SIE - Retirement Plans Pt. 2
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 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 in a Roth IRA 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 who earn over $139,000 and couples who earn over $206,000, in 2020, cannot open Roth IRAs. They can open Traditional IRAs, however.
Catch-up IRA contributions are permitted for individuals who are at least age:
50 For the year 2020, the maximum annual 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.
Distributions from an Individual Retirement Account must commence by:
April 1st of the year following that person reaching age 72 Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 72.
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?
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, 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.
Employees of non-profit organizations are permitted to make salary reduction retirement plan contributions to a:
Tax sheltered annuity 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, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.
Which statement is TRUE regarding RMDs (Required Minimum Distributions) from IRA accounts?
The RMD is based on the life expectancy of the account beneficiary 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. Remember, RMDs do not apply to Roth IRAs.
A husband and wife wish to open a spousal IRA. The wife works while the husband does not. What is the permitted maximum contribution to this spousal IRA for the year 2020?
$6,000 for the wife; $6,000 for the husband For the year 2020, the maximum contribution to a spousal IRA, is $6,000 each, in two accounts, for a total of $12,000. It makes no difference if the spouse works or not.
Which statement is TRUE regarding contributions to, and distributions from, tax qualified retirement plans?
Contributions are typically made with "before-tax" dollars Contributions to tax qualified retirement plans are tax deductible. They are typically 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 at ordinary income rates. Another way of saying this is that these plans have a "$0 cost basis," which means the entire distribution is taxable.
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.
Distributions from Section 401(k) plans are:
100% taxable 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.
To avoid penalties, funds cannot be withdrawn from a Keogh retirement plan before age:
59 1/2 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 person can start withdrawing from his or her Individual Retirement Account without penalty at 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.
Under Keogh rules, distributions from a Keogh Plan must commence the year after the individual turns age:
72 Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 72.
All of the following retirement plans require that minimum distribution amounts be taken once the participant reaches the age of 72 EXCEPT:
A 403(b) plans B 401(k) plans Correct answer C Roth IRAs D Traditional IRAs Roth IRA contributions are not deductible. As long as the assets are held in the Roth IRA for at least 5 year and distributions start after age 59 1/2, they are tax-free. Since the IRS does not get to tax the distributions, they don't care when they start! On the other hand, Traditional IRA contributions, 401(k) contributions and 403(b) contributions, are all tax deductible. Distributions at retirement age are taxable, and the government wants its money before the plan participant dies. Thus, RMDs (Required Minimum Distributions) must commence at age 72. If they don't, a draconian tax rate of 50% is applied to any under distributed amount.
All of the following statements are true regarding defined benefit plans EXCEPT:
A contributions made to the plan can vary from year-to-year B employees with the highest salaries and the fewest years to retirement benefit the most Correct answer C benefits paid to employees consists of a tax-free return of capital and a taxable return of earnings D actuarial tables are used to determine contribution rates for each employee 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.
All of the following statements about 403(b) Plans are true EXCEPT:
A employees make voluntary contributions through their employers B contributions are tax deductible to the employee Correct answer C employees of any organization can contribute to this type of plan D earnings on contributions by employees are tax deferred 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.
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 Correct answer D the contributions made are not deductible 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 small business that has variable cash flow.
Which statement is TRUE about non-contributory defined benefit retirement plans?
Annual benefit payments are fixed In a "defined benefit" retirement plan, contribution amounts vary based upon the age of the person covered under the plan. Larger contributions are made for older plan participants nearing retirement than for younger plan participants who have many years left until retirement. Once benefit payments start, the amount of the benefit is fixed - since the plan funded a "defined" benefit. Benefit payments are fully taxable at ordinary income rates. The other type of plan is a "defined contribution." In this type, the contribution amount is fixed. The benefit payment depends on the investment results of the fixed contributions made, and hence can vary.
An unmarried person, earning $100,000 a year, is not covered by a pension plan and has been contributing to an IRA account annually. If this individual joins a corporation at the same salary, and is included in that company's pension plan, which statement is TRUE?
Annual contributions to the IRA can continue but will not be tax deductible Anyone who has earned income can contribute to an IRA, whether covered by a pension plan or not. However, the contribution is not tax deductible for individual employees covered by a pension plan who earn over $75,000 in year 2020 (the deduction phases out between $65,000 - $75,000 of income).
What is the first age at which distributions must commence from a 401(k) Plan?
April 1st of the year after reaching age 72 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 72. If the RMD is not taken each year thereafter, a penalty tax of 50% (ouch!) is applied to the under-distributed amount.
Which of the following is a characteristic of Defined Contribution Plans?
The annual benefit varies based on length of service 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 and the assets grow tax-deferred. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements.
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 not 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 (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.
