Distribution Strategies
An individual’s work life savings rate will not impact his retirement plan funding requirements.
False. The amount an individual saves during his work life will reduce his retirement plan funding requirements, as the amount saved will be available during the individual’s retirement.
Margaret earned $6,000 during January of this year. She was unemployed for February and March, and during April she earned an additional $5,000. She did not work again until December, during which time she earned $1,200. How many quarters of coverage has Margaret earned for Social Security during this year?
A) 1
B) 3
C) 4
D) 7
The correct answer is c.
An individual attains a quarter of coverage for earning $1,730 (2024), but the maximum quarters per year is 4. The employee earns the quarters as earning income - regardless of the earning date.
Contributions to SIMPLE plans predominantly consist of employer contributions.
False. Contributions to SIMPLEs are predominantly employee deferral contributions. The employer may elect to make nonelective contributions of at least 2% of employee compensation, or the employer may elect to match employee deferrals dollar-for-dollar up to 3% of the employee’s compensation.
Which of the following is not a qualified retirement plan?
A) ESOP.
B) 401(k) plan.
C) 403(b) plan.
D) Target benefit plan.
The correct answer is c. A 403(b) plan is a tax-advantaged plan, not a qualified plan. All of the others are qualified plans.
MH sponsors a qualified profit sharing plan. Of their 205 employees, 200 are non-excludable. Of the 200 non-excludable employees, 160 are NHC and 40 are HC. The plan covers 110 of the NHC and 15 of the HC. The plan does not meet the coverage requirements because only 69% of the NHC are covered by the plan.
False. MH’s plan meets the coverage requirements because the plan passes the ratio percentage test. The percentage of NHC covered, 68.75% (110/160), divided by the percentage of HC covered, 37.5% (15/40), is greater than 70%.
Of the following expenditures, which is most likely to increase during retirement?
A) Automobile Expenses;
B) Medical expenses;
C) Clothing expenses;
D) Mortgage expense.
The correct answer is b.
Each of these expenses may increase or decrease during an individual’s retirement, but the most likely expense to increase during retirement is an individual’s medical expenses.
This year, Bo and Martha received $14,000 of Social Security income and had $6,000 of interest income. What portion of the Social Security benefits will be taxable on their married filing jointly income tax return?
A) $0
B) $3,000
C) $7,000
D) $14,000
The correct answer is a.
The lesser of: 50% of $14,000 = $7,000; or
0.5 [$6,000 + 0.5 ($14,000) - $32,000] < 0
Since the answer calculated is less than $0, none of the Social Security benefits received by Bo and Martha are taxable.
Danielle has worked for the City of Buffalo for the last 20 years. She has deferred $23,000 into her 457(b) plan for 2024. She will attain her normal retirement age under the City’s 457(b) plan in 2024. Danielle has prior unused deferral amount of $45,000 as of December 31, 2023. How much can Danielle contribute as her three-year catch-up contribution in 2024?
A) $0
B) $23,000
C) $30,500
D) $69,000
The correct answer is b. Since the plan’s normal retirement age for Danielle is 2024, Danielle would be allowed to defer an additional $23,000 in 2024. This is within the three years of the plan’s normal retirement age and Danielle has sufficient prior unused deferral.
An individual whose average three highest consecutive years of compensation is $250,000 will have a maximum benefit payable at retirement from their defined benefit pension plan of $275,000 (2024) per year.
False. The maximum benefit payable to a participant of a defined benefit pension plan at retirement is the lesser of $275,000 (2024) or the average of the participant’s three highest consecutive years of compensation. Since this individual’s average three highest consecutive years of compensation is less than the maximum, the maximum payment to the individual at retirement from the defined benefit pension plan is $250,000.
Going Higher Construction sponsors a 401(k) profit sharing plan. In the current year, Going Higher Construction contributed 25% of each employees’ compensation to the profit sharing plan. The ADP of the 401(k) plan for the NHC was 3.5%. If Bob, age 57, earns $100,000 and is a 6% owner, what is the maximum amount that he may defer into the 401(k) plan for 2024?
A) $5,500.
B) $7,500
C) $13,000.
D) $30,500.
