Retire Ch 7 Distributions from Qual. Plans

Question 1

Loans from qualified plans can never exceed 50% of the participant’s vested account balance.

a. True b. False

Answer 1

b. False

Question 2

Loans from qualified plans must always be repaid within five years

. a. True b. False

Answer 2

b. False

Question 3

The law requires loans from qualified plans to be repaid upon the participant’s termination of employment from the plan sponsor.

a. True b. False

Answer 3

b. False

Question 4

Sam has a vested account balance in her employer-sponsored qualified profit-sharing plan of $18,000. Sam had an outstanding loan balance within the prior 12 months of $9,000 that has been reduced to $6,000.

The maximum loan Sam could take from this qualified plan is $4,000.

a. True b. False

Answer 4

True

Question 5

Inherited IRAs are protected in bankruptcy because they are IRAs.

a. True b. False

Answer 5

b. False

Question 6

Trusteed IRAs allow IRA owners to control how distributions from the IRA will be paid out and to whom the assets will pass to after the death of the primary beneficiary.

a. True b. False

Answer 6

a. True

Question 7

See-through trusts are the same as trusteed IRAs

a. True b. False

Answer 7

b. False

Question 8

Stretch IRAs are available for all designated beneficiaries.

a. True b. False

Answer 8

b. False

Question 9

For deaths prior to January 1, 2020, stretch IRAs were best accomplished by choosing young beneficiaries.

a. True b. False

Answer 9

a. True

Question 10

Leaving an IRA to a spouse could be a better way to stretch an IRA than leaving it to a child.

a. True b. False

Answer 10

a. True

Question 11

The eligible beneficiaries of an inherited IRA will use the life expectancy of the youngest beneficiary on the account.

a. True b. False

Answer 11

b. False

Question 12

Reese has assets both in her Roth IRA and in her Roth account that is part of her employer’s 403(b) plan. However, she is not sure about the differences between the two types of accounts. Which of the following statements would you tell her is correct?

Both Roth IRAs and Roth accounts have a five-year holding period requirement, but the establishment of the first Roth IRA or Roth account starts the five-year holding period for all Roth IRAs and Roth accounts.

Both Roth IRAs and Roth accounts have the same rules regarding the definition of a qualified distribution.

Roth IRAs are not subject to minimum distribution rules during the lifetime of the account owner, but Roth accounts are subject to lifetime RMDs.

The nature of the income received by beneficiaries in a qualified distribution is the same for distributions from both Roth IRAs and Roth accounts.

Answer 12

The nature of the income received by beneficiaries in a qualified distribution is the same for distributions from both Roth IRAs and Roth accounts.

Rationale

Option a is not correct because the five-year holding period is separate for each type of account. Option b is not correct because the Roth IRA has an additional distribution triggering event for first time home buying. Otherwise, the rules are the same. Option c is not correct because, as a result of the SECURE 2.0 Act, neither Roth IRAs nor Roth accounts are subject to lifetime RMDs after 2023.

Question 13

Which of the following are benefits of converting assets in a qualified plan to a Roth account through an in-plan Roth rollover?

1. The conversion may result in a reduction in income tax in future years.
2. The conversion will result in increasing after-tax deferred assets and reducing the gross estate.
3. The conversion will eliminate the need for minimum distributions during the life of the participant.

1 and 2.
1 and 3.
2 and 3.
1, 2 and 3

Answer 13

1, 2 and 3.

Rationale

While there are no guarantees, the conversion may result in a reduction in tax in future years since all future income in the account will escape taxation. The conversion does result in increasing after-tax deferred assets and reducing the gross estate. Prior to 2024, RMDs were required from Roth accounts during the lifetime of the participant; however, the SECURE 2.0 Act eliminated this requirement for taxable years beginning after December 31, 2023.

Question 14

The early distribution penalty of 10 percent does not apply to qualified plan distributions:

1. Made after attainment of the age of 55 and separation from service.
2. Made for the purpose of paying qualified higher education costs.
3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

1 only.
1 and 3.
2 and 3.
1, 2, and 3.

Answer 14

1 and 3.

Rationale

Statement 2 is an exception for distributions from IRAs, not qualified plans. Statements 1 and 3 are exceptions to the 10% penalty for qualified plan distributions.

Question 15

n 2024, Demetres, age 43, is a victim of domestic abuse and needs additional funds to move out of the home in which the abuse occurred. Demetres has a pretax 401(k) balance of $100,000. All of the following statements regarding Demetres’s ability to use funds from the 401(k) are correct except:

Demetres may take a $100,000 distribution without incurring a ten percent penalty.

Demetres may take a distribution of up to $10,000 without penalty but will owe taxes on the amount distributed.

If Demetres takes a distribution from the 401(k), an equal amount may be repaid by the three-year anniversary of the distribution, and Demetres will receive a tax refund for the taxes paid on the distribution.

Demetres may self-certify the domestic abuse without filing criminal charges.

Answer 15

Demetres may take a $100,000 distribution without incurring a ten percent penalty.

