vehicles are governed by _____________ rules rather than FINRA rules

ERISA

If a Traditional IRA account holder does not take distributions by age 70 1/2, what kind of penalty may they face?

Late distributions are subject to a 50% penalty tax on the insufficient distributions (Ex. if, based on life expectancy, a person should be taking 10k a year and only takes 6k, the insufficient distribution of 4k would be subject to a 50% penalty)

Are IRAs classified as qualified plans?

No

Are contributions to a Coverdell ESA tax deductible?

No

Can 403(b) plans invest in limited partnerships?

No

Can a 529 plan be for multiple students?

No

Do prepaid tuition plans have investment risk?

No

Are Non-tax qualified Deferred Compensation Plans subject to ERISA?

No (since they are agreements between two parties and the employer is not making contributions on behalf of the employee)

Does it make sense to invest in municipal bonds in an IRA?

No, because they are already tax free

___________________________ - Allows anyone, a parent, grandparent, or family friend, to establish an account in the name of a student and lock in the cost of a specific number of academic periods or units at current prices, but the units or periods will be used in the future.

Prepaid Tuition Plan

A _________________ plan is a retirement plan established and maintained by a private employer that meets the requirements of the Employee Retirement Income Security Act (ERISA)

Qualified Plan Ex. 401k

At what age are there required minimum distributions for a Traditional IRA?

Required minimum distributions must begin no later than April 1st following the calendar year in which the owner reaches age 70 1/2

What type of accounts does ERISA involve?

Retirement accounts

A Safe ___________ provision in a qualified retirement plan refers to the protection from liability given to the employer/sponsor of a self directed plan if the employee/participant makes imprudent investment decisions and loses money.

Safe Harbor Provision (employer is not responsible for losses in employees account)

Are Qualified Plan contributions (ie 401k) still subject to social security, Medicare, and state and federal unemployment tax?

Yes

Are contributions to a Roth 401k made on an after tax basis?

Yes

Are withdrawals from a Coverdell ESA tax free as long as they are used to cover the cost of a beneficiaries education expenses?

Yes

Can Individuals who are not active in a retirement plant at work deduct all of their contributions up to the contribution limitations?

Yes

Can certain precious coins be held in an IRA?

Yes

Can contributions to a Roth IRA be made after the owner turns 70 1/2?

Yes

Can real estate be held in an IRA?

Yes

Can the funds from a Coverdell ESA be rolled over into the account of a sibling or other family member if the funds are not used by the intended child?

Yes

Can the proceeds of a Coverdell ESA be used to pay qualified higher education expenses as well as qualified elementary and secondary education expenses?

Yes

Can you be exempt from mandatory distributions if your are 70 or older and are still employed by the sponsor company and you own less than 5% of that company?

Yes

Can you have the trust be the beneficiary of an IRA?

Yes

Is a 529 plan a municipal security?

Yes (alot of fees with these )

If a spouse inherits an IRA, can they treat it as their own?

Yes (this transfer would qualify for the federal estate tax marital deduction, only for spouses, non spouses cannot become owner, taxes have to be paid)

If four years ago someone opened a Roth IRA and now they want to make a withdrawal, would there be a penalty?

Yes, 5 year holding period

A teacher in a public school is paid a salary of $8,000. The school district has a retirement plan that invests in a tax-deferred annuity. During the past year, $400 was contributed into the plan from the teacher's salary deductions. What would be considered the teacher's taxable income? (A)$7,600 (B)$8,000 (C)$8,400 (D)$ 0

[A]$7,600 EXPLANATION A teacher in a public school would be able to participate in a tax-sheltered annuity plan under Section 403(b) of the Internal Revenue Code. In such a plan part of an individual's salary can be withheld and deposited into the plan. Money put into the plan is not taxed until it is withdrawn upon retirement. In this question, the teacher had an $8,000 salary and $400 was withheld for the plan. Therefore, her taxable income would be $7,600.

All of the following are true regarding a SEP-IRA (Simplified Employee Pension Plan) EXCEPT: (A)Fixed contributions are required annually. (B)Contributions made by the employer are deposited directly into the eligible employees IRA. (C)Employees are allowed to make contributions into a separate personal IRA up to the annual contribution limit. (D)Part-time employees who meet the eligibility requirements must be included in the plan.

