Chapter 13

- Qualified retirement plans include defined benefit plans but not defined contribution plans.

True False

- Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee's plan. True False

- 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. True False

- Jacob participates in his employer's defined benefit plan. He has worked for his employer for four full years. If his employer uses a five-year cliff vesting schedule, Jacob will need to work another year in order to vest in any of his defined benefit plan retirement benefits. True False

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

True False

- Taxpayers withdrawing funds from an IRA before they turn 70 ½ are generally subject to a 10 percent penalty on the amount of the withdrawal. True False

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

- 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. True False

- 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. True False

- 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. True False

- 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 59 ½ 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. True False

- Retired taxpayers over 59 ½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty. True False

- On December 1, 2012 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 2012 from her 401(k) account because she has not yet retired. True False

- An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account. True False

- Employee contributions to traditional 401(k) accounts are deductible by the employee, but employee contributions to Roth 401(k) accounts are not. True False

- When a taxpayer receives a nonqualified distribution from a Roth 401(k) account the taxpayer contributions are deemed to be distributed first. If the amount of the distribution exceeds the taxpayer contributions, the remainder is from the account earnings. True False

- Just like distributions from qualified retirement plans, distributions from nonqualified deferred compensation plans are taxed as ordinary income to the recipient. True False

- 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. True False

- From a tax perspective, participating in a nonqualified deferred compensation plan is an effective tax planning strategy especially when the employee anticipates that her marginal tax rate will be higher when she receives the deferred compensation than when she defers the compensation. True False

- Employers may choose whom they allow to participate and whom they do not allow to participate in their nonqualified deferred compensation plans. True False

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

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

- Darren is eligible to contribute to a traditional 401(k) in 2012. He forgot to contribute before year end. If he contributes before April 15, 2013, he is allowed to treat the contribution as though he made it during 2012.

True False

- Taxpayers never pay tax on the earnings of a traditional 401(k) account. True False

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

- Taxpayers contributing to and receiving distributions from a Roth IRA generally earn a before-tax rate of return on their contributions equal to their after-tax rate of return. True False

- 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. True False

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

- Individual 401(k) plans generally have higher contribution limits than SEP IRAs. True False

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

True False

- High-income taxpayers are not allowed to receive the saver's credit. True False

- Which of the following statements is true regarding employer-provided qualified retirement plans? May discriminate against rank and file employees.
- Deductible contributions are generally phased-out based on AGI.
- Executives are generally ineligible to participate in these plans.
- Generally referred to as defined benefit plans or defined contribution plans.

- Which of the following describes a defined benefit plan? Provides fixed income to the plan participants based on a formula
- Distribution amounts determined by employee and employer contributions
- Allows executives to defer income for a period of years D. Retirement account set up by an individual

- Which of the following statements regarding defined benefit plans is false?
- The benefits are based on a fixed formula
- The vesting period can be based on a graded or cliff schedule
- Employees bear the investment risks of the plan
- Employers are generally required to make annual contributions to meet expected future liabilities

- Which of the following statements regarding vesting in a defined benefit plan is correct? Under a cliff vesting schedule, a portion of an employee's benefits vest each year.
- Under a graded vesting schedule, an employee's entire benefit vests all at the same time.
- When an employee's benefits vest, she is entitled to participate in the employer's defined benefit plan.
- When an employee's benefits vest, she is legally entitled to receive the benefits.

- Dean has earned $70,000 annually for the past five years working as an architect for MWC Inc. Under MWC's defined benefit plan (which uses a 7-year graded 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. Dean has worked for five full years for MWC and his vesting percentage is 60%. What is Dean's vested benefit (or annual retirement benefit he has earned so far)?
- $12,250
- $42,000
- $7,350
- $0

- Dean has earned $70,000 annually for the past 4 ½ 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)?
- $12,250
- $42,000
- $7,350
- $0

- Which of the following best describes distributions from a defined benefit plan? Distributions from defined benefit plans are fully taxable as ordinary income.

B.Distributions from defined benefit plans are partially taxable as ordinary income and partially nontaxable as a return of capital.

- Distributions from defined benefit plans are fully taxable as capital gains.

D.Distributions from defined benefit plans are partially taxable as capital gains and partially nontaxable as a return of capital.

- Which of the following is a true statement regarding saving for retirement?
- In a given year, a taxpayer may participate in either an employer-sponsored defined benefit plan or . defined contribution plan but not both.

