FINC 340 & 440 WEEK 2

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 2

1

DIRECTIONS: Here is the Homework #2 Assignment. Use the Homework #2 Answer Sheet for your responses to the questions. When you have completed Homework #2 submit the Answer Sheet to your Homework #2 Assignment Folder. Please submit your Homework #2 in MS Word format with the following file name: LastNameFirstInitial_Homework02AnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_Homework02AnswerSheet.docx.

1-Under a qualified domestic relations order (QDRO)

a. a demand for cash payment can be made even if the plan has no provision for the account owner

b. a person who receives a distribution because of a QDRO can roll over the distribution to his/her own retirement account and preserve the tax deferral

c. a means is provided to circumvent the provision that qualified plan benefits cannot be assigned to another

d. a and b e. b and c

2- For IRAs, the early distribution penalty applies to all of the following, except

a. distributions attributable to the participant’s disability b. distributuions to unemployed individuals for health insurance premiums under certain

conditions c. distributions to the IRA participant’s estate prior to the participant’s death d. distributions for higher education costs for the taxpayer e. distributions made on or after attainment of age 59 ½

3- As an actuary, you are helping Roadster Custom Auto Shop determine the annual cost of its defined benefit plan. In making your calculations, you must make reasonable assumptions about:

a. employee turnover rate b. employee salary scale c. future investment and inflation rates d. all of the above e. only b and c

4- George Flint was transferred to Chicago three years ago. When he left Detroit, he sold his home and put some of the money in a new Roth IRA. He and his wife, Wilma, have been renting a home for the past 3 years. Recently, the homeowner decided to sell. George is interested in buying the home. George can make a penalty-free withdrawal from his Roth IRA to help complete the purchase.

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 2

2

a. true b. false

5- Gary Hinton, age 54, is planning to retire this year. He has $600,000 accumulated in a traditional IRA.

a. Gary must wait until he is 59½ to take IRA distributions without penalty b. Gary could take an IRA distribution of $100,000 without penalty before age 59½ if he

uses the money to make a qualified purchase of a condo in a retiree community c. Gary must pay a 10% penalty for any withdrawals that he makes from his IRA before

age 59½ unless the distribution is to purchase health insurance or medical care d. an amount equal to an annual payment under a life annuity can be distributed to

Gary without penalty, but once begun, the payment can never be changed e. Gary can make penalty-free withdrawals in an amount equal to an annual life annuity

payment until age 59½; at that time, he can withdraw the remaining balance in his IRA without penalty

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- Brothers Tim and Jim Shanton have asked you, their financial advisor, to settle a friendly quarrel between them. Tim argues that a Roth IRA and a traditional IRA are actuarially equivalent if $4,000 is available for investing on a before-tax basis, contributions to the traditional IRA are deductible, tax rates are expected to stay the same, and both have the same interest rates. So, it makes no difference which vehicle one uses to save for retirement. Jim insists that a Roth IRA is the better investment. You tell them

a. Tim is wrong; the tax deduction available for a traditional IRA allows more money to work for the contributor

b. Jim is wrong; at least for some low-income individuals, the traditional IRA is a better investment because of its relatively lower tax rates

c. Tim is right; the two investments are equivalent in every respect when considered at the end of an investment horizon at least 10-years long

d. Jim is right; the ability to make tax-free withdrawals from a Roth IRA gives a greater return even when contributions and interest rates are equivalent over time

e. both are right; the two investments are actuarially equivalent, but absence of a minimum distribution date and more liberal penalty-free withdrawal options may make the Roth IRA more attractive

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 2

3

8-Bankroll Corp. sponsors a profit sharing plan in which Bankroll’s four employees made elective deferrals. The payroll of Bankroll Corp. is $500,000. Bankroll’s deduction is:

a. $40,000 b. $75,000 c. $125,000 d. $165,000 e. $500,000

9- Advantages of rolling a qualified plan over to an IRA include

a. an IRA can invest in life insurance b. there may be more investment flexibility with an IRA c. spousal consent is required for IRA distributions d. the ability to take loans from the IRA

10- Dalton Construction has a defined contribution plan that provides 65% of account balances to the three owners, each of whom have a 10% ownership of the company. To remain qualified, which of the following vesting schedules would Dalton be permitted to use?

a. 5-year cliff b. 3 to 7 year c. 3-year cliff d. a and b e. b and c

11- Ann has a Roth IRA. She died this year. Her son Jim is the designated beneficiary. Jim is not required to start minimum distributions next year because Roth IRAs are not subject to the required minimum distribution rules after death.

