They can be rolled into another IRA within 60 days once each year.
What percentage of the full Social Security benefit will a worker receive if he or she retires 9 months prior to attaining the individual's full Social Security retirement age?
The benefit is reduced by 5/9 of one percent for each month prior to the full Social Security retirement age (5/9 of 1% x 9 = 5%).
An employee exercises nonqualified stock options with an option price of $5 a share and a market price of $10 a share. How much ordinary income does the individual have for each share at the time of exercise?
With a nonqualified stock option, the participant receives ordinary income in the amount of the difference between the market value at the time of exercise and the option price ($10 - $5 = $5).
Ted Smith, aged 65, is considering the establishment of an individual retirement account (IRA). He is not employed in 2011 but has investment income of $95,000. His maximum tax-deductible contribution to an IRA for 2011 will be...
$0. Smith cannot make any contribution since he did not have any income from employment activities.
In 2011, Jill and Joseph (both aged 38) are married, file a joint tax return, and have AGI of $100,000. While Jill is an active participant in her employer's qualified plan, Joseph is not an active participant. Assuming no contributions have been made to any type of IRA for 2011 for either individual...
A $2,500 deductible contribution can be made to a traditional IRA for Jill. Because their AGI is less than $169,000, a $5,000 contribution could be made for Jill. Active participant status does not have any effect on the ability to make Roth IRA contributions. A $5,000 deductible contribution could be made for Joseph since he is not an active participant and the couple's AGI is less than $169,000.
What does the exclusive-benefit rule require of fiduciaries?
The exclusive-benefit rule requires that fiduciaries discharge their duties solely in the interest of the plan's participants and beneficiaries for the exclusive purpose of providing benefits and defraying reasonable expenses.
What are the 4 rules concerning SIMPLE plans?
-An employer cannot place any restrictions on participant withdrawals.
-the maximum number of employees an employer can have and still sponsor a SIMPLE is 100
-a SIMPLE sponsor cannot sponsor any other tax-advantaged retirement plan, including qualified plans, SEPs, and 403(b) plans.
-the maximum employee salary deferral in a SIMPLE is lower than in a 401(k) plan.
What are the 4 rules concerning contributions to a SIMPLE?
-the employer can elect to provide a 50-cent match for each dollar that the employee elects to defer, as long as the employer matches a salary deferral of up to 6 percent of compensation.
-the employer-matching contribution to a SIMPLE must be a dollar-for-dollar match up to 3 percent that employees elect to defer.
-employees can make pretax salary deferrals of up to the maximum deferral limit without regard to how much the other employees contribute.
-the employer must always contribute either a matching contribution or a nonelective contribution.
What are the 4 rules concerning employee contributions to a qualified plan (other than to a 401(k) plan)?
-Voluntary employee contributions must satisfy a nondiscrimination test.
-Highly compensated employees cannot make such contributions unless nonhighly compensated employees contribute to the plan.
-voluntary contributions must be fully vested at all times.
-voluntary contributions are treated as annual additions.
The Adam Company recently adopted a qualified money-purchase plan. Assuming the employer made the election to limit the definition of highly compensated employees to as small a group as allowed by law, how many of Adam's employees are considered members of the highly compensated group in 2011?
Even though an employee earns over the $110,000 limit (the dollar limit for the previous year), his compensation does not place him in the top-paid group (the top 20 percent of payroll).
What is the "Ball Park Estimate Answer?"
It is a retirement calculator that is linked to the Department of Labor and IRS web pages.
What is the maximum monthly benefit that the PDGC will pay to a plan participant if the plan cannot meet its benefit promise?
What are the 4 major features of a stock option program?
-With an incentive stock option (ISO) program, the participants must meet certain holding period requirements to take full advantage of the special tax rules.
-At the time of exercise, the employer gets a deduction in the amount that the participant has in ordinary income.
-Like other forms of executive compensation, the program can be only for a small group of executives.
-As the time of the sale, the participant has long-term capital gain if the sale price exceeds the market value at the time of exercise.
What are the 4 major concerns for defined-contribution plans with contribution formulas integrated with Social Security?
-If the integration level is the taxable wage base and employees receive a contribution of 3 percent of total compensation, an additional 3 percent can be contributed for compensation in excess of the taxable wage base.
-all types of defined-contribution plans can be integrated with Social Security.
