6: Qualified Plans/Federal Tax Considerations
What is the penalty for excessive contributions to a traditional IRA?
0.06
What are the consequences of withdrawing funds from a traditional IRA prior to the age of 59 1/2?
10% penalty
What is the name for an overfunded life insurance policy?
A Modified Endowment Contract (MEC)
Who may contribute to an HR-10 plan?
A self-employed individual
Who would be considered a third-party owner?
An individual or an entity who is not the insured
According to the taxation rules of life insurance policies, how are cash value increases taxed?
Cash value growth is tax deferred.
How are income payments from a 403(b) plan taxed?
Contributions are excluded from the employee's taxable income, but are taxable upon withdrawal.
What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes.
Why are dividends in life insurance policies not taxable?
Dividends are not considered income for tax purposes; they are a return of unused premium.
What is required to qualify an individual to contribute to a traditional IRA?
Earned income
For a retirement plan to be qualified, it must be designed for whose benefit?
Employees
What are the income tax benefits of a qualified plan?
Employer contributions are tax deductible and are not taxed as income to the employee. The earnings accumulate tax deferred.
What qualified plan is suitable for the self-employed?
HR-10 or Keogh
What are some examples of qualified plans?
IRA, 401(k), HR10 (Keogh), SEP, SIMPLE
In what form of payment must the contributions to a traditional IRA be made?
In cash
What portion of a nonqualified annuity payment would be taxed?
Interest earned on principal
If the beneficiary of a life insurance policy receives death benefit payments that consist of principal and interest, which portion, if any, will be taxed?
Interest only
SIMPLE plans are available to groups of how many employees?No more than 100SIMPLE plans are available to groups of how many employees?
No more than 100
In qualified plans, are employer contributions taxed as income to the employees?
No, employer contributions are not taxed as income to the employees
Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?
No, lump-sum benefits are received tax free.
Upon surrender of a life insurance policy, what portion of the cash value will be taxed?
Only the portion in excess of the premium paid
What is the primary purpose of a 401(k) plan?
Provide retirement income
What type of plan is 401(k)?
Qualified profit-sharing plan
What are the three types of Social Security benefits?
Retirement, disability and survivors
If a retirement plan is 'qualified,' what does that mean?
The plan has favorable tax treatment.
What is the main purpose of the Seven-pay Test?
To determine if a life insurance policy is a Modified Endowment Contract
When would life insurance policy proceeds be included in the insured's taxable estate?
When there is an incident of ownership at the time of death
An employer is sponsoring a qualified retirement plan for its employees where the employer contributes money whenever the business has profit. What is this type of plan called?
Profit-sharing plan
Who qualifies for tax-sheltered annuities, or 403(b) plans?
Employees of nonprofit organizations under Section 501(c)(3) and employees of public school systems
In a direct rollover, how is the money transferred from one retirement plan to a new one?
From trustee to trustee