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Retirement > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

T/F There are no in-service withdrawals for participants under age 62 for pension plans

A

True.

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2
Q

T/F At the participant’s death, the distribution options: are:

A

Distributed to the beneficiary. The participant’s estate.

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3
Q

What is a Qualified Preretirement Survivor Annuity

A

An annuity benefit payable to the surviving spouse of the participant if the participant dies before attaining normal retirement age.

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4
Q

At the particpant’s disability, the distribution options for pension plans are:

A

The plan proceeds are distributed to the participant.

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5
Q

What happens if a employee is terminated before normal retirement age?

A

The distribution options include: a lump sum distribution, rollover the plan assets to an IRA or other qualified plan, or leave assets in plan, however the value must be greater than 5,000.

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6
Q

What happens if an employee is terminated at normal retirement age?

A

The following options are available: Qualified Joint Survivor Annuity, Qualified Preretirement Survivor Annuity, a lump sum distribution, or rollover plan assets into IRA or other qualified plan.

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7
Q

Qualified Joint Survivor Annuity

A

An annuity benefit payable to the participant and his spouse as long as either lives.

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8
Q

Qualified Preretirement Survivor Annuity

A

An annuity benefit payable to the surviving spouse of a participant if the participant dies before attaining normal retirement age.

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9
Q

What are the distribution options for a profit sharing plan?

A

A profit sharing plan may permit in-service withdrawals after two years of participation in the plan. A 401k plan may permit loans.

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10
Q

At termination of service in a profit sharing plan, the participant has the following choices:

A

a lump sum distribution, rollover plan to an IRA or other qualified plan, or purchase an annuity.

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11
Q

How are distributions from a qualified plan normally treated for tax purpose?

A

Treated as ordinary income.

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12
Q

What are some exception to tax rules for distributions?

A

Direct rollovers of plan assets to IRAs or other qualifying plans. Adjusted basis in the plan. Lump sum options. Qualified Domestic Relations Orders and NUA treatment when applicable.

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13
Q

T/F Taxable distributions are subject to a 20 percent income tax witholding.

A

True.

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14
Q

When qualified plan assets are rolled over to an IRA, it causes the loss of:

A

ERISA protection, the 10 year forward averaging possibility, net unrealized appreciation possibility, and pre-1974 capital gain treatment.

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15
Q

In order to be eligible for 10 year forward averaging, a participant must ______________________________

A

Have been born before January 1, 1936.

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16
Q

For a lump sum distribution (10 year averaging):

A

The tax is calculated using 1986 ordinary income rates and 1/10 of the lump sum distribution, the the calculated tax is multiplied by 10.

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17
Q

What are the benefits of 10 year forward averaging?

A

Avoids higher marginal tax distribution.

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18
Q

Net unrealized distribution

A

A lump sum distribution of employer securies usually from an ESOP or Stock bonus plans.

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19
Q

To determine the amount of NUA

A

Fair market value of the stock at the date of distribution less the value of stock at date of the employer contribution equals net unrealized appreciation.

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20
Q

In NUA in the year of distirbution of employer sotck

A

The value of the stock at the date of employer contribution is treated as ordinary income. The NUA poriton is taxed as deferred lont-term capital gain.

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21
Q

In NUA at the date of sale of employer stock

A

The participant must recognize any deferred long-term capital gain. Any subsequent gain/loss short/long term capital gain is based on the holding period since the date of distribution.

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22
Q

How are inheritances treated with NUA

A

NUA does not receive a step-to fair market value adjusted taxable basis in the hands of the beneficiary. Heirs maintain NUA long term capital gains treatment. Any additional gain beyond NUA tax treatment is based on the holding period.

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23
Q

What are the requirements for pre-1974 Capital Gain Treatment

A

The participant must have been born prior to January 1, 1936 to be eligible for Pre-1974 Capital Gain Treatment.

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24
Q

What happens with pre 1974 treatment if a lump sum distribution is given?

A

The portion of the distribution attributable to pre 1974 participation in the plan is subject to a 20 percent long term capital gains tax, the remaining portion is eligible for 10 year forward averaging.

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25
Q

Direct IRA rolover is defined as:

A

A distribution from a qualified plan trustee directly to the trustee of the recipient account. A direct roll over results in no income tax withholding.

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26
Q

A indict IRA rolver is defined as

A

A distribution to the participant with a subsequent transfer to another account. An indirect rollover results in a mandatory 20 percent income tax withholding. If a participant completes an indirect rollover, the individual will receive 80 percent of the distribution but must contribute 100 percent to avoid current income taxation.

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27
Q

IRC 408(d)(3)(B) provides for a _______ limitation

A

one-rollover-per-year

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28
Q

T/F Tax court opinion, Bobrow v Commissioner, held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if she can made such a rollover involving any of the individual IRA in the preceding 1 year period.

A

True

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29
Q

T/F Beginning in 2015, the limit will apply by aggregating all of an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.

A

True

30
Q

How are after tax 401k contribution to an IRA treated

A

Basic rules. Distribution from qualified plans include pro-rata share of pre-tax and after-tax amounts. Under IRC 402(c)(2), rollover first consists of the pre-tax amount.

31
Q

What are the potential benefits to rollover to Roth IRA

A

Tax reduction/tax diversification. Tax deferred funds transfer. Minimum distributions are not required from Roth IRAs Estate tax reduction

32
Q

Small Business Jobs Act 2010 ____________________________________.

A

Added Roth accounts to governmental 457 plans and created “in-plan Roth rollovers.”

33
Q

T/F Roth rollovers result in taxation on the amounts transferred to the Roth Account

A

True.

