The required minimum-distribution rules apply to qualified plans, 403(b) plans, traditional IRAs, SIMPLEs, and SEPs.
a) True
b) False
a) True
Under the required minimum-distribution rules, benefits always must be distributed within 5 years after the death of the participant.
a) True
b) False
b) False
There are several things wrong with this statement. If the participant dies after attaining the required beginning date, the 5-year rule does not apply at all. Even if the participant dies prior to the RBD, in many cases the 5-year rule still does not apply.
The required minimum distribution rules impose a 10 percent excise tax on the amount by which a distribution in a given year falls short of the amount of the required minimum distribution.
a) True
b) False
b) False
The tax is 50% of the shortfall.
The required beginning date for distributions from a qualified plan is always the April 1 of the year following the calendar year in which the covered individual attains age 70½.
a) True
b) False
b) False
Non-5-percent owners in qualified plans who are still working at age 70½ can wait until they retire to begin receiving their required minimum distributions.
Under the account plan rules, while the participant is alive, the required minimum distribution is determined by dividing the participant’s account balance at the end of the previous year by the applicable distribution period.
a) True
b) False
a) True
If the beneficiary in the year following a participant’s death is a person who is not the decedent’s spouse, the remaining distribution period is fixed, based on the beneficiary’s age at the end of that year.
a) True
b) False
a) True
A 50 percent joint and survivor annuity purchased before the required beginning date will generally fail to satisfy the required minimum-distribution rules.
a) True
b) False
b) False
A 50 percent joint and survivor annuity purchased before the required beginning date will satisfy the required minimum-distribution rules.
Under the required minimum-distribution rules, if a trust is the beneficiary, then the beneficiaries of the trust are considered the beneficiaries of the death benefit as long as the trust conforms with specific requirements.
a) True
b) False
a) True
Under the required minimum-distribution rules, if the plan has multiple beneficiaries, it is still possible to use the life expectancy of each individual beneficiary in the calculation of the beneficiary’s required minimum distribution as long as a separate account has been established for each beneficiary by the end of the year following the year of the participant’s death.
a) True
b) False
a) True
The executor of an estate is allowed to add a new beneficiary to the beneficiary designation form in an IRA after the participant’s death.
a) True
b) False
b) False
No new beneficiaries can be added to a beneficiary designation form after the participant dies.
If The American College is one of several beneficiaries (the others are persons), paying the College out before the September 30 deadline can result in a longer required minimum distribution period for the other beneficiaries.
a) True
b) False
a) True
If an IRA owner dies with three children as beneficiaries, and separate accounts are established for each child during the year of the participant’s death, then the life expectancy of the oldest child is used to calculate the required minimum distribution from each separate account.
a) True
b) False
b) False
Since separate accounts were established in a timely manner, the life expectancy of each child can be used when calculating the required distribution from that child’s account.
A qualified plan must clearly specify the normal and optional forms of distribution and when benefits are payable.
a) True
b) False
a) True
If a terminating participant is entitled to a lump-sum benefit of $800 and the plan provides for involuntary cash-outs, the plan can force out the payment in a lump sum and forgo giving the participant the right to elect any optional forms of distribution.
a) True
b) False
a) True
A single life annuity is an appropriate benefit option for the individual who wants the guarantee of lifetime payments but who has no need to provide retirement income to a spouse or other dependent.
a) True
b) False
a) True
In a joint and survivor benefit, a monthly benefit continues to be paid to a surviving beneficiary after the death of the participant.
a) True
b) False
a) True
Installment payments and a period certain annuity are two names for the same option.
a) True
b) False
b) False
A period certain annuity pays out a specified benefit for a stated period of time. Installment payments are less certain. Essentially, installment payments continue until the account is depleted.
In a defined-benefit plan, an annuity is purchased with the participant’s account balance.
a) True
b) False
b) False
This describes what happens when a participant elects an annuity option in a defined-contribution plan. In a defined-benefit plan, there is no account balance just a promised benefit amount. The plan may pay the promised benefit out of plan assets or can purchase an annuity to cover the required payments.
A subsidized early retirement benefit generally means that a benefit otherwise payable at normal retirement age can begin earlier without an actuarial reduction.
a) True
b) False
a) True
If the actual interest rate of a variable annuity is higher than the AIR, the annuity payments will decrease.
a) True
b) False
b) False
When interest rates are higher than the AIR, the variable annuity payment will increase.
