Misc.

Question 1

Roth Qualifying Distribution (no tax/penalty)

Answer 1

• *must satisfy 5 Yr. Holding Period for any qualifying dist- starts Jan 1 for first tax year contribution was made (can make prior year contribution and that counts)
• Plus trigger: 59 ½, disabled, death, 1st time home purchase

All outside Roths have same holding period. Roth 401ks have their own holding period

Roth IRA Non Qualifying Distribution (taxes)- best out first (basis, conversions then earnings) ( you don’t really pay tax on the basis or conversions since you already paid tax on them)

Roth 401K Non Qualifying Distribution (taxes) - pro -rata based on

Question 2

Roth IRA Qualifying Distribution Triggers

Question 3

Simples

Answer 3

• employees are eligible to participate if they earned at least $5,000 in the preceding year form the employer and is expected to earn $5,000 in the current year
• no age requirement

Question 4

IRS example deferral vs. covered comp limit

Answer 4

Question 5

SImple IRA

Answer 5

Subject to early withdrawl penalties of 25% (rather than 10%) if withdrawal is within the first two years of the employee’s participation in the plan

Question 6

Distributions Prior to 59 ½

Answer 6

• you cannot use your IRA for a loan but you CAN liquidate 10,000 of it and distribute it penalty free for first time home purchase

Question 7

non - qual. distr. from Roth IRA

Answer 7

Qualified Roth IRA Dist. - distribution is made after a 5 year taxable period (contribution made at beginning of that year) AND age 59.5, death, disability or first time home purchase (max 10K)

Question 8

Roth Non-Qualfi. Dist. Ex

Answer 8

Earnings can be withdrawn tax-free if you are at least age 59 1/2 and you’ve had your Roth for five years or more. Withdrawals of earnings are also tax-free if you are disabled, you inherited the Roth, or you use the distribution to buy or rebuild a first home.

First home = tax and penalty free from Roth

Question 9

True/False. Must have earned income to contribute to a Traditional or Roth IRA

Answer 9

True. Non-working spouse can use earned income of other spouse to qualify.

Question 10

Deductibility of IRAs can be limited if the Taxpayer is an active participant in an employer sponsored plan.

Answer 10

Question 11

True/False: RAs, SEPs, SIMPLEs and 403(b) Plans are not qualified plans.

Answer 11

True.

Question 12

Active Participant

Answer 12

Active Participant Status

• Limits deductibility of Traditional IRA contributions.
• Individual is considered an active participant:
  
  • Defined Benefit Plan
    
    • Participates or meets the eligibility requirements of the plan.
  • Defined Contribution Plan, SEP, Simple, 403b
    
    • Receives a contribution to the qualified plan on his behalf for the year (including forfeitures), or
    • Defers compensation to a CODA plan.

*Remember, being an active participant will limit deductibility on outside IRAs

Question 13

Calculation of IRA Deduction

Answer 13

Fred is single, age 38, and an active participant in his employer’s qualified retirement plan. His AGI for 2022 is $70,000, and he makes the maximum contribution to his traditional IRA. What is Fred’s deductible IRA contribution?

Reduction = Contribution Limit x [(AGI - Lower Limit) ÷ Phaseout Range*]

Reduction = $6,000 x [($70,000 - $68,000) ÷ $10,000] = $1,200

Deduction = $6,000 - $1,200 = $4,800

*Phaseout Range is the difference between the upper and lower limits of the phaseout. $78,000 - $68,000 = 10,000

Question 14

IRA Deductiubiilty

Answer 14

Rob, age 32 and Sara, age 31 are married and are active participants. They file a joint return and have AGI of $110,000 for 2022. Both Rob and Sara make the maximum contribution to their respective traditional IRAs in 2022. What is their deductible IRA contribution?

Reduction = Contribution Limit x [(AGI - Lower Limit) ÷ Phaseout Range]

Reduction = $6,000 x [($110,000 - $109,000) ÷ $20,000] = $300

Deduction = $6,000 - $300 = $5,700 Each!!!

*Phaseout range for MFJ is $109,000 - $129,000 = 20,000

Phaseout Tip: AGI Phaseout for MFJ is $109 - $129k for 2022.

Question 15

TRue/False. Owner may continue to fund Roth after attaining age 72, assuming they have earned income.

