Series 7: Retirement Plans (Retirement Plans)
In 2020, a self-employed person earning $100,000, who also has $100,000 of investment income, wishes to open a Keogh Plan. Their maximum permitted contribution is:
$20,000 Keogh (HR10) contributions are based only on personal service income - not investment income. $100,000 of personal service income x 20% effective contribution rate = $20,000. Note that this is less than the maximum contribution allowed of $57,000 in 2020.
What is the penalty imposed for excess contributions to an IRA?
6% of the excess contribution Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.
Contributions to Individual Retirement Accounts must be made by:
April 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return Contributions to Individual Retirement Accounts must be made by April 15th (tax filing date) of the year after the tax filing year. For example, a contribution for tax year 2020 must be made by April 15th, 2021. No extensions are permitted
A divorced woman with 2 young children has a small trust fund that gives her $2,500 a year in income. She collects another $2,500 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE?
No contribution can be made based on either the alimony payments or the trust fund income IRA contributions can only be made based on earned income - meaning income from one's work. Portfolio income does not count, since it is not earned income. Alimony and child support payments, starting in 2019, also do not count. (Of course, the big question here is: "If this person only has total income of $5,000 a year, how would she be able to make an IRA contribution since she doesn't even have enough money to eat?!")
A 55-year old individual has just retired after working for the same employer for 20 years. She will collect an annual pension benefit of $55,000, but is not yet ready to stop working.She has lined up a part-time job that will pay $4,000 this coming year. How much can she contribute to a Traditional Individual Retirement Account for her first year in retirement?
$4,000 Because this individual is not yet age 70 ½, she can still contribute to a Traditional IRA - but only based on earned income - not on her pension income. The maximum contribution in 2020 is 100% of earned income, capped at $6,000. Because she only has $4,000 of earned income, this is the maximum IRA contribution for this year.
In 2020, a self-employed person earning $300,000 wishes to open a Keogh Plan. The maximum yearly contribution is:
$57,000 The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $57,000 in 2020, whichever is less. 20% of $300,000 = $60,000. However, only the $57,000 maximum can be contributed in 2020. (Note that this amount is adjusted each year for inflation.)
For the year 2020, the maximum contribution that an individual under age 50 can make to an IRA is:
$6,000 In 2020, for an individual under age 50, the maximum contribution to an IRA is the lesser of 100% of income or $6,000.
An unmarried person, earning $100,000 a year, is not covered by a pension plan and has been contributing to an IRA account annually. If this individual joins a corporation at the same salary, and is included in that company's pension plan, which statement is TRUE?
Annual contributions to the IRA can continue but will not be tax deductible Anyone who has earned income can contribute to an IRA, whether covered by a pension plan or not. However, the contribution is not tax deductible for individual employees covered by a pension plan who earn over $75,000 in year 2020 (the deduction phases out between $65,000 - $75,000 of income).
Distributions from Roth IRAs:
can commence at any time after reaching age 59 1/2 without being penalized Unlike Traditional IRAs that require distributions to start on April 1st of the year after reaching age 72, there is no mandatory distribution age for Roth IRAs.
Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II If the corporation has an unprofitable year, the contribution may be omitted III The annual benefit varies dependent on the number of years that the employee is included IV This type of plan is not subject to ERISA requirements
I and III only Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements.
If a person under the age of 59 1/2 becomes disabled and wishes to withdraw money from her IRA, which statements are TRUE? I The withdrawal is subject to income tax II The withdrawal is not subject to income tax III The withdrawal is subject to a 10% penalty tax IV The withdrawal is not subject to a 10% penalty tax
I and IV Distributions from tax qualified pension plans such as IRAs and Keoghs prior to age 59 1/2 are subject to regular tax plus a 10% penalty tax, unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax but are not subject to the 10% penalty tax.
