Final Exam Study 2 Flashcards

Question 1 Gary Hinton, age fifty-four, 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.

Question 2 All of the following are true regarding tax implications of cash balance plans, except A. Employer contributions to the plan are deductible when made. B. Taxation of the employee on employer contributions is deferred. C. The plan is not subject to minimum funding rules of the Internal Revenue Code. D. Certain employers who adopt a cash balance plan may be eligible for a business tax credit up to $5,000. E. Employees may make voluntary contributions to a "deemed IRA" established under the plan.

Question 3 Peter is fifty 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

Question 4 The form of employer contribution used at Quinton Enterprises is A. Formula matching B. Discretionary matching C. Pure discretionary D. Formula contributions E. Proportional contributions

Question 5 Which of the following types of contributions into a savings or thrift plan are allowable? (i.) After-tax employee (ii.) Matching employer (iii.) Pre-tax employee (iv.) Deductible employee A. (i.) only B. (i.) and (ii.) only C. (i.), (ii.), and (iii.) only D. (ii.), (iii.), and (iv.) only

Question 6 If John withdraws $7,000 from his profit sharing plan to pay for unexpected medical expenses, A. He is in big trouble because withdrawals from a profit sharing plan are not allowed by law. B. He must pay income tax and a 10 percent penalty on the amount withdrawn. C. He must pay income tax but face only a 5 percent penalty for early withdrawal because it is a hardship withdrawal. D. All withdrawals from a profit sharing plan are penalty free, but income tax must be paid. E. He would pay income tax, but no early withdrawal penalty to the extent the medical expenses are tax-deductible.

Question 7 Older employees nearing retirement are attracted to savings plans. A. True B. False

Question 8 Employees who take out a loan from their profit sharing plan must pay 10 percent of the loan amount as a penalty as well as reasonable interest on the funds borrowed. A. True B. False

Question 9 How many times during a year may a Roth IRA be rolled over to another Roth IRA tax-free? A. One B. Two C. Five D. No limit

Question 10 All of the following are true regarding money purchase plans, except A. Most money purchase plan benefit formulas use a factor related to the employee's service that favors owners and key employees. B. Nondiscrimination regulations provide a safe harbor for money purchase plans. C. A plan benefit formula can be integrated with Social Security. D. Forfeitures, unvested amounts left behind by employees in their plans, can be used to reduce future employer contributions. E. Money purchase plan funds are generally invested in a pooled account managed by the employer or a fund manager selected by the employer.

Advantages of defined benefit plans include all of the following, except A. defined benefit plans are easy to design and easy to explain to employees. B. employees obtain a tax-deferred retirement savings medium. C. retirement benefits at adequate levels can be provided for all employees regardless of age. D. benefit levels are guaranteed both by the employer and, for some plans, by the PBGC. E. for an older highly compensated employee, a defined benefit plan will allow the maximum amount of tax-deferred retirement saving.

Question 12 2 / 2 pts Qualified plans require that the purchase of life insurance be governed by what are described as "incidental limits." What is the limitation on purchasing life insurance in a profit sharing plan? A. all amounts in the plan may be used. B.all amounts that have been in the plan for at least two years may be used. C. no amount of plan assets may be used. D. no more than 50 percent of plan assets may be used.

Question 13 2 / 2 pts Bane Industries, Inc. has 1,000 employees. The average age of the workforce at Bane is forty-five, and 80 percent of the workers earn a mid-range income. Ten percent of workers are highly compensated, and 10 percent of workers are low-wage workers. Advantages of using a cash balance plan at Bane Industries include A. employer can spread administrative cost over a large number of employees. B. younger workers have time to accumulate retirement savings. C. employee bears investment risk. D. only a and b. E. only a and c.

Question 14 2 / 2 pts Borrowing from an IRA A. is treated as an early withdrawal. B. requires use of a written loan agreement. C. reduces the deductible employee contribution amount. D. causes an insufficient withdrawal penalty. E. is not allowed.

Question 15 2 / 2 pts A cash balance plan favors older workers. A. True B. False

Question 16 2 / 2 pts T. L. Timber, age forty, works for Treeline, Inc., a logging company. Treeline uses both compensation and service as a basis for allocating Treeline's $20,000 annual contribution to Treeline's profit sharing plan. How much would be allocated to T. L.'s account if he received forty units of credit for his twenty years of service and 160 units for $80,000 in earnings? Total units for all employees are 1,000. A. $100. B. $2,000. C. $4,000. D. $8,000. E. need more information to calculate.

Question 17 2 / 2 pts Harris Corporation has a savings plan for employees. Last year, Harris made non-elective contributions amounting to 4 percent of compensation to all employee accounts. By doing this, Harris has met the contribution requirements for a safe harbor test. A. True B. False

Question 18 2 / 2 pts An IRA owner can loan funds to a related person or business. A. True B. False

Question 19 2 / 2 pts Caribon Cruise Tours has a traditional 401(k) plan for employees. Last year, payroll for employees covered under the plan was $500,000, and employee elective deferrals amounted to $100,000. Which of the following is true? A. Caribon Cruise Tours can deduct up to $225,000 for federal income tax purposes. B. Caribon Cruise Tours can deduct no more than $125,000 for federal income tax purposes. C. employees paid income and payroll taxes on the amounts they chose to defer. D. a and c. E. a and b.