Answer 15

True

Question 16

403(b) Plans - Tax Sheltered Annuities

Answer 16

403(b) or Tax Sheltered Annuities are retirement plans for the following:

• Public schools or educational organizations, and
• Tax-exempt Organizations under IRC Section 501(c)(3).
• Also, certain self-employed and other ministers.

Tip: 403(b) plans are commonly referred to as “401(k)s for schools and tax-exempt organizations,” although there are many differences.

403B very similar to 401k plans (because they are considered a CODA plan - listed under same 415 limits)

Tip: Investment choices that are available in a 403b are limited!

Question 17

457 Plans

Answer 17

Section 457 of the Internal Revenue Code allows employees of state and local governments and employees of tax-exempt nongovernmental entities to save tax-deferred compensation for retirement.

457 plans work in many ways like 401(k)s and 403(b)s. Employees contribute a portion of their salary through a payroll reduction.

The annual amount that an employee may contribute is limited (except for ineligible 457(f) plans explained below), and employee elective deferral contributions are not includible in an employee’s gross income in the year earned but are deferred until paid out or made available to the employee.

457 plans are not “qualified plans” and, thus, are not subject to many of the eligibility standards of the Internal Revenue Code, including such requirements as nondiscrimination, minimum participation, and funding and vesting standards.

A 457 plan is a “nonqualified” deferred compensation plan.

Question 18

If you have multiple CODAs (401k and 403b) you will be limited to the $20,500 (elective deferrral) contribution limit across both plans

Answer 18

There is a shared CODA or Section 415 limit. Another example or a CODA is a profit sharing plan

Any plan that allows a participant to make a cash or deferred election has a CODA. Only a profit-sharing, stock bonus, pre-ERISA money purchase pension plan or a rural cooperative plan may contain a CODA.

Question 19

Employee Fringe Benefits

Answer 19

Taxation of Fringe Benefits

The value of a fringe benefit provision is:

• Taxable as wages to the employee.
  
  • Unless specifically excepted by the code.
• A tax deduction is available for the employer.
  
  • Unless specifically excepted by the code.

Nondiscrimination

• The provision of fringe benefits is on a nondiscriminatory basis:
  
  • Most fringe benefits (but not all) require nondiscriminatory allocation to reap exclusion from employee’s taxable income.
• The employer cannot discriminate in favor of highly compensated employees.
• Exclusions are lost if the fringe benefit is provided on a discriminatory basis.

Examples of Fringe Benefits

Meals

Meals provided to an employee for the benefit of the employer.

The value of the meal is excludable from the employee’s gross income if the meals are furnished:

• For the convenience of the employer, and
• On the employer’s business premises.

Under TCJA, employers may only be allowed to deduct 50% of these meals. As an alternative, the employer may include the meal as income and still receive 100% of the deduction.

Question 20

Advantages to Group Benefits

Answer 20

• Lower rates than individuals alone,
• Better coverage than individual policies,
• The employer can deduct costs,
• The employee excludes the value from taxable income.

Question 21

COBRA Provisions

Answer 21

• Requires an employer that maintains a group health plan to continue to provide coverage under the plan to covered employees and qualified beneficiaries.
  
  • The employer can pay the premiums or require the employee to pay the premiums.
  • Required by an employer who (1) has a plan AND (2) has 20 or more full time employees in a calendar year. Part time employees meeting the 1000 hour status count as half time for purposes of COBRA qualification.
• Employee or dependent may pay up to the full group premium plus 2% administrative charge.
• insurance policy, or only a high coverage insurance policy.

60 days

Q8: How long do I have to elect COBRA coverage? If you are entitled to elect COBRA coverage, you must be given an election period of at least 60 days (starting on the later of the date you are furnished the election notice or the date you would lose coverage) to choose whether or not to elect continuation coverage.

Question 22

Group Disability Insurance

Answer 22

• Provides periodic payments for an employee who is unable to work due to sickness or accidental injury.
• Group disability insurance may be short or long term coverage.
• The employer paid premiums are deductible to employer, and excluded from the employee’s gross income.
  
  • Benefits are taxable to employee:
    
    • Many choose to forego the exclusion of the premiums from their taxable income in order for benefits to be nontaxable.

Question 23

Cafeteria Plan

Answer 23

Cafeteria Plan

A written plan that allows employees to receive cash (as compensation) or defer receipt of the cash to purchase various tax-free fringe benefits.

Cafeteria plans are deductible expenses for the employer.

