Unit 24 Retirement & Educational Funding Plans
Which of the following retirement plans would be appropriate for a highly compensated government employee? A) 457(b) B) 403(b) C) IRA D) 401(k)
Answer: A) 457(b) PLAN TYPE EMPLOYEE TYPE 401(k) Corporate-sponsored employees 403(b) Employees of tax-exempt organizations, public schools, and churches 457(b) State and government employees, highly-compensated employees of tax- exempt organizations Keogh Plan Owner-employee, independent contractors, freelancers SEP IRA Self-employed persons and their employees SIMPLE 100 or fewer employees
If Gerald turned age 70 on November 15, 2016, when was he required to take his firm IRA distribution? A) 31-Dec-16 B) 31-Dec-17 C) 1-Apr-18 D) 1-Apr-17
Answer: C) 1-Apr-18 Because his birthday is late in the year, Gerald will not attain age 70 1/2 until May 15, 2017, so his required beginning date was April 1, 2018 (the year following the date Gerald attains age 70 1/2)
Ways in which a Section 529 Plan differs from a Coverdell ESA include: I. tax-free distributions when the funds are used for qualifying educational expenses II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian A) I and IV B) I and II C) II and III D) II and IV
Answer: C) II and III Contributions to an ESA are limited to $2,000 per beneficiary per year, whereas the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA, where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 Plans and Coverdell ESAs enjoy tax-free distributions and plans may be established by almost anyone.
A frequent concern of parents initiating a savings plan for the college education of their child is the lack of control over the assets, particularly if the child decides to forego higher education. When you have a client who shares this concern with you, it would be most appropriate to suggest A) opening a new account in the client's name for this purpose. B) an UTMA account C) a Section 529 plan D) US Treasury zero-coupon bonds
Answer: C) a Section 529 plan One of the features of the Section 529 plan is that the donor maintains control over the funds in the account. Therefore should the child not go to college, the money van either be transferred to another family member or withdrawn by the donor (although that will incur taxation issues). With an UTMA account, once the child reaches the termination age set by the state, the money is now theirs. The zero-coupon bonds would have to be purchased in a custodial account so the issue is the same. Opening a separate account renders no tax benefits or protection from creditors.
Martha passed away recently at the age of 87. Among the assets in her estate was an IRA with a value of $150,000. Martha's son, Jerome, a successful 52-year old surgeon and a client of yours, was named as the beneficiary of the IRA. From a tax standpoint, which of the following options would you recommend to Jerome? A) Jerome should take the cash now and use the money to fund a new IRA B) Jerome should use the 5-year cash-out option C) Jerome should take the cash now and use a Section 1035 exchange into an annuity D) A separate inherited IRA should be opened in Martha's name for the benefit of Jerome
Answer: D) A separate inherited IRA should be opened in Martha's name for the benefit of Jerome
