Exam 13: Retirement Savings and Deferred Compensation

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.

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

During 2020, 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 to an IRA during 2020 is $6,000. How much of a tax-deductible contribution can Jacob make to an IRA?

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.

Sean (age 74 at end of 2020)retired five years ago. The balance in his 401(k)account on December 31, 2019, was $1,700,000 and the balance in his account on December 31, 2020, was $1,750,000. In 2020, Sean received a distribution of $50,000 from his 401(k)account (not a coronavirus-related distribution). 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 Treasury table below in determining therequired minimum distribution penalty, if any).

Dean has earned $70,000 annually for the past five years working as an architect for WCC Incorporated Under WCC's defined benefit plan (which uses a seven-year graded vesting schedule)employees earn a benefit equal to 3.5 percent of the average of their three highest annual salaries for every full year of service with WCC. Dean has worked for five full years for WCC and his vesting percentage is 60 percent. What is Dean's vested benefit (or annual retirement benefit he has earned so far)?

On March 30, 2020 Rodger (age 56)was laid off from his employer of 30 years due to rough economic times from the coronavirus. 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?

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

Ryan, age 48, received an $8,000 distribution from his traditional IRA to pay for medical expenses (above the 7.5% of AGI floor). 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?

Lisa, age 45, needed some cash so she withdrew $50,000 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?

Which of the following statements concerning nonqualified deferred compensation plans is true?

On December 1, 2020, Irene turned 73 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 required minimum distribution for 2020 from her 401(k)account because she has not yet retired.

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

Riley participates in his employer's 401(k)plan. He turns 71 years of age on February 15, 2020, and he plans on retiring on July 1, 2020. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

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.

Yvette is a 44-year-old self-employed contractor (no employees). During 2020, her Schedule C net income was $500,000. Assume 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)? (Round your answers to the nearest whole number.)

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 32 percent and she 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? (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

Carmello and Leslie (ages 34 and 35, respectively)are married and want to contribute to a Roth IRA. In 2020, their AGI totaled $43,200 before any IRA-related transactions. Of the $43,200, Carmello earned $35,400 and Leslie earned $7,800. 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?

Kathy is 48 years of age and self-employed. During 2020 she reported $126,000 of revenues and $50,400 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 SEP IRA for 2020? (Round your final answer to the nearest whole number.)

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