Final extra tito

Which of the following is an example of a qualified retirement plan? A) Section 401(k) plan B) SEP plan C) Deferred compensation plan D) Section 403(b) plan

A Section 401(k) plan is a qualified plan. 403(b) plans and SEP plans are tax-advantaged plans, but are not ERISA-qualified retirement plans. A deferred compensation plan is a nonqualified plan. While tax-advantaged plans are very similar to qualified plans, there are some minor differences. LO 1.2.1

Which of the following is NOT an example of a qualified retirement plan? A) New comparability plan B) Section 403(b) plan C) Employee stock ownership plan (ESOP) D) Section 401(k) plan

A Section 403(b) plan is a tax-advantaged plan but not an ERISA-qualified retirement plan. While tax-advantaged plans are very similar to qualified plans, there are some minor differences. For example, a tax-advantaged plan is not allowed to have NUA treatment. NUA is covered later in the course. They are also not allowed to offer 10-year forward averaging or special pre-1974 capital gains treatment. Tax-advantaged plans also have less restrictive nondiscrimination rules. Otherwise, they are very similar to qualified plans. LO 1.2.1

Which of the following retirement plans can be adopted only by private, tax-exempt organizations and state or local governments? A) Section 457 plan B) Section 403(b) plan C) Stock bonus plans D) ESOP

A Section 457 plan can be adopted only by private, tax-exempt organizations and state and local government entities. Section 403(b) plans may be adopted by Section 501(c)(3) nonprofit organizations, and ESOPs and stock bonus plans may be adopted by corporations. LO 8.1.1

In the allocation of assets to determine the best portfolio composition for a qualified plan, what is a major factor to be considered? A) The administration requirements associated with the plan B) The type of plan and who bears the investment risk C) The maximum deductible contribution amount permitted under the plan D) The reputation and experience of the plan sponsor

A major factor to be considered in the asset allocation process of qualified plans is the type of plan (defined contribution or defined benefit) and who bears the investment risk (the employee or employer). Very broadly, a more conservative allocation is appropriate for a defined benefit plan than in the defined contribution approach. LO 8.2.1

The Acme Corporation has six owners, ranging in age from 30 to 60 years old, and 25 rank-and-file employees. The owners want to adopt a qualified retirement plan that will allow them to maximize the contributions to the owners' accounts and minimize the contributions to the accounts of the rank-and-file employees. Which of the following plans would best meet the owners' needs? A) New comparability plan B) Age-based profit-sharing plan C) Section 401(k) plan D) Self-employed Keogh plan

A new comparability plan would allow the owners to divide the participants into two classes based on their compensation levels and allocate different contribution levels to the classes. An age-based profit-sharing plan wouldn't meet their objectives because the owners' ages are significantly different. Section 401(k) plans are subject to discrimination testing, and a self-employed Keogh plan is inappropriate because the owners aren't self-employed. LO 3.2.1

If the client's business objectives are to reduce income tax, reward executive employees, retain and recruit employees, and reduce employee turnover, which plan selection approach is the client using? A) A pension plan or a profit-sharing plan B) None of these C) Profit-sharing only approach D) Pension plan only approach

A pension plan or a profit-sharing plan can address each of these objectives. LO 8.1.1

In the administration of a qualified retirement plan, which of the following individuals is considered to be a fiduciary? A) A highly compensated employee who participates in the plan B) The marketing director of the plan sponsor C) A CPA who prepares the plan's Form 5500 D) A financial planner handling the investment of plan assets

A person or corporation is considered a fiduciary under ERISA if that person or entity renders investment advice or services to the plan for direct or indirect compensation. Clearly, the financial planner-investment manager is within this definition. LO 1.4.1

Which of the following statements regarding the characteristics or use of a profit-sharing plan is CORRECT? A) Profit-sharing plans require a fixed, mandatory, annual contribution by the employer to the plan. B) A company with a great number of older employees will find the implementation of a traditional profit-sharing plan to be the most beneficial for the older employee-participants. C) Profit-sharing plans are best suited for companies that experience fluctuating cash flow. D) The maximum tax-deductible employer contribution to a profit-sharing plan is 15% of covered payroll.

A profit-sharing plan does not require a mandatory, annual employer contribution. Therefore, they are best suited for companies that experience fluctuating cash flow and would like the flexibility of a discretionary (though substantial and recurring) contribution. The maximum tax-deductible contribution is 25% of covered payroll. Because there is less time to accrue a retirement benefit by retirement age, a profit-sharing plan is not the best choice for a plan with a great number older employee-participants. LO 3.1.1

Joe, age 52, has just started a consulting company. He currently employs six people, who range in age from 22 to 31 years old. Joe estimates the average employment period for his employees will be approximately three years and would like to implement a retirement plan that will favor older participants while including an appropriate vesting schedule. In addition, Joe would like the employees to bear the risk of investment performance within the plan. Which of the following plans is most appropriate for Joe's company? A) Cash balance pension plan B) SIMPLE 401(k) C) Target benefit pension plan D) SEP plan

A target benefit pension plan is likely most appropriate. It would permit Joe to favor older participants and allow for a vesting schedule. A cash balance pension plan does not favor older participants and provides employees with a guaranteed rate of return on investments (thus, not transferring the risk of investment performance to the employees). SEP plans and SIMPLE 401(k) plans both provide for 100% immediate vesting of employer contributions. LO 8.1.2

Jack, age 51, is the owner of an architectural firm with 23 employees, most of whom are younger than 40. The company's cash flow varies from year to year, depending on their contracts. Jack wants to implement a qualified plan that is easy for employees to understand and that is administratively cost-effective. He also wants a plan with an incentive feature by which an employee's account balance increases with company profits. Which of the following plans would be most appropriate for Jack's firm? A) Defined benefit pension plan B) Money purchase pension plan C) Traditional profit-sharing plan D) Section 403(b) plan

A traditional profit-sharing plan may be appropriate when an employer's profits, or cash flow, fluctuate from year to year; an employer wishes to implement a qualified plan with an incentive feature by which an employee's account balance increases with employer profits; or most employees are young (under age 50) and have substantial time to accumulate retirement savings, and the employees are, most likely, willing to accept a degree of investment risk in their individual accounts. Jack's company is not eligible to implement a Section 403(b) plan, as it is not a nonprofit organization. A defined benefit plan is not appropriate for the company's employee demographics, requires stable cash flows, and can be expensive to administer. Money purchase plans also require a mandatory contribution each year and do not provide the incentive feature regarding company profits. LO 3.1.1

A businessowner-client approaches a financial planner for advice on selecting a retirement plan for the business. What factors should guide the financial planner's recommendations? The owner's retirement savings need The owner's current age The amount of risk the client is comfortable assuming The financial stability of the business

All of the factors listed should be considered in selecting a retirement plan for the business. LO 8.1.1

Prohibited transactions are those that are not in the best interest of plan participants and include which of these? A loan between the plan and any party in interest The acquisition of employer securities or real property in excess of legal limits A transfer of plan assets to or use of plan assets for the benefit of a party in interest The sale, exchange, or lease of any property between the plan and a party in interest

All of the statements are prohibited transactions. Self-dealing is also a prohibited transaction. LO 1.4.1

In addition to meeting the financial needs and resources tests for hardship withdrawals, money may only be withdrawn from profit-sharing plan accounts for the following reasons: Purchase of a primary residence Payment of unreimbursed medical expenses Payment necessary to prevent foreclosure on the participant's primary residence Payment of higher education expenses for the participant, spouse, or dependent children

All of the statements regarding hardship withdrawal requirements are correct. LO 3.1.1

ERISA requirements for qualified plans include A) coverage and vesting. B) all of these. C) participation and fiduciary requirements. D) reporting and disclosure.

