Question 1

Jacque Solis, a 38-year-old, is leaving her current job and would like to take a long vacation before a new job. She has $62,000 in an individual retirement account (IRA) that she would like to live on during this period. If she is in a 25% marginal tax bracket, how much will she have left after paying taxes and penalties?

Accepted Answer

Jacque will face both income taxes and a 10% early withdrawal penalty for taking money out of her IRA before age 59½. The total deductions from her withdrawal will be 25% (income tax) + 10% (penalty) = 35%. Therefore, she will have 65% of her $62,000 left, which is $62,000 * 0.65 = $40,300.

Question 2

Marcia works for Telephonic Industries and participates in its supplemental retirement plan. Last year, the firm did not earn a profit. Therefore, it did not contribute to the supplemental retirement plan. This plan is a(n):

Accepted Answer

The correct answer is a profit-sharing plan because contributions to the plan are contingent upon the company earning a profit. In the scenario described, since Telephonic Industries did not earn a profit last year, it did not contribute to the supplemental retirement plan, which is characteristic of a profit-sharing plan.

Question 3

Bill has worked for Excellent Corp. for 4 years. During this period, Excellent Corp. has contributed $25,000 to his retirement plan. Assuming the company uses graded vesting, how much will Bill be able to roll into an individual retirement account (IRA) if he leaves Excellent Corp. at the end of 4 years?

Accepted Answer

Under a graded vesting schedule, employees gain ownership of employer contributions to their retirement plan over time. A common graded vesting schedule allows for 20% ownership after 2 years, with an additional 20% for each year thereafter. After 4 years, Bill would be 80% vested (20% for the second year, plus 20% for each subsequent year), so he would be able to roll 80% of $25,000, which is $20,000, into an IRA. However, there was a mistake in my calculation in the choice provided. The correct calculation based on the explanation is indeed 80% of $25,000, which equals $20,000, aligning with option E, not D.

Question 4

The period during which premiums are paid for the purchase of an annuity is called the:

Accepted Answer

The period during which premiums are paid for the purchase of an annuity is called the accumulation period. During this period, the annuity holder is saving and accumulating funds with the intention of using them to generate income during the distribution period. The accumulation period can vary in length depending on when the annuity holder plans to start receiving payments.

Question 5

The average level of Social Security benefits for retirees aged 67 and above is adjusted upward each year with subsequent increases in the:

Accepted Answer

Social Security benefits for retirees aged 67 and above are adjusted upward each year with subsequent increases in the cost of living. This is done according to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures changes in the prices of goods and services. As the cost of living increases, the Social Security Administration increases benefits to ensure that retirees can maintain a consistent standard of living.

Question 6

Marie, a 67-year-old, is receiving Social Security benefits. She received $25,000 in interest and dividends this year. Her Social Security benefits are:

Accepted Answer

Social Security benefits for individuals over the full retirement age are not reduced because of earnings from interest and dividends. The earnings test applies only to earned income, such as wages or self-employment income, not to investment income.

Question 7

Lillian has a defined benefit plan that promises an annual retirement benefit based on 2% of her final 3-year average annual salary for each year of service. At retirement, Lillian has 15 years of service and had an average salary of $80,000 over the last 3 years. What is the amount of her annual benefit?

Accepted Answer

The annual benefit is calculated as 2% of the average salary ($80,000) times the number of years of service (15). So, the calculation is 0.02 * $80,000 * 15 = $24,000.

Question 8

Jamie has worked for ABC Printing for 5 years. During this period, ABC Printing has contributed $25,000 to her noncontributory retirement plan. Assuming ABC uses cliff vesting, the longest period allowed, how much will Jamie be able to roll into an individual retirement account (IRA) if she leaves ABC Printing?

Accepted Answer

Under a cliff vesting schedule, an employee becomes 100% vested in their employer's contributions to a retirement plan after a certain period of service, which, according to federal law, cannot exceed 3 years for cliff vesting schedules. Since Jamie has worked for ABC Printing for 5 years, she is fully vested and can roll the entire $25,000 into an IRA.

Question 9

If an annuity plan is designed so that the monthly payment is adjusted by the actual investment experience of the insurer, it is a(n):

Accepted Answer

A variable annuity is designed to provide payments that are adjusted based on the investment experience of the insurer. This means that if the insurer's investments perform well, the payments may increase, but if they perform poorly, the payments may decrease. Variable annuities are often considered higher risk than other annuity types because of the potential for payment fluctuations.

