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Effective Sample Tests and Study Strategies
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Gift splitting - ansAllows a married couple to double their allowable annual exclusions is only allowed for married couples Ownership limited to spouses only - ansJoint tenancy tenancy by the entirety community property Grantor retained interest Trust Grit - ansGrantor can receive all income earned by the trust Qualified terminable interest Property Trust Q-tip - ansIncome of a Q-tip goes to the grantor's spouse Charitable lead Trust CLT - ansThe income goes to charity Power of appointment trust POA - ansIncome goes to the grantor's spouse Valuation date for gifts - ansThe date on which the transfer is completed Gross estate - ansIncludes all the property that is subject to the federal estate tax whether or not owned by the decedent and whether or not included in the the probate or taxable estate Taxation of reinvestment of ordinary dividends - ansQualified dividends are subject to the same tax rates applicable to long-term capital gains The basis for charitable contribution deduction for stock - ansBased on the current fair market value of the stock Taxation of substitute payments in lieu of a dividend - ansSubstitute payments in lieu of a dividend are not subject to preferential treatment and are treated as ordinary income How does a stock dividend affect basis - ansThe basis is reduced to provide basis for shares are received as a stock dividend Net capital loss amount - ans$3,000 per year are deductible Taxation of qualified dividends - ansDividends are taxed at 15% or 20% if the dividends fall into the 39.6% bracket Text treatment for a shareholder participating in common stock dividend reinvestment program - ansThe shareholder is treated as if he received a cash dividend equal to the fair market value of the shares purchased under the plan When is earned income taxed - ansIt is taxed in the year when the check was received Medical expenses and AMT - ansMost that are deducted are allowed for AMT purposes 10% of AGI Bargain element on exercise of an incentive stock option and AMT - ansIncluded as a preference item for AMT Private activity municipal bonds and AMT - ansInterest from private activity Muni bonds is an AMT preference item except for bonds issued in 2009 and 2010 Home mortgage interest and AMT - ansHome mortgage interest is allowed for regular and AMT Adjusted gross income - ansIncome remaining after subtracting the adjustments to income Domestic Partners transfer wealth to the other vs legal spouse - ansGovernor domestic partner cannot take a marital deduction in excess of the gift tax annual exclusion for the transfer while a donor spouse could
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If a domestic partner is appointed as conservator or Guardian - ansThe individual should make his or her desire to have the domestic partner appointed by executing written documents approved by state law as intestacy laws typically follow the bloodline Per year 4 retirement benefit increase over full retirement age - ans8% Qlac - ansSuitable for those who are healthy and have a family history of longevity and those entering retirement with Social Security as their only source of guaranteed income Bucket approach to withdrawals from retirement savings - ans... Proper written Financial goal - ansSpecific in terms of gold dollar amount and time frame Income replacement percentages - ansIncome replacement percentages vary between low- income and high-income retirees. Income replacement ratios should not be used as the only basis for planning. Are useful for younger clients as a guide to their long-term planning and investing. Investment policy attributes - ansLong-term perspective. Realistic. Clearly defined. Asset allocation strategies - ansTactical. Core satellite. Strategic Correlation and diversification - ansThe lowest correlation provides the most diversification Two major risks associated with Common Stocks - ansMarket risk and business risk Two major risks associated with Bond investing - ansInterest rate risk and purchasing power risk Calculating yield to maturity on the calculator - ansSet the end mode Allowable earnings limit for 2015 for no reduction in Social Security benefits - ans$15, earned income Social Security benefits available when fully insured worker begins at full retirement age - ansAt full retirement age the workers spouse will receive at least 50% of the workers PIA. Capitulo 4 retirement age the PIAA is reduced by 25/36 of 1% for each of the first 36 months the spouse is under full retirement age How does tax-exempt interest affect social security taxation - ansAll tax-exempt income is included to determine a social security taxation a maximum of 85% of Social Security benefits are subject Features of defined benefit plans - ansWrite a predetermined fix retirement benefit for participating employees Do Target benefit plans offer Survivor annuity benefits to married participants - ansQualified Pension Plan such as Target benefit plans are required to offer Survivor annuity benefits to married participants qualified profit sharing plans including stock bonus plans and Aesop's generally are not subject to the Survivor annuity requirements but more typically offer lump sum payouts Describe an in lieu of plan - ansA pure Deferred Compensation Plan is sometimes called in lieu of plan because the employee is receiving the employer's promise to pay benefits in lieu of current income. death benefit plans provide no life time benefits to the employee participant the employer helps to fund the retirement benefit provided by a supplemental