The correct answer is c. Bob is highly compensated because he is more than a 5% owner, so the maximum that he can defer to satisfy the ADP Test requirements is 5.5% (3.5% + 2%) and because he is over 50, he can defer the additional $7,500 (2024) as a catch-up contribution. Bob can defer $5,500 (5.5% x $100,000) and $7,500 (the catch-up) for a total of $13,000.
John, who is not married, has been employed by Phone Services, Inc. for 13 years, and currently earns $450,000 per year. John saves $40,000 per year. He plans to pay off his home at retirement and live debt free. He currently spends $80,000 per year on his mortgage. What do you expect John’s wage replacement ratio to be based on the above information?
A) 70%;
B) 73%;
C) 60%;
D) 65%
The correct answer is a. Calculate the Wage Replacement Ratio:
Salary $450,000 100.00%;
Payroll Taxes
($6,525) 1.45% of $450,000
($10,453.20) 6.20% of $168,600 (2024) 2.32% of 450,000
Savings ($40,000) 9%
Mortgage Paid-Off ($80,000) 18%
$313,022 70%
All of the following statements concerning the Social Security system are correct EXCEPT:
A) The Social Security retirement benefit is payable at normal retirement age with reduced benefits available as early as age 59 ½, to anyone who has obtained at least a minimum amount of Social Security benefits.
B) Disability benefit recipients must have a severe physical or mental impairment that is expected to either prevent them from performing “substantial” work for at least a year, or result in death.
C) The family benefit is provided to certain family members of workers eligible for retirement or disability benefits.
D) Survivors benefits apply to those family members listed for family benefits, and may also include the worker’s parents if the worker was their primary means of support.
The correct answer is a. Age 62 is the minimum retirement age except for widows and widowers who are eligible for reduced benefits at age 60.
Jordan contributed $5,000 each year to her Roth IRA for eleven years. At age 57, Jordan’s IRA was worth $100,000 consisting of $55,000 in contributions, $25,000 in conversions from her 401(k) plan last year, and earnings of $20,000. What are the tax consequences if Jordan takes a complete distribution of the Roth IRA at age 57, once she has retired, to travel around the world?
A) Only $20,000 is subject to the 10 percent early withdrawal penalty.
B) $20,000 is subject to income tax but no penalty.
C) $45,000 is subject to the 10 percent early withdrawal penalty and $20,000 is subject to income tax.
D) None of the distribution is taxable or subject to a penalty.
The correct answer is c. The distribution is not a qualified distribution, which means that choice d is not correct. The distribution is not qualified as it does not meet one of the distribution reasons, one of which is the attainment of age 59½. The $20,000 of earnings is subject to tax and penalty. The $25,000 of conversions is not subject to tax as it was already subject to income tax. However, because the conversion took place within the last five years, it is subject to the 10 percent penalty
If a term life insurance policy is purchased in a defined contribution plan, the aggregate cost of the term life insurance policy cannot exceed 10% of the value of the account.
False. The aggregate cost of a term life insurance policy included in a defined contribution plan cannot exceed 25% of the value of the defined contribution plan assets.
The following statements concerning retirement plan service requirements for qualified plans are correct EXCEPT:
A) The term “year of service” refers to an employee who has worked at least 1,000 hours during a 12-month period.
B) If an employee hired on October 5, 20X2 has worked at least 1,000 hours or more by October 4, 20X3, he has acquired a year of service the day after he worked his 1,000th hour.
C) An employer has the option of increasing the one-year of service requirement to 2 years of service.
D) Once an employee attains the service requirement of the plan, the employer cannot make the employee wait more than an additional six months to be considered eligible to participate in the plan.
The correct answer is b. Option b is incorrect because the employee would NOT acquire a year of service the day after he worked his 1,000th hour, but after twelve months AND 1,000 hours.
In August of this year, Paul turned 73. He was a participant in his former employer’s profit sharing plan. His profit sharing plan had an account balance of $600,000 on December 31 of this year, and $450,000 on December 31 of last year. According to the Uniform Lifetime Table the factors for ages 72, 73, and 74 are 27.4, 26.5, and 25.6 respectively. What is the amount of Paul’s first required minimum distribution for this year?
A) $16,423
B) $16,981
C) $17,578
D) $22,641
The correct answer is b.