For the client whose primary objective is funding retirement needs, the most important pension distribution issues are when to begin receiving benefits and what form the distributions should take.
a) True
b) False
a) True
For the client concerned about outliving his or her assets, a rollover into an IRA (not invested in an annuity contract) is always the best distribution option.
a) True
b) False
b) False
Not necessarily. The guarantee of lifetime income through an annuity can be of tremendous value to a person concerned about outliving his or her assets.
A client concerned about maximizing his or her estate may want to consider distributing assets as slowly as allowed under the required minimum-distribution rules.
a) True
b) False
a) True
A client should never consider converting a traditional IRA to a Roth IRA either at or after normal retirement age.
a) True
b) False
b) False
Because the required minimum-distribution rules do not require Roth IRA distributions during the participant’s lifetime, converting at a later age can still be an appropriate option.
Qualified plans can be described as great places to accumulate money, but bad places from which to inherit it.
a) True
b) False
a) True
If an IRA owner or plan participant names multiple beneficiaries, the average life expectancy must be used to measure the payout period.
a) True
b) False
b) False
If the IRA owner or plan participant has multiple beneficiaries, without establishing a separate account for each beneficiary, the shortest life expectancy must be used to measure the payout period.
If income tax deferral is an objective of the client, one of the critical planning steps in the drafting of a trust to be named as a beneficiary of retirement assets is to satisfy the “see-through trust” requirements.
a) True
b) False
a) True
To qualify as a see-through trust, documentation must be provided to the plan administrator or IRA custodian by the December 31 of the year following the year the participant’s death occurs.
a) True
b) False
b) False
The deadline for the see-through trust requirement is October 31 of the year after the year in which the participant’s death occurs.
Joe names his two daughters, Sue (age 54) and Sarah (age 42) as beneficiaries of his IRA. Joe dies in November. On the following July 15th separate accounts are established within the IRA for Sue and Sarah. Under the required minimum distribution rules, Sue’s life expectancy has to be used to calculate the required minimum distributions from both of the separate accounts.
a) True
b) False
b) False
Establishing the separate accounts allows you to use Sue and Sarah’s life expectancies to calculate the required distribution from each of their accounts.
The separate accounts strategy allows multiple beneficiaries to use different life expectancies, invest in different assets, and avoid responsibility for one another’s minimum distributions.
a) True
b) False
a) True
Sondra names The American College and her daughter Lucy as beneficiaries of one-half of her IRA. If The American College’s benefit is paid out prior to September 30 following the calendar year in which Sondra dies, Lucy’s life expectancy is used to calculate required minimum distributions.
a) True
b) False
a) True
Ralph, who is married, is aged 45 and maintains an IRA (valued at $300,000) that contains no nondeductible contributions. He wants to withdraw $50,000 to purchase a second home. Which of the following statements concerning this transaction are correct?
D) The entire distribution is taxed as ordinary income.
IRAs are not subject to mandatory withholding. These rules do apply to qualified plans and 403(b) annuities.
IRAs are not subject to the qualified joint and survivor annuity rules. These rules do apply to qualified plans.
Ralph is not eligible for any exception to the 10 percent penalty tax. Since this is the purchase of a second home, the $10,000 first-time homebuyer exception does not apply.
Cindy Lou, aged 52, voluntarily terminated employment from High Tech, Inc. Her benefit in the High Tech, Inc., profit-sharing plan is $200,000, $20,000 of which represents after-tax contributions that she had made. She is going to take the entire benefit in a single sum. Which of the following statements concerning the tax treatment of Cindy Lou’s benefit is correct?
C) If she rolls $180,000 into an IRA, she will have no current income tax consequences.
She can roll the entire benefit into an IRA.
Shewas born after 1935.
Receiving a lump-sum distribution is not one of the exceptions to the Sec. 72(t) excise tax.
John is a participant in the Betsy, Inc., profit-sharing plan. He turns 70 on May 1, 2010, and retires from the company on February 1, 2011. John is not a stockholder in Betsy, Inc. What is his required beginning date under the minimum-distribution rules?
A) April 1, 2012
Because John is a participant in a qualified plan and is not a 5 percent owner, his required beginning date is the later of the April 1 following the year he attains age 70½ or retires. In this case, he retires in 2011 (a year after he attained age 70½). John’s required beginning date is April 1, 2012.
Failure to meet the minimum-distribution requirements for a qualified plan subjects the employee to an excise tax equal to:
C) 50 percent of the excess of the required distribution over the amount actually distributed
The penalty is based on the shortfall between the minimum distribution and the actual distribution.
