Retirement Planning

Final Exam

(Chapters 2 14)

Which of the following is an example of a qualified retirement plan?Rabbi trust.401(k) plan.Nonqualified stock option plan.ESPP.

John 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 Johns wage replacement ratio to be based on the above information?65.68%.70.41%.73.33%.91.11%.

Which of the following factors may affect a retirement plan?

Career earnings.

Retirement life expectancy.

Mortality.

Savings rate.

1 and 2.2 and 3.1, 3, and 4.All of the above.

Christian wants to retire in 15 years when he turns 62. Christian wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. He expects to receive $25,714 per year from Social Security in todays dollars at full retirement age of 67. However, he will take Social Security early at age 62, when he retires. Christian is aggressive and wants to assume an 8% annual investment rate of return and that inflation will be 3% per year. Based on his family history, Christian expects that he will live 30 years in retirement (age 92). If Christian currently earns $80,000 per year and he expects his raises to equal the inflation rate, how much does he need at retirement to fulfill his retirement goals? $874,794.$1,022,807.$1,072,458.$1,583,152.

Which of the following vesting schedules may a non-top-heavy profit sharing plan use?

2 to 6 year graduated.

3-year cliff.

1 to 4 year graduated.

3 to 7 year cliff.

1 only.2 and 3.1, 2, and 3.1, 2, 3, and 4.

Jason, age 52, is a highly compensated employee who earns $300,000 per year and is a participant in his employers 401(k). His employer also made a 20% profit sharing plan contribution during the year. Ignoring the ADP test requirements, what is the maximum amount that Jason can defer under the 401(k) during 2016?$0.$6,000.$18,000.$24,000.

Randy, age 63, is a participant in a stock bonus plan sponsored by XYZ, Inc., a closely held corporation. Randys account was credited with contributions in shares of XYZ stock to the stock bonus plan and XYZ Inc. had the following income tax deductions:

Years	# of Shares	Deduction per Share (At Time of Contribution)
Year 1	100	$12
Year 2	125	$15
Year 3	150	$8
Year 4	200	$18
Year 5	400	$20
TOTAL	975	Simple Average Price $14.75

Randy terminates employment in August of Year 6 and takes a distribution from the plan consisting of 975 shares of XYZ, Inc., having a fair market value of $24,000. If Randy sells the stock for $40,000 six months after receiving the distribution, which of the following statements are true?

Randy has ordinary income of $14,382 in year 6.

Randy has long term capital gain of $24,000 in year 6.

Randy has long term capital gain of $8,125 in year 6.

Randy has a short term capital gain of $16,000 in year 7.

1 only.4 only.3 and 4.2 and 4.

Alicia owns Advertising Solutions, Inc. (ASI) and sells 100% of the company stock on January 2 of this year to an ESOP for $2,000,000. Alicia had an adjusted basis in the ASI stock of $150,000. She purchased the stock on July 3, 2001. Which of the following statement(s) are true?

Alicia will not recognize long term capital gain or ordinary income this year if she reinvests the proceeds of the sale in qualified replacement securities within 12 months.

Alicia must recognize $1,850,000 of long term capital gain at the time of the sale to the ESOP.

If Alicia dies before selling the qualified replacement securities when the fair market value of those qualified replacement securities is $4,000,000, her heirs will have an adjusted basis in the qualified replacement securities of $2,150,000.

1 only.2 only.1 and 3.None of these statements are true.

Which of the following qualified plan distributions are subject to a 10% early withdrawal penalty?

Carolyn, age 56, currently employed by UBEIT Corporation, takes a $125,000 distribution from the UBEIT 401(k) plan.

Brad, age 60, takes a $1,000,000 distribution from his employers profit sharing plan. Ten days after receiving the $800,000 check (reduced for 20% withholding), Brad deposited the $800,000 into a new IRA account.

Tara, age 22, withdraws $2,000 of her contributions from her 401(k).

1 only.3 only.2 and 3.1 and 3.

