EB Test 2 Chapter 7

Jim, a participant in the Zappa retirement plan, has requested a second plan loan. Jim's vested account balance is $80,000. He borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan?

$22,000. Rationale He can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance in the last twelve months - $23,000. Half of the vested account balance ($40,000) less the outstanding loan of $18,000 equals $22,000.

On January 5, Cindy, age 39, withdrew $42,000 from her qualified plan. Cindy had an account balance of $180,000 and an adjusted basis in the account of $30,000. Calculate any early withdrawal penalty.

$3,500. Rationale $30,000/$180,000 = 0.1667 exclusion. $42,000 x 0.1667 = $7,000. $42,000 - $7,000 = $35,000 x 0.10 = $3,500.

Nancy, age 70 on February 2, 2018, had the following account balances in a qualified retirement plan. 12/31/2017 $500,000 12/31/2018 $478,000 12/31/2019 $519,000 12/31/2020 $600,000 Assuming that Nancy is retired and has never taken a distribution prior to 2019, what is the total amount of minimum distribution required in 2019? Life expectancy factors according to the uniform life table are 27.4 for a 70 year old and 26.5 for a 71 year old

$36,286. Rationale For 2018, look back to 2017: $500,000 ÷ 27.4 = $18,248 For 2019, look back to 2018: $478,000 ÷ 26.5 = $18,038 $18,248 + $18,038 = $36,286 She must take a distribution for 2018 and 2019. However, she can wait to take the 2018 distribution until April 1, 2019 in which case she has 2 distributions in 2019.

Jose Sequential, age 70½ in October of this year, worked for several companies over his lifetime. He has worked for the following companies (A-E) and still has the following qualified plan account balances at those companies. Company Jose's Account Balance A $250,000 B $350,000 C $150,000 D $350,000 E $200,000 Jose is currently employed with Company E. What, if any, is his required minimum distribution for the current year from all plans? Life expectancy tables are 27.4 for age 70 and 26.5 for age 71.

$40,146. Rationale Jose is required to take a minimum distribution for the years in which he is 70½ from each qualified plan, except from his current employer ($1,100,000 ÷ 27.4 = $40,146). He can delay the payment until April 1 of next year, but the question asks for the distribution required for the current year. Note: He must take from each account. He cannot take $40,146 from one account as he could if A-D were IRAs.

Gary quits his job with a 401(k) account worth $500,000. He wants to roll the funds over to his IRA. If his employer sends the funds to Gary directly, how much will they send?

$400,000. Rationale An employer will withhold 20%. Gary should use a direct trustee to trustee transfer to avoid the required withholding.

Gerry is 70½ on April 1 of the current year and must receive a minimum distribution from his qualified plan. The account balance had a value of $423,598 at the end of last year. The distribution period for a 70 year old is 27.4, and for a 71 year old it is 26.5. If Gerry takes a $15,000 distribution next April 1st, what is the amount of the minimum distribution tax penalty associated with his first year's distribution?

$492. Rationale The required minimum distribution for Gerry is $15,985 ($423,598 divided by 26.5) because he is 71 years old as of December 31 of the current year. Gerry only took a distribution of $15,000, therefore, the minimum distribution penalty (50%) would apply to the $985 balance. Therefore, the minimum distribution penalty is $492 (50% of the $985).

Which of the following are benefits of converting assets in a qualified plan to a Roth account through an in-plan Roth rollover? 1. The conversion may result in a reduction in income tax in future years. 2. The conversion will result in increasing after-tax deferred assets and reducing the gross estate. 3. The conversion will eliminate the need for minimum distributions during the life of the participant.

1 and 2. Rationale While there are no guarantees, the conversion may result in a reduction in tax in future years since all future income in the account will escape taxation. The conversion does result in increasing after-tax deferred assets and reducing the gross estate. However, because the funds are in a qualified plan, they will have to be distributed to comply with the minimum distribution rules or be rolled over to a Roth IRA.

