Module 10

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Module 10
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Module 10
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  1. Reducing the taxation on a client’s retirement distribution is the only consideration when making a distribution decision.

    a) True
    b) False
    b) False

    Tax planning is only part of the process when making a retirement distribution decision. The ultimate goal is to maximize wealth while meeting the client’s cash flow and other needs, not merely to save taxes.
  2. Most distributions from IRAs, qualified plans, and 403(b) plans are taxed as ordinary income.

    a) True
    b) False
    a) True
  3. Distributions to death beneficiaries are subject to income tax, which may be offset somewhat by a deduction for estate taxes paid on account of the death benefit.

    a) True
    b) False
    a) True
  4. The Sec. 72(t) penalty applies to both the taxable and nontaxable portions of a distribution.

    a) True
    b) False
    b) False

    The Sec. 72(t) penalty applies only to the taxable portion of a distribution.
  5. An in-service distribution from a qualified plan made to a 50-year-old employee in the form of a life annuity is not subject to the 10 percent Sec. 72(t) penalty.

    a) True
    b) False
    b) False

    Even though a life annuity would qualify as "substantially equal periodic payments," the exception does not apply in a qualified plan unless the participant terminates employment.
  6. A hardship withdrawal from a 401(k) plan to a 40-year-old participant is not subject to the 10 percent Sec. 72(t) penalty

    a) True
    b) False
    b) False

    This question is answered incorrectly fairly often. There is no specific exception from the 10 percent penalty tax for hardship withdrawals from a 401(k) plan.
  7. A withdrawal from a qualified plan in the amount of qualified educational expenses for the participant's child is not subject to the 10 percent Sec. 72(t) penalty.

    a) True
    b) False
    b) False

    The education exception only applies to IRAs (which includes SEPs and SIMPLEs), not to qualified plans.
  8. A withdrawal of $50,000 from an IRA by a participant to purchase his first home is not subject to the 10 percent Sec. 72(t) penalty tax.

    a) True
    b) False
    b) False

    There is an exception from the 10 percent penalty tax for IRA distributions for first-time homebuyer expenses. However, the exception is limited to a lifetime maximum of $10,000.
  9. In order for distributions prior to age 59½ to satisfy the substantially equal periodic payment exception, distributions must continue for the participant’s entire life.

    a) True
    b) False
    b) False

    Distributions can cease after the later of 5 years or the attainment of age 59½ without penalty.
  10. Sole proprietors that receive a distribution of a life insurance policy from a qualified plan may recover cost basis due to accumulated PS 58 (Table 2001) costs.

    a) True
    b) False
    b) False

    Even though PS 58 (Table 2001) costs can be recovered when an insurance policy is distributed to a participant, sole proprietors and partners in a partnership are not allowed to recover these costs.
  11. A participant with $8,000 of nondeductible IRA contributions can generally withdraw $8,000 without income tax consequences.

    a) True
    b) False
    b) False

    With IRAs, a pro rata recovery rule applies to recovering the cost basis of nondeductible contributions.
  12. A profit-sharing participant who receives his or her entire benefit of $320,000 can roll the entire amount into an IRA, even if $25,000 represents after-tax contributions (cost basis).

    a) True
    b) False
    a) True
  13. A profit-sharing participant who contributed $25,000 of voluntary after-tax contributions prior to 1987 can generally withdraw this amount in-service without income tax consequences.

    a) True
    b) False
    a) True
  14. A participant receiving a nonqualifying distribution from a Roth IRA can withdraw up to the amount of accumulated contributions without income tax consequences.

    a) True
    b) False
    a) True
  15. When an individual owns multiple Roth IRAs, the 5-year measuring period for all of those IRAs begins the first time a contribution is made to any of the Roth IRAs.

    a) True
    b) False
    a) True
  16. A distribution from a qualified plan can generally be rolled over into a 403(b) tax-sheltered annuity.

