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Questions and Answers
What happens when an individual withdraws $50,000 from a Qualified Profit-Sharing Plan and deposits it into a personal savings account?
What happens when an individual withdraws $50,000 from a Qualified Profit-Sharing Plan and deposits it into a personal savings account?
- Only a 10% penalty assessed
- No tax consequences
- Income tax only
- Income tax and a 10% penalty assessed upon withdrawal (correct)
The 10% penalty is applied to withdrawals from traditional individual retirement accounts before age 59 1/2.
The 10% penalty is applied to withdrawals from traditional individual retirement accounts before age 59 1/2.
True (A)
Which tax does an IRA participant face on distributions received prior to age 59 1/2?
Which tax does an IRA participant face on distributions received prior to age 59 1/2?
Ordinary income tax and a 10% tax penalty for early withdrawal.
What retirement plan is intended for a sole proprietor and the employees of that business?
What retirement plan is intended for a sole proprietor and the employees of that business?
Which of the following is TRUE about a qualified retirement plan that is 'top heavy'?
Which of the following is TRUE about a qualified retirement plan that is 'top heavy'?
Which retirement plan can an employee start even if another plan is in existence?
Which retirement plan can an employee start even if another plan is in existence?
What is the tax consequence when an employee has their 401(k) balance sent directly to them instead of rolled over?
What is the tax consequence when an employee has their 401(k) balance sent directly to them instead of rolled over?
Rollover contributions in an individual retirement account (IRA) are limited by dollar amount.
Rollover contributions in an individual retirement account (IRA) are limited by dollar amount.
What is a qualified profit-sharing plan designed to do?
What is a qualified profit-sharing plan designed to do?
At what age can an IRA owner start making withdrawals without facing a tax penalty?
At what age can an IRA owner start making withdrawals without facing a tax penalty?
What is the excise tax rate imposed by the IRS on individuals aged 70 1/2 or older who do not take required minimum distributions?
What is the excise tax rate imposed by the IRS on individuals aged 70 1/2 or older who do not take required minimum distributions?
Where are post-tax dollar contributions found?
Where are post-tax dollar contributions found?
What is the maximum deductible IRA contribution allowable for an individual with an annual income of $25,000?
What is the maximum deductible IRA contribution allowable for an individual with an annual income of $25,000?
What deduction qualifies a widow receiving an IRA account left by her deceased spouse?
What deduction qualifies a widow receiving an IRA account left by her deceased spouse?
What is the income tax withholding requirement when an individual receives eligible rollover funds from a profit-sharing plan?
What is the income tax withholding requirement when an individual receives eligible rollover funds from a profit-sharing plan?
When must traditional individual retirement annuity (IRA) distributions start?
When must traditional individual retirement annuity (IRA) distributions start?
If a 55-year-old receives a $30,000 distribution from a previous employer's 401(k) plan, which federal taxes apply if none of the funds were rolled over?
If a 55-year-old receives a $30,000 distribution from a previous employer's 401(k) plan, which federal taxes apply if none of the funds were rolled over?
How are yearly contributions to an employee's account in a qualified retirement plan managed?
How are yearly contributions to an employee's account in a qualified retirement plan managed?
How long does an individual have to 'rollover' funds from an IRA or qualified plan?
How long does an individual have to 'rollover' funds from an IRA or qualified plan?
What advantage does a trustee-to-trustee transfer of rollover funds in a qualified plan provide?
What advantage does a trustee-to-trustee transfer of rollover funds in a qualified plan provide?
What can an employer offering a qualified retirement plan do?
What can an employer offering a qualified retirement plan do?
How are Roth IRA distributions typically taxed?
How are Roth IRA distributions typically taxed?
Which product would best serve a retired individual looking to invest a lump-sum of money through an insurance company?
Which product would best serve a retired individual looking to invest a lump-sum of money through an insurance company?
What is a retirement plan that sets aside part of a company's net income for distributions to qualified employees called?
What is a retirement plan that sets aside part of a company's net income for distributions to qualified employees called?
If the owner of an IRA names their spouse as beneficiary but dies before distributions are made, what can happen?
If the owner of an IRA names their spouse as beneficiary but dies before distributions are made, what can happen?
What type of employee welfare plans are not subject to ERISA?
What type of employee welfare plans are not subject to ERISA?
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Study Notes
Retirement Plans Overview
- Withdrawals from Qualified Profit-Sharing Plans incur income tax and a 10% penalty if taken before age 59 1/2.
- Traditional Individual Retirement Accounts (IRAs) have a 10% penalty for early withdrawals.
- Distributions from IRAs before age 59 1/2 incur ordinary income tax and a 10% penalty.
Specific Retirement Plans
- Keogh Plans are designed for sole proprietors and their employees to save for retirement.
- A retirement plan is deemed "top heavy" if more than 60% of its assets are held in key employee accounts.
- An Individual Retirement Account (IRA) can be initiated by an employee regardless of other plans.
Distribution and Tax Implications
- Direct distributions from 401(k) plans are subject to federal income tax withholding.
- Rollover contributions to IRAs are not restricted by dollar limits.
- Qualified profit-sharing plans share company profits with employees.
Withdrawal Rules
- Withdrawals from an IRA can begin without penalty at age 59 1/2.
- The IRS imposes a 50% excise tax on individuals over 70 1/2 who fail to take required minimum distributions.
- Roth IRA contributions are made with post-tax dollars, allowing for tax-free withdrawals.
Contribution Limits
- Individuals can claim a maximum deductible IRA contribution of $2,500 if earning $25,000 annually.
- Inheritance of an IRA by a spouse allows for a marital deduction, preserving tax advantages.
Rollover and Transfer Guidelines
- A 20% income tax withholding applies to eligible rollover funds received from a profit-sharing plan.
- Traditional IRAs require distributions to start by April 1 of the year after turning 70 1/2.
- Federal taxes including a 10% penalty apply to distributions taken from a 401(k) without rollover.
Contribution Regulations
- Contribution limits in qualified retirement plans are governed by IRS regulations.
- Individuals have 60 days to complete rollovers from IRAs or qualified plans to avoid taxes.
Transfer Benefits
- Trustee-to-trustee transfers of rollover funds avoid mandatory income tax withholding.
- Employers offering qualified retirement plans can make tax-deductible contributions.
Taxation of Distributions
- Roth IRA distributions are generally received tax-free.
- Annuitization is a recommended investment vehicle for retirees looking to invest lump sums through insurance companies.
Profit-Sharing Plans
- Profit-sharing plans allocate a portion of net income for distributions to qualifying employees.
- If the owner of an IRA names a spouse as a beneficiary and dies, the IRA can be transferred to the spouse's account.
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