4 Flashcards
(31 cards)
What does a 401(k) plan generally provide its participants?
Tax-free distributions
A defined retirement benefit
Salary-deferral contributions
Salary-deferral distributions
The correct answer is “Salary-deferral contributions”. A 401(k) plan normally provides participants with a salary-deferral option for contributions to the plan.
What is the excise tax rate the IRS imposes on individuals aged 70 1/2 or older who do not take the required minimum distributions from their qualified retirement plan?
50%
60%
30%
40%
The correct answer is “50%”. Distributions must be made by April 1 following the year the participant turns age 70 1/2 or a 50% excise tax will be assessed on the amount that should have been withdrawn.
What is the maximum number of employees (earning at least $5,000) that an employer can have in order to start a SIMPLE retirement plan?
25
250
50
100
The correct answer is “100”. An employer can have a maximum of 100 employees earning at least $5,000 to be eligible for a SIMPLE retirement plan.
To be eligible for Social Security disability benefits, an employee must be unable to perform:
his/her current occupation
any occupation
any occupation that the employee is qualified and willing to do
any occupation that reflects the employee’s education level
The correct answer is “any occupation”. To be eligible for Social Security disability benefits, an employee must be unable to perform any occupation.
Which tax would an IRA participant be subjected to on distributions received prior to age 59 1/2?
Ordinary income tax
10% tax penalty for early withdrawal
Ordinary income tax and a 10% tax penalty for early withdrawal
Capital gains tax
The correct answer is “Ordinary income tax and a 10% tax penalty for early withdrawal”. Income tax and a penalty tax are generally assessed when a participant receives retirement savings from an IRA before reaching age 59 1/2.
A 55 year old recently received a $30,000 distribution from a previous employer’s 401k plan, minus $6,000 withholding. Which federal taxes apply if none of the funds were rolled over?
Only income taxes on $30,000
Only income taxes on $24,000
Income taxes plus a 10% penalty tax on $24,000
Income taxes plus a 10% penalty tax on $30,000
The correct answer is “Income taxes plus a 10% penalty tax on $30,000”. All withdrawals from a qualified retirement plan are taxable as current income. In addition, any withdrawals made before age 59 1/2 is subject to an additional tax penalty of 10% of the amount withdrawn.
What is Old Age and Survivors Health Insurance (OASDHI) also known as?
FICA
Medicaid
Social Security
Medicare
The correct answer is “Social Security”. Social Security, also known as Old Age, Survivors, and Disability Insurance (OASDI), was signed into law in 1935 by President Roosevelt as part of the Social Security Act.
Which of the following does Social Security NOT provide benefits for?
Retirement
Survivorship
Dismemberment
Disability
The correct answer is “Dismemberment”. Social Security provides for all of these types of benefits EXCEPT dismemberment.
A retirement plan that sets aside part of the company’s net income for distributions to qualified employees is called a:
salary reduction plan
rollover plan
profit-sharing plan
403(b) plan
The correct answer is “profit-sharing plan”. Profit-sharing plans set aside a portion of the company’s net income for distributions to qualified employees.
All of the following statements about traditional individual retirement accounts are false EXCEPT
Contributions are not tax deductible
Withdrawals are normally tax-free to the recipient
10% penalty is applied to withdrawals before age 59 1/2
10% penalty is applied to withdrawals after age 59 1/2
The correct answer is “10% penalty is applied to withdrawals before age 59 1/2”. Because an IRA is a qualified plan, it has the same rules for early withdrawal.
In a qualified retirement plan, the yearly contributions to an employee’s account:
are not tax-deductible
must be matched dollar-for-dollar by the employer
are restricted to maximum levels set by the IRS
are restricted to minimum levels set by the IRS
The correct answer is “are restricted to maximum levels set by the IRS”. Annual limits to an employee’s qualified retirement plan are based on maximum limits set by the IRS.
Which of these is NOT a source of funding for Social Security benefits?
Federal Government
Self employed individuals
Employers
Employees
The correct answer is “Federal Government”. All of these are sources of Social Security benefit funding EXCEPT the Federal Government.
