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Exam 13: Retirement Savings and Deferred Compensation

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Question 31

True/False

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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.

A) True
B) False

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Question 32

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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.

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

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Question 33

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

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

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 is $9,000)

What is the maximum saver's credit available to any taxpayer in 2016?

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.

Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. This year, 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?

Amy is single. During 2016, 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?

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. Cars Corp. uses a five year cliff vesting schedule. Henry retired on January 1, 2016 Henry received annual salaries of $520,000, $540,000, and $560,000 for 2013, 2014, and 2015, respectively. What is the maximum benefit Henry can receive under the plan in 2016?

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.

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?

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

Which of the following statements is true regarding taxpayers receiving distributions from traditional defined contribution plans?

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.

Darren is eligible to contribute to a traditional 401(k) in 2016. He forgot to contribute before year end. If he contributes before April 15, 2017, he is allowed to treat the contribution as though he made it during 2016.

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) ?

Aiko (single, age 29) earned $40,000 in 2016. 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 2016?

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

Riley participates in his employer's 401(k) plan. He turns 70 years of age on February 15, 2015 and he plans on retiring on July 1, 2017. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?