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Exam 13: Retirement Savings and Deferred Compensation

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Question 21

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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.

E) None of the above
F) All of the above

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Question 22

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In 2014, Madison is a single taxpayer who is 25 years of age. During 2014, she contributed $3,000 to her employer sponsored 401(k) account. Her 2014 AGI was $64,500 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make her to IRA?

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Question 23

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

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.

Katrina's executive compensation package allows her to participate in the company's nonqualified 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?

Which of the following describes a defined benefit plan?

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?

Which of the following statements regarding contributions to defined contribution plans is true?

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) ?

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.

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.

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

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?

Kathy is 48 years of age and self-employed. During the year 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) ?

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

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

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

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?

Which of the following statements regarding Roth IRAs is false?

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 penalties?