Deck 14: Deferred Compensation and Education Savings Plans

Question 1

Contributions to defined contribution plans are capped at $220,000.

Answer 1

False
the income on which contributions are based is limited to $250,000 (for 2012).

Question 2

If a qualified pension plan is contributory, the annuitant may use either the "exclusion ratio" or the "cost recovery" methods of reporting.

Answer 2

False
Neither method is available anymore
the Simplified Method must be used

Question 3

Eligible employees may contribute up to $11,500 per year to their SIMPLE account.

Answer 3

True

Question 4

Amounts contributed by employees to a SIMPLE are not subject to employment tax.

Question 5

SIMPLE plans may be administered by companies with 100 or more employees earning $5,000 or more in the previous year.

Question 6

Contributions made by an employer to an employee's SIMPLE accounts are not generally deductible by the employer.

Question 7

A deductible IRA would convert tax-exempt municipal bond interest into fully taxable ordinary income.

Question 8

Tax-exempt organizations generally may establish 401(k) plans for their employees.

Question 9

Employer contributions to a SIMPLE do not vest until the employee has been in the plan for five years.

Question 10

Lump-sum distributions from qualified pension plans, but not from profit- sharing plans, may be rolled over to an IRA by the plan participant.

Question 11

A plan participant may borrow the first $50,000 of the total vested account balance.

Question 12

IRA distributions may be made with no penalties prior to age 59 ½ if: (1.) Made to a spouse age 59 ½ or more, or
(2.) If actual retirement occurred.

Question 13

An S corporation is permitted to adopt a Keogh plan or a SEP IRA for its employees.

Question 14

A married couple, both aged 50, with only one working spouse may contribute up to $12,000 to deductible IRA accounts in 2012.

Question 15

Employees may be subject to a fine of up to 25 percent of the amount withdrawn for early withdrawal from a SIMPLE.

Question 16

A deduction to a Keogh plan for the prior year is allowed as long as the plan is established and the contribution made by the due date of the return (including extensions).

Question 17

For a non-qualified distribution from a Roth IRA, the distribution is deemed to come from direct contributions first.

Question 18

Qualified distributions from Roth IRAs are made free of tax.

Question 19

Unemployed individuals may be able to take early withdrawals from qualified pension plans to pay for medical insurance premiums without being subject to the penalty tax.

Question 20

Under the SIMPLE pension plans, employers must contribute an amount equal to 5 percent of their employees' earnings.

Question 21

Gil Jerome retired from Health Nuts, Inc. and will receive $1,100 a month for the rest of his life from its noncontributory pension plan. fte following statements regarding Gil's retirement annuity are all true, except:

A) fte adjusted basis in the annuity was, is, and will always be zero, even to a surviving spouse beneficiary.
B) Gil will use the exclusion ratio to determine his gross income from the annuity.
C) Gil's gross income from the annuity is $13,200 a year, regardless how long he lives.
D) Gil's tax consequences are independent of whether the pension plan is qualified or not.

Question 22

Moira Sweeney, age 68 and retired, receives a $5,000 partial distribution from her 401(k) plan. fte plan does not pay out an annuity. Immediately before the distribution, her account balance is $100,000, including $20,000 in nondeductible contributions. How much of the $5,000 distribution must Moira include in gross income?

A) $0
B) $1,000
C) $4,000
D) $5,000

Question 23

Generally, a qualified plan must cover a broad spectrum of employees on a nondiscriminatory basis. Specifically, the plan may qualify if it covers at a minimum:

A) All full-time employees who are age 25 and over
B) 70 percent of all nonhighly compensated employees
C) All full-time employees over age 21 with at least three years of service
D) All full-time employees earning in excess of the FICA limit

Question 24

fte maximum yearly amount that an employee may contribute to a SIMPLE is:

A) $2,500
B) $3,000
C) $17,000
D) $5,000
E) $11,500

Question 25

A taxpayer whose spouse is covered at work under a qualified pension plan is generally not eligible to make a tax- deductible contribution to an IRA.