-Properly integrated formulas satisfy a design safe harbor. This means that nondiscrimination tests do not have to be performed each year.
-The maximum integration level in a defined-contribution plan is the current year's taxable wage base. Covered compensation is typically the integration level in a defined-benefit plan.
What are the 4 features concerning the Code Sec. 401a (A)(4) nondiscriminiation rules that apply to qualified plans?
-A plan can show that it satisfies the nondiscrimination rules by demonstrating that either benefits or contributions are nondiscriminatory.
-A plan that satisfies one of the design safe-harbor rules does not have to do any other testing.
-The rules say that if contributions constitute a level % of compensation for all employees, then the plan will be in compliance.
-There are no clear objective tests under the regulations for determining whether a plan satisfies the rules.
For taxpayers under age 70½ who are active participants in an employer-maintained qualified plan, how does it work for unmarried taxpayers?
For unmarried taxpayers, a full IRA deduction is allowed for adjusted gross income of up to $56,000.
Esther is a participant in her employer's profit-sharing plan. Esther attained age 70 on October 1, 2008. She is not a 5 percent owner and she retires on January 15, 2011. Her required beginning date is...
April 1, 2012
Because this is a qualified plan, Esther is not a 5 percent owner, and because she continues working beyond age 70½, the required beginning date is the April 1 following the calendar year in which she retires.
What are the 4 concerns regarding participant loans from qualified retirement plans?
-Loans frequently are secured by using a participant's account balance as security. Securing the loan with the account balance is a good idea because it both satisfies the DOL's regulations and simplifies the administration of the loan.
-A plan need not include a loan provision.
-The plan is required to charge a market rate.
-A loan program must be available to all participants.
What are 3 features concerning Code 409A that apply to nonqualified deferred-compensation plans?
-Payments to meet the requirements of a domestic relations order do not violate the acceleration of benefit provisions.
-The penalty tax is 20%
- Elections have to be made at the time of the deferral election, not the time of distribution.
What are the 4 features concerning the reversion of assets in a qualifed plan?
-The excise tax is a prohibitive 50% unless a portion of the excess is shared with participants (it is reverted to the employer).
-A defined-contribution plan does not have excess assets. All assets are allocated among the participants.
-A defined-benefit plan must provide for a reversion at the time the plan is drafted. It cannot be amended later to allow a reversion.
- The tax does not go away if a portion of the excess is shared with the participants. The tax is reduced to 20%.
As far as profit-sharing plans are concerned, the IRS will recognize an involuntary termination under what circumstances?
In the case of profit-sharing-type plans, failure to make substantial and recurring contributions results in an involuntary plan termination as of the time contributions cease. Participants become fully vested in their benefits as of the date of the involuntary plan termination. Profit-sharing plans are not subject to actuarial funding.
Bill James retired at age 66 and started receiving Social Security benefits. Bill, now aged 68, accepted a part-time consulting job that pays $24,160 a year. The Social Security earnings limit is $14,160 for 2011. Assuming Bill was receiving Social Security benefits of $10,000 a year, how much Social Security will Bill be entitled to in 2011?
The earnings threshold rule, which can result in a reduction of Social Security benefits when an individual works after beginning to receive Social Security benefits, no longer applies after the individual attains the full retirement age.
Jim Rock, aged 65, is retired and annually receives a fully taxable $29,000 pension income and $9,000 in Social Security benefits. Jim has no other sources of retirement income and files jointly with his wife. How much of Jim's Social Security benefits will be subject to federal income taxation given his provisional income?
Because Jim Rock's adjusted gross income ($29,000) plus one-half of his Social Security income ($9,000/2 = $4,500) exceeds $32,000 (but does not exceed $44,000), as a married taxpayer, he will have to include $750, or one-half of the excess over the $32,000 threshold, as taxable income ($33,500 - $32,000 = 1,500/2 = $750).
What are the 4 features concerning a SEC. 423 employee stock purchase plan?
-If the price of the stock rises over the purchase period and the price is 15 percent off the market price at the beginning of the period, the discount can vastly exceed 15 percent of the market price of the stock at the time of the purchase.
- These plans must cover most full-time employees.
-Taxes are not paid until the stock is sold.
-Only a portion of the value is taxed as ordinary income.
What benefits are covered under Part A of Medicare?
