Unit 23: Qualified Plans - Quiz Questions and Checkpoint

Who is responsible for meeting the desired returns on a defined contribution plan? A) The custodian B) The employee C) The Pension Benefit Guaranty Corporation D) The sponsor

B) The employee Explanation The employee chooses how the money is invested so the employee takes responsibility for the returns. (LO 23.b -Question #8 of 10 - Question ID: 1269849)

Who is responsible for meeting the desired returns on a defined benefit plan? A) The sponsor B) The Pension Benefit Guaranty Corporation C) The employee D) The custodian

A) The Sponsor Explanation The sponsor is the employer who has promised the defined benefit plan to the employee. (LO 23.a -Question #7 of 10 - Question ID: 1280177)

Another term for a defined benefit plan is A) an annuity. B) a pension plan. C) a traditional term plan. D) a defined withdrawal plan.

B) a pension plan. Explanation Though an annuity acts much like a defined benefit plan, it does not require sponsorship by an employer. The other two responses are just made up. (LO 23.b -Question #5 of 5 - Question ID: 1313175)

What is a big advantage Roth IRAs have over traditional IRAs? A) There are no penalties for early distributions. B) Contributions are tax free. C) Normally distributions are tax free. D) There are no income limits.

C) Normally distributions are tax free. Explanation If taken after 59 ½ and the account has been open for five years, there are no tax or penalties on distributions from Roth IRAs. Contributions are made with after tax dollars. There may be penalties on distributions if the account hasn't been open for five years and the distributions are made before 59 ½. Roth allowable contribution amounts decrease and then are end above certain income levels. (LO 23.a -Question #6 of 10 - Question ID: 1269842)

A 73-year old client in the 25% income tax bracket withdraws $20,000 from her traditional IRA. Based on her life expectancy, the withdrawal should have been $30,000. How much tax will she owe? A) $10,000 B) $12,500 C) $5,000 D) $7,500

B) $12,500 Failure to meet the required minimum distribution results in a 50% penalty on the shortfall. In this case, she took $20,000 when she should have taken $30,000 so there will be a 50% tax on the $10,000 difference ($5,000 penalty). In addition to that $5,000 penalty, the ordinary income tax on the total amount that should have been withdrawn must also be paid (25% × $30,000 = $7,500). Total tax liability on the withdrawal equals $12,500 ($5,000 penalty tax plus $7,500 ordinary income tax). (LO 23.a - Question #4 of 5 - Question ID: 1313172)

In a defined benefit plan I. the benefit amount is fixed. II. the benefit amount is variable. III. the contribution amount is fixed. IV. the contribution amount can vary. A) II and IV B) II and III C) I and IV D) I and III

C) I and IV In a defined benefit plan, the employee is promised a certain amount at retirement and the employer has to put in enough money to meet that promise. Changing rates of return can require changing deposits to meet the promised amounts at retirement. (LO 23.b - Question #5 of 10 - Question ID: 1269850)

In a defined contribution plan I. the benefit amount is fixed. II. the benefit amount is variable. III. the contribution amount is fixed. IV. the contribution amount can vary. A) II and IV B) II and III C) I and IV D) I and III

B) II and III In a defined contribution plan, the amount that the employer is depositing is fixed by the employer, but the employee chooses the investments, so the benefit varies. (LO 23.a - Question #8 of 10 - Question ID: 1280180)

Andrea recently began working for the Seabird Coffee Company as a barista. She tells you that her company has two retirement plans she can participate in. In one plan, she contributes a portion of her salary into an account where she can choose from a set of investments. The contributions reduce her taxable income. The money grows and when she retires, or leaves the company, she can take the balance. In the other program, she does not contribute to the plan; the company pays into the plan and invests the money. When she retires, and if she qualifies, she will receive a retirement income for life from the plan based on her working income. You explain that Seabird Coffee has A) a defined contribution and a defined benefit plan. B) two different defined benefit plans. C) a defined benefit and a nonqualified-deferred compensation plan. D) two different defined contribution plans. Explanation The plan she contributes into on a pretax basis is a defined contribution plan. The other plan promises an income for and is a defined benefit plan. Both are types of qualified plans. LO 23.b

A) a defined contribution and a defined benefit plan. Explanation The plan she contributes into on a pretax basis is a defined contribution plan. The other plan promises an income for and is a defined benefit plan. Both are types of qualified plans. (LO 23.b - Question #3 of 5 - Question ID: 1313174)

Which of these features does the Roth IRA include? I. There are no minimum required distributions after age 70½ with a Roth IRA. II. There are higher contribution limits to a Roth IRA than to a traditional IRA. III. Withdrawal of earnings in the Roth IRA may be made without any taxation as long as a Roth IRA has been open for a minimum of one year and the participant is age 59. IV. There is the ability to contribute to both a Roth IRA and a traditional IRA. A) II and I B) I and III C) I and IV D) II and III

