Retirement accounts

Question 1

Who may open and contribute to an IRA?

Answer 1

All employed individuals, regardless of whether covered by a qualified retirement plan

This includes those not participating in an employer-sponsored retirement plan.

Question 2

What is the catch-up contribution amount for individuals age 50 or older?

Answer 2

$1,000

This allows older individuals to save more for retirement.

Question 3

How can married couples contribute to an IRA if one spouse has little or no earned income?

Answer 3

Contributions may still be made for that spouse based on the couple’s joint income

This allows for spousal IRA contributions.

Question 4

What penalty is imposed on amounts contributed above the IRA maximum?

Answer 4

6% penalty every year until the excess amount is withdrawn

This applies to contributions exceeding the set limits.

Question 5

Which investment practices are not allowed in IRAs?

Answer 5

• Short sales of stock
• Speculative option strategies
• Tax-exempt municipal securities
• Margin account trading

These restrictions aim to protect the integrity of retirement savings.

Question 6

What is a custodian-to-custodian transfer in relation to IRAs?

Answer 6

A transfer of IRA assets between matching types: traditional to traditional or Roth to Roth. Account owner never takes possession of assets when transfering between custodians.

There is no limit on the number of transfers.

Question 7

What is a direct rollover?

Answer 7

Moving money from an employer plan, like a 401(k), to an IRA

It is important to note that this is considered a transfer, not a rollover.

Question 8

What is an indirect rollover?

Answer 8

When a customer withdraws and holds assets in their own account, needing to deposit into a qualified account within 60 days

The entire amount plus 20% withholding must be deposited to avoid taxes and penalties.

Question 9

Fill in the blank: A person who is age 50 or older may make a higher contribution, called a _______.

Answer 9

catch-up

This allows older individuals to increase their retirement savings.

Question 10

True or False: There is a limit on the number of times a customer may transfer IRA assets.

Answer 10

False

Customers can transfer IRA assets as many times as they wish.

Question 11

What must be done to avoid taxes and penalties during an indirect rollover?

Answer 11

The funds must be deposited into a qualified account within 60 days

Failure to do so can lead to tax implications.

Question 12

What type of contributions may be deductible from earned income for tax purposes?

Answer 12

Contributions to qualified retirement plans

Question 13

If a person is not covered by an employer-sponsored qualified retirement plan, what can they deduct?

Answer 13

The full amount of any contribution, regardless of their income

Question 14

How does coverage by an employer-sponsored qualified retirement plan affect contribution deductions?

Answer 14

The amount that may be deducted varies with income

Question 15

What does the IRS do regarding the range of income for contribution deductions?

Answer 15

Sets a range that adjusts regularly based on inflation

Question 16

At what age may distributions begin without penalty?

Answer 16

Age 59½

Question 17

How are distributions generally taxed for tax purposes?

Answer 17

Added to ordinary income

Question 18

What happens to the full amount deposited into a qualified retirement plan at distribution?

Answer 18

The full amount is taxable

Question 19

Are capital gains included in the taxation of distributions?

Answer 19

Yes, the whole amount is taxed at the ordinary income tax rate

Question 20

What penalty applies to distributions taken before age 59½?

Answer 20

A 10% penalty

Question 21

What additional tax applies to distributions before age 59½?

Answer 21

Regular income tax

Question 22

Are there any exceptions to the penalty for early distributions?

Answer 22

Yes, there are exceptions to the penalty but not to the taxes

Question 23

What year was the Roth IRA introduced?

Answer 23

1997

Question 24

Who was the principal sponsor of the Roth IRA?

Answer 24

Senator William Roth

Question 25

Are contributions to a Roth IRA tax deductible?

Answer 25

No

Question 26

What happens to an investor's eligibility to contribute to a Roth IRA at higher income limits?

Answer 26

It is phased out, eventually falling to zero

Question 27

Are distributions from a Roth IRA tax free?

Answer 27

Yes, they can be entirely tax free

Question 28

What is the return of the cost basis in the context of Roth IRA distributions?

Answer 28

Distributions of the original contribution are tax free

Question 29

What are qualified distributions of income or gains in a Roth IRA?

Answer 29

They are tax free

Question 30

What happens to nonqualified distributions of income or gains from a Roth IRA?

Answer 30

They are taxed as ordinary income and subject to a 10% penalty

Question 31

Who benefits most from a Roth IRA?

Answer 31

* Younger individuals * Those in lower income-tax brackets * Anyone unable to deduct contributions to a traditional IRA

Question 32

Fill in the blank: Contributions to a Roth IRA are _______.

Answer 32

not tax deductible

Question 33

What is a defined benefit plan also called?

Answer 33

Traditional pension plan ## Footnote Defined benefit plans guarantee a specific benefit at retirement.

Question 34

What factors determine the benefit amount in a defined benefit plan?

Answer 34

Years of service, age, and salary at the time of retirement ## Footnote The plan calculates the benefit based on these key factors.

Question 35

What does a defined benefit plan replace?

Answer 35

A portion of the preretirement income ## Footnote This ensures retirees have a stable income after retirement.

Question 36

Who determines how much the company needs to contribute to a defined benefit plan?

Answer 36

An outside firm ## Footnote This firm assesses the contributions needed to meet future benefit payments.

Question 37

What investment risk is associated with defined benefit plans?

Answer 37

The company carries the investment risk ## Footnote Many companies are moving away from defined benefit plans due to this risk.

Question 38

How do the benefits of defined benefit plans from private employers change over time?

Answer 38

The amount will not change once benefits are collected ## Footnote This provides stability for retirees.

Question 39

What adjustment do pensions from government agencies often include?

Answer 39

Cost-of-living adjustment (COLA) ## Footnote This helps maintain the purchasing power of retirees.

Question 40

What does a defined contribution plan define?

Answer 40

The amount that may be contributed to the plan ## Footnote Employees have more control over their investments in these plans.

Question 41

What can employees do with their balance in a defined contribution plan at retirement?

Answer 41

Take possession of the assets or transfer them to an IRA ## Footnote This flexibility is a key feature of defined contribution plans.

Question 42

Why are defined contribution plans more popular than defined benefit plans?

Answer 42

The investment risk is carried by the employee ## Footnote Employees prefer plans where they have control over their investments.

Question 43

What ability do employees have regarding assets in defined contribution plans when changing employers?

Answer 43

Assets may be moved between employers ## Footnote This portability is advantageous for employees.