In August of this year, Paul turned 71. He was a participant in his former employers 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 70, 71, and 72 are 27.4, 26.5, and 25.6 respectively. What is the amount of Pauls first required minimum distribution for this year?$16,423.$16,981.$17,578.$22,641.

George, age 60, is a member of We Work, LLC. We Work sponsors a profit sharing plan. Georges portion of the net income was $200,000 and one-half of his self employment taxes were $8,258 for this year. If We Work makes a 25% of salary contribution on behalf of all of its employees to the profit sharing plan, how much is the contribution to the profit sharing plan on behalf of George?$38,348.$42,000.$47,935.$50,000.

Justin, age 42, had the following items of income:

Earnings as a general partner in a partnership of $400.

Workers compensation of $600.

Gambling losses of $200.

Distribution from profit sharing plan of $1,500.

Wages from an S Corp of $2,000.

Income from Municipal Bond Portfolio of $100,000.

Justin also contributed $1,000 to his Roth IRA during the year. What is the maximum deduction Justin can take for a traditional IRA contribution for 2016?

$1,000.$1,400.$5,500.$6,500.

Shawn, a married 29 year old, deferred 10% of his salary, or $10,000, into a 401(k) plan sponsored by his employer this year. His wife was unemployed all year and did not receive unemployment compensation. Assuming Shawn has no other income, what is the maximum contribution Shawns wife can make to her Roth IRA for 2016?$0.$1,000.$5,500.$6,500.

Maxine, age 35, earns $200,000 annually from ABC Incorporated. ABC sponsors a SIMPLE, and matches all employee deferrals 100% up to a 3% contribution. What is the maximum employee deferral contribution to Maxines SIMPLE account for 2016?$12,500.$18,000.$18,500.$21,500.

Which of the followings statement(s) regarding 403(b) plans is true?

Assets within a 403(b) plan may be invested in annuities.

Assets within a 403(b) plan may be invested in mutual funds.

All 403(b) plans must pass the ADP test.

In certain situations, a participant of a 403(b) plan can defer an additional $25,000 (catch up) to a 403(b) plan in a single plan year.

1 only.1 and 2.2 and 3.1, 2, and 4.

Vance has a vested account balance in his employer-sponsored qualified profit sharing plan of $80,000. Vance had an outstanding loan balance within the prior 12 months of $27,000 that has been reduced to $18,000. What is the maximum loan Vance could take from this qualified plan, assuming the plan permitted loans?$22,000.$23,000.$40,000.$50,000.

RCM Incorporated sponsors a qualified plan that requires employees to meet one year of service and to be 21 years old before being considered eligible to enter the plan. Which of the following employees are not eligible?

Donald, age 18, who has worked full-time with the company for 3 years.

Rachel, age 22, who has worked full-time with the company for 6 months.

Randy, age 62, who has worked 500 hours per year for the past 6 years.

Theodore, age 35, who has worked full-time with the company for 10 years.

4 only.1 and 2.3 and 4.1, 2, and 3.

Bank Corp has a defined benefit plan with 90 employees. 10 of the employees belong to a union. 20 of the employees have just started working within the last nine months. What is the minimum number of employees the defined benefit plan must cover to conform with the requirements set forth by the IRC?24.36.42.50.

Margaret earned $3,000 during January of this year. She was unemployed for February and March, and during April she earned an additional $2,000. She did not work again until December, during which time she earned $1,700. How many quarters of coverage has Margaret earned for Social Security during this year?1.3.4.7.

Which of the following statements is true?Social Security payments are not adjusted for inflation.A workers average indexed monthly earnings (AIME) will be their Social Security benefit at retirement.If an individual who will reach full retirement age for Social Security purposes at the age of 67 begins taking benefits at age 62, they will take a 30 percent reduction in benefits.A 68 year old worker will have their Social Security benefits reduced based on earnings from their current employment.

A single individual has an adjusted gross income of $28,000, no tax-exempt interest, and Social Security benefits of $14,000. How much of this individuals Social Security benefits is subject to income tax?$5,000.$5,350.$7,000.$11,900.

