TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When a
calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale
for the correct answer is also given.
Part A: Retirement Planning
IRAs
Chapter 5: Traditional IRA
True/False
5.1
Under current tax law, a nonrefundable tax credit is available for some lower income
taxpayers who make a contribution to a traditional IRA.
5.2
Distributions from a traditional IRA cannot be made before the participant turns 59½ unless
the IRA owner dies.
5.3
IRAs can be invested in a variety of investment vehicles, including mutual funds, stocks,
bonds, and life insurance contracts.
Answer:
5.1
5.2
5.3
True [p. 50]
False [p. 53]
False [p. 53]
Multiple Choice
5.4
A nondeductible traditional IRA
a. allows prior nondeductible contributions to be distributed tax free
b. provides better tax advantages than investing in tax-deferred non-IRA investments
c. is created when someone must make an after-tax contribution to a traditional IRA
because of being an active participant in an employer plan
d. distributes contributions and earnings tax free
e. can be established up to the due date of a participant’s tax return, including extensions
Answer: A [p. 51]
5.5
Borrowing from an IRA
a.
b.
c.
d.
e.
is treated as an early withdrawal
requires use of a written loan agreement
reduces the deductible employee contribution amount
causes an insufficient withdrawal penalty
is not allowed
Answer: E [p. 53]
5.6
A traditional IRA
a.
b.
c.
d.
e.
allows a couple to set aside money for retirement even if one spouse is not employed
has higher contribution limits than an employer-sponsored IRA
is often used as a supplement to employer sponsored retirement plans
a and c
b and c
Answer: D [p. 49-50]
Application
5.7
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
Answer: B [p. 52]
5.8
Ken and Barbie Dahl file a joint tax return in 2009. 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, 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
Answer: E [p. 51 – The “no spousal attribution of active participation” rule is phased out for joint
adjusted gross incomes over $176,000 in 2009. Ken and Barbie’s joint income is over $176,000.]
5.9
Gary Hinton, age 54, is planning to retire earlier 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 an 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
Answer: E [p. 54]
5.10
Minnie and Micky Mous are married, filing jointly in 2009. Minnie earns $60,000 a year and
takes full advantage of her employer’s qualified retirement plan. Micky is not employed.
a.
b.
c.
d.
e.
Micky can receive a full deduction for an IRA contribution
Micky can receive a partial deduction for an IRA contribution
both Micky and Minnie can make a nondeductible IRA contribution
Micky cannot make an IRA contribution
Minnie can make a nondeductible IRA contribution, but Micky cannot make an IRA
contribution because he has no earned income
Answer: A [p. 50]