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defined contribution plan the plan May provide for forfeiture is either to be reallocated to remaining participants accounts are applied to reduce the employer contribution Basic provisions of Target benefit plans - ansFind contribution. Participants bear the risk of investment results. The employee deduction for contributions is limited to 25% of covered payroll. Unlike other defined-contribution plans Target benefit plans favorite older participants because the contribution allocations are skewed to revive the faster funding necessary for older participants with fewer years remaining until retirement The company has payroll of 800000 what is the maximum contribution to integrated profit sharing plan - ans$200,000 which is 25% of cover payroll Compare a 457 plan and a tax-sheltered annuity - ansBoth plans are based on contracts with employer. Both plans are subject to a $18,000 limit. Both plans are subject to rollover rules that are similar to the requirements that apply to qualified plans. Both 403b and TSA and section 457 plans are based on contracts with employer. Both plans are also subject to rollover rules. However 457 plans are available to employees of state and local governments not just employees of public school system as a section 501 c 3 tax-exempt organizations Tax consequences to employer and employee under a non-qualified plan - ansAn employer will not receive a deduction for contributions until the employee recognizes income upon receipt. Payer gets the deduction only when benefits become taxable income to the participant when they are received or constructively received. Spouse makes $153 the other $111,000 and has a qualified plan how much can you contribute to an IRA - ansThey can each contribute $5,500 the combined contribution cannot exceed the total compensation about spouses If one spouse has a retirement plan at work can the other spouse still fully deduct Ira contributions - ansYes unless the couple's combined AGI exceeds 183000 phasing out to $193,000 in 2015 Nonqualified deferred compensation example of substantial risk of forfeiture provisions - ansPotential risk of forfeiture requires that the employee's right to receive benefits is contingent upon performance of substantial Services death and disability do not create substantial risk of forfeiture since they do not involve performance of services A characteristic of an unfunded excess Benefit Plan - ansUnfunded excess benefit plans need not comply with either the disclosure or reporting requirements of erisa Taxation of a funded Deferred Compensation Plan - ansWill be taxable to an employee if nonforfeitable. Unless the plan benefits are subject to substantial risk of forfeiture Provisions contributions to a funded nonqualified Deferred Compensation Plan will be constructively received by the participant and subject to tax Characteristics of unfunded supplemental executive retirement plans - ansThe employee has no securing rights and the benefits to be paid. These plans are often referred to as Top Hat plans because they provided to top Executives of the company. SERPs provide no security to the employees and unfunded serp is also often referred to as a top-hat plan the employee has
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nothing more than the employer's promise to pay future benefits these plans generally are subject only to the reporting and disclosure requirements of Erisa Top Hat plans must be unfunded SERP can be funded although they are normally unfunded substantial risk of forfeiture Provisions generally are not necessary in unfunded plans Rabbi Trust - ansEmployer sponsor of a non-qualified deferred comp plan ______ assets and a rabbi trust or receive earnings and dividends paid on plan assets as taxable income the SS and the earnings and those assets remain property of the sponsor and subject to the sponsors predators. Deductions are usually taken in the year the employee receives the benefit. A top- hat plan and formally it funded with a rabbi trust may be offered to a select group of management only. Income averaging is not available for non qualified Deferred Compensation Plan distributions. What is a possible disadvantage of a simplified employee pension SEP for an employer - ansThe vesting requirements for a separate _____ forfeitures contributions must be 100% vested as a general rule an employer does not have further investment responsibility after contributions are made to sep IRAs the contribution formula of a set is not required to be fixed. Employer contributions to assets are not subject to payroll taxes Non springing durable power of - ansGives authority to act after the principal becomes incapacitated but does not survive death. A springing durable power of attorney becomes effective when the principal becomes incompetent or incapacitated Medicare part A patient must pay - ansAll cost for a hospital stay Beyond 150 days How many days will Medicare pay for a Skilled Nursing Facility - ansApproved charges for the first 20 days in a Skilled Nursing Facility who is currently eligible for Medicare - ansSomeone in an occupation covered by Social Security and is over age 65. Someone who has never had an income and under 65 is not eligible. Basic provisions of Medicare Part B - ansMedically necessary services: Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice. Preventive services: Health care to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best. Test 2 - ansTest 2 First 2 steps ofRetirment Planning Process - ans1) Establish and define client-counselor relationship including compensation