Question 26

fte following are all true statements about a tax-free rollover to an IRA, except:

A) Only lump-sum distributions are eligible.
B) fte participant, but not a nonspousal beneficiary, is eligible for rollover, as a general rule.
C) An eligible rollover can include the nontaxable portion of the distribution.
D) fte rollover must take place within 60 days of the distribution.

Question 27

fte following statements on vesting are all true, except:

A) Vesting means that the employee has a present nonforfeitable right to enjoy a future benefit.
B) Employees are immediately vested in their own contributions.
C) Once a pension plan is 100 percent vested, the account balance will be paid to a named beneficiary if the employee dies prior to normal retirement.
D) Normally, if an employee who is fully vested in a pension plan leaves employment for any reason, he receives no benefits until normal retirement, perhaps decades later.

Question 28

For eligible individuals under age 50 the annual deduction to an IRA is limited to the following maximum:

A) $5,000, or 100 percent of compensation, whichever is less.
B) $2,000, or 25 percent of earned income (net of IRA contribution), whichever is less.
C) fte first $2,250 of earned income.
D) fte lesser of $2,000 or 100 percent of taxable income attributable to earned income.

Question 29

fte following statements made about the phaseout of deductible contributions to IRAs are false, except:

A) If one spouse is a participant in a qualified plan for any part of the taxable year, the other spouse may not make deductible IRA contributions, even if the parties file joint returns.
B) A de minimis rule provides that a minimum deductible contribution may be made in the amount of $200 regardless of the amount of adjusted gross income.
C) fte income phaseout limits for making deductible IRA contributions do not apply if neither taxpayer nor taxpayer's spouse participates in a qualified employer-sponsored retirement plan.
D) If an individual is precluded from making deductible IRA contributions, such individual also may not roll over a distribution from a qualified plan on a tax-deferred basis.

Question 30

fte following statements about Roth IRAs are all true, except:

A) A Roth IRA may not be started by an 80 year old.
B) A Roth IRA is attractive to taxpayers in a high tax bracket.
C) A beneficiary may receive all distributions tax-free.
D) Non Roth IRAs may be rolled over to a Roth IRA.

Question 31

Cathy Lyons has been receiving a $100 monthly annuity from her qualified plan account over several years. At the end of the current year, her account balance is $100,000, including a $20,000 cost basis. In order to satisfy a personal obligation, she withdraws an extra $5,000 from her account in the current year. fte withdrawal does not affect the amount of her subsequent annuity payments. How much of the $5,000 distribution is taxable?

A) $0
B) $1,000
C) $4,000
D) $5,000

Question 32

Taxpayers may make penalty-free withdrawals from Coverdell education savings accounts to pay for qualified higher education expenses of the taxpayer, the taxpayer's spouse, and children and grandchildren of the taxpayer or the taxpayer's spouse.

Question 33

fte following represent tax advantages of a qualified pension plan, except:

A) fte plan itself is a tax-exempt trust not subject to income tax on income earned.
B) fte employer can make currently deductible contributions to the plan, even though the participants may never be taxed, and if they are, they may be taxed at low rates.
C) Forward averaging and capital gain treatment may be available to the participants.
D) A surviving spouse can roll over a lump-sum distribution from a qualified plan into an IRA.

Question 34

United Mechanics, Inc. established a qualified 401(k) plan. Scott Meadows, the head mechanic, was paid a flat salary of $40,000. fte maximum employer contribution deduction allowable with respect to Scott's account in one year is:

A) $11,500
B) $17,000
C) $40,000
D) $10,000

Question 35

fte following statements about an individual who has made nondeductible IRA contributions are false, except:

A) fte 10 percent penalty for premature withdrawals applies to nontaxable distributions from an IRA account.
B) When an individual has made both deductible and nondeductible IRA contributions, the "exclusion ratio" approach used in annuity taxation is employed to compute the portion of a distribution which is tax-free.
C) An individual who may not make a deductible IRA contribution because of high adjusted gross income coupled with participation in a qualified plan may also not make nondeductible contributions.
D) Tax advantages may result from keeping IRA accounts funded with deductible and nondeductible contributions separate from each other to facilitate the necessary tracing of funds.