Ch18: Retirement Plans, ERISA & Edu Funding S66
ERISA regulation does not apply to public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans A) I, II, and III B) I and II only C) I and III only D) I only
C ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974
A person providing which of the following services to an ERISA plan would be performing in a fiduciary capacity? A) Selecting and monitoring third-party service providers B) Changing the level of employer contributions C) Determining the age at which benefits are to be provided D) Amending the plan
A
Employee contributions to a 401(k) plan are subject to Social Security taxes federal unemployment taxes federal income tax withholding state income tax withholding A) I and II B) II and IV C) I and III D) III and IV
A
One of your clients asks about a Coverdell Education Savings Account for college savings. To avoid income taxation and penalties, your advice is that these funds must be used before the student reaches age A) 30. B) 25. C) 24. D) 32.
A
To comply with Section 404(c) of ERISA, A) the plan must offer at least 3 different investment choices, such as a stable value option, an income option, and a conservative growth option B) the plan fiduciary must act in accordance with the provisions of the retirement plan's objectives and goals C) plan participant loans must be limited to 50% of vested assets or $50,000, whichever is less D) the plan must cover all full-time employees with at least 1 year of service who are 21 or older
A
Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) An UTMA account B) A Roth IRA C) A Coverdell ESA D) A prepaid tuition plan
A Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won't hurt the individual's chances for financial aid eligibility.
Which of the following statements about 401(k) plans are correct? 401(k) plans are a type of defined benefit retirement plan. An employee's elective deferrals are made with pre-tax dollars. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A) II and III B) I and III C) I and II D) I, II, and III
A A 401(k) plan is a type of defined contribution plan rather than a defined benefit plan. A participating employee is not guaranteed a specific retirement benefit from the plan; instead, the retirement benefits depend on how much is contributed to the plan and how much the contributions earn. A 401(k) plan allows employees to make elective deferrals from their pay which results in those funds being contributed on a pre-tax basis. Plan earnings accumulate on a tax-deferred basis. This means that plan participants do not pay income tax on the earnings until they are withdrawn
Which of the following would not constitute a conflict of interest between the plan and a fiduciary? A) The fiduciary receives fees for acting as a trustee to the plan. B) A fiduciary participates in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan. C) A fiduciary offers reduced commissions to the plan for transactions that are executed through his employing financial institution. D) A fiduciary sells a real estate investment to the plan at the current market rate.
A A fiduciary can receive compensation from the sponsor of the plan for acting as a trustee, if fees are reasonable and consistent with duties performed. A fiduciary may not sell a real estate investment to the plan at the going market rate. Such self-dealing presents a conflict of interest regardless of the terms of the transaction. A fiduciary may not participate in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan. The situation is self-dealing and presents a conflict of interest prohibited under ERISA. Offers of reduced commissions to the plan for transactions that are executed through his employing financial institution are prohibited and a conflict of interest.
Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) An UTMA account B) A Roth IRA C) A Coverdell ESA D) A prepaid tuition plan
A Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won't hurt the individual's chances for financial aid eligibility.
Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) An investment adviser using the interest from plan assets to cover the adviser's office expenses B) None of these transactions constitute a prohibited transaction under the provisions of the legislation C) A loan between a 401(k) plan and plan participant D) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value
A An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building).
An investment policy statement would likely include I. expected returns of the recommended strategy and the expected range of these returns II. recommended allocations among differing asset classes III. strategies used for selecting specific stocks in the equity portion of the portfolio IV. disclosure of the fees that the adviser will earn for implementing the recommended strategy A) I, II, and III B) II, III, and IV C) I and II D) I only
A An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.
Which of the following statements regarding Coverdell Education Savings Accounts are true? I. After-tax contributions of up to an indexed maximum per student per year are allowed. II. Unless a special needs beneficiary, contributions may not be made for students past their 18th birthday. III. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. IV. Distributions are always taxable. A) I and II B) II and IV C) III and IV D) I and III
A Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member. When the beneficiary is a special needs beneficiary (an individual who because of a physical, mental, or emotional condition requires additional time to complete their education), there are no age restrictions. Furthermore, unless something in the question refers to this beneficiary, always use the age 18 and 30 restrictions.
