11.2 Individual Retirement Accounts (IRAs)
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A customer who has just started an IRA will be vested: - immediately. Investors are always vested immediately in their IRAs.
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A married couple in their late 50s (both employed) but neither covered under an employer sponsored retirement plan wish to open traditional IRAs and make the maximum tax-deductible contribution. If their combined income is $78,000 which of the following would apply? -Each is eligible to make a catch-up contribution. -Because both spouses are employed and not covered by other retirement plans, they are eligible for traditional IRAs with tax-deductible contributions up to specified limits. -Each being older than age 50 is eligible to make a catch-up contribution. Spousal IRAs are for a non-working spouse and therefore neither is eligible in this instance.
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A registered representative (RR) is explaining the characteristics of a Coverdell ESA to a customer. Which of the following statements regarding this type of savings account is CORRECT? -Contributions are not tax deductible. -When used for qualified educational expenses, withdrawals are not taxable. --Contributions to a Coverdell Education Saving Account (ESA) are made with after- tax dollars. --Distributions used for qualified educational expenses are tax free.
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Distribution from a traditional IRA can begin at age 59½ and must begin no later than: -age 70½. The owner of a traditional IRA has until April 1 of the year after the year in which he turns age 70½ to begin withdrawing from the account.
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Excess IRA contributions are subject to a penalty of: -6%. Excess IRA contributions are subject to a yearly penalty of 6% until they are either withdrawn together with associated growth or applied to the following year's contribution limit.
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To avoid penalty, a rollover of an IRA may occur no more frequently than: -annually. Securities or funds may be rolled over by the account holder from one IRA to another only once every year. Direct transfers from one account to another, where the account holder does not receive the funds during the transfer, are not restricted in frequency.
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An employee not covered under his company's pension plan has been contributing to a traditional IRA for 5 years. If he leaves his current job, starts a new job, and is covered under the new corporation's pension plan, which of the following statements is TRUE? -Contributions to his traditional IRA may continue. An employee covered under a qualified retirement plan may continue to own and contribute to an IRA. -The contributions to a traditional IRA may not be fully tax-deductible, depending on the amount of compensation earned, but the employee benefits from the tax deferral of IRA earnings.
11.2
For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 70 ½, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as -required beginning date (RBD) -required minimum distribution (RMD) For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 70 ½. This is known as the "required beginning date" (RBD). The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the "required minimum distribution" (RMD).
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If an employee makes a withdrawal from her IRA at age 52, she pays no penalty tax if she: - is disabled. An employee may withdraw from an IRA before the age of 59½ without a penalty tax in the case of death or disability. Funds may be withdrawn without penalty for qualified education expenses for immediate family members, but that does not include nieces and nephews.
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If your 50-year-old client wants to withdraw funds from his traditional IRA, the early withdrawal will be taxed as: -- ordinary income plus a 10% penalty. An early withdrawal from an IRA is taxed as ordinary income plus a 10% penalty.
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One of your customers set up a Section 529 plan for a child of one of his neighbors and contributed to it for some years. When the child reached age 17, it was obvious that he had no plans to pursue higher education and your customer decided to redesignate the account. Which of the following would be a permissible new beneficiary? -The original beneficiary's younger sister. --There are few restrictions on who may be the first beneficiary of a Section 529 plan. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first.
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Which of the following investment activities are suitable for an individual retirement account? -Writing covered calls. -Buying puts on stock held long. Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.
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Which of the following investments is the least appropriate for a qualified pension or profit sharing plan? -Municipal bonds. -When advising qualified plans, it is not a good investment practice to buy tax-free income. - The yield on municipal bonds is typically lower than that on other bonds of comparable quality due to the tax-exempt status of their income payments. Any assets in the retirement plan are free of current taxation so the usual municipal security benefit is lost, and the portfolio contains assets that produce less income. -A second problem arises because as participants in the plan begin withdrawing assets, the withdrawal is usually 100% taxable, thus turning what is inherently tax free into something taxable. It makes more sense to buy higher yielding taxable income and to shelter the income within the tax-exempt plan trust.
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Your client who has not yet attained the age of 59 ½ wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal you explain that the amount taken will be subject to a penalty of: - 10%. Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn in addition to ordinary income taxes.
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All of the following are benefits of a traditional IRA : - earnings accumulate on a tax-deferred basis. - contributions may be tax deductible. - funds may be withdrawn without penalty for certain exemptions.
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All of the following are benefits of a traditional IRA EXCEPT that: - no penalty is charged for failing to withdraw funds after age 70½. Required minimum distributions must begin the year after the account owner reaches age 70½.
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Which of the following can be rolled over into an IRA? -Another IRA. -Corporate pension plan. -Corporate profit-sharing plan. -Keogh plan. . Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.
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All of the following are true concerning a Section 529 prepaid tuition plan EXCEPT: - monies distributed from the plan can only be used in a state-funded higher education institution. -529 prepaid tuition plans are used to lock in higher education costs at current tuition rates. Eligibility for the plans is state specific. -Monies distributed from the plan may be used to pay for tuition in a state funded institution in that state or you can use those monies to pay for a portion of an in-state private school or any out of state school. -In these instances the amount available for use in tuition payments will be determined by the tuition that an in-state publicly funded college would charge.
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Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should: --explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened.
11.2.1
A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is TRUE? -The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over. -The maximum annual contribution to an ESA is $2,000. -Contributions are not deductible and must cease when the beneficiary reaches age 18. -Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. -Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.
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Which of the following is (are) TRUE concerning a Coverdell Education Savings Account (ESA)? *****All of these. ******** -The maximum annual contribution is $2,000 per beneficiary. - The beneficiary may be the contributor's child or grandchild or child of a friend of the contributor. - A beneficiary's unused balance may be rolled over to an ESA account for another child. -The maximum contribution permitted for any beneficiary is $2,000 per year. -The beneficiary need not be related to the contributor(s). - ESA accounts may be rolled over to change investment vehicles or to change beneficiaries.
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Which of the following retirement plans permit individuals to make contributions to the plan, after the plan participant reaches age 70-½, as long as they have earned income? - Roth IRA -Roth IRAs are not subject to minimum distributions at age 70-½ and therefore allow contributions to be made after age 70-½, provided the participant has earned income.
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Which of the following statements CORRECTLY describe a Roth IRA? -The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. -Contributions are not tax deductible. -The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. -Contributions are made with after-tax dollars.
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If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? --They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. --No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. --Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.
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The income level of a donor: -may affect contributions into a Coverdell ESA. -will NOT affect contributions into a Section 529 plan. -Contributions into a Coverdell ESA are phased out at high income levels, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.
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Which of the following investors are eligible to establish an IRA? Law student who earned $1,200 in a part-time job. Property owner whose income is solely from rent charged on family dwellings he owns. An individual may contribute 100% of earned income up to a maximum allowable dollar limit, whichever is less . Interest and dividend income is portfolio income and rent is passive income, not earned income.
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Which two statements are true regarding Section 529 college savings plans? -Contributions are considered gifts under federal law. -Earnings generated are tax deferred. B) I and IV. -Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. -Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level-if used for college-related expenses.