Ch. 7 Federal Tax Considerations & Retirement Plans Quiz

What is the tax treatment of premiums for personal life insurance?

• Tax deductible for individuals

• Considered a personal expense and not deductible

• Tax deductible for employers

• Tax deductible for both individuals and employers

What is the Cost Recovery Rule in relation to cash value life insurance policies?

• The policyowner can recover the entire cash value tax-free

• The policyowner can recover all premiums paid

• The policyowner can recover the cash value of the policy

• The difference between what is received and what had been paid in is generally taxed as ordinary income

Under what conditions is the payment of an accelerated death benefit tax free?

• If the benefit payment is made to a non-family member

• If the benefit payment is qualified

• If the benefit payment is unqualified

• If the benefit payment exceeds a certain amount

What is the purpose of the 7-pay test in relation to life insurance policies?

• To determine the maximum premium that can be paid in the first 7 years

• To determine the cash value of the policy

• To determine if the policy is a Modified Endowment Contract

• To determine if the policy qualifies for a tax deduction

Which type of retirement plan is available to employees of public schools and nonprofit organizations?

• 401(k) Plan

• Simplified Employee Pension (SEP)

• Cash or Deferred Arrangement Plan (CODA)

• Tax-Sheltered Annuity (TSA)

What is the maximum amount of life insurance that may be purchased by a qualified plan on the life of a plan participant?

• It must be 'incidental' to the retirement benefit

• Twice the participant's annual salary

• Five times the participant's annual salary

• No maximum limit

What is the tax treatment of contributions to a nonqualified deferred compensation plan?

• Tax deductible for the employee

• Not tax deductible for either the employer or the employee

• Tax deductible for the employee but not the employer

• Tax deductible for the employer

What is the purpose of a 1035 exchange in relation to insurance policies?

• To convert a nonqualified plan into a qualified plan

• To transfer funds from one retirement plan to another

• To exchange an existing insurance policy into another without incurring any tax liability on the interest and/or investment gains

• To transfer ownership of a life insurance policy to a new owner

What is the tax treatment of distributions from a Roth IRA?

• Fully taxable at ordinary income rates

• Partially taxable depending on the amount withdrawn

• Not taxable at all

• Tax free if the account has been open for at least 5 years and the owner is at least 59 ½

What is the main difference between a defined benefit plan and a defined contribution plan?

• The type of investments allowed

• The tax treatment of contributions

• The amount of the retirement benefit at retirement

• The level of employee participation required