Exam 13: Retirement Savings and Deferred Compensation

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 5½ yearsat 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 PDEKfor her retirement? Exhibit 13-1

Which of the following statements regarding traditional IRAs is true?

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.

Amy is single. During 2017, 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?

Kathy is 48 years of age and self-employed. During the year she reported $500,000 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)?

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

Amy is single. During 2017, 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?

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

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

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?

Carmello and Leslie (ages 34 and 35, respectively) are married and want to contribute to a RothIRA. In 2017, their AGI totaled $42,000. Of the $42,000, Carmello earned $35,000 and Leslieearned $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?

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

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. Thebalance 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 inthe future, Tyson receives a distribution of the entire $50,000 balance of his traditionalIRA. 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?

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

Which of the following statements regarding IRAs is false?

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 from 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?

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

Deborah (single, age 29) earned $25,000 in 2017. 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 2017? Exhibit 13-9

On December 1, 2017 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 2017 from her 401(k) account because she has not yet retired.

Which of the following describes a defined contribution plan?