Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap013

TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 13-02 Explain and determine the tax consequences assoc

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Chapter 13 Retirement Savings and Deferred Compensation

True / False Questions

1 Qualified retirement plans include defined benefit plans but not defined contribution plans

True False

2 Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee's plan

True False

3 The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement

True False

4 Jacob participates in his employer's defined benefit plan He has worked for his employer for four full years If his employer uses a five-year cliff vesting schedule, Jacob will need to work another year in order to vest in any of his defined benefit planretirement benefits

True False

5 Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries

True False

6 Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject

to a 10 percent penalty on the amount of the withdrawal

True False

7 Both 401(k) plans and Roth 401(k) plans are forms of defined contribution plans True False

8 Both employers and employees may contribute to defined contribution plans

However, the amount that employees may contribute to the plan in a given year is limited by the tax law while the amount that employers may contribute is not

True False

McGraw-Hill Education.

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9 When an employer matches an employee's contribution to the employee's 401(k) account, the employee is immediately taxed on the amount of the employer's

matching contribution

True False

10 Employees who are at least 50 years old at the end of the year are allowed to

contribute more to their 401(k) accounts than employees who are not 50 years old byyear end

True False

11 Heidi retired from GE (her employer) at age 56 At the end of the year, when she was

56 years of age, Heidi received a distribution from her GE sponsored 401(k) account Because Heidi was not at least 59½ years of age at the time of the distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution

True False

12 Retired taxpayers over 59½ years of age at the end of the year must receive

minimum distributions from defined contribution plans or they are subject to a

penalty

True False

13 On December 1, 2014 Irene turned 71 years old She is still working for her employer and she participates in her employer's 401(k) plan Irene is not required to receive a minimum distribution for 2014 from her 401(k) account because she has not yet retired

True False

14 An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account

True False

15 Employee contributions to traditional 401(k) accounts are deductible by the

employee, but employee contributions to Roth 401(k) accounts are not

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18 Participating in an employer-sponsored nonqualified deferred compensation plan is potentially risky because employers are not required to fund nonqualified plans If theemployer is not able to pay the employee when the payment is due, the employee usually becomes an unsecured creditor of the employer

True False

19 From a tax perspective, participating in a nonqualified deferred compensation plan is

an effective tax planning strategy when the employee anticipates that her marginal tax rate will be higher when she receives the deferred compensation than when she defers the compensation

True False

20 Employers may choose whom they allow to participate and whom they do not allow

to participate in their nonqualified deferred compensation plans

True False

21 Taxpayers who participate in an employer-sponsored retirement plan are not allowed

to contribute to individual retirement accounts (IRAs)

True False

22 Taxpayers who participate in an employer-sponsored retirement plan are not allowed

to deduct contributions to individual retirement accounts (IRAs) under any

circumstances

True False

23 Darren is eligible to contribute to a traditional 401(k) in 2014 He forgot to contribute before year end If he contributes before April 15, 2015, he is allowed to treat the contribution as though he made it during 2014

True False

24 Taxpayers never pay tax on the earnings of a traditional 401(k) account

True False

25 Qualifying distributions from traditional IRAs are nontaxable while qualifying

distributions from Roth IRAs are fully taxable as ordinary income

True False

26 Taxpayers contributing to and receiving distributions from a Roth IRA generally earn abefore-tax rate of return on their contributions equal to their after-tax rate of return True False

27 If a taxpayer's marginal tax rate is decreasing, a taxpayer contributing to a

traditional IRA can earn an after-tax rate of return greater than her before-tax rate of return

True False

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28 A SEP IRA is an example of a self-employed retirement account

Multiple Choice Questions

32 Which of the following statements is true regarding employer-provided qualified

retirement plans?

A May discriminate against rank and file employees

B Deductible contributions are generally phased-out based on AGI

C Executives are generally ineligible to participate in these plans

D They are generally referred to as defined benefit plans or defined contribution plans

33 Which of the following describes a defined benefit plan?

A Provides fixed income to the plan participants based on a formula

B Distribution amounts determined by employee and employer contributions

C Allows executives to defer income for a period of years

D Retirement account set up by an individual

34 Which of the following statements regarding defined benefit plans is false?

A The benefits are based on a fixed formula

B The vesting period can be based on a graded or cliff schedule

C Employees bear the investment risks of the plan

D Employers are generally required to make annual contributions to meet expected future liabilities

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35 Which of the following statements regarding vesting in a defined benefit plan is

correct?

