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Exam 13: Retirement Savings and Deferred Compensation

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Question 41

Multiple Choice

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Which of the following statements regarding IRAs is false?

A) Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make deductible contributions to a traditional IRA.
B) The 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.
C) A taxpayer may contribute to a traditional IRA in 2015 but deduct the contribution in 2014.
D) Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full proceeds when they receive distributions from the IRA.

E) None of the above
F) B) and C)

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Question 42

Multiple Choice

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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) ?

A) $11,152
B) $16,652
C) $28,652
D) $52,000

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

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Question 43

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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) ?

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

Gordon is a 52-year-old self-employed contractor (no employees). During 2014, 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).

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.

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.

Which of the following statements regarding Roth 401(k) accounts is 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.

Which of the following statements regarding self-employed retirement accounts is true?

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.

How is a traditional 401(k) account similar to a Roth 401(k) account?

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 4½ 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?

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) ?

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) ?

Sean (age 74 at end of 2014) retired five years ago. The balance in his 401(k) account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,750,000. In 2013, 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). $\begin{array} { | c | c | l | } \hline \begin{array} { c } \text { Age of } \\\text { Participant }\end{array} & \begin{array} { c } \text { Distribution } \\\text { Period }\end{array} &{ \begin{array} { c } \text { Applicable } \\\text { Percentage }\end{array} } \\\hline 70 & 27.4 & 3.65 \% \\\hline 71 & 26.5 & 3.77 \% \\\hline 72 & 25.6 & 3.91 \% \\\hline 73 & 24.7 & 4.05 \% \\\hline 74 & 23.8 & 4.20 \% \\\hline 75 & 22.9 & 4.37 \% \\\hline\end{array}$

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

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)?

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.

On December 1, 2014 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 2014 from her 401(k) account because she has not yet retired.