Which of the following situations might convince an employer to choose a nonqualified retirement plan over a qualified profit-sharing plan?The employer, a closely held C Corporation, is in the 15% income tax bracket and the sole owner of the employer is in the 35% income tax bracket. The employer only wants to meet the organizations objectives of attracting executives, retaining executives, and providing for a graceful transition in company leadership. The employer is not concerned with providing retirement benefits to the rank and file employees.The employer is not willing to pay high administrative costs.All of the above.

Which of the following statements concerning rabbi trusts is(are) correct?A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employers creditors, but any funds in the trust cannot generally be used by or revert back to the employer.A rabbi trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employers creditors.A rabbi trust can only be established by a religious organization.All of the above are correct.

Jackie receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $22. Jackie exercises these options 3 years from the date of the grant when the FMV of the stock is $30. Jackie then sells the stock 3 years after exercising for $35. Which of the following statements is (are) true?

At the date of grant, Jackie will have ordinary income equal to $22.

At the date of exercise, Jackie will have W-2 income of $8.

At the date of sale, Jackie will have long-term capital gain of $13.

Jackies employer will not have a tax deduction related to the grant, exercise or sale of this ISO by Jackie.

3 only.3 and 4.2, 3, and 4.1, 2, and 4.

Marguerite received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $22. Marguerite exercises the options 3 years after the grant date when the FMV of the stock was $30. Marguerite then sells the stock 3 years after exercising for $35. Which of the following statements are true?

At the date of the grant, Marguerite will have ordinary income of $22.

At the date of exercise, Marguerite will have W-2 income of $8.

At the date of sale, Marguerite will have long term capital gain of $5.

Marguerites employer will have a deductible expense in relation to this option of $22.

3 only.2 and 3.2, 3, and 4.1, 2, 3, and 4.

Which of the following statements concerning tax considerations of nonqualified retirement plans is (are) correct?

Under IRS regulations an amount becomes currently taxable to an executive even before it is actually received if it has been constructively received.

Distributions from nonqualified retirement plans are generally subject to payroll taxes.

1 only.2 only.1 and 2.Neither 1 nor 2.

James is employed by a large corporation with 400 employees. The corporation provides its employees with a no-cost gym membership at the local public YMCAs. The cost of the membership is $60/month which is completely paid for by James employer for all employees. How much, if any, must James include in his yearly gross income related to this fringe benefit?$0.$60.$600.$720.

Which of the following situations would create an inclusion in an employees gross income?Kay is the director and manager of Holiday Hotel. As a condition of her employment, Kay is required to live at the hotel. The value of this is $1,000 per month.Natalie is a secretary at JKL Law Firm. JKL provides her with free soft drinks. Natalie estimates that she drinks $20 worth of soft drinks per month.Brian is an airline pilot with We Dont Crash Airlines, Inc. and is allowed to fly, as a passenger, for free on the airline whenever an open seat is available.Eric moved from Houston to New Orleans. His expenses for the move included $400 of truck rental costs, $100 of lodging and $200 of pre-move house hunting expenses. Erics employer reimbursed him $600.

Judy is covered by a $200,000 group-term life insurance policy of which her daughter is the sole beneficiary. Judys employer pays the entire premium for the policy, for which the uniform annual premium is $0.75 per $1,000 per month of coverage. How much, if any, of the cost of the group-term life insurance is excluded from Judys gross income on an annual basis?$0.$450.$1,350.$1,800.

A business valued at $4,000,000 has 4 partners. The partnership purchases a life insurance policy on each partners interest. This is an example of:A buy-sell entity insurance plan.A partnership buy/sell plan.A buy-sell cross-purchase insurance plan.A key person plan.

A non-safe harbor 401(k) plan allows plan participants the opportunity to defer taxation on a portion of regular salary simply by electing to have such amounts contributed to the plan instead of receiving them in cash. Which of the following statements is/are rules that apply to 401(k) salary deferrals?