BIn a given year, a taxpayer who receives salary as an employee and also receives self-employment . income may participate in an employer-sponsored defined contribution plan or may contribute to a self employed retirement account but not both.

CIn a given year, a taxpayer may contribute to an IRA (either traditional or Roth) or contribute to a self. employment retirement account but not both. D. None of these is a true statement.

- Which of the following describes a defined contribution plan? Provides guaranteed income on retirement to plan participants.
- Employers and employees generally may contribute to the plan.
- Generally set up to defer income for executives and highly compensated employees but not other
- Retirement account set up to provide an individual a fixed amount of income on retirement.

- Which of the following statements regarding defined contribution plans is false? Employers bear investment risk relating to the plan.
- Employees immediately vest in their contributions to the plan.
- Employers typically match employee contributions to the plan to some extent.

DAn employer's vesting schedule is used for employers' contributions in determining the amount of the . plan benefits the employee is entitled to receive on retirement.

- Which of the following statements regarding contributions to defined contribution plans is true? Employer contributions to a defined contribution plan are not limited by the tax law.
- Employee contributions to a defined contribution plan are not limited by the tax law.

CAn 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.

- The tax laws limit the sum of the employer and employee contributions to a defined contribution plan.

- When employees contribute to a traditional 401(k) plan, they _____ allowed to deduct the contributions and they ______ taxed on distributions from the plan.
- are, are not
- are, are
- are not, are
- are not, are not

- When employees contribute to a Roth 401(k) account, they _____ allowed to deduct the contributions and they _______ taxed on distributions from the plan.
- are, are not
- are, are
- are not, are
- are not, are not

- How is a traditional 401(k) account similar to a Roth 401(k) account?
- Employees contribute before-tax dollars to both types of accounts

B.Distributions from a traditional 401(k) account and a Roth 401(k) account are both subject to minimum distribution penalties

- Both accounts can receive matching contributions from employers
- Employers generally choose how funds in these accounts will be invested

- Which of the following best describes distributions from a traditional defined contribution plan? Distributions from defined contribution plans are fully taxable as ordinary income.

B.Distributions from defined contribution plans are partially taxable as ordinary income and partially nontaxable as a return of capital.

- Distributions from defined contribution plans are fully taxable as capital gains.

D.Distributions from defined contribution plans are partially taxable as capital gains and partially nontaxable as a return of capital.

- Shauna received a distribution from her 401(k) account this year. In which of the following situations will Shauna be subject to an early distribution penalty?
- Shauna is 60 years of age but not yet retired when she receives the distribution.
- Shauna is 58 years of age but not yet retired when she receives the distribution.
- Shauna is 56 years of age and retired when she receives the distribution.
- Shauna is 69 years of age but not yet retired when she receives the distribution.

- 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 59
^{th}birthday and she has not yet retired? $0.- $10,000.
- $25,000.
- $35,000.
- None of these.

- Riley participates in his employer's 401(k) plan. He retired in 2011 at age 75. When must Riley receive his distribution pertaining to 2011 to avoid minimum distribution penalties? April 1, 2011
- April 1, 2012
- December 31, 2011
- December 31, 2012

- Riley participates in his employer's 401(k) plan. He turns 70 years of age on February 15, 2011 and he plans on retiring on July 1, 2013. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?
- by April 1, 2011
- by April 1, 2012
- by April 1, 2013
- by April 1, 2014

- Riley participates in his employer's 401(k) plan. He turns 69 years of age on February 15, 2012, and he plans on retiring on July 1, 2012. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?
- by April 1, 2012
- by April 1, 2013
- by April 1, 2014
- by April 1, 2015

- Which of the following statements is true regarding taxpayers receiving distributions from traditional defined contribution plans?
- A taxpayer who retires at age 71 in 2012 is required to pay a minimum distribution penalty if she does . not receive a distribution in 2012.
- The minimum distribution penalty is 30% of the amount required to have been distributed.

CA taxpayer who receives a distribution from a retirement account before she is 55 years old is subject to . a 10% penalty on both the distributed and undistributed portions of her retirement account.

- Taxpayers are not allowed to deduct either early distribution penalties or minimum distribution penalties.

- 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?

AIf 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.

BIf 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.

- Jenny will earn the same after-tax rate of return no matter which plan she contributes to.
- Jenny is not allowed to make a one-time contribution to either plan.

