FINC 355 and 430 week 2

1. Which of the following represents both the age after which an individual may no longer establish a non-rollover traditional IRA and the trigger point for beginning required distributions?

A. 65

B. 70½

C. 72½

D. 75

2. For individuals who have attained age 50 before the close of the tax year, what is the maximum dollar amount that may be contributed to a traditional IRA in 2013?

A. $3,000

B. $4,000

C. $5,000

D. $6,500

3. Pam wants to use money from a traditional IRA for a down payment to purchase a first home. How much can she withdraw from her IRA without having to pay the federal early distribution penalty?

A. $10,000

B. $12,500

C. $15,000

D. $20,000

4. Distributions from a traditional IRA cannot be made before the participant turns 59½ unless the IRA owner dies.

A. True

B. False

5. IRAs can be invested in a variety of investment vehicles, including mutual funds, stocks, bonds, and life insurance contracts.

A. True

B. False

6. Minnie and Micky Pluck are married, filing jointly in 2013. Minnie earns $60,000 a year and takes full advantage of her employer’s qualified retirement plan. Micky is not employed.

A. Micky can receive a full deduction for an IRA contribution

B. Micky can receive a partial deduction for an IRA contribution

C. both Micky and Minnie can make a nondeductible IRA contribution

D. Micky cannot make an IRA contribution

E. Minnie can make a nondeductible IRA contribution, but Micky cannot make an IRA contribution because he has no earned income

7. Sandi wants to convert her traditional IRA to a Roth IRA. The current IRA account value is $100,000. If Sandi follows through, how will the conversion be taxed?

A. $100,000, as capital gains

B. $100,000, as ordinary income

C. $90,000, as capital gains with $10,000 carry-forward

D. $10,000, as ordinary income with $90,000 carry-forward

8. Andrew established a Roth IRA five years ago. When must he begin taking distributions in order to avoid the required minimum distribution penalty?

A. 59½

B. 70½

C. 95

D. Never

9. Unlike a traditional IRA, a Roth IRA contribution is not restricted by active participation in an employer’s retirement plan.

A. True

B. False

10. Quincy Winstar, age 50, has $200,000 in a traditional IRA and is considering conversion to a Roth IRA in 2013. Quincy earns $125,000 per year and his wife, Shawna, earns $50,000. They file separate tax returns. As his financial advisor, you tell Quincy

A. he is not eligible for making an IRA conversion

B. he would have to pay income tax on any amounts rolled over from the traditional IRA to the Roth IRA

C. he would have to pay a 10% penalty in addition to tax on any monies rolled over since he is under age 59½

D. he can make a tax-free rollover from a traditional IRA to a Roth IRA

E. he can minimize the tax consequences of the rollover by using a series of annual partial conversions rather than one large conversion

11. A defined benefit plan can help an older controlling employee in a small business maximize tax-deferred savings.

A. True

B. False

12. The Internal Revenue Code sets a maximum limit on the projected annual benefit that a defined benefit plan can provide.

A. True

B. False

13. An employee cannot be covered under both a defined benefit and a defined contribution plan.

A. True

B. False

14. Sherin Blake, owner of Blake Architectural Design, Inc., has hired an actuary to calculate the funding requirement for the company’s defined benefit plan. To make an accurate calculation, the actuary will have to consider

A. the estimated retirement age of all employees covered by the plan

B. the formula that Sherin chose to use to calculate employee retirement benefits

C. interest earnings on the fund

D. all of the above

E. only A and B

15. Which of the following is a disadvantage of a cash balance plan?

A. provides relatively larger benefits for older workers, creating large disparity among younger and older workers

B. is difficult to fund with a large number of middle-income employees

C. plan shifts investment risk to employees

D. retirement benefits may be inadequate for older workers

E. plan complexity makes it difficult to explain to employees

16. Which plan has benefit levels that are guaranteed by both the employer and the Pension Benefit Guaranty Corporation (PBGC)?

A. money purchase plan

B. target benefit plan

C. cross tested plan

D. defined benefit plan

E. tax-deferred annuity

17. Which of the following may allow a defined benefit plan to meet safe harbor nondiscrimination requirements?

(1) a unit credit plan with an annual accrual rate less than 133 1/3% of the rate for any prior year of service

(2) a fractional accrual plan

(3) a fully insured plan

(4) a section 401(k) plan with seven-year cliff vesting

A. (1) and (3) only

B. (1) (2) and (3) only

C. (2) (3) and (4) only

D. (1) (2) (3) and (4)

18. Peter is 55 years old, and he decided to establish and contribute to a Roth IRA for the first time this year. What is the minimum number of years Peter must wait before being able to withdraw any accumulated earnings from the Roth IRA tax free?

A. 1

B. 3

C. 5

D. 10

19. If more than the maximum allowable amount is contributed in any year, an excise tax is imposed on the excess contribution.

A. True

B. False

20. Under current tax law, a nonrefundable tax credit is available for some lower-income taxpayers who make a contribution to a traditional IRA.

A. True

B. False