Hospital nursing services. Part A specifically excludes elective surgery and self-administered drugs.
What are the 4 features of the "retirement ladder" model of retirement savings?
-Home equity was not recognized in the "three-legged stool" model of sources of retirement income, but it has been added to the expanded list included in the retirement ladder.
-The retirement ladder still considers Social Security, personal savings, and employer pensions as key sources of retirement funding.
-Only about 15% of baby boomers expect significant inheritances.
-Many individuals who consider themselves retired will choose to do some form of work.
Which document must be provided automatically to all participants in a qualified plan?
The summary plan description.
-The annual report is filed with the governement and is not furnished to participants, although they may request to see it.
-participants have a right to see and copy the plan document and trust agreement. However, it need not be provided automatically to them.
-Form 5500 is used for annual report filing.
What are the 4 features concerning the fee disclosure rules tha apply to service providers?
-The rules apply to those providing brokerage services to a 401(k) plan with participant-directed accounts.
-The fee disclosure rules do not apply to SEPs and SIMPLEs. Covered service providers must disclose both direct and indirect compensation.
-If the rules are not followed, the fiduciary has engaged in a prohibited transaction and the service provider can be subject to a penalty tax, which is 15% of the amount involved.
What are the 3 features concerning minium funding requirements?
-At-risk plans are subject to more accelerated funding.
-Fully insured plans are exempt from the minimum funding requirements.
-The rules today require all sponsors to use the same method for determining cost; in the past employer's had more choice.
What are 2 main features concerning money-purchase pension plans?
-Because contributions are tied to each year's compensation, the benefit grows relatively evenly over the accumulation period. This is good for employees who change jobs often, but may not be good for a long-term employee in an economic environment of high inflation in the years just preceding retirement. In this environment, a defined-benefit plan that bases benefits on final-average compensation can better protect the participant.
-They are relatively easy to administer.
What are the four major features of a SEP plan?
-The plan must provide for immediate and full vesting.
-the plan can only exclude employees from participation prior to age 21.
-the plan can disregard only those part-time employees who earn less than a specified dollar limit ($550 in 2011)
-SEPs can have an allocation formula that is integrated with Social Security.
What factor is likely to be the most important in choosing a qualified plan for a small employer?
The use of the plan as a tax shelter for key owner-employees
Which of the following statements concerning the design of a 401(k) plan is (are) correct?
I. All types of plans have minimum vesting requirements.
II. The employer always receives a deduction at the time contributions are made.
Both I and II
Which of the following statements regarding tax advantages of a qualified plan is (are) correct?
I. Investment income earned on qualified pension plan assets is distributed tax free to participants.
II. Employer contributions to a qualified pension plan are taxable to an employee at the time contributions are made.
I is incorrect because income earned on qualified pension plan assets is taxed when benefits are distributed to participants. II is incorrect because, as long as the plan is qualified, employer contributions are not taxable to the employee until they are distributed.
Which of the following statements concerning profit-sharing plans is (are) correct?
I. The employer can choose from a number of different allocation formulas.
II. Profit-sharing plans are popular because contributions may be made on a discretionary basis.
Both 1 and 2
Which of the following statements concerning the cost of living in retirement is (are) correct?
I. Income taxes are reduced because a nonworking person is not subject to FICA taxes and the individual is more likely to be eligible for a deduction for heath care expenses.
II. One of the largest expenses that goes away in retirement is the expense of saving for retirement.
Both 1 and 2
Which of the following statements concerning retirement security concerns for women is (are) correct?
I. Women have less income for retirement because they tend to work in jobs that do not provide pension benefits.
II. Women may have less income for retirement because they are more likely to leave a job to become caregivers then men.
Both 1 and 2
Which of the following statements concerning the expense method used in retirement planning is (are) correct?
I. The expense method of retirement planning focuses on the percentage of a person's final salary that should be provided for retirement.
II. The expense method of retirement planning is more precise for younger than for older people.
Neither 1 or 2
I is incorrect because the expense method focuses on the projected expenses a retiree will have in the first year of retirement. II is incorrect because the expense method is more precise for older people than for younger people.
Which of the following statements concerning rules that apply to 401(k) plans is (are) correct?