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) $40,300 C) $35,700 D) $2,300
A 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 include
To protect the benefits of plan participants and beneficiaries, ERISA prescribes standards for the execution of the plan fiduciary's duties and responsibilities. Which of the following CORRECTLY describes those standards? I. The standard of prudence applies to responsibilities relating to the investment of the plan assets but not to the responsibilities relating to the administration and management of the plan. II. Participants must be offered a broad range of investment options. III. The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan even though a particular transaction may benefit the plan participants. ERISA requires the plan fiduciaries to adopt and adhere to an investment policy that must be communicated in writing to all participants. A) II and III. B) I and II. C) I and IV. D) III and IV.
A The fiduciary standards of ERISA require that plan participants be offered a broad range of investment options in order to obtain the benefit of broad diversification. Under no circumstance, even when benefiting plan participants, are fiduciaries permitted to engage in prohibited transactions such as lending money to the plan. The standards of prudence apply to the administration of the plan, as well as to the investment decisions, and the investment policy, although a good thing to have, is not required under ERISA. LO 18.g
A client has made both tax-deductible and nondeductible contributions to a traditional IRA. When distributions are taken from the IRA, A) they are taxed on a pro rata basis B) they are treated as being from the tax-deductible portion first and the nondeductible last C) they are treated as being from the nondeductible portion first and the deductible portion last D) that portion derived from the nondeductible contributions is not subject to penalty if withdrawn before age 59½
A The portion of the distribution that is nontaxable must be prorated with amounts that are taxable. For instance, if the individual contributed $2,000 in after-tax amounts and $8,000 in pre-tax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pre-tax assets
Which one of the following statements regarding a characteristic or use of a Roth IRA is correct? A) Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. B) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. C) Unlike traditional IRAs, Roth IRA contributions may not be made after the participant attains age 73. D) Roth IRA withdrawals are tax-deferred in their entirety regardless of the participant's age at withdrawal.
A Unlike the traditional IRA, Roth IRAs are not subject to the minimum distribution rules upon the participant attaining age 73. Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made after a five-year holding period and after the participant reaches age 59½. Like traditional IRAs, contributions may be made at any ages (as long as there is earned income). Roth eligibility is restricted by adjusted gross income, not participation in an employer-sponsored plan. Under the SECURE Act, there is no longer an age limitation for contributions to any retirement plan.
Which of the following statements regarding Roth IRAs is true? A) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. B) Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 73. C) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. D) Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal.
A Unlike traditional IRAs, Roth IRAs are not subject to the minimum distribution rules regarding a participant's age (73). Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59½. Effective with the SECURE Act, there are no age limitations for contributions for any retirement plan.
Under ERISA, a pension portfolio manager may engage in writing covered options A) only if it fits with the objectives of the plan B) only during declining markets C) under any circumstances D) at no time; writing options is too high a risk
A Writing covered options is appropriate as long as it matches investment objectives. While writing covered calls is sometimes done to generate income, writing uncovered, or naked, calls is not appropriate for a pension plan because of the unlimited risk potential
Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) The cost to attend a summer camp B) A percentage of housing expenses, such as the utilities for his bedroom C) Clothing expense for a child who has gone through a growth spurt D) A percentage of food expense
A You cannot use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted.
If a retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary, which of the following retirement plans offers this type of payment? A) Deferred compensation B) Defined benefit pension C) Money purchase pension D) Profit-sharing
B
Which of the following regarding customer accounts is not true? A) Asset held under JTWROS goes to the survivor(s) in the event of the death of one of the tenants. B) Stock held in a custodial account may be registered in the name of the minor. C) In some cases, a TOD account is referred to as a POD account. D) Margin trading in a fiduciary account requires special documentation.
