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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

True/False

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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.

A) True
B) False

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Question 2

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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.

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

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Question 3

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

A taxpayer can only receive a saver's credit if she contributes to a qualified retirement account.

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?

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

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?

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?

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?

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.

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?

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.

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?

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

Which of the following describes a defined benefit plan?

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 to an individual 401(k) ?

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?

Which of the following is true concerning SEP IRAs?

When employees contribute to a traditional 401(k) plan, they _____ allowed to deduct the contributions and they ______ taxed on distributions from the plan.

Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $30,000, she received a distribution of the entire $30,000 balance of her traditional IRA. She retained $5,000 of the distribution to help her pay the taxes due on the distribution and she immediately contributed the remaining $25,000 to a Roth IRA. What amount of tax and early distribution penalty is she required to pay on the $30,000 distribution from the traditional IRA if her marginal tax rate is 25 percent?