I. The ADP test can have the result of limiting the salary deferral contributions of the highly compensated employees.
II. Employee salary deferral contributions can only be distributed in-service prior to age 59½ if the employee has an unforeseen emergency.
The ADP test can have the result of limiting the salary deferral contributions of the highly compensated employees.
II is incorrect because the standard is financial hardship, which under the safe-harbor rules includes purchasing a primary residence or paying for a child's college education expenses. The unforeseen emergency standard is more difficult to satisfy, it is a rule that applies to nonqualified plans under Code Sec. 409A.
Which of the following statements concerning post-ERISA legislative changes that have an effect on retirement planning is (are) correct?
I. The laws have been changed so that today corporations and self-employed individuals have virtually the same opportunities (with a few minor exceptions) under the pension rules.
II. The laws have added special tax advantages for distributions from qualified plans.
II is incorrect because, over the years, some of the special tax rules that apply to qualified plan distributions have been repeal
Which of the following statements about 403b. (B) plans is (are) correct?
I. A 403b. (B) plan can be designed to include independent contractors.
II. A 403b. (B) plan can allow participants to make Roth elections on their salary deferral contributions.
The answer is (B). I is incorrect because 403(b) plans are not allowed to cover independent contractors.
Which of the following statements concerning the coverage requirements that apply to qualified plans is (are) correct?
I. The 401a. (A)(26) minimum-participation rule applies only to defined-benefit plans.
II. If an employer has separate lines of business, the 410b. (B) tests may be applied separately in each line of business when the businesses are operated for bona fide business reasons, have at least 50 employees, and meet several other regulatory requirements.
Both I and II
Which of the following statements concerning the vesting break-in-service rules is (are) correct?
I. A break in service is a year in which the individual does not complete more than 500 hours of service.
II. In a defined-contribution plan, if an individual has five consecutive breaks in service, the nonvested portion of the benefit earned prior to the break can be permanently forfeited.
Both I and II
Which of the following statements concerning information sources for a pension practitioner is (are) correct?
I. Loose-leaf services provide up-to-date information about laws, plans, and related areas.
II. Primary sources include books and periodicals that provide in-depth overviews of pension plans.
Which of the following statements concerning 401(k) plans is (are) correct?
I. 401(k) plan can allow for employee salary deferral contributions, employer-matching contributions, and employer profit-sharing contributions.
II. Employee salary deferral contributions can be distributed 2 years after they have been made.
Which of the following statements concerning incentive stock options (ISO) is (are) correct?
I. An ISO's exercise price must be equal to or greater than 100 percent of the underlying stock's fair market value on the date of grant.
II. If an employee does not satisfy the ISO's holding period requirements, the gain to the extent of the spread at the time of exercise is taxed as ordinary income.
Both I and II
Which of the following statements concerning 401(k) plans with safe harbor contributions is (are) correct?
I. The safe harbor option that is available for plans with automatic enrollment may require two years of service before participants are fully vested in the safe harbor contribution.
II. A contribution of 3 percent of compensation for all nonhighly compensated employees eligible to participate in the plan satisfies the safe harbor contribution requirements.
Both I and II
Which of the following statements concerning a rabbi trust is (are) correct?
I. It can have an "insolvency trigger" in which benefits are paid to the executive if the company begins to fail financially.
II. It is a way to protect participants from a corporate takeover without triggering taxation at the time contributions are made to the trust.
I is incorrect because a rabbi trust cannot contain an insolvency trigger. This would be a way to circumvent the requirement that assets in the trust must be available to the company's creditors.
Which of the following statements concerning cross-tested defined-contribution plans is (are) correct?
I. In a cross-tested plan, contributions allocated to participants are tested for nondiscrimination by first converting the contributions to equivalent benefit accruals.
II. An age-weighted plan is a type of cross-tested plan that allocates the amount necessary so all participants receive the same benefit accrual (as a percentage of salary).
Both I and II
Which of the following vesting schedules may be used in a defined-benefit plan that is not top heavy?
I. Years of Service
15 or more
II. Years of Service
6 or more
I is incorrect because the participant does not become vested until after 7 years of service, which is the longest possible vesting period.
Which of the following statements concerning pension portfolio investments is (are) correct?
I. Bond investments can be used to create sufficient cash flow to satisfy benefit payouts.
II. A plan purchasing an operating car wash could result in the assessment of the unrelated business income tax.
Both I and II
Which of the following statements concerning disability benefits in a qualified plan is (are) correct?