Rationale

Option a is an incorrect statement because the distribution is limited to the lesser of 50% of the vested account balance or $10,000 in 2024.
All of the other statements correctly describe the penalty exception for domestic abuse under the SECURE 2.0 Act (effective for distributions after December 31, 2023).

Question 16

Carlton recently died in 2024 at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Carlton was married to Vanessa, age 53, who is the designated beneficiary of the qualified plan. Which of the following is correct?

Vanessa must distribute the entire account balance within five years of Carlton’s death.

Vanessa must begin taking distributions over Carlton’s remaining single-life expectancy.

Any distribution from the plan to Vanessa will be subject to a 10 percent early withdrawal penalty until she is 59½.

Vanessa can receive annual distributions over her remaining single-life expectancy, recalculated each year.

Answer 16

Vanessa can receive annual distributions over her remaining single-life expectancy, recalculated each year.

Rationale

Vanessa can receive distributions over her remaining single-life expectancy. A spouse beneficiary is an eligible designated beneficiary who may distribute over her life expectancy and can recalculate life expectancy each year. Option a is incorrect. She is not required to distribute the entire account within five years. Option b is incorrect. Vanessa can wait until Carlton would have been age 75 and begin taking distributions over her life expectancy. Option c is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death. Vanessa could also roll the account over to her own IRA and begin distributions when she attains age 75.

Question 17

Which of the following is/are elements of an effective waiver for a pre-retirement survivor annuity?

1. Both spouses must sign the waiver.
2. The waiver must be notarized or signed by a plan official.
3. The waiver must indicate that the person(s) waiving understand the consequences of the waiver.

2 only.
1 and 3.
2 and 3.
1, 2, and 3.

Answer 17

2 and 3.
Rationale

Only the nonparticipant spouse must sign the waiver. Note that when the waiver is a separate document, only the nonparticipant spouse must sign the waiver form. In practice, many plan administrators include the waiver as part of the same document in which the participant elects a different form of benefit or different beneficiary, which requires the participant’s signature for those elections; however, only the nonparticipant spouse must sign the waiver section.

Question 18

Viola, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial advisor inadvertently moved the funds into a taxable account. Viola did not make the request of the IRS until five years after the mistake was made. Will the IRS permit the waiver?

No. The IRS never waives this requirement, except under the most extreme of circumstances.

Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances.

No. Viola waited beyond the one-year period for filing such a request.

No. Viola waited an unreasonable amount of time before filing the request.

Answer 18

No. Viola waited an unreasonable amount of time before filing the request.

Rationale

The IRS generally grants such requests if timely made. However, Viola should have realized this long before five years. She would have reported interest on her Form 1040 which would have caused her to realize the mistake. She certainly would have received account statements. Option a is false. Option b would be correct if Viola had filed the request timely. Option c is false and there is no such one-year period.

Question 19

Steve, who was born in 1954, is an employee of X2, Inc. He plans to work until age 75. He currently contributes six percent of his pay to his 401(k) plan, and his employer matches with three percent. Which one of the following statements is true?

Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he attains age 73.

Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he retires.

Steve is required to take minimum distributions from his traditional IRA beginning April 1 of the year after he retires.

Steve cannot contribute to his 401(k) plan after age 73 in any case.

Answer 19

Steve is required to take minimum distributions from his 401(k) plan beginning April 1 of the year after he retires.

Rationale

Generally, an individual who is born in 1954 must receive their first minimum distribution by April 1 following the year the individual attains age 73. However, if the individual remains employed beyond age 73, they may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer’s qualified plan. Therefore, options a and c are incorrect. Option d is incorrect because Steve can continue to contribute to the 401(k) plan as long as he is still working for X2, Inc. and the plan permits.

Question 20

Brooks, a participant in the Zappa retirement plan, has requested a second plan loan. His vested account balance is $80,000.
Brooks borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan?

$13,000.
$22,000.
$23,000.
$31,000.

Answer 20

$22,000.
Rationale

Brooks can borrow the lesser of $50,000 or half of the vested account balance. The $50,000 must be reduced by the highest outstanding balance in the last twelve months ($27,000) which equals a maximum new loan of $23,000. Half of the vested account balance also requires an adjustment; it must be reduced by the outstanding loan amount. Half of the vested account balance ($40,000) less the outstanding loan of $18,000 equals $22,000

Question 21

Arisa has a vested account balance of $150,000 in her employer-sponsored 401(k) plan. This year during a hurricane, Arisa failed to evacuate her home which was located in an area that was declared a qualified disaster area. The experience was very frightening, but Arisa feels lucky because her home was not damaged, and she did not suffer any economic loss as a result of the hurricane.

What is the maximum loan Arisa can take from her 401(k), assuming the plan permits loans, and she has not had an outstanding loan at any time in the past 12 months.

$50,000.
$75,000.
$100,000.
$150,000.

Answer 21

$50,000.

Rationale

The maximum loan amount is generally limited to the lesser of 50% of the vested account balance or $50,000, reduced by the highest outstanding loan balance within the 12 months prior to taking the new plan loan.