- Which of the following statements regarding Roth 401(k) accounts is false? Employees can make contributions to a Roth 401(k).
- Employers can make contributions to Roth accounts on behalf of their employees.
- Contributions to Roth 401(k) plans are not deductible.
- Qualified distributions from Roth 401(k) plans are not taxable.

- Which of the following statements is true regarding distributions from Roth 401(k) accounts? There are no minimum distribution requirements for distributions from Roth 401(k) accounts.
- Qualified distributions are subject to taxation.

C A taxpayer receiving a nonqualified distribution from a Roth 401(k) account may be taxed on a portion . but not all of the distribution.

- None of these is a true statement.

- Heidi has contributed $20,000 in total to her Roth 401(k) account over a six year period. In 2012, when her account was worth $50,000 and Heidi was in desperate need of cash, Heidi received a $30,000 nonqualified distribution from the account. How much of the distribution will be subject to income tax and 10% penalty?
- $0
- $10,000
- $12,000
- $18,000
- $30,000

- Which of the following is true concerning employer funding of nonqualified deferred compensation plans?
- Employers are required to invest salary deferred by employees in investments specified by the
- Employers are required to annually fund their deferred compensation obligations to employees.
- Employers annually deduct the amount earned by employees under the plan.
- Employers may discriminate in terms of who they allow to participate in the plan.

- Which of the following statements concerning nonqualified deferred compensation plans is true? If an employer doesn't have the funds to pay the employee, the employee becomes an unsecured creditor of the employer.

B.These plans can be an important tax planning tool for employers if they expect their marginal tax rate to decrease over time.

C.These plans can be an important tax planning tool for employees who expect their marginal tax rate to increase over time.

- Distributions are taxed at the same tax rate as long-term capital gains.

- Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?
- Employers must fund qualified defined contribution plans but not nonqualified deferred compensation
- Qualified defined contribution plans are subject to formal vesting requirements while nonqualified . deferred compensation plans are not.
- Distributions from both types of plans are taxed at ordinary income tax rates.

DIn 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.

- During 2012 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 during 2012 is $5,000. How much of a tax-deductible contribution can Jacob make to an IRA? $0 (Full-time students are not allowed to participate in IRAs)
- $500
- $4,500
- $5,000

- Which of the following statements regarding traditional IRAs is true?
- Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year.
- Taxpayers with high income are not allowed to contribute to traditional IRAs.

CTaxpayers who participate in an employer-sponsored retirement plan are allowed to deduct . contributions to a traditional IRA regardless of their AGI.

- A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

- Which of the following statements regarding IRAs is false?
- Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make . deductible contributions to a traditional IRA.

BThe ability to make deductible contributions to a traditional IRA and nondeductible contributions to a . Roth IRA may be subject to phase-out based on AGI.

- A taxpayer may contribute to a traditional IRA in 2013 but deduct the contribution in 2012.

DTaxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full . proceeds when they receive distributions from the IRA.

- 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? $3,000 income tax; $2,000 early distribution penalty
- $3,000 income tax; $0 early distribution penalty
- $0 income tax; $2,000 early distribution penalty
- $0 income tax; $0 early distribution penalty

- In 2012, 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?
- $0
- $5,000
- $37,500
- $45,000
- $50,000

- Which of the following statements regarding Roth IRAs is false? Contributions to Roth IRAs are not deductible.
- Qualifying distributions from Roth IRAs are not taxable.

CWhether or not they participate in an employer-sponsored retirement plan, taxpayers are allowed to . contribute to Roth IRAs as long as their AGI does not exceed certain thresholds.

- Taxpayers who are married and file separately are not allowed to contribute to a Roth IRA.

- Which of the following statements regarding Roth IRAs distributions is true?
- A distribution is not a qualifying distribution unless the distribution is at least two years after the . taxpayer has opened the Roth IRA.
- A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not . subject to an early distribution penalty.
- A Roth IRA does not have minimum distribution requirements.
- The full amount of all nonqualifying distributions is subject to tax at the taxpayer's marginal tax rate.

- Daniela retired at the age of 65. The current balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years ago. Through a rollover and annual contributions Daniela has contributed $80,000 to her account. If Daniela receives a $50,000 distribution from the Roth IRA, what amount of the distribution is taxable?
- $0
- $20,000
- $30,000
- $50,000

- Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 8 years ago. Through a rollover and annual contributions, she has contributed $80,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?
- $0
- $20,000
- $30,000
- $50,000

- Lisa, age 45, needed some cash so she received a $50,000 distribution 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?
- $0
- $5,000
- $30,000
- $50,000

- 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?