The value of fringe benefits purchased are excluded from employee’s taxable income, and are not subject to payroll taxes.

Cash received by the employee is taxable income and is subject to payroll taxes.

A cafeteria plan must be nondiscriminatory.

• FSAs are a type of cafeteria plan.
  
  • Employees can defer cash into the flexible spending account.
  • Deferred amounts are not subject to income tax or payroll tax.

Question 24

Flexible Spending Accounts (FSAs)

Answer 24

• FSAs are a type of cafeteria plan.
  
  • Employees can defer cash into the flexible spending account.
  • Deferred amounts are not subject to income tax or payroll tax.
• Funds may be used towards the cost of certain employee selected benefits.
• After-tax employee expenditures become pretax employee expenditures.
• Unused funds above the annual carry over are forfeited.
  
  • 2022 carry over amount is $570.
  • Consolidated Appropriations Act 2021 allow participants in health care or dependent care FSAs to carry over unused balances from a plan year ending in:
    
    • 2020 to a plan year ending in 2021, and
    • 2021 to a plan year ending in 2022.
    • An employer could choose to provide either, or neither, of these carryover extensions.

Question 25

**Health Savings Accounts (HSAs)**

Answer 25

* Created by the Medicare Act of 2003. * Very similar to Archer MSAs with fewer restrictions, such as: * Can be established by any individual with a high deductible health insurance plan. * Contributions to the plan are deductible for AGI if made by the employee, excludable from income if made by the employer. * Earnings within the account are not taxable. **Distributions from Health Savings Accounts (HSAs)** * Distribution from an HSA for medical expenses: * Completely tax-free. * Any other distribution: * Ordinary income and subject to 20% penalty if the owner of the account is younger than 65.

Question 26

Group Long-Term Care (LTC) Insurance

Answer 26

* Premium payments are deductible by the employer, and benefits are tax-free to the employee. * **Group LTC insurance rates are less expensive than individual.** * **The employee is guaranteed coverage and renewal of coverage.** * The employer may provide on a discriminatory basis. * L**TC cannot be provided in a cafeteria plan or flexible spending account.** * If the employee pays premiums with after-tax dollars, the employee’s deduction may be limited. **Tip: IMPORTANT: Cannot be provided in a cafeteria plan or flexible spending account.**

Question 27

**Employer/Employee Insurance Arrangements**

Answer 27

* Provide a business with funds necessary to sustain business operations if a key employee/owner dies. * Buy-sell cross-purchase insurance plan. * Each partner/shareholder has a life insurance policy on each other partner/shareholder. * A key advantage of using the cross-purchase method of a buy sell is that surviving shareholders will receive a full step-up in cost basis on a deceased shareholder’s interest. The step-up in cost basis also provides favorable and valuable tax advantages in the future when the surviving shareholders sell their interests. * * Buy-sell entity insurance plan. * The entity has a life insurance policy on each partner/shareholder. * Because the corporation owns the policy and will receive the proceeds of the policy, typically the remaining owners will not receive a step-up in basis when an owner dies.

Question 28

**Split-Dollar Life Insurance**

Answer 28

A life insurance policy paid for by the employee and the employer. **Used to provide executives with life insurance at a low cost.** **Split-dollar life insurance can be discriminatory.** May be structured in one of two ways: * **The Endorsement Method** The employer owns policy and pays premium. The employer holds the right to be repaid for all premiums paid. Any death benefit in excess of employer’s right is paid to beneficiaries income tax-free * **The Collateral Assignment Method** The employee owns policy. The employer makes a loan to the employee to pay the premium of the policy. * The loan should have a reasonable interest charge. At the employee’s death, the loan is repaid with the death benefit proceeds. Additional proceeds are payable to policy beneficiaries income tax-free.

Question 29

**Key Person Life Insurance**

Answer 29

**Key Person Life Insurance** ## Footnote The entity purchases a life insurance policy on key employees whose death may cause a financial loss to the company. The entity pays premiums and is the beneficiary of the policy. Premiums are not deductible. The death benefit is not taxable.

Question 30

## Footnote Jim, age 32, earns $65,000 per year. When he retires at age 62 he believes his wage replacement ratio will be 80% and Social Security will pay him $12,000 in today’s dollars. How much must Jim save at the end of each year and make the last payment at 62, if he can earn 10% on his investments, inflation is 3% and he expects to live until age 100?