However, under the SECURE 2.0 Act, for loans made to qualified individuals, the limit is increased to the lesser of 100% of the vested account balance or $100,000.
Qualified individuals are those whose place of principal residence at any time during the incident period is located in the qualified disaster area and who sustained an economic loss by reason of the qualified disaster.

Since Arisa did not suffer an economic loss as a result of the disaster, she is not a qualified individual. Arisa may take a maximum plan loan of $50,000

Question 22

One approach that is used in some domestic relations orders is to “split” the actual benefit payments made with respect to a participant under the plan to give the alternate payee part of each payment. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. This approach is often used when a support order is being drafted after a participant has already begun to receive a stream of payments from the plan (such as a life annuity).

This approach to dividing retirement benefits is often called what?

The separate interest approach.
The split payment approach.
The shared payment approach.
The divided annuity approach.

Answer 22

The shared payment approach.
Rationale

This is the definition of the shared payment approach. There is no such term as split payment approach or divided annuity approach

Question 23

Amani, age 45, has a vested account balance of $140,000 in his employer-sponsored 401(k) plan. This year, Amani’s home was damaged during the incident period related to a qualified disaster, causing Amani to suffer an economic loss.

What is the maximum distribution Amani can take from his 401(k) without penalty, assuming that the distribution meets the requirements in relation to the timing of the incident period for the disaster?

$0.
$10,000.
$22,000.
$100,000

Answer 23

$22,000.

Rationale

Under the SECURE 2.0 Act, qualified individuals whose place of principal residence at any time during the incident period is located in the qualified disaster area and who sustained an economic loss by reason of the qualified disaster may take a penalty-free distribution of up to $22,000 per disaster.

The distribution must be made on or after the incident period and before the date which is 180 days after the applicable date with respect to the disaster. The applicable date is the later of the date of enactment of the SECURE 2.0 Act, the first day of the incident period, or the date of the disaster declaration. Since Amani is a qualified individual and has met the timing rules, he may take a penalty-free distribution of $22,000.

Question 24

Laura, age 43, has several retirement accounts and wants to know what accounts can be rolled over to other accounts. Which of the following statements regarding rollovers is not correct?

She could take a distribution from her SEP IRA and roll it over to a qualified plan without incurring a 20% withholding.

She could rollover her government 457(b) plan to her new employer’s qualified plan.

She could rollover the funds from her old employer’s qualified plan to her new employer, who sponsors a 401(k) plan with a Roth account, and be able convert the funds in an in-plan Roth rollover.

She could rollover her traditional IRA to her designated Roth account in her 403(b) plan.

Answer 24

She could rollover her traditional IRA to her designated Roth account in her 403(b) plan.
Rationale

Options a, b and c are all correct and permissible. She cannot roll over traditional IRA funds to a Roth account.

Question 25

Decatur 401(k) Plan maintains a loan program for its participants. The plan has 50 participants, three of whom had participant loans. Decatur conducted a year-end review of its loan program and found the following:

• Lee received a loan from the plan one year ago for $60,000 over a five-year term, amortized monthly using a reasonable interest rate. He timely made the required payments. Lee’s vested account balance is $180,000.
• Brice received a loan of $10,000 to help her mother move to Florida this year, amortized over 72 months. Payments are timely and the interest rate is reasonable.

Which of the following individuals have loans that do not comply with the IRC?

Lee.
Brice.
Both Lee and Brice.
Neither Lee nor Brice

Answer 25

Both Lee and Brice.

Rationale

Lee’s loan exceeds the $50,000 limit and Brice’s exceeds the five-year repayment rule.

Question 26

Which of the following is true regarding QDROs?

The court determines how the retirement plan will satisfy the QDRO. (i.e. split accounts, separate interest).

In order for a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA.

All QDRO distributions are charged a 10% early withdrawal penalty.

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s qualified plan

Answer 26

A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s qualified plan.

Rationale

The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form. QDRO distributions are an exception to the 10% penalty. Note, however, that if the QDRO distribution is rolled to an IRA, subsequent distributions from the IRA will be subject to the 10 percent penalty unless an IRA penalty exception applies.

Question 27

Bert, age 73 on December 2, 2024, had the following account balances in a qualified retirement plan.

12/31/2023 $500,000
12/31/2024 $478,000
12/31/2025 $519,000
12/31/2026 600,000

Assuming that Bert is retired and has never taken a distribution prior to 2025, what is the total amount of minimum distribution required in 2025?

The distribution period for a 73-year-old is 26.5 and for a 74-year-old it is 25.5 under the Uniform Lifetime Table.

$18,745.
$37,613.
$38,352.
$39,098.

Answer 27

37,613.
Rationale

For 2024, look back to 2023: $500,000 ÷ 26.5 = $18,868

For 2025, look back to 2024: $478,000 ÷ 25.5 = $18,745
$18,868 + $18,745 = $37,613

Bert must take a distribution for 2024 and 2025. However, he can wait to take the 2024 distribution until April 1, 2025, in which case he has 2 distributions in 2025.