All of these are ERISA requirements for qualified plans. LO 1.1.1

An employee stock ownership plan (ESOP) is a defined contribution plan that may provide the employer with which of the following advantages? Increased corporate cash flow The ability to borrow money to purchase corporate stock A market for employer stock Financial resources to expand the business

All of these statements are ESOP advantages to the employer. LO 3.2.2

Which of the following statements regarding the safe harbor rules for Section 401(k) plans is CORRECT? The employer can avoid ACP and ADP testing if it matches 100% up to 4% of compensation for nonhighly compensated employees. The employer can avoid ACP and ADP testing if it makes contributions of 3% or more of compensation for all employees who are eligible to participate in the plan, whether or not the employee chooses to participate. To meet the safe harbor requirements, the matching and non-elective contributions must be immediately 100% vested. The employer must provide notice to each eligible employee about rights and obligations under the plan.

All of these statements regarding Section 401(k) plan safe harbor rules are correct. LO 3.3.2

Grant, age 51, made an initial contribution of $10,000 to a Roth 401(k) in 2013. He made subsequent contributions of $6,000 annually for the next four years. In 2020, Grant took a $50,000 distribution from his Roth 401(k) to purchase a boat. Which of the following statements regarding this distribution is CORRECT? A) It is income tax free because it was made after five taxable years, and Grant is over age 50. B) It is income tax free because it was made after five taxable years from the date of initial contribution. C) It is partially taxable because Grant was not age 59½, disabled, the distribution was not made to a beneficiary or Grant's estate after his death, or used for a first-time home purchase. D) It is taxable because it was within 10 taxable years from the date of initial contribution.

Although Grant took the distribution after five taxable years from the date of initial contribution, he did not meet one of the other requirements for a qualified distribution (it must be made after the individual attained age 59½, the individual must be disabled, the distribution must be made to a beneficiary or estate of an individual on or after the individual's death, or it must be used for a first-time home purchase). In this case, the first $34,000 is counted against his contributions. Thus, there is no tax or penalty on $34,000. There are no conversions, so the rest of the distribution is earnings and thus subject to income tax and the 10% early distribution rules. LO 3.3.3

Which of the following retirement plans would be appropriate for a general partnership with stable cash flows? A) Age-weighted profit-sharing plan B) Employee stock ownership plan (ESOP) C) Section 403(b) plan (TSA) D) Stock bonus plan

An ESOP and stock bonus plan may only be established by an S or C corporation. A Section 403(b) plan (TSA) is only available to certain tax-exempt organizations. An age-weighted profit-sharing plan is the only plan appropriate for a general partnership from the choices given. LO LO 3.2.1

ABC Corporation is a closely held company that wants to establish a qualified retirement plan for its employees. Also, the company wants to improve the marketability of its stock and give the employees an ownership stake in the company. Which of the following plans would help ABC meet all of these objectives? A) Employee stock ownership plan (ESOP) B) SIMPLE 401(k) C) Keogh (self-employed) plan D) Target benefit pension plan

An ESOP could help ABC meet all of these objectives. LO 3.2.2

Qualified retirement plans are which of these? They are subject to ERISA requirements. They offer tax-deferred earnings to employees. They can discriminate in favor of highly compensated employees. They provide a deferred tax deduction for employer funding.

Answer 1 and 2 Statements I and II are correct. Qualified retirement plans are subject to ERISA requirements and provide tax deferral on investment earnings for employees. While qualified plans in general can provide different levels of benefits to different classes of employees, qualified plans cannot "discriminate in favor of highly compensated employees" in the sense that there is a legal limit to the amount of the difference. As long as the difference is inside the legal limits, the plan is not discriminatory (by definition). Qualified retirement plans provide an immediate tax deduction on employer contributions—not a deferred tax deduction, like a nonqualified deferred compensation plan. LO 1.2.1

Which of the following statements regarding top-heavy plans is CORRECT? An accelerated vesting schedule is used when a defined benefit pension plan is top heavy. A qualified plan is considered top heavy if it provides more than 50% of its aggregate accrued benefits or account balances to key employees. Top-heavy defined benefit plans must provide a minimum benefit accrual of 2% per year of service for up to 10 years (20%) for all non-key employees. For a top-heavy plan, a key employee is an employee who owns more than 3% of the employer with compensation greater than $130,000 (2020).

Answer 1 and 3 An accelerated vesting schedule is used when a defined pension benefit plan is top heavy. A defined contribution plan always requires an accelerated vesting schedule. A qualified plan is considered top heavy if it provides more than 60% of its aggregate accrued benefits or account balances to key employees. A key employee is an employee who, at any time during the plan year, is the following: greater than a 5% owner; a greater than 1% owner with compensation greater than $150,000 (not indexed); or an officer of the employer with compensation greater than $185,000 in 2020. LO 1.3.1

Jerry wants to establish a qualified plan for his business to provide employees of the company with the ability to save for retirement. Which of the following plans is a qualified plan? Profit-sharing plan Simplified employee pension (SEP) plan SIMPLE IRA Section 457 plan

Answer 1 only Of the plans listed, only the profit-sharing plan is a qualified plan. The SIMPLE IRA and the SEP plan are tax-advantaged plans, and the Section 457 plan is a nonqualified plan. LO 1.2.1

Qualified retirement plans should do which of the following? They must meet specific vesting requirements. They have special tax advantages over nonqualified plans. They must provide definitely determinable benefits. They require an annual profit to allow funding for the plan.

Answer 1, 2, and 3 Qualified plans must meet specific vesting schedules. Qualified plans are preferred to nonqualified plans because of the special tax advantages enjoyed by qualified plans. Qualified retirement plans must offer definitely determinable benefits. An annual profit is not required for a qualified plan to be funded. LO 1.2.1

Which of the following are minimum coverage tests for qualified retirement plans? Nondiscrimination test Average benefits percentage test Ratio test Maximum compensation test

Answer 2 and 3 The two minimum coverage tests for qualified retirement plans are the average benefits percentage test and the ratio test. To be qualified, a retirement plan must meet at least one of these tests if the plan does not meet the percentage (safe harbor) test. LO 1.3.1

Which of the following statements regarding a top-heavy plan is CORRECT? A top-heavy plan is one that provides more than 50% of its aggregate accrued benefits or account balances to key employees. A top-heavy defined pension benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service (up to 20%). For a top-heavy defined contribution plan, the employer must make a minimal contribution of 3% of annual covered compensation for each eligible non-key employee. If the contribution percentage for key employees is less than 3%, the contribution percentage to non-key employees can be equal to the key employees' percentage. A top-heavy defined benefit pension plan must provide accelerated vesting.

