Deck 13: Basic Structure of Retirement Income

Question 1

Are Medicare payments a part of social security benefits? How does Medicare work?

Answer 1

Medicare is a two-part, government-sponsored health insurance program for persons over age 65 and certain disabled persons. The basic plan provides automatic coverage of hospital and nursing care expenses when a person becomes eligible. The other part of the program, the supplementary plan, is voluntary and covers only those individuals who make the required premium payments. Medicare service is handled by the Health Care Financing Administration.
The hospital insurance part of Medicare pays for the cost of inpatient hospital care and certain kinds of follow-up care. The medical insurance part of Medicare helps pay the costs of physician's services, outpatient hospital services, and for certain other medical items and services not covered by the hospital insurance. Premiums are paid by eligible individuals for appropriate coverage, whether or not they are currently receiving social security benefits.

Question 2

What qualifications are necessary for becoming eligible for social security payments?

Answer 2

Commonly called OASDHI (Old Age, Survivors', Disability, and Health Insurance), the social security program is financed by payroll taxes. Social Security taxes are paid by both the employer and employee in equal amounts. Self-employed persons also pay social security taxes, although the rates that apply to them are different from those that apply to employed individuals.
Before a person or family becomes eligible to receive monthly cash benefits under the social security, a minimum amount of work credit must be earned. Social security credit is measured in "quarters of coverage." In 2015, employees and self-employed persons received one quarter of coverage for $1,220 of annual earnings subject to social security taxes. The amount of earnings needed to receive a quarter of coverage will increase automatically in the future in order to keep pace with average wages.
No more than four quarters can be credited for one year. The work credit requirements for receiving disability benefits are considerably lower than those for normal social security benefits. Forty quarters of work credit were necessary to become eligible for social security. If a person becomes disabled before age 24, only 1 and a half years of work out of the three-year period ending when the disability begins are required for receiving disability benefits. Persons meeting the minimum work credit requirements are called fully insured while those meeting the disability requirements are called currently insured.

Question 3

Describe the provisions regarding the deductibility of an IRA.

Answer 3

The deductibility provisions of an IRA are summarized in Table 13.8. The following facts are revealed by the table. First, if neither spouse is covered by a qualified plan, the law allows an income tax deduction of $5,500 per worker or $11,000 for married couples, regardless of income (2015). Second, married couples covered by a corporate plan, and having a modified adjusted gross income (MAGI) in 2015 of less than $98,000 ($61,000 on a single return), keep the full deduction. These income limits are adjusted for inflation in increments of $1,000 workers age 50 and older can add an extra $1,000 to their IRAs for the tax year and thereafter.
The act also treats more fairly those couples where both spouses work but only one has a retirement plan. The spouse without a plan will not be penalized by restrictions on IRA eligibility. However, to take advantage of this change, the couple's joint MAGI must be below $183,000 (2015).
A nonworking spouse under the age of 70 and a half year is eligible to make a spousal IRA contribution, if the working spouse has earned income. The contribution is tax-deductible, if the family's MAGI is below $183,000 (2015). The tax-deductibility of the spousal IRA phases out completely at $193,000 (2015).
Deduction limits for an active participant in a qualified plan who is married and files separately are not as straightforward as those for the categories just discussed. In general, for such a person, no deduction is allowed if the MAGI is over $10,000. If the MAGI is less than $10,000, a partial deduction is allowed.
Finally, joint filers whose MAGI is less than $61,000 ($30,500 for single filers) in 2015 will receive an additional incentive to contribute to an IRA or an employer-sponsored retirement savings plan-the income limits are indexed for inflation. Depending on the income, a wage earner may be able to get a nonrefundable tax credit of up to $1,000 a year. The tax credit (referred to as the "saver's credit") is available even if the contribution is tax-deductible. The new tax credit is designed to make it easier for younger workers to save for retirement as well as for families in lower income brackets.
Besides the traditional IRA, the current law permits contributions to the Roth IRA, which is designed to help a large group of eligible taxpayers who currently do not qualify for tax-deductible contributions to traditional IRAs. These taxpayers can put $5,500 (for 2015) a year into a Roth IRA on a nondeductible basis and avoid federal taxes altogether upon distribution on the earnings assuming a qualifying distribution after five years.
The full $5,500 (for 2015) nondeductible contribution to a Roth IRA can be made by taxpayers with MAGI of as much as $183,000 on joint returns and $116,000 on individual returns. The Roth IRA phases out at $193,000 for joint filers and at $131,000 for single filers (2015). Active participation in an employer plan does not matter for the purpose of Roth IRA eligibility.
The Roth IRA earnings can be taken out tax-free, if the money remains in the account for at least five years, and is then withdrawn: (a) after death, (b) on account of disability, (c) after age 59 and a half years, or (d) for the purchase of a first home, maximum $10,000 lifetime. The Roth IRA's tax benefits remain intact in later years even if the holder's income soars above the contribution limits.