Which of the following statements are TRUE regarding contributions to, and distributions from, non-tax qualified retirement plans? I Contributions are made with before tax dollars II Contributions are made with after tax dollars III Distributions are 100% taxable IV Distributions are partially tax free, with the amount above the original cost basis being taxed
II and IV Contributions to non-tax qualified plans are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital contributions made with after-tax dollars is not taxed. Only the tax deferred "build-up" in the account above what was originally contributed is taxed.
A working couple that has a combined income of $150,000 are both covered by qualified pension plans. Which statement is TRUE about IRA contributions by these persons?
IRA contributions are permitted; however the contribution amount is not deductible Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2020 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $124,000 in year 2020 (the deduction phases out between $104,000 - $124,000 of income).
An individual, age 40, earns $60,000 per year. He has no family and has $200,000 of life insurance. He contributes 6% of his salary to his company sponsored 401(k) annually. He informs his registered representative that he is getting a $5,000 raise. What should you recommend that the customer do with the raise?
Increase the 401(k) contributions by $5,000 per year Since any permitted 401(k) contribution is deductible, it is best to recommend that the customer max out his 401(k). Remember, he can contribute up to 25% of salary (statutory rate), capped to $19,500 in 2020, and this is a salary reduction. The purchase of either a variable annuity or a fixed annuity will not permit a salary reduction - these are non-qualified plans. Choice D is utter nonsense.
Which statement is TRUE about the use of index option strategies by managers of pension plans subject to ERISA requirements?
Index option trades are permitted only if such transactions conform with the objectives stated in the plan document There is no prohibition on the trading of options by retirement plans subject to ERISA (Employee Retirement Income Security Act) regulation. However, before a plan may engage in options trades, it must adopt a policy, in the plan document, of permitting options transactions. It is common for large pension plans to use index options contracts to hedge positions (by buying index puts) and to generate extra income by selling index call contracts.
Employees of non-profit organizations are permitted to establish tax deferred retirement plans, similar to a Keogh, by making investments in a:
Tax sheltered annuity 403(b) retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.
Which statement is FALSE regarding RMDs (Required Minimum Distributions) from IRA accounts?
The RMD is taxable at capital gains tax rates Distributions from IRAs are taxable at ordinary income tax rates, not at lower capital gains tax rates. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 72 is 50% of the under-distribution. There is an incentive to take the money out (and pay tax on it, which is what the Treasury is really looking for)! The IRS creates tables that lay out the required minimum distribution amount each year; and these are based on life expectancy.
If an individual, aged 69, takes a withdrawal from his IRA, which statement is TRUE?
The amount withdrawn is subject to regular income tax only Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.
Two years ago, a client of a representative rolled over his 401(k) into a Traditional IRA because he was terminated by his company at age 45. Since then, the customer has been upset by the fact that his permitted annual IRA contribution is so much lower than what he was able to contribute annually into the 401(k). He directs the representative to roll over his IRA into a variable annuity contract, which was completed by setting up an IRA account at the insurance company to hold the variable annuity. Now, a few months after all these transactions, the client is not happy with the variable annuity and wants to roll it back into another Traditional IRA account. What is the most important action for the representative to take?
The client should be told that this would require cashing out the annuity, possibly subjecting the client to high surrender fees A client can roll the proceeds of a Traditional IRA into a variable annuity tax-free. The insurance company creates an IRA holding account that purchases the variable annuity. It is similar to moving IRA assets from one trustee to another. The cost basis in the separate account would be any non-deductible contributions that were made into the IRA. The IRS does not allow a "non-qualified" annuity to be rolled over into an IRA - only qualified plan assets can be rolled over into an IRA. However, in this case, the variable annuity is purchased within an IRA account established by the insurance company, so it can be rolled back into a Traditional IRA without penalty - it is treated as an IRA trustee-to-trustee transfer. The big issue is that the insurance company that sold the variable annuity usually imposes high surrender fees for early termination of the annuity. This is the most important thing to be explained to the client.
Which statement is FALSE about a SIMPLE IRA?