Answer 2, 3, and 4 Only Statement I is incorrect. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees. LO 1.3.1

Which of the following plans is a cross-tested plan? New comparability plan Employee stock ownership plan (ESOP) Age-based profit-sharing plan Stock bonus plan

Answwers 1 ans 3 Of the plans listed, only the new comparability plan and the age-based profit-sharing plan are cross-tested plans. Cross-testing means a defined contribution plan is tested for nondiscrimination based on benefits rather than contributions. LO LO 3.2.1

A client's employer has recently implemented a traditional Section 401(k) plan as part of its profit-sharing plan. Which of the following is CORRECT regarding the client's participation in the plan? A) The client is immediately vested in all elective deferrals and their accrued earnings. B) The client will not pay current federal income taxes on amounts distributed from the plan. C) The client is always immediately vested in all employer-matching contributions and their accrued benefits. D) The client will not pay Social Security (FICA) taxes on amounts paid into the plan.

Because a Section 401(k) plan is a qualified defined contribution plan, the employee is immediately vested (100%) in all elective deferrals and their accrued benefits. Such deferrals are, however, subject to FICA taxes. Vesting schedules may be used with employer-matching contributions. LO 3.1.1

Which of the following describe differences between a tax-advantaged retirement plan and a qualified plan? IRA-funded employer-sponsored tax-advantaged plans may not incorporate loan provisions. Employer stock distributions from a tax-advantaged plan do not benefit from NUA tax treatment.

Both statements are correct. IRA-funded employer-sponsored tax-advantaged plans are SEPs, SARSEPs, and SIMPLE IRAs. LO 1.2.1

Carol has an additional retirement need of $30,000 annually in today's dollars. She will retire in 15 years and projects a retirement period of 20 years. Carol believes she can achieve a 6% after-tax rate of return and is assuming a 4% annual rate of inflation. Using the level payment approach, how much will Carol need to save in a single annual payment at the end of each year to fund her retirement need? A) $38,973.65 B) $36,767.56 C) $34,044.67 D) $30,000.00

Carol will need to make 15 level annual payments of $38,973.65 at the end of each year. Here is how to work this problem using the regular TVM keystrokes. What will it take to have $30,000 of today's purchasing power in 15 years? $30,000, +/-, PV 4, I 15, N 0, PMT FV Answer: $54,028.3052 How much needs to be in the account at retirement to fund 20 years of serial payments at the first of each year? +/-, +/-, PMT (Hitting the +/- button twice before PMT allows the entire FV of 54,028.3052 to be entered as the PMT quickly and to nine decimal places, The second +/- makes the value positive again) Shift, MAR (To get into the Begin Mode) 0, FV [(1.06 ÷ 1.04) -1] × 100 = 1.9231, I 20, N PV Answer: -$907,149.5440 How much needs to be saved at the end of each year to have $907,149.5440? +/-, $907,149.5440, FV (Hitting the +/- here allows the calculator to take the answer and turns the number positive) 15, N 6, I 0, PV Shift MAR (To be in the End Mode.) PMT Answer: $38,973.65 LO 8.3.2

How is an age-weighted profit-sharing plan similar to a traditional defined benefit pension plan? A) Minimum vesting schedules are more liberal than in other types of plans. B) Employer contributions are flexible from one year to another and, if resources are not available, the employer may choose not to contribute to the plan. C) Retirement benefits are determined by the participant's final account balance. D) Contribution allocations to older participants may be maximized, while allocations to younger participants may be minimized.

Contribution formulas for both age-weighted profit-sharing plans and traditional defined benefit pension plans favor older employees. Retirement benefits are determined by the participant's final account balance in defined contribution plans. Employer contributions can be flexible in an age-weighted profit-sharing plan, but not in a defined benefit pension plan. Vesting is not more liberal in these plans than in other types of plans. LO LO 3.2.1

Richard participates in a defined benefit pension plan at his place of employment. His projected monthly benefit under the plan is $1,000. If the plan provides life insurance for Richard, the death benefit payable under the policy is limited to A) $10,000. B) $1,000. C) $100,000. D) $25,000.

Defined benefit pension plans use the 100 times test for determining whether they comply with the incidental benefit rules. Under this test, the death benefit cannot exceed 100 times the participant's projected monthly benefit. LO 8.2.2

ERISA requires reporting and disclosure of plan information to all of the following except A) the Internal Revenue Service (IRS). B) plan sponsors. C) plan participants. D) the Department of Labor (DOL).

ERISA requires reporting and disclosure of plan information by plan sponsors to the IRS, DOL, Pension Benefit Guaranty Corporation (PBGC), and plan participants. LO 1.1.1

All of the following retirement plans permit employees to make elective deferrals except A) SIMPLE 401(k)s. B) SEP plans. C) profit-sharing plans with Section 401(k) provisions. D) Section 401(k) plans.

Employee elective deferrals are permitted in Section 401(k) plans, profit-sharing plans with a Section 401(k) provisions, and SIMPLEs, but not in SEP plans. LO 8.1.1

Bernie is a participant in his employer's noncontributory employee stock ownership plan (ESOP). Two years ago, his employer contributed stock with a fair market value of $30,000 into Bernie's account. Bernie retired one year later and took distribution of the stock when its fair market value was $40,000. Two years after his retirement, Bernie sold the stock for $50,000. What is the appropriate tax treatment available to Bernie upon sale of the stock? A) $10,000 long-term capital gain B) $20,000 ordinary income C) $20,000 long-term capital gain D) $50,000 ordinary income

Employees are not taxed on stock in an ESOP until the stock is distributed. Upon distribution, the employee must pay ordinary income taxes on the fair market value of the stock when it was contributed to the plan on his behalf. Any net unrealized appreciation (NUA) at that time can be deferred until the stock's subsequent sale. Upon the sale, the NUA portion will be treated as long-term capital gain. Additionally, the growth of the stock subsequent to the distribution will receive long-term capital gain treatment because Bernie held the stock longer than one year after distribution. Therefore, the appropriate tax treatment available to Bernie upon sale of the stock is a $20,000 long-term capital gain. LO 3.2.2

The employee bears the investment risk in all of the following types of retirement plans except A) cash balance pension plans. B) money purchase pension plans. C) target benefit pension plans. D) traditional profit-sharing plans.

Employees bear the investment risk in defined contribution plans, and employers bear the investment risk in defined benefit plans. Cash balance pension plans are defined benefit plans; all the other answer choices are defined contribution plans. LO 8.2.1

A Section 401(k) plan does not have to satisfy the ADP and ACP tests if it meets one of the safe harbor provisions. All of the following statements about the safe harbor provisions are correct except A) mandatory employer contributions under the safe harbor provisions may be subject to a three-year cliff vesting requirement. B) an employer may satisfy the safe harbor provisions by making certain matching contributions for non-highly compensated employees who participate in the plan. C) a plan that satisfies the safe harbor provisions is not subject to the top-heavy rules. D) an employer may satisfy the safe harbor provisions by making non-elective contributions for all eligible employees.