Question 28

Maren, a participant in the Zappa retirement plan, has requested a second plan loan. Her vested account balance is $70,000.
Maren borrowed $30,000 ten months ago and still owes $20,000 on that loan. Could she increase his maximum permissible loan if she repaid the outstanding loan before taking the new loan?

No. Paying off the loan will not increase an available loan.

Yes. Paying off the loan will increase the loan available by $15,000.

Yes. Paying off the loan will increase the loan available by $5,000.

No. She is not permitted to pay off the loan

Answer 28

Yes. Paying off the loan will increase the loan available by $5,000.
Rationale

Maren can borrow the lesser of $50,000 or half of the vested account balance. However, the $50,000 must be reduced by the highest outstanding balance ($30,000) in the last twelve months, which equals a maximum new loan of $20,000.

Half of the vested account balance also requires an adjustment; it must be reduced by the outstanding loan amount.

Half of the vested account balance ($70,000 ÷ 2 = $35,000) less the outstanding loan of $20,000 equals $15,000.

If the loan of $20,000 is repaid, which it could be, then the available loan would increase by $5,000 to $20,000.

Question 29

Which of the following statements is/are correct regarding the early distribution 10 percent penalty tax from a qualified plan?

1. Retirement at age 55 or older exempts the distributions from the early withdrawal penalty tax.
2. Distributions used to pay medical expenses in excess of the 7.5% of AGI for a tax filer who itemizes are exempt
   from the early withdrawal penalty.
3. Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the early withdrawal penalty.

3 only.
1 and 3.
2 and 3.
1, 2, and 3.

Answer 29

1, 2, and 3.

Rationale

Statements 1, 2, and 3 are correct. All three are exceptions to the 10% penalty for qualified plans. Note that statement 1 applies to distributions from qualified plans, but not to distributions from an IRA.

Question 30

Crystal, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. Her total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Crystal is 100 percent vested.

Which of the following statements is/are correct?

1. Crystal may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years.
2. If Crystal takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) she will be subject to income tax, but not the 10% penalty.

1 only.
2 only.
Both 1 and 2.
Neither 1 nor 2.

Answer 30

Neither 1 nor 2.
Rationale

Statement 1 is incorrect because she can take a loan equal to one-half of his total vested account balance up to $50,000. Statement 2 is incorrect because the medical insurance premium exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Question 31

Roger and Anita were happily married until Roger fell in love with Sam. As a result, Roger and Anita have agreed they need to get a divorce. As part of the process, the court has provided a domestic relations order that calls for Anita’s profit-sharing plan to be divided into equal portions such that Roger will have his own account with half of the value of the retirement account.
What type of approach has been taken?

The separate interest approach.
The split payment approach.
The shared payment approach.
The divided account approach.

Answer 31

The separate interest approach.

Rationale

The separate interest approach calls for splitting a retirement account into two separate accounts. Each party is free to act with regard to their separate account without the interference or consent of the other party. There is not such term as split payment approach or divided account approach.

Question 32

In June 2024, Mario converts $100,000 in his 401(k) plan to a Roth account through an in-plan Roth rollover. The value of the assets in the Roth account drops by 40 percent due to a significant decline in the stock market that occurs in August 2024. The in-plan Roth rollover results in Mario incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40 percent drop).

Which of the following statements is correct?

Mario cannot recharacterize the conversion.

Mario can recharacterize as long as it is done within six months from the conversion.

Mario can recharacterize after December 31, 2024.

Mario can recharacterize at any time before the due date of his tax return, including extensions.

Answer 32

Mario cannot recharacterize the conversion.

Rationale

In-plan Roth rollovers cannot be “undone” or recharacterized.
The other options are not correct.

Question 33

Which of the following distributions from a qualified plan would not be subject to the 10% early withdrawal penalty, assuming the participant has not attained age 59½?

1. A distribution made to a spouse under a Qualified Domestic Relations Order (QDRO).
2. A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company.
3. A distribution to pay for costs of higher education.
4. A distribution made immediately after separation from service at age 57.

1 and 2.
1 and 3.
1 and 4.
2 and 3.

Answer 33

1 and 4.

Rationale

Statement 2 is incorrect for two reasons. The exception to the 10 percent early withdrawal penalty for health insurance premiums is only applicable to unemployed individuals. In addition, this exception is only available for distributions from IRAs, not qualified plans. Statement 3 is incorrect because the exception to the 10 percent penalty for higher education expenses only applies to distributions from IRAs, not qualified plans.

Question 34

Marleen, age 53 and a recent widow, is deciding between taking a lump-sum distribution from her husband’s pension plan of $263,500 now or selecting a life annuity starting when she is age 65 (life expectancy at 65 is 21 years) of $2,479 per month. Current 30-year Treasuries are yielding six percent annually.

Which of the statements below are true?