    a) True
    b) False
    a) True
  17. A distribution that is one of a stream of life annuity payments from a qualified plan is an eligible rollover distribution.

    a) True
    b) False
    • b) False
    • Life annuity payments are not eligible rollover distributions and cannot be rolled over into an IRA.
  18. A distribution must be rolled over by the 60th day after the day it is received (unless the IRS waives the 60-day requirement), or the entire distribution is subject to income tax and, if applicable, the 10 percent Sec. 72(t) penalty tax.

    a) True
    b) False
    a) True
  19. If a participant elects a direct rollover from a qualified plan to an IRA, no income tax is required to be withheld.

    a) True
    b) False
    a) True
  20. A nonspousal beneficiary can elect to make a direct rollover of a participant’s death benefit into an existing IRA.

    a) True
    b) False
    b) False

    A nonspousal beneficiary must elect to have the death benefit transferred into a newly established inherited IRA.
  21. An automatic waiver of the 60-day rollover rule is available if a participant fills out all required paperwork to roll a benefit into an IRA, the funds are delivered to the financial institution within the 60-day period, and the financial institution fails to complete the transaction in a timely manner.

    a) True
    b) False
    a) True
  22. An automatic waiver of the 60-day rollover rule is available if a participant fills out all required paperwork to roll a benefit into an IRA, the funds are delivered to the financial institution within the 60-day period, and the financial institution fails to complete the transaction in a timely manner.

    a) True
    b) False
    a) True
  23. A death beneficiary inheriting employer securities that have net unrealized appreciation can avoid income taxes under the estate tax’s step up in basis rules.

    a) True
    b) False
    b) False

    Net unrealized appreciation is not eligible for a step up in basis, so that the beneficiary cannot avoid paying income taxes.
  24. An individual who receives a lump-sum distribution that consists of $70,000 of cash and $40,000 of qualified employer securities (with cost basis of $10,000) can roll the cash into an IRA and continue to hold the securities. This will require the participant to include $10,000 as taxable income at the time of the distribution.

    a) True
    b) False
    a) True
  25. To qualify for special tax treatment, a lump-sum distribution must come from a pension, profit-sharing plan, 401(k), stock-bonus plan, employee stock ownership plan, or SEP.

    a) True
    b) False
    b) False

    Special lump-sum tax treatment is only available from qualified plans. A SEP does not qualify.
  26. A 10 percent early withdrawal penalty will be imposed on which of the following types of qualified retirement plan distributions?

    A) a lump-sum distribution paid to a 52-year-old employee after separation from service for early retirement
    B) a distribution paid annually in equal payments over the life expectancy of the employee beginning at age 50 after separation from service
    C) a lump-sum distribution paid to a 45-year-old employee to cover medical expenses deductible for the year under Code Sec. 213
    D) a lump-sum distribution paid to a 52-year-old beneficiary due to the employee’s death
    A) a lump-sum distribution paid to a 52-year-old employee after separation from service for early retirement

    Distributions after separation from service because of retirement will be subject to the 10 percent penalty if the payment occurs before the employee reaches age 55.

    Others are incorrect because they each apply to one of the several exceptions that will escape the penalty.
    (this multiple choice question has been scrambled)
  27. Which of the following statements concerning rollovers and direct rollovers from qualified retirement plans is correct?

    A) Rollovers can be made to IRAs but not to other qualified plans.
    B) Participants must generally be given the option to elect a direct rollover to an IRA.
    C)Direct rollovers to IRAs are subject to 20 percent income tax withholding.
    D) Rollovers require the transfer of the entire distribution to another plan or IRA.
    B) Participants must generally be given the option to elect a direct rollover to an IRA.

    Distributions from qualified plans can be rolled over to other qualified plans or IRAs.

    Direct rollovers to IRAs are exempt from the 20 percent withholding requirements that apply when distributions are made directly to the participant.