Question 4

Explain the basic characteristics of a defined benefit plan.

Question 5

Discuss the advantages of age-weighted profit sharing plans to an employer.

Question 6

Discuss the essential features of a 401(k) plan.

Question 7

Describe the nature of a profit sharing plan.

Question 8

What are the coverage requirements of a qualified plan?

Question 9

Explain the funding requirements of a qualified plan.

Question 10

David Landmesser, a successful businessman, is 50 years old. His wife has been asking him to come to you for retirement planning. David is reluctant to do so because he is convinced that, over time, inflation will erode the value of the dollar, in which case the retirement plan will be rendered worthless. Can you convince him to let you develop a retirement plan?

Question 11

Distinguish between rollover and transfer of an IRA.

Question 12

What are the major steps concerning planning for retirement?

Question 13

What are the vesting requirements of a qualified plan?

Question 14

Describe the essential features of defined contribution plans.

Question 15

Susan Ebbing has been reading about the financial mess. She is convinced that by the time she retires in 15 years, social security will have become bankrupt. In developing her retirement plan, would you ignore social security completely?

Question 16

What are the specific requirements for starting and maintaining corporate retirement plans?

Question 17

Discuss briefly the nature of money purchase pension plans?

Question 18

How are social security benefits taxed?

Question 19

What are the major types of plans available to an employer today?

Question 20

Describe the basic types of benefits offered by social security.

Question 21

Peter Bertocci, a consulting electrical engineer, is 58 years old. His business has taken off and this year he expects to earn about $500,000. He is self-employed and believes that he can only set aside $5,000 in an IRA plan. How would you advise him?

Question 22

Question 14. Which of the following is a major advantage of a qualified plan?

A) An immediate tax deduction for the employee
B) An immediate tax deduction for the employer
C) Tax-deferred build-up of funds
D) A and C
E) A, B, and C

Question 23

Lynn Thompson has $300,000 in an IRA which is currently invested in a CD. The money was rolled over from another investment in April. It is October of the same year now and the CD is matured. Lynn is about to roll it over into a mutual fund. It is almost by accident that you have discovered this fact. What is your advice?

Question 24

David Doane is confused about IRAs. Some friends have told him that since he cannot set aside $5,000 on a tax-deferred basis (because he participates in a pension plan) he should completely ignore the IRA investment. Others have said that he should invest in an IRA because the money would grow on a tax-deferred basis. Can you clarify the issue?

Question 25

Question 1. Which of the following categories is not a key source of income with regard to retirement?

A) Government-sponsored plans
B) Corporate retirement plans
C) Personal investment/retirement plans
D) Employment after retirement
E) All of the above are sources of income

Question 26

Question 17. An age-weighted profit-sharing plan

A) Does not have to meet all the requirements applicable to a regular profit-sharing plan
B) Does have to meet all the requirements applicable to a regular profit-sharing plan
C) Is one where contributions are proportional to the ages of the participants
D) Is one where the owner is unable to reward the older valued employees
E) Can incorporate the best features of a defined benefit plan but not those of a defined contribution plan

Question 27

Question 3. In 2015, the maximum monthly Social Security benefit for an insured worker was approximately $_______, whereas the maximum FICA payroll tax was ______ percent.

A) $2,513; 28 percent
B) $11,500; 50 percent
C) $11,500; 80 percent
D) $2,639; 6.2 percent
E) Cannot be determined because everyone earns different incomes

Question 28

Which of the following are true with respect to a simplified employee pension SEP plan?

A) An SEP plan combines the simplicity of a 401k with a generous contribution limit of a formal pension plan
B) An SEP plan allows employers to use IRAs to build tax-sheltered retirement funds for themselves and their employees at a nominal cost
C) An SEP plan minimizes the employer's record-keeping function
D) A and B
E) B and C

Question 29

Question 15. Defined benefit plans may include which of the following features?