A Under a cliff vesting schedule, a portion of an employee's benefits vest each year

B Under a graded vesting schedule, an employee's entire benefit vests all at the same time

C When an employee's benefits vest, she is entitled to participate in the employer's defined benefit plan

D When an employee's benefits vest, she is legally entitled to receive the vested benefits

36 Dean has earned $70,000 annually for the past five years working as an architect for

MWC Inc Under MWC's defined benefit plan (which uses a 7-year graded vesting

schedule) employees earn a benefit equal to 3.5% of the average of their three

highest annual salaries for every full year of service with MWC Dean has worked for

five full years for MWC and his vesting percentage is 60% What is Dean's vested

benefit (or annual retirement benefit he has earned so far)?

A

B

C

D

37 Dean has earned $70,000 annually for the past 4½ years working as an architect for

MWC Under MWC's defined benefit plan (which uses a 5-year cliff vesting schedule)

employees earn a benefit equal to 3.5% of the average of their three highest annual

salaries for every full year of service with MWC What is Dean's vested benefit (or

annual benefit he has earned so far)?

A

B

C

D

38 Which of the following best describes distributions from a defined benefit plan?

A Distributions from defined benefit plans are fully taxable as ordinary income

B Distributions from defined benefit plans are partially taxable as ordinary income and partially nontaxable as a return of capital

C Distributions from defined benefit plans are fully taxable as capital gains

D Distributions from defined benefit plans are partially taxable as capital gains and partially nontaxable as a return of capital

39 Which of the following is a true statement regarding saving for retirement?

A In a given year, a taxpayer may participate in either an employer-sponsored defined benefit plan or defined contribution plan but not both

B In a given year, a taxpayer who receives salary as an employee and also receives self-employment income may participate in an employer-sponsored defined contribution plan or may contribute to a self-employed retirement account but not both

C In a given year, a taxpayer may contribute to an IRA (either traditional or Roth) or contribute to a self-employment retirement account but not both

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40 Which of the following describes a defined contribution plan?

A Provides guaranteed income on retirement to plan participants

B Employers and employees generally may contribute to the plan

C Generally set up to defer income for executives and highly compensated employees but not other employees

D Retirement account set up to provide an individual a fixed amount of income on retirement

41 Which of the following statements regarding defined contribution plans is false?

A Employers bear investment risk relating to the plan

B Employees immediately vest in their contributions to the plan

C Employers typically match employee contributions to the plan to some extent

D An employer's vesting schedule is used for employers' contributions in determining the amount of the plan benefits the employee is entitled to receive on retirement

42 Which of the following statements regarding contributions to defined contribution

plans is true?

A Employer contributions to a defined contribution plan are not limited by the tax law

B Employee contributions to a defined contribution plan are not limited by the tax law

C An employee who is at least 60 years of age as of the end of the year may contribute more to a defined contribution plan than an employee who has not reached age 60 by year end

D The tax laws limit the sum of the employer and employee contributions to a defined contribution plan

43 When employees contribute to a traditional 401(k) plan, they _ allowed to deduct

the contributions and they taxed on distributions from the plan

A

B

C

D

44 When employees contribute to a Roth 401(k) account, they _ allowed to deduct

the contributions and they _ taxed on distributions from the plan

A

B

C

D

45 How is a traditional 401(k) account similar to a Roth 401(k) account?

A Employees contribute before-tax dollars to both types of accounts

B Distributions from a traditional 401(k) account and a Roth 401(k) account are both subject to minimum distribution penalties

C Both accounts can receive matching contributions from employers

D Employers generally choose how funds in these accounts will be invested

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46 Which of the following best describes distributions from a traditional defined

contribution plan?

A Distributions from defined contribution plans are fully taxable as ordinary income

B Distributions from defined contribution plans are partially taxable as ordinary income and partially nontaxable as a return of capital

C Distributions from defined contribution plans are fully taxable as capital gains

D Distributions from defined contribution plans are partially taxable as capital gains and partially nontaxable as a return of capital

47 Shauna received a distribution from her 401(k) account this year In which of the

following situations will Shauna be subject to an early distribution penalty?