    Any portion of the distribution may be rolled over.
    (this multiple choice question has been scrambled)
  28. Which of the following statements concerning the tax treatment of Roth IRAs and Roth accounts in a 401(k) plan is correct?

    A) A 60 year old who has maintained a Roth IRA for eight years can withdraw the entire Roth IRA account without any income tax consequences.
    B) A distribution that is less than the individual’s contributions from either a Roth IRA or Roth account in a 401(k) plan will be tax-free.
    C) A distribution of a Roth account from a 401(k) plan can be rolled into a traditional IRA but not into a Roth IRA..
    D) When an individual owns several Roth IRAs, the 5–year rule must be calculated separately for each Roth IRA.
    A) A 60 year old who has maintained a Roth IRA for eight years can withdraw the entire Roth IRA account without any income tax consequences.

    A Roth account can be rolled into a Roth IRA and not into a traditional IRA.

    An individual who owns several Roth IRAs can look back to the first year that a contribution was made to the first Roth IRA for calculating the 5-year period for all Roth IRAs.

    A distribution that is less than the individual’s contributions from either a Roth IRA or Roth account in a 401(k) plan will be tax-free - this is the rule for Roth IRAs, but not for Roth accounts in a 401(k) plan.

    Nonqualifying distributions are subject to a prorata tax rule.
    (this multiple choice question has been scrambled)
  29. Which of the following statements concerning a participant’s recovery of his or her investment (cost basis) when receiving an annuity at retirement from a qualified plan is (are) correct?

    I. The portion of each periodic payment treated as a return of investment is generally determined by dividing the individual’s cost basis by a specified number of months (based on the individual’s age).

    II. When the amount to be excluded has been determined, the amount is excluded from all future distributions.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    A) I only

    II is incorrect because the entire distribution will be taxable once the individual’s investment in the contract has been recovered.
    (this multiple choice question has been scrambled)
  30. Ralph, aged 50, begins to receive substantially equal periodic payments from his IRA to avoid the Sec. 72(t) penalty tax. Given these facts, which of the following statements is (are) correct?

    I. If payments do not continue until age 55, a 50 percent penalty tax applies on the amount that should have been distributed.

    II. If payments were to stop at age 59½, the participant would have to pay the 10% penalty tax on all prior distributions.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    D) Neither I nor II

    I is incorrect. If payments do not continue until age 59½ (not 55), the 10 percent Sec. 72(t) penalty tax (not 50 percent) applies to all distributions that have been made to date. II is incorrect because after age 59½, Ralph can stop or change the amount of distributions that he takes from the plan without restriction.
    (this multiple choice question has been scrambled)
  31. Which of the following statements concerning rollovers from a qualified plan to an IRA is (are) correct?

    I. If a direct rollover is made from the trustee directly to the IRA trustee, no income tax withholding is required.

    II. A hardship withdrawal from a 401(k) plan can be rolled over into an IRA.
    A) II only
    B) Neither I nor II
    C) I only
    D) Both I and II
    C) I only

    II is incorrect because hardship withdrawals are not considered qualified rollover distributions.
    (this multiple choice question has been scrambled)
  32. Which of the following statements concerning distributions of the employer’s stock from qualified plans is (are) correct?

    I. The net unrealized appreciation in the employer’s stock that is included in a lump-sum distribution can be excluded from income tax until the year in which the stock is actually sold.
    II. The net unrealized appreciation is only taxed as long-term capital gain if the stock is held for a year after the date of distribution.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    B) I only

    II is incorrect because the unrealized appreciation is taxed as long-term capital gain regardless of how long the recipient holds the stock.
    (this multiple choice question has been scrambled)
  33. Which of the following statements concerning the net unrealized appreciation rule that applies to lump-sum distributions from qualified retirement plans is (are) correct?

    I. The rule provides a valuable tax benefit only if the price of the stock is the same at the time it is allocated to the participant’s account as when it is distributed to the participant.

