REVIEW QUESTIONS


Unless otherwise noted, assume the following questions relate to participants under age 50.


1.   For an investor in the 28% tax bracket, a contribution of $5,000 to a deductible IRA results in an immediate tax savings of:

   a.   0
   b.   $140
   c.   $560
   d.   $1,400

 (d)     A deductible contribution of $5,000 will reduce taxable income by $5,000.  In the 28% tax bracket, there will be an immediate tax savings of $1,400 (28% x $5,000).




2.   The Internal Revenue Service will tax income in a traditional IRA when it is:

   I.   earned in the account
   II.   transferred from one custodian to another
   III.   rolled over from one custodian to another
   IV.   withdrawn from the account

   a.   I only
   b.   IV only
   c.   II and III only
   d.   I, II and III only

(b)     Earnings in an IRA are tax deferred.  The IRS taxes the earnings when they are withdrawn from the account.  There is no tax consequence to transfers between IRA custodians.  There is no tax liability when a distribution is rolled over between custodians provided the rollover is accomplished within 60 calendar days -- the IRS will impose withholding against the rollover, but this can be refunded upon proper completion of the rollover.




3.   For tax year 2011, an IRA can be established anytime between:

   a.   April 15, 2011  and  April 15, 2012
   b.   January 1, 2011 and December 31, 2011
   c.   January 1, 2011 and April 15, 2012
   d.   April 15, 2011 and December 31, 2011

 (c)     IRAs may be established for a given year at any time between January 1st of that year and the tax filing deadline of April 15th of the following year.




4.   All of the following are considered "earned income" EXCEPT:

   a.   wages
   b.   salary
   c.   dividends
   d.   commissions

(c)     Dividends, interest and capital gains are referred to as "investment" or "portfolio" income.  They are not sources of "earned" income.




5.  Mary Jackson, age 52, works part-time at a local department store during the Christmas season.  She earned $2,500. She has no other earnings.   How much may she may contribute to an IRA?

   a.   0
   b.   $2,000
   c.   $2,500
   d.   $3,000

  (c)     Current regulations allow workers to contribute the lesser of 100% of earned income or $4,000 per year in 2007 ($5,000 for those age 50 or older).  In this case, 100% of earned income is less, so she may contribute $2,500.




6.   Dr. Knight,  a retired dentist aged 73, earned $2,500 speaking at a seminar in 2011.  How much may he contribute to a traditional IRA?

   a.   0
   b.   $2,500
   c.   $5,000
   d.   $6,500

 (a)     Workers may contribute to a traditional IRA up to age 70½  Dr. Knight may not contribute to a traditional IRA, even though he has earned income, because he is too old.




7.   Dr. Knight,  a retired dentist aged 73, earned $2,500 speaking at a seminar in 2011.  How much may he contribute to a Roth IRA?

   a.   0
   b.   $4,000
   c.   $5,000
   d.   $6,500

 (c)     Although traditional IRAs limit workers older than age 70½  from contributing to their IRA, a Roth IRA permits contributions at any age.  The maximum Dr. Knight may contribute to a Roth IRA is $6,000 in 2011 ($5,000 plus $1,000 "catch-up" contribution) but he is limited to no more than 100% of earned income or $5000.





8.   Mr. Brady, age 45, earned $60,000 in 2011.  By mistake, Mr. Brady contributed $6,000 to his IRA for tax year 2011.  Mr. Brady must pay a penalty of:

   a.   0
   b.   $60
   c.   $120
   d.   $180

    (b)     Excess contributions to an IRA are subject to a 6% penalty.  In this case, Mr. Brady is entitled to contribute $5,000.  The 6% penalty is applied to the excess $1,000 contribution.  He must pay a penalty of $60.  Current rules require the excess contribution of $1,000 to be withdrawn from the account no later than the tax filing date.




9.   John and Mary Smith report joint taxable income of $120,500 in 2011.  John  earns $115,500.  He is covered by his company's  pension plan.  Mary  works part-time as a secretary for her church. She is not covered by any pension.   She earned $5,000.   They may contribute:

   I.   $5,000 to John's non-deductible IRA
   II.   $5,000 to John's deductible IRA
   III.   $5,000 to Mary's non-deductible IRA
   IV.   $5,000 to Mary's deductible IRA

   a.   I and III
   b.   I and IV
   c.   II and III
   d.   II and IV

(b)     In this example, both spouses have earned income, so both may contribute $5,000 to their IRAs, on their own behalf (i.e., not as spousal IRAs).  John is an active participant in a qualified plan while Mary is not.  As an "active participant" in a pension plan and earning more than $110,000 jointly (the income threshold in 2011), John's contribution is not tax deductible.  Mary, on the other hand, is not an "active participant"; her contribution may be tax-deductible.  Deductions for such contributions phase out when joint income is between $169,000 and $179,000 (in 2011).  Her contribution is tax deductible since the couple earned less than $169,000.




