Exam 13: Retirement Savings and Deferred Compensation

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

Kathy is 60 years of age and self-employed. During 2020, 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)for 2020? Assume she paid $8,478 of self-employment tax for 2020. (Round your final answer to the nearest whole number.)

Georgeanne has been employed by SEC Corporation for the last two and a half years. Georgeanne participates in SECs 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)?

Which of the following statements regarding contributions to defined contribution plans is true?

When employees contribute to a Roth 401(k)account, they _____ allowed to deduct the contributions and they _______ taxed on qualified distributions from the plan.

Which of the following statements concerning individual 401(k)s is false?

Shauna received a $100,000 distribution from her 401(k)account this year. Assuming Shauna's marginal tax rate is 25 percent, 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?

Jessica retired at age 65. On the date of her retirement, the 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 on the date of retirement, what amount of the distribution is taxable?

Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $32,000, shedirectly 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 conversion?

Deborah (single, age 29)earned $25,000 in 2020. 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 2020? Use Exhibit 13-8.

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.

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 percent. 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 (not a coronavirus-related distribution). He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA five days after the distribution. What amount of income tax and penalty must Tyson pay on this series of transactions?

Henry has been working for Cars Corporation for 40 years and four months. Cars Corporation provides a defined benefit plan for its employees. Under the plan, employees receive 2 percent of the average of their three highest consecutive calendar years compensation for each full year of service. Cars Corporation uses a five-year cliff vesting schedule. Henry retired on January 1, 2020. Henry received annual salaries of $520,000, $540,000, and $560,000 for 2017, 2018, and 2019, respectively. What is the maximum benefit Henry can receive under the plan in 2020?

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?

Taxpayers whose income exceeds certain thresholds are not allowed to claim the saver's credit.

Yvette is a 44-year-old self-employed contractor (no employees). During 2020, her Schedule C net income was $540,000. 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.)

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

Which of the following taxpayers is most likely to qualify for the saver's credit?

Scott and his wife, Leanne (ages 39 and 37, respectively), earned $50,000 in 2020. 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 2020?

Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. This year, 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 24 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? (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)