    II. The net unrealized appreciation rule can change the tax treatment of a portion of the distribution of employer securities from ordinary income to capital gains treatment.

    A) Neither I nor II
    B) Both I and II
    C) I only
    D) II only
    D) II only

    I is incorrect because the rule only has value if the price of the stock is lower at the time it is allocated to the participant’s account than at the time of distribution.
    (this multiple choice question has been scrambled)
  34. All of the following statements concerning the estate and income taxation of qualified plans are
    correct EXCEPT:

    A) The benefits payable from a qualified plan to a deceased participant’s beneficiary will be considered income in respect of a decedent and will be taxable to the beneficiary at ordinary income tax rates.
    B) Qualified plan benefits payable to a beneficiary will be included in the gross estate of the participant at death.
    C) When a distribution is received from a decedent’s qualified plan, the beneficiary will be eligible for an income tax deduction for the estate taxes paid by the decedent.
    D) If the decedent’s surviving spouse is the beneficiary of the qualified plan, the decedent’s estate will not be eligible for an estate tax marital deduction because the qualified plan represents a terminable interest.
    D) If the decedent’s surviving spouse is the beneficiary of the qualified plan, the decedent’s estate will not be eligible for an estate tax marital deduction because the qualified plan represents a terminable interest.

    If the qualified plan names the surviving spouse as beneficiary, the qualified plan will be eligible for the estate tax marital deduction.
    (this multiple choice question has been scrambled)
  35. Which of the following statements is/are correct regarding the Section 72(t) early withdrawal penalty applicable to certain distributions from retirement plans?

    I. The early withdrawal penalty for a SIMPLE plan is 25% during the 2-year period beginning on
    the date the employee first participated in the SIMPLE plan.

    II. The early withdrawal penalty only applies to the taxable portion of a distribution from a qualified
    plan, IRA, or 403(b) plan.

    a) Only I.
    b) Only II.
    c) Both I and II.
    d) Neither I nor II.
    • II is correct. If a distribution is rolled over, the distribution will not be taxable, and therefore will not be
    • subject to an early withdrawal penalty.

    • II is correct. If a distribution is rolled over, the distribution will not be taxable, and therefore will not be
    • subject to an early withdrawal penalty.
  36. A 10% early withdrawal penalty will be imposed on which one of the following types of qualified
    retirement plan distributions?
    a) A lump-sum distribution paid to a 25-year-old beneficiary due to the participant’s death.
    b) A distribution paid annually in equal payments over the life expectancy of the employee
    beginning at age 45 after separation from service.
    c) A lump-sum distribution paid to a 45-year-old participant who is totally and permanently disabled.
    d) A lump-sum distribution paid to a 50-year-old employee for payment of educational expenses of the employee’s child.
    d) A lump-sum distribution paid to a 50-year-old employee for payment of educational expenses of the employee’s child.

    Only IRAs have an exception to the early withdrawal penalty when the distribution is used for education.
  37. A 10% early withdrawal penalty will be imposed on which one of the following types of IRA distributions?

    a) A lump-sum distribution paid to a 35-year-old beneficiary due to the participant’s death.
    b) A distribution paid to an unemployed 45-year-old participant for the purpose of paying health
    insurance premiums.
    c) A lump-sum distribution paid to a 56-year-old participant who separated from service this year.
    d) A lump-sum distribution paid to a 50-year-old participant for payment of educational expenses
    of his child.
    c) A lump-sum distribution paid to a 56-year-old participant who separated from service this year.

    The “age 55” exception to the early withdrawal penalty only applies to distributions from qualified plans.

    Distributions after a participant’s death are not subject to an early withdrawal penalty.

    Distributions from an IRA used to pay the health insurance premiums for an unemployed person are not subject to the penalty.

    Distributions from an IRA used to pay education costs are not subject to the penalty.
  38. Bob, age 56, retired from XYZ Company last month, and would like to take a $5,000 one-time distribution from one of his retirement plans to pay for a vacation. Which of the following plans would allow Bob to take a penalty-free withdrawal?