- Gather Client Data Cash Flow Statement covers - ans1 year IRA contributions show on what statement? - ansStatement of Financial Condition An early Retirement BudgetingStep - ansUnderstanding goals and dreams and their related costs Set Calculator to 4 decimal places - ansdown arrow, DISP, #of places
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a worker's Social Security full retirement age is 66. What percentage of the worker's full retirement age benefits will be paid to her at age 62? - ans75%. [(five-ninths of 1% per month for each of the first 36 months prior to full retirement age = 20%) + (plus five-twelfths of 1% × 12 months = 5%); 20% + 5% = 25%]. the effect that income and asset ownership has on Social Security benefit payments - ansI. The value of assets owned by a worker does not affect the amount of Social Security benefits that he or she will receive. II. Investment income received by a worker does not affect the amount of Social Security benefits that he or she will receive. restricted application strategy. - ansThe restricted application strategy provides an opportunity for the higher-earning spouse to file a restricted application for spousal benefits at full retirement based on the lower earner's record. windfall elimination provision. - ansThe windfall elimination provision is related to the reduction in one's Social Security benefit due to receipt of a government pension. Money purchase plans, profit sharing plans, and target benefit plans are? - ansdefined contribution plans. A defined contribution plan is a retirement plan in which the dollar amount or percentage of the annual contribution is specified. The benefits ultimately received by plan participants are not specified, however, but are determined by contributions, forfeitures, and investment results. cash balance plan- required to specify the dollar amount or percentage of benefit to be received annually during retirement - ansdefined benefit plan, a type of retirement plan in which the dollar amount or percentage to be received annually during retirement is specified in advance. A cash balance pension plan is a defined benefit plan with design features similar to a defined contribution plan. It provides benefits based on a participant's career average pay If a defined benefit pension plan provides a retirement benefit equal to 40% of final three- year average compensation. What type of benefit formula does the plan use? - ansflat percentage benefit formula (also known as a fixed benefit formula). Under a flat benefit plan, a participant's benefit is usually based on compensation or may be expressed as a flat amount. unit benefit dollar formula - ansis a formula that determines benefits based on a fixed amount per month earned by an employee during his or her employment, taking into account years of service. unit benefit percentage formula - ansA unit benefit percentage formula is a formula that determines benefits based on units earned by an employee during his or her employment, taking into account years of service and compensation. excess benefit plan - ansthat can only be used to make a participant whole for the loss of benefits caused by the IRC Section 415 limits top hat plan - ansa SERP, including top hat plans, can provide benefits that greatly exceed those provided by the company's retirement plan calculations. SERPs can only be provided for management or highly compensated employees, or the top hat group.Top hat plans are
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always unfunded and SERPs must be unfunded to be exempt from most of ERISA's requirements. Funded SERPs are subject to ERISA's vesting requirements. A pure deferred compensation plan is sometimes called an "in lieu of" - ansthe employee is receiving the employer's promise to pay benefits in lieu of current income that is deferred. flat benefit formula - ansUnder a flat benefit plan, a participant's benefit is usually based on compensation or may be expressed as a flat amount. A fixed benefit formula - ansprovides a benefit based on a participant's average compensation. A cash balance pension plan - ansis a defined benefit plan with design features similar to a defined contribution plan. There is generally a hypothetical account for each participant. The annual employer contributions must reflect a uniform allocation formula based on compensation or a flat dollar amount. When a cash balance plan provides that the employer contribution is based upon a percentage of compensation—for example 8%—the plan is a career average pay plan. Interest credited to participants' "accounts" is usually specified in the plan document as a fixed rate—for example 6%. Your client