10.   John and Mary Smith report joint taxable income of $202,500 in 2011.  John  earns $197,500, and is covered by a pension plan.  Mary earned $5,000 as a secretary for her church. She is not covered by any pension.  They may contribute:

   I.   $5,000 to John's non-deductible IRA
   II.   $5,000 to John's deductible IRA
   III.   $5,000 to Mary's non-deductible IRA
   IV.   $5,000 to Mary's deductible IRA

   a.   I and III
   b.   I and IV
   c.   II and III
   d.   II and IV

    (a)     In this example, both spouses have earned income, so both may contribute $5,000 to their IRAs, on their own behalf (i.e., not as spousal IRAs).  John is an active participant in a qualified plan while Mary is not.  As an "active participant" in a pension plan and earning more than $110,000 jointly (the income threshold in 2011), John's contribution is not tax deductible.  Mary, on the other hand, is not an "active participant"; her contribution may be tax-deductible.  Deductions for such contributions phase out when joint income reaches $179,000 (in 2011).  Her contribution is not tax deductible since the couple earned more than $179,000 -- the income cutoff for such deductions.





11.   John Morgan, 47-year old a single taxpayer, has worked for XYZ Corporation for two years, earning $95,000 per year.  XYZ offers a qualified pension plan.  John's pension benefits will be fully vested next year.  For 2011, John may:

   a.   contribute $5,000 to a non-deductible IRA
   b.   contribute $5,000 to a deductible IRA
   c.   contribute $5,000 to an IRA, of which $1,250 is deductible
   d.   not contribute to an IRA


  (a)     Whether the employee's pension benefits are vested or not is immaterial.  This employee is "eligible" for a pension plan -- so he is an "active participant". Since his income exceeds the income threshold  any contributions are non-deductible.   He may make a contribution of $5,000 to a non-deductible IRA or Roth IRA.  




12.   Jim Polk, a single taxpayer, is covered by an employer-provided pension plan.  He earns $67,000 in 2011.  If he contributed $5,000 to an IRA, how much of this contribution would be deductible?

   a.   0
   b.   $1,000
   c.   $4,000
   d.   $5,000

  (b)     For individual taxpayers covered by a qualified pension plan, the deductibility of IRA contributions is "phased out" at the rate of $.50 for every $1 of earnings above the income      threshold ($59,000 in 2011).  Jim earned $8,000 more than the $59,000 limit.  The non-deductible portion of his contribution is $4,000 ($8,000 x .50).  The remaining $1,000 of the contribution is deductible.





13.   Which of the following statements are true?

      I.         An individual may transfer an IRA between custodians no more than once per year
    II.    There are no limits on transfers between custodians of IRAs
    III.    An individual may rollover an IRA between custodians no more than once per year
    IV.    There are no limits on rollovers between custodians on IRAs

    a.    I and III only
    b.    I and IV only
    c.    II and III only
    d.    II and IV only


 (c)     Individuals are limited in the number of rollovers they may make in any 12-month period.  There are no such limitations on the number of transfers they may make.




14.    Bunker Hunt, age 53, established an Individual Retirement Account with fully deductible contributions.  He withdraws $10,000 from his IRA , buys an airline ticket to Monte Carlo, plays roulette, winning $100,000, and returns home a week later.      He then redeposits $10,000 into an IRA.  Which of the following is true?

    a.    The withdrawal is fully taxable as capital gains.
    b.    The withdrawal is fully taxable as ordinary income and subject to a 10% penalty.
    c.    Only the earnings portion of the withdrawal is taxable as ordinary income.    
    d.    There is no tax consequence to the withdrawal.


 (d)     This is an example of a rollover - and is a prime example of why the IRS limits the number of rollovers an IRA holder is entitled to.  Because the IRA funds were redeposited in an IRA within 60 days of the withdrawal, there is no tax consequence assuming Mr. Hunt has not rolled over the funds in the past year.  If they had not been redeposited, Mr. Hunt would have to pay taxes on the withdrawal, plus a penalty for early withdrawal.  [Needless to say, this type of activity should not be recommended to clients.]



15.    Which of the following is an example of an IRA rollover:

    a.    movement of IRA assets directly from a bank custodian to a brokerage firm custodian
    b.    movement of pension plan assets from the plan's trustee to an IRA custodian
    c.    withdrawal of IRA assets from a bank custodian and subsequent deposit with a brokerage firm custodian
    d.    movement of assets from a Keogh plan's trustee to an IRA custodian


   (c)     Movement of IRA or pension plan assets directly between custodians is an example of a transfer, not a rollover.  




16.    Robert Cratchet, age 65, is retiring.  He elects to receive $375,000 as a lump sum distribution from his employer's pension plan.  Which of the following is a reason for rolling over the lump sum into an IRA?

    a.    to eliminate taxes on the distribution
    b.    to delay taxes on the distribution
    c.    to receive current income from the IRA
    d.    federal law requires rollover of lump sum distributions into an IRA

(b)     Rolling lump sum distributions into an IRA is a way of delaying the tax bite on the pension distribution.  Taxes will be owed when money is withdrawn, which must begin no later than age 70½.  Rollovers do not "eliminate" taxes.  By placing the pension plan assets in the IRA, they will not generate current income for the IRA holder.  There is no law which requires rollovers of pension plan assets.




