Question 1

The tax advantage of a Roth IRA is that although the contributions are not deductible,the distributions of contribution and income are tax-free.

Accepted Answer

The statement accurately describes the tax advantage of a Roth IRA.

Question 2

Thelma can get the 10% penalty on the early withdrawal from her IRA waived if the money is used to pay her son's college tuition.

Accepted Answer

Thelma can avoid the 10% penalty on early IRA withdrawals if the money is used to pay for qualified higher education expenses, such as college tuition.

Question 3

A nonqualified stock option is a right to buy a share of stock at a fixed price within a specified time period.If the employee recognizes income when the stock option is received then the employer can take a deduction of the same amount.

Accepted Answer

True

Question 4

A Keogh plan is administratively more convenient and economical than a simplified employee pension plan (SEP).

Accepted Answer

A SEP is generally easier to set up and maintain than a Keogh plan, as it requires less paperwork and administrative costs.

Question 5

One of the benefits of an incentive stock option is that the employee can sell the option at any time.

Accepted Answer

One of the requirements for an incentive stock option is that the employee must hold onto the option for a certain period of time before being able to exercise it and sell the underlying stock. This is known as a vesting period and the employee cannot sell the option before it has vested.

Question 6

The Data Company employs John and Jesse.John has worked for Data for 4 years,whereas Jesse has worked for the company for only 18 months.Both are 27 years old.
I.John is eligible to participate in Data's qualified pension plan.
II.Jesse is eligible to participate in Data's qualified pension plan.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Participation in a qualified pension plan usually requires an employee to work for a certain number of years, typically 1-2 years. Since John has worked for 4 years, he is eligible to participate in the plan. However, since Jesse has only worked for 18 months, he is not yet eligible to participate.

Question 7

Ester is employed by Montgomery Enterprises and will retire at the end of the current year after 22 years of service.Under the company's defined benefit plan,she can retire at 80% of the average of her three highest consecutive years' salary.Her average salary over these three years is $80,000.What is the maximum amount Ester can receive from Montgomery's pension plan?
A)$35,000
B)$64,000
C)$80,000
D)$100,000
E)$125,000

Accepted Answer

Ester can retire at 80% of her average salary over three years, which is $80,000. So her annual pension benefit will be $80,000 x 80% = $64,000. This is the maximum amount she can receive from Montgomery's pension plan.

Question 8

Under a nonqualified pension plan
I.The yearly earnings on the pension plan assets are taxable income to the employee.
II.An employer's contribution is taxable income to the employee at the time of the contribution.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Under a nonqualified pension plan
I.The yearly earnings...

Question 9

A Keogh plan must be established as a defined contribution plan,and the rules are similar to those of a qualified pension plan.

Accepted Answer

The answer of A Keogh plan must be established as...

Question 10

Peter opened his IRA in 2003 and withdrew money to purchase a house in 2016.Since the distribution qualified as a "qualified first-time-homebuyer expenses," it is not subject to the 10% early withdrawal penalty.

Accepted Answer

According to IRS rules, a distribution from an IRA before age 59½ can be subject to a 10% early withdrawal penalty, however, there are certain exceptions including for qualified first-time homebuyer expenses. As Peter withdrew money to purchase a house and the distribution qualified as a "qualified first-time-homebuyer expenses," it is not subject to the penalty. Therefore, the statement is true.

Question 11

Under a qualified pension plan
I.The yearly earnings on the pension plan assets are taxable income to the employee.
II.An employer's contribution is not taxable income to the employee at the time of the contribution.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Under a qualified pension plan, the yearly earnings on the pension plan assets are not taxable income to the employee until the funds are withdrawn. An employer's contribution is not taxable income to the employee at the time of the contribution.

Question 12

The adjustment for three-fourths of the excess adjusted current earnings (ACE)over AMTI before the ACE adjustment applies only to corporations.

Accepted Answer

The adjustment for three-fourths of the excess ACE over AMTI before the ACE adjustment applies only to corporations and not to individuals, partnerships, or LLCs.

Question 13

IRS scrutiny of reasonable compensation usually deals with excess compensation paid to the shareholders of closely held corporations and unreasonably low salaries to shareholders of an S corporation.

Accepted Answer

The IRS typically focuses on cases where closely held corporation shareholders are receiving excessive compensation or where S corporation shareholders are receiving unreasonably low salaries.

Question 14

Unmarried taxpayers who are not active participants in a pension plan are allowed to deduct their entire contribution to an IRA regardless of the amount of their adjusted gross income.

Accepted Answer

This statement is true according to the IRS rules for deducting contributions to traditional IRAs. However, there are income limits and other rules that apply to deductions for contributions to Roth IRAs and for taxpayers who are active participants in a pension plan.

Question 15

All of the following are requirements of a qualified pension plan except:
A)The plan must be in writing.
B)The plan cannot discriminate in favor of highly paid employees.
C)The plan must be for the exclusive benefit of the employees or their beneficiaries.
D)The plan must cover all employees who have worked for the company more than 18 months.
E)The plan must limit the amount of contributions that can be made to the plan and/or the benefits received from the plan.

Accepted Answer

The requirement that a qualified pension plan must cover all employees who have worked for the company more than 18 months is incorrect. While many employers choose to cover all employees, it is not a legal requirement for a plan to be considered qualified.

Question 16

Any structure over 100 years old is eligible for the rehabilitation tax credit.

Accepted Answer

Any structure must be at least 50 years old to be eligible for the rehabilitation tax credit.

Question 17

A taxpayer must begin withdrawals from any type of retirement plan (except a Roth IRA)no later than April 1 of the tax year after the taxpayer reaches age 70¹/₂ or,if later,the year they retire.

Accepted Answer

This statement is true. The required minimum distribution (RMD) rules apply to traditional IRAs, 401(k)s, 403(b)s, and other qualified retirement plans except Roth IRAs. The RMD for each year is calculated based on the account balance as of December 31 of the previous year and the life expectancy of the account owner using IRS life expectancy tables. The first RMD must be taken by April 1 of the year following the year in which the account owner reaches age 70½ or retires, whichever is later.

Question 18

Tim has a 25% interest in Hill and Associates,a partnership.Tim is eligible for coverage as an employee under the firm's qualified pension plan.

Accepted Answer

As a partner with a 25% interest in the partnership, Tim is considered an owner, not an employee, and therefore his eligibility for coverage under the firm's qualified pension plan would be based on his status as a partner, not as an employee.

Question 19

The employee's contribution to a nonqualified pension plan cannot be deferred,and the employer is not allowed a tax deduction for the contribution even though the employee includes the contribution in their income.

Accepted Answer

Employee contributions to a nonqualified pension plan can indeed be deferred, and the employer's tax deduction for contributions is typically deferred until the employee recognizes the income. This means the employer does not get an immediate tax deduction at the time of contribution if the plan defers the taxation of the income for the employee.

Question 20

Savings incentive match plan for employees (SIMPLE)were created to encourage small businesses to establish retirement plans for their employees.

Accepted Answer

SIMPLE plans were indeed created to encourage small businesses to establish retirement plans for their employees.

Quiz 15: Choice of Business Entity-Other Considerations