I. An employer is required to fully vest participants when they become disabled.
II. Many plans give credit for those on disability for years of benefit service.
Neither I or II
I is incorrect because full vesting at disability is common but not required. II is incorrect because providing benefit service to disabled participants can be costly, and most employers provide disability benefits outside of the qualified plan environment.
Which of the following statements concerning the prohibited transaction rules is (are) correct?
I. A sale of an investment to the plan from a party in interest is a prohibited transaction unless it is exempted by a statutory, administrative, or individual exemption.
II. The plan's attorney is not a party in interest.
II is incorrect because all service providers to the plan, including an attorney, are considered parties in interest.
Which of the following statements concerning IRA rollovers is (are) correct?
I. An IRA account can never be rolled into a 403b. (B) plan.
II. A qualified plan benefit can generally be rolled into an IRA.
I is incorrect because an IRA can be rolled into or transferred into another IRA, qualified plan, 403(b) plan, and a even government sponsored 457 plan.
Which of the following statements concerning investment guidelines is (are) correct?
I. Investment guidelines help fiduciaries perform their duties by providing clear procedures for the fiduciary to follow.
II. Establishing clear investment guidelines can offer significant protection for the fiduciary whose actions may be questioned.
Both I and II
Which of the following statements concerning qualified domestic relations orders (QDROs) is (are) correct?
I. The divorce court determines whether a domestic relations order is qualified or not.
II. Only a spouse or former spouse can be an alternate payee under a QDRO.
Neither I or II
I is incorrect because the plan administrator must determine whether the court order meets the qualification requirements. II is incorrect because a child or other dependant can also be an alternate payee under a QDRO.
Characteristics of a properly structured nonqualified plan include which of the following?
I. fully secured benefit promises
II. deferral of taxation until benefit receipt
I is incorrect because fully secured promises would be taxable as soon as benefits became fully vested.
Which of the following statements concerning the tax treatment of nonqualified plans is (are) correct?
I. Salary deferrals are not included in income as long as they are subject to a substantial risk of forfeiture.
II. Salary deferrals are not included in income as long as the participant does not have current possession of the benefits.
II is incorrect because a participant could have taxable income without having possession since the economic benefit doctrine or the requirements of Code Sec. 409A are not followed.
Which of the following statements concerning the ERISA 404c. (C) participant-directed individual account plan exception is (are) correct?
I. The exemption means that the fiduciaries are not responsible for the investment alternatives available to plan participants.
II. The fiduciary relief can not apply to an individual who fails to make affirmative investment elections.
Neither I or II.
I is incorrect because the fiduciaries remain responsible for the investment alternatives that they choose to include in the plan. II is incorrect because there is an exception to the general rule that the participant must make an affirmative election if the assets are invested in a qualified default investment alternative and certain disclosure requirements are satisfied.
For individual retirement account (IRA) contribution purposes, which of the following statements concerning who is an active participant in an employer-maintained retirement plan is (are) correct?
I. Generally, a person is an active participant in a defined-benefit plan unless excluded under the plan's eligibility provision.
II. Generally, a person is an active participant in any type of defined-contribution plan if employer contributions or forfeitures are allocated to the individual's account for the year.
Both I and II
Which of the following statements concerning individuals' retirement objectives is (are) correct?
I. Maintaining financial independence is an important retirement-planning goal.
II. Adapting to a nonworking environment is an important retirement-planning goal.
Both I and II
Which of the following statements concerning retirement investing during the accumulation period is (are) correct?
I. Annual retirement funding during this period should be concentrated in investments of employer stock.
II. A tax efficient way to save for retirement is to invest in tax-deferred accounts (such as IRAs in stock) and invest taxable accounts in bonds
Neither I or II
I is incorrect because clients are not well diversified if they concentrate on employer stock. II is incorrect because it is better to invest in bonds in a tax deferred account and better to invest in stock (because of its special tax treatment) in taxable accounts.
Which of the following statements concerning a life annuity is (are) correct?
I. If a client dies within one year of a life annuity's starting date, the amount of the purchase price less any payments made is distributed to the client's beneficiary.