1. If Marleen takes the lump-sum distribution, she will receive $263,500 in cash now and be able to reinvest for 34 years, creating an annuity of $4,570 per month.
2. If Marleen takes the lump-sum distribution she will be subject to the 10% early withdrawal penalty.

1 only.
2 only.
Both 1 and 2.
Neither 1 nor 2

Answer 34

Neither 1 nor 2.

Rationale

Statement 1 is false. Marleen will only receive $210,800 ($263,500 less 20% withholding).

Statement 2 is also false. The distribution is on account of death, an exception to the 10% early withdrawal penalty rule.

Question 35

MaryAnn, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial advisor that she wanted to take a distribution from her IRA and roll it over into a new IRA.
Her financial advisor inadvertently moved the funds into a taxable account. MaryAnn did not make the request of the IRS until six months after the mistake was made. Will the IRS permit the waiver?

No. The IRS never waives this requirement, except under the most extreme of circumstances.

Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances.

No. MaryAnn waited beyond 90-days for filing such a request.

No. MaryAnn waited an unreasonable amount of time before filing the request.

Answer 35

Yes. The mistake was the fault of the financial advisor and the IRS regularly grants waivers in these circumstances.

Rationale

The IRS generally grants such requests if timely made.

Question 36

Owen turned 73 on November 1, 2024 and must receive a minimum distribution from his qualified plan. The account balance had a value of $437,989 at the end of 2023. The distribution period for a 73-year-old is 26.5, and for a 74-year-old it is 25.5 under the Uniform Lifetime Table effective for distribution years after 2021.

If Owen takes a $15,000 distribution on April 1, 2025, what is the amount of the minimum distribution tax penalty associated with his first year’s distribution?

Assume that Owen does not correct the failure (if any) within the correction window.

$0.
$382.
$544.
$764.

Answer 36

$382.
Rationale

The required minimum distribution for Owen is $16,528 ($437,989 divided by 26.5) because he is 73 years old as of December 31, 2024.

Owen only took a distribution of $15,000, therefore, the minimum distribution penalty (25%) would apply to the $1,528 balance.

The minimum distribution penalty is $382 (25% of the $1,528).

Under the SECURE 2.0 Act, beginning in 2023, the penalty tax for failure to take a required minimum distribution was reduced from 50 percent to 25 percent.

The 25 percent penalty is further reduced to 10 percent if the distribution failure is corrected within a specified correction window which ends on the earlier of
(1) the date the IRS issues a notice of deficiency,
(2) the date the IRS assesses the excise tax, or
(3) the last day of the second taxable year that begins after the end of the year in which the tax is imposed.

Question 37

Sesame’s Box, a shop that specializes in custom trinket and storage boxes, has a 401(k) plan. The plan allows plan loans up to the legal limit allowed by law and they may be repaid under the most generous repayment schedule available by law. The plan has the following employee information:

Employee 401(k) Balance Outstanding Loan
Olivia $400,000 $0
Gordon $250,000 $30,000
Miles $75,000 $0
Roscoe $15,000 $0

Which of the following statements is correct?

If Gordon quit today, state law requires that he repay the loan within five days.

The maximum Olivia can borrow from her account is $200,000.

The maximum Roscoe can borrow from his account is $10,000.

If Miles wanted to borrow money from his plan for the purchase of a personal residence, he would have to pay the loan back within five years.

Answer 37

The maximum Roscoe can borrow from his account is $10,000.

Rationale

Roscoe can borrow one half of his vested account balance up to $50,000. Since the balance is below $20,000, he can borrow a full $10,000.

State law does not require the repayment of the loans within a specified time; however, the plan can require that Gordon repay the loan immediately.

Olivia can only borrow one-half of her account balance up to $50,000, thus she can only borrow $50,000.

Miles will not have to repay the loan in five years because the loan proceeds are being used for a home purchase and an extended period is available.

Question 38

Alanis recently died at age 77, leaving behind a qualified plan worth $200,000. Alanis began taking minimum distributions from the account after attaining age 70½ (prior to 2020) and correctly reported the minimum distributions on her federal income tax returns. Before her death, Alanis named her granddaughter, Nadine, age 22, as the designated beneficiary of the account.
Now that Alanis has died, Nadine has come to you for advice with respect to the account.

Which of the following is correct?

Nadine must distribute the entire account balance within ten years of Alanis’s death.

In the year following Alanis’s death, Nadine may begin taking distributions from the account based on Nadine’s remaining life expectancy, recalculated each year.

In the year following Alanis’s death, Nadine must begin taking distributions over Alanis’s remaining single-life expectancy.

Nadine can roll the account over to an IRA and name a new beneficiary.

Answer 38

Nadine must distribute the entire account balance within ten years of Alanis’s death.

Rationale

Since Alanis’s died after December 31, 2019 the post-death minimum distribution rules under the SECURE Act will apply.

Nadine is not an “eligible designated beneficiary” (spouse, minor child, disabled, or beneficiary no more than 10 years younger than the deceased), therefore, she must take a full distribution within 10 years of Alanis’s death.