Question 20 2 / 2 pts John Appleton, owner of Appleton Enterprises, Inc., is considering installing a retirement plan in his company. He wants a plan that allows the use of Social Security integration. Which of the following plans would permit this? A. cash balance plan. B. typical defined contribution plan. C. typical defined cost plan. D. a and b only. E. a and c only.

Question 21 2 / 2 pts 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.

Question 22 2 / 2 pts The IRC generally limits the amount of employer stock that can be in a retirement plan. Diversification is not required, however, for employee stock ownership plans (ESOPs). A. True B. False

Question 23 2 / 2 pts Bardwell Manufacturing, Inc. began fifteen years ago. The two co-owners now earn $300,000 each per year. Four supervisors earn $40,000 each annually and have been with the company for ten to eleven years. Fifteen line employees earn a total of $300,000 and have been with the company from two months to five years. All employees are over age twenty-one. The co-owners want to install a 15 percent money purchase plan and structure the plan in a way that maximizes their plan contributions. Which vesting schedule would be most appropriate for Bardwell? A. six-year graded vesting. B. three- to seven-year vesting. C. three-year cliff. D. two- to six-year vesting. E. 100 percent immediate vesting.

Question 24 2 / 2 pts Sam Blodgett, an employee at Cog Industries, has an employer-sponsored savings plan. Cog offers employees a choice of twelve different mutual funds-three are index funds and among the rest are ones emphasizing international investments, small cap, large cap, and bonds. Cog gives employees a 3 percent match for contributions with a three-year cliff vesting in those employer contributions. Two years ago, on a tip from his brother-in-law, Sam decided to place all of his investment in one "hot" small cap mutual fund. Unfortunately for Sam, about half of the companies in the fund went bankrupt or were close to it last year, and the value of his shares plummeted. Sam wants to sue Cog for his losses. Sam A. has a case because Cog has a fiduciary responsibility to its employees. B. has a case because Cog did not offer financial planning advice to Sam. C. does not have a case because Cog matches employee contributions and thus shares investment risk. D. does not have a case because Cog offered at least three different diversified investment alternatives. E. does not have a case because federal law exempts employer from any investment choice made by an employee.

Question 25 2 / 2 pts An ESOP enables the employer company to borrow money on a favorable basis. All of the following are true about ESOP loans, except A. the ESOP trustee borrows money from a lending institution, such as a bank. B. the trustee uses the loan proceeds to purchase stock of the employer from the employer corporation or from principal shareholders. C. the employer makes tax-deductible contributions to the ESOP in amounts sufficient to enable the trustee to pay off the principal and interest of the loan to the lender. D. the leveraging feature of an ESOP loan distinguishes an ESOP from a regular stock bonus plan. E. all of the above are true.

Question 26 2 / 2 pts Which of the following is (are) true regarding Section 401(k) plans? A.employees decide how much of their compensation is to be deferred. B. all types of employers can adopt a Section 401(k) plan. C. Section 401(k) plans can allow hardship withdrawals. D. a and b. E. a and c.

Question 27 2 / 2 pts The employer makes annual contributions to each employee's account under a nondiscriminatory contribution formula that requires a contribution of a specified percentage up to A. 5 percent. B. 20 percent. C. 50 percent. D. 25 percent.

Question 28 2 / 2 pts The employer match A. is immediately 100 percent vested. B. is a random amount determined by the employer. C. can be some percentage of the employee's contribution. D. is usually twice as much as the employee's contribution.

Question 29 2 / 2 pts A nondeductible traditional IRA A. allows prior nondeductible contributions to be distributed tax free. B. provides better tax advantages than investing in tax-deferred non-IRA investments. C. is created when someone must make an after-tax contribution to a traditional IRA because of being an active participant in an employer plan. D. distributes contributions and earnings tax free. E. can be established up to the due date of a participant's tax return, including extensions.

Question 30 2 / 2 pts The IRS generally allows money purchase plans to provide for "in-service distributions"-that is, benefits payable before termination of employment. A. True B. False

Question 31 2 / 2 pts Which of the following correctly identifies the ESOP/stock bonus plan requirement that an employer must repurchase stock that is not traded on an established market? A. put option. B. ESOP loan. C. deemed IRA option. D. ERISA 10 percent requirement.

Question 32 2 / 2 pts Jackson Kerpatrik, age forty, is an employee of Beason Industries. Beason has an ESOP. This year, the ESOP purchased stock for $500 and allocated it to Jackson's account. Twenty-five years from today, Jackson retires and receives this stock in a lump sum distribution. At the time of his retirement, the stock that was allocated to Jackson's account this year is worth $5,000. Jackson pays taxes on A. $5,500. B. $4,500. C. $5,000. D. no tax at time of distribution; all initial deposits and gains taxed when stock is sold. E. $500 at time of distribution; gains are taxed when the stock is sold.