[A]Fixed contributions are required annually. EXPLANATION In a SEP-IRA, contributions are voluntary, not required. In a SEP the EMPLOYER makes the contributions, employees may not contribute to the SEP-IRA but may establish and contribute to a separate personal Traditional IRA but the total contributions of both accounts cannot exceed the annual contribution limits.

The state in which you operate has contracted out your firm to be the program manager for its 529 program. The 529 college savings plan is not gathering the attention that it used to, so the state has asked that your firm's marketing department produce an advertisement which includes the total return data for the plan. The advertisement is completed in late April, but is not scheduled to run until July. If the advertisement goes online during July as scheduled, with no modifications to include the most current total return data, your firm is responsible for providing a toll-free number where prospective investors viewing the advertisement can obtain return information for which of the following? (A)The most current data to the past month ended 7 business days prior to the date of any use of the Ad. (B)The past six months of 529 operation (C)The past 2 years of 529 operation (D)The most current data through the past year's end

[A]The most current data to the past month ended 7 business days prior to the date of any use of the Ad. EXPLANATION Unless the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of any use of the advertisement, the legend must also identify either a toll-free (or collect) telephone number or a website where an investor may obtain total return quotations current to the most recent month-end for which such total return, or all information required for the calculation of such total return, is available;

An RR has a customer who is 55, has been making contributions to an IRA for many years and is in the top federal tax bracket. She has an urgent medical-related issue and needs $11,000 cash now to resolve it. She explains that the issue concerns payment of outstanding medical insurance premiums. The RR correctly responds that (A)she can proceed with the withdrawal as stated but will have to pay income taxes. (B)withdrawals are not permitted before age 59 1/2. (C)she can withdraw up to $10,000 only because she is in the top federal tax bracket. (D)withdrawal can proceed but she will have to pay a 10% penalty.

[A]she can proceed with the withdrawal as stated but will have to pay income taxes. EXPLANATION Under IRS rules, IRA account owners can withdraw from the account prior to age 59½ without penalty if the withdrawal has a qualifying reason (i.e., medical expenses, medical insurance premiums) but the account owner still must pay income taxes. The 10% penalty would not apply.

The primary purpose of ERISA, in setting minimum standards and reporting requirements for retirement plans, is to protect (A)Against a registered representative's mishandling of a client's portfolio (B)All employees from employer's mishandling of retirement funds (C)Shareholders from investment adviser's mismanagement of the portfolio (D)Government employees from mismanagement of funds

[B]All employees from employer's mishandling of retirement funds EXPLANATION The primary purpose of ERISA is to set minimum standards and reporting requirements for retirement plans to protect employees from the mishandling of retirement funds.

529 Education Savings Plan accounts have all of the following features EXCEPT: (A)Beneficiaries of the 529 education savings accounts can be changed by the owner. (B)Annual contributions to the account can total no more than $2,000. (C)The owner of the account maintains control over the account. (D)As long as withdrawals are qualified, federal income tax does not apply.

[B]Annual contributions to the account can total no more than $2,000. EXPLANATION 529 educations savings plan accounts do not have annual limitations on contributions like IRAs and Keogh plans. They are fully controlled by the owner who can change the beneficiary of the account. As well, withdrawals meeting qualification requirements are free from federal income tax.

The Employee Retirement Income Security Act of 1974 (ERISA) covers which of the following? (A)Retirement accounts of public sector employees. (B)Retirement accounts of private sector employees. (C)Retirement accounts of public and private sector employees. (D)Retirement accounts of municipal employees only.

[B]Retirement accounts of private sector employees. EXPLANATION ERISA covers Retirement Plans of private sector employees. Its primary purpose is to protect employees from the mishandling of retirement fund

Which of the following statements is INCORRECT concerning IRA contributions? (A)Under current tax laws, some people will be allowed to deduct their IRA contribution from their adjusted gross income. (B)The deadline for IRA contributions is December 31st of the tax year. (C)Contributions can be made for a tax year anytime between January 1 of that year and April 15 of the following year. (D)Investors may file their tax return indicating an IRA contribution, but may postpone the deposit of the contribution until April 15.

[B]The deadline for IRA contributions is December 31st of the tax year. EXPLANATION All contributions to IRAs must be received in the account prior to April 15, regardless when clients pays their taxes. So, even though the calendar year ends on Dec 31, you can still contribute to your IRA up until April 15th the following year.