II. All else being equal, a life annuity will provide a lower monthly benefit than a joint and survivor annuity.
Neither I or II
I is incorrect because there are no death benefits paid out under a life annuity. II is incorrect because, all other things being equal, a life annuity will provide a higher monthly benefit than a joint and survivor annuity.
Which of the following statements concerning Medicare Part B premiums is (are) correct?
I. There is no premium due if the client elects Part D coverage.
II. The premium increases for clients with modified adjusted gross income over specified levels.
I is incorrect because Part D prescription drug coverage has no impact on the Part B premium.
Which of the following statements concerning a life-care community is (are) correct?
I. A life-care community typically offers a range of housing options for the changing needs of the retiree, including custodial nursing care.
II. A life-care community typically charges an up-front fee and an ongoing monthly fee.
Both I and II
Which of the following statements concerning retirement planning for individuals is (are) correct?
I. A worker's income can fall by the amount being saved for retirement with no concurrent reduction in standard of living.
II. A replacement ratio approach is appropriate for determining the retirement needs of a young person who cannot anticipate retirement expenses.
Both I and II
Which of the following statements concerning the exclusion of gain from the sale of a principal residence is (are) correct?
I. To exclude gain, the taxpayer must be aged 65 or older.
II. A qualifying married taxpayer may exclude up to $750,000 of gain.
Neither I or II
I is incorrect because the new exclusion rules apply to taxpayers of all ages. II is incorrect because the amount is $500,000.
Which of the following statements concerning plan distributions is (are) correct?
I. Minimum distributions from an IRA must begin as of the April 1 following the year in which the person reaches age 70½.
II. The net unrealized appreciation rule is available to a participant who receives a qualifying lump-sum distribution from a qualified plan that includes a distribution of stock of the sponsoring employer.
Both I and II
True or False?
Concerning the use of an early retirement age plan is required to provide for early retirement benefits.
Every plan must have a normal retirement provision, but early retirement is optional.
What are the permitted eligibility requirements for a qualified pension plan?
Even if a plan satisfied Code Sec. 410(b) the eligibility provisions relating to age and years of service are specifically restricted. The Code requires that the age requirement for eligibility in a qualified plan be no older than 21 and the required years of service for eligibility be no more than one unless immediate 100 percent vesting is provided, in which case, up to 2 years may be required.
Example: All employees who have earned 4 years of service are eligible to participate.
What should an employer NOT have in a defined-benefit plan?
A past-service provision since it will increase an employer's costs.
Jane Johnson, who earns $75,000 in 2010 and is the second highest paid employee in a 25-person firm. Why is she NOT considered a highly compensated employee?
Jane Johnson is not highly compensated in 2011 because she neither earns $110,000 in 2010 nor is a 5 percent owner. Bill James is a highly compensated employee because he is a more-than-5-percent owner. Cathy Carr also is considered a highly compensated employee because she is a 5 percent owner. John Smith earns more than $110,000 in 2010 and is an employee whose earnings put him in the top 20 percent group.
What plan allows for more than 10% of the plan's assets in employer securities?
A profit-sharing plan.
Can a profit sharing plan ONLY be funded if the employer has profits?
No. Since 1987, contributions are allowed in profit-sharing plans even if the company has no profit.
What format are nonqualified plans structured in?
Nonqualified plans can be structured in the defined-benefit format or the defined-contribution format.
True or False and WHY?
A Roth IRA contribution is likely to result in a greater long-term accumulation than a deductible IRA contribution if the participant's marginal tax bracket is higher at the time of the contribution than the time of the distribution.
The opposite is true. The Roth IRA results in a greater accumulation than a traditional IRA if the tax rate is lower at the time of the contribution than the time of the distribution.
What is the most likely format for a defined-benefit plan benefit formula?
It is likely that the benefit formula will replace final average compensation, which will be the highest 3-5 years.
True or False.
The taxable income (Table 2001 costs) associated with the cost of life insurance in a qualified plan can be recovered tax-free by the participant, even if the trustee cashes in the insurance policy and distributes the proceeds to the participant.
To recover Table 2001 costs, the policy must be distributed.
Will a qualified defined-benefit plan lose its status if it becomes top-heavy?
No. A plan will not lose its qualified status just because it is top heavy, as long as the plan satisfies the special top-heavy rules.
What happens when a plan fails the ADP test?
Failing the ADP test means that the contributions for the highly compensated employees (not the nonhighly compensated) may have to be returned or recharacterized.