17.    Mr. Franklin, age 53, established an IRA and made deductible contributions annually from 1982 until 1986.   Due to the Tax Reform Act of 1986, current contributions would be non-deductible.  Because of this, Mr. Franklin has not contributed to the IRA since 1986.  The account has grown in value to $80,000.  Mr. Franklin is laid off from his present job.  As part of his severance package, he receives a lump sum distribution from his     employer's pension plan.  Mr. Franklin is seeking another job with retirement benefits.  His best course of action is to:

    a.    accept the lump sum distribution and pay taxes on it
    b.    roll the lump sum distribution into his existing IRA
    c.    establish a new IRA to accept the rollover distribution
    d.    use income averaging methods to calculate the taxes owed on distribution


(c)     To avoid taxes on the pension plan distribution, Mr. Franklin should roll the distribution into an IRA.  Since he is seeking another job with retirement benefits, he may wish to eventually move the "old pension" money to the new employer's plan.  If the lump sum is commingled with other IRA assets (such as the account established with deductible  contributions), the pension money can not be subsequently moved into the new pension plan.  The best course of action is to hold that money in a separate IRA account -- a Conduit IRA.



18.    All of the following are acceptable investments in an Individual Retirement Account EXCEPT:

    a.    preferred stocks
    b.    zero coupon bonds
    c.    variable annuity contracts
    d.    term life insurance policy

(d)     IRS rules prohibit the investment of IRA assets in life insurance policies.    



19.    Which of the following investments is permitted in an IRA?

    a.    stamp collection
    b.    limited edition lithographs
    c.    US Gold Eagle coins
    d.    Canadian Maple Leaf gold coins

 (c)     Collectibles and precious metals are prohibited investments in an IRA with the exception of US Gold Eagle coins and certain types of precious metals.



20.    The most popular investments in self-directed IRAs are:

    a.    common stocks
    b.    corporate bonds
    c.    mutual funds
    d.    certificates of deposit

(c)     Mutual funds provide the most convenient investment in an self-directed IRA.  Almost 40% of IRA investors own at least one stock fund, 12% are invested in bond funds, and 27% hold money market funds in their IRAs.  Certificates of deposit are typically held in bank IRAs.



21.    All of the following mutual funds would be suitable for a conservative IRA investor EXCEPT:

    a.    mutual funds investing in corporate bonds
    b.    mutual funds investing in utility stocks
    c.    mutual funds investing in US government bonds
    d.    mutual funds investing in municipal bonds

(d)     All of the choices presented are suitable for conservative investors.  However, municipal bond funds would be poor choice as an IRA investment.  In an IRA, the earnings are tax deferred.  The lower, tax free yields of municipal bonds is a disadvantage for an IRA investor.  Tax-advantaged investments, such as municipal bonds are best held in the individual's "regular" accounts -- not an IRA.


22.    Investors concerned with the effects of inflation would most likely invest their IRA assets in:

    a.    corporate bond mutual fund
    b.    zero coupon bonds
    c.    mutual fund investing in utility stocks
    d.    mutual fund investing in growth stocks

(d)     Fixed income securities, such as bonds (both interest paying and zero coupon), are subject to inflation risk.  Stocks, with their potential for appreciation, provide a better inflation hedge than bonds.   Growth stocks have greater appreciation potential than utility stocks.



23.    Mrs. Lincoln purchased a blue chip growth fund in her IRA a couple of years ago.  Mrs. Lincoln is approaching retirement and is looking for a more conservative investment.  She sells the growth fund shares for a $25,000 gain and invests the proceeds in a bond fund.  The tax on the capital gains is:

    a.    payable in the year of the sale
    b.    deferred until Mrs. Lincoln reaches age 59½
    c.    deferred until Mrs. Lincoln retires    
    d.    deferred until proceeds are withdrawn from the IRA

(d)     Taxes on any earnings in the account, whether from dividends, interest or capital gains, are deferred until withdrawal from the account.  There is no requirement thatwithdrawal begin at age 59½ , or at retirement. All earnings in the account - dividends, interest or capital gains - will be taxed at the ordinary tax rate (i.e., the capital gains tax rate does not apply in an IRA)



24.    Due to financial hardship, Mr. Johnson, age 46, withdraws $5,000 from his IRA.  He is in the 28% tax bracket.  On the withdrawal, he must pay:

    a.    $500 penalty
    b.    $1,400 in taxes
    c.    $1,400 in taxes and a $500 penalty
    d.    $2,500 penalty


(c)     Withdrawals prior to age 59½  are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn.  The penalty can be avoided in the event of death or disability.  There is no exemption for "financial hardship".  Mr., Johnson owes taxes of $1,400 (28% of $5,000) plus a penalty of $500 (10% of $5,000).




25.    Which of the following may withdraw funds from an IRA?

    I.    a 47-year old woman
    II.    a 53-year old permanently disabled man
    III.    a beneficiary upon the death of an IRA account holder
    IV.    a 74-year old man

    a.    II and III only
    b.    III and IV only
    c.    I, II and IV only
    d    I, II, III and IV

(d)     Once an IRA has been established, the holder may withdraw funds at any time.  However, premature withdrawals subject the IRA owner to a 10% penalty.  




