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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

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Kathy is 48 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) ?

A) $51,000
B) $56,500
C) $74,287
D) $79,787

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

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Question 2

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Yvette is a 44-year-old self-employed contractor (no employees) .During 2013,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) ?

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Question 3

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On March 30,2013,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?

Participating in an employer-sponsored nonqualified deferred compensation plan is potentially 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.

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

Which of the following statements regarding Roth IRAs is false?

Which of the following is true concerning SEP IRAs?

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

In 2013,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 taxable?

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

Kathy is 48 years of age and self-employed.During 2013 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 2013?

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

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.Distributions are taxable as ordinary income in the year received.

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?

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

Riley participates in his employer's 401(k) plan.He retired in 2013 at age 75.When must Riley receive his distribution pertaining to 2013 to avoid minimum distribution penalties?

Qualified retirement plans include defined benefit plans but not 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.The penalty is assessed on employees who receive distributions before they reach 59½ years of age or 55 years of age and have separated from service (retired) .

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?

Qualifying distributions from traditional IRAs are nontaxable while qualifying distributions from Roth IRAs are fully taxable as ordinary income.