Unit 18

What are the exceptions for 401(k) early withdrawal?

- death - disability - qualified domestic relations others (QDROs) - medical expenses - certain period payments - corrections of excess contributions in a reasonable amount of time

A self-employed CPA has earned $38,000 from his practice; he also earned $2,300 interest on his savings. What is the basis for his deposit into his defined contribution Keogh (HR-10) account this year? A) $38,000 B) $35,700 C) $2,300 D) $40,300

A) $38,000 Only earned income may be included in determining the income eligible for Keogh contributions. Dividends and interest are classed as portfolio income and are not included

Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is not true? A) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. B) A participant in a Keogh Plan may also maintain an IRA. C) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. D) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution.

A) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA.

Your client, Jane, died, and her 35-year-old son, Patrick, is the beneficiary of her IRA account. There was $750,000 in the account at the time of her death. All contributions were made with pre-tax dollars. Ten years later, the account had grown to $1.2 million, and Patrick distributed all of the money during that year. The distributions will be A) taxed on the amount withdrawn in a given year. B) 100% taxable on the amount over $1 million. C) tax free because the estate paid the taxes at the time of Jane's death. D) taxable on the growth and earning since Jane's death.

A) taxed on the amount withdrawn in a given year.

Which of the following is a benefit to an employee of a business offering a safe harbor 401(k) using a nonelective formula? A) The plan is free from the top-heavy testing requirements. B) The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. C) It guarantees that highly compensated employees do not get more of an employer match than employees who are not highly compensated. D) The employees are guaranteed the ability to consult an investment adviser.

B) The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. A safe harbor 401(k) with a nonelective formula is one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan. Furthermore, those contributions are immediately vested. As a result, these plans offer a safe harbor from being tested for being top-heavy, but this is a benefit for the employer, not the employee

Which of the following permits the highest annual contributions? A) A traditional spousal IRA for which the contribution has been deducted B) A traditional nondeductible IRA C) A SEP IRA D) A Coverdell Education Savings Account

C) A SEP IRA Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.

A pension plan administrator would probably be able to qualify for the exemption offered under the safe harbor provisions of 404(c) of ERISA if the plan offered which of the following choices? A) DEF Long-term Investment Grade Bond Fund; PQR U.S. Government Bond Fund; STU High Yield Bond Fund B) ABC Large-Cap Growth Fund; JKL Small-Cap Technology Fund; MNO International Equities Fund C) ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund D) PQR U.S. Government Bond Fund; GHI Money Market Fund; VWX Global Bond Fund

C) ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund In order to qualify for the safe harbor under 404(c), the portfolio selections must include at least 3 different asset classes, such as equity, debt, and cash equivalent. All equities or all debt won't qualify.

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is not true? A) Even though these plans are generally under state control, the rollover rules are federal law. B) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. C) If there is a distribution of the assets, the rollover must be completed within 60 days. D) This may be done, but only if the entire account is rolled over.

D) This may be done, but only if the entire account is rolled over. Partial rollovers are permitted.

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations, A) real estate, like life insurance, cannot be purchased in an IRA. B) this would not be a prohibited transaction unless the investor personally used the property more than 14 days per year. C) real estate, such as a personal condominium, would be a permitted investment. D) this would be a prohibited transaction.

D) this would be a prohibited transaction.

Employee contributions to a 401(k) plan are subject to i) Social Security taxes ii) federal unemployment taxes iii) federal income tax withholding iv) state income tax withholding

i & ii Employee contributions are excluded from taxable income at the time of contributions, which exempts them from income tax, but not from payroll taxes such as social security and FUTA (federal unemployment tax).

Among the differences between a Coverdell Education Savings Account and Section 529 plans are i) one has adjusted gross income limits, the other does not ii) one has contribution limits set by federal law, the other by the individual state iii) in the case of the ESA, any potential income taxes and penalties are the obligation of the beneficiary while they are the obligation of the donor of the 529 plan.

i, ii, iii The Coverdell may only be used by persons who fall within certain income limits—no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for qualified education expenses, it is the donor in a 529 plan who is responsible for any taxes and penalties, but to the beneficiary in a Coverdell ESA.

William and Kat, a married couple, are advisory clients of yours. Each is employed and covered by a qualified plan. Which of the following statements are correct? i) Employees covered by a qualified plan are not eligible to open Roth IRAs. ii) Employees covered by a qualified plan are eligible to open Roth IRAs. iii) Distributions from a qualified plan may be rolled over into a Roth IRA. iv) Distributions from a qualified plan may not be rolled over into a Roth IRA.

ii & iii