26.    Which of the following may withdraw funds from a traditional IRA without penalty?

    I.    a 47-year old woman
    II.    a 53-year old permanently disabled man
    III.    a beneficiary upon the death an IRA account holder
    IV.    a 74-year old man

    a.    I and II only
    b.    III and IV only
    c.    II, III and IV only
    d    I, II, III and IV

(c)     Withdrawals prior to age 59½  are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn.  The penalty can be avoided in the event of death or disability.  




27.    Withdrawals may be taken, penalty-free, from a traditional IRA     prior to age 59½ under all of the following circumstances EXCEPT:

    a.    the account holder is disabled
    b.    the account holder is deceased
    c.    substantially equal payments are scheduled for a lifetime
    d.    due to financial hardship

(d)     Withdrawals prior to age 59½  are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn.  The penalty can be avoided in the event of death or disability.  The penalty may also be avoided if the distributions are taken in "substantially equal periodic payments".  There is no exception for "financial hardship".  



28.    A 79-old widow has an IRA account valued at $88,000 as of January 1, 2011.  Her life expectancy, according to IRS tables, is 22.0 years.  To avoid paying a penalty, she must withdraw:

    a.    $500
    b.    $2,000
    c.    $4,000
    d.    $6,000

(c)     Mandatory withdrawals are required once an IRA holder reaches age 70½ . Failure to take the required amount results in a 50% penalty. The amount of the required annual distribution is found by dividing the value of the account (as of January 1st of the year) by the life expectancy of the holder (based on age as of December 31st).  In this case the woman must withdraw $4,000 ($88,000 divided by 22.0 years) to avoid the 50% penalty.  She will, of course, pay taxes on any amounts withdrawn.




29.    Mrs. Thompson celebrated her 70th birthday August 1, 2011.      She is required to begin withdrawals from her IRA no later than:

    a.    December 31, 2011
    b.    April 1, 2012
    c.    December 31, 2012
    d.    April 1, 2013

(d)     The IRS requires the first mandatory withdrawal from an IRA to be taken no later than April 1st of the year following the year in which the account holder reaches age 70½ .  In this case, Mrs. Thompson reaches age 70½  in 2012 (her 70th birthday was August 1, 2011).  She must begin withdrawals no later than April 1st of the following year - 2013.

 

30.    An 89-year old man has an IRA valued at $60,000 as of January 1, 2011.  According to IRS tables, his life expectancy is 12.0 years.      He withdrew $3,000 from the IRA during 2011.  In addition to the taxes owed on the withdrawal,  he is subject to a penalty of:


    a.    0
    b.    $1,000
    c.    $1,500
    d.    $2,000

(b)     The man is required to withdraw $5,000 from the account ($60,000 value divided by 12.0 year life expectancy).  Since he withdrew only $3,000, he is subject to the 50% penalty on the $2,000 undistributed amount - the "excess accumulation".  His penalty is $1,000 (50% of $2,000).





31.    Roth IRAs are sometimes called:

    a.    SEP IRAs
    b.    SIMPLE IRAs
    c.    backloaded IRAs
    d.    nondeductible IRAs

 (c)     Since the tax advantages of a Roth IRA occur upon withdrawal, these accounts have been called "backloaded" IRAs.




32.    Contributions to a Roth IRA are:

    a.    always tax deductible
    b.    sometimes tax deductible
    c.    never tax deductible
    d.    subject to the same rules as traditional IRAs

(c)     Contributions to a Roth IRA are never tax-deductible.  



33.    Which of the following are true?

    a.    Persons over age 70½ may establish a Roth IRA
    b.    Persons over age  70½ may contribute to a Roth IRA
    c.    Persons over age 70½  may rollover IRA assets
    d.    all of the above

 (d)     While persons over age 70½ may not establish or contribute to a traditional IRA, these rules do not apply to Roth IRAs.  Persons of any age, with earned income, may establish and contribute to a Roth IRA.  Persons of all ages may roll assets over from an existing plan into traditional and Roth IRAs.




34.    Which of the following may NOT contribute to a Roth IRA?

    a.    a 75-year old single taxpayer with earned income of $105,000
    b.    a 65-year old married taxpayer earning $150,000
    c.    a 45-year old single taxpayer with earned income of $95,000
    d.    a 39-year old married taxpayer earning  $195,000

  (d)     Persons of any age may contribute to a Roth IRA, provided they "earn" income during the year, and their income does not exceed $110,000 individually or $160,000 jointly-- adjusted for inflation: $112,000 and $179,000 in 2011, respectively.




35.    Which of the following "active plan participants" may NOT contribute to any IRA this year?

    a.    Mr. Able, a 69-year old single taxpayer earning $75,000
    b.    Ms. Bravo, a 74-year old married taxpayer earning $10,000
    c.    Mr. Charlie, a 65-year old married taxpayer earning $17,000
    d.    Ms. Delta, a 72-year old single taxpayer earning $120,000


(d)     Mr. Able and Mr.Charlie could both contribute to either a traditional or Roth IRA.  Mr. Charlie's contributions to a traditional IRA could be deducted on his tax return, while Mr. Able's is not deductible. Ms. Delta and Ms. Bravo are too old to contribute to a traditional IRA.  Ms. Bravo could contribute to a Roth IRA. Ms. Delta could not as she earned more than $122,000 -- the 2011 income cutoff for single taxpayer Roth IRAs.