Who is normally considered to be the owner of a 403(b) tax-sheltered annuity?
The employer
The 403(b) custodian
The employee
The financial institution
The correct answer is “The employee”. The participating employee normally applies for and owns a 403(b) tax-sheltered annuity.
How are Roth IRA distributions normally taxed?
Distributions are received tax-free
Taxed as ordinary income
Capital gains tax is applied
10% penalty tax is applied
The correct answer is “Distributions are received tax-free”. Qualified distributions are received tax free in a Roth IRA.
In an individual retirement account (IRA), rollover contributions are:
partially limited by dollar amount
subject to capital gains tax
subject to ordinary income tax
not limited by dollar amount
The correct answer is “not limited by dollar amount”. Rollover contributions to an individual retirement annuity (IRA) are not limited by dollar amount.
Post-tax dollar contributions are found in:
401K investments
Roth IRA investments
SIMPLE investments
Traditional IRA investments
The correct answer is “Roth IRA investments”. No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn.
Traditional individual retirement annuity (IRA) distributions must start by:
age 65
April 1st of the year following the year the participant attains age 59 1/2
April 1st of the year following the year the participant attains age 70 1/2
age 59 1/2
The correct answer is “April 1st of the year following the year the participant attains age 70 1/2”. Distributions from a traditional IRA must be made by April 1 following the year the participant turns age 70 1/2 or an excise tax will be assessed.
A trustee-to-trustee transfer of rollover funds in a qualified plan allows a participant to avoid:
paying trustee fees
paying transfer fees
ever paying income taxes on the distributions
mandatory income tax withholding on the transfer amount
The correct answer is “mandatory income tax withholding on the transfer amount”. There is no federal tax withholding involved in a transfer of funds from one qualified plan into another. Rollovers, however, involve a 20% withholding. Once the rollover takes place to the new custodian, the remainder of the distribution is made.
How long does an individual have to “rollover” funds from an IRA or qualified plan?
60 days
90 days
No limit
120 days
The correct answer is “60 days”. In IRA’s and qualified plans, the time limit for rollover funds is 60 days, or the funds could be subjected to income taxes and a penalty tax.
Which of the following is TRUE about a qualified retirement that is “top heavy”?
More than 50% of plan assets are in key employee accounts
More than 30% of plan assets are in key employee accounts
More than 60% of plan assets are in key employee accounts
More than 40% of annual additions are for key employee accounts
The correct answer is “More than 60% of plan assets are in key employee accounts”. A plan is considered to be top heavy if more than 60% of plan assets are attributable to “key employees” as of the last day of the prior plan year.
Which product would best serve a retired individual looking to invest a lump-sum of money through an insurance company?
Universal Life
Variable Life
Interest-sensitive Life
Annuity
The correct answer is “Annuity”. In this situation, an annuity would be recommended.
Rick recently died and left behind an individual IRA account in his name. His widow was forwarded the balance of the IRA. The widow qualifies for the:
marital deduction
capital gains tax rate
Section 1035 exchange
death benefits
The correct answer is “marital deduction”. The transfer of a decedent’s IRA account balance to a surviving spouse qualifies for the Unlimited Marital Deduction, which generally exempts the transfer from estate taxes.
An individual participant personally received eligible rollover funds from a profit-sharing plan. What is the income tax withholding requirements for this transaction?
Nothing is withheld
20% is withheld for income taxes
10% is withheld for income taxes
30% is withheld for income taxes
The correct answer is “20% is withheld for income taxes”. A plan sponsor must withhold 20% of the distribution in federal taxes on a rollover. Once the rollover takes place to a new custodian, the remainder of the distribution is made.
A sole proprietor may use this plan ONLY if the employees of this business are included.
SIMPLE Plan
Keogh Pension Plan
Individual Retirement Account (IRA)
SEP Plan
The correct answer is “Keogh Pension Plan”. A Keogh Plan may be used by a sole proprietor only if the employees of the business are included.