34
Q

What were the eligible amounts before ATRA 2012

A

Vested amounts in plan permitted to be distributted by the plan. Rollover amounts. PS plan amounts available for distribution. 401k deferrals for a participant over 59.5

35
Q

Atra 2012

A

Expanded in plan Roth rollover availability to amounts “not yet distributable.” This modification allows for any vested amounts to be rolled over via an in-plan Roth rollover. Plans must be amended to allow for in-plan Roth rollovers.

36
Q

How is adjusted basis created in qualified plans?

A

After tax contributions create basis. Also if the participant was subject to income tax on payment of life insurance premiums.

37
Q

How is adjusted basis taxed at distribution?

A

It is treated as a tax-free return of capital to the extent of adjusted basis. Any distributions above adjusted basis is treated as ordinary income.

38
Q

T/F Annuity payments consist of both a return of principal and earnings.

A

True

39
Q

T/F The principal portion of each payment is treated as tax free return of adjusted basis.

A

False, treated as partially tax free.

40
Q

The definition of lump sum distribution includes:

A

A distribution of the participant’s entire account balance or accrued benefit. Within one taxable year. On account of the participant’s death, attainment of age 59.5, separation from service, or disability, and the employee participated int he plan for at least 5 years prior to the date of distribution.

41
Q

What does QDRO stand for?

A

Qualified Domestic Relations Order

42
Q

What is QDRO

A

An order, judgment, or decree set forth by a judge that details the right of a third party to receive benefits from another individual’s qualified plan, which is the result of: Child support and or divorce.

43
Q

T/F QDRO is a nontaxable distribution as long as assets are deposited into an IRA or another qualified plan.

A

True.

44
Q

What are the two methods of distributions subject to QDRO?

A

Shared payment, Separate interest

45
Q

How does shared payment work in relation to QDRO?

A

Each person receives a portion of the payment. IF thre is a 800 payment with each receiving 50 percent each person would receive 400 dollars.

46
Q

How does separate interest work in relation to QDRO?

A

Divides the benefit into two different portions. For example, if the account balance was 100,000 each receives 50 percent, the account would be separated into two accounts, 50,000 each.

47
Q

If a QDRO distribution to a former spouse is rolled over to a IRA or qualified plan, then

A

There is not taxation at rollover.

48
Q

If the distribution is not deposited into an IRA or qualified plan, then

A

There is ordinary income on distribution, but it is not subject to 10 percent penalty.

49
Q

A QDRO distribution to a child:

A

The distribution is not elligible to an IRA or qualifying plan. The child is not taxed on the distribution.

50
Q

T/F Plan loans are permissible by any qualified plan

A

True, but they are only usually foudn in CODA type plans.

51
Q

Plan loans may not exceed the lesser of

A

50,000, or 1/2 of the participant’s vested account balance. Exception, when the vested account balance is 20,000, the maximum loan is limited to the lesser of 10,000 or the vested account balance. Plan loans are reduced by the highest outstanding loan balance within the previous twelve month period.

52
Q

T/F Qualified loans must always be repaid within five years

A

Flase. The repayment period is extended up to 30 years if loan proceeds used to purchase a principal residence.

53
Q

T/F Loans from qualified plans required substantially level amortization over its term

A

True, and payments must be made at least quarterly.

54
Q

What happens when a recipient of a loan from a qualified loan is unable to pay back the loan?

A

Failure to repay the loan as prescribed will consider the value of the loans a taxable distribution. Possibly subject to the 10 percent early distribution penalty.

55
Q

T/F Termination from employment generally causes the entire loan to become due.

A

True

56
Q

What are the exceptions to 10 percent early distribution penalty for qualified plans?

A

Death, attainment of age 59 1/2, disability, substantially equal periodic payments, medical expenses in excess of 10 percent AGI. Attainment of age 55 and termination and public safety employees separated from service after 50.

57
Q

What are the exceptions to 10 percent early withdrawal penalty for IRAs/SEP?

A

Death, attainment of age 59.5, disability, substantially equal payments, medical payments in excess of 10 percent AGI, higher education expenses, first time home purchase up 10,000, payment of health insurance premiums by unemployed.

58
Q

72(t) distributions

A

A distribution part of a series of substantially equal periodic payments, avoid the 10 percent penalty

59
Q

What are the requirements for a 72(t) distribution?

A

Substantially equal periodic payments, made at least annually, for the life expectancy of the participant or joint lives of the participant and his designed beneficiary, payments are made after separation of service.

60
Q

What are the three methods for 72(t) distribution?

A

Required minimum distribution method, fixed amortization method, fixed Annuitization method.

61
Q

Required minimum distribution

A

Payments are calculated the same as minimum distributions.

62
Q

Fixed amortization method

A

Payments are calculated over the applicable single or joint life expectancy with a reasonable interest rate.

63
Q

Fixed annuitization method

A

Payments are calculated using an annuity factor.

64
Q

T/F If one of the three 72(t) methods are used, the payments must continue for the greater of 5 years or until the participant attains the age of 59.5

A

True

65
Q

T/F Minimum distribution must begin by April 1 of the year following the year in which the participant attains age 70 1/2

A

True, except when a participant is still employed by the plans sponsor may delay until April 1 of the year after the participant terminations employment. A greater than 5 percent owner cannot use the exception

66
Q

T/F All subsequent minimum distribution must occur by December 31 of the year

A

True

67
Q

How is required minimum distribution calculated?

A

Fair market value of participant’s account at december 31 of the preceding plan year/ distribution period determined based on participant’s age at December 31 of the distribution year.

68
Q

T/F The distribution period for RMD depends on the beneficiary.

A

True.

69
Q

RMD Participant and/or spouse near same age

A

Uniform lifetime table

70
Q

Participant who is greater than 10 years younger than the partiipant

A

Joint and Survivor table

71
Q

Any other beneficiary

A

Single life table

Retirement (11 decks)

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