wants to maximize tax-deferred retirement savings for highly compensated accountants (also shareholders) and older then 3 younger office workers and provide a benefit at retirement equal to a specific dollar amount for each employee-participant. Which of the following retirement plans will meet your client's goals? - ansThe maximum contribution that may be made for each of the accountants in a defined contribution plan (profit sharing plan or target benefit plan) is $53,000 (for 2015). In contrast, a larger benefit may be funded for the accountants under a defined benefit plan. Contributions to a defined benefit plan necessary to fund an individual participants' benefits up to the annual benefit limit may be made: the lesser of $210,000 (for 2015), or 100% of compensation. Contributions to older workers (accountants in this case) are greater than for younger employees because a traditional defined benefit plan is age-based and because older workers have fewer years in which to accrue their retirement benefits. Under a defined benefit plan, the employer promises a designated retirement benefit and then funds the plan as necessary to meet that specified benefit. On the other hand, under a defined contribution plan, a specified retirement benefit is not guaranteed. In contrast to a traditional defined benefit plan, a cash balance plan's uses a career average benefit formula averages a participant's compensation over his or her length of service, including the years of service when compensation is typically lower. Therefore, a cash balance provides a smaller benefit for the same participant than a traditional defined benefit plan that uses a final average benefit formula. Which of the following are correct statements about cash balance plans? - ansA cash balance plan must provide the actuarial assumptions on how the hypothetical account balance is converted into an annuity. For married participants, the plan must provide a qualified joint and survivor annuity (QJSA). A cash balance pension plan is a defined benefit plan with design features similar to a defined contribution plan. There is generally a hypothetical
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a qualified profit sharing Keogh plan max contrib. - ansThe maximum employer contribution to a profit sharing Keogh for a rank-and-file employee such as John Harper is 25% of participants' earnings. However, this formula applies only to rank-and-file employees and must be adjusted for the owner, a self-employed individual. The following formula must be used to determine the maximum plan contribution that may be made on behalf of John Harper, owner (sole-proprietor) of Harper enterprises: 20% times John's Schedule C income reduced by one-half of this individual's self-employment taxes. When will participants in an unfunded nonqualified deferred compensation plan will be taxed on their benefits - ansParticipants in an unfunded nonqualified deferred compensation plan will be taxed on their benefits when the benefits are actually or constructively received. Salary and bonuses are deferred prior to the time these monies are paid or made available; therefore, they are not taxed at the time of deferral. A typical unfunded nonqualified deferred compensation plan does not provide a vesting schedule; however, most such plans will provide that benefits are payable following death, disability, or termination of employment. Which of the following are characteristics of SERPs and excess benefit plans? - ansI. Benefits are usually paid out of the employer's general assets. II. Both plans are used to supplement benefits provided by the employer's qualified plan. IV. The plan's benefit formula may provide for defined contributions or a defined benefit. Statements I, II, and IV are correct. Unfunded excess benefit plans are exempt from the requirements of ERISA. In contrast, funded excess benefit plans are subject to the fiduciary, written plan requirements; reporting and disclosure requirements; and the enforcement and claims provisions of ERISA. However, funded excess benefit plans are exempt from other ERISA requirements. SERPs are subject to brief reporting and disclosure requirements, and the enforcement and claims provisions of ERISA. However, top hat plans and unfunded SERPs are exempt from other ERISA requirements. Which of the following types of nonqualified plans are exempt from the vesting requirements of ERISA? - ansfunded excess benefit plans are subject to the fiduciary, written plan requirements; reporting and disclosure requirements; and the enforcement and claims provisions of ERISA. However, funded excess benefit plans are exempt from other ERISA requirements such as vesting. A secular trust - ansestablished by an employer is subject to several ERISA requirements, including vesting. A typical secular trust arrangement would result in immediate income taxes to Martin and would be included in Martin's taxable estate. funded nonqualified plan benefits. - ansA substantial risk of forfeiture and non-transferability are the two conditions that must be met for an employee to be able to defer income taxes on funded nonqualified plan benefits. A substantial risk of forfeiture means that the employee's right to deferred compensation payments must be contingent upon the performance of substantial services in the future.