A Shauna is 60 years of age but not yet retired when she receives the distribution

B Shauna is 58 years of age but not yet retired when she receives the distribution

C Shauna is 56 years of age and retired when she receives the distribution

D Shauna is 69 years of age but not yet retired when she receives the distribution

48 Shauna received a $100,000 distribution from her 401(k) account this year Assuming

Shauna's marginal tax rate is 25%, what is the total amount of tax and penalty

Shauna will be required to pay if she receives the distribution on her 59th birthday

and she has not yet retired?

49 Riley participates in his employer's 401(k) plan He retired in 2014 at age 75 When

must Riley receive his distribution pertaining to 2014 to avoid minimum distribution

50 Riley participates in his employer's 401(k) plan He turns 70 years of age on February

15, 2013 and he plans on retiring on July 1, 2015 When must Riley receive his first

distribution from the plan to avoid minimum distribution penalties?

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51 Riley participates in his employer's 401(k) plan He turns 69 years of age on February

15, 2014, and he plans on retiring on July 1, 2014 When must Riley receive his first

distribution from the plan to avoid minimum distribution penalties?

A

B

C

D

52 Which of the following statements is true regarding taxpayers receiving distributions

from traditional defined contribution plans?

A A taxpayer who retires at age 71 in 2014 is required to pay a minimum distribution penalty if she does not receive a distribution in 2014

B The minimum distribution penalty is 30% of the amount required to have been distributed

C A taxpayer who receives a distribution from a retirement account before she is 55 years old is subject to a 10% penalty on both the distributed and undistributed portions of her retirement account

D Taxpayers are not allowed to deduct either early distribution penalties or minimum distribution penalties

53 Jenny (35 years old) is considering making a one-time contribution to either a

traditional 401(k) plan or to a Roth 401(k) plan She plans to withdraw the account

balance when she retires in 40 years Jenny expects to earn a 7% before-tax rate of

return no matter which plan she contributes to Which of the following statements is

true?

A If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan

B If Jenny's marginal tax rate in the year of contribution is lower than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan

C Jenny will earn the same after-tax rate of return no matter which plan she contributes to

D Jenny is not allowed to make a one-time contribution to either plan

54 Which of the following statements regarding Roth 401(k) accounts is false?

A Employees can make contributions to a Roth 401(k)

B Employers can make contributions to Roth accounts on behalf of their employees

C Contributions to Roth 401(k) plans are not deductible

D Qualified distributions from Roth 401(k) plans are not taxable

55 Which of the following statements is true regarding distributions from Roth 401(k)

accounts?

A There are no minimum distribution requirements for distributions from Roth 401(k) accounts

B Qualified distributions are subject to taxation

C A taxpayer receiving a nonqualified distribution from a Roth 401(k) account may be taxed on a portion but not all of the distribution

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56 Heidi has contributed $20,000 in total to her Roth 401(k) account over a six year

period In 2014, when her account was worth $50,000 and Heidi was in desperate

need of cash, Heidi received a $30,000 nonqualified distribution from the account

How much of the distribution will be subject to income tax and 10% penalty?

A Employers are required to invest salary deferred by employees in investments specified by the employees

B Employers are required to annually fund their deferred compensation obligations to employees

C Employers annually deduct the amount earned by employees under the plan

D Employers may discriminate in terms of who they allow to participate in the plan

58 Which of the following statements concerning nonqualified deferred compensation

plans is true?

A If an employer doesn't have the funds to pay the employee, the employee becomes an unsecured creditor of the employer

B These plans can be an important tax planning tool for employers if they expect their marginal tax rate to decrease over time

C These plans can be an important tax planning tool for employees who expect their marginal tax rate to increase over time

D Distributions are taxed at the same tax rate as long-term capital gains

59 Which of the following statements comparing qualified defined contribution plans and

nonqualified deferred compensation plans is false?

A Employers must fund qualified defined contribution plans but not nonqualified deferred compensation plans

B Qualified defined contribution plans are subject to formal vesting requirements while nonqualified deferred compensation plans are not

C Distributions from both types of plans are taxed at ordinary income tax rates

D In terms of tax consequences to the employee, earnings on qualified plans (except Roth plans) are deferred until distributed to the employee but earnings on nonqualified plans are immediately taxable

60 During 2014 Jacob, a 19 year old full-time student, earned $4,500 during the year

and was not eligible to participate in an employer-sponsored retirement plan The

general limit for deductible contributions during 2014 is $5,500 How much of a

tax-deductible contribution can Jacob make to an IRA?