The early distribution penalty of 10 percent does not apply to qualified plan distributions: 1. Made after attainment of the age of 55 and separation from service. 2. Made for the purpose of paying qualified higher education costs. 3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

1 and 3. Rationale Statement 2 is an exception for distributions from IRAs, not qualified plans. Statements 1 and 3 are exceptions to the 10% penalty for qualified plan distributions.

Which of the following distributions from a qualified plan would not be subject to the 10% early withdrawal penalty, assuming the participant has not attained age 59½? 1. A distribution made to a spouse under a Qualified Domestic Relations Order (QDRO). 2. A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company. 3. A distribution to pay for costs of higher education. 4. A distribution made immediately after separation from service at age 57.

1 and 4. Rationale Statement 2 is incorrect for two reasons. The exception to the 10 percent early withdrawal penalty for health insurance premiums is only applicable to unemployed individuals. In addition, this exception is only available for distributions from IRAs, not qualified plans. Statement 3 is incorrect because the exception to the 10 percent penalty for higher education expenses only applies to distributions from IRAs, not qualified plans.

Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan for years after 2017? 1. Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax. 2. Distributions used to pay medical expenses in excess of the 7.5% of AGI for a tax filer who itemizes are exempt from the early withdrawal penalty. 3. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the early withdrawal penalty.

1, 2, and 3. Rationale Statements 1, 2, and 3 are correct. The 2017 TCJA reduced the 10% AGI limit to 7.5% of AGI for medical deductions for 2017 and 2018.

Which of the following is/are elements of an effective waiver for a pre-retirement survivor annuity? 1. Both spouses must sign the waiver. 2. The waiver must be notarized or signed by a plan official. 3. The waiver must indicate that the person(s) waiving understand the consequences of the waiver.

2 and 3. Rationale Only the nonparticipant spouse must sign the waiver.

If Colin receives a distribution from a qualified plan, how long does he have to roll it over to an IRA without it being subject to taxation?

60 days. Rationale Colin has 60 days to rollover a distribution to an IRA.

Which of the following is true regarding QDROs?

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient's qualified plan. Rationale The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form. QDRO distributions may be subject to the 10% early withdrawal penalty if the distribution is not deposited into the recipient's qualified plan.

Bobby Brown would not listen to his financial advisor and decided to rollover his qualified plan assets to a traditional IRA. Which of the following is correct?

Bobby has lost some of his creditor protection by moving the funds from a qualified plan to an IRA. Rationale Choice a is not correct because ten year forward averaging, pre-74 capital gain treatment and NUA treatment are available in a qualified plan, but not available in an IRA. Choice b is not correct because qualified plans can investment in life insurance and collectibles, which is not permitted in an IRA. Choice c is not correct, as he could have converted direct from a qualified plan to a Roth IRA. Choice d is correct as the assets are no longer protected under ERISA. The assets will be protected under bankruptcy law, but not ERISA.

Decatur 401(k) Plan maintains a loan program for its participants. The plan has 50 participants, three of whom had participant loans. Decatur conducted a year-end review of its loan program and found the following: • Bob received a loan from the plan one year ago for $60,000 over a five-year term, amortized monthly using a reasonable interest rate. Bob timely made the required payments. Bob's vested account balance is $180,000. • Sandi received a loan of $10,000 to help her mother move to Florida this year, amortized over 72 months. Payments are timely and the interest rate is reasonable. Which of the following individuals have loans that do not comply with the IRC?

Both Bob and Sandi. Rationale Bob's loan exceeds the $50,000 limit and Sandi's exceeds the five-year rule.

In June 2018, Cody converts $100,000 in his 401(k) plan to a Roth account through an in-plan Roth rollover. The value of the assets in the Roth account drops by 40 percent due to a significant decline in the stock market that occurs in August 2018. The in-plan Roth rollover results in Cody incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40 percent drop). Which of the following statements is correct?