Answer 30

**Solution:** The correct answer is A. $8,513 Step #1 N = 30 (62-32) I = 3 PV = (65,000 × .80) – 12,000 = 40,000 PMT = 0 FV = ? = 97,090.50 Step #2 – BEGIN MODE N = 38 (100 – 62) I = (1.10) / (1.03) – 1 × 100 = 6.7961 PV = ? = 1,400,288.69 PMT = 97,090.50 FV = 0 Step #3 – END MODE N = 30 (62-32) I = 10 PV = 0 PMT = ? = 8,512.70 FV = 1,400,288.69

Question 31

Which of the following capital needs analysis methods mitigates the risk of outliving retirement funds and assumes at life expectancy the same account balance as when the client enters retirement? 1. Capital Preservation Model 2. Present Value of an Annuity Due Model 3. Purchasing Power Preservation Model 4. Serial Accumulation Model

Answer 31

**Solution:** The correct answer is A. The Capital Preservation Model assumes at life expectancy, as estimated in the annuity method, the client has exactly the same account balance as he/she started with at retirement. So if life expectancy is exceeded there is still capital available.

Question 32

When calculating the Wage Replacement Ratio (WRR), what percentage of income is subtracted for a self-employed individual, under the Social Security wage base, for Social Security and Medicare Taxes excluding the Additional Medicare Tax? 1. 7.65% 2. 6.20% 3. 15.30% 4. 12.40%

Answer 32

**Solution:** The correct answer is C. This is an important point to stress as many clients are self-employed and pay both employer and employee portions of the tax, 6.2% social security, 1.45% medicare (7.65%) for the employee portion, and the same for the employer portion for a total of 15.3% (7.65 + 7.65).

Question 33

**Capital Needs Analysis**

Answer 33

**Basic Annuity Model** * The **annuity method** is the simplest way to determine retirement needs yet is the least conservative method. * The annuity method assumes the individual saves for a period of time, begins taking distributions at retirement, and then dies with a zero dollars on the projected life expectancy date. **Capital Preservation Model** * The capital preservation model assumes that at life expectancy, as estimated in the annuity model, the client has exactly the same account balance as he started with at retirement. * Provides the amount that will mathematically provide the “annuity method” amount at date of death. * Designed to be more conservative than the annuity approach in which your last dollar is spent at exactly the life expectancy thus there is some risk of outliving the money. The capital preservation model builds a “cushion” of savings in case factors change. **Purchasing Power Preservation Model** * The **purchasing power preservation** model assumes that the client will have a capital balance of equal purchasing power at life expectancy as he did at retirement. * Provides the amount that will mathematically provide the inflation - adjusted “annuity method” capital needs at the date of death. * The purchasing power preservation model is designed to be even more conservative than the other two methods.

Question 34

An individual has determined utilizing the annuity method of capital needs analysis that he needs $1,045,656 at the beginning of his retirement to meet his retirement life expectancy goals. If this individual would like to be more conservative in his retirement planning forecast and maintain this capital balance throughout his retirement life expectancy of 32 years, given an expected earnings rate of 6%, and an inflation rate of 3% during the period, how much more would he need to have at the beginning of his retirement? 1. $162,032 2. $406,067 3. $417,246 4. $674,023

Answer 34

**Solution:** The correct answer is A. N = 32 I = 6% FV = $1,045,656 PMT = $0 PV = $162,032 (Answer)

Question 35

Andrea died this year (2022) at the age 77, leaving behind a qualified plan worth $200,000. Andrea began taking minimum distributions from the account after attaining age 72 and correctly reported the minimum distributions on her federal income tax returns. Before her death, Andrea named her granddaughter, Reese age 22, as the designated beneficiary of the account. Now that Andrea has died, Reese has come to you for advice with respect to the account. Which of the following is correct? 1. Reese must distribute the entire account balance within five years of Andrea’s death. 2. Reese must distribute the entire account balance within ten years of Andrea's death. 3. In the year following Andrea’s death, Reese must begin taking distributions over Andrea’s remaining single-life expectancy. 4. Reese can roll the account over to her own name, treat the account as her own and name a new beneficiary.