A) Fixed benefit plans in which all employees receive the same benefits
B) Flat benefit plans in which the benefit is a percentage of salary
C) Unit benefit plans which depend on income and length of service
D) A and B
E) A, B, and C

Question 30

Question 8. All qualified plans must cover employees who have reached the age of ______ and completed _______ years of service. However, if a plan provides immediate vesting, only______ years of service are necessary.

A) 20; 1; 2
B) 21; 5; 2
C) 22; 2; 1
D) 21; 2; 1
E) 20; 2; 1

Question 31

Question 4. Who is eligible for Medicare Part A?

A) Any person who is over the age of 65 or disabled
B) Any person who meets requirements for Social Security retirement benefits
C) Any person who is at least 62 years old and offers to pay the monthly premium
D) A and B
E) B and C

Question 32

Question 9. Which of the following plans are subject to minimum funding requirements?

A) Profit sharing
B) Government
C) Unfunded PLAN
D) IRAs
E) None of the above funds are subject to minimum funding requirements

Question 33

Question 7. To meet the percentage test:

A) The plan must not discriminate in favor of highly compensated employees
B) The average benefit percentage of the nonhighly compensated employee is at least 70 percent
C) Eighty percent or more of all employees must participate
D) A and B
E) None of the above

Question 34

Question 6. Which of the following is true regarding the percent test, ratio test, and average benefits test?

A) A plan must satisfy one or more of these to be qualified
B) A plan must satisfy two tests to be qualified
C) A plan must satisfy three tests to be qualified
D) Even when it does not pass any test, a plan becomes qualified if the IRS allows it
E) None of the above statements are true

Question 35

Question 11. Under the defined contribution plan, the overall annual deduction is limited to____________ of the total compensation of all eligible employees:

A) One hundred percent
B) Fifty percent
C) Twenty five percent
D) Ten percent
E) B or C

Question 36

Question 5. In order to qualify for Medicare supplementary plan benefits, a worker must:

A) Be eligible for the basic plan
B) Be 65 years old or older and pay a monthly premium
C) Be fully insured or currently insured
D) Earn less than $10,000 a year

Question 37

Question 2. What requirements must be met by a worker to be considered fully insured?

A) Ten consecutive quarters
B) Twenty consecutive quarters
C) Forty consecutive quarters
D) Forty quarters but not necessarily consecutive)
E) None of the above

Question 38

Question 12. A SEP plan can be set up so that

A) All employees who are at least 21 years old and have worked for three of the past five years are covered
B) The corporation can handsomely reward the highly paid employees
C) The employees can make $2,500 in a SEP and an additional $2,500 tax-deductible contribution in an IRA
D) The employees can make tax-deferred contributions which are not currently deductible from taxes
E) The employees can avoid the 125 percent discrimination test even when the contributions are higher than $2,500

Question 39

Question 10. What is the maximum contribution for defined contribution plans in 2015?

A) Lesser of $50,000 or 50 percent of compensation
B) Lesser of $40,000 or 100 percent of compensation
C) Lesser of $53,000 or 100 percent of compensation
D) A flat $50,000
E) Contribution is based upon adjusted gross income

Question 40

The maximum contribution for a defined benefit plan is lesser than $210,000 2007, adjusted for inflation or

A) One hundred percent of average compensation for three highest consecutive years
B) One hundred and fifty percent of average compensation for three highest consecutive years
C) One hundred and twenty five percent of average compensation for three highest consecutive years
D) One hundred and twenty five percent of average compensation for two highest consecutive years
E) None of the above

Question 41

Question 19. Which of the following is true with respect to an IRA?

A) Every IRA must have a trustee or custodian
B) The individual's interest must be forfeitable
C) Investments may not be made in highly speculative investments
D) Distribution must begin when annuitant is 70½ years old or the IRS will impose a penalty tax
E) A, C, and D

Question 42

Question 20. Your client is interested in making a contribution to a Roth IRA. Which of the following statements is not correct?

A) Contributions to a Roth IRA are not tax deductible
B) Anyone with earned income in a given year can make a contribution to a Roth IRA
C) Active participation in an employer-sponsored plan is not an issue when considering eligibility for making a Roth IRA contribution
D) Qualified withdrawals from a Roth IRA are tax free

Question 43

Question 18. Employees wishing to rollover funds to another qualified plan or an IRA can choose from all of the following options except one:

A) Create a taxable event
B) Use a five-year forwarding average method for a partial withdrawal
C) Make up the difference
D) Direct transfer