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employers is eligible to offer both a 457 plan and 403(b) plan to its employees? - ansstate university. Section 403(b) plans are available only to employees of public school systems and Section 501(c)(3) tax-exempt organizations specified in the Internal Revenue Code, namely, nonprofit groups organized and operated for religious, charitable, scientific, educational, literary, or safety-testing purposes. Section 457 plans enable employees of state and local governments (and agencies and instrumentalities thereof) and nonprofit—Section 501(c)(3)— organizations to defer taxation on salary reduction contributions. A state university may offer its employees a 457 plan and a 403(b) plan because it is an agency or instrumentality of the state government and is part of the public school system. A city may offer its employees a governmental 457 plan. However, a city cannot offer its employees a 403(b) plan because it is not a public school system, nor is it a IRC Section 501(c)(3) organization. An IRC Section 501(c)(6) trade association is not a 501(c)(3) organization; therefore, it cannot offer its employees a governmental 457 plan, nor can it offer its employees a 403(b) plan. A state natural resources department may offer its employees a governmental 457 plan; however, a state natural resources department (an agency or instrumentality of a state government) cannot offer its employees a 403(b) plan because a it is not a public school system, nor is it a IRC Section 501(c)(3) organization. rabbi trust - ansIII. Benefits may be paid on account of unforeseeable emergency involving the participant or termination of the nonqualified plan. IV. An informally funded rabbi trust is treated as being unfunded for ERISA purposes.FICA taxes are imposed when the employee-participant in a rabbi trust is paid for performing services, even though some of his or her compensation is deferred and not subject to income taxes until such time as the benefits are paid. A rabbi trust cannot contain an "insolvency trigger," under which payments would be made to participating employees if the employer becomes insolvent. This provision would violate the requirement that benefits must be subject to the claims of the employer's creditors. As of this writing, it appears that the IRS will rule on a model rabbi trust that provides for payment of benefits on account of the following events recognized by IRC Section 409A: retirement, separation from service, death, disability, specified time or pursuant to affixed schedule, unforeseeable emergency involving the participant, or change in ownership or control of the employer. Rabbi trusts are unfunded, unsecured, and do not have a substantial risk of forfeiture provision. (An informally funded rabbi trust is treated as being unfunded for purposes of government regulations; i.e., the IRS and the Department of Labor.) Ted is a participant in a SIMPLE IRA plan sponsored by his employer. He earned $416, in annual compensation and made elective deferrals of $12,500 to the plan for 2015. What is the maximum employer contribution that may be made to the plan for 2015 on Ted's behalf? - ans$12,
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establish and make a deductible contribution to a simplified employee pension (SEP) for its fiscal year ending December 31, 20X1 - ansthe due date for filing its 20X1 corporate tax return, including extensions An employer need not establish a SEP by year-end. Instead, an employer may set up the SEP and make contributions, including the initial contribution, as late as the due date of the employer's income tax return, including approved extensions. Dan, age 58, has decided to begin periodic withdrawals from his IRA. In order to avoid the 10% early withdrawal penalty, distributions must continue until at least age - ans Distributions must continue for at least five years, or until individual reaches age 59½, whichever is later. A non-springing durable power of attorney - ansremains effective after the principal becomes incapacitated. The very purpose of any durable power of attorney is to give the attorney-in-fact authority to act after the principal becomes incapacitated. However, such authority does not survive the principal's death. Such authority is created in an independent document, and is effective immediately in this type of power of attorney. Under the Affordable Care Act, Platinum plans offered on the exchanges vary in - anshow the insured and insurer share the costs of care. Plans in each category (i.e., Platimum, Gold, etc.) all cover the same services. It is how the insured and the insurer share the costs of care that varies. The amount beyond which the insurance company pays 100% of the expenses for covered services in a given year is the - ansmaximum out-of-pocket limit. The maximum out-of-pocket (MOOP) limit is a set amount that varies among the plan categories beyond which the insurance company pays 100% of the expenses for covered services. This is a stop-loss amount that allows individuals to know the maximum amount they might have to pay for health expenses in any given year. Which one of the following is covered under Medicare Part A and Part B? - anshome health care Medicare Part A covers the following post-hospital home health care: 100 home health visits per benefit period. In general, Medicare Part A covers expenses such as inpatient hospital care, post-hospital skilled nursing care, post-hospital home health care, hospice care, psychiatric hospital care, and blood in excess of three pints. Medicare's Supplemental Medical Insurance (Part B) provides coverage for physicians' services and for the following services that are not already covered under Part A: home health care; medical services, which include physician services, therapist (physical, speech) services, supplies, and ambulances; outpatient hospital services; and certain costs for blood that are not covered by Medicare Part A. Medical expenses not covered by Part B include most routine physicals, most immunizations, eyeglasses (and eye exams), hearing aids (and hearing exams), cosmetic surgery, dental care, orthopedic shoes, and most prescription