Cody cannot recharacterize the conversion. Rationale In-plan Roth rollovers cannot be "undone" or recharacterized. The other choices are not correct.

Josh recently died at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Josh was married to Kay, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct?

Kay can receive annual distributions over her remaining single-life expectancy, recalculated each year. Rationale Kay can receive distributions over her remaining single-life expectancy. A spouse beneficiary can recalculate life expectancy each year. Statement a is incorrect. She is not required to distribute the entire account within 5 years. Statement b is incorrect. Kay can wait until Josh would have been 70½ and begin taking distributions over her life expectancy. Statement c is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death. Kay could also roll the account over to her own IRA and begin distributions when she attains age 70½.

Brenda, age 53 and a recent widow, is deciding between taking a lump-sum distribution from her husband's pension plan of $263,500 now or selecting a life annuity starting when she is age 65 (life expectancy at 65 is 21 years) of $2,479 per month. Current 30-year Treasuries are yielding 6 percent annually. Which of the statements below are true? 1. If she takes the lump-sum distribution, she will receive $263,500 in cash now and be able to reinvest for 34 years, creating an annuity of $4,570 per month. 2. If she takes the lump-sum distribution she will be subject to the 10% early withdrawal penalty.

Neither 1 nor 2. Rationale Statement 1 is false. She will only receive $210,800 ($263,500 less 20% withholding). Statement 2 is also false. The distribution is on account of death, an exception to the 10% early withdrawal penalty rule.

Tom, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. His total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Tom is 100 percent vested. Which of the following statements is/are correct? 1. Tom may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years. 2. If Tom takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) he will be subject to income tax, but not the 10% penalty.

Neither 1 nor 2. Rationale Statement 1 is incorrect because he can take a loan equal to one-half of his total vested account balance up to $50,000. Statement 2 is incorrect because the exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Ginger, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. Ginger did not make the request of the IRS until five years after the mistake was made. Will the IRS permit the waiver?

No. Ginger waited an unreasonable amount of time before filing the request. Rationale The IRS generally grants such requests if timely made. However, Ginger should have realized this long before five years. She would have reported interest on her Form 1040 which would have caused her to realize the mistake. She certainly would have received account statements. Choice a is false. Choice b would be correct if Ginger had filed the request timely. Choice c is false and there is no such one-year period.

Andrea recently died at age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 70½ and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account. Which of the following is correct?

Reese can roll the account over to an IRA and name a new beneficiary. Rationale Statement a is incorrect because the five-year rule only applies if there is no designated beneficiary, or if a charity is the beneficiary. Since minimum distributions had already begun at the time of Andrea's death, Reese must take distributions over the greater of Reese's life expectancy or Andrea's life expectancy. Thus, statement c is incorrect because Andrea's life expectancy is definitely shorter than Reese's life expectancy. While statement b may appear to be correct, Reese would need to take distributions from the account based on her remaining life expectancy reduced by one year. She is not allowed to recalculate her life expectancy. Statement d is correct. However, the account must be in the name of the deceased (Andrea) for the benefit of Reese. In addition, the distributions can be taken over Reese's single life expectancy and not over a joint life expectancy.

In May 2018, Seth converts $100,000 in his traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40% due to a significant decline in the stock market that occurs in October 2018. The Roth conversion results in Seth incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40% drop). Which of the following statements is correct?

Seth cannot recharacterize the conversion. Rationale Prior to 2018, taxpayers had the ability to recharacterize a Roth conversion up to the due date of the income tax return, including extensions. As a result of The 2017 TCJA, Roth conversions cannot be recharacterized after 2017.

Laura, age 43, has several retirement accounts and wants to know what accounts can be rolled over to other accounts. Which of the following statements regarding rollovers is not correct?

She could rollover her traditional IRA to her SIMPLE IRA. Rationale Choices a, b and c are all correct and permissible. Basically no other retirement assets can be rolled over to a SIMPLE IRA except assets currently in a SIMPLE IRA.