A $0 (Full-time students are not allowed to participate in IRAs)

B

C

D

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61 Which of the following statements regarding traditional IRAs is true?

A Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year

B Taxpayers with high income are not allowed to contribute to traditional IRAs

C Taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct contributions to a traditional IRA regardless of their AGI

D A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs

62 Which of the following statements regarding IRAs is false?

A Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make deductible contributions to a traditional IRA

B The ability to make deductible contributions to a traditional IRA and nondeductible contributions to a Roth IRA may be subject to phase-out based on AGI

C A taxpayer may contribute to a traditional IRA in 2015 but deduct the contribution in 2014

D Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full proceeds when they receive distributions from the IRA

63 Bryan, who is 45 years old, had some surprise medical expenses during the year To

pay for these expenses (which were claimed as itemized deductions on his tax

return), he received a $20,000 distribution from his traditional IRA (he has only made

deductible contributions to the IRA) Assuming his marginal ordinary income tax rate

is 15%, what amount of taxes and/or early distribution penalties will Bryan be

required to pay on this distribution?

A $3,000 income tax; $2,000 early distribution penalty

B $3,000 income tax; $0 early distribution penalty

C $0 income tax; $2,000 early distribution penalty

D $0 income tax; $0 early distribution penalty

64 In 2014, Jessica retired at the age of 65 The current balance in her traditional IRA

was $200,000 Over the years, Jessica had made $20,000 of nondeductible

contributions and $60,000 of deductible contributions to the account If Jessica

receives a $50,000 distribution from the IRA, what amount of the distribution is

65 Which of the following statements regarding Roth IRAs is false?

A Contributions to Roth IRAs are not deductible

B Qualifying distributions from Roth IRAs are not taxable

C Whether or not they participate in an employer-sponsored retirement plan, taxpayers are allowed to contribute to Roth IRAs as long as their AGI does not exceed certain thresholds

D Taxpayers who are married and file separately are not allowed to contribute to a Roth IRA

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66 Which of the following statements regarding Roth IRAs distributions is true?

A A distribution is not a qualifying distribution unless the distribution is at least two years after the taxpayer has opened the Roth IRA

B A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not subject to an early distribution penalty

C A Roth IRA does not have minimum distribution requirements

D The full amount of all nonqualifying distributions is subject to tax at the taxpayer's marginal tax rate

67 Daniela retired at the age of 65 The current balance in her Roth IRA is $200,000

Daniela established the Roth IRA 10 years ago Through a rollover and annual

contributions Daniela has contributed $80,000 to her account If Daniela receives a

$50,000 distribution from the Roth IRA, what amount of the distribution is taxable?

A

B

C

D

68 Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth

IRA At the time of the distribution, the balance in the Roth IRA was $200,000 Lisa

established the Roth IRA 8 years ago Through a rollover and annual contributions,

she has contributed $80,000 to her account What amount of the distribution is

taxable and subject to early distribution penalty?

A

B

C

D

69 Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth

IRA At the time of the distribution, the balance in the Roth IRA was $200,000 Lisa

established the Roth IRA 10 years ago Over the years, she has contributed $20,000

to her account What amount of the distribution is taxable and subject to early

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70 Tyson (48 years old) owns a traditional IRA with a current balance of $50,000 The

balance consists of $30,000 of deductible contributions and $20,000 of account

earnings Convinced that his marginal tax rate will increase in the future, Tyson

receives a distribution of the entire $50,000 balance of his traditional IRA and he

immediately contributes the $50,000 to a Roth IRA Assuming his marginal tax rate is

25%, what amount of penalty, if any, must Tyson pay on the distribution from the

71 Tyson (48 years old) owns a traditional IRA with a current balance of $50,000 The

balance consists of $30,000 of deductible contributions and $20,000 of account

earnings Tyson's marginal tax rate is 25% Convinced that his marginal tax rate will

increase in the future, Tyson receives a distribution of the entire $50,000 balance of

his traditional IRA He retains $12,500 to pay tax on the distribution and he

contributes $37,500 to a Roth IRA What amount of income tax and penalty must

Tyson pay on this series of transactions?