Employees must be immediately 100% vested in mandatory employer contributions that are made under the safe harbor provisions. The mandatory contributions can take the form of either a non-elective contribution to all eligible employees or matching contributions to participating non-highly compensated employees who participate in the plan. LO 3.3.2

Paul estimates he will need a $75,000 annual income in today's dollars when he retires 10 years from now. He assumes a 3% annual rate of inflation, a 5% after-tax rate of return on his investments, and a 20-year retirement period. What lump-sum amount should Paul have accumulated over the next 10 years to support his retirement income need? A) $1,689,612 B) $2,015,880 C) $1,657,429 D) $1,257,227

His total retirement fund needed to support his standard of living is $1,689,612, calculated as follows: The client's first-year retirement income need is $100,794. PV = -$75,000 i = 3 n = 10 FV = $100,794 The total capital required to support this need for 20 years is $1,689,612. In BEGIN mode (the client will make annual withdrawals at the beginning of each year) PMT = $100,794 n = 20 i = 1.9417 [(1.05 ÷ 1.03) - 1] × 100 PVAD = -$1,689,612 LO 8.3.2

If a defined benefit pension plan is determined to be top heavy, what is one practical significance of this determination? A) One of two maximum contribution and benefit formulas must be used. B) Different coverage requirements and nondiscrimination tests apply. C) Different eligibility requirements come into effect. D) One of two accelerated vesting schedules must be used.

If a defined benefit pension plan is top heavy, one of two accelerated vesting schedules must be used: either 100% vesting after three years of service or graded two- to six-year vesting. The same eligibility and nondiscrimination tests apply as for qualified plans that are not top heavy. LO 1.3.2

Which of the following statements accurately describes a reason for the suitability of an asset class in a qualified retirement plan portfolio? A) Common stocks offer capital appreciation and are relatively low risk. B) Mutual funds provide diversification and offer a competitive rate of return. C) Money market investments provide liquidity and a high real rate of return. D) Bonds are useful for funding future fixed obligations and offer protection against inflationary pressures.

In determining the suitability of an asset class in a retirement plan portfolio, mutual funds provide diversification and provide a comparable historical rate of return to that of equities (of course, depending on the investment objective and composition of the particular fund). LO 8.2.1

Life insurance may be a suitable investment for all of the following retirement plans except A) profit-sharing plans. B) money purchase pension plans. C) defined benefit pension plans. D) SEP plans.

Life insurance cannot be held in any type of IRA, including SEPs. Qualified retirement plans and Section 403(b) plans can purchase life insurance if they comply with the incidental benefit rules. LO 8.2.2

Which of the following statements regarding prohibited transactions is NOT correct? A) One category of prohibited transactions involves the sale, lease, or exchange of any property between the plan and a party in interest. B) One category of prohibited transactions involves the investment in the sponsoring employer's stock or real property. C) One category of prohibited transactions bars a fiduciary from causing the plan to engage in a transaction if the fiduciary knows or should know that such a transaction constitutes a direct or indirect involvement between the plan and the parties in interest. D) The lending of money or other extension of credit between the plan and a party in interest is a prohibited transaction exemption.

Loans between the plan and a party in interest are prohibited transactions. LO 1.4.1

Mac, age 39, works for the SLH Company. He has a salary of $28,000 and a 401(k) there. Mac also has another job with AKH, Inc., making $65,000. SLH and AKH are not related. Mac is deferring $9,500 into the 401(k) at SLH. How much can he defer into the 401(k) at AKH? A) $10,000 B) $47,500 C) $57,000 D) $19,500

Mac can defer $10,000 into his 401(k) at AKH, Inc. The total he can contribute to employer retirement plans in 2020 is $19,500. Since he is already doing $9,500 at one employer, he is limited to $10,000 at the other. The fact that the two employers are unrelated does not matter for how much a worker can defer into the two plans. However, when it comes to unrelated organizations, each would have an independent annual additions limit. In other words, the law expects workers to know how much they are contributing to various employer retirement plans and to stay below the limit. The same would be true for related employers. However, unrelated employers are not held responsible for the employee or employer contributions to the other employers. LO 1.3.2

Which of the following is the easiest type of retirement plan for an employer to adopt? A) A custom plan B) A prototype plan C) An individually designed plan D) A Pension Benefit Guaranty Corporation (PBGC) plan

Master plans and prototype plans are easier to use than individually designed plans or custom plans because they are standardized plans approved as qualified in concept by the IRS. The PBGC is the governmental body that insures pension benefits; it is not a type of plan. LO 1.4.1

Sharon plans to retire next year and begin taking distributions from her traditional IRA. Her investment objectives are low risk, safety of principal, and liquidity. She is content with minimal rates of return. Which of the following investments is most suitable for her IRA? A) Dividend-paying common stock B) Corporate bonds C) Nondividend-paying common stock D) Money market instruments

Money market instruments provide the low risk, safety, and liquidity Sharon is seeking for her IRA. Corporate bonds and stocks do not provide safety of principal. LO 8.2.1

Which type of assumed annual rate of return is frequently used in retirement planning calculations? A) Consumer Price Index (CPI) B) Black-Scholes model C) A flat annual return based on past performance D) Quantum simulation

Most planners use a flat annual rate of return based on past performance. The Black-Scholes model is a stock option valuation model. The Consumer Price Index (CPI) measures inflation. LO 8.3.1

Bernie and Tim, both age 53, are partners in a computer software consulting firm. They have 20 employees whose average age is 25 and average length of employment is three years. The firm is highly profitable and enjoys stable cash flows. Of the following retirement plan options, which is best suited to the partners' business? A) A stock bonus plan B) An eligible Section 457 plan C) Traditional defined benefit pension plan D) Section 403(b) plan

Of the listed plans, only a traditional defined benefit pension plan is available to Bernie and Tim's business. A Section 403(b) plan may only be adopted by a Section 501(c)(3) organization. An eligible Section 457 plan may only be adopted by a private, tax-exempt organization or a state or local governmental organization. A partnership cannot use a stock bonus plan because this form of business does not issue stock. Notice how subtlety the form of business was introduced in the question. The form of business is very important in selecting a retirement plan. LO 8.1.2

Susan makes $400,000 working for Great Grapes, Inc. She defers 4% into the 401(k) and receives the 4% match. How much will go into her account in 2020? A) $19,500 B) $32,000 C) $22,800 D) $16,000

Only the first $285,000 of compensation may be used to determine contributions to qualified retirement plans in 2020. Thus, she contributes 4% of $285,000 in 2020. This amount is matched, so $285,000 × 0.08 = $22,800. LO 1.3.2

Paul estimates he will need $75,000 of annual income in today's dollars when he retires 10 years from now. He assumes a 3% annual rate of inflation, a 5% after-tax rate of return on his investments, and a 20-year retirement period. Using the serial payment approach, how much will Paul need to save in a single annual payment at the end of the first year to fund his retirement need? A) $100,794.00 B) $120,880.49 C) $115,124.27 D) $118,578.00

Paul will need to make a serial payment of $118,578.00. Here is how to calculate this type of problem using the regular TVM keystrokes: What will it take in ten years to have $75,000 of today's purchasing power? 75,000, +/-, PV 3, I 10, N FV Answer: $100,793.7285 What does Paul need to have in his account when he retires to produce a serial payment of $100,793.7285 at the beginning of the year for 20 years? +/-, +/-, PMT (This enters $100,793.7285 into the PMT as a positive value. The first +/- allows the calculator to accept the number. The second +/- makes it a positive number.) Shift, MAR (To get into the Begin mode.) 20, N 0, FV [(1.05 ÷ 1.03) - 1] × 100 = 1.9417, I PV Answer: $1,689,607.5595 What is $1,689,607.5595 in 10 years with inflation taken out of it? This step is critical because it prepares for the serial payment from today to retirement by removing the inflation from the dollar goal in 10 years. Serial payments account for inflation by adjusting the interest rate. Without expressing the FV in today's dollars, inflation will be double counted for the investment period. +/- $1,689,607.5595, FV (Only one +/- is needed here because the first +/- allows the calculator to accept the value and the PV was negative so after one +/- the new value will for FV will be positive.) 10, N 0, PMT 3, I PV Answer: -$1,257,226.7036 What is the first serial payment required at the end of the first year to have $1,257,226.7036 in 10 years? +/-, FV (This enters the result from aboe and changes the sing to positive $1,257,226.7036 Shift, MAR (To get in the End mode.) [(1.05 ÷ 1.03) - 1] × 100 = 1.9417, I 0, PV 10, N PMT Answer: $115,124.2738 This answer is in today's dollars, but the first payment will be made in a year, so... $115,124.27 X 1.03 = $118,578 LO 8.3.2