Salary deferral into the 401(k) plan are limited to $18,000 for individuals younger than 50 for 2016.

A non-discrimination test called the actual deferral percentage test applies to salary deferral amounts.

1 only.2 only.Both 1 and 2.Neither 1 nor 2.

Retirement plan participants who wish to take advantage of a qualified plans loan provision must agree to the following restrictions on the amount of the loan and how it is repaid:Generally, a participant may borrow no more than $50,000 or one-half of the vested account balance, whichever is less.A participants loan must be repaid within 5 years, unless the loan is used to acquire a participant's principal residence.A participant is allowed to repay the loan anytime within the 5 year period.Both a and b.

Mary, who turned 90 last December, retires and takes a lump sum cash distribution of $600,000 from her former employers profit sharing plan this year. Mary had worked for the employer since 1969. Which of the following taxation options are available for Mary in the year of this distribution?

Ten-year forward averaging.

Pre-74 capital gain treatment.

Net unrealized appreciation.

Five-year forward averaging.

1 and 4.1 and 2.1, 2, and 3.2, 3, and 4.

Which of the following are characteristics of a SIMPLE?Contributions to a SIMPLE are 100% vested at all times.The maximum contribution to a SIMPLE is the lesser of 25% of compensation or $53,000 for 2016.A SIMPLE permits employer discretionary contributions.A SIMPLE imposes a 25% penalty on distributions prior to 59.

Which of the following people is always considered highly compensated for 2016?Robin, a 1% owner who earns $80,000 per year.Helen, who earned $195,000 last year and is the 40th highest paid employee of 100 employees.Casey, a 20% owner who earns $19,000 per year.Donna, a 5% owner who earns $45,000 per year.

Carla would like to determine her financial needs during retirement. All of the following are costs she might eliminate in her retirement needs calculation except: The $175 per month of parking expenses for parking at her place of employment.The $1,500 mortgage payment she makes that is scheduled to end 2 years into retirement.The Medicare taxes she pays each year. The $2,000 per month she deposits into savings.

Which of the following vesting schedules may a top-heavy defined benefit plan use?

Years of Service	(A)	(B)	(C)	(D)
1	5%	10%	0%	0%
2	10%	20%	0%	0%
3	15%	45%	0%	20%
4	20%	65%	100%	40%
5	60%	100%	100%	60%
6	100%	100%	100%	80%
7	100%	100%	100%	100%

Crowne, a manufacturing company, sponsors a qualified defined benefit pension plan covered by the PBGC and a qualified profit sharing plan. Crownes annual covered compensation is $1,000,000 and the actuary has determined that a $200,000 contribution must be made to the defined benefit plan for the year to meet the minimum funding requirements. If Crowne would like to contribute the maximum to their defined contribution plan for the year, how much could Crowne contribute to the defined contribution plan?$25,000.$42,000.$50,000.$250,000.

Robbie is the owner of SS Automotive and he would like to establish a qualified pension plan. Robbie would like most of the plans current contributions to be allocated to his account. He does not want to permit loans and he does not want SS Automotive to bear the investment risk of the plans assets. Robbie is 32 and earns $700,000 per year. His employees are 25, 29, and 48 and they each earn $25,000 per year. Which of the following qualified pension plans would you recommend that Robbie establish?Target benefit pension plan.Cash balance pension plan.Money purchase pension plan.Defined benefit pension plan using permitted disparity.

Paper Chasers, a shop that specializes in confetti has a 401(k) plan that allows plan loans up to the legal limit allowed by law. Participants must repay the loans under the most generous repayment schedule available by law. Paper Chasers plan has the following employee information:

Employee	401(k) Balance	Outstanding Loan
Sara	$200,000	$0
Kay	$250,000	$19,000
Judy	$14,000	$2,000
Brian	$35,000	$0

Which of the following statements is correct?