Question 39

Bobby would not listen to his financial advisor and decided to rollover his qualified plan assets to a traditional IRA. Which of the following is correct?

Bobby is entitled to the same alternative tax options in an IRA that are available in a qualified plan.

Bobby has the same or more investment options in his IRA as compared to his qualified plan.

Bobby can now convert the funds to a Roth IRA, where before he could not.

Bobby has lost some of his creditor protection by moving the funds from a qualified plan to an IRA.

Answer 39

Bobby has lost some of his creditor protection by moving the funds from a qualified plan to an IRA.

Rationale

Option a is not correct because ten year forward averaging, pre-74 capital gain treatment and NUA treatment are available in a qualified plan, but not available in an IRA
Option b is not correct because qualified plans can investment in life insurance and collectibles, which is not permitted in an IRA.

Option c is not correct, as he could have converted direct from a qualified plan to a Roth IRA.

Option d is correct as the assets are no longer protected under ERISA. The assets will be protected under bankruptcy law, but not ERISA.

Question 40

On January 5, Belinda, age 39, withdrew $42,000 from her qualified plan. Belinda had an account balance of $180,000 and an adjusted basis in the account of $30,000.
Calculate any early withdrawal penalty.

$0.
$700.
$3,500.
$4,200

Answer 40

$3,500.
Rationale

The penalty applies only to the taxable amount.

$30,000 ÷ $180,000 = 0.1667 exclusion
$42,000 x 0.1667 = $7,000 excluded from taxation
$42,000 - $7,000 = $35,000 x 0.10 = $3,500

Question 41

In May 2024, Seth converts $100,000 in his traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40% due to a significant decline in the stock market that occurs in October 2024. The Roth conversion results in Seth incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40% drop).
Which of the following statements is correct?

Seth cannot recharacterize the conversion.

Seth can recharacterize as long as it is done within six months from the date of the conversion.

Seth can recharacterize after December 31, 2024.

Seth can recharacterize at any time before the due date of his tax return, including extensions.

Answer 41

Seth cannot recharacterize the conversion.

Rationale

Prior to 2018, taxpayers had the ability to recharacterize a Roth conversion up to the due date of the income tax return, including extensions. As a result of The TCJA 2017, Roth conversions cannot be recharacterized after 2017.

Question 42

UPDATED FOR 2024:
Jose, who attained age 73 in October of 2024, worked for several companies over his lifetime. He has worked for the following companies (A-E) and, as of December 31, 2023, still has the following qualified plan account balances at those companies.
Company Jose’s Account Balance
A $250,000
B $350,000
C $150,000
D $350,000
E $200,000

Jose is currently employed with Company E with no plan to retire. What, if any, is his required minimum distribution for 2024 from all plans? Life expectancy tables are 26.5 for age 73 and 25.5 for age 74.

$0.
$41,509.
$43,137.
$49,057

Answer 42

$41,509.

Rationale

Jose is required to take a minimum distribution for the years in which he is 73 from each qualified plan, except from his current employer ($1,100,000 ÷ 26.5 = $41,509).

He can delay the payment until April 1 of 2025, but the question asks for the distribution required for 2024.

Note: He must take from each account. He cannot take $41,509 from one account as he could if A-D were IRAs.

Question 43

Saki, age 35, is having a run of bad luck. In December 2023, Saki experienced a health emergency forcing her to work only part time for two months (December 2023 and January 2024). Unfortunately, Saki does not have disability insurance and does not have any emergency funds available to help cover the cost of her rent, utilities, and groceries in excess of her part-time income. Saki does, however, have an IRA with a balance of $2,000.

Which of the following is correct regarding Saki’s potential use of the IRA to cover these expenses?

Saki can take a penalty-free distribution of $1,000 in 2023 and an additional penalty-free distribution of $1,000 in 2024.

Saki cannot take a penalty-free distribution in 2023 but can take a penalty-free distribution of $1,000 in 2024.

Saki cannot take a penalty-free distribution in 2023 but can take a $2,000 penalty-free distribution in 2024.

Saki cannot take a penalty-free distribution in 2023 or 2024.

Answer 43

Saki cannot take a penalty-free distribution in 2023 but can take a penalty-free distribution of $1,000 in 2024.

Rationale

Under the SECURE 2.0 Act, beginning in 2024, a self-certified emergency withdrawal of up to $1,000 per calendar year is permitted from an IRA, 401(k), 403(b), or 457(b) plan. Amounts distributed can be repaid any time during the three-year period beginning on the day after the date the distribution is received. No additional distributions are allowed during the three calendar years immediately following the year of distribution unless the distribution is fully repaid or total employee contributions to the plan (or contributions to the IRA) are at least equal to the amount that has not been repaid.

Question 44

Which of the following distributions from a qualified plan would not be subject to the 10 percent early withdrawal penalty, assuming the participant has not attained age 591⁄2?

