Chapter 3 Question Answers
- 1. Answer: A. Qualified retirement plans are employee benefit plans that, in return for complying with Internal Revenue Code requirements, qualify for certain income tax advantages. One type of qualified plan is the defined contribution plan. In essence, the IRS defines the maximum amount that can be contributed to the plan. Examples of these types of plans include 401(k) plans, profit-sharing plans, and 403(b) plans. A deferred compensation plan is a non-qualified plan that allows employers to put away compensation for an employee to receive at a later date.
- 2. Answer: B. Government and church retirement plans are excluded from ERISA requirements by law. In other words, ERISA regulates retirement plans in the private sector only. A section 457 plan is a retirement plan for state and local government workers. Section 401(k) plans are available to corporate employees. ERISA contains rules pertaining to beneficiary designation, participation requirements, vesting requirements, and disclosure requirements.
- 3. Answer: A. There are no capital gains with retirement plans; all income received from them is subject to ordinary income tax. Money received under the proper conditions from a Roth retirement plan can be received tax-free, but that’s not the question.
- 4. Answer: B. 403(b) plans (formerly called tax-sheltered annuities) are for employees of nonprofit entities.
- 5. Answer: D. IRS Rule 72(t) allows an investor to withdraw substantially equal periodic payments over a