Which of the following is not a broad category personal of financial planning goals? A) Financial nontax goals B) Nonfinancial goals C) Funding the collegiate education of a grandchild. D) Financial tax goals

Personal financial planning goals are typically thought of as tax versus non tax goals and financial and non financial goals. Funding collegiate education is not a broad category of a personal financial planning goal. It is, however, a type of financial non tax financial goal. LO 1.2.1

Which of the following statements regarding profit-sharing plans is NOT correct? A) Profit-sharing plans are types of qualified defined contribution plans. B) Profit-sharing plans are best suited for companies that have fluctuating cash flows. C) The maximum tax-deductible employer contribution to a profit-sharing plan is 25% of total (aggregate) eligible employee covered compensation. D) A company that adopts a profit-sharing plan must make contributions each year.

Profit-sharing plans are not required to make contributions each year. LO 3.1.1

Scott is the fiduciary of the BSB retirement plan. The entity responsible for monitoring his actions as a fiduciary is A) the ERISA. B) the DOL. C) the SPD. D) the PBGC

The Department of Labor (DOL) governs the actions of plan fiduciaries and ensures compliance with the ERISA plan reporting and disclosure requirements. LO 1.1.1

Max is the finance director for Bland Foods, Inc. He is trying to implement a new qualified retirement plan for the company. There are numerous federal guidelines with which the company must comply. Which of the following federal agencies is tasked with supervising the creation of new, qualified retirement plans? A) DOL B) PBGC C) ERISA D) IRS

The Internal Revenue Service (IRS) carries out the task of supervising the creation of new, qualified retirement plans. LO 1.1.1

Several of the steps involved in the process are Understanding the client's personal and financial circumstances Implement the recommendation(s) Identify and select goals Develop the recommendation(s) Which one of the following lists the sequence of these steps correctly?

The answer is I, III, IV, II. Understanding the client's personal and financial circumstances must be completed prior to identifying and selecting goals. From there, you can develop recommendation(s) and, with client agreement, implement recommendation(s). LO 1.3.3

Several of the steps involved in the process are Develop the recommendation(s) Implement the recommendation(s) Identify and select goals Analyze potential alternate courses of action Which one of the following lists the sequence of these steps correctly?

The answer is III, IV, I, II. Understanding the client's personal and financial circumstances must be completed prior to identifying and selecting goals. From there, you can analyze the client's current course of action and potential alternative courses of action. After analysis, you can develop recommendation(s) and present them to the client. With client agreement, you can help implement recommendation(s) and, of course, monitor and update as needed. LO 1.1.1

Elizabeth and Tyler have been clients of yours for many years. In a recent meeting they share that in the last year three new grandchildren have joined the family. You recommend reviewing their beneficiary designations. This is an example of avoiding which of the following mistakes, pitfalls, or weaknesses? A) Improperly arranged life insurance B) Lack of estate liquidity C) Improper disposition of assets D) Failure to avoid ancillary probate

The answer is improperly arranged life insurance because it is the only answer choice which addresses changes in beneficiary designations. The remaining answer choices would also be good to avoid, but they do not involve beneficiary arrangements whereas life insurance certainly does. LO 1.2.1

Which of the following is not a mistake, pitfall, or weakness? A) Improper arrangement of life insurance B) Failure to minimize taxes C) Lack of estate liquidity D) Providing business planning

The answer is providing business planning because it is the only answer choice which would be a strength in an estate plan. The remaining choices are, in fact, mistakes, pitfalls, and weaknesses. LO 1.2.2

Alice participates in a qualified retirement plan at work. The plan provides Alice with life insurance. If Alice dies, which of the following statements correctly describes the income tax treatment of the life insurance death benefit paid to Alice's beneficiary? A) The pure insurance element of the death benefit is income tax free to the beneficiary. B) The beneficiary must pay income tax on the entire death benefit. C) The entire death benefit is income tax free to the beneficiary. D) The beneficiary must pay income tax plus a 10% penalty on the entire death benefit.

The beneficiary receives the pure insurance element of the death benefit income tax free. LO 8.2.2

Under a profit-sharing plan A) the company must make annual contributions. B) the employer bears investment risk. C) up to 25% of the plan's assets can be invested in the employer's stock. D) the company has flexibility regarding annual funding.

The company has funding flexibility. Pension plans can invest only up to 10% of plan assets in employer stock. Profit-sharing plans have no restrictions regarding investment in employer stock. The employer may deduct a contribution limited to only 25% of participating employees' covered compensation. They must make substantial and recurring employer contributions, or the IRS will remove the plan's qualified status. The employee bears investment risk. LO 3.1.1

What is the maximum elective deferral a participant can make to a Section 401(k) plan in 2020, assuming no catch-up provisions apply? A) $57,000. B) $19,500 C) $13,500 D) $6,000

The elective deferral limit for 2020 to a Section 401(k) is $19,500. The maximum annual additions limit is $57,000. LO LO 3.3.1

Window Washers, Inc., is establishing a profit-sharing plan using Social Security integration. The base contribution percentage for the profit-sharing plan will be 5%, and the owners have come to you with some questions about Social Security integration. Which one of the following statements is CORRECT? A) The excess contribution percentage for the plan could be as high as 26.25%. B) The permitted disparity for the plan is 3%. C) The excess contribution percentage for the plan could be as high as 10%. D) The permitted disparity for the plan is 5.7%.

The excess contribution percentage for the plan could be as high as 10%. The excess contribution percentage is the base contribution percentage plus the permitted disparity. The permitted disparity for the defined contribution plan is the lesser of the base benefit percentage and 5.7%. Thus, in this case, the permitted disparity is 5% and the maximum the excess benefit percentage could be would be 10%. LO 1.3.3

Jim, the president of East Dover Construction Company, has requested your advice in setting up a defined benefit pension plan for eligible employees in the company. Jim founded the company 17 years ago and now has 200 employees, most of whom are under 35 years of age. Due to the nature of the work and ongoing management difficulties, tenure among the employees has averaged under two years. Jim has just fired the managers who were creating problems, but turnover is likely to remain high due to ongoing morale problems. Jim's current salary is $300,000, and he wants the plan to provide him with annual retirement income of $100,000 per year. He expects to retire in 13 years, at age 64. Which of the following statements describes information you need to convey to Jim about factors that could affect the amount of his retirement benefit? A) If the plan investments outperform expectations, he will receive the largest allocation of the excess earnings. B) The excess integration method could be used to increase the amount of his plan benefit in retirement. C) Using a flat benefit formula will always provide Jim a larger benefit than would a unit benefit formula. D) One method of increasing the retirement benefit paid to him is by integrating the plan using the offset method.