B
You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be A) ordinary income tax on the entire amount because the account has not been open for 5 years. B) no tax. C) ordinary income tax on the $500 that exceeds the original cost. D) ordinary income tax on the $1,000 growth because the account has not been open for 5 years.
B
The chief financial officer (CFO) of a company approaches an investment adviser representative who happens to be the trustee of the corporation's qualified plan requesting a loan from the plan to help the company meet some short-term obligations. Which of the following would be the appropriate action to be taken by the IAR? A) The IAR is permitted to meet any reasonable request from the CFO of the employing company. B) The IAR is prohibited from making this loan because of his fiduciary responsibility to the plan. C) With sufficient collateral, the loan may be made. D) The IAR is prohibited from making this loan if it is not a part of the asset allocation model used in the plan's investment policy statement.
B As the plan fiduciary, the IAR is prohibited from taking any action that is against the rules. Companies cannot use their qualified plan assets to finance their business operations.
A premature distribution from an IRA would be exempt from the premature distribution penalty under all of the following circumstances except A) to correct an excessive contribution to the IRA B) as a result of hardship C) to pay for qualifying medical expenses D) upon the death of the IRA owner
B Hardship withdrawals are not permitted from IRAs. They are a feature permitted in 401(k) plans.
Which of the following securities is the least suitable recommendation for a qualified money purchase plan account? A) A-rated corporate bond B) Investment-grade municipal bond C) Large-cap common stock D) Treasury bond
B Investment-grade municipal bonds bear low yields that are federally tax exempt. Because money in a qualified retirement plan account grows tax deferred regardless of the investment instrument, tax-exempt securities are unsuitable. In addition, when the money is withdrawn, it is taxable as ordinary income, so in effect, tax-free income has been converted into taxable income. Although the interest on Treasury bonds is exempt from state income tax, that rate is invariably considerably less than the federal income tax rate.
When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options except A) withdrawing all of the funds immediately B) keeping the money in the deceased's IRA C) opening a separate inherited IRA in the name of the deceased FBO the beneficiary D) withdrawing the funds over a 10-year period following the death of the owner
B It is only a beneficiary who is the spouse of the deceased who may continue that IRA.
Mrs. Jones, age 70, is retiring, and her employer has three investment options for her 401(k). You should advise her to A) do a rollover to her new employer's plan B) do a rollover to a traditional IRA C) take a distribution of 100% of the funds in the account D) leave the investments with her employer
B Most advisers would agree that even when the employer's 401(k) plan permits retirees to continue to maintain their account, it is better for the client to move the assets to a self-directed IRA when the plan offers a limited number of investment choices. Mrs. Jones is retiring, so there is no new employer. Because of the immediate tax liability, it generally does not make sense to take a lump-sum distribution. LO 18.b
A 45-year-old employment counselor has a Keogh plan for himself and 3 full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA? A) He may not have an IRA. B) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. C) He may have an IRA but may not make a contribution for this year. D) He may invest any amount up to 100% of his earned income.
B Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.
Among the differences between a Coverdell Education Savings Account and Section 529 plans are one has adjusted gross income limits, the other does not one has contribution limits set by federal law, the other by the individual state if the money is not used, money reverts back to the donor in one and to the beneficiary in the other A) I and III B) I, II, and III C) I and II D) II and III
B 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 education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.
A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be I. specific security selection II. methods of performance measurement III. determination for meeting future cash flow needs IV. the Summary Plan Description A) III and IV B) II and III C) II and IV D) I, II, and III
B The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL)-required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.
One of your clients is planning to participate in a pension plan. Which of the following statements is least accurate? A) In a defined contribution pension plan, the eventual amount of the client's retirement benefits will depend upon the fund's investment performance. B) A defined contribution pension plan makes retirement planning significantly easier than a defined benefit pension plan. C) In a defined benefit pension plan, the client would have the advantage of a guaranteed retirement payment from the employer. D) In defined benefit pension plan, the client can have some reasonable certainty about the amount of income she will receive in retirement.