The plan is available to any size employer SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administrate than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $13,500 (in 2020) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company. Note that a SIMPLE IRA gives a higher contribution amount than a Traditional IRA, which is capped at $6,000 in 2020 (plus a $1,000 catch up contribution for employees who are age 50 or older).
An individual earning $60,000 in 2020 makes an annual contribution of $4,000 to a Traditional IRA. Which statement is TRUE?
This person can contribute a maximum of $2,000 to a Roth IRA The maximum permitted contribution to a Traditional IRA or Roth IRA for an individual is $6,000 total in 2020. This can be divided between the 2 types of accounts. In this case, since $4,000 was contributed to the Traditional IRA, another $2,000 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $124,000 and $139,000 for individuals in 2020).
Distributions from an Individual Retirement Account must commence:
by April 1st of the year following that person reaching age 72 Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 72.
A 55 year old woman wishes to remove funds from her Individual Retirement Account to remodel her house. The customer is subject to:
both regular income tax liability and 10% penalty tax on the amount withdrawn Premature distributions from an IRA (before age 59 1/2), unless for reason of death, disability, to pay qualified education expenses, or to pay up to $10,000 of first-time home purchase expenses, incur normal income tax plus a 10% penalty tax on the amount withdrawn.
Under ERISA provisions, a pension fund manager that wishes to write naked call options:
can only do so if explicitly allowed in the plan document ERISA does not specify securities strategies that are prohibited. It does state that all investments must meet both "fiduciary responsibility" tests and "prudent man" rule tests. Selling naked call options exposes the writer to unlimited risk, but is not explicitly prohibited. If the plan document specifically authorizes such a strategy, it would be permitted. However, the plan trustee bears unlimited liability, if this action is deemed to be imprudent.
All of the following statements about 403(b) Plans are true EXCEPT:
employees of any organization can contribute to this type of plan 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income as taken.
ERISA requirements regarding the investments that are suitable for a retirement account stress:
safety of principal ERISA rules regarding retirement plans stress that investments should be "safe."
If a corporation has an unfunded pension liability, this means that:
the expected future value of fund assets is less than projected benefit claims An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.
In 2020, a customer earns $500,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $25,000 per year. The contribution to be made for the nurse is:
$6,250 If an employer earns $285,000 or more and contributes the maximum of $57,000 to a Keogh in 2020, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $500,000 and contributes $57,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $285,000. $285,000 - $57,000 = $228,000 of "after Keogh deduction" income. $57,000/$228,000 = 25%. Thus, for the nurse, $25,000 of income x 25% = $6,250 contribution.
The maximum contribution in the year 2020 into an IRA for an individual, age 50 or older, is:
$7,000 For the year 2020, the maximum contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000.
In 2020, a customer earns $300,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $30,000 per year. The contribution to be made for the nurse is:
$7,500 If an employer earns $285,000 or more and contributes the maximum of $57,000 to a Keogh in 2020, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $300,000 and contributes $57,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $285,000. $285,000 - $57,000= $228,000 of "after Keogh deduction" income. $57,000/$228,000 = 25%. Thus, for the nurse, $30,000 of income x 25% = $7,500 contribution.
Distributions after age 59 ½ from tax qualified retirement plans are:
100% taxable Contributions to tax qualified plans such as Keogh Plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.
Distributions from Section 401(k) plans are:
100% taxable Contributions to tax qualified plans such as corporate 401(k) plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.
A self-employed individual purchases variable annuity units with funds contributed to a Keogh Account. Once the contract is annuitized, the payments are:
100% taxable Keogh contributions are tax deductible (up to $57,000 in 2020), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that person's income tax bracket.
A client can roll the proceeds of a Traditional IRA into a variable annuity tax-free. The insurance company creates an IRA holding account that purchases the variable annuity. It is similar to moving IRA assets from one trustee to another. The cost basis in the separate account would be any non-deductible contributions that were made into the IRA. The IRS does not allow a "non-qualified" annuity to be rolled over into an IRA - only qualified plan assets can be rolled over into an IRA. However, in this case, the variable annuity is purchased within an IRA account established by the insurance company, so it can be rolled back into a Traditional IRA without penalty - it is treated as an IRA trustee-to-trustee transfer. The big issue is that the insurance company that sold the variable annuity usually imposes high surrender fees for early termination of the annuity. This is the most important thing to be explained to the client.