72 Which of the following statements concerning traditional IRAs and Roth IRAs is true?

A A taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed to contribute to a traditional IRA after reaching 70½ years of age

B The annual contribution limits for a traditional IRA and Roth IRA are the same

C Taxpayers with high income are allowed to contribute to traditional IRAs but not to Roth IRAs

73 Which of the following is not a self-employed retirement account?

A

B

C

D None of these All of these are self-employed retirement accounts

74 In general, which of the following statements regarding self-employed retirement

accounts is true?

A SEP IRAs have higher contribution limits than individual 401(k)s if the contributing taxpayer is at least 50 years of age at year end

B SEP IRAs have higher contribution limits than individual 401(k)s no matter the age of the contributing taxpayer

C Individual 401(k)s have higher contribution limits than SEP IRAs

D None of these Both SEP IRAs and individual 401(k)s have exactly the same annual contribution limits

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75 Which of the following statements regarding self-employed retirement accounts is

true?

A A self-employed taxpayer who has hired employees may not set up a SEP IRA

B A self-employed taxpayer who has hired employees may set up either a SEP IRA or an individual 401(k)

C A self-employed taxpayer who has hired employees may not set up an individual 401(k)

76 Which of the following is true concerning SEP IRAs?

A SEP IRAs are difficult to set up and have high administrative costs

B Taxpayers may contribute unlimited amounts to SEP IRAs

C Employees of the taxpayer cannot be included in SEP IRAs

D Taxpayers with a SEP IRA must contribute for their employees

77 Which of the following statements concerning individual 401(k)s is false?

A In general, individual 401(k)s have higher administrative costs than SEP IRAs

B Employees cannot participate in individual 401(k)s

C Individual 401(k)s are available only to self-employed taxpayers with 100 or fewer employees

D Individual 401(k)s have contribution limitations

78 Kathy is 60 years of age and self-employed During 2014 she reported $100,000 of

revenues and $40,000 of expenses relating to her self-employment activities If Kathy

has no other retirement accounts in her name, what is the maximum amount she can

contribute to a simplified employee pension (SEP) IRA for 2014?

A

B

C

D

79 Kathy is 48 years of age and self-employed During 2014 she reported $100,000 of

revenues and $40,000 of expenses relating to her self-employment activities If Kathy

has no other retirement accounts in her name, what is the maximum amount she can

contribute to a simplified employee pension (SEP) IRA for 2014?

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80 Kathy is 60 years of age and self-employed During the year she reported $400,000

of revenues and $100,000 of expenses relating to her self-employment activities If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute this year to a simplified employee pension (SEP) IRA?

A

B

C

D

of revenues and $40,000 of expenses relating to her self-employment activities If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to an individual 401(k)?

A

B

C

D

A

B

C

D

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of revenues and $100,000 of expenses relating to her self-employment activities If

Kathy has no other retirement accounts in her name, what is the maximum amount

she can contribute to an individual 401(k)?

A

B

C

D

85 Which of the following taxpayers is most likely to qualify for the saver's credit?

A A low AGI taxpayer who does not contribute to any qualified retirement plan

B A low AGI taxpayer who contributes to her employer's 401(k) plan

D A high AGI employee who does not contribute to any qualified retirement plan

86 Amy is single During 2014, she determined her adjusted gross income was $12,000

During the year, Amy also contributed $2,500 to a Roth IRA What is the maximum

saver's credit she may claim for the year?

A

B

C

D

87 Amy is single During 2014, she determined her adjusted gross income was $12,000

During the year, Amy also contributed $1,500 to a Roth IRA What is the maximum

saver's credit she may claim for the year?

A

B

C

D

88 Amy files as a head of household She determined her 2014 adjusted gross income

was $70,000 During the year, she contributed $2,500 to a Roth IRA What is the

maximum saver's credit she may claim for 2014?

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89 What is the maximum saver's credit available to any taxpayer in 2014?

$65,000 for years one through four, respectively Joan earned $35,000 of her $70,000annual salary in year five What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

91 Joan recently started her career with PDEK Accounting, LLP which provides a defined benefit plan for all employees Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service Plan benefits vest under a 5-year cliff schedule Joan worked 5½ years at PDEK before leaving for another opportunity She received an annual salary of $49,000, $52,000, $58,000, $65,000, and $75,000 for years one through five respectively Joan earned $40,000 of her

$80,000 annual salary in year six What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

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92 Henry has been working for Cars Corp for 40 years and 4 months Cars Corp

provides a defined benefit plan for its employees Under the plan, employees receive

2 percent of the average of their three highest annual salaries for each full year of service Henry's vested benefit percentage is 80 percent (40 years × 2 percent for each full year) Henry retired on January 1, 2014 Henry received annual salaries of

$520,000, $540,000, and $560,000 for 2011, 2012, and 2013, respectively What is the maximum benefit Henry can receive under the plan in 2014?