36.    The maximum amount that may be contributed annually to a Roth IRA is:

    a.    100% of earned income
    b.    $5,000
    c.    the greater of a or b
    d.    the lesser of a or b

 (d)     The maximum contribution to a Roth IRA is identical to traditional IRA, 100% of earned income to a maximum of $5,000 per year (plus $1,000 if age 50 or older).




37.    Contributions made to a Roth IRA by taxpayers whose income exceeds the permissible levels are subject to:

    a.    confiscation by the IRS
    b.    a 6% penalty tax
    c.    a 10% penalty tax
    d.    a 50% penalty tax

(b)     The IRS levies a 6% penalty for contributions made in excess of the permissible levels (100% of income up to $5,000) and for contributions made to a Roth IRA by those whose income exceed the permissible levels ($122,000 for single taxpayers and $179,000 for joint taxpayers, adjusted for 2011).





38.    If a taxpayer contributed more than the allowable amount to a Roth IRA, the excess may be withdrawn, penalty free, at any time up to:

    a.    the end of the tax year
    b.    the taxpayer's tax filing date
    c.    the taxpayer's tax filing date plus extensions
    d.    the end of the calendar year

(b)     Excess contributions, in either Roth IRAs or traditional IRAs, may be withdrawn without penalty at any time prior to the taxpayer's filing date - April 15th for most taxpayers.





39.    Regarding the penalty tax on excess contributions to a Roth IRA, all of the following are true EXCEPT:

    a.    the penalty only applies to the year of the contribution
    b.    the penalty applies each year the contribution remains in the account
    c.    the penalty applies until the excess is withdrawn
    d.    the penalty applies until the contributor underfunds future contributions to "correct" the excess

(a)     The penalty on excess contributions in a Roth IRA is cumulative -- it applies for each year the excess remains in the account.  Underfunding future contributions is one way to correct the situation, as is simply withdrawing the excess.




40.    Distributions from a long-established Roth IRA are tax-free if they are taken from the account:

    I.    after age 59½
    II.    due to the account holder's disability
     III.    due to the account holder's death
    IV.    to pay for the first-time purchase of a primary residence

    a.    I only
    b.    II and III only
    c.    I, II and III only
    d.    I, II, III and IV

(d)     Assuming the account has been open for at least five tax-years, all of these are "qualified distributions", allowing for tax-free distribution from a Roth IRA.




41.    To take a tax-free distribution from a Roth IRA, the contributions must first remain in the account for:

    a.    one tax-year
    b.    two tax-years
    c.    three tax-years
    d.    five tax-years

(d)     To qualify for tax-free distributions the contributions must first remain in the Roth IRA for five "tax years".




42.    If a taxpayer takes a "non-qualified" distribution from a Roth IRA, the distribution is taxable as ordinary income.  The     distribution is treated, for tax purposes:

    a.    as contributions first, then earnings
    b.    as earnings first, then contributions
    c.    the same as a distribution from a non-deductible traditional IRA
    d.    the same as a distributions from a deductible traditional IRA

(a)     If the contributions did not remain in the Roth IRA for five "tax years" or are taken before age 59½, death, disability, etc., the distribution is "nonqualified".  Nonqualified distributions are considered tax-free return of contributions first,  then taxable earnings.




43.    The penalty on "premature withdrawals", i.e. prior to age 59½ , from a Roth IRA is:

    a.    0%
    b.    6%
    c.    10%
    d.    50%

 (a)     There is no penalty on "premature" distributions from a Roth IRA - just possible taxation as ordinary income.




44.    A 76-year old man has a Roth IRA valued at $88,000 as of January 1, 2011.  According to IRS tables, his life expectancy is 22.0 years.  If he withdrew $2,000 from the IRA during 2011, he is subject to a penalty of:

    a.    0
    b.    $1,000
    c.    $1,500
    d.    $2,000

(a)     There are no required mandatory distributions from a Roth IRA, and therefore no 50% penalty.




45.    If a 45-year old taxpayer owns a traditional IRA and wishes to convert that IRA into a Roth IRA, she may do so:

    a.    tax free
    b.    subject to the 20% withholding tax
    c.    but must pay tax as though the traditional IRA assets were distributed, including a 10% penalty on premature withdrawals
    d.    but must pay tax as though the traditional IRA assets were distributed, but no 10% penalty for premature withdrawals

(d)     To convert a traditional IRA into a Roth, the value of the account being converted is taxed as ordinary income - but there is no premature distribution penalty on such conversions.  Conversions can occur through a rollover, a direct trustee-to-trustee transfer or by simply notifying the trustee of the conversion.  20% withholding applies in the case of rollovers, but not transfers or trustee notification.




46.    Simplified Employee Pensions may be established by all of the following EXCEPT:

    a.    an employer with 50 or fewer employees
    b.    an employer with more than 100 employees
    c.    a self-employed individual
    d.    an employee with earned income

 (d)     Any employer may establish a SEP.  Employees may not establish a SEP.  To establish a SIMPLE IRA plan, the employer may not have more than 100 employees - but this limitation does not apply to SEP-IRAs.




