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 25: Tax Deferred Annuity
True/False
25.1
In-service withdrawals are not permitted in a Tax Deferred Annuity
25.2
Tax Deferred Annuity plans allow employer contributions in addition to, or instead of,
employee salary reductions
25.3
A Tax Deferred Annuity is not subject to Section 415 limits.
Answers:
25.1 false [p 210]
25.2 true [p 211]
25.3 false [p 211]
Multiple Choice
25.4
Which of the following cannot offer a Tax Deferred Annuity?
a.
b.
c.
d.
e.
the First Baptist Church
Healthsmart Drug Store, Inc.
St. Luke’s Hospital
Sentential College, a private institution
State University
Answer: B [p 209 - Healthsmart Drug Store, Inc. is a for profit business and does not meet the
criteria for a tax-exempt employer.]
25.5
Which of the following statements about a Tax Deferred Annuity plan is (are) true?
a.
b.
c.
d.
e.
an employer can contribute to an employees account
Tax Deferred Annuity plans are relatively inexpensive and simple to administer
employers bear the investment risk under the plan
a and b
b and c
Answer: A [p. 210 - TDA plans are costly and complex due to need to meet nondiscrimination
tests; employees, not employers, bear investment risk.]
25.6
A Tax Deferred Annuity Plan can invest in all of the following except:
a.
b.
c.
d.
e.
level premium annuities
a growth mutual fund
variable annuities
a bond mutual fund
shares of stock
Answer: E [p. 212]
Application
25.7
Bill Brown, age 51, is planning to retire in five years and withdraw funds from his Tax
Deferred Annuity. Bill can make this withdrawal, but must pay a 10% penalty for early
withdrawal.
a. true
b. false
Answer: B [p. 213 – Withdrawal of funds after age 55 due to separation from service is an
exception to the 10% tax penalty.]
25.8
Avent Charities is a Section 501(c)(3) organization that has three highly paid administrators
and a small clerical staff. The administrators have asked you to help them evaluate the
merits of installing a Tax Deferred Annuity plan (Section 403(b)) instead of a Section
401(k) plan. You tell them:
a. a Tax Deferred Annuity plan is not limited to annuity contracts or mutual funds, but can
invest in a broad array of investment options
b. top-heavy rules generally do not apply to a Tax Deferred Annuity plan
c. the entire plan will not be disqualified if the salary reduction limit is exceeded for one
employee
d. a and c
e. b and c
Answer: E [p 210 – All but “a” are listed as advantages of a Tax Deferred Annuity plan versus a
Section 410(k) plan.]
25.9
August Winter has a Tax Deferred Annuity (TDA) at her place of employment. Currently,
she has almost 80% very conservatively invested. She wants to reallocate her plan assets
so that only 10% is very conservatively invested and the remainder is invested in moderate
to high risk investments. To make sure the fund transfer is not a taxable event:
a. August can receive a distribution from the TDA in the form of a check made out to her;
then deposit the check with the brokerage firm that has the investments that she wants
to make
b. August can direct the mutual fund company that holds her original investment to
transfer assets directly to the new mutual funds that she designates
c. August can structure the transaction as a direct rollover from the old plan to the new
plan
d. August can do either a or b to keep the transfer tax free
e. August can do either b or c to keep the transfer tax free
Answer: E [p. 215]
25.10 Maria Valquez is a public school teacher. Her employer provides a Tax Deferred Annuity
(TDA). She began working for this employer four years ago and started her TDA at that
time. Over those four years, she has contributed $1000, $2500, $3000, $3000 to her TDA
through salary reduction. Her employer matches $1 for $1 up to $100 and offers graded
vesting at the rate required by law for TDA accounts. Currently, Maria’s vested interest in
the plan is:
a.
b.
c.
d.
e.
9,500
9,580
9,660
9,740
9,900
Answer: D [p. 212 – Maria has invested $9,500 into her account through salary reduction. She is
always 100% vested in her own contributions. By law, TDAs must use 3-year cliff or 2 to 6 year
graded vesting schedule. Maria’s employer has contributed $400 to her account. Maria has
worked for 4 years, and she is 60% vested in that $400, so $240 is her vested amount at this time.
Consequently, Maria’s vested interest is $9,500 + $240 = $9,740.]