The excess integration method increases the retirement benefit for compensation above the integration level. The offset integration method reduces the retirement benefit due to the receipt of Social Security benefits. With a defined benefit plan, excess investment performance reduces the subsequent employer contributions. A flat benefit formula versus a unit benefit formula would depend on the details of the flat benefit versus the unit benefit formula, so more information would be required to determine which would give a larger benefit. LO 1.3.3

The Jones Corporation has a profit-sharing plan with a 401(k) provision. The company matches dollar-for-dollar up to 5%. Pedro makes $150,000 and defers 5% into the 401(k) for 2020. The Jones Corporation has had a banner year and is considering a large contribution to the profit-sharing plan. What is the most that could be contributed to Pedro's profit-sharing account this year? A) $49,500 B) $19,500 C) $42,000 D) $57,000

The maximum allowed contribution for 2020 is $42,000. The section annual additions limit for 2020 is $57,000. However, Pedro has already contributed $7,500, and this amount has been matched. Thus, $15,000 has already gone toward the $57,000 annual additions limit for 2020. LO 1.3.2

In 2020, what is the maximum amount an employee under the age of 50 may contribute to a traditional Section 401(k) plan as an elective deferral? A) $26,000 B) The lesser of 100% of compensation or $57,000 annually C) $13,500 D) $19,500

The maximum amount of elective deferrals possible in 2020 to a traditional profit-sharing Section 401(k) plan for an individual under age 50 is $19,500 (it is $26,000 for an individual age 50 or older). The lesser amount of $13,500 applies to the SIMPLE 401(k) form. LO LO 3.3.1

Shawn, age 32, needs $10,000 for the purchase of a primary residence. She has no other source of funds at her disposal. Her Section 401(k) plan allows participant loans. The current value of Shawn's deferral account is $14,000, of which $9,500 is her aggregate vested balance. What is the maximum loan Shawn can take from the Section 401(k) plan? A) $10,000 B) $7,000 C) $14,000 D) $9,500

The maximum amount of loan Shawn can take is $9,500, which represents her aggregate vested balance. When the vested account balance is less than $20,000, loans up to $10,000 are available without regard to the half the vested balance rule. LO LO 3.3.1

Which of the following statements regarding a nonspouse designated beneficiary of an IRA is CORRECT? A) The nonspouse beneficiary may elect to distribute the IRA over the remaining life expectancy of the beneficiary commencing the year following the year of death, reduced by one for each subsequent year. B) The nonspouse beneficiary must take a lump-sum distribution in the year following the death of the participant-owner. C) The nonspouse beneficiary may rollover the IRA into his own IRA and defer distribution until attaining age 72. D) The nonspouse beneficiary must follow the five-year payout rule.

The nonspouse beneficiary may not rollover the IRA into his own IRA. While a lump-sum distribution or the five-year payout are options for the nonspouse beneficiary, they are not mandatory. LO 8.3.1

Which of the following is a financial goal? A) Maximizing benefits for a surviving spouse B) Control of assets C) Meeting the needs of dependents D) The efficient transfer of assets at death

The other answer choices are nonfinancial goals. LO 1.2.1

Able Company is considering various types of qualified plans and seeks your advice. You are asked how a plan participant's benefits at retirement are determined in a defined benefit plan with a flat benefit formula that uses the offset method of integration. Which of these statements would best answer the company's question? A) The benefit paid from the employer plan is reduced by the amount the employer pays into Social Security on behalf of the employee. B) The benefit paid from the employer plan is based only on employee compensation above the Social Security wage base. C) The employee's Social Security benefit is reduced by a specific percentage of the retired employee's retirement plan benefit. D) The percentage of pay benefit specified by the plan is reduced by a specific percentage of the retired employee's Social Security benefit.

The percentage of pay benefit specified by the plan is reduced by a specific percentage of the retired employee's Social Security benefit. Offset integration reduces the defined benefit received due to the retiree also getting Social Security benefits. LO 1.3.3

What is the permitted disparity for a defined contribution plan with a current base contribution percentage of 6%? A) 11.7% B) 5.7% C) 12.0% D) 6.0%

The permitted disparity is the extra amount reached above the integration level. For an integrated defined contribution plan, the permitted disparity is the lesser of 5.7% and the base contribution percentage. Since the base benefit percentage is 6%, the permitted disparity is limited to 5.7%. That would mean the excess benefit percentage is 11.7% (6% + 5.7%). LO 1.3.3

With an integrated defined contribution plan, what is the maximum permitted disparity? A) For an integrated defined contribution plan, the permitted disparity is the lower of the base amount, or 5.7%. B) The maximum permitted disparity is 25%, so if the base benefit percentage is greater than 25% then the permitted disparity would be capped at 25%. C) In an integrated defined contribution plan, if the base contribution percentage is 5% then the permitted disparity is 5.7%. D) The permitted disparity is 0.75% per year for up to 35 years.

The permitted disparity is the lower of the base amount, or 5.7%. Thus, the maximum permitted disparity is 5.7% for integrated defined contribution plans. The number 5.7% is the percentage of an employee's compensation that goes toward his Social Security retirement benefit for compensation below the taxable wage base ($137,700 in 2020). LO 1.3.3

Benjamin, who is unmarried, lives in Illinois and owns his home. He also owns a second home in Florida and has several liquid assets. Benjamin's goal is to leave all of his assets, including the two residences, to his brother, Daniel, while incurring the least amount of transfer tax and administration fees as possible. Benjamin is currently the sole owner of each property. As his planner, you recommend that he consider a revocable trust and title the Florida property in the name of the trust to avoid the administrative costs of an ancillary probate in Florida. Since Benjamin's goal is to reduce taxes, placing the property in joint tenancy with his brother would not be advisable since a gift tax liability would be incurred. Benjamin can also place his Illinois residence and his other assets in trust to avoid probate and reduce the estate administration fees and costs. This is an example of avoiding which of the following mistakes, pitfalls, or weaknesses? A) Failure to provide business planning B) Failure to minimize taxes and costs C) Lack of estate liquidity D) Failure to recommend necessary changes to a will

The recommendations made will reduce or avoid taxes and costs that would otherwise be incurred. LO 1.2.2

Which of the following is a tax-related financial goal? A) Minimizing nontax transfer costs B) Deferring the recognition of gain C) Maximizing benefits for a surviving spouse D) Maintaining a satisfactory standard of living

The remaining answer choices are nontax-related financial goals. LO 1.2.1

Which if the following is a nonfinancial goal? A) Preserving business value B) Asset protection C) Maximizing flexibility D) Minimizing nontax transfer costs

The remaining choices are financial goals. LO 1.1.1

Which of the following is a tax goal related to transfer taxes? A) Obtaining a stepped-up basis B) Maximizing benefits for a surviving spouse C) Freezing the value of assets subject to tax D) Maintaining a satisfactory standard of living

The remaining choices are not tax goals related to transfer taxes. LO 1.2.1

Which of the following is a common mistake people make regarding estate planning? A) Adequate estate liquidity B) Proper titling of assets C) Recommending necessary changes to a will D) Improper disposition of assets