1. A distribution made to a spouse under a qualified domestic relations Order (QDRO).
2. A distribution from a qualified plan used to pay the private health insurance premiums of a current employee of Clinical Trials Company.
3. A distribution to pay for costs of higher education. 4. A distribution made immediately after separation from service at age 57.

a. 1 and 2.
b. 1 and 3.
c. 1 and 4.
d. 2 and 3.

Answer 44

The correct answer is c.

Statement 2 is incorrect for two reasons.
The exception to the 10 percent early withdrawal penalty for
health insurance premiums is only applicable to unemployed individuals. In addition, this exception is only available for distributions from IRAs, not qualified plans.

Statement 3 is incorrect because the exception to the 10 percent penalty for higher education expenses only applies to distributions from IRAs, not qualified plans

Question 45

Viola, who is 75 years old, requested from the IRS a waiver of the 60-day rollover requirement. She indicated that she provided written instructions to her financial adviser that she wanted to take a distribution from her IRA and roll it over into a new IRA. Her financial adviser inadvertently moved the funds into a taxable account.
Viola did not make the request of the IRS until five years after the mistake was made.
Will the IRS permit the waiver?

a. No. The IRS never waives this requirement, except under the most extreme of circumstances.

b. Yes. The mistake was the fault of the financial adviser and the IRS regularly grants waivers in these circumstances.

c. No. Viola waited beyond the one-year period for filing such a request.

d. No. Viola waited an unreasonable amount of time before filing the request.

Answer 45

The correct answer is d.

The IRS generally grants such requests if timely made. However, Viola should have realized this long before five years.

She would have reported interest on her Form 1040 which would have caused her to realize the mistake. She certainly would have received account statements.

Choice a is false.

Choice b would be correct if Viola had filed the request timely.

Choice c is false and there is no such one-year period

Question 46

Laura, age 43, has several retirement accounts and wants to know what accounts can be rolled over to other accounts. Which of the following statements regarding rollovers is not correct?

a. She could take a distribution from her SEP IRA and roll it over to a qualified plan without incurring a 20% withholding.

b. She could rollover her government 457(b) plan to her new employer’s qualified plan.

c. She could rollover the funds from her old employer’s qualified plan to her new employer, who sponsors a 401(k) plan with a Roth account, and will be able to convert the funds in an in-plan Roth rollover.

d. She could rollover her traditional IRA to her designated Roth account in her 403(b) plan.

Answer 46

The correct answer is d.

Options a, b and c are all correct and permissible.

She cannot roll over traditional IRA funds to a Roth account.

Question 47

In May 2023, Seth converts $100,000 in his traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40 percent due to a significant decline in the stock market that occurs in October 2023. The Roth conversion results in Seth incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40 percent drop). W
hich of the following statements is correct?

a. Seth cannot recharacterize the conversion.

b. Seth can recharacterize as long as it is done within six months from the date of the conversion.

c. Seth can recharacterize after December 31, 2023.

d. Seth can recharacterize at any time before the due date of his tax return, including extensions.

Answer 47

The correct answer is a.

Prior to 2018, taxpayers had the ability to recharacterize a Roth conversion up to the due date of the income tax return, including extensions. As a result of TCJA 2017, Roth conversions cannot be
recharacterized after 2017.

Question 48

Gerry is 72 on April 1, 2023 and has an account balance of $423,598 as of the end of last year. If Gerry takes a $15,000 distribution in December 2023, what is the amount of the minimum distribution tax penalty?

A. 6% of the amount not taken
B. 25% of the amount not taken
C. $0
D. 50% of the amount not taken

Answer 48

The correct answer is C.

SECURE Act 2.0 revised Required Minimum Distributions to age 73 as a start date for those that turn 72 after 12/31/22. Gerry will not need to begin RMDs for another year. Any distributions prior to that will not count towards the RMD.

Choice A is incorrect. The insufficient withdrawal penalty was 50% of the amount not taken prior to 2023.

Choice B is incorrect. The insufficient withdrawal penalty is 25% of the amount not taken as of 2023 and may be reduced to 10% if corrective action is taken within specific time limits.

Choice D is incorrect. The penalty for over contribution is 6%

Question 49

Josh recently died on January 5, 2021 at the age of 63, leaving a qualified plan account with a balance of $1,000,000. Josh was married to Kay, age 53, who is the designated beneficiary of the qualified plan.
Which of the following is correct?

A. Kay must distribute the entire account balance within five years of Josh’s death.

B. Kay must begin taking distributions over Josh’s remaining single-life expectancy.

C. Any distribution from the plan to Kay will be subject to a 10 percent early withdrawal penalty until she is 59½.

D. Kay can receive annual distributions over her remaining single-life expectancy.

Answer 49

The correct answer is D.

Kay can receive distributions over her remaining single-life expectancy. Kay qualifies as an eligible designated beneficiary as she is 10 years younger, not more than 10 years younger.

Answer A is incorrect. She is not required to distribute the entire account within 5 years.

Answer B is incorrect. Kay can wait (not must) until Josh would have been 72 to begin taking distributions over her recalculated life expectancy.

Answer C is incorrect. The distribution will not be subject to the early withdrawal penalty because the distributions were on account of death.