- $0.
- $1,250.
- $3,750.
- $5,000.

- 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?
- $0 income tax; $0 penalty.
- $12,500 income tax; $1,250 penalty.
- $12,500 income tax; $3,000 penalty.
- $12,500 income tax; $5,000 penalty.
- $0 income tax; $5,000 penalty.

- Which of the following statements concerning traditional IRAs and Roth IRAs is true?

AA taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed to contribute to a . traditional IRA after reaching 70 ½ years of age.

- The annual contribution limits for a traditional IRA and Roth IRA are the same.
- Taxpayers with high income are allowed to contribute to traditional IRAs but not to Roth IRAs.
- All of these are true statements.

- Which of the following is not a self-employed retirement account? SEP IRA.
- SEM 403(c).
- Individual 401k.
- None of these. All of these are self-employed retirement accounts.

- 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.

- Individual 401(k)s have higher contribution limits than SEP IRAs.
- None of these. Both SEP IRAs and individual 401(k)s have exactly the same annual contribution

- Which of the following statements regarding self-employed retirement accounts is true? A self-employed taxpayer who has hired employees may not set up a SEP IRA.
- A self-employed taxpayer who has hired employees may set up either a SEP IRA or an individual 401(k).
- A self-employed taxpayer who has hired employees may not set up an individual 401(k).
- All of these statements are false.

- Which of the following is true concerning SEP IRAs?
- SEP IRAs are difficult to set up and have high administrative costs
- Taxpayers may contribute unlimited amounts to SEP IRAs
- Employees of the taxpayer cannot be included in SEP IRAs
- Taxpayers with a SEP IRA must contribute for their employees

- Which of the following concerning individual 401(k)s is false?
- In general, individual 401(k)s have higher administrative costs than SEP IRAs.
- Employees cannot participate in individual 401(k)s.

C.Individual 401(k)s are available only to self-employed taxpayers with 100 or fewer employees earnings at least $5,000 a year.

- Individual 401(k)s have contribution limitations.

- Kathy is 60 years of age and self-employed. During 2012 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

2012?

- $11,152
- $13,202
- $55,500
- $50,000

- Kathy is 48 years of age and self-employed. During 2012 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 2012?
- $11,152
- $13,202
- $55,500
- $50,000

- 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 this year to a simplified employee pension (SEP) IRA?
- $50,000
- $55,500
- $57,832
- $277,050

- Kathy is 60 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)? $28,152
- $33,652
- $50,000
- $55,500

- 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)? $11,152
- $16,652
- $28,152
- $50,000

- 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)? $50,000
- $55,500
- $74,832
- $80,332

- 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)? $50,000
- $55,500
- $74,832
- $80,332

- Which of the following taxpayers is most likely to qualify for the saver's credit? A low AGI taxpayer who does not contribute to any qualified retirement plan.
- A low AGI taxpayer who contributes to her employer's 401(k) plan.
- A high AGI self-employed taxpayer.
- A high AGI employee who does not contribute to any qualified retirement plan.

- Amy is single. During 2012, 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?
- $1,250
- $2,500
- $1,000
- $0

- Amy is single. During 2012, 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? $750
- $1,000
- $1,500
- $0

- Amy files as a head of household. She determined her 2012 adjusted gross income was $60,000. During the year, she contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for 2012?
- $1,000
- $2,000
- $2,500
- $1,250
- $0

- What is the maximum saver's credit available to any taxpayer in 2012?
- $2,000
- $1,000
- $500
- It depends on the filing status of the taxpayer

- Joan recently started her career with PDEK Accounting, LLP which provides a defined benefit plan for all employees. Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service. Plan benefits vest under a 5-year cliff schedule. Joan worked 4 ½ years at PDEK before leaving for another opportunity. She received an annual salary of $49,000, $52,000, $58,000 and $65,000 for years one through four, respectively. Joan earned $35,000 of her $70,000 annual salary in year five. What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

- Joan recently started her career with PDEK Accounting, LLP which provides a defined benefit plan for all employees. Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service. Plan benefits vest under a 5-year cliff schedule. Joan worked 5 ½ years at PDEK before leaving for another opportunity. She received an annual salary of $49,000, $52,000, $58,000, $65,000, and $75,000 for years one through five respectively. Joan earned $40,000 of her $80,000 annual salary in year six. What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

- 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 x 2 percent for each full year). Henry retired on January 1, 2012. Henry received annual salaries of $520,000, $540,000, and $560,000 for 2009, 2010, and 2011, respectively. What is the maximum benefit Henry can receive under the plan in 2012?