Ans: I and IV One of the primary benefits to the Roth IRA is that reaching age 70½ does not trigger the required minimum distributions found in other retirement plans. Probably the biggest benefit is that all earnings grow tax deferred, and may be withdrawn free of any tax, as long as there has been an open Roth IRA for at least 5 years AND the participant is at least 59½. One may contribute to both types of IRA, but the combined contribution may not exceed that annual maximum for a single plan. (LO 23.a - Question ID: 1313171 - Test Id: 151027402)

Who can contribute to an IRA? A) Anyone with earned income under the age of 59½ B) Anyone with earned income not covered by an employer-sponsored plan C) Anyone with earned income D) Anyone with taxable income

C) Anyone with earned income Anyone with earned income can contribute even if covered by an employer sponsored plan. The contribution however may or may not be deductible depending on income level. (LO 23.a - Question #4 of 10 -Question ID: 1289025)

What is the penalty for not taking the required minimum distribution (RMD) for the year? A) 50% of the annual contribution limit B) 10% of the amount that should have been taken C) 10% of the annual contribution limit D) 50% of the amount short of what should have been taken

D) 50% of the amount short of what should have been taken Explanation There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 50% of the amount missed. (LO 23.a -Question #9 of 10 - Question ID: 1280167)

Required Minimum Distributions (RMDs) for traditional IRAs must begin A) the year following the year the participant turns 59½. B) prior to the year the participant turns 59½. C) prior to the year the participants turns 72. D) the year following the year the participant turns 72.

D) the year following the year the participant turns 72. There is a penalty for early withdrawal prior to 59½ but distributions do not need to begin until the year following the year the participant turns 72. (LO 23.a - Question #1 of 10 - Question ID: 1299534)

All of the following are true of Roth IRAs except A) distributions are required after reaching 72. B) distributions are not required after reaching 72. C) contributions are not deductible. D) anyone with earned income under a certain limit may contribute.

A) distributions are required after reaching 72. Explanation Because distributions are not taxable on Roth IRAs, there are no required distributions. Roth IRAs have income limits and contributions to Roth IRAs are not deductible. (LO 23.a - Question #6 of 10 - Question ID: 1289029)

A 72-year-old customer has a $30,000 required minimum distribution (RMD) calculated to be taken from an IRA. If the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much in taxes and penalties will be owed? A) $12,500 B) $8,500 C) $10,000 D) $5,000

B) $8,500 Explanation Failure to meet the required minimum distribution (RMD) results in a 50% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 50% penalty tax. $5,000 × 50% equals $2,500. Note that the IRS will force the distribution of the RMD shortfall ($5,000). In addition to the penalty, the ordinary income tax on the amount withdrawn must also be paid (20% × $30,000 = $6,000). Total tax liability on this withdrawal equals $8,500 ($2,500 penalty tax plus $6,000 ordinary income tax). (LO 23.a - Question #10 of 10 - Question ID: 1269829)

Which of the following are true of qualified plans but not true of nonqualified plans? A) All withdrawals are tax free B) The plan cannot discriminate C) The plan may discriminate D) All withdrawals are taxable above cost basis

B) The plan cannot discriminate Explanation With qualified plans, all withdrawals are taxable, and the plan cannot discriminate; it has to be offered to all qualified employees. A nonqualified plan does not need to be offered to all qualified employees, and distributions above the cost basis are taxable. (LO 23.a -Question #2 of 10 - Question ID: 1280175)

Individual retirement accounts allow a catch-up contribution of $1,000 to be made into the account for those who are A) 50 years old or over. B) over 72 years old. C) 59½ years old or over. D) over 50 years old.

A) 50 years old or over. Explanation Catch-up contributions are for those ages 50 and over (not over 50). (LO 23.a - Question #1 of 5 - Question ID: 1313173 - Checkpoint)

What is the penalty if any for over contribution to an IRA? A) 6% B) No penalty C) 10% D) 50%

A) 6% 10% penalty is for early withdrawal 50% is for failure to make the minimum required distribution (MRD) for the year. Contribution of more the maximum amount in a year is 6%. (LO 23.a - Question #2 of 10 - Question ID: 1269835)

Which of the following are true of Traditional IRAs but not Roth IRAs? I. Contributions may be deductible. II. Contributions are always deductible. III. There is a 50% penalty for failing to take the minimum required distribution (RMD). IV. There are income limits for making contributions. A) II and III B) I and III C) I and II D) III and IV

B) I and III If the contributor has an employer sponsored plan and makes over the limit, they can still have an IRA but it won't be deductible. After reaching age 72, RMDs must be taken each year. Failure to do so results in a 50% penalty. Income limits on traditional IRAs impact deductibility not contributions. (23.a - Question #3 of 10 - Question ID: 1299535)

Contributions to an IRA can be made up to which of the following dates? A) The extension deadline, October 15th of the year following the year the contribution is for B) April 15th of the year the contribution is for C) December 31st of the year the contribution is for D) April 15th of the year following the year the contribution is for

D) April 15th of the year following the year the contribution is for A contribution for tax year 2019 could be made until the tax filing deadline for the year, which would be April 15, 2020. No extensions are available for contributions even if an extension is granted for filing the taxes. (LO 23.a - Question #3 of 10 - Question ID: 1280163)