    A) SEP established by Bob several years ago and funded with income from a consulting
    B) 401(k) plan from ABC Company, a company he left 10 years ago.
    C) Traditional IRA.
    D) 401(k) plan from XYZ Company.
    business.
    D) 401(k) plan from XYZ Company.

    If an individual separates from service after attaining age 55, the early withdrawal penalty will not apply to
    THAT EMPLOYER’s qualified plan. This exception does not apply to IRAs.

    The age 55 exception does not apply to IRAs.

    When Bob left ABC Company 10 years ago, he was only 46 years old.

    The age 55 exception does not apply to IRAs. A SEP is a type of IRA.
    (this multiple choice question has been scrambled)
  39. All of the following are IRS-approved methods of determining substantially equal periodic payments EXCEPT:

    A) Recalculation.
    B) Annuitization.
    C) Life expectancy.
    D) Amortization.
    A) Recalculation.

    Only three methods have been approved by the IRS. Recalculation is not one of those methods.
    (this multiple choice question has been scrambled)
  40. John, aged 45, would like to receive substantially equal periodic payments from his IRA to avoid the Sec. 72(t) penalty tax. Which of the following statements is/are correct regarding John’s desire?

    I. John can divide the IRA into separate accounts to better accommodate his desired distribution
    amount.

    II. John must continue receiving distributions until age 70½, or he will be subject to a cumulative
    10% early withdrawal penalty.

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    A) Only I.

    II is incorrect. The distributions must continue until the later of (a) 5 years or (b) attainment of age 59½.
    There is no requirement that payments continue until age 70½.
    (this multiple choice question has been scrambled)
  41. All of the following statements are correct regarding substantially equal periodic payments EXCEPT:

    A) If a taxpayer participates in a qualified plan, he or she must separate from service before taking substantially equal periodic payments from the plan.
    B) Substantially equal periodic payments can begin at any age.
    C) With the life expectancy calculation method, the amount of required withdrawal will decline each year as the participant’s life expectancy declines.
    D) Under the annuity and amortization calculation methods, any reasonable interest rate and mortality table can be used in determining the distribution.
    C) With the life expectancy calculation method, the amount of required withdrawal will decline each year as the participant’s life expectancy declines.

    Since the individual’s life expectancy will decline each year, the requirement payments will INCREASE each year if the life expectancy method is chosen.
    (this multiple choice question has been scrambled)
  42. Which of the following statements is correct regarding the taxation of retirement plans?

    A) If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be an early withdrawal penalty on the distributions.
    B) Permanent life insurance held in a qualified plan is income tax-free to the participant of the plan.
    C) A participant in a qualified plan is permitted to rollover nontaxable contributions into an IRA.
    D) A participant in an IRA may withdraw funds tax-free from the IRA up to basis.
    C) A participant in a qualified plan is permitted to rollover nontaxable contributions into an IRA.

    Nontaxable contributions can be rolled over into an IRA.

    Funds withdrawn from an IRA are considered part basis recovery (if the participant has basis) and part taxable.

    The cost of the “pure amount at risk” of the life insurance is taxable each year to the participant, based on IRS tables.

    Immediate annuities begin the annuity payment immediately. This is considered a substantially equal periodic payment and is not subject to an early withdrawal penalty.
    (this multiple choice question has been scrambled)
  43. John Edwards is about to begin a retirement benefit from his qualified plan in the form of a single
    life annuity. John has accumulated a basis in the plan of $50,000. Based on IRS tables, John is
    expected to receive 310 annuity payments. If John receives an annuity payment of $250 in the first
    month, how much of the payment is taxable?

    A) $250.
    B) $89.
    C) $161.
    D) $0.
    B) $89.

