Series 7 Retirement Plans Practice Questions

Correct answer: D. pay off a personal credit card balance

The 10% early-withdrawal penalty on pre-59 1/2 IRA distributions has statutory exceptions, including qualified higher-education expenses, a first-time home purchase (up to a $10,000 lifetime cap), total and permanent disability, death, substantially equal periodic payments, certain unreimbursed medical expenses, and health insurance premiums while unemployed. Paying off a personal credit card balance is not one of the listed exceptions, so that distribution remains subject to both ordinary income tax and the 10% penalty.

• A. Qualified higher education expenses are a recognized statutory exception to the 10% penalty.
• B. The first-time homebuyer exception, capped at a $10,000 lifetime limit, is a valid statutory exception.
• C. Substantially equal periodic payments (72(t) payments) over life expectancy are a valid statutory exception.
• D. Paying off a personal credit card balance is ordinary personal use of funds and is not among the recognized statutory exceptions, so this withdrawal would be subject to the 10% penalty.

Correct answer: D. Only the employer contributes to a SEP IRA, and the contribution must be made at a uniform percentage of compensation for all eligible employees, including the owner

A SEP IRA is funded entirely by employer contributions — employees do not make salary-deferral contributions as they would in a 401(k). The employer must apply the same contribution percentage of compensation to every eligible employee, including the owner, and SEP contribution limits are substantially higher than standard Traditional IRA limits. SEPs are popular precisely because they're simple and available to businesses of any size, including sole proprietors.

• A. SEP IRAs do not permit employee salary-deferral contributions (outside of legacy SARSEPs); only the employer contributes, unlike a 401(k).
• B. SEP IRAs are popular specifically with small businesses and the self-employed; there is no minimum employee count like 100 required to establish one.
• C. SEP IRA contribution limits are actually much higher than Traditional IRA limits, not lower, since they're based on a percentage of compensation up to a high annual dollar cap.
• D. SEP contributions come only from the employer, and the plan must use a uniform contribution percentage of compensation applied consistently across all eligible employees, including the owner.

Correct answer: B. The distribution is subject to ordinary income tax but not the 10% early withdrawal penalty, since 457(b) plans are not subject to that penalty

Governmental 457(b) plans are nonqualified deferred compensation arrangements that are not subject to the 10% early-withdrawal penalty tax that applies to qualified plans and IRAs, regardless of the participant's age at distribution; the distribution is still taxed as ordinary income when received. Choice A incorrectly imports the 10% penalty from qualified-plan rules. Choice C is wrong because 457(b) plans are typically funded with pre-tax deferrals, not after-tax dollars. Choice D invents a penalty that does not apply to 457(b) distributions generally.

• A. This misapplies the general early-withdrawal penalty rule; governmental 457(b) plans are specifically exempt from the 10% early withdrawal penalty regardless of the participant's age or separation from service.
• B. 457(b) distributions are taxed as ordinary income, but a key distinguishing feature of these plans is that the 10% early withdrawal penalty simply does not apply, unlike 401(k)s and 403(b)s.
• C. Governmental 457(b) plans are typically funded with pre-tax contributions, so distributions are taxable as ordinary income, not tax-free.
• D. There is no mandatory 20% penalty tax on 457(b) distributions; that figure confuses the concept with unrelated withholding rules for other plan types and misstates it as a penalty.

Correct answer: B. May contribute to their own IRA, based on the working spouse's compensation, up to the annual contribution limit, as long as they file a joint return

The spousal IRA rule allows a non-working (or low-earning) spouse to make IRA contributions in their own name, using the working spouse's compensation to satisfy the earned-income requirement, provided the couple files a joint tax return. Each spouse has their own separate IRA — the accounts are never combined — and both may contribute up to the full individual annual limit, subject to the couple's combined compensation covering both.

• A. A non-working spouse can still contribute to their own IRA using the working spouse's compensation under the spousal IRA rules — lack of personal earned income doesn't bar contributions here.
• B. Correct. Under spousal IRA rules, a non-working spouse may contribute to their own IRA up to the annual limit based on the working spouse's compensation, provided the couple files a joint return.
• C. There is no rule limiting the non-working spouse to half of the other spouse's contribution — each spouse can contribute up to the full individual limit, subject to combined compensation.
• D. IRAs are individually owned; spousal contributions go into a separate IRA titled in the non-working spouse's own name, not a joint account.