93 Georgeanne has been employed by SEC Corp for the last 2½ years Georgeanne participates in SEC's 401(k) plan During her employment, Georgeanne has

contributed $6,000 to her 401(k) account SEC has contributed $3,000 to

Georgeanne's 401(k) account (it matched 50 cents of every dollar contributed) SEC uses a three-year cliff vesting schedule If Georgeanne were to quit her job with SEC, what would be her vested benefit in her 401(k) account (assume the account balance

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95 In 2014, Ryan contributes 10 percent of his $75,000 annual salary to a Roth 401(k) account sponsored by his employer, XYZ XYZ offers a dollar-for-dollar match up to 10percent of the employee's salary The employer contributions are placed in a

traditional 401(k) account on the employee's behalf Ryan expects to earn an percent before-tax rate of return on contributions to his Roth and traditional 401(k) accounts Assuming Ryan leaves the funds in the accounts until he retires in 25 years, what are his after-tax accumulations in the Roth 401(k) and in the traditional 401(k) accounts if his marginal tax rate at retirement is 30 percent? If Ryan's

8-marginal tax rate in 2014 is 35 percent will he earn a higher after tax rate of return from the Roth 401(k) or the traditional 401(k)? Explain

96 On March 30, 2014, Rodger (age 56) was let go from his employer of 30 years due to rough economic times During his 30 years of employment, Rodger contributed

$300,000 to his traditional 401(k) account When Rodger was let go, his 401(k) account balance was $900,000 (this included both employer matching and account earnings) Rodger immediately withdrew $40,000 to use as an emergency savings fund What amount of tax and early distribution penalties must Rodger pay on the

$40,000 withdrawal if his ordinary marginal tax rate is 28 percent?

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97 Heidi invested $4,000 in her Roth 401(k) on January 1, 2006 This was her only contribution to the account On July 1, 2014, when the account balance was $6,000, she received a nonqualified distribution of $4,500 What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution?

98 Sean (age 74 at end of 2013) retired five years ago The balance in his 401(k)

account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,800,000 Using the IRS tables below, what is Sean's required minimum distribution for 2014?

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99 Sean (age 74 at end of 2014) retired five years ago The balance in his 401(k)

account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,750,000 In 2013, Sean received a distribution of $50,000from his 401(k) account Assuming Sean's marginal tax rate is 25 percent, what amount of the $50,000 distribution will Sean have left after paying income tax on the distribution and paying any minimum distribution penalties (use the IRS table below

in determining the minimum distribution penalty, if any)

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Kim (50 years of age) is considering whether to participate in her company's Roth 401(k) or traditional 401(k) This year, she plans to invest either $4,000 in a Roth 401(k) or $5,000 in a traditional 401(k) Kim plans on leaving the contribution in the retirement account for 20 years when she will receive a distribution of the entire balance in the account Her employer does not have a matching program for

employee contributions to retirement accounts Assume Kim can earn a 6 percent before tax return in either account and that she anticipates that in 20 years her tax rate will be 30%

1) What would be Kim's after-tax accumulation in 20 years if she contributes $4,000

to a Roth 401(k) account? 2) What would be her after-tax accumulation in 20 years if she contributes $5,000 to a traditional 401(k) account?

101

Katrina's executive compensation package allows her to participate in the company'snonqualified deferred compensation plan In 2014, Katrina defers 20 percent of her

$400,000 salary Katrina's deemed investment choice will earn 7 percent annually on the deferred compensation until she takes a lump sum distribution in 10 years Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate will be 35 percent upon receipt of the deferred salary What is her after-tax accumulation from the deferred salary in 10 years?

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Katrina's executive compensation package allows her to participate in the company'snonqualified deferred compensation plan In the current year, Katrina defers 15 percent of her $300,000 salary Katrina's deemed investment choice will earn 8 percent annually on the deferred compensation until she takes a lump sum

distribution in 10 years Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate to be 28 percent upon receipt on the deferred salary What is her after-tax accumulation from the deferred salary in 10 years?