If Kay repays her $19,000 loan by the end of this year, she may take a loan of $50,000 anytime next year.Sara can borrow $100,000 (50% of her vested account balance) from her account.The maximum Judy can borrow from her account is $8,000.Brian could borrow $17,500 from his plan for the purchase of a personal residence, but he would have to repay the loan within ten years.

Which of the following is true regarding negative elections?

A negative election is a provision whereby the employee is deemed to have elected a specific deferral unless the employee specifically elects out of such election in writing.

Negative elections are no longer approved by the IRS.

When an employer includes a negative election in its qualified plan, the employer must also provide 100% immediate vesting.

1 only.1 and 3.2 and 3.1, 2, and 3.

On January 15^th of last year, Rustin retired from Fox, Inc., a national plastics supplier. When Rustin retired, he had 1,000 shares of Fox, Inc. stock in his stock bonus plan. Fox, Inc. took deductions equal to $20 per share for the contributions made on Rustins behalf. At retirement, Rustin took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $35 per share. On July 15^th of this year, Rustin sold the stock for $40 per share. Which of the following will Rustin report on his tax return at the date he sells the Fox, Inc. stock? $0 of ordinary income, $0 of short-term capital gain, $20,000 of long-term capital gain.$20,000 of ordinary income, $20,000 of short-term capital gain.$35,000 of ordinary income, $5,000 long-term capital gain.$40,000 of ordinary income.

One of the disadvantages of an ESOP is that the stock is in an undiversified investment portfolio. Which of the following statements is correct about ESOPs?

An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 25 percent of the account balance be diversified.

An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution.

1 only.2 only.1 and 2.Neither 1 nor 2.

Which of the following is/are elements of an effective waiver for a preretirement survivor annuity?

The waiver must be signed within six months of death.

The waiver must be signed by a plan participant.

The waiver must be notarized or signed by a plan official.

3 only.1 and 2.2 and 3.1, 2, and 3.

Generally, which of the following are noncontributory plans?

401(k) and money purchase pension plans.

401(k) and thrift plans.

Thrift plans and ESOPs.

Money purchase pension plans and profit sharing plans.

4 only.1 and 2.3 and 4.1, 2, 3, and 4.

Generally, younger entrants are favored in which of the following plans?

Defined benefit pension plans.

Cash balance pension plans.

Target benefit pension plans.

Money purchase pension plans.

4 only.2 and 4.1 and 3.2, 3, and 4.

Mary, age 46, is a self-employed financial planner and has Schedule C net income from self-employment of $22,000. Her self-employment tax for the year is $6,000. She has failed to save for retirement until now. Therefore, she would like to make the maximum contribution to her profit sharing plan. How much can she contribute to her profit sharing plan account?$3,800.$4,400.$4,750.$5,500.

What is the first year in which a single taxpayer, age 48 in 2016, could receive a qualified distribution from a Roth IRA, if he made a $5,000 contribution to the Roth IRA on April 1, 2016, for the 2015 tax year?2016.2019.2020.2027.

Which of the following people cannot make a deductible contribution to a traditional IRA for 2016?

	Person	AGI	Active Participant of Qualified Plan	Marital Status
1.	Dianne	$79,000	Yes	Married
2.	Joy	$50,000	Yes	Single
3.	Kim	$280,000	No	Single
4.	Loretta	$75,000	Yes	Single

None.4 only.2 and 4.1, 2, 3, and 4.

Henry Hobbs, age 42, has compensation of $72,000. The normal retirement age for his 457(b) plan is age 62. Henry has unused deferrals totaling $21,000 as of the beginning of the year. How much can Henry defer into his 457(b) public plan for 2016?$18,000.$24,000.$27,000.$36,000.

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?$0.$3,000.$7,000.$14,000.Jennifer received 1,000 SARs at $18, the current trading price of Clippers, Inc., her employer. If Jennifer exercises the SARs three years after the grant when Clippers stock is $20 per share, which of the following statements is true?Jennifer will have an adjusted taxable basis of $18,000 in the Clippers, Inc. stock.Jennifer will have W-2 income equal to $20,000.Jennifer will have long-term capital gain of $2,000.Jennifer will have W-2 income equal to $2,000.