- Georgeanne has been employed by SEC Corp. for the last 2 ½ 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)?

- In 2012, Christina made a one-time contribution of $12,000 to her 401(k) account, and she received a matching contribution from her employer in the amount of $4,000. Christina expects to earn a 6-percent before-tax rate of return on her account balance. Assuming Christina withdraws the entire balance in 25 years when she retires, what is Christina's after-tax accumulation from the 2012 contributions to her 401(k) account? Assume her marginal tax rate at retirement is 35 percent?

- In 2012, Ryan contributes 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 aftertax 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 in 2012 is 35 percent will he earn a higher after tax rate of return from the Roth 401(k) or the traditional 401(k)? Explain.

- On March 30, 2012, 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?

- Heidi invested $4,000 in her Roth 401(k) on January 1, 2005. This was her only contribution to the account. On July 1, 2012, when the account balance was $6,000, she received a nonqualified distribution of $4,500. What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution?

- Sean (age 74 at end of 2012) retired five years ago. The balance in his 401(k) account on December 31, 2011 was $1,700,000 and the balance in his account on December 31, 2012 was $1,800,000. Using the IRS tables below, what is Sean's required minimum distribution for 2012?

- Sean (age 74 at end of 2012) retired five years ago. The balance in his 401(k) account on December 31, 2011 was $1,700,000 and the balance in his account on December 31, 2012 was $1,750,000. In 2012,

Sean received a distribution of $50,000 from his 401(k) account. Assuming Sean's marginal tax rate is 25 percent, what amount of the $50,000 distribution will Sean have left after paying income tax on the distribution and paying any minimum distribution penalties (use the IRS table below in determining the minimum distribution penalty, if any).

100.Kim (50 years of age) is considering whether to participate in her company's Roth 401(k) or traditional 401(k). This year, she plans to invest either $4,000 in a Roth 401(k) or $5,000 in a traditional 401(k). Kim plans on leaving the contribution in the retirement account for 20 years when she will receive a distribution of the entire balance in the account. Her employer does not have a matching program for employee contributions to retirement accounts. Assume Kim can earn a 6 percent before tax return in either account and that she anticipates that in 20 years her tax rate will be 30%.

- What would be Kim's after-tax accumulation in 20 years if she contributes $4,000 to a Roth 401(k) account?
- What would be her after-tax accumulation in 20 years if she contributes $5,000 to a traditional 401(k) account?

101.Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. In 2012, 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?

102.Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. In the current year, Katrina defers 15 percent of her $300,000 salary. Katrina's deemed investment choice will earn 8 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 expects her marginal tax rate to be 28 percent upon receipt on the deferred salary. What is her after-tax accumulation from the deferred salary in 10 years?

103.In 2012, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2012?

104.In 2012, Tyson (age 52) earned $50,000 of salary. Assuming he does not participate in an employersponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2012?

105.In 2012, Madison is a single taxpayer who is 25 years of age. During 2012, she contributed $3,000 to her employer sponsored 401(k) account. Her 2012 AGI was $62,500 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make her to IRA?

106.Carmello and Leslie (ages 34 and 35, respectively) are married and want to contribute to a Roth IRA. In 2012, their AGI totaled $42,000. Of the $42,000, Carmello earned $35,000 and Leslie earned $7,000. How much can each spouse contribute to a Roth IRA if they file jointly? How much can each spouse contribute to a Roth IRA if they file separately?

107.Cassandra, age 33, has made deductible contributions to her traditional IRA over the years. When the balance in her IRA was $40,000, Cassandra received a distribution of $34,000 from her IRA in order to purchase a new car. How much of the $34,000 distribution will she have remaining after paying income taxes and early distribution penalties on the distribution? Her marginal tax rate is 25 percent.

108.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?

109.Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $32,000, she transferred the entire $32,000 out of her traditional IRA and immediately into a Roth IRA. Her current marginal tax rate is 25 percent. What amount of tax and penalty is she required to pay on this rollover?

110.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?