Which of the following statements concerning the minimum-distribution requirements that apply to death-benefit distributions when the participant dies prior to the required beginning date is correct?
A) Benefits can be paid over the lifetime of a spousal beneficiary as long as payments begin no later than the year the participant would have reached age 59½.
Distributions must begin by December 31 of the calendar year following the year of the participant’s death.
Payments must begin no later than December 31 of the calendar year following the year the participant would have reached age 70½.
Distributions must be distributed in full within 5 years after the year the participant died when the beneficiary is a nonperson.
Which of the following statements concerning pension withdrawals for those individuals with limited retirement resources is (are) correct?
I. This type of retiree will always want to choose a lump-sum rollover over an IRA.
II. For many retirees, the most important considerations are the timing of retirement and the form of benefit distribution.
B) II only
I is incorrect because this type of retiree should carefully consider his or her benefit distribution options. Especially for participants in defined-benefit plans, an annuity option might provide a higher-and more secure-benefit.
Which of the following statements concerning required minimum distributions (RMDs) for multiple beneficiaries is (are) correct?
I. The separate-account strategy can be used to stretch out RMDs if a trust is the beneficiary.
II. If an IRA owner names multiple beneficiaries, the life expectancy of the oldest beneficiary generally has to be used to calculate RMDs.
B) II only
I is incorrect because the separate-account strategy does not work when a trust is the beneficiary.
All the following statements concerning distribution options from qualified plans are correct EXCEPT
a) Plans will always provide for a specified set of distribution alternatives. b) Plans will always provide for in-service withdrawals when a participant has suffered a financial hardship.
c) Plans are allowed to make involuntary cash-outs benefits to participants with benefits of less than $5,000.
d) Plans are allowed to defer payment until terminated participants attain normal retirement age. All the following statements concerning distribution options from qualified plans are correct EXCEPT:
a) Plans will always provide for a specified set of distribution alternatives. b) Plans will always provide for in-service withdrawals when a participant has suffered a financial hardship.
c) Plans are allowed to make involuntary cash-outs benefits to participants with benefits of less than $5,000.
d) Plans are allowed to defer payment until terminated participants attain normal retirement age.
b) Plans will always provide for in-service withdrawals when a participant has suffered a financial hardship.
A plan is never required to allow for in-service withdrawals, and certain qualified plans are not allowed to permit in-service withdrawals.
All the following statements concerning the calculation of the required minimum distribution for the first distribution year to a participant in an individual account plan are correct EXCEPT
C) The calculation is the same regardless of whether the participant is aged 70 or aged 71.
The calculation depends primarily on the participant’s age. It does not depend on who is the chosen beneficiary unless the beneficiary is a spouse who is more than 10 years younger than the participant.
Which of the following statements is/are correct regarding the minimum distribution rules?
I. If a participant fails to take the minimum required distribution, a 15% excise tax will apply to any shortfall.
II. The rules are designed to ensure that a significant portion of the plan benefit is paid out during retirement.
B) Only II.
I is incorrect. The excise tax is 50% of the shortfall.
The minimum distribution rules governing lifetime distributions apply to all of the following plans EXCEPT:
D) Roth IRAs.
The lifetime minimum distribution rules do not apply to Roth IRAs. However, the minimum distributionrules do apply to Roth IRAs after the death of the participant.
Which of the following statements is/are correct regarding the required beginning date for minimum distributions?
I. The required beginning date for an IRA is March 1 of the calendar year in which the participant attains age 70½.
II. A participant of a government plan who is still employed after age 70½ can defer the required beginning date until after retirement.
B) Only II.
I is incorrect. The required beginning date for an IRA is April 1 of the calendar year following the year inwhich the participant attains age 70½.
Each of the following individuals listed below is an employee of a company sponsoring a retirement plan. Assuming each individual will continue employment beyond age 70½, which one can defer the minimum distribution required beginning date until after retirement?
A) Jake, a 3% owner of PDQ Company, a company that sponsors a money purchase plan.
A less-than-5% owner who is still working can defer the required beginning date until April 1 following theyear of retirement. This deferral of the required beginning date is only permitted for qualified plans and403(b) plans.
The deferral is not allowed for IRAs.
Sara owns 10% of the company. The deferral is only allowed for less-than-5% owners.
A SEP is a type of IRA, and therefore, the deferral is not allowed.
Which of the following statements is/are correct regarding the timing of required minimum distributions?
I. Delaying the first year’s minimum distribution until April 1 of the second year will actually require two distributions in the second year.
