Series 66 Chapter 11: Retirement Plans and College Tuition Plans
Which of the following investments would be allowed in an Individual Retirement Account (IRA)? I. Common stock II. Life and/or Health Insurance III. Mutual funds IV. Collectable stamps [A]I & II[B]I & III***[C]II & III[D]I, II, III, IV
EXPLANATION Allowable investments in an IRA include stocks, bonds, mutual funds and other types of securities and real estate. Insurance and collectibles items would NOT be allowable.
The features of a Coverdell Education Savings Account include all of the following EXCEPT: [A]The contributions are deductible. [B]$2,000 is the maximum contribution in any one year.**** [C]Withdrawals are tax free. [D]Contributions are phased out for certain taxpayers who have adjusted gross income above a certain level.
EXPLANATION The contributions are not deductible.
A registered representative who recommends investments for an account subject to ERISA (pension plan), should first consider which of the following? [A]The tax status of the investment. [B]Liquidity. [C]The risk associated with the investment.**** [D]The amount of current income generated.
EXPLANATION Accounts subject to ERISA are tax-deferred accounts that do not allow early distribution without penalty, so current income, liquidity, and tax status are not at issue when recommending investments. Risk associated with the investment should always be a primary concern when recommending securities.
A single taxpayer with an existing IRA elects to participate in his company's newly-formed pension plan. His adjusted gross income is $200,000. Which of the following is true? [A]No contributions of any kind can be made to an IRA.[B]Contributions can continue as before on a tax-deductible basis.[C]After-tax contributions may be made to an IRA by the taxpayer.[D]The IRA must be closed and the entire amount withdrawn immediately.
EXPLANATION After-tax contributions up to $6,000 (2020) may be made to an IRA by the taxpayer participating in his company's pension plan. This maximum amount is unchanged from 2019.
A doctor plans to retire from his corporation and take his retirement plan in a lump sum. Under the IRA rollover rules, how long does he have to invest his benefit check in a new IRA before incurring a tax liability? [A]30 days [B]60 days**** [C]90 days [D]1 year
EXPLANATION An individual has 60 days to invest benefits from a retirement plan into a new IRA before incurring a tax liability. (Rollover)
Which of the following is true about a defined benefit plan? [A]All participating employees are vested immediately following a contribution to the plan. [B]Contributions are made in regular fixed amounts. [C]High salaried employees with only a few years to retirement benefit the most.**** [D]Low salaried employees are excluded from the plan.
EXPLANATION Benefits directly depend on length of time employee is under plan and the amount contributed on their behalf. High salaried employees benefit the most.
Under ERISA, which of the following is correct regarding covered call writing: [A]It should not be done because it is too risky [B]It may be used only if it fits in with the planned overall objectives.[C]There are no restrictions on covered call writing usage. [D]It may be utilized only if the option premiums are sufficiently large enough to cover the downside risk.
EXPLANATION Covered call writing can only be done in ERISA accounts if it is in line with the general objectives of the plan.
All of the following are characteristics of defined benefit pension plans EXCEPT: [A]Retirement benefits are taxable [B]All of the employees receive the same pension benefits at retirement**** [C]The plan contains the formula for calculating the pension benefits [D]High income employees with long service who are near retirement benefit the most
EXPLANATION Defined Benefit Pension Plans are qualified retirement plans where the employees/participants' pension benefits can be defined or calculated from a formula contained in the plan. The pension benefit for each is generally computed from a formula that includes that employee's level of compensation, years of service and age. High income employees with long service who are near retirement generally benefit the most from this type of plan. The pension benefits are taxable.
Which of the following retirement plans would NOT be subject to the rules of ERISA? A Company-Administered 401(k) Plan for a mid-sized firm A Non-Qualified Deferred Compensation Plan for a professional athlete A Variable Annuity purchased by an individual from an insurance company A Keogh Plan covering a private practice doctor and her employees [A]I and III only[B]I and IV only[C]II and III only****[D]II and IV only
EXPLANATION ERISA is designed to ensure that self-directed retirement plans for private companies are handled in a responsible manner. The two scenarios listed that would NOT be covered by ERISA would be the non-qualified deferred compensation plan and the variable annuity. The non-qualified deferred compensation plan is related to deferred compensation and is a contract between the employer and employee related to when compensation will be paid. The variable annuity is directed by the holder, and thus there isn't really a risk associated with mis-handling by a fiduciary. The company-administered 401(k) and the Keogh are both scenarios where a qualified retirement plan is being handled by a private employer, subjecting both to ERISA.
The purpose of ERISA was to establish guidelines for the protection of those employees working in the: [A]private sector*** [B]public and private sector [C]municipal sector [D]public sector
EXPLANATION ERISA was established to protect employees working in the private sector.
Which of the following sources of cash can be used as qualified contributions to a Traditional IRA? [A]Pensions and annuities [B]Earned income and alimony**** [C]Earned income and pensions [D]Pensions and alimony
EXPLANATION IRAs are designed for workers who earn current compensation from employment i.e. earned income. Alimony is also considered qualified income. Pensions and annuities are not qualified because they are forms of deferred compensation rather than current compensation.
Stewart has worked as an accountant for several years. He is hired by a company to handle the tax filings associated with a company's retirement plan, which is covered by ERISA. Which of the following is TRUE related to Stewart and this scenario? [A]Stewart is considered a financial adviser to the firm and would have to adhere to rules that apply to fiduciaries. [B]Stewart is obligated to adhere to general accounting standards, but would not be considered a fiduciary.**** [C]Stewart is considered an administrator of the plan and would have to adhere to rules that apply to fiduciaries. [D]Stewart has no duty whatsoever with regards to fiduciaries or general accounting standards in this scenario.