20% withholding tax Distributions from qualified retirement plans, unless they are rolled over into an IRA, are taxable. To ensure that the tax will be paid, the tax code requires that 20% of the distribution amount be withheld as a credit against taxes due. No withholding tax is imposed if a trustee to trustee transfer is made - with the assets being transferred directly into another IRA or qualified retirement plan.
Which statement is FALSE about 401(k) Plans?
All corporate employees must participate in the plan 401(k) Plans are corporate-sponsored salary reduction plans allow employees to contribute up to $19,500 in 2020 as a salary reduction, so these are pre-tax dollars going into the plan. The account grows tax-deferred and all distributions at retirement age are 100% taxable. Participation in the plan is voluntary, and employers can make matching contributions for employees that contribute.
All of the following are allowed investments into an Individual Retirement Account EXCEPT:
Antiques, Art, and Other Collectibles Collectibles are not allowed as an investment in an IRA account. Securities are allowed; so are gold coins minted by the U.S. Government, and precious metals bullion.
Under Keogh rules, any distributions from a Keogh Plan must start no later than:
April 1st of the year following the year the individual turns 72 Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 72.
Contributions to Keogh Plans must be made by:
August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statements are TRUE? I The entire withdrawal is taxed as ordinary income II Since half the account balance has been withdrawn, the withdrawal is taxed at 50% of ordinary rates III The entire withdrawal is subject to a 10% penalty tax IV Since half of the account has been withdrawn, the withdrawal is subject to half of the 10% penalty tax
I and III Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.
A couple, earning over $124,000 in year 2020, where both are covered by qualified retirement plans, wishes to contribute to an IRA. The contributions are: I permitted II not permitted III tax deductible IV not tax deductible
I and IV Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2020 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $124,000 in year 2020 (the deduction phases out between $104,000 - $124,000 of income).
Which statements are TRUE when comparing a Roth IRA to a Traditional IRA? I Traditional IRAs are available to anyone who has earned income II Roth IRAs are available to anyone who has earned income III Traditional IRAs are not available to high-earning individuals IV Roth IRAs are not available to high-earning individuals
I and IV Roth IRAs allow for the same contribution amounts as Traditional IRAs, but the contribution is never tax-deductible (which is usually the case with a Traditional IRA). Earnings build tax deferred and when distributions commence after age 59 1/2, no tax is due. This is a very good deal. Unfortunately, it is not available for high-earners. Individuals that earn over $139,000 and couples that earn over $206,000, in 2020, cannot open Roth IRAs. They can open Traditional IRAs, however.
Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II Annual contribution amounts will vary III The benefit amount to be received is fixed IV The benefit amount to be received will vary
I and IV Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.
Which statements are TRUE regarding a Roth IRA? I Roth IRAs allow a greater contribution than Traditional IRAs II Roth IRA contributions are not tax deductible III Distributions from a Roth IRA are not taxable if the investment is held for at least 5 years IV The legal maximum contribution amount can be made to both a Roth IRA and a Traditional IRA annually
II and III Roth IRAs, introduced in 1998, are an alternate to the Traditional IRA. Both allow the same contribution amount - a maximum of $6,000 per person in 2020 for individuals under age 50. If one contributes the maximum to a Traditional IRA, a contribution cannot be made to a Roth IRA; and vice-versa. Roth IRA contributions are not tax deductible. However, all distributions from a Roth IRA made after age 59 1/2 are 100% excluded from taxation as long as the investment has been held for 5 years. Compared to a Traditional IRA which allows a tax deduction for the contribution, a Roth contribution is not tax deductible. The benefit is that when distributions commence from a Roth IRA, there is no tax due (in contrast, distributions from Traditional IRAs are taxable).