Answer 35

**Solution:** The correct answer is B. SECURE Act 2019 changed distribution rules for beneficiaries of account owners that died after 12/31/19. Whether the account owner died before RBD (Required Begin Date) or after, the distribution rules are now the same. All Designated Beneficiaries must withdraw the account balance within 10 years of the owner's death. Eligible Designated Beneficiaries may distribute over their life expectancy in the year following owner's death. Eligible Designated Beneficiaries are: * Surviving spouse for the employee or IRA owner * Child of employee or IRA owner who has not reached majority * At age of majority becomes a designated beneficiary * Chronically ill individual * Any other individual who is not more than ten years younger than the employee or IRA owner Non-Designated Beneficiaries (no listed Beneficiary) rules are pending clarification from the IRS but we believe must be distributed within 5 years of the account owner's death. The new rules were not clear if the difference for before or after RBD were still applicable. Reese is more than 10 years younger than Andrea, which makes her a Designated Beneficiary.

Question 36

In August of this year, Paul is turning 72. He is currently a participant in his 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 required minimum distribution for this year? 1. $16,423 2. Paul does not need to take an RMD. 3. $21,898 4. 22,642

Answer 36

**Solution**: The correct answer is B. Paul is actively working and can delay his RMD based on his current employment. The SECURE Act 2019 also change the RMD Begin date to age 72. If Paul retires by age 72, he will begin RMDs. If he continues working, he can continue to defer this RMDs.

Question 37

Qualified Plans: Pension vs. Profit Sharing

Answer 37

Question 38

Defined Contribution Limits

Answer 38

Question 39

Catch Up Contributions

Answer 39

Age 50 and older - 401k, 403(b) Age 55 and older - HSA

Question 40

Tom, age 39, is an employee of Star, Inc., which has a profit sharing plan with a CODA feature. His total account balance is $412,000, $82,000 of which represents employee elective deferrals and earnings on those deferrals. The balance is profit sharing contributions made by the employer and earnings on those contributions. Tom is 100 percent vested. Which of the following statements is/are correct? 1. Tom may take a loan from the plan, but the maximum loan is $41,000 and the normal repayment period will be 5 years. 2. If Tom takes a distribution (plan permitting) to pay health care premiums (no coverage by employer) he will be subject to income tax, but not the 10% penalty.

Answer 40

**Solution:** The correct answer is D. (neither 1 nor 2) Statement 1 is incorrect because he can take a loan equal to one-half of his total account balance up to $50,000. Statement 2 is incorrect because the exemption from the 10% penalty only applies to IRAs and only to the unemployed.

Question 41

Plan Loans

Answer 41

**Plan Loans** * Plan loans are permissible by any qualified plan. However, they are usually only found with CODA type plans. * Plan loans may not exceed the lesser of: * $50,000, or * ½ of the participant’s vested account balance.

Question 42

Which of the following is true regarding QDROs? 1. The court determines how the retirement plan will satisfy the QDRO (i.e., split accounts, separate interest). 2. In order for a QDRO to be valid, the order must be filed on Form 2932-QDRO provided by ERISA. 3. All QDRO distributions are charged a 10% early withdrawal penalty. 4. A QDRO distribution is not considered a taxable distribution if the distribution is deposited into the recipient’s IRA or qualified plan.

Answer 42

**Solution:** The correct answer is D. The plan document, not the court, determines how the QDRO will be satisfied. No particular form is required for a QDRO, although some specific information is required. Form 2932-QDRO is not a real form.

Question 43

In July of last year Paul turned 71. He retired years ago and was a participant in his former employer’s profit sharing plan. His profit sharing plan had an account balance $600,000 on December 31 of last year, and $450,000 on December 31 of the year prior. According to the Uniform Lifetime Table the factors for ages 72, and 73 are 27.4 and 26.5 respectively. What is the amount of Paul’s first required minimum distribution that he must take by the deadline? 1. 21,898 2. $22,641 3. $16,981 4. $16,423

Answer 43

**Solution:** The correct answer is A. $600,000/27.4 = $21,898 is his RMD. Paul is age 72 in the current year and he will be required to take his first distribution for this tax year. The RMD for the first year may be delayed until April 1 of the next year but is still based on the year the taxpayer turns 72. If they delay the first RMD until April 1 of the next year, they will then be required to take two RMDs, the RMD for age 72 that was delayed and the RMD for age 73. SECURE Act changed distributions for those reaching 70 1/2 after 12/31/19.

Question 44

457

Answer 44

457 are not qualified plans

Question 45

403bs are not a qualified plan