47.    Which of the following is the least expensive method for an employer to establish a retirement plan for its employees?

    a.    a profit sharing plan
    b.    a 401(k) plan
    c.    a Model SEP plan
    d.    a Non-Model SEP plan

  (c)     A Model SEP is the least expensive method to establish a retirement plan.  The employer simply fills out a short IRS form and retains a copy for its files.




48.    Employers offering a SEP plan must cover all employees who worked for them during the year and:

    I.    are at least 21 years old
    II.    earned at least $300 (adjusted for inflation) during the year
    III.    earned at least $5,000 during the year
    IV.    have worked for the employer for three of the past five years

    a.    I only
    b.    II only
    c.    I and III only
    d.    I, II, and IV only

(d)     The employer must cover all employees who are 21 or older, earns at least $300 per year (adjusted for inflation, $550 in 2011) and have worked for the employer for any three of the past five years.  The employer may make the eligibility requirements less stringent.  The $5,000 limit applies to SIMPLE IRAs, not SEPs.




49.    Which type of retirement plan may be established after the end of the employer's tax year?

    a.    401(k) plan
    b.    Keogh plan
    c.    SEP plan
    d.    SIMPLE plan

  (c)     The only type of tax-advantaged retirement plan that may be set up and funded after the close of the tax year is a SEP.  SEPs may be established up to the business' tax filing date plus extensions.




50.    The maximum amount that may be contributed to a SEP on behalf of an employee is:        
     
    a.    $40,000 (adjusted for inflation)
    b.    25% of compensation
    c.    the greater of a or b
    d.    the lesser of a or b

(d)     The contribution limit for SEPs is 25% of employee compensation up to a maximum of $40,000 per year (adjusted for inflation, $49,000 in 2011).




51.    Contributions to a SEP-IRA are deductible by:

    a.    the employee
    b.    the employer
    c.    both the employee and employer
    d.    neither the employee or employer

 (b)     The employer claims a tax deduction for amounts contributed to an employee's SEP-IRA.  The employee does not include that amount as taxable income (and therefore does not claim a deduction).




52.    For employees, employer contributions to a SEP-IRA are:

    a.    included in gross income
    b.    tax deductible
    c.    excluded from gross income
    d.    tax free

(c)     Employees do not include any contributions made by an employer to their SEP-IRA as taxable income.  That amount is "excluded" from income.



53.    A Model SEP is:

    a.    governed by a document executed by all eligible employees
    b.    a verbal agreement between the employer and employees
    c.    a written document executed by the employer
    d.    always submitted to the IRS for approval


 (c)     Model SEPs are established when an employer signs Form 5305-SEP.  This "pre-approved" form is not filed the IRS.




54.    An employer may establish a Model SEP if the employer:

    a.    integrates SEP contributions with Social Security
    b.    currently maintains a profit sharing plan
    c.    terminates any existing defined benefit plan
    d.    establishes IRAs for all eligible employees


 (d)     Model SEPs require an IRA for each participating employee.  These plans may not be integrated with Social Security, nor may they be established if the employer has ever maintained a defined benefit plan or current maintain other qualified plans.




55.    When determining if a SEP plan is top-heavy, which of the following are considered "key personnel"?

    I.    an officer of the employer earning $175,000
    II.    owners holding 5% or more ownership in the employer
    III.    non-owner employees earning $150,000 or more per year
    IV.    any of the 10 largest owners in the employer

    a.    I and II only
    b.    I or IV only
    c.    II and III only
    d.    I, II and IV only

(a)     Key personnel are any employees who serve as officers and earn $130,000 or more annually (adjusted for inflation, $160,000 in 2011); or those owners of the employer having a 5+% ownership interest; or those owning 1+% of the employer and earning more than $150,000.  Choice III is not an owner or officer, and therefore is not a "key" employee.





56.    If a SEP plan is "top-heavy", the employer must:

    a.    vest benefits more quickly
    b.    reduce the contributions made for key personnel
    c.    make a mandatory contribution of 3% of each non-key employee's compensation
    d.    terminate the plan

 (c)     When qualified plans are top-heavy, they typically require an accelerated vesting schedule,  Since contributions to a SEP-IRA are 100% immediately vested, they can't be accelerated.  In top-heavy SEP plans, the employer must make a contribution of at least 3% for all non-key employees.




57.    The excise tax imposed on employers who contribute more than the deduction limit to a SEP is:

    a.    6%
    b.    10%
    c.    20%
    d.    50%

(b)     Excess employer contributions are subject to a 10% excise tax -- payable by the employer.




58.    Which SEP contribution formula would be judged "discriminatory" by the IRS?

    a.    6% of an employee's compensation
    b.    $3,000 per year
    c.    6% of an employee's first $15,000 of compensation and 3% of compensation over $15,000
    d.    6% of an employee's compensation in excess of $25,000

(d)     Flat contribution formulas, such as a fixed dollar amount or fixed percentage of compensation are allowed, as are formulas in which the contribution level decreases as income increases.  Formulas which have lower contribution levels for lower levels of compensation are discriminatory and therefore prohibited.




