Tools & techniques of employee benefit and retirement planning 11th Edition College Course Materials

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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
Chapter 6: Roth IRA
6.1 Unlike a traditional IRA, a Roth IRA contribution is not restricted by active participation in an employer’s retirement plan.

6.2 An early distribution penalty can be assessed on Roth IRA withdrawals.

6.3 Account holders with more than one Roth IRA can treat them as separate accounts when calculating tax consequences of distributions from any of them.


6.1 True [p. 57]

6.2 True [p. 59]

6.3 False [p. 59]

Multiple Choice
6.4 A tax-free rollover of a Roth IRA can be made to

a. another Roth IRA

b. a traditional IRA

c. a tax-deferred annuity

d. a and b

e. a and c

Answer: A [p. 59]

6.5 If the inidividaul made a contribution to a Roth IRA more than 5 years ago, which of the following permits a tax-free distribution from a Roth IRA?

a. distribution is made to help purchase a first home for grandchild of Roth IRA owner

b. distribution is made due to individual’s short term disability

c. distribution is made after age 59½

d. all of the above

e. only a and c
Answer: E [p. 59 – A tax-free distribution due to disability must be due to total and permanent disability.]

6.6 Ways that a Roth IRA differs from a traditional IRA include:

a. initial investment and earnings can be withdrawn tax-free

b. Roth IRA contributions can be made past age 59½

c. Roth IRAs are never subject to minimum distribution rules

d. a and b

e. a and c
Answer: A [p. 57]

6.7 Orville Winbacher died last year at age 58, leaving $500,000 accumulated in a Roth IRA. Which of the following is (are) true?

a. monies in the Roth IRA must be distributed within a year of the Orville’s death either to his estate or to a beneficiary

b. distribution from the account can be made over the life of a designated beneficiary if begun within a year of Orville’s death

c. initial distribution of Orville’s Roth IRA funds to a beneficiary are tax free, but subsequent investment returns on amounts distributed are taxable

d. a and b

e. b and c

Answer: E [p. 59]

6.8 George Flint was transferred to Chicago three years ago. When he left Detroit, he sold his home and put some of the money in a new Roth IRA. He and his wife, Wilma, have been renting a home for the past 3 years. Recently, the homeowner decided to sell. George is interested in buying the home. George can make a penalty free withdrawal from his Roth IRA to help complete the purchase.

a. true

b. false
Answer: B [p. 59 – In two more years, a distribution of up to $10,000 for this reason would be penalty free. To be penalty free, qualified Roth IRA contributions must have been made 5 years prior.]

6.9 Brothers Tim and Jim Shanton have asked you, their financial advisor, to settle a friendly quarrel between them. Tim argues that a Roth IRA and a traditional IRA are actuarially equivalent if $4,000 is available for investing on a before-tax basis, contributions to the traditional IRA are deductible, tax rates are expected to stay the same, and both have the same interest rates. So, it makes no difference which vehicle one uses to save for retirement. Jim insists that a Roth IRA is the better investment. You tell them

a. Tim is wrong; the tax deduction available for a traditional IRA allows more money to work for the contributor

b. Jim is wrong; at least for some low income individuals, the traditional IRA is a better investment because of their relatively lower tax rates

c. Tim is right; the two investments are equivalent in every respect when considered at the end of an investment horizon at least 10 years long

d. Jim is right; the ability to make tax-free withdrawals from Roth IRA gives a greater return even when contributions and interest rates are equivalent over time

e. both are right; the two investments are actuarially equivalent, but absence of a minimum distribution date and more liberal penalty-free withdrawal options may make the Roth IRA more attractive

Answer: E [p. 57, 60]

6.10 Quincy Winstar, age 50, has $200,000 in a traditional IRA and is considering conversion to a Roth IRA in 2009. Quincy earns $125,000 per year and his wife, Shawna earns $50,000. They file separate tax returns. As his financial advisor, you tell Quincy

a. he is not eligible for making an IRA conversion

b. he would have to pay income tax on any amounts rolled over from the traditional IRA to the Roth IRA

c. he would have to pay a 10% penalty in addition to tax on any monies rolled over since he is under age 59½

d. he can make a tax free rollover from a traditional IRA to a Roth IRA

e. he can minimize the tax consequences of the rollover by using a series of annual partial conversions rather than one large conversion
Answer: A [p. 59 – the Winstar’s income exceeds the $100,000 threshold for such conversions and they filed separate tax returns]

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