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?
The distribution is subject solely to regular income tax 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.
A 55 year old woman wishes to remove funds from her Individual Retirement Account to remodel her house. The customer is subject to:
both regular income tax liability and 10% penalty tax on the amount withdrawn Premature distributions from an IRA (before age 59 1/2), unless for reason of death, disability, to pay qualified education expenses, or to pay up to $10,000 of first-time home purchase expenses, incur normal income tax plus a 10% penalty tax on the amount withdrawn.
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.
Under ERISA provisions, a pension fund manager that wishes to write naked call options:
can only do so if explicitly allowed in the plan document ERISA does not specify securities strategies that are prohibited. It does state that all investments must meet both "fiduciary responsibility" tests and "prudent man" rule tests. Selling naked call options exposes the writer to unlimited risk, but is not explicitly prohibited. If the plan document specifically authorizes such a strategy, it would be permitted. However, the plan trustee bears unlimited liability, if this action is deemed to be imprudent.
In an Individual Retirement Account, a 6% penalty tax will be imposed for:
excess contributions to an Individual Retirement Account 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.
ERISA regulations cover:
private sector retirement plans ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated. Self-directed IRAs are also not covered by ERISA.
A 50 year old individual leaves a corporate employer and receives a $50,000 lump sum distribution from the pension plan. He rolls over $30,000 of the funds within 60 days into an IRA and deposits the rest to his checking account. The individual pays:
tax on the $20,000 not rolled over Any pension plan distributions before age 59 1/2 not rolled over into an IRA are subject to tax. The individual rolled over $30,000 - this remains tax deferred. The $20,000 not rolled over is taxable.
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.
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.
A married couple, where both individuals work, earns in excess of $124,000 in year 2020. Both individuals are covered by qualified retirement plans. Which statement is TRUE regarding contributions to Individual Retirement Accounts for these persons?
A non-tax deductible contribution of $12,000 ($6,000 each) is permitted 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).
When must distributions commence from a Roth IRA?
After the death of the owner Isn't this one special! There is no mandatory distribution age for a Roth IRA, because distributions are tax free, so the Treasury is not worried about collecting taxes before the owner dies! However, upon death, whoever inherits the account must start taking RMDs (Required Minimum Distributions), either over 5 years or the expected life of the beneficiary, to deplete the account. The nice thing is, because this was a Roth IRA that was inherited, the distributions are tax free.
Individual Retirement Account contributions can be made with:
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).
Which statement is TRUE about Roth IRAs?
Distributions are not required to start after age 72 Roth IRA contributions can continue after age 72, as long as that person has earned income (and this is the case for all retirement plans starting in January 2020). Unlike Traditional IRAs, there are no required minimum distributions after age 72 for Roth IRAs (the IRS does not get to tax the distributions from a Roth, so the government does not care when distributions start!).
Contributions to qualified retirement plans, other than IRAs, must be made by:
The date on which the tax return is filed with the Internal Revenue Service 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.
An individual who worked for 30 years for the local electric company recently retired at age 60. Even though she receives a pension, she works part-time at the local grocery store to keep occupied, earning $5,000 in 2020. How much can this individual contribute for this year into an IRA?
$5,000 IRA contributions are based on "earned income" with the maximum contribution for 2020 being 100% of income, capped at $6,000. Since this individual earned $5,000, that is the maximum contribution. Also know that contributions must stop at age 70 ½, when distributions must commence.
Which statement is TRUE regarding contributions to, and distributions from, non-tax qualified retirement plans?
Distributions are partially tax free, with the amount above the original cost basis being taxed 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 - this is the investor's cost basis. Only the tax deferred "build-up" in the account above what was originally contributed is taxed.
403(b) Plans are permitted to invest in all of the following EXCEPT:
Correct answer A ADRs B Mutual Funds C Fixed Annuities D Variable Annuities 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. 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. Note that these are all "managed" products - where an investment adviser is managing the portfolio. Direct investments in common stocks selected by the plan participant are prohibited. An ADR is equivalent to a common stock.
In 2020, a customer earns $400,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $40,000 per year. The contribution to be made for the nurse is:
$10,000 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 $400,000 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, $40,000 of income x 25% = $10,000 contribution.
Which of the following are characteristics of Defined Contribution Plans?
Annual contribution amounts are fixed and the benefit amount to be received will vary 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.
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 IRA contributions must be made by April 15th of the following year - no extensions are permitted.
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 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 are not classified as "earned income" for purposes of making IRA contributions. Thus, a woman who has income from a trust fund and who received alimony payments cannot make an IRA contribution based on either of these sources of income. (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!")
Which statement is TRUE regarding a defined benefit plan?