59.    If an eligible employee has not established an IRA account to receive the employer's SEP contribution:

    a.    the plan is disqualified
    b.    the contribution must be paid directly to the employee
    c.    the employer may establish an IRA in the name of the employee
    d.    no SEP contributions may be made to any other employee IRAs for that year

(c)     For a SEP to work properly, each eligible employee must have an IRA to which the employer may contribute.  If one doesn't exist, the employer may establish an IRA on the employee's behalf.




60.    In the case of self-employed individuals who establish a SEP, the contribution limits are based on the business':

    a.    gross revenues
    b.    net income before deducting the SEP contribution
    c.    net income after deducting the SEP contribution
    d.    gross revenues after deducting the SEP contribution

  (c)     Self-employed compensation is measured after all relevant business deductions have been made i.e., net income.  The tax code requires the self-employed to deduct their contributions to the SEP and one-half of the self-employment tax as part of that calculation.



61.    Excess contributions distributed to SEP participants before the end of the tax year are subject to:

    a.    ordinary income taxation
    b.    a 10% penalty for premature distribution
    c.    a 6% penalty on excess contributions
    d.    all of the above


(a)     Excess contributions that are withdrawn from the account are included in the employee's taxable income for that year, but there are no penalties.  If not corrected by the employee's tax filing date (usually April 15th) the excess contributions are subject to a 6% penalty for each year they remain in the account.



62.    Distributions may be taken from a SEP-IRA as early as:

    a.    age 21
    b.    age 59½
    c.    retirement
    d.    70½

(a)     Contributions to a SEP-IRA are usually made for employees who have reached age 21.  Since funds may be withdrawn immediately (there is no deferred vesting allowed in a SEP), withdrawals can begin as soon as they are deposited in the account.  




63.    Distributions from a SEP-IRA must begin no later than:

    a.    retirement
    b.    plan termination
    c.    age 59½     
    d.    age 70½

 (d)     As with traditional IRAs, distributions must begin when the account holder reaches age 70½.



64.    Contributions to a SEP-IRA must be made no later than the:

    a.    end of the calendar year
    b.    the end of the employer's tax year
    c.    the employer's tax filing date
    d.    the employer's tax filing date plus extensions


 (d)     Employers may delay contributions to a SEP until the tax filing deadline for the tax year, plus any extensions.




65.    Employers must notify participants in a SIMPLE plan of the employer's contribution method for the year no later than:

    a.    the start of the election period
    b.    30 days before the election period
    c.    60 days before the election period
    d.    90 days before the election period

(a)     Employers must notify employees of their right to make SIMPLE plan deferrals, and the amount of the employer's contribution, before the election period.  The election period must extend over at least 60 days.



66.    An employer's matching contribution to an employee's SIMPLE IRA account, is based on the employee's:

    a.    compensation
    b.    compensation up to a maximum of $150,000 -- adjusted for inflation
    c.    years of service
    d.    earnings history

(a)     Employers base matching contributions to SIMPLE IRA plans on the employee's compensation.  The inflation-adjusted limit  applies to compensation when calculating an employer's non-elective 2% contribution.




67.    An employer offering a SIMPLE IRA plan must either:

    I.    match employee elective deferrals dollar-for-dollar
    II.    match employee elective deferrals dollar-for-dollar up to 3% of compensation
      III.    contribute no more than 2% of the employee's compensation as a non-elective contribution
    IV.    contribute 2%  of the employee's compensation as a non-elective contribution

    a.    I or III
    b.    I or IV
    c.    II or III
    d.    II or IV

 (c)     Employers must either match employee contributions up to 3% of compensation, to contribute 2% as a non-elective contribution.  Under certain circumstances, employers may choose to match SIMPLE IRA deferrals up to 1%, instead of 3%.




68.    The maximum allowable employee elective contribution to a SIMPLE IRA plan is:

    a.    less than that allowed in a "regular" IRA
    b.    more than that allowed in a "regular" IRA
    c.    the same as that allowed in a "regular IRA
    d.    offset by contributions to "regular" IRAs

(b)     Employees may contribute up to $5,000 to a "regular" IRA, while the maximum employee deferrals to SIMPLE IRAs is $11,500 (in 2011).



69.    SIMPLE plans may be established in the form of a:

    I.    401(k) plan
    II.    IRA plan
    III.    SEP plan

    a.    I only
    b.    II only
    c.    I and II only
    d.    I and III only

(c)     SIMPLE plans may be established as 401(k) plans or IRAs.




70.    The primary advantage of a SIMPLE plan is that employers are relieved of:

    a.    vesting requirements under ERISA
    b.    non-discrimination rules
    c.    matching contribution requirements
    d.    drawing up plan documents

(b)     SIMPLE IRAs allow employers to ignore the non-     discrimination and top heavy rules.  SIMPLE plans must be in writing, require  employer contributions and provide for 100% immediate vesting (which is more strict than allowed under ERISA).