111.Gordon is a 52-year-old self-employed contractor (no employees). During 2012, his Schedule C net income was $88,000. What is the maximum amount that Gordon can contribute to (1) a SEP IRA and (2) an individual 401(k)? (Round your answers to the nearest whole number)

112.Yvette is a 44-year-old self-employed contractor (no employees). During 2012, 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)?

113.Scott and his wife Leanne (ages 39 and 37 respectively) earned $50,000 in 2012. Scott was able to contribute $2,400 ($200/month) to his employer sponsored 401(k). What amount of saver's credit can Scott and Leanne claim in 2012?

114.Deborah (single, age 29) earned $25,000 in 2012. Deborah was able to contribute $1,800 ($150/month) to her employer sponsored 401(k). What is the total saver's credit that Deborah can claim for 2012?

115.Aiko (single, age 29) earned $40,000 in 2012. 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 2012?

Chapter 13 Key

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89. B

Feedback: Under a 5-year cliff vesting schedule, employees do not vest in any benefits until they have worked for five full years. Joan worked for 4 ½ years so she is not entitled to a benefit.

- $0.

Feedback: Joan worked for more than five years so she is fully vested in her benefit from the plan. Joan's vested benefit is calculated as follows: [($58,000 + $65,000 + $75,000)/3] × (1.5% × 5 years) × 100% vesting.

- $4,950.

80 percent (40 years of service × 2 percent for each year) × 100 percent (100 percent vested after 5 years) = 80 percent Average of ($520,000, $540,000, $560,000) = $540,000

Feedback: Without consideration of the benefit limitation that amount would be $432,000 = $540,000 (average salary) × 80 percent (vested benefit) Calculated as follows:

- $200,000 (maximum annual benefit limitation set by the government).

Feedback: Georgeanne fully vests in her own contributions, but does not vest in any of her employer's contributions because she has not worked for three full years.

- $6,000.

Feedback: ($16,000 × 1.0625) - (68,670 × 35%). The future value factor for 25 years, 6%, is 4.29187.

- $44,636.

Feedback: Roth 401(k): $7,500 × 1.0825; Traditional 401(k): ($7,500 × 1.0825) × (1 - 30%); The future value factor for 25 years, 8%, is 6.84848. 95. Roth 401(k) after-tax accumulation: $51,364. Traditional 401(k) after-tax accumulation: $35,955. Higher after-tax rate of return from the traditional 401(k). The after-tax rate of return on the traditional 401(k) is higher than the return on the Roth because Ryan gets a tax benefit of the deductible contribution on the traditional 401(k) at a marginal tax rate of 35 percent and only pays tax on the income at 30 percent at retirement. Thus, after taxes, he earns a rate of return above the 8 percent before tax rate of return he earns on a Roth 401(k).

Rodger owes income tax on the distribution ($40,000 × 28%) but no penalty because he is over age 55 and is no longer employed.

- Tax is $11,200 ($40,000 × 28%); Penalty is $0.

Feedback: See computation below:

- $1,500 taxable portion of distribution; $150 penalty.

Feedback: This is determined by his age at the end of the year of distribution (74) and the balance in his account at the end of the year prior to the distribution (2011).

- For 2012, his required minimum distribution is $71,400 ($1,700,000 × 4.2%).

Feedback: Sean must pay $12,500 of income tax ($50,000 distribution x 25% marginal tax rate). He also must pay a penalty of $10,700. His required minimum distribution is $71,400 ($1,700,000 × 4.2% (from the table)). This is determined by his age at the end of the year of distribution (74) and the balance in his account at the end of the year prior to the distribution (2011). Because his distribution was only $50,000, he must pay a 50% penalty on $21,400 ($71,400 - 50,000); the amount by which his distribution was short of the required distribution). Thus, his penalty is $10,700 ($21,400 × 50%).

- $26,800 remaining after taxes and penalty ($50,000 distribution minus $12,500 of income tax minus $10,700 penalty).

Feedback: See computations above.

The future value factor for 20 years, 6%, is 3.20714.

2) After-tax accumulation in traditional 401(k) is $11,225 = [($5,000 × 1.0620) × (1 - .3)].

100. 1) After-tax accumulation in Roth 401(k) is $12,829 ($4,000 × 1.0620);

After-tax = $102,292. The future value factor for 10 years, 7%, is 1.96715.

Feedback: $80,000 ($400,000 × 20% deferred salary) × 1.0710 × (1 - .35) = $102,292.