Question 33 0 / 2 pts Quincy Winstar, age fifty, has $200,000 in a traditional IRA and is considering conversion to a Roth IRA in 2021. 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 percent 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.

Question 34 2 / 2 pts 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 ten-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.

Question 35 2 / 2 pts A leveraged ESOP can borrow funds to acquire company stock. The employer can make a tax-deductible contribution to the ESOP that lets the trustee repay the loan principal and interest. A. True B. False

Question 36 2 / 2 pts 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.

Question 37 2 / 2 pts 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 59½.

Question 38 2 / 2 pts Which of the following employee categories would typically benefit most from a savings or thrift plan? A. low income; nearing retirement. B. high income; nearing retirement. C. low income; young age. D. high income; young age.

Question 39 2 / 2 pts Ways that a Roth IRA differs from a traditional IRA include Correct! A. initial investment and earnings can be withdrawn tax-free. B. Roth IRA contributions can be made past age 59½. C. Roth IRAs are never subject to minimum distribution rules. D. a and b. E. a and c.

Question 40 2 / 2 pts 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.

Question 41 2 / 2 pts Appleton Enterprises, Inc. is a closely held corporation that employs members of the Appleton family. The company's ESOP has more than 10 percent of plan assets in Appleton stock. Appleton's stock is not publicly traded. Appleton must give employees the right to vote on all corporate issues. A. true. B. false.

Question 42 2 / 2 pts Pamela Renquist, owner of Advance Software Solutions, Inc., wants to install a stock-based retirement plan for herself and her employees. She has a young company that has averaged 5 percent a year growth since opening five years ago. Pamela has asked you, her financial advisor, to help her understand which type of plan would be more advantageous for Advance Software Solutions-a stock bonus plan or an ESOP. You tell Pamela that A. both plans are identical except that an ESOP can be integrated with Social Security while a stock bonus plan cannot, making an ESOP less expensive to provide. B. only a stock bonus plan requires a "put option," making it more difficult to retire employees when company cash is short. C. the ability to use the ESOP to borrow money with tax-deductible dollars could be advantageous to a young and growing business. D. an ESOP will dilute company ownership, but the diversification requirements in a stock bonus plan prevent that from happening. E. only an ESOP can be used to fund a corporate buy-sell agreement and should be used if Pamela wants to control business succession.

Question 43 2 / 2 pts Shannon McDougal will retire December 31 of this year. Shannon has worked for Shamrock Construction for thirty years. During his last five years, he earned $40,000, $47,000, $44,000, $46,000, and $48,000. Shamrock's retirement plan uses a unit credit formula that awards employees 1.5 percent for each year of service using a financial average of the last three years. Shannon's annual benefit will be A. $19,500. B. $20,250. C. $20,700. D. $21,150. E. $21,600.

Question 44 2 / 2 pts Disadvantages of defined benefit plans include A. employee bears investment risk. B. higher installation and administrative costs as compared with a defined contribution plan. C. older employees will receive a lower retirement benefit than younger employees. D. a and b E. a and c

Question 45 2 / 2 pts Evergreen Semiconductors, Inc., is a young and innovative company with twenty-five employees between twenty-four and thirty-five years of age. Turnover has averaged about 2 percent per year for the nine-year old company. Profit has been intermittent. The owners believe that a substantial investment will need to be made in new equipment next year. Which of the following retirement savings plans is best for Evergreen? A. money purchase plan. B. target benefit plan. C. nonqualified deferred compensation plan. D. defined benefit plan. E. profit sharing plan.

Question 46 2 / 2 pts Which of the following is (are) true regarding a cash balance plan? A. employee bears investment risk. B. each participant has a hypothetical account that the employer credits at least annually. C. plan benefits older workers more than younger workers. D. a and c. E. b and c.

Question 47 2 / 2 pts Elective deferrals in a 401(k) plan can be distributed upon occurrence of all of the following, except A. retirement. B. disability. C. severance from employment with the employer. D. attainment of age 55½ by the participant. E. plan termination (if the employer has no other defined contribution plan other than an ESOP).

Question 48 0 / 2 pts A Roth IRA can be rolled over to a traditional IRA. A. TRUE B. FALSE

Question 49 2 / 2 pts All of the following are true statements about savings plans, except A. life insurance can be used in a savings plan. B. the employer can make a matching contribution to the savings plan. Correct! C. employer matching contributions must follow a three- to seven-year vesting schedule. D. employees can select investment vehicles among a set of predetermined options. E. employee contributions are not tax deductible.

Question 50 2 / 2 pts Which of the following are estate planning-related problems that an ESOP or stock bonus plan may help to reduce or eliminate? (i.)plan income is taxed at the lower 15 percent marginal tax rate (ii.)funds accumulated by the corporation for the purchase of stock at death may result in exposure to the accumulated earnings tax (iii.)receipt by the corporation of life insurance proceeds may trigger the corporate AMT (iv.)insurance owned by the corporation to fund a buyout increases corporate value and, thereby, federal estate tax A. (i.) and (iii.) only. B. (i.) (ii.) and (iii.) only. C. (ii.) and (iv.) only. D. (i.) (ii.) (iii.) and (iv.).