EXPLANATION In this scenario, Stewart is being hired to handle tax filings associated with a company's retirement plan. He would not be considered an administrator or fiduciary of the plan. He also would not be a financial adviser to the firm unless his services extended beyond advice that was incidental to his accounting practice, none of which are listed in the question. Stewart would, however, be obligated to adhere to general accounting standards when reviewing the tax information of the plan.
Correct statements concerning Employees Retirement Income Security Act (ERISA) plans include all of the following EXCEPT: [A]Defined benefit plans include a formula to use in determining the benefits employees will receive on their retirement. [B]Payroll deduction plans must be "qualified" plans under the IRS code.**** [C]Under defined contribution plans, employee retirement benefits depend on factors such as contributions made and portfolio performance. [D]Trading for ERISA plan accounts make up a significant part of the volume on all national exchanges.
EXPLANATION Payroll deduction plans can be non-qualified plans under the IRS code. This means the money going into the plan is "after-tax" money.
Which of the following statements is FALSE regarding a SEP-IRA? [A]Employee/participants must make the first contributions to their IRA accounts*** [B]Employee/participants are 100% immediately vested in employer contributions [C]Employee/participants may make their own contributions to their IRA accounts [D]Distributions are subject to the regular IRA distribution rules.
EXPLANATION Simplified Employee Pension IRAs (SEP IRAs) provide for (1.)100% immediate vesting in the employee/participants of employer contributions, (2.) employee/participants may make their own additional contributions to their IRA accounts, and (3.) distributions from the IRA accounts are subject to the regular distribution rules. There is no requirement that the employees must make the first contributions.
Under the Safe Harbor Provisions (404c) of ERISA qualified retirement plans must provide participants with all of the following EXCEPT: [A]Participants must be given the ability to choose between different plans and periodically make changes with the plan administrator or fiduciary. [B]Participants must be provided with education related to their plan.[C]Participants must be provided with a minimum return on their plan.**** [D]Participants must be provided with required disclosures with regard to their plan.
EXPLANATION The Safe Harbor Provisions (404(c )) of ERISA are required to provide all choices except "C". Participants cannot provide a minimum return on the plan.
Jeanine spent most of her life working for a charity. When Jeanine passed away she left half of her IRA to her daughter who was named as a beneficiary of the IRA and the other half to the charity that she worked for. How will these inheritances be handled for tax purposes under IRS rules? [A]Both her daughter and the charity will be required to take the IRA inheritance as a distribution which will be taxed as ordinary income in the year received. [B]Her daughter will be required to take the inheritance as a taxable distribution but the charity will be allowed to take the distribution with no tax consequences. [C]Because her daughter was named as a beneficiary, she may "stretch" the IRA, allowing for continued tax-deferred growth of principal with required minimum distributions. The distribution to the charity will be taxable in the year it is received by the charity.[D]Because her daughter is a beneficiary, her daughter will have to withdraw and receive distributions of all of the IRA assets left to her within 10 years of inheriting the account. The charity will have no tax consequence from the inheritance.****
EXPLANATION The beneficiary of the IRA named in this question is Jeanine's daughter. Under current IRS rules, the daughter must take distributions from the inherited account and completely withdraw all the account's assets left to her by the 10th year of the inheritance. There are no required minimum withdrawals, but by the 10th year she must withdraw all of the assets. When charities receive donations, the donations are tax-free, whether given as a gift or inherited as is seen in this case.
In 2020, a single individual who is not an active participant in a qualified retirement plan earned $18,000. The maximum tax deductible contribution that can be made to an IRA is [A]$2,000. [B]$2,250. [C]$6,000.**** [D]$7,000.
EXPLANATION The maximum tax deductible contribution to an IRA for a single individual who is not an active participant in a qualified plan at work is $6,000 per year (2020, unchanged from 2019), unless the individual is 50 years of age or older, in which case there is an additional $1,000 catch up contribution allowed. Because there is no indication in this question that the taxpayer is 50 or older, do not assume that the taxpayer is eligible for the extra catch up contribution.
Which of the following retirement plans would NOT be subject to the rules of ERISA? I. A Company-Administered 401(k) Plan for a mid-sized firm A Non-Qualified Deferred Compensation Plan for a professional athlete A Variable Annuity purchased by an individual from an insurance company A Keogh Plan covering a private practice doctor and her employees [A]I and III only[B]I and IV only[C]II and III only***[D]II and IV only
EXPLANATION ERISA is designed to ensure that self-directed retirement plans for private companies are handled in a responsible manner. The two scenarios listed that would NOT be covered by ERISA would be the non-qualified deferred compensation plan and the variable annuity. The non-qualified deferred compensation plan is related to deferred compensation and is a contract between the employer and employee related to when compensation will be paid. The variable annuity is directed by the holder, and thus there isn't really a risk associated with mis-handling by a fiduciary. The company-administered 401(k) and the Keogh are both scenarios where a qualified retirement plan is being handled by a private employer, subjecting both to ERISA.
A 403(b) Plan is a retirement plan which is offered to all of the following except? [A]Public School Teachers [B]Public School Administrators [C]Hospitals [D]Self-employed individuals****
EXPLANATION 403(b) Plans are designed for employees of certain non-profit organizations including public education facilities, hospitals, as well as charitable and religious organizations. 403(b)'s are NOT available to self-employed individuals. A self-employed individual would likely establish an IRA. Corporations generally establish 401(k) Plans.
Money withdrawn from a Keogh Plan or Individual Retirement Plan by an individual is normally: [A]Taxed as ordinary income**** [B]Tax exempt [C]Taxed as long-term capital gain [D]Taxed 60% as a long-term gain and 40% as ordinary income
EXPLANATION Withdrawals from Keogh or IRA would be taxed as ordinary income and, if the withdrawal was made early, it would be subject to a penalty.
