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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

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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.

E) B) and C)
F) B) and D)

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Question 2

Multiple Choice

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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.

E) All of the above
F) A) and B)

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Question 3

Multiple Choice

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Lisa, age 45, needed some cash so she withdrew $50,000 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 distribution penalty?

Riley participates in his employer's 401(k) plan. He retired in 2018 at age 75. When must Riley receive his distribution pertaining to 2018 to avoid minimum distribution penalties?

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 traditional IRA?

Aiko (single, age 29) earned $40,000 in 2018. 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 2018? Exhibit 13-9

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

On December 1, 2018 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 2018 from her 401(k) account because she has not yet retired.

During 2018, 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 to an IRA during 2018 is $5,500. How much of a tax-deductible contribution can Jacob make to an IRA?

Kathy is 48 years of age and self-employed. During 2018, 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 an individual 401(k) for 2018? (Round your final answer to the nearest whole number)

Which of the following statements regarding defined benefit plans is False?

Kathy is 48 years of age and self-employed. During 2018 she reported $500,000 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 to an individual 401(k) ?

Which of the following statements concerning nonqualified deferred compensation plans is True?

Which of the following statements regarding traditional IRAs is True?

Kathy is 48 years of age and self-employed. During 2018 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 2018? (Round your final answer to the nearest whole number)

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?

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

Amy files as a head of household. She determined her 2018 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 2018?

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.

This year, Ryan contributed 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 10 percent 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 8-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 marginal tax rate this year is 35 percent will he earn a higher after tax rate of return from the Roth 401(k) or the traditional 401(k)? Explain. (Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number)