Concerning the exclusion of gain on the sale of a taxpayer's primary residence, when can the exclusion be used?
The exclusion can be used as often as once every 2 years.
Which assets generally are considered to NOT be protected from a decline in purchasing power due to increases in inflation?
Defined-benefit pension income is not protected from a decline in purchasing power after retirement begins.
Concerning the taxation of social security of a retired married couple (both over age 65) who file a joint tax return, how do taxes work?
If a married taxpayer has provisional income in excess of $32,000, some of the Social Security will be taxed. Provisional income includes adjusted gross income, as well as the taxpayer's tax-exempt interest and one-half of Social Security benefits.
What is NOT a permissible investment for IRA funds?
IRA funds cannot be invested in life insurance.
Concerning retirement ages in a defined-benefit plan, what is the oldest age that can be set for the normal retirement age?
The oldest age that can be set for the normal retirement age is the later of age 65 or 5 years of participation.
What is key in comparing a target-benefit plan with a defined-benefit plan?
Because a target-benefit plan is a defined-contribution plan, the maximum contribution limit is generally lower than that in a defined-benefit plan.
Concerning defined-benefit formulas, how do flat-amount formulas work?
Flat-amount formulas provide the same benefit for all participants.
Concerning the controlled group and affiliated service group rules, how do the ownership interests by an individual's adult child work?
With one exception, ownership by an individual's spouse is attributed to that individual. If an individual owns more than 50 percent of the entity, then he or she is also attributed the ownership of any adult children.
All of the following plans are subject to the minimum funding rules, meaning that there are generally required contributions each year EXCEPT...
A profit-sharing plan can have discretionary contributions.
All the other types of plans fall in the pension category which makes them subject to the minimum funding requirements.
An employer has a choice of how benefits will be distributed if it terminates its qualified plan. The plan can be designed to accommodate all the following distribution possibilities EXCEPT...The plan can purchase deferred annuities from the PBGC if it is currently fully funded?
The PBGC does not sell paid-up annuities.
Concerning planning for the distribution of qualified plan benefits for a very wealthy client, this type of client is somewhat reluctant to do what?
This type of client is somewhat reluctant to take an annuity form of payment because he or she can "self-fund" the risk of retirement with the goal of leaving substantial assets to heirs.
Concerning qualified plan death benefits, a plan cannot contain...
A plan cannot contain any form of death benefit if it is determined to be top heavy.
Advisory opinions are issued by who?
Advisory opinions-communications similar to private-letter rulings-are distributed by the Department of Labor.
Concerning a qualified plan's summary plan description (SPD), it cannot be....
The SPD cannot be used as a sales piece.
If the maximum is contributed to a Roth IRA, what cannot be done?
If the maximum is contributed to a Roth IRA, no contribution can be made to a traditional IRA maintained on behalf of the same taxpayer.
Beginning in 2008 an eligible individual can convert...
Beginning in 2008 an eligible individual can convert directly from a qualified plan to a Roth IRA.
The Employee Retirement Income Security Act of 1974 (ERISA) did not to what?
ERISA was the parent of modern pension law and instituted many of the qualification rules that currently apply in their original or a modified form. It was a later law, the Tax Equity and Fiscal Responsibility Act, however, that led to the top-heavy rules. This change was enacted to address the perception that small employer plans were abusing the qualified plan rules.
Concerning housing issues that face the retiree, what is important to remember?
Staying in the family home may be the right choice for some, but it is not always the prudent option. Downsizing may help free up assets. Also, if the home does not meet the retiree's changing needs, it may cost more to make adjustments than to move. Retirees living in a big home may also need to purchase many more services than before. Moving to a more senior-friendly setting may better meet the retiree's social and emotional needs as well.
Concerning tax aspects of tax-advantaged retirement plans, how are investment earnings treated?
The trust is a tax-exempt entity, and investment earnings are never taxed at the trust level regardless of the type of investment involved. Once investment earnings are paid out as benefits to participants, they are always taxed to the participant.
When does a reverse mortgage have to be repaid?
Typically, a reverse mortgage only has to be repaid when the last surviving borrower dies, sells the home, or moves away permanently.
ChFC Retirement Planning 2
Exam for the final of the Chartered Financial Advisor Retirement Planning Exam