umuc finc355 homework 2 latest 2017

Homework 2

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK #2

1. Tony Johnson, an over-the-road trucker, had several out-of-town trips early in the year, so he got an extension for filing his income tax return. Tony can make the maximum IRA contribution this year. He has until the last date of his income tax filing extension to make a tax-deductible contribution to his IRA.

a. true

b. false

2. Ken and Barbie Dahl file a joint tax return in 2013. Both are employed. Ken is an active participant in his employer’s qualified retirement plan. Barbie is not. Barbie earns $125,000 and Ken earns $75,000. Assuming they have no other tax deductions,

a. based on their income levels, Ken can contribute to a traditional IRA and deduct contributions, but Barbie must contribute to a Roth IRA

b. both Ken and Barbie can make a deductible contribution to a traditional IRA

c. Ken can make a deductible IRA contribution, but Barbie must make a nondeductible IRA contribution

d. neither Ken nor Barbie can make a traditional IRA contribution because Ken is an active participant in his employer’s qualified plan

e. neither Ken nor Barbie can make a deductible contribution to a traditional IRA

3. Gary Hinton, age 54, is planning to retire this year. He has $600,000 accumulated in a traditional IRA.

a. Gary must wait until he is 59½ to take IRA distributions without penalty

b. Gary could take an IRA distribution of $100,000 without penalty before age 59½ if he uses the money to make a qualified purchase of a condo in a retiree community

c. Gary must pay a 10% penalty for any withdrawals that he makes from his IRA before age 59½ unless the distribution is to purchase health insurance or medical care

d. an amount equal to an annual payment under a life annuity can be distributed to Gary without penalty, but once begun, the payment can never be changed

e. Gary can make penalty-free withdrawals in an amount equal to an annual life annuity payment until age 59½; at that time, he can withdraw the remaining balance in his IRA without penalty

?

4. Orville Winbacher died last year at age 58, leaving $500,000 accumulated in a Roth IRA. Which of the following is (are) true?

a. monies in the Roth IRA must be distributed within a year of the Orville’s death either to his estate or to a beneficiary

b. distribution from the account can be made over the life of a designated beneficiary if begun within a year of Orville’s death

c. initial distribution of Orville’s Roth IRA funds to a beneficiary are tax-free, but subsequent investment returns on amounts distributed are taxable

d. a and b

e. b and c

5. George Flint was transferred to Chicago three years ago. When he left Detroit, he sold his home and put some of the money in a new Roth IRA. He and his wife, Wilma, have been renting a home for the past 3 years. Recently, the homeowner decided to sell. George is interested in buying the home. George can make a penalty-free withdrawal from his Roth IRA to help complete the purchase.

a. true

b. false

6. Brothers Tim and Jim Shanton have asked you, their financial advisor, to settle a friendly quarrel between them. Tim argues that a Roth IRA and a traditional IRA are actuarially equivalent if $4,000 is available for investing on a before-tax basis, contributions to the traditional IRA are deductible, tax rates are expected to stay the same, and both have the same interest rates. So, it makes no difference which vehicle one uses to save for retirement. Jim insists that a Roth IRA is the better investment. You tell them

a. Tim is wrong; the tax deduction available for a traditional IRA allows more money to work for the contributor

b. Jim is wrong; at least for some low-income individuals, the traditional IRA is a better investment because of its relatively lower tax rates

c. Tim is right; the two investments are equivalent in every respect when considered at the end of an investment horizon at least 10-years long

d. Jim is right; the ability to make tax-free withdrawals from a Roth IRA gives a greater return even when contributions and interest rates are equivalent over time

e. both are right; the two investments are actuarially equivalent, but absence of a minimum distribution date and more liberal penalty-free withdrawal options may make the Roth IRA more attractive

?