B The disadvantage of a defined contribution pension plan is that the actual income the employee will receive in retirement will not be known in advance of retirement. Therefore, this makes effective planning significantly more difficult.
o comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must I. offer plan participants at least 10 different investment alternatives II. allow plan participants to exercise control over their investments III. allow plan participants to change their investment options no less frequently than monthly IV. provide plan participants with information relating to the risks and performance of each investment alternative offered A) I and IV B) II and IV C) I and III D) II and III
B To comply with the safe harbor provisions of ERISA's Section 404(c), the plan trustee must allow each participant control over her investments and furnish her with full performance and risk information. The rule only mandates a minimum of 3 alternatives and quarterly changes.
Which of the following phrases best describes a prudent investor? A) An investment adviser representative handling a discretionary account B) The custodian for a minor under the Uniform Transfers to Minors Act C) A trustee who invests with reasonable care, skill, and caution D) A person in a fiduciary capacity who invests in a prudent manner
C
Which of the following statements regarding Roth IRAs is not true? A) There is no age limit on making contributions to Roth IRAs. B) Distributions prior to age 59½ may be subject to penalty. C) Roth IRAs have higher contribution limits than traditional IRAs. D) Roth IRAs do not have required distributions.
C
Which of the following concerning a money purchase pension plan are true? I. All employees must contribute to the plan. II. Voluntary employee contributions are optional. III. Employer contributions are required. IV. Employer contributions are optional. A) I and IV B) II and IV C) II and III D) I and III
C A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income.
If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A) She will pay income taxes on the full $1 million immediately. B) She will pay no income taxes because the estate taxes have already been paid. C) She will pay income taxes on the full amount she withdraws each year. D) She will pay income taxes only on a portion of the withdrawals which exceed $1 million.
C An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner. How do we know that all of the contributions were made with pre-tax funds? We don't. What we do know is that we never read into a question to make it more complicated. If a portion of the IRA represented contributions that were not tax-deductible, the question would tell us that fact.
Which of the following employer-sponsored plans allows coverage to discriminate in favor of key employees? A) Defined benefit pension plan B) 401(k) plan C) 457 plan D) 403(b) plan
C Because the 457 plan is technically non-qualified, it does not come under the non-discrimination rules of ERISA.
Many parents prefer to use a Section 529 plan over a Coverdell ESA to finance their child's education plans because contribution limits are higher funds may be withdrawn tax-free if used for qualified education expenses there are no earnings limits 529 contributions are tax deductible on the federal level A) I and II B) I, II, and III C) I and III D) III and IV
C Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year while those to a Section 529 plan can be as high as $300,000 in some states. A married couple cannot make a Coverdell contribution if their income exceeds $220,000, while there is no earnings limit to contribute to a 529. In neither case is the contribution tax deductible on the federal level (although the Section 529 plans may have tax advantages in some states). We are often asked about choice II. The question is asking about differences between the two plans and choice II is true for both of them.
Which of the following regarding a Roth IRA are true? I. The contributions are nondeductible. II. . One may not contribute to a Roth IRA if concurrently contributing to a traditional IRA. III. The contributions are deductible. IV. Withdrawals after age 59½ may be tax free. A) II and III B) III and IV C) I and IV D) I and II
C In a Roth IRA, contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least 5 years. One may maintain both a Roth and a traditional IRA concurrently. However, the maximum total contribution between both plans is whatever the indexed maximum for a single plan is for the year plus the catch up amount for those age 50 and older. LO 18.a
Which of the following statements is true regarding Section 529 plans? I. Funds withdrawn for qualified education expenses are always free of federal income tax. II. Funds withdrawn for qualified education expenses are always free of state income tax. III. The maximum contribution limits are determined on a federal level. IV. The maximum contribution limits are determined on a state level. A) II and IV B) II and III C) I and IV D) I and III
C Section 529 plan withdrawals are exempt from federal income tax if used for the right expenses. In almost all cases, if the plan is one operated by your state of residence, it will be exempt from your state's income tax. But, if you elect to contribute to a plan operated by another state, more than likely, any withdrawals will be subject to your state's income tax. Because the plans are state operated, the maximum contribution limits are set by each state.
Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 in 2023 from his IRA. However, a distribution of only $8,000 has been made. Assuming that Jason does not correct the problem, what is the dollar amount of penalty that may be assessed in this situation? A) $2,000 B) $4,000 C) $500 D) $200
C The penalty for failure to make the correct amount of required minimum distribution is 25% of the difference between the minimum required amount and the actual distribution. In this case, this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0 reduced the penalty to 25% or even as low as 10% if promptly corrected.
Which one of the following statements regarding a characteristic or use of a Roth IRA is correct? A) Unlike traditional IRAs, Roth IRA contributions may not be made after the participant attains age 73. B) Roth IRA withdrawals are tax-deferred in their entirety regardless of the participant's age at withdrawal. C) Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. D) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan.
C Unlike the traditional IRA, Roth IRAs are not subject to the minimum distribution rules upon the participant attaining age 73. Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made after a five-year holding period and after the participant reaches age 59½. Like traditional IRAs, contributions may be made at any ages (as long as there is earned income). Roth eligibility is restricted by adjusted gross income, not participation in an employer-sponsored plan. Under the SECURE Act, there is no longer an age limitation for contributions to any retirement plan.
An investment policy statement would likely include expected returns of the recommended strategy and the expected range of these returns recommended allocations among differing asset classes strategies used for selecting specific stocks in the equity portion of the portfolio disclosure of the fees that the adviser will earn for implementing the recommended strategy A) I and II B) I only C) II, III, and IV D) I, II, and III
D
Which of the following statements about 401(k) plans are correct? I. 401(k) plans are a type of defined benefit retirement plan. II. An employee's elective deferrals are made with pre-tax dollars. III. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A) I, II, and III B) I and III C) I and II D) II and III
D A 401(k) plan is a type of defined contribution plan rather than a defined benefit plan. A participating employee is not guaranteed a specific retirement benefit from the plan; instead, the retirement benefits depend on how much is contributed to the plan and how much the contributions earn. A 401(k) plan allows employees to make elective deferrals from their pay which results in those funds being contributed on a pre-tax basis. Plan earnings accumulate on a tax-deferred basis. This means that plan participants do not pay income tax on the earnings until they are withdrawn.
If a retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary, which of the following retirement plans offers this type of payment? A) Deferred compensation B) Profit-sharing C) Money purchase pension D) Defined benefit pension
D A retirement plan that establishes the retiree's payout in advance is a defined benefit plan. Profit sharing and money purchase pension plans are defined contribution plans.
Which of the following would be permitted to contribute to an IRA? I. An individual whose sole income consists of dividends and capital gains II. A divorced mother whose sole income is alimony and child support under the terms of a divorce agreement signed on October 31, 2018 III. A self-employed attorney who has a Keogh plan IV. A corporate officer covered by 401(k) A) III and IV B) I, II, III, and IV C) I and II D) II, III, and IV
D An IRA contribution can only be made by someone who has earned or otherwise eligible income. Earned income is defined as salary, wages, commissions, and tips. Alimony (but not child support) is considered eligible income for an IRA as long as the divorce decree was signed prior to January 1, 2019. Individuals can contribute to an IRA even if they are covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible depending on the individual's income. Dividends and capital gains are not considered earned income.
Which of the following is (are) true regarding qualified pension plans? They must not discriminate. They must have a vesting schedule. They must be in writing. Every month the employer must update the current status of all accounts. A) I and III B) III only C) I, II, III, and IV D) I, II, and III
D An employer must update the status of all employees at least annually, not monthly.