- $102,292.

Feedback: $45,000 ($300,000 × 15% deferred salary). $45,000 × 1.0810 × (1 - .28) = $69,949. The future value factor for 10 years, 8%, is 2.15892.

- $69,949.

Feedback: Deductible contributions to an IRA are limited to the lesser of $5,000 or earned income.

- $3,500.

Feedback: The maximum deductible contribution to an IRA in 2012 is $5,000. Taxpayers who are at least 50 years of age at the end of the year may deduct an additional $1,000.

- $6,000.

Because she participates in an employer-sponsored retirement plan, her contribution is subject to phase out. Before phase-out, the

maximum deductible contribution is $5,000. Because her AGI is 45 percent of the way through the $58,000 - $68,000 phase-out range for a single taxpayer (4,500/10,000), her deductible contribution is phased-out or reduced by $2,250 ($5,000 × .45). Thus, the maximum deductible contribution is $2,750 ($5,000 - 2,250).

- $2,750.

Feedback: If the couple files jointly, Carmello and Leslie can each contribute $5,000 to Roth IRAs because their AGI is below the beginning of the phase out range ($173,000). However, if they file separately, contributions are phased out for AGI between $0 and $10,000. Because Carmello's AGI exceeds $10,000 he is not allowed to contribute. Because Leslie's AGI is 70 percent of the way through the phase-out range, she must phase out or reduce the $5,000 contribution by 70 percent. Consequently, she is allowed to contribute $1,500 ($5,000 - 70% × 5,000).

- If they file jointly, each spouse can contribute $5,000. If they file separately, Carmello cannot contribute to a Roth IRA and Leslie can contribute $1,500.

Feedback: She must pay $8,500 income taxes on the distribution ($34,000 × 25%). In addition, she must pay a 10 percent early distribution penalty of $3,400 ($34,000 distribution × 10%). This leaves her with $22,100 after tax and penalties ($34,000 - $8,500 taxes - $3,400 penalties) to purchase the car.

- $22,100.

Feedback: The full distribution is subject to income tax at 28 percent ($8,000 × 28% = $2,240). However, because the distribution was used to pay qualified medical expenses, it is not subject to the 10-percent early distribution penalty.

- $2,240 tax; $0 penalty.

Feedback: She is taxed on the full amount transferred out of the traditional IRA ($32,000 × 25%). Because she transferred the entire balance into a Roth IRA within the required time period, she is not required to pay an early distribution penalty.

- $8,000 tax; $0 penalty.

Feedback: Tatia is taxed at 25 percent on the full $30,000 distribution ($30,000 × 25%). She also must pay a 10% penalty on the $5,000 distribution she received but did not contribute to the Roth IRA ($5,000 × 10%).

- $7,500 income tax; $500 early distribution penalty.

Individual 401(k) maximum contribution is the lesser of (1) $50,000 or (2) $33,357 [[($88,000 - (88,000 × .9235 × .133 × .5751)) × 20%] + $17,000]. Because Gordon has reached age 50 by the end of the year he may deduct an additional $5,500. In total, the maximum contribution is $38,857 (33,357 + 5,500).

Feedback: SEP IRA maximum contribution is lesser of (1) $50,000 or (2) $16,357 [($88,000 - (88,000 × .9235 × .133 × .5751)) × 20%].

- SEP IRA = $16,357; Individual 401(k) = $38,857.

Individual 401(k) maximum contribution is the lesser of (1) $50,000 (2) $94,564 ([20% × ($400,000 - [((400,000 × .9235 - 110,100) × 2.9% × 50%) + (110,100 × 13.3% × 57.51%)]] + $17,000).

Feedback: SEP IRA maximum contribution is lesser of (1) $50,000 or (2) $77,564 [20% × ($400,000 - [((400,000 × .9235 - 110,100) × 2.9% × 50%) + (110,100 × 13.3% × 57.51%)]].

- SEP IRA = $50,000; Individual 401(k) = $50,000.

Feedback: $2,000 (maximum contribution amount) × 10 percent (applicable percentage for joint filers with AGI from $37,500 to $57,500).

- $200.

Feedback: $1,800 (contribution amount) x 10 percent (applicable percentage for single filers with AGI from $18,750 to $287).

- $180.

Single taxpayers with AGI in excess of $28,750 are not allowed to claim any saver's credit.

- $0.

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