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Is Life Insurance Tax Deductible

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					  TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
                              9th 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

                                                   IRAs

Chapter 5: Traditional IRAs

True/False

5.1         Under current tax law, a nonrefundable tax credit is available for some lower income
            taxpayers who make a contribution to a traditional IRA.

5.2         Distributions from a traditional IRA cannot be made before the participant turns 59 ½
            unless the IRA owner dies.

5.3          IRAs can be invested in a variety of investment vehicles, including mutual funds, stocks,
            bonds, and life insurance contracts.

Answer:

      5.1    True [p. 51]
      5.2    False [p. 52]
      5.3    False [p. 55]


Multiple Choice

5.4         A nondeductible traditional IRA

            a. allows prior contributions to be distributed tax free
            b. provides better tax advantages than investing in tax-deferred non-IRA investments
            c. is created when someone must make an after-tax contribution to a traditional IRA
               because of being an active participant in an employer plan
            d. distributes contributions and earnings tax free
            e. can be established up to the due date of a participant’s tax return, including extensions

Answer: A [p. 51]
5.5    Borrowing from an IRA…

       a.   is treated as an early withdrawal
       b.   requires use of a written loan agreement
       c.   reduces the deductible employee contribution amount
       d.   causes an insufficient withdrawal penalty
       e.   is not allowed

Answer: E [p. 55]

5.6    A traditional IRA

       a.   allows a couple to set aside money for retirement even if one spouse is not employed
       b.   has higher contribution limits than an employer-sponsored IRA
       c.   is often used as a supplement to employer sponsored retirement plans
       d.   a and c
       e.   b and c

Answer: D [p. 54-55]



Application

5.7    Tony Johnson, an over the road trucker, had several out of town trips early in the year, so
       he got an extension for filing his income tax return. Tony can make the maximum IRA
       contribution this year. He has until the last date of his income tax filing extension to make
       a tax-deductible contribution to his IRA.

       a. true
       b. false

Answer: B [p. 51]

5.8    Ken and Barbie Dahl file a joint tax return. Both are employed. Ken is an active participant
       in his employer’s qualified retirement plan. Barbie is not. Barbie earns $125,000 and Ken
       earns $ 40,000. Assuming they have no other tax deductions,

       a. based on their income levels, Ken can contribute to a traditional IRA and deduct
          contributions, but Barbie must contribute to a Roth IRA
       b. both Ken and Barbie can make a deductible contribution to a traditional IRA
       c. Ken can make a deductible IRA, but Barbie must make a nondeductible IRA
          contribution
       d. neither Ken nor Barbie can make a traditional IRA contribution because Ken is an
          active participant in his employer’s qualified plan
       e. neither Ken nor Barbie can make a deductible contribution to a traditional IRA

Answer: E [p. 51 – The “no spousal attribution of active participation” rule is phased out for joint
adjusted gross incomes over $160,000. Ken and Barbie’s joint income is over $160,000.]
5.9    Gary Hinton, age 54, is planning to retire earlier this year. He has $600,000 accumulated
       in a traditional IRA.

       a. Gary must wait until he is 59 1/2 to take IRA distributions without penalty
       b. Gary could take an IRA distribution without penalty before age 59 1/2 if he uses the
          money to make a qualified purchase of a condo in an retiree community
       c. Gary must pay a 10% penalty for any withdrawals that he makes from his IRA before
          age 59 1/2 unless the distribution is to purchase health insurance or medical care
       d. an amount equal to an annual payment under a life annuity can be distributed to Gary
          without penalty, but once begun, the payment can never be changed
       e. Gary can make penalty free withdraws in an amount equal to an annual life annuity
          payment until age 59 1/2; at that time, he can withdraw the remaining balance in his
          IRA without penalty

Answer: E [p. 52]

5.10   Minnie and Micky Mous are married, filing jointly. Minnie earns $60,000 a year and takes
       full advantage of her employer’s qualified retirement plan. Micky is not employed.

       a.   Micky can receive a full deduction for an IRA contribution
       b.   Micky can receive a partial deduction for an IRA contribution
       c.   both Micky and Minnie can make a nondeductible IRA contribution
       d.   Micky cannot make an IRA contribution
       e.   Minnie can make a nondeductible IRA contribution, but Micky cannot make an IRA
            contribution because he has no earned income

Answer: A [p. 53]

				
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