71.    Which of following are permitted to offer SIMPLE plans to their employees?

    a.    employers with fewer than 100 employees
    b.    only employers with employees covered by a collective bargaining agreement
    c.    employers who offer other qualified retirement plans
    d.    any of the above

(a)     Only employers with no other qualified plan who employ fewer than 100 employees may establish a SIMPLE plan.




72.    When counting employees who are "eligible" for a SIMPLE plan, the employer must count:

    a.    all employees who worked for the employer during the year
    b.    only those employees who may make contributions to the plan
    c.    only those employees not covered by a collective bargaining agreement
    d.    only those employees who have one year of service and are age 21 or older

(a)     When counting employees for purposes of the "100 employee rule", all employees must be counted -- even those not eligible to participate.  If the employer controls more than one business all employees of all businesses must be counted.




73.    Which are true of SIMPLE IRA plans?

    a.    new plans may be established on a fiscal or calendar year
    b.    existing plans may continue to operate on a fiscal or calendar year basis
    c.    existing plans may continue to operate on a fiscal year basis, but new plans must be established on a calendar year basis
    d.    all SIMPLE plans must operate on a calendar year basis

(d)     All SIMPLE plans operate on a calendar-year basis.  



74.    If an employer adopts the most strict "participation rules", which "eligible employees" may participate in the SIMPLE plan, i.e., contribute to the plan?

    a.    all "eligible" employees may participate
    b.    only those "eligible" employees who expect to earn at least $5,000 from the employer this year
    c.    only those "eligible" employees who earned at least $5,000 from the employer in any of the past two years
    d.    only those "eligible" employees who expect to earn at least $5,000 from the employer this year and who earned at least $5,000 from the employer in any of the past two years

(d)     Employers may exclude certain employees from participating in the plan (i.e., contributing to the plan).  Employers may exclude employees who are not expected to earn $5,000 this year and those who have not earned $5,000 in any of the prior two years (these need not be consecutive years).





75.    An "eligible" employee works for two unrelated employers, earning $40,000 from each in the past two years.  Both employers offer a SIMPLE IRA. If the employee is eligible to contribute to Employer A's plan this year, the employee:

    a.    may not contribute to Employer B's plan this year
    b.    may contribute to either Employer A or Employer B's plan, but not both during the same year    
    c.    may contribute up to the annual SIMPLE contribution limit to Employer A's plan and up to the annual SIMPLE contribution limit to Employer B's plan this year
    d.    may contribute up to the annual SIMPLE contribution limit this year in split between Employer A and Employer B's plans

(d)     Employees may participate in more than one SIMPLE plan each year - but may contribute no more than $10,500  (in 2007) to all such plans during the year.




76.    Which of the following are mandatory in a SIMPLE IRA?

    I.    employee elective deferrals
    II.    employee voluntary contributions
    III.    employer matching contributions
    IV.    employer non-elective contributions

    a.    I only
    b.    I or II only
    c.    III or IV only
    d.    I, III or IV only

(c)     Employees need not defer compensation under a SIMPLE plan.  However, the SIMPLE rules require employers to either match employee contributions or make non-elective contributions.




77.    Which of the following are NOT permitted in a SIMPLE IRA?

    a.    employee elective deferrals
    b.    employee voluntary, after-tax contributions
    c.    employer matching contributions
    d.    employer non-elective contributions

(b)     Voluntary, after tax contributions are not permitted under the SIMPLE rules.




78.    Employees may terminate participation, i.e. elective deferrals, in a  SIMPLE plan:
    
    a.    only on the election date
    b.    by giving notice within 30 days of the election date
    c.    by giving notice within 60 days of the election date
    d.    at any time

(d)     Employees may terminate participation in the plan at any time.




79.    Employers must "segregate" participating employees' elective     deferrals into the SIMPLE IRA plan:

    a.    as quickly as possible
    b.    by the 30th day after the end of the month in which the employee would have otherwise received the deferral in cash
    c.    by the end of the employer's tax year
    d.    by the filing date of the employer's tax return


(a)     The rules require segregation of employee deferrals "as quickly as possible" - but under no circumstances later than the 30th of the following month.

    


80.    Employers may deposit their matching or non-elective contributions into the SIMPLE IRA plan:

    a.    as soon as is reasonably possible
    b.    by the 30th day after the end of the month in which the employee would have otherwise received the deferral in cash
    c.    by the end of the employer's tax year
    d.    by the filing date of the employer's tax return

(d)     Employer contributions must be deposited into the plan by the employer's tax filing date, including extensions.




81.    All contributions to a SIMPLE IRA plan must vest no slower than:
    
    a.    three-year cliff vesting
    b.    five-year cliff vesting
    c.    three-to-seven year graded vesting
    d.    immediately

 (d)     All contributions to a SIMPLE plan are 100%, immediately vested.





82.    Which of the following are "immediately and fully" vested in a SIMPLE IRA plan?

    I.    employee elective deferrals
    II.    employee voluntary contributions
    III.    employer matching contributions
    IV.    employer non-elective contributions

    a.    I only
    b.    I and II only
    c.    III and IV only
    d.    I, III and IV only

(d)     All contributions to a SIMPLE plan are 100%, immediately vested.  Since voluntary contributions are not permitted in a SIMPLE plan, they cannot vest.