The smallest contributions are made for those individuals who are far away from retirement 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. The benefit amount to be paid is not based on years of service - rather, it is based on a formula, such as "50% of the employee's salary level over the 3 years preceding retirement." Once the benefit payments start, they are fixed in amount and do not change.
An individual earning $60,000 in 2020 makes an annual contribution of $2,000 to a Traditional IRA. Which statement is TRUE?
This person can contribute a maximum of $4,000 to a Roth IRA The maximum permitted annual contribution to a Traditional IRA or Roth IRA for an individual is $6,000 total in 2020. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $4,000 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $124,000 and $139,000 for individuals in 2020).
ERISA legislation was enacted to protect:
employee retirement funds from employer mismanagement ERISA was enacted to protect employee retirement funds from employer mismanagement.
In 2020, a self-employed individual earns $350,000 for the year. The maximum contribution that can be made to an HR10 plan for this year is:
$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 $350,000 = $70,000. However, only the $57,000 maximum can be contributed in 2020. (Note that this amount is adjusted each year for inflation.)
In 2020, a self-employed person earning $200,000 also has $100,000 of investment income. This person wishes to open a Keogh Plan. Their maximum permitted contribution is:
$40,000 Keogh (HR10) contributions are based only on personal service income - not investment income. $200,000 of personal service income x 20% effective contribution rate = $40,000. Note that this is less than the maximum contribution allowed of $57,000 in 2020.
What are characteristics of Defined Contribution Plans?
Annual contribution amounts are fixed; if the corporation has an unprofitable year, the contribution must still be made 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. If the corporation has an unprofitable year, it must still make the contributions.
An individual owns a bicycle repair business as a sole proprietorship. He does not make a lot of money, but he does have $5,000 available for investment this year. The BEST recommendation for this individual is to make a $5,000 contribution to a(n):
Roth IRA Since this individual does not make a lot of money, a tax-deductible Traditional IRA contribution would not produce significant tax savings. When distributions from the Traditional IRA are taken at retirement, they are taxable. A Roth IRA does not permit a deduction for the contribution, but when distributions are taken at retirement age, there is no tax due. Roth IRAs are a very good deal, but they are not available to high-earning individuals. This question states that the individual does not earn a lot of money, so this is not an issue. SEP IRAs are designed for small businesses. These are "Simplified Employee Pension" plans that do not have to comply with ERISA. The employer establishes the plan and makes deductible contributions for the employees. The employer has the flexibility to change the amount contributed each year. A sole proprietor would not use this type of plan. SIMPLE IRAs are also designed for small businesses and do not have to comply with ERISA. They are similar to 401(k) plans because the employee makes the contribution as a salary reduction. The employer must make a matching contribution (the "SIM" in SIMPLE stands for "Simplified Incentive Match") of either 2% of the salary of each employee or 3% of the salary of each employee who makes a salary-reduction contribution. Whether times are good or bad, the employer must make the match, so there is no flexibility as to the amount the employer contributes each year, as compared to a SEP IRA. Again, a sole proprietor would not use this type of plan.
If a corporation has an unfunded pension liability, this means that:
the expected future value of fund assets is less than projected benefit claims 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.
All of the following are allowed investments into an Individual Retirement Account EXCEPT:
A Preferred Stock Incorrect answer B U.S. Government Bonds C U.S. Government Gold Coins Correct answer D 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.
All of the following are true statements about Individual Retirement Accounts EXCEPT:
A the earliest a taxpayer may make an annual contribution is January 1st of that tax year B the latest a taxpayer may make an annual contribution is April 15th of the following tax year Correct answer C if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date D annual contributions may be made even if the person is covered by another qualified retirement plan Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.
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 IRA contributions can only be made based on earned income - meaning income from one's work. Alimony and child support payments are not classified as "earned income" for purposes of making IRA contributions. Thus, a woman who has both earned income from work and who received alimony payments can only make an IRA contribution based on the $3,000 earned from work. (Of course, the big question here is, "If this person only has total income of $5,400 a year, how would she be able to make an IRA contribution since she doesn't even have enough money to eat!")
Which statement is TRUE about Keogh Plans?
Contributions are 100% deductible 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 individual's tax bracket.
Which statement is FALSE about a SIMPLE IRA?
Correct answer 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 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 $13,500 (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. 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 $57,000 in 2020 is permitted.
Which statement is TRUE regarding a Roth IRA?
Roth IRAs allow for tax-free distributions 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 1/2 are 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). Because the IRS is not collecting tax, Roth IRAs are not subject to Required Minimum Distributions after age 72, which is the case with a Traditional IRA. Roths offer a very good deal, but they are not available to high earning individuals. High earning individuals can still contribute to a Traditional IRA.
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?
There will be both regular tax liability and a 10% penalty tax liability 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.