ERISA regulations cover: I public sector retirement plans II private sector retirement plans III federal government employee retirement plans
II only ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated.
Which of the following investments are permitted for 403(b) plans? I Corporate stocks II Certificates of deposit III Fixed annuities IV Variable annuities
III and IV only 403(b) retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager.
Which of the following statements are TRUE regarding the transfer of Individual Retirement Accounts from one trustee to another? I Each transfer is considered to be an "IRA Rollover" and thus is permitted only once per year II The funds can be transferred by having the trustee or custodian make a check payable to the account holder; who will then deposit the check with the new trustee or custodian III The transfer can be effected by wiring the funds directly between trustees or custodians IV The transfer can be effected by having the predecessor trustee or custodian make a check payable to the successor trustee or custodian
III and IV only IRA transfers between trustees must be made directly from trustee to trustee. There is no limit on the number of transfers that can be made each year. If the transfer is effected by having the check made out to the account holder, this is considered to be an IRA rollover, which must be completed within 60 days and only 1 rollover per year is permitted. Thus, transfers cannot be effected by having the check made out to the account holders - the funds must go directly from trustee to trustee.
A money purchase retirement plan would invest in all of the following securities EXCEPT:
Tax Free Municipal Bonds A retirement plan would not invest in tax free municipal bonds because such instruments provide a lower yield than taxable bonds. Since the pension plan itself is a "tax free" envelope in which securities are held, the plan would invest in securities that yield a higher amount.
If an individual, aged 69, takes a withdrawal from his Keogh Plan, which statement is TRUE?
The amount withdrawn is subject to regular income tax only Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.
Contributions to qualified retirement plans, other than IRAs, must be made by:
The date on which the tax return is filed with the Internal Revenue Service Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
An individual works in a small manufacturing business with fewer than 100 employees. The company does not offer a retirement plan. This individual has $5,000 of discretionary funds that she wishes to put away for retirement. The BEST recommendation for this individual is to make a $5,000 contribution to a(n):
Traditional IRA SEP IRAs and SIMPLE IRAs are designed for small businesses, but the plans must be established by the corporate employer. Similarly, a 401(k) plan is established by the corporate employer - these plans are designed for larger businesses. The only retirement plans that can be set up by an individual are a Traditional IRA, a Roth IRA, or an annuity contract purchased from an insurance company.
A client who owns a Traditional IRA and who is age 72 or older:
can take RMDs in securities from the account, with their cost basis being "0" and the sales proceeds being the market value at the distribution date, with the resulting gain taxable at ordinary income tax rates While RMDs from Traditional IRAs are typically taken in cash, they can be taken as securities from the account. The cost basis of the securities is "0," and the market value as of the distribution date is the sales proceeds, so the entire value is taxable. The entire gain is taxable as ordinary income - it does not receive long-term capital gains rates. Clients have requested this in years when the market has declined steeply because they don't want to liquidate positions at a loss. The client is hoping that the securities taken for the distribution recover over the long term. However, note that the client must have the available cash to pay the tax bill!
Individual Retirement Account contributions can ONLY be made with:
cash Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).
A client, age 74 has $314,000 in her Traditional IRA. She is required to take an $11,000 RMD for this year. She does not need the cash and wants to maintain her investment portfolio. She asks her representative if she can take the RMD in shares into her cash account at the firm This action will result in a:
cost basis of "0" for the share distribution and a sale proceeds of $11,000, with $11,000 of ordinary income and a cost basis of $11,000 for the shares transferred into the cash account While RMDs from Traditional IRAs are typically taken in cash, they can be taken as securities from the account. The cost basis of the securities is "0," and the market value as of the distribution date is the sales proceeds, so the entire value is taxable. The entire gain is taxable as ordinary income - it does not receive long-term capital gains rates. The cost basis of the securities in the cash account is the market value at the date of transfer. Clients have requested this in years when the market has declined steeply because they don't want to liquidate positions at a loss. The client is hoping that the securities taken for the distribution recover over the long term. However, note that the client must have the available cash to pay the tax bill!