Mike was awarded 1,000 shares of restricted stock of B Corp at a time when the stock price was $14. Assume Mike properly makes an 83(b) election at the date of the award. The stock vests 2 years later at a price of $12 and Mike sells it then. What are Mikes tax consequences in the year he makes the 83(b) election?Mike has W-2 income of $12,000.Mike has a long-term capital loss of $2,000.Mike has W-2 income of $14,000.Mike has a $12,000 long-term capital gain.

Mitchell LLC is a manufacturing company based in Boulder, Colorado. Mitchell manufactures car stereo equipment for high-end performance cars. Mitchell provides the following fringe benefits to employees:

Mitchell made an agreement with the N-Shape athletic facility in the same building as Mitchells offices. The monthly fee is generally $100, but is paid for by Mitchell for any employees who are interested.

Mitchell allows employees to purchase equipment for themselves at a 40% discount, even though the cost of goods sold is 45%.

Which of these employee fringe benefits will be taxable to employees?

1 only.2 only.Both 1 and 2.Neither 1 nor 2.

Alpha partnership has 8 partners who have entered into a binding buy/sell agreement that requires any surviving partners to purchase the partnership interest of any partner to die. The partnership uses an entity approach to fund this arrangement. How many policies are required to satisfy this arrangement?1.8.16.64.

Bruno terminated employment with Philips Bar and Grill (PBG) after completing five years of service. PBG sponsors a 401(k) profit sharing plan with a dollar for dollar match up to 6% of compensation in which Bruno had an account balance of $50,000. Of that account balance, $20,000 was attributable to PBG noncontributory contributions and $30,000 was attributable to the combination of Brunos deferral contributions and the equivalent employer match on those deferral contributions. At this time, considering Bruno has terminated employment and that PBGs 401(k) profit sharing plan is not top-heavy and follows the least generous graduated vesting schedule permitted under PPA 2006, what is Brunos vested account balance in the 401(k) profit sharing plan?$43,000.$44,000.$46,000.$47,000.

Monarch Machines sponsors a 15% money purchase pension plan and 401(k) profit sharing plan in which the employees are permitted to defer up to 75% of their compensation. Monarch Machines matches employee deferral contributions 100% up to 6% of deferred compensation. If James, age 31, is a highly compensated employee who earns $200,000, what is the maximum he could receive as an employer match in 2016 from Monarch if the ADP of the NHC is 4%?$8,000.$10,500.$11,500$12,000.

Sodium Services, Inc. (SSI) sponsors a SIMPLE for its employees with a 100% match up to 3% of compensation. Mary, age 42, has been an SSI employee for 14 years. In the current year, Mary earns $35,000 and defers $10,000 to the SIMPLE plan. What is the maximum matching contribution to Marys SIMPLE from SSI?$0.$1,050.$3,000.$10,000.

Marisol was granted 100 NQSOs on January 12^th, five years ago. At the time of the option grant, the value of the underlying stock was $100 and the exercise price was equal to $100. If Marisol exercises the options on August 22^nd of this year, when the stock is valued at $145, what are the tax consequences (per share) to Marisol?$45 of W-2 income, $100 of short-term capital gain.$100 of W-2 income, $45 of short-term capital gain.$145 of W-2 income.$45 of W-2 income.

On January 1^st, three years ago, Randy was awarded 15,000 ISOs at an exercise price of $3 per share when the fair market value of the stock was equal to $3. On April 17^th this year, Randy exercised all of his ISOs when the fair market value of the stock was $5 per share. At the date of exercise, what are the tax consequences to Randy?$0 W-2 income, $30,000 AMT adjustment.$0 W-2 income, $75,000 AMT adjustment.$30,000 ordinary income, $30,000 AMT adjustment.$75,000 ordinary income, $0 AMT adjustment.