$450,000/26.5 = $16,981
Chris died suddenly at the age of 42, leaving behind his wife, Robin (age 44) and their six-year-old son, Myles. Chris and Robin had been married for 15 years. All of the following statements concerning Social Security benefits available to the family are correct, EXCEPT:
A) Myles will be able to collect Social Security benefits on Chris’ account until he reaches age 18.
B) Robin will be able to collect Social Security benefits on Chris’ account until Myles reaches the age of 18.
C) Robin will receive a death benefit of $255.
D) When Robin reaches age 60, assuming she does not remarry, she will be entitled to collect Social Security retirement benefits on Chris’ account.
The correct answer is b.
Robin will be able to collect Social security benefits on Chris’ account until Myles reaches the age of 16. All of the other statements are correct.
Matthew, Mark, Luke and John are all considering making a contribution to a Roth IRA. Which of the following individuals is permitted to contribute to a Roth IRA this year?
A) John, age 75, who earns $35,000 as a part-time engineering consultant – self-employment income.
B) Luke, age 60, who is single and receives unemployment.
C) Matthew, age 37, who earns $250,000 as a Doctor of Physical Therapy.
D) Mark, age 16, who received $8,000 as a gift from his grandfather.
The correct answer is a. Matthew’s income (AGI) is too high to make a Roth IRA contribution. Luke does not have earned income. Mark, who is 16, could make a contribution if he had earned income, but a gift is not earned income. John has earned income and can make a contribution to a Roth IRA.
A profit sharing plan that uses permitted disparity allocates a higher percentage of the plan contribution to those participants whose earnings are in excess of the Social Security wage base.
True. This is a true statement.
Each of the following are requirements imposed by law on qualified tax-advantaged retirement plans EXCEPT:
A) Plan documentation.
B) Employee vesting.
C) Selective employee participation.
D) Employee communications.
The correct answer is c. Broad employee participation, as opposed to selective participation, is a requirement of a tax-advantaged retirement plan. All of the others are requirements for “qualified” plans.
Which of the following is not a permitted rollover?
A) SEP IRA to a Traditional IRA;
B) Private 457(b) Plan to Roth IRA;
C) 403(b) Plan to a Qualified Plan;
D) Qualified Plan to a Public 457(b) Plan
The correct answer is b. Private 457(b) plans can only be rolled over to another similar plan. All of the other rollovers are permitted.
Wally’s PIA for determining Social Security Retirement Benefits is $2,200. What is the approximate maximum family benefit that Wally’s family can receive?
A) $2,200
B) $3,100
C) $3,850
D) $4,400
The correct answer is c.
The maximum family benefit under Social Security is approximately 150% to 180% of the PIA. The best answer is c, which is 175% of the PIA.
Jan, a widow and age 72, is a participant of the Ace Web Enterprise (AWE) 401(k) plan. For the current year she deferred $6,000, or 10 percent of her salary to the plan. She did not receive a profit-sharing contribution, a forfeiture, an employer match, or any other employer contribution. Jan would like to make a contribution to her Roth IRA. If Jan’s AGI is $75,000 (all comprised of W-2 earnings, Social Security and portfolio income), what is the maximum contribution she can make for 2024?
A) $0
B) $2,000
C) $7,000
D) $8,000
The correct answer is d. Her income does not exceed the phase-out for contributing to a Roth IRA. Therefore, she can contribute the maximum amount, including the catch-up.
Robert, age 54, is a participant in a noncontributory qualified profit sharing plan sponsored by his employer. The maximum that may be contributed to Robert’s account by the employer for the 2024 plan year is $76,500.
False. The maximum contribution to a qualified profit sharing plan for 2024 is $69,000. The catch-up contribution can only be contributed as a deferral contribution from employees who are age 50 and over. Since Robert’s employer’s qualified profit sharing plan is noncontributory (all contributions are made by the employer), Robert would not have the availability to make deferral contributions to the noncontributory profit sharing plan to meet the catch-up availability.
Packlite Company has a defined benefit plan with 250 employees, of which 200 are nonexcludable employees (40 HC and 160 NHC). They are unsure if they are meeting all of their testing requirements. What is the minimum number of total employees that must be covered on a daily basis to conform with the requirements set forth in the IRC?
A) 40.
B) 50.
C) 80.
D) 100.
The correct answer is b. The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. Here 40% would be 80 (200 x 0.40), so 50 is less than 80. This would be the absolute minimum number of covered employees.