Generally, if a non-spouse inherits an IRA, the beneficiary must:
elect to receive the entire proceeds over the next 10 years Roll over of an inherited IRA into either an existing IRA for the beneficiary or a new IRA for the beneficiary is only available to surviving spouses. It is not available for inherited IRAs where the beneficiary is a non-spouse. The big advantage of a roll over is that the proceeds that are rolled over stay tax-deferred until the spouse takes distributions from the account (which must start at age 72). The options available on an IRA inherited from a non-spouse are to take all the proceeds immediately (and pay tax on that as ordinary income); or elect to receive the proceeds over 10 years. On each distribution, income tax must be paid (but there is no 10% penalty tax if the recipient is under age 59 1/2).
A defined benefit plan:
gives the greatest benefit to high salaried employees close to retirement age Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions.
All of the following are characteristics of Defined Benefit Plans EXCEPT:
if the corporation has an unprofitable year, the contribution may be omitted Under a defined benefit plan, contributions are made by the employer on behalf of the employees, to fund a defined "future" benefit. With this plan type, less funds are contributed on behalf of younger employees, and more funds are contributed on behalf of the older employees. However, all of the pooled monies in the fund are used to pay out current benefits, and in effect, younger employees with many years to retirement, are paying for both the retirement benefits of older retired employees, and for the funding of the benefit of those older employees nearing retirement. Once a person retires, the benefit amount is fixed, based upon that person's last year's salary and years of plan participation. Annual contribution amounts are not fixed with this type of plan - the actual annual contribution amount is based upon actuarial assumptions about the plan participants. If the corporation has an unprofitable year, it must still make the contribution amount as determined by the actuary.
All of the following are true statements about Individual Retirement Accounts EXCEPT:
if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.
Generally, in order to defer taxation on an IRA that is inherited from a deceased spouse for the longest time period, a much younger surviving spouse can:
roll over the IRA proceeds into an existing IRA owned for the benefit of the surviving spouse Roll over of an inherited IRA into either an existing IRA for the beneficiary or a new IRA for the beneficiary is only available to surviving spouses. It is not available for inherited IRAs where the beneficiary is a non-spouse. The big advantage is that the proceeds that are rolled over stay tax-deferred until the beneficiary takes distributions from the account (which must start at age 72). If the spouse elects to take the proceeds as a lump sum and does not roll them over into another IRA then the full amount is taxable. If the spouse transfers the funds into an inherited account, then the account must be depleted over 10 years. If the spouse is much younger, he or she can "stretch" the time period to much more than 10 years before distributions must commence with a roll-over. Electing to take the proceeds over 5 years means that the distributions would be much larger and more tax would be due in each of these 5 years.
A company has decided to terminate its retirement plan and is going to make lump sum distributions to its employees. In order to defer taxation on the distribution, the employee may:
roll over the funds into an Individual Retirement Account within 60 days Lump sum distributions from qualified plans can be "rolled over" into an IRA without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.
All of the following statements are true about SEP IRAs EXCEPT:
the contributions made are not deductible A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $57,000 in 2020). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a small business that has variable cash flow.
All of the following statements are true regarding the transfer of Individual Retirement Accounts from one trustee to another EXCEPT:
the funds can be transferred by having the trustee or custodian make a check payable to the account holder; who will then deposit the check with the new trustee or custodian IRA transfers between trustees must be made directly from trustee to trustee. There is no limit on the number of transfers that can be made each year. If the transfer is effected by having the check made out to the account holder, this is considered to be an IRA rollover, which must be completed within 60 days and only 1 rollover per year is permitted. Thus, transfers cannot be effected by having the check made out to the account holders - the funds must go directly from trustee to trustee.
For a qualified retirement plan contribution to be deductible from that year's tax return, the contribution must be made by no later than:
the tax filing date of the following year Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