The remaining choices are the exact opposite of mistakes people make. LO 1.2.2

Which of the following is a common mistake people make regarding estate planning? A) Failure to give proper advice regarding funeral arrangements B) Proper titling of assets C) Recommending necessary changes to a will D) Adequate estate liquidity

The remaining choices are the exact opposite of mistakes people make. LO 1.2.2

Which of the following investments would be the least suitable for a qualified retirement plan? A) Municipal bond fund B) Equity mutual fund C) Guaranteed investment contract (GIC) D) Real estate investment trust (REIT)

The tax-exempt nature of qualified retirement plans must be considered in determining if a specific type of investment is appropriate. Municipal bonds are tax-free investments. Because a qualified plan is already tax exempt, there would be no reason to utilize them in plan assets. LO 8.2.2

Lisa has accumulated assets of $350,000 that she wishes to dedicate to her retirement. Inflation is anticipated to average 2% over the next 20 years. She plans on retiring in 15 years. What would be the value of her fund at retirement if Lisa can average a 5% after-tax rate of return on her accumulated assets? A) $467,035 B) $928,654 C) $520,082 D) $727,625

This is a future value calculation. PV = -$350,000 i = 5 (after-tax rate of return) n = 15 (years to retirement) FV = $727,625 LO 8.3.2

Northwest Instruments Corp. made matching contributions to its SIMPLE 401(k) in the last three years. Assume all eligible employees earn at least the maximum includible compensation limit and all defer the maximum amount allowed. Due to extensive capital expenses anticipated this year, the company is considering how to reduce expenses. It will not be able to continue to make the 3% matching contribution and has called you to discuss their options. Which of the following could you recommend? A) Because they have satisfied the 3% matching contribution for three years, Northwest Instruments Corp. could reduce the matching contribution to 1%. B) With SIMPLE 401(k) plans, employers who begin using the 3% matching contribution do not have any option available to modify the company's contribution. C) By providing adequate notice, Northwest Instruments Corp. could move to the 2% non-elective contribution this year, although the savings would be minimal. D) Employer contributions under a SIMPLE plan are discretionary, and Northwest Instruments Corp. could provide notice that they will not provide any contribution this year.

Under a SIMPLE 401(k), an employer does not have the option to change the percentage used for the matching contribution. However, the employer can use the 2% non-elective contribution instead of the 3% matching contribution. Under the scenario described, however, the savings would be minimal. LO 3.3.3

Nigel's employer, Alpha, Inc., maintains a qualified defined benefit pension plan. There are 100 eligible employees working for Alpha, Inc. What is the minimum number of employees the retirement plan must cover to satisfy the 50/40 test? A) 100 B) 80 C) 40 D) 50

Under the 50/40 test, a defined benefit plan must cover the lesser of 50 employees or 40% of all eligible employees. In this case, the lesser of 50 employees or 40% of all eligible employees (100) is 40 employees. One way to remember the 50/40 test is the phrase people before percentages (50 people or 40%). Also, note that there are no qualifiers to the types of people. It is not 50 non-highly compensated people. It is just 50 individuals who work for the employer. LO 1.3.1

Jeanette uses the serial payment approach to calculate the amount she must save each year to accumulate her desired retirement income fund. She assumes an annual inflation rate of 4%, and an annual investment rate of return of 7%. If she determines that she must save $10,000 in the first year, how much must she save in the second year to meet her goal? A) $10,000 B) $10,288 C) $10,700 D) $10,400

Under the serial payment approach, the first-year savings amount is computed and then increased each year by the inflation rate. In this example, the amount in the second year is $10,000 × 1.04, or $10,400. LO 8.3.2

Which of the following constitutes unrelated business taxable income (UBTI) to a qualified plan trust? A) Dividends from common stock purchased on margin B) Interest payments from corporate bonds C) Reinvested dividends from mutual funds D) Rents from real property investments

Unrelated business taxable income (UBTI) is gross income generated by a qualified plan trust that is not related to the function that is the basis for the trust's income tax exemption. In addition, the trust is generally prohibited from incurring debt. Therefore, dividends declared on common stock purchased on margin are treated as UBTI. LO 8.2.1

A planner may use a before-tax rate of return in making projections regarding the preretirement investment returns for all of the following assets except A) Roth IRA. B) Section 401(k) plan. C) mutual fund held outside a qualified retirement plan. D) traditional IRA.

Using a before-tax rate of return to project investment performance is appropriate for tax-advantaged assets, such as qualified plans and IRAs, because the earnings on these assets are not taxed each year as they accumulate. LO 8.3.1

Valerie earns $290,000 annually from XYZ Corporation. The company profit-sharing plan provides for a contribution of 25% of participant compensation. What is the amount of the company's contribution for Valerie for 2020? A) $230,000 B) $57,000 C) $100,000 D) $71,250

Valerie earns $290,000 annually in 2020. The plan provides for a contribution of 25% of participants' compensation. However, the maximum compensation that can be taken into consideration is $285,000. Twenty-five percent of $285,000 is $71,250. Finally, the maximum annual additions limit is $57,000, making the maximum company contribution for Valerie $57,000. LO 3.1.1

Ellen participates in a SIMPLE 401(k) maintained by her employer. If she has completed two years of service, to what extent is she vested in the employer contributions to her account? A) 0% B) 40% C) 20% D) 100%

Vesting schedules are not permitted in SIMPLE 401(k)s. Employees are always 100% vested in employer contributions. LO 3.3.3

Which of the following legal requirements apply to employee stock ownership plans (ESOPs)? ESOPs must permit participants who have reached age 55 and have at least 10 years of service the opportunity to diversify their accounts. ESOPs cannot be integrated with Social Security. An employer's deduction for ESOP contributions and amounts made to repay interest on an ESOP's debt cannot exceed 25% of the participants' payroll. The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP.

amswers 1, 2, and 4 Options I and II correctly state the diversification rule and the rule that prohibits integrated ESOPs. There is no limit on amounts used to pay interest on ESOP debt. ESOP distributions of employer stock only are not subject to the 20% income tax withholding requirement. LO 3.2.2

In a Section 401(k) plan, which of the following must be considered in complying with the maximum annual additions limit? Employee contributions Catch-up contributions for an employee age 50 or older Dividends paid on employer stock held in the Section 401(k) plan Employer contributions

answer 1 and 4 Statement I is correct. Employee contributions are counted against the annual additions limit. Statement II is incorrect. Catch-up contributions for an employee age 50 or older are not counted against the annual additions limit. Statement III is incorrect. Earnings on plan investments are not taken into account when computing the maximum annual additions limit. Statement IV is correct. For 2020, the annual additions limit is the lesser of 100% of the employee's compensation, or $57,000. LO 1.3.2

Which of the following plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made? Traditional profit-sharing plan Simplified employee pension (SEP) plan Individual retirement account (IRA) Section 403(b) tax-deferred annuity

answer 1 only Only lump-sum distributions from qualified plans may be eligible for 10-year forward averaging. SEP plans, IRAs, and tax-deferred annuities—also known as Section 403(b) plans—are not qualified plans and, therefore, are not eligible for 10-year forward averaging. Remember, to be eligible for 10-year forward averaging, a person must be born before Jan 2, 1936. Thus, only people working into their 80s can today qualify for 10-year forward averaging. Even then, they would have to take a lump-sum distribution to meet another rule to qualify for 10-year forward averaging. LO 3.1.1

Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses such as vacation costs. medical expenses. college tuition costs. insurance premiums.