Question 10

The Employee Retirement Income Security Act (ERISA) was established to provide:

Accepted Answer

ERISA was established to provide protection to employees participating in private employer retirement plans. It sets minimum standards for retirement, health, and other welfare benefit plans, and establishes requirements for reporting and disclosure of information about the plans to ensure accountability and transparency. It also created the Pension Benefit Guaranty Corporation (PBGC), which provides insurance to protect pension benefits in case the plan sponsor is unable to meet its obligations.

Question 11

Which of the following statements regarding individual retirement accounts (IRAs) is true?

Accepted Answer

Withdrawals from Roth IRAs are tax-free after age 59½ as long as the account has been open for at least 5 years. A 10% tax penalty applies to withdrawals made from traditional IRAs before 59½. It is possible to convert a traditional IRA to a Roth IRA, but it will result in a taxable event. There is no income limit for opening a Traditional IRA, but there are income limits for contributing to a Roth IRA. Contributions made to traditional IRAs may be tax-deductible, depending on income level and whether the individual is covered by an employer-sponsored retirement plan.

Question 12

Henry has a defined benefit plan that promises an annual retirement benefit based on 2% of his final 5-year average annual salary for each year of service. At retirement, Henry has 21 years of service and had an average salary of $95,000 over the last 5 years. His annual benefit will be:

Accepted Answer

Henry's annual benefit is calculated as 2% of his final 5-year average salary for each year of service. Therefore, 0.02 * $95,000 * 21 = $39,900.

Question 13

A person who is not gainfully employed must start withdrawing funds from his or her Keogh retirement account by age:

Accepted Answer

A person who is not gainfully employed but has a Keogh retirement account must begin withdrawing funds by April 1 of the year after they turn 70½, according to the IRS.

Question 14

Which of the following statements regarding a refund annuity is true?

Accepted Answer

A refund annuity ensures that if the annuitant dies before recovering the total purchase price of the annuity, the remaining amount will be paid to a designated beneficiary, typically in the form of continued monthly payments until the full purchase price has been returned.

Question 15

The employer retirement plan that is intended to promote employee productivity and allows the employer to vary the amount of annual contributions is a:

Accepted Answer

A profit-sharing plan allows employers to vary the amount of annual contributions based on the company's profits, making it a plan intended to promote employee productivity. The other options listed may have fixed contribution amounts or restrictions on employer variability.

Question 16

If you withdraw funds from a Keogh plan before age 59½, you will have to pay a _____ federal income tax penalty.

Accepted Answer

If you withdraw funds from a Keogh plan (also known as a HR-10 plan) before age 59½, you will have to pay a 10% federal income tax penalty on top of any regular income taxes owed on the distribution. There are some exceptions to the penalty, such as if the distribution is due to disability or death, but in general, early withdrawals from a Keogh plan should be avoided if possible to avoid the penalty.

Question 17

Marshall will need $1,250,000 in his retirement fund in 40 years at the time of his retirement. If Marshall can earn 8% annually over this period, how much does Marshall need to save annually to meet that goal? (Show all work. Round the answer to the nearest dollar.)

Accepted Answer

The answer of Marshall will need $1,250,000 in his retirement...

Question 18

Melissa's retirement plan is described in her employee handbook as follows:
Noncontributory
Cliff vesting (100%) after 3 years of full-time employment
Monthly retirement benefits based on average salary over the last 3 years of employment and the total number of years worked for the company
Which of the following statements about this retirement plan is true?

Accepted Answer

According to the plan description, Melissa's retirement plan is noncontributory, which means she does not have to pay money into the plan. However, her benefits are cliff-vested, meaning she must work full-time for 3 years in order to be fully vested and eligible for any retirement benefits. This also means that if she leaves the company before completing 3 years of full-time employment, she will not receive any retirement benefits. The plan is also described as providing monthly retirement benefits based on average salary and total years worked, which suggests that it is a defined benefit plan, not a defined contribution plan. Finally, there is no mention of Melissa having to make investment decisions regarding her retirement plan.

Question 19

In which of the following procedures does vesting take place gradually over the first 6 years of employment?

Accepted Answer

Graded schedule involves vesting taking place gradually over a period of time, usually the first few years of employment.

Question 20

You will receive the largest monthly payment under an annuity contract when the annuity disbursement option is the:

Accepted Answer

A life annuity with no refund typically offers the largest monthly payment because the payments cease upon the annuitant's death, without any obligation to refund any portion of the principal. This option involves a higher risk for the beneficiary, as no benefits are paid out after their death, allowing the insurer to pay higher monthly amounts.

Quiz 14: Planning for Retirement

Marcia works for Telephonic Industries and participates in its supplemental retirement plan. Last year, the firm did not earn a profit. Therefore, it did not contribute to the supplemental retirement plan. This plan is a(n) :