103

In 2014, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income) Assuming he does not participate in

an employer-sponsored plan, what is the maximum deductible IRA contribution Tysoncan make in 2014?

104

In 2014, Tyson (age 52) earned $50,000 of salary Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014?

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Carmello and Leslie (ages 34 and 35, respectively) are married and want to

contribute to a Roth IRA In 2014, their AGI totaled $42,000 Of the $42,000, Carmelloearned $35,000 and Leslie earned $7,000 How much can each spouse contribute to

a Roth IRA if they file jointly? How much can each spouse contribute to a Roth IRA if they file separately?

107

Cassandra, age 33, has made deductible contributions to her traditional IRA over the years When the balance in her IRA was $40,000, Cassandra received a distribution

of $34,000 from her IRA in order to purchase a new car How much of the $34,000 distribution will she have remaining after paying income taxes and early distribution penalties on the distribution? Her marginal tax rate is 25 percent

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Ryan, age 48, received an $8,000 distribution from his traditional IRA to pay for medical expenses Ryan has made only deductible contributions to the IRA and his marginal tax rate is 28 percent What amount of taxes and early distribution

penalties will Ryan be required to pay on the distribution?

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Gordon is a 52-year-old self-employed contractor (no employees) During 2014, his Schedule C net income was $88,000 What is the maximum amount that Gordon can contribute to (1) a SEP IRA and (2) an individual 401(k)? (Round your answers to the nearest whole number)

112

Yvette is a 44-year-old self-employed contractor (no employees) During 2014, her Schedule C net income was 400,000 Assuming Yvette has no contributions to other retirement plans What is the maximum amount that Yvette can contribute to (1) a SEP IRA and (2) an individual 401(k)?

113

Scott and his wife Leanne (ages 39 and 37 respectively) earned $50,000 in 2014 Scott was able to contribute $2,400 ($200/month) to his employer sponsored 401(k) What amount of saver's credit can Scott and Leanne claim in 2014?

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Deborah (single, age 29) earned $25,000 in 2014 Deborah was able to contribute

$1,800 ($150/month) to her employer sponsored 401(k) What is the total saver's credit that Deborah can claim for 2014?

115

Aiko (single, age 29) earned $40,000 in 2014 He was able to contribute $1,800 ($150/month) to his employer sponsored 401(k) What is the total saver's credit that Aiko can claim for 2014?

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Chapter 13 Retirement Savings and Deferred Compensation

Answer Key

True / False Questions

1 Qualified retirement plans include defined benefit plans but not defined

contribution plans

FALSE

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation

Blooms: Remember Learning Objective: 13-01 Describe the tax and nontax aspects of employer-provided defined benefit plans

from both the employer's and employee's perspective.

Level of Difficulty: 1 Easy Topic: Defined benefit plans

2 Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee's plan

TRUE

3 The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement

FALSE

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4 Jacob participates in his employer's defined benefit plan He has worked for his employer for four full years If his employer uses a five-year cliff vesting schedule, Jacob will need to work another year in order to vest in any of his defined benefit plan retirement benefits

TRUE

5 Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries

FALSE

Distributions are taxable as ordinary income in the year received

6 Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal

FALSE

7 Both 401(k) plans and Roth 401(k) plans are forms of defined contribution plans

TRUE

Blooms: Remember Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided

defined contributions plans; including traditional 401(k) and Roth 401(k) plans.

Level of Difficulty: 2 Medium Topic: Defined contribution plans

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8 Both employers and employees may contribute to defined contribution plans However, the amount that employees may contribute to the plan in a given year islimited by the tax law while the amount that employers may contribute is not

FALSE

9 When an employer matches an employee's contribution to the employee's 401(k) account, the employee is immediately taxed on the amount of the employer's matching contribution

FALSE

10 Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old

by year end

TRUE

Level of Difficulty: 1 Easy Topic: Defined contribution plans

11 Heidi retired from GE (her employer) at age 56 At the end of the year, when she was 56 years of age, Heidi received a distribution from her GE sponsored 401(k) account Because Heidi was not at least 59½ years of age at the time of the

distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution

Blooms: Remember

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Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided

12 Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty

13 On December 1, 2014 Irene turned 71 years old She is still working for her

employer and she participates in her employer's 401(k) plan Irene is not required

to receive a minimum distribution for 2014 from her 401(k) account because she has not yet retired