Of the clients listed below, which of them could establish a Keogh plan? (A)a former colonel in the military wanting tax relief on a pension he is receiving (B)a doctor in a partnership with another doctor (C)a small corporation with 25 full-time employees (D)a person employed by the government that wants to save more than the amount allowed in an IRA

[B]a doctor in a partnership with another doctor EXPLANATION The self-employed doctor would be the only one of the four choices that would be allowed to establish a Keogh plan.

In 2021, an attorney who is not an active participant in a retirement plan earns $110,000 annually and the attorney's spouse is unemployed. The maximum tax deduction allowed under IRS tax rules for IRAs for this couple is (A)$6,000. (B)$2,000. (C)$12,000. (D)$10,000.

[C]$12,000. EXPLANATION The maximum deductible contribution to an IRA for the attorney and the eligible unemployed spouse in 2021 is $12,000, $6,000 each. (The amounts are unchanged from 2020).

In 2021, a single, unmarried father wants to contribute money to his child's 529 Education Savings Plan. What is the maximum contribution he can make using five-year averaging? (A)$15,000 (B)$30,000 (C)$75,000 (D)$150,000

[C]$75,000 EXPLANATION In 2021, the Gift Tax exclusion for individuals in one year is $15,000 (and is $30,000 for married couples). A one-time gift of up to five times the annual gift tax exclusion can be contributed to a 529 Plan, which would result in a total of $75,000 for an unmarried individual (or $150,000 for a married couple). The gift limits are unchanged from 2020.

A Keogh Plan may be referred to as all of the following EXCEPT: (A)A tax-deferred investment (B)An HR-10 Plan (C)A tax-free trust (D)A self-employed retirement plan

[C]A tax-free trust EXPLANATION Keogh Plans may not be referred to as a tax-free trust. Referring to these plans as tax-deferred is accurate.

In 2021, a single person who is not an active participant in a pension or profit-sharing plan has earned income of $70,000 and wants to establish an Individual Retirement Account. Which of the following is TRUE? (A)An IRA cannot be established because his income exceeds $50,000. (B)An IRA can be established but only after-tax dollars can be deposited. (C)An IRA can be established and up to $6,000 can be contributed on a tax-deductible basis. (D)An IRA can be established but the deduction allowed is only $2,500.

[C]An IRA can be established and up to $6,000 can be contributed on a tax-deductible basis. EXPLANATION This person is not an active participant in a pension or profit-sharing plan. Therefore, he can establish an IRA and make a tax-deductible contribution up to $6,000 in 2021 (this amount is unchanged from 2020).

Which of the following statements regarding a 403(b) tax-deferred variable annuity is not true? (A)Employers may make contributions for their employees. (B)Employees may make voluntary contributions through payroll deductions. (C)Any legally formed organization is eligible. (D)Earnings are tax deferred if under the exclusion limits.

[C]Any legally formed organization is eligible. EXPLANATION 403-b plans are set up for employees of schools, hospitals, etc. Therefore, not all organizations are eligible.

A working couple has a combined earned income of $52,000. Each of the individuals wants to open an IRA. Which of the following would probably be the best choice for investing the IRA funds? (A)Penny stocks. (B)Oil and gas exploratory limited partnerships. (C)Growth stocks. (D)Options on blue chip stocks.

[C]Growth stocks. EXPLANATION Penny stocks and Oil and Gas Exploratory limited partnerships are very risky investments and are not suitable for most investors. Growth stocks would be a more conservative investment than the options on blue chip stocks. They would also show more growth over the years, allowing the couple enough money for retirement.

All of the following are TRUE of an Individual Retirement Account EXCEPT: (A)Single individuals with earned income, who are not active participants in a retirement plan, may deposit up to $6,000 (2021) on a tax-deductible basis. (B)An individual who does not qualify for a tax deduction on an IRA contribution, can establish an IRA and deposit up to $6,000 (2021) on an after-tax basis. (C)IRA funds can be invested in all types of collectibles such as paintings, rugs, and diamonds. (D)IRA funds can be invested in gold and silver coins issued by the U.S. Government.