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After a lengthy hospital stay, Frank applied for and began receiving Social Security disability benefits on January 1, 20X1. When will Frank become eligible for Medicare Part A? - ansHe will become eligible on January 1, 20X3. Individuals must be totally and permanently disabled (satisfy Social Security's definition of disability) and have received Social Security disability benefits for 24 months to be eligible for Medicare Part A. a Medigap insurance policy is designed to cover which one of the following Medicare- approved charges that are not paid by Medicare? - ansdeductibles or coinsurance amounts The costs not covered by either Part A or Part B of Medicare are referred to as Medicare gaps or Medigaps. Medigap insurance is designed to supplement Medicare's benefits by filling in some of what Medicare does not cover. A Medigap policy pays for Medicare-approved charges that are not paid by Medicare because of deductibles or coinsurance amounts for which the beneficiary is responsible. The cost and services covered by Medigap policies varies from vendor to vendor and from plan to plan. Some, but not all, Medigap policies cover such items as at-home recovery deductibles, skilled nursing coinsurance amounts, and Medicare Part B excess amounts. The probation period of a disability policy is best defined as which one of the following? - ansthe period the policy must be in force before it provides coverage The probation period is the period of time that the individual policy must be in force before it covers the insured for specified perils or illnesses. This provision is designed to protect the insurance company from having to cover certain preexisting conditions and other adverse selection situations. A longer elimination period naturally reduces the policy premium. The client must finance an additional month of zero or partial income during the period after disability occurs but before benefits begin (answer b). Clients need to keep in mind that the first benefit check will be sent 30 days after the end of the elimination period chosen. The elimination period (answer c) is the period of time after the disability occurs and before benefit payments begin. A disability policy may reduce the benefit otherwise payable by amounts received under Social Security, workers' compensation, or other sources of indemnity. This type of provision (answer d) is known as the "coordination of benefits" clause. (LO 6-3) availability of Medicare Advantage plans? - ansI. Individuals with end-stage renal disease (ESRD) are not eligible for Medicare Advantage plans. II. To qualify for the new options, the Medicare beneficiary must have Medicare Part A (hospital insurance) and Medicare Part B (supplemental medical insurance). Medicare Advantage plans are not available to everyone. In addition to the two correct statements governing the plan availability, the Medicare beneficiary must live in the service area of a health plan that is offered as a Medicare Advantage plan option. The service area is
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Susan knows this is not the right time for retirement. She cannot afford to retire until she turns 62. The right time for the former may be when the following occur: they (clients) feel that they are losing their ability to perform up to standards; the economics of working become less favorable; or the worker's personal health is an issue. If Susan retires, neither she nor Brent will have health care coverage; also, neither will qualify for Medicare until age 65 (almost two more years for Brent). Although Susan's health is excellent, Brent's health is fair. Susan is very concerned about how her spouse and family situation will be affected. A client who doesn't feel appreciated by his or her company is typically asking whether he or she wants to be retired, is the work satisfying, and does he or she have control over working conditions. Which one of the following is a correct statement about a golden parachute payment? - ansAn excess parachute payment is includible as income for tax purposes by certain employees. By definition, excess parachute payments are includible as income for income tax purposes. If the parachute payment is more than three times the base amount, then the parachute payment becomes an excess parachute payment. (The base amount is essentially the employee's average annual gross compensation for the five preceding years.) A parachute payment represents a payment made to a disqualified individual, not a qualified individual. Excess parachute payments (payments in excess of three times the base amount) are subject to a 20% excise tax (not a 15% excise tax) for the employee, and the employer cannot take an expense deduction for the excess parachute payment. You have a client, age 56, who has decided to take early retirement. She would like to maximize distributions from her IRA without having to pay the 10% penalty tax on premature distributions. Which, if any, of the following words of advice should you give her?