TRUE

Minimum distributions are required by April 1 of the later of (1) the year after the year in which the employee turns 70½ or (2) the year after the year the employee retires

Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided

14 An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account

TRUE

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15 Employee contributions to traditional 401(k) accounts are deductible by the

employee, but employee contributions to Roth 401(k) accounts are not

TRUE

Level of Difficulty: 1 Easy Topic: Defined contribution plans

16 When a taxpayer receives a nonqualified distribution from a Roth 401(k) account the taxpayer contributions are deemed to be distributed first If the amount of the distribution exceeds the taxpayer contributions, the remainder is from the accountearnings

FALSE

Level of Difficulty: 3 Hard Topic: Defined contribution plans

17 Just like distributions from qualified retirement plans, distributions from

nonqualified deferred compensation plans are taxed as ordinary income to the recipient

TRUE

Blooms: Remember Learning Objective: 13-03 Describe the tax implications of deferred compensation from both the employer's

and employee's perspective Level of Difficulty: 1 Easy Topic: Nonqualified deferred compensation

18 Participating in an employer-sponsored nonqualified deferred compensation plan ispotentially risky because employers are not required to fund nonqualified plans If the employer is not able to pay the employee when the payment is due, the employee usually becomes an unsecured creditor of the employer

TRUE

and employee's perspective Level of Difficulty: 2 Medium Topic: Nonqualified deferred compensation

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19 From a tax perspective, participating in a nonqualified deferred compensation plan

is an effective tax planning strategy when the employee anticipates that her marginal tax rate will be higher when she receives the deferred compensation thanwhen she defers the compensation

FALSE

20 Employers may choose whom they allow to participate and whom they do not allow to participate in their nonqualified deferred compensation plans

TRUE

21 Taxpayers who participate in an employer-sponsored retirement plan are not allowed to contribute to individual retirement accounts (IRAs)

FALSE

Blooms: Remember Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement

Accounts and explain the difference between them.

Level of Difficulty: 3 Hard Topic: Individual retirement accounts

22 Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs) under any circumstances

FALSE

Level of Difficulty: 2 Medium Topic: Individual retirement accounts

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23 Darren is eligible to contribute to a traditional 401(k) in 2014 He forgot to

contribute before year end If he contributes before April 15, 2015, he is allowed totreat the contribution as though he made it during 2014

TRUE

Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement

24 Taxpayers never pay tax on the earnings of a traditional 401(k) account

FALSE

25 Qualifying distributions from traditional IRAs are nontaxable while qualifying

distributions from Roth IRAs are fully taxable as ordinary income

FALSE

26 Taxpayers contributing to and receiving distributions from a Roth IRA generally earn a before-tax rate of return on their contributions equal to their after-tax rate

of return

TRUE

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27 If a taxpayer's marginal tax rate is decreasing, a taxpayer contributing to a

traditional IRA can earn an after-tax rate of return greater than her before-tax rate

of return

TRUE

28 A SEP IRA is an example of a self-employed retirement account

TRUE

Blooms: Remember Learning Objective: 13-05 Describe retirement savings options available to self-employed taxpayers and compute the limitations for deductible contributions to retirement accounts for self-employed taxpayers.

Level of Difficulty: 1 Easy Topic: Self-employed retirement accounts

29 Individual 401(k) plans generally have higher contribution limits than SEP IRAs

TRUE

Blooms: Remember Learning Objective: 13-05 Describe retirement savings options available to self-employed taxpayers and compute the limitations for deductible contributions to retirement accounts for self-employed taxpayers.

Level of Difficulty: 2 Medium Topic: Self-employed retirement accounts

30 A taxpayer can only receive a saver's credit if she contributes to a qualified

retirement account

TRUE

Blooms: Remember Learning Objective: 13-06 Compute the saver's credit.

Level of Difficulty: 1 Easy Topic: Saver's credit

31 High-income taxpayers are not allowed to receive the saver's credit

TRUE

Blooms: Remember Learning Objective: 13-06 Compute the saver's credit.

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Level of Difficulty: 1 Easy Topic: Saver's credit

Multiple Choice Questions

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32 Which of the following statements is true regarding employer-provided qualified retirement plans?

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See discussion in text.

Level of Difficulty: 2 Medium Topic: Defined benefit plans

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