[C]IRA funds can be invested in all types of collectibles such as paintings, rugs, and diamonds. EXPLANATION Collectibles, such as paintings, rugs, and diamonds are not permitted in an IRA.Gold and silver coins issued by the U.S. Government are permitted in IRAs. For 2021, the contribution limit for IRAs is $6,000 without a catch-up contribution (this amount is unchanged from 2020), and this amount is deductible for individuals with earned income who are not active participants in a retirement plan at work.

All of the following are true regarding IRA contributions EXCEPT: (A)Although a tax return is filed prior to April 15th, the IRA contribution may be delayed until April 15th. (B)Contributions may be made at any time between Jan. 1, and April 15th of the following year. (C)If an extension for a tax return is obtained, the IRA contribution may be delayed until the date the tax return is filed. (D)Persons not participating in any other type of retirement plan may deduct their IRA contributions up to certain limits.

[C]If an extension for a tax return is obtained, the IRA contribution may be delayed until the date the tax return is filed. EXPLANATION If an extension is granted for the filing of a tax return the IRA contribution must still be made no later than April 15th.

Which of the following statements would NOT be true with regard to 529 Education Savings plans? (A)The account owner is allowed to change beneficiary. (B)The account is overseen by the account owner. (C)The maximum annual contribution to the account is $2,000. (D)Withdrawals from the plan are exempt from federal income tax if they are qualified.

[C]The maximum annual contribution to the account is $2,000. EXPLANATION The maximum annual contribution of $2,000 is applicable to a Coverdell Plan - NOT a 529 Plan. Contributions limits to 529 Plans vary based on the plan and the state.

All of the following would be considered qualified distributions from a 529 Plan except (A)the student becomes disabled (B)tuition expenses at a qualified institution (C)set up a small business for the student since they will not be attending college (D)room and board

[C]set up a small business for the student since they will not be attending college EXPLANATION Distributions from a 529 Plan must be used for education related expenses and could not be used to start a small business for the beneficiary that decides not to pursue a higher education.

In 2021, a self-employed person earns $140,000. What is this person's maximum allowable contribution into a Defined Contribution Keogh Plan? (A)$0 (B)$6,000 (C)$50,000 (D)$58,000

[D]$58,000 EXPLANATION For a Defined Contribution Keogh plan, the contribution is limited to the lesser of 100% of earned income or $58,000 (2021 tax year). Therefore, this person's contribution is limited to $58,000 for the 2021 tax year. In 2020, the contribution limit was $57,000.

All of the following individuals are entitled to participate in a Keogh Plan EXCEPT: (A)A doctor with income from his professional practice that is organized as a sole proprietorship (B)A security analyst with income from giving talks to clients of his employer, an investment adviser that is organized as a partnership (C)A corporate engineer who has income from a "sideline" business of his own organized as a sole proprietorship (D)A corporate executive that has income from his corporate employer including incentive stock options

[D]A corporate executive that has income from his corporate employer including incentive stock options EXPLANATION Keogh Plans are designed for self-employed sole proprietors, partnerships and other unincorporated entities and their employees. Although the engineer works for a corporation, he can have a Keogh Plan for his "sideline" business. The executive is employed by a corporation which cannot establish a Keogh Plan. The doctor is organized as a sole proprietorship. The security analyst works for a partnership.

Which of the following would be an allowable contribution into a self-directed Individual Retirement Account? (A)Stock (B)Mutual fund shares (C)U.S. Treasuries (D)Cash

[D]Cash EXPLANATION Contributions to an IRA must be in cash. The contributions may be invested in stock, mutual funds, and U.S. Treasuries. The question is asking about "contributions" into the IRA - NOT allowable investments.

Concerning qualified profit-sharing plans, it is correct to state that: (A)Under the plan, employee benefits are fixed and not dependent on the plan's performance. (B)Interest, dividends and capital gains which are generated by a plan's assets are subject to current income taxes. (C)If in any year a corporation does not have any profits, it must make its contribution to the plan from any cash reserves. (D)Contributions made by a corporation to the plan are tax-deductible to the corporation.

[D]Contributions made by a corporation to the plan are tax-deductible to the corporation. EXPLANATION Qualified profit-sharing plans allow employees to share in the company's profits on a tax-deferred basis. If there are no profits, the firm does not contribute to the plan. Assets are taxed only upon withdrawal from the plan. Any contributions the firm makes into the profit-sharing plan are tax-deductible.