Question 50

Andrea died this year (2024) at the age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 70½ and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account.
Which of the following is correct?

A. Reese must distribute the entire account balance within five years of Andrea’s death.

B. Reese must distribute the entire account balance within ten years of Andrea's death.

C. In the year following Andrea’s death, Reese must begin taking distributions over Andrea’s remaining single-life expectancy.

D. Reese can roll the account over to her own name, treat the account as her own and name a new beneficiary.

Answer 50

Solution: The correct answer is B.

SECURE Act 2019 changed distribution rules for beneficiaries of account owners that died after 12/31/19. Whether the account owner died before RBD (Required Begin Date) or after, the distribution rules are now the same.

All Designated Beneficiaries must withdraw the account balance within 10 years of the owner’s death.

Eligible Designated Beneficiaries may distribute over their life expectancy in the year following owner’s death. Eligible Designated Beneficiaries are:
* Surviving spouse for the employee or IRA owner
* Child of employee or IRA owner who has not reached majority
* At age of majority becomes a designated beneficiary
* Chronically ill individual
* Any other individual who is not more than ten years younger than the employee or IRA owner

Non-Designated Beneficiaries (no listed Beneficiary) rules are pending clarification from the IRS, but we believe must be distributed within 5 years of the account owner’s death. The new rules were not clear if the difference for before or after RBD were still applicable.

Reese is more than 10 years younger than Andrea, which makes her a Designated Beneficiary.

Question 51

Tom, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. His total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Tom is 100 percent vested.

Which of the following statements is/are correct?

Tom may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years.
If Tom takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) he will be subject to income tax, but not the 10% penalty.

A. 1 only
B. 2 only
C. 1 and 2
D. Neither 1 nor 2

Answer 51

Solution: The correct answer is D.

Statement 1 is incorrect because he can take a loan equal to one-half of his total account balance up to $50,000. Statement 2 is incorrect because the exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Question 52

Which of the following is true regarding QDROs?

A. The court determines how the retirement plan will satisfy the QDRO (i.e., split accounts, separate interest).

B. In order for a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA.

C. All QDRO distributions are charged a 10% early withdrawal penalty.

D. A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s IRA or qualified plan.

Answer 52

D. A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s IRA or qualified plan.

Question 53

In August of this year, Paul is turning 72. He is currently a participant in his employer’s profit sharing plan. His profit sharing plan had an account balance of $600,000 on December 31 of this year, and $450,000 on December 31 of last year. According to the Uniform Lifetime Table the factors for ages 72, 73, and 74 are 27.4, 26.5, and 25.5 respectively.

What is the amount of Paul’s required minimum distribution for this year?

A. $16,423
B. Paul does not need to take an RMD.
C. $16,981
D. 22,642

Answer 53

Solution: The correct answer is B.

The SECURE Act 2.0 revised the RMD age to begin distributions to age 73. If Paul retires by age 73, he will begin RMDs.

If he continues working, he can continue to defer this RMDs.

Question 54

In July of this year Paul turned 73. He retired years ago and was a participant in his former employer’s profit sharing plan.

His profit sharing plan had an account balance $600,000 on December 31st last year and $450,000 on December 31st this year.

According to the Uniform Lifetime Table the factors for ages 73, and 74 are 26.5 and 25.5 respectively.

What is the amount of Paul’s first required minimum distribution that he must take by the deadline?

A. $22,641
B. $23,529
C. $16,981
D. $16,423

Answer 54

Solution: The correct answer is A.

$600,000/26.5 = $22,641.51 is his RMD.

Paul turned age 73 this year and he will be required to take his first distribution for this tax year.
The RMD for the first year may be delayed until April 1st of the next year but is still based on the year the taxpayer turns 73.

If the owner delays the first RMD until April 1st of the next year, they will then be required to take two RMDs, the RMD for age 73 that was delayed, and the RMD for age 74.

SECURE Act 2.0 revised distributions to age 73 start for those reaching 72 after 12/31/22.

Question 55

On April 30, Janet, age 42, received a distribution from her qualified plan of $150,000. She had an adjusted basis in the plan of $500,000 and the fair market value of the account as of April 30 was $625,000. Calculate the taxable amount of the distribution and any applicable penalty.

$30,000 taxable, $3,000 tax penalty
$30,000 taxable, $0 tax penalty
$120,000 taxable, $12,000 tax penalty
$150,000 taxable, $15,000 tax penalty

Answer 55

The correct answer is A.

Because the distribution to Janet does not qualify for the exception to the 10% penalty, the taxable amount of the distribution will be subjected a 10% penalty.

To calculate the amount of the distribution that is return of adjusted basis, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution.

This ratio is then multiplied times the gross distribution amount.

As such, $120,000 (($500,000/$625,000) × $150,000) of the $150,000 distribution is return of adjusted taxable basis.

Accordingly, $30,000 ($150,000 - $120,000) will be subject to income tax, and there will be a $3,000 ($30,000 × 10%) tax penalty.