answer 2 and 3 Hardship withdrawals are typically allowed for medical expenses, college tuition and fees, to purchase a principal residence, burial expenses for spouse or dependents, and to prevent eviction from one's principal residence or foreclosure on the mortgage of such residence. LO LO 3.3.1

Which of the following penalties apply to prohibited transactions? A tax equal to 15% of the amount involved applies unless it can be demonstrated that the transaction satisfies ERISA's fiduciary standards. The transaction must be corrected and the plan placed in a financial position no worse than if the transaction had never occurred. Plan participants who engage in prohibited transactions are subject to income tax on a judicially determined amount. Transactions that continue uncorrected into subsequent years are subject to additional penalties.

answer 2 and 4 The law requires correction (i.e., undoing) of a prohibited transaction and restoring a plan to the position it would have been in, had the transaction never occurred. Ongoing transactions (e.g., loans, leases) create additional prohibited transactions in subsequent years (and additional penalties) until corrected. Options I and III are incorrect for the following reasons. Once the prohibited transaction has taken place, the 15% penalty cannot be waived for extenuating circumstances. Income tax consequences may or may not apply depending on the nature of the underlying prohibited transaction. Usually, the IRS (not the courts) determines the amount of tax involved. LO 1.4.1

Ryan wants to take a distribution from his SIMPLE 401(k) account balance from his previous employer and deposit it in an IRA at his local banking institution. Which of the following statements regarding his transfer is CORRECT? The distribution from the SIMPLE 401(k) plan is not subject to the mandatory 20% income tax withholding requirement. A direct transfer from Ryan's SIMPLE 401(k) to an IRA is not subject to the mandatory 20% income tax withholding requirement.

answer 2 only Statement I is incorrect. SIMPLE 401(k) plans are qualified plans and are subject to mandatory 20% income tax withholding for a distribution that is not a direct trustee-to-trustee transfer. When there is a direct transfer of a distribution from a qualified plan to an IRA, the mandatory 20% withholding rule does not apply. LO 3.3.3

Which of the following should a businessowner accomplish before considering the adoption of a retirement plan? Purchase personal and business liability insurance. Establish cash reserves sufficient to cover potential emergencies. Ensure the business has sufficient cash flow to support ongoing funding of the plan.

answer all of them A businessowner (or a person planning for his own retirement) should accomplish all of these objectives before considering the adoption of a retirement plan. LO 8.1.1

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary or bonuses simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following is a rule that applies to Section 401(k) plan elective deferrals? Section 401(k) plan elective deferrals are immediately 100% vested and cannot be forfeited. In-service withdrawals are to be made only if an individual has attained age 62. An extra nondiscrimination test called the actual deferral percentage test applies to elective deferral amounts.

answers 1 an 3 Statement II is incorrect. A Section 401(k) plan may allow in-service distributions before age 62. LO LO 3.3.1

Which of the following statements regarding the anticipated effective income tax rate a planner should use for required retirement plan distributions is CORRECT? The projected rate should be based only on a blend of current federal and state marginal income tax rates. The projected rate should be based only on current federal marginal income tax rates. Precisely predicting future income taxes is not feasible. A planner should only use before-tax rate of return assumptions on retirement plan distributions.

answers 1 and 3 Before retirement, the planner may use a before-tax rate of return in the assumptions, particularly if tax-advantaged savings vehicles (such as a traditional or Roth IRA) are used in the planning process. However, at the time of either optional or required retirement plan distributions, the client's anticipated effective income tax rate is very important. This rate should be a blend of the client's federal and state marginal income tax rates but should be projected based only on current rates because precisely predicting future income tax rates is not feasible. LO 8.3.1

What may be the client's personal retirement plan objective if he selects a qualified defined benefit pension plan as the retirement plan for his company? An approaching retirement need A desire to maximize tax benefits to the business Selectively choose participants in the plan Maximize retirement contributions for older workers

answers 1, 2, and 4 Only Statement III is incorrect. A qualified pension plan is subject to nondiscrimination rules and the client would not be able to cover only select participants. LO 8.1.2

Which of the following events should trigger a recalculation of the retirement needs analysis? Marriage Employment change Change in FICA rate Significant income change

answers 1, 2, and 4 The retirement needs analysis should be recalculated any time there is a change in the client's life such as marriage, divorce, births, deaths, employment and income, or health. Temporary changes in tax laws will not impact the retirement needs over the long term. LO 8.3.1

Which of the following statements regarding Section 401(k) plans is CORRECT? Employer contributions and their accrued earnings are always immediately 100% vested in the plan. A Section 401(k) plan is a qualified profit-sharing or stock bonus plan. The maximum pretax elective deferral for a participant age 35 is $19,500 in 2020. Elective deferrals in a cash or deferred arrangement (CODA) are not subject to FICA and FUTA taxes.

answers 2 and 3 Statements II and III are correct. Statement I is incorrect. Employee contributions and investment earnings are always 100% vested, not the employer contributions. Statement IV is incorrect. Elective deferrals in a CODA are subject to FICA and FUTA taxes. LO LO 3.3.1

Which of the following are basic provisions of an IRC Section 401(k) plan? Employee elective deferrals are exempt from income tax withholding and FICA and FUTA taxes. An employer's deduction for a vested contribution to a Section 401(k) plan cannot exceed 25% of covered payroll, which is not reduced by the employees' elective deferrals. A Section 401(k) plan cannot require as a condition of participation that an employee complete a period of service longer than one year. Employee elective deferrals may be made from salary or bonuses.

answers 2 and 4 Options II and IV correctly describe the 25% employer deduction limitation, eligibility requirement, and potential sources of employee elective deferrals for Section 401(k) plans. Option I is incorrect because employee elective deferrals (i.e., salary deferrals) are subject to FICA and FUTA taxes. Option III is incorrect because there can be a two-year period of service requirement if the participants are 100% immediately vested. LO LO 3.3.1

Which of the following can be used as a funding vehicle for tax-sheltered annuities (TSAs)? Stocks Bonds Annuities Regulated investment company shares held within a custodial account

answers 3 and 4 The primary investment vehicles for Section 403(b) plans are annuities or mutual funds held in a custodial account, although funds can also be used to purchase life insurance. Section 403(b) accounts can be invested in annuities or mutual funds held in a custodial account. Funds also can be used to purchase life insurance. Neither stocks nor bonds can be used as an investment for a Section 403(b) plan. LO 8.2.1

XYZ Inc. has 80 employees in the current year and is expected to employ the same number next year. They are considering the adoption of a retirement plan next year. The objectives are to use elective deferrals by employees with an appropriate match and immediate vesting. Which of the following plans would be appropriate? Traditional defined benefit pension plan Section 403(b) plan SIMPLE 401(k) SIMPLE IRA

answers 3 and 4 Traditional defined benefit pension plans do not permit employee contributions through elective deferrals. Section 403(b) plans are for 501(c)(3) tax-exempt organizations, and there is no indication that this is a tax-exempt organization. SIMPLE plans permit employee contributions through elective deferrals, matching, and immediate vesting. LO 8.1.2

Which of the following qualified plans can an S corporation implement? Profit-sharing plan Stock bonus plan Money purchase pension plan Employee stock ownership plan (ESOP)

answers all of them S corporations can establish stock bonus and ESOPs. LO 3.2.2