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 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. the First Baptist Church

b. Healthsmart Drug Store, Inc.

c. St. Luke’s Hospital

d. Sentential College, a private institution

e. 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. an employer can contribute to an employees account

b. Tax Deferred Annuity plans are relatively inexpensive and simple to administer

c. employers bear the investment risk under the plan

d. a and b

e. 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. level premium annuities

b. a growth mutual fund

c. variable annuities

d. a bond mutual fund

e. 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. 9,500

b. 9,580

c. 9,660

d. 9,740

e. 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.]

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