- ansI. At age 59½, she can stop taking substantially equal periodic payments until age 70½, if she wishes. II. Use of the fixed annuitization method or the required distribution method will maximize the amount of substantially equal periodic payments she receives. neither I nor II The client must take a series of substantially equal payments for the longer of five years (until age 61) or until she reaches age 59½, after which she can stop taking substantially equal periodic payments until age 70½, if she wishes. Of the three methods that may be used to calculate substantially equal periodic payments, use of the fixed amortization or fixed annuitization methods will maximize payments to your client. In contrast, use of the required distribution method will minimize payments to your client. Harlan Smith is a participant in his employer's qualified profit sharing plan. The plan document permits loans to participants. Harlan is 80% vested in his account balance. The fair market value of his account is $30,000. He has asked you what the limits are on profit sharing plan loans. During a meeting with Harlan, you explain that the maximum amount he can borrow from his profit sharing plan account balance is - ans$12,000.
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The amount of a loan from a qualified plan may not exceed the lesser of $50,000 or one-half of the present value (fair market value) of the participant's nonforfeitable accrued benefit (account balance). Harlan is vested in 80% of his $30,000 balance or $24,000. Plans can allow that loan amounts of up to $10,000 may be borrowed without regard to the 50% restriction. Harlan's loan cannot exceed $12,000 (50% × $24,000 = $12,000). A direct rollover may be accomplished by providing a distributee with a check payable to the custodian or trustee of the rollover plan or IRA, and appropriate instructions. - ansIRS regulations indicate that providing a distributee with a check made payable to a trustee for delivery is an acceptable way to accomplish a direct rollover. Providing the distributee with a check and instructing the distributee to deliver the check to the trustee of an eligible retirement plan is a reasonable means of accomplishing a direct rollover. Under current rules, mandatory 20% withholding is imposed on a qualified plan or TSA distribution (if the distribution is eligible for rollover treatment) if the plan issues a distribution check to the participant (answer a.). Corrective distributions of excess deferrals and hardship distributions from 401(k) plans (answers b. and c. respectively) do not qualify as eligible rollover distributions. William Bengen presented one of the earliest studies on safe initial withdrawal rate percentages. What percentage did Bengen originally suggest? - ans4% Early work in this area by William Bengen put a safe initial withdrawal rate at a little more than 4% for an individual in the 60-65 age bracket. In his studies, Bengen found that at around a 4% initial withdrawal rate, with annual adjustments for inflation, just about all well- constructed portfolios would be able to last throughout retirement (at least for 30 years). Which of the following are correct statements about the legal requirements for a loan to a participant from a retirement plan? I. The term of a loan for a medical emergency must not exceed five years. II. Loans from SEP IRAs are not permitted. III. The term of a loan used to acquire a principal residence may exceed five years. IV. Loans from a SIMPLE 401(k) plan are permitted. - ansI, II, III, and IV All of the statements are true. The term of the loan must not exceed five years. If the loan is not repaid in five years, it may be treated as a distribution and taxed (and penalized) as such. Loans to acquire the participant's principal residence may be for a longer (unspecified) period. Loans from IRAs, SEP IRAs, and SIMPLE IRAs are not permitted under current tax law; however, loans from a qualified plan, including a SIMPLE 401(k) plan, are permitted. Mike Harper recently terminated employment with ENCO Inc. Mike has a $70,000 account balance in ENCO Inc.'s simplified employee pension (SEP) plan. Which one of the following steps should be taken by Mike to rollover his SEP account into an IRA? A: Elect payment in the form of a direct rollover to an IRA. B: Roll over all of the distribution he receives, within 60 days of receipt, into an IRA.