a. true b. false

12- Brothers Tim and Jim Shanton have asked you, their financial advisor, to settle a friendly quarrel between them. Tim argues that a Roth IRA and a traditional IRA are actuarially equivalent if $4,000 is available for investing on a before-tax basis, contributions to the traditional IRA are deductible, tax rates are expected to stay the same, and both have the same interest rates. So, it makes no difference which vehicle one uses to save for retirement. Jim insists that a Roth IRA is the better investment. You tell them

a. Tim is wrong; the tax deduction available for a traditional IRA allows more money to work for the contributor

b. Jim is wrong; at least for some low-income individuals, the traditional IRA is a better investment because of its relatively lower tax rates

c. Tim is right; the two investments are equivalent in every respect when considered at the end of an investment horizon at least 10-years long

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 2

4

d. Jim is right; the ability to make tax-free withdrawals from a Roth IRA gives a greater return even when contributions and interest rates are equivalent over time

e. both are right; the two investments are actuarially equivalent, but absence of a minimum distribution date and more liberal penalty-free withdrawal options may make the Roth IRA more attractive

13- Requirements for participant loans from qualified retirement plans include which of the following:

a. the loan must bear reasonable repayment terms b. the loan may not exceed specific dollar limits c. a written loan contract signed by all parties must be used d. a and b e. b and c

14- Any distribution from a qualified retirement plan is eligible for a rollover except which of the following?

a. hardship withdrawal b. a required minimum distribution c. a distribution from a series of substantially equal payments d. all of the above e. only a and c

15- Ken and Barbie Dahl file a joint tax return in 2013. Both are employed. Ken is an active participant in his employer’s qualified retirement plan. Barbie is not. Barbie earns $125,000 and Ken earns $75,000. Assuming they have no other tax deductions,

a. based on their income levels, Ken can contribute to a traditional IRA and deduct contributions, but Barbie must contribute to a Roth IRA

b. both Ken and Barbie can make a deductible contribution to a traditional IRA c. Ken can make a deductible IRA contribution, but Barbie must make a nondeductible

IRA contribution d. neither Ken nor Barbie can make a traditional IRA contribution because Ken is an

active participant in his employer’s qualified plan e. neither Ken nor Barbie can make a deductible contribution to a traditional IRA

16- When rolling over an existing IRA to a Roth IRA, all of the following are true, except

a. the amount rolled over is not included in the gross income of the IRA account holder for federal income tax purposes

b. there is no limit on the rollover, and it can be a total or partial rollover of an existing IRA

c. distributions from the Roth IRA are received tax free if they are made after a 5-year holding period and they are made after age 59 ½, death, disability, or for a first-time home purchase

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 2

5

d. no minimum distribution rules apply to the Roth IRA except at death e. all of the above are true

17- Bob died in 2009 at age 60. Bob named his spouse, Jessica (age 58), as beneficiary of his qualified plan.

a. Jessica can roll over the qualified plan assets to a traditional IRA. If she does so, minimum distributions from the IRA must begin in 2012.

b. If Jessica does not roll over the qualified plan assets to a traditional IRA, minimum distributions from the IRA must begin in 2010.

c. Jessica can roll over the qualified plan assets to a traditional IRA. If she does so, minimum distributions from the IRA must begin when Jessica attains age 70½.

d. If Jessica does not roll over the qualified plan assets to a traditional IRA, minimum distributions from the IRA must begin when Jessica attains age 70½.

18- Jon, age 53, is a disabled veteran. He is married to Lisa, age 50, and they have two children. Their son Garrett is 15 years old. Their daughter Olivia is 23 years old and was diagnosed with multiple sclerosis when she was 22 years old. In determining who is entitled to Social Security disability benefits, which of the following are true?

(1) Only Jon is eligible (2) Lisa is not eligible because she is not older than 62 (3) Lisa is eligible because she is caring for a child under age 16 (4) Garrett is eligible because he is unmarried and under age 18, but Olivia is not eligible

because she was not diagnosed with a disability prior to age 22

a. (1) only b. (1) and (2) only c. (3) only d. (3) and (4) only

19- Tony Johnson, an over-the-road trucker, had several out-of-town trips early in the year, so he got an extension for filing his income tax return. Tony can make the maximum IRA contribution this year. He has until the last date of his income tax filing extension to make a tax-deductible contribution to his IRA.

a. true b. false

20- Orville Winbacher died last year at age 58, leaving $500,000 accumulated in a Roth IRA. Which of the following is (are) true?

a. monies in the Roth IRA must be distributed within a year of the Orville’s death either to his estate or to a beneficiary

b. distribution from the account can be made over the life of a designated beneficiary if begun within a year of Orville’s death

c. initial distribution of Orville’s Roth IRA funds to a beneficiary are tax-free, but subsequent investment returns on amounts distributed are taxable

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK 2

6

d. a and b e. b and c