II. If an individual takes a distribution in one year that is larger than the required minimum distribution, he or she will receive a credit against the following year’s minimum required distribution.
A) Only I.
An individual waiting until April 1 of the following year to take the first year’s distribution will also berequired to take a second distribution by December 31.
II is incorrect. Excess distributions taken in one year will not result in a credit for future years.
All of the following statements are correct regarding the calculation of the required minimum distribution during the participant’s lifetime EXCEPT:
C) The distribution period is always determined based on the uniform lifetime table.
The distribution period is NOT always determined based on the uniform lifetime table. If the beneficiary isthe participant’s spouse, and the spouse is more than 10 years younger than the participant, actual jointlife expectancy tables are used.
Jessica had her 70th birthday on September 2, 2010. When would she be required to receive her first minimum distribution from her traditional IRA?
D) April 1, 2012.
Since her 70th birthday was on September 2, 2010, she will turn 70½ on March 2, 2011. Therefore, her required beginning date is April 1, 2012
Horatio became age 70½ on October 2 of the current year and must receive a minimum distribution from his IRA account, which had a value at the end of the prior year of $50,000. According to IRS tables, the distribution period is 25. If he takes a $1,000 distribution by next April 1, what will be
the tax penalty?
D) $500
The required distribution is $2,000 ($50,000 / 25). Since he only took out $1,000, the shortfall is $1,000,resulting in a 50% penalty of $500.
Tony, age 65, wants to defer his retirement from ABC Company until age 75. He contributes 6% of his pay to the 401(k) plan, and his employer matches 100%. Which of the following statements is correct, assuming Tony does not own any ABC Company stock?
B) Tony must start distributions by April 1 following the year of his retirement.
Since he is a less-than-5% owner, he can defer the required beginning date until April 1 following the yearof retirement.
As long as he is an employee for ABC, he can contribute to the 401(k) plan.
Hardship withdrawals are fully taxable.
He is over age 59½, so the early withdrawal penalty will not apply.
Which of the following statements is correct regarding minimum required distributions that must occur if a participant dies after the required beginning date?
D) If the plan has a non-spouse beneficiary, the plan must be distributed over the beneficiary’s life expectancy.
The required distribution period is the employee’s life expectancy calculated in the year ofdeath, reduced by one in each future year.
Minimum distributions are not required from a Roth IRA while the participant is alive.However, at the participant’s death, minimum distributions are required.
In the year of death, the heirs must take the decedent’s required minimum distribution.
Jackie, age 60, a participant in a Roth IRA for 10 years, died this year. Which of the following statements is correct regarding the Roth IRA?
D) Her husband could roll the plan into his Roth IRA if he is the beneficiary.
With a non-spouse beneficiary, the distributions must be taken over the beneficiary’s lifeexpectancy.
When the participant dies, minimum distribution rules do apply to a Roth IRA.
Typically, the distribution from the Roth IRA would be income tax free if the participantdied.
Which of the following statements is correct regarding the minimum-distribution requirements that
apply to death-benefit distributions when the participant dies prior to the required beginning date?
C) A trust will not be considered a beneficiary unless the trust is irrevocable and the trust beneficiaries are identifiable.
The account must be distributed within 5 years of death if the decedent’s estate is namedas the beneficiary.
Payments must begin as of the later of (a) December 31 of the year following the participant’s death or (b) December 31 of the year after the participant would have attained age 70½.
Only a spouse beneficiary can rollover a decedent’s plan.
Which of the following types of annuities will provide a monthly benefit for the longer of the participant’s life or some specified period of time?
C) Annuity certain.
A life annuity with guaranteed payments will provide a monthly benefit for the longer of the participant’slife or some specified period of time.
An annuity certain ends at the end of the term, regardless of whether the annuitant is alive.
Which of the following statements is/are correct regarding plan distributions and retirement planning?
I. A wealthy, older client should never consider converting a traditional IRA to a Roth IRA.
II. For a client concerned with funding retirement needs, the most important defined benefit plan distribution issues are when to begin distributions and the type of distributions.
B) Only II.
I is incorrect. Even though income taxes will occur at the time of conversion, the conversion may be agood idea because the Roth IRA is not subject to minimum distributions during the participant’s lifetime.
Which of the following statements is/are correct regarding the operation of a variable annuity?
I. If the investment performance exceeds the assumed investment rate (AIR), the benefit payment will increase.
II. The number of units a client holds does not change during the benefit payout period.