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II. Distributions must be made to an individual age 55 or older who has terminated employment with his or her employer. III. Under the required minimum distribution method, the resulting annual payments are redetermined each year. IV. Under the fixed annuitization method, the higher the interest rate assumption and the shorter the life expectancy, the greater the payment amount that results from the calcu - ansI, III, and IV only The 10% early distribution penalty is not assessed if distributions are part of a series of substantially equal periodic payments made over the plan participant's life expectancy or the joint life expectancy of the participant and spouse (or beneficiary of an IRA). Option I meets these requirements. Option II is incorrect because distributions do not have be made to an individual age 55 or older who has terminated employment with his or her employer. Under the required minimum distribution method (Option III), the annual payment for each year is determined by dividing the account balance for that year by the number from the chosen life expectancy table for that year. Under this method, the account balance, the number from the chosen life expectancy table, and the resulting annual payments are redetermined for each year. Under the fixed annuitization method (Option IV), the higher the interest rate assumption and the shorter the life expectancy, the greater the payment amount resulting from the calculation. Conversely, the lower the interest rate assumption and the longer the life expectancy, the smaller the payment amount resulting from the calculation. Jan Allen has been employed by Bryce Corporation for 40 years and is a 4% owner of the company; she received $60,000 in compensation during the preceding year. Jan is a participant in the corporation's profit sharing plan, will celebrate her 70th birthday on July 3rd of this year, and plans to retire in four more years. Which of the following correctly describes the date by which Jan must start taking distributions from her profit sharing account? by April 1 of this year by December 31 of this year by April 1 of the year following the year she retires - ansby April 1 of the year following the year she retires Distributions from qualified plans, IRAs, SEPs, SIMPLE IRAs, TSAs, and other retirement accounts must begin by a certain date. This rule does not apply to Roth IRAs. For 2010 and subsequent years, for IRAs, SEPs, SIMPLE IRAs, and 5% owners of a business with a qualified plan, that date is April 1 of the year following the year in which the participant attains age 70½. However, for 2010 and subsequent years, distributions from qualified plans, 403(b) plans, and 457 plans to individuals who are not 5% owners (such as Jan Allen) must begin by April 1 of the year following the later of the year the participant attains age 70½, or the year in which the participant retires. Note: Jan won't attain age 70½ until next year. (LO 8-4)
Effective Sample Tests and Study Strategies
A Comprehensive CRPC Sample Tests
Current Updated Exam Study Guide 2025/2026.
qtip trust Qualified Terminable Interest Party - ansfor business transfer, must last as long as grantors spouse lifetime familty lp used to tranfer business can be done at discount - ansbecause donee does not have control and because it is illiquid installment sale main benefit - ansseller realizes gain as payments are received in installments Totten Trust tranfers outside probate - ans Assets as Joint Tennants with spouse trasfer outside probate - ans community property - ansnot a will substitute tenancy by entierty - ansonly used by spouses The federal gift tax applies to which of the following transfers? I. inter vivos transfers II. transfers where the donor receives less than full value for the property III. transfers whether or not the donor intended to make a gift IV. transfers where the donor has retained control over the property - ansI, II, and III only The donor must give up control over the property for the gift tax to apply. assets will be included in the decedent's gross estate? - ansI. A life insurance policy on the decedent's life that the decedent transferred to his son five years ago. II. Trust assets in a trust established by the decedent 30 years ago, in which the decedent holds the right to income at death. III. Assets transferred to the decedent's spouse one year before death. IV. Securities on which the decedent placed a T.O.D. designation four years prior to her death. 2&4 ONLY I. is not included because all incidents of ownership were transferred more than three years prior to death. III. is incorrect as this was an outright transfer with no strings attached. It does not matter when such transfers are made. They are removed from the donor's gross estate. LLC (t290) - ansI. No member of an LLC is personally liable for the debts of the business. II. Every member of an LLC is entitled to an equal voice in management, unless otherwise stated in the operating agreement. III. The LLC is usually not taxed on income that it earns. IV. An LLC is subject to less statutory regulation than an S corporation. The donee's basis in gifted property is determined by which of the following valuations? - ansII. the donor's adjusted basis in the property at the time of the gift if the property has appreciated in value while owned by the donor IV. the property's FMV at the time of the gift if this value is less than the donor's adjusted basis, and the property is sold for a loss
