5: Which of the following is TRUE of a qualified plan?
A It has a tax benefit for both employer and employee.
B It does not need to have a vesting schedule.
C It may discriminate in favor of highly paid employees.
D It may allow unlimited contributions.
A qualified plan is approved by the IRS, which then gives both the employer and employee benefits in deductibility of contributions and tax deferral of growth.
9: Which is INCORRECT concerning a Section 457 Deferred Compensation plan?
A It has a vesting requirement.
B The deferred amount is paid upon death, disability, or retirement.
C It is a nonqualified plan.
D It is a means of deferring current income until later when the employee is in a lower tax bracket.
Since the employee forfeits the amount deferred if he/she leaves the employment, it has no vesting requirement.
15: In a defined contribution plan,
A The contribution and the benefit are unknown.
B The contribution and the benefit are known.
C The contribution is known and the benefit is unknown.
D The benefit is known and the contribution is unknown.
In a defined contribution plan the contribution is defined (known) and the benefit is undefined (unknown).
8: Which of the following is NOT an allowable 1035 exchange?
A A whole life insurance policy is exchanged for a term insurance policy.
B A whole life insurance policy is exchanged for a Universal life insurance policy.
C An annuity is exchanged for another annuity.
D A life insurance policy is exchanged for an annuity.
The key is that the exchange may not be from a less tax-advantaged contract to a more tax-advantaged contract. "Same to same" is acceptable.
9: Which of the following is used to determine the annuity amounts that are not taxable?
A Exclusion ratio
B Pro rata ratio
C Exclusion index
D Market-adjusted annuities index
The "exclusion ratio" is used to determine the annuity amounts that should be excluded from taxes. During the accumulation phase, the contributions to the annuity have already been taxed. Therefore, the contributions are not taxed during the income period.
10: Which of the following statements is TRUE concerning whole life insurance?
A Dividend interest is not taxable.
B Premiums are tax deductible.
C Policy loans are tax deductible.
D Lump-sum death benefits are not taxable.
Dividend interest is taxable; policy loans are not tax deductible, and premiums are not tax deductible.
15: A 60-year-old participant in a 401(k) plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?
A The amount of the distribution is reduced by the amount of a 20% withholding tax.
B No taxes are due since the plan participant is over age 59 1/2.
C There is a 10% early withdrawal penalty.
D The amount distributed is subject to ordinary income tax.
Distributions from 401(k) plans are taxable as ordinary income in the year of the distribution. However, if the distribution is rolled over to a Traditional IRA, taxes are deferred until the required minimum IRA distributions begin (which is generally no later than age 70 1/2). Since this client actually took a distribution (instead of making a trustee-to-trustee roll over), the distribution is subject to 20% withholding tax.