TOOLS & TECHNIQUES OF LIFE INSURANCE PLANNING



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c. income generated by investments in a Keogh are tax-deferred until withdrawn from the plan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 self-employment 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. can deduct $1,400 as a Keogh plan contribution

b. can deduct $800 of the premium as a plan contribution

c. must report $1,400 as taxable income

d. 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 self-employment

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]

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