When completing an individual tax return on Form 1040, one of the most important numbers is the adjusted gross income (AGI). Which of the following would not be included in AGI? A) Salary and commissions B) Alimony received from pre-2019 divorce decree C) Qualifying dividends on common stock D) Tax-exempt interest received from municipal bonds
D Even though municipal bond interest is reported on line 8b of the 1040, it is specifically not included in AGI. Paying alimony is a deduction, while receiving it is considered income. Qualifying dividends merely means the tax rate is limited to a maximum of 15% (except for very high-income earners—not tested). Please note: Effective January 1, 2019, there were changes to the tax treatment of alimony for all divorce agreements entered on and after that date (no changes to those already in existence).
One of your clients has recently turned 73 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, I. the RMD from each IRA is computed and may be made from one or both of them II. the RMD from each IRA is computed and must be paid from that IRA III. both 401(k)s are combined to compute the required distribution, which may be made from one or both of them IV. the RMD from each 401(k) is computed and must be paid from that 401(k) A) II and IV B) II and III C) I and III D) I and IV
D For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has an RMD that can only be paid from that account.
IRAs and Keogh plans are similar in the following ways except A) deferral of taxes. B) distributions without penalty can begin as early as age 59½ C) there is a 25% tax penalty for insufficient distributions. D) identical amounts of contributions are allowed.
D IRAs and Keogh plans do not have identical contribution amounts; IRAs allow a maximum of $6,500 per individual or $13,000 per couple per year (with a catch-up of $1,000 for each individual aged 50 or older), whereas Keogh plans allow substantially more. Both IRAs and Keoghs allow tax-deferred growth until the individual withdraws the funds. IRAs and Keoghs have premature distribution penalties before age 59½. Once the participant reaches age 73, required minimum distributions must be made or, under the SECURE Act 2.0, a 25% tax penalty will be assessed. If the insufficient distribution is promptly rectified, the penalty can be reduced to 10%.
In general, in a defined benefit plan, the pension to be received upon retirement is based on the number of years of service and the individual's A) agreed salary. B) current salary. C) life expectancy. D) final average salary.
D The final average salary at retirement (typically using the final five years) and the length of service at the employer are most commonly used to calculate the total benefit to be paid to the employee in the defined benefit pension plan
Which of the following statements are not true? I. The kiddie tax applies to any income received by a child under the age of 19. II. IRAs have advantages over other estate assets when left to charity. III. Simple trusts have to distribute income annually. IV. For U.S. citizens, there is an unlimited marital estate tax deduction. A) I, II, III, and IV B) I, II, and III C) II, III, and IV D) I and II
D The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.
Thomas, age 49, owns his own business and pays himself a salary of $80,000 per year. He employs his wife, Grace, age 51 as receptionist and pays her $45,000 per year. What is the maximum deductible contribution that they could have made to their traditional IRAs? A) They can contribute $6,500 to each of their individual IRAs. B) They can contribute a total of $6,500 only because they both work at the same business. C) They cannot make deductible contributions because their joint incomes are too high. D) They can contribute $6,500 to his IRA and $7,500 to hers.
D They both could have made deductible contributions to their own respective IRAs for that year. Because Grace is 51, she can take advantage of the $1,000 catch-up provision and, therefore, contribute $7,500 rather than Thomas's $6,500 limit. A taxpayer's income does not restrict the deductibility of the contributions unless one or both of the spouses are also covered under some other qualified plan. Even though Thomas could establish a Keogh or a SEP, the question did not state that he had. Do not read more into the question than is there.
Which of the following statements regarding Roth IRAs is true? A) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. B) Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal. C) Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 73. D) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan.
D Unlike traditional IRAs, Roth IRAs are not subject to the minimum distribution rules regarding a participant's age (73). Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59½. Effective with the SECURE Act, there are no age limitations for contributions for any retirement plan.