7. The owner of Hilton Tours is considering installing a money purchase plan and integrating it with Social Security. Which of the following is true?

a. Social Security integration will allow Hilton Tours to make greater contributions to higher-paid employees

b. Hilton’s owner must use the excess method for integrating defined contribution formulas with Social Security

c. Hilton’s owner must use the offset method for integrating defined contribution formulas with Social Security

d. a and b

e. a and c

8. Dalton Construction has a defined contribution plan that provides 65% of account balances to the three owners, each of whom have a 10% ownership of the company. To remain qualified, which of the following vesting schedules would Dalton be permitted to use?

a. 5-year cliff

b. 3 to 7 year

c. 3-year cliff

d. a and b

e. b and c

9. Blake Johnston retired from Brumley Enterprises a month after his 56th birthday. Blake began receiving a series of substantially equal periodic payments from his qualified plan based on his life expectancy. When he turned 59, he decided that he wanted to alter his payments so that he would receive a higher monthly payment. If Blake does this

a. he will not incur any additional taxes

b. he will pay an early withdrawal penalty for the additional amount withdrawn until he reaches age 59½

c. a penalty with interest will be imposed for early withdrawal backdated to his original retirement date

d. he can avoid a penalty tax if he uses the additional income to pay for health insurance

10. Jim Tandy, age 65, will retire next month from Algor Industries. Last month, Jim withdrew $40,000 from his qualified retirement savings plan at work. Before the withdrawal, Jim had an account balance of $500,000. While employed at Algor, Jim made $100,000 of after-tax contributions to his retirement plan. The taxable portion of his withdrawal is

a. $8,000

b. $20,000

c. $32,000

d. $40,000

e. not enough information to calculate

11. For purposes of required minimum distributions from an IRA or qualified plan, which of the following cannot be a designated beneficiary?

a. a spouse

b. an individual unrelated to the participant

c. a charity

d. a trust

12. Advantages of rolling a qualified plan over to an IRA include

a. an IRA can invest in life insurance

b. there may be more investment flexibility with an IRA

c. spousal consent is required for IRA distributions

d. the ability to take loans from the IRA

13. If a spouse is to be the beneficiary of an IRA or a qualified plan, it is generally preferrable to leave the IRA or qualified plan

a. to a bypass trust

b. to a QTIP trust

c. to the participant’s estate

d. outright to the spouse

14. Under a qualified domestic relations order (QDRO)

a. a demand for cash payment can be made even if the plan has no provision for the account owner

b. a person who receives a distribution because of a QDRO can roll over the distribution to his/her own retirement account and preserve the tax deferral

c. a means is provided to circumvent the provision that qualified plan benefits cannot be assigned to another

d. a and b

e. b and c

15. For IRAs, the early distribution penalty applies to all of the following, except

a. distributions attributable to the participant’s disability

b. distributuions to unemployed individuals for health insurance premiums under certain conditions

c. distributions to the IRA participant’s estate prior to the participant’s death

d. distributions for higher education costs for the taxpayer

e. distributions made on or after attainment of age 59 ½

?

16. As an actuary, you are helping Roadster Custom Auto Shop determine the annual cost of its defined benefit plan. In making your calculations, you must make reasonable assumptions about:

a. employee turnover rate

b. employee salary scale

c. future investment and inflation rates

d. all of the above

e. only b and c

17. Ann has a Roth IRA. She died this year. Her son Jim is the designated beneficiary. Jim is not required to start minimum distributions next year because Roth IRAs are not subject to the required minimum distribution rules after death.

a. true

b. false

18. Requirements for participant loans from qualified retirement plans include which of the following:

a. the loan must bear reasonable repayment terms

b. the loan may not exceed specific dollar limits

c. a written loan contract signed by all parties must be used

d. a and b

e. b and c

19. When rolling over an existing IRA to a Roth IRA, all of the following are true, except

a. the amount rolled over is not included in the gross income of the IRA account holder for federal income tax purposes

b. there is no limit on the rollover, and it can be a total or partial rollover of an existing IRA

c. distributions from the Roth IRA are received tax free if they are made after a 5-year holding period and they are made after age 59 ½, death, disability, or for a first-time home purchase

d. no minimum distribution rules apply to the Roth IRA except at death

e. all of the above are true

?

20. Jon, age 53, is a disabled veteran. He is married to Lisa, age 50, and they have two children. Their son Garrett is 15 years old. Their daughter Olivia is 23 years old and was diagnosed with multiple sclerosis when she was 22 years old. In determining who is entitled to Social Security disability benefits, which of the following are true?

(1) Only Jon is eligible

(2) Lisa is not eligible because she is not older than 62

(3) Lisa is eligible because she is caring for a child under age 16

(4) Garrett is eligible because he is unmarried and under age 18, but Olivia is not eligible because she was not diagnosed with a disability prior to age 22

a. (1) only

b. (1) and (2) only

c. (3) only

d. (3) and (4) only