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
Other Employer Retirement Plans
Chapter 22: HR 10 (Keogh) Plan
True/False
22.1
A Keogh plan is a qualified retirement plan that covers self-employed business owners and
partners
22.2
Keogh plans are much simpler and less costly to administer than other forms of qualified
retirement plans
22.3
An individual who has a Keogh plan cannot also invest in a traditional or Roth IRA.
Answers:
22.1 true [p. 193]
22.2 false [p. 194]
22.3 false [p. 197]
Multiple Choice
22.4
For the self-employed owner of an unincorporated business, advantages of a Keogh plan
over a traditional IRA include which of the following:
a. employees of the business may be excluded from participation in the plan
b. contribution limits for a Keogh are higher than limits for a traditional IRA
c. income generated by investments in a Keogh are tax-deferred until withdrawn from the
plan
d. a and b
e. b and c
Answer: B [pp. 193-94 C is true, but applies to both Keogh plans and IRAs]
22.5
The “earned income” that a self-employed person uses to calculate a Keogh plan
deduction is:
a. gross business income
b. gross business income less deduction for Keogh plan
d. business income, net of business expenses, excluding the deduction for Keogh plan
contributions
d. net business income including the deduction for the Keogh plan less one-half selfemployment tax
e. business income less one-half self-employment tax and business expenses, excluding
the deduction for the Keogh plan
Answer: D [p. 195]
22.6
The feature that sets a Keogh plan apart from other plans is that:
a. it is established by self employed individuals, such as sole proprietorships or
partnerships
b. it operates like a hybrid defined benefit plan
c. it operates like a hybrid defined contribution plan
d. b and c only
e. none of the above
Answer: A [p. 195]
Application
22.7
Otis Carrington, a 50-year-old self-employed person, was severely injured in an auto
accident and is no longer able to perform the tasks of any occupation.
a. funds cannot be withdrawn from Otis’ Keogh until he is age 59 1/2 or he dies
b. Otis must first apply for and receive Social Security disability before he can withdraw
funds from his Keogh plan without penalty
c. until he reaches age 59 1/2, Otis can only withdraw his original Keogh contributions
without penalty
d. Otis will pay a 10% early withdrawal penalty on any dollars taken out of his Keogh
e. Otis can withdraw any contributions and earnings without penalty
Answer: E [p. 197]
22.8
Tandy is a self-employed owner of Candle Creations. She has a Keogh plan that provides
incidental insurance through a cash value life insurance contract. This year, her premium
is $1,400, of which $800 is for pure life insurance protection and the rest is used to
increase the cash value. Tandy
a.
b.
c.
d.
can deduct $1,400 as a Keogh plan contribution
can deduct $800 of the premium as a plan contribution
must report $1,400 as taxable income
can deduct $600 as a Keogh plan contribution
e. must report $600 as taxable income
Answer: D [p. 196]
22.9
Winston Cantrell earns $70,000 annually as business professor at Greenlaw University.
Winston is a participant in the university’s defined benefit plan. Five years ago, he began
doing some management and marketing consulting for small business owners. He now
earns $35,000 a year as a self-employed person in addition to his university income.
Winston is considering adopting a money purchase Keogh for this self-employed business.
As his financial advisor, you tell Winston:
a. he cannot establish a Keogh plan since he has a qualified plan in the job where he
earns the most
b. he can establish a Keogh plan and deduct up to 25% of his total earnings
c. he can establish a Keogh plan and deduct up to 25% of his gross self-employment
earnings
d. he can established a Keogh plan and deduct up to the statutory limit as counted by his
total income
e. he can establish a Keogh plan and deduct up to 25% of earned income from selfemployment
Answer: E [p. 197]
22.10 Jay Casteel, age 29, ran a small water ski and Jet Ski rental shop in Gulf Shores.
Unfortunately, near the end of the last season, a sudden storm with hurricane force winds
damaged or destroyed over half of his inventory. Revenues since the storm have been
meager due to massive clean up efforts and slower tourist trade. Jay is beginning to be
pressured by some of his creditors. Jay has heard that the small Keogh fund that he
started can be seized by his creditors if he cannot work out a repayment plan. You tell him
that this is:
a. true
b. false
Answer: B [p. 197]