Which of the following is a characteristic of a Roth IRA? (A)Contributions are made with pre-tax dollars. (B)All early distributions are subject to a 10% penalty tax. (C)Distributions must begin by age 72. (D)Qualified distributions typically occur after a 5-year holding period and the owner of the account reaching age 59 1/2.

[D]Qualified distributions typically occur after a 5-year holding period and the owner of the account reaching age 59 1/2. EXPLANATION Qualified distributions from a Roth IRA take place after a 5-year holding period and satisfying one of a handful of criteria. Reaching age 59 1/2 is the most common of those criteria.Roth IRA contributions are made on an after-tax basis. Because contributions are after-tax and because other conditions can apply to early distributions, it is possible for such early distributions to avoid the 10% penalty. Unlike Traditional IRAs, Roth IRA distributions are not required in relation to reaching age 72.

All of the following statements about qualified defined benefit pension plans are true EXCEPT (A)They are employer sponsored plans (B)The employer bears the investment risk (C)High paid and long service employees are the primary beneficiaries of such plans (D)Small and mid-size employers are the primary sponsors of such plans

[D]Small and mid-size employers are the primary sponsors of such plans EXPLANATION Qualified defined benefit pension plans are employer sponsored plans in which the plan sponsor defines/promises a monthly pension on retirement to employees/plan participants based on a benefit formula that includes the employee's age, years of service and salary.(e.g. 2% of final pay times years of service). The longer the service and/or the higher the salary, the higher the pension. These plans are going out of favor, but remain popular with governments and very large employers.

All of the following are characteristics of an ERISA Sec.404(c) qualified plan EXCEPT: (A)The plan participants control the investment of the assets in their accounts. (B)The plan participants must be offered at least three core alternative investments. (C)Plan fiduciaries will not be held liable for losses where the plan participants have selected the investments. (D)Such a plan can include a defined benefit plan.

[D]Such a plan can include a defined benefit plan. EXPLANATION An ERISA Sec.404(c) qualified plan (aka a self-directed plan) is an individual account plan, such as a Sec.401(k) plan in which the plan participants are given the opportunity to exercise meaningful, independent investment control over the assets in their accounts. In such a plan, the plan fiduciaries (e.g. plan administrator and the plan trustee) are provided with a "safe harbor" for liability for losses resulting from decisions made by the plan participants. To qualify as a "404(c) plan", the plan participants must be given certain minimum investment information and at least three core alternative investment options, each of which is diversified. A qualified defined benefit plan is not an individual account plan and therefore is not eligible for safe harbor treatment.

Contributions to a Section 529 Education Savings Plan account may be subject to federal gift taxes. All of the following are true statements about the federal gift tax rules EXCEPT. (A)There is an annual tax exclusion for a donor. (B)A spouse of the donor may join in the contribution to the account increasing the exclusion. (C)Five years of future exclusions can be advanced into the current year thus permitting a larger initial exclusion as a joint gift. (D)The federal gift tax liability falls on the donee of the account, not the donor..

[D]The federal gift tax liability falls on the donee of the account, not the donor.. EXPLANATION The federal gift tax liability falls on the donor, not the donee. All of the other choices are correct statements of the federal gift tax rules.

To qualify for the Safe Harbor Provision, participants must have the ability to choose between at least _____ categories of investments which are diversified.

at least 3 categories of investments

The department of Labor (DOL) requires that a plan administrator must furnish investment related information for each option offered under a plan (generally in the form of a chart) to a plan participant prior to or on the date the participant directs their investment and at least ____________ thereafter.

at least annually thereafter

Athletes use ____________________

deferred compensation plans

High salaried employees near retirement benefit the most from a __________ benefit plan

defined benefit plan

The value of an education savings plan (529 Plan) is based on the performance of the _____________ chosen by the account holder/ owner.

investments

When talking about Coverdall ESA, contributions may be made until the beneficiary reaches age 18 unless the beneficiary is a special needs beneficiary. Assets in the account must be distributed or transferred before the designated beneficiary reaches age _______.

must be distributed or transferred before the designated beneficiary reaches age 30. (if it is not distributed within 30 days fo age 30 the account will be assessed a 10% penalty)