Steve, age 69, is an employee of X2, Inc. He plans to work until age 75. He currently contributes 6 percent of his pay to his 401(k) plan, and his employer matches with 3 percent. Which one of the following statements is true?

Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he retires. Rationale Generally, an individual must receive his or her first minimum distribution by April 1 following the year the individual attains age 70½. However, if the individual remains employed beyond age 70½, he or she may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer's qualified plan. Therefore, answers a and c are incorrect. Answer d is incorrect because Steve can continue to contribute to the 401(k) plan as long as he is still working for X2, Inc. and the plan permits.

Pander's Box, a shop that specializes in custom trinket and storage boxes, has a 401(k) plan. The plan allows plan loans up to the legal limit allowed by law and they may be repaid under the most generous repayment schedule available by law. The plan has the following employee information: Employee 401(k) Balance Outstanding Loan Karen $400,000 $0 Teddy $250,000 $30,000 Josh $75,000 $0 Justin $15,000 $0 Which of the following statements is correct?

The maximum Justin can borrow from his account is $10,000. Rationale Justin can borrow one half of his vested account balance up to $50,000. Since the balance is below $20,000, he can borrow a full $10,000. State law does not require the repayment of the loans within a specified time; however, the plan can require that Teddy repay the loan immediately. Karen can only borrow one-half of her account balance up to $50,000, thus she can only borrow $50,000. Josh will not have to repay the loan in five years because the loan proceeds are being used for a home purchase and an extended period is available.

Reese has assets both in her Roth IRA and in her Roth account that is part of her employer's 403(b) plan. However, she is not sure about the differences between the two types of accounts. Which of the following statements would you tell her is correct?

The nature of the income received by beneficiaries in a qualified distribution is the same for distributions from both Roth IRAs and Roth accounts. Rationale Choice a is not correct because the five year holding period is separate for each type of account. Choice b is not correct because the Roth IRA has an additional distribution exception for first time home buying. Otherwise the rules are the same. Choice c is not correct because Roth IRAs do not have to comply with minimum distribution rules upon attainment of age 70½, while Roth accounts do have to comply.

Roger and Robin were happily married until Roger fell in love with Sam. As a result, Roger and Robin have agreed they need to get a divorce. As part of the process, the court has provided a domestic relations order that calls for Robin's profit-sharing plan to be divided into equal portions such that Roger will have his own account with half of the value of the retirement account. What type of approach has been taken?

The separate interest approach. Rationale The separate interest approach calls for splitting a retirement account into two separate accounts. Each party is free to act with regard to their separate account without the interference or consent of the other party. There is not such term as split payment approach or divided account approach.

One approach that is used in some domestic relations orders is to "split" the actual benefit payments made with respect to a participant under the plan to give the alternate payee part of each payment. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. This approach is often used when a support order is being drafted after a participant has already begun to receive a stream of payments from the plan (such as a life annuity). This approach to dividing retirement benefits is often called what?

The shared payment approach. Rationale This is the definition of the shared payment approach. There is not such term as split payment approach or divided annuity approach.

Tim, a participant in the Zappa retirement plan, has requested a second plan loan. Tim's vested account balance is $70,000. He borrowed $30,000 ten months ago and still owes $20,000 on that loan. Could he increase his maximum permissible loan if he repaid the outstanding loan before taking the new loan?

Yes. Paying off the loan will increase the loan available by $5,000. Rationale He can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance ($30,000) in the last twelve months, which equals $20,000. Half of the vested account balance ($70,000) less the outstanding loan of $20,000 equals $15,000. If the loan of $20,000 is repaid, which it could be, then the available loan would increase by $5,000 to $20,000.

MaryAnn, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. MaryAnn did not make the request of the IRS until six months after the mistake was made. Will the IRS permit the waiver?

Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances. Rationale The IRS generally grants such requests if timely made.