    The non-taxable portion is determined by dividing the basis by the expected number of payments.
    Therefore, the non-taxable portion is $161 ($50,000 / 310). The taxable portion is $89 ($250 total
    payment less $161 non-taxable portion).
    (this multiple choice question has been scrambled)
  44. All of the following are reasons to rollover a qualified plan distribution to an IRA EXCEPT:

    A) The participant in a qualified plan that is being terminated would like to defer taxes on distributions from the terminated plan.
    B) The spouse of a deceased participant wants to defer taxes on a lump-sum distribution from the qualified plan.
    C) The participant would like to begin taking loans
    D) The participant would like to gain greater control over his or her plan investments.
    C) The participant would like to begin taking loans

    Loans are not permitted from IRAs.
    (this multiple choice question has been scrambled)
  45. Andrea, age 60, decided to take the $120,000 balance from her profit sharing plan in a lump sum
    distribution. If she did so, what is the amount of her check?

    A) $96,000 but subject to the 10% penalty.
    B) $96,000 with no 10% penalty.
    C) $120,000 with no 10% penalty.
    D) $120,000 but subject to the 10% penalty.
    B) $96,000 with no 10% penalty.

    She is older than age 59½, so the 10% early withdrawal penalty will not apply. Distributions from qualified plans are subject to a mandatory 20% withholding at the time of distribution. Therefore, Andrea will only receive 80% of her plan balance.
    (this multiple choice question has been scrambled)
  46. Which of the following distributions will be eligible for rollover treatment?

    A) A substantially equal periodic payment taken by a 35-year old participant of a SEP.
    B) A hardship withdrawal taken by a 50-year old participant of a 401(k) plan to pay medical expenses.
    C) A lump sum distribution taken by a 55-year old employee from a qualified plan after separation from service.
    D) A minimum required distribution taken by a 75-year old participant of an IRA.
    C) A lump sum distribution taken by a 55-year old employee from a qualified plan after separation from service.

    Lump sum distributions can be rolled over. Substantially equal periodic payments, minimum required
    distributions, and hardship withdrawals from 401(k) plans cannot be rolled over.
    (this multiple choice question has been scrambled)
  47. Which of the following statements is/are correct regarding the 10-year averaging election and the
    capital gain election available to certain plan distributions?

    I. These special tax elections are only available to plan accruals occurring before 1986.

    II. These special tax elections are only available for lump sum distributions from qualified plans, if
    the participant was born before 1936.

    A) Both I and II.
    B) Only I.
    C) Neither I nor II.
    D) Only II.
    D) Only II.

    I is incorrect. The capital gain election is only available for accruals occurring before 1974. The 10-year averaging election does not have a year requirement.
    (this multiple choice question has been scrambled)
  48. Tommy is a participant in his company’s Employee Stock Ownership Plan (ESOP). The company originally transferred $5,000 worth of company stock to his account. Years later, when the stock was
    valued at $10,000, Tommy retired and took a lump sum in-kind distribution. Three years after retirement, Tommy sold the stock for $14,000. What are the tax consequences of this series of events?

    A) Tommy will recognize $10,000 of ordinary income at the time of the lump sum distribution, and will have a $4,000 capital gain at the time of the stock
    B) Tommy will recognize $5,000 of ordinary income at the time of the lump sum distribution, and will have a $9,000 capital gain at the time of the stock sale.
    C) Tommy will have a $14,000 capital gain at the time of the stock sale.
    D) Tommy will recognize $14,000 of ordinary income at the time of the stock sale.
    B) Tommy will recognize $5,000 of ordinary income at the time of the lump sum distribution, and will have a $9,000 capital gain at the time of the stock sale.

    Tommy will only be required to report the original cost of the stock ($5,000) as ordinary income at the time of distribution. Therefore, after the distribution, his tax basis in the stock will be $5,000. When he sells the stock three years later, his long-term capital gain will be $9,000 ($14,000 sales price less $5,000 basis).
    (this multiple choice question has been scrambled)

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