Deck 13: Retirement Savings and Deferred Compensation

Question 1

Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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

Question 16

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

Question 17

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

Question 18

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.

Question 19

Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty.

Question 20

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.

Question 21

Darren is eligible to contribute to a traditional 401(k)in 2017.He forgot to contribute before year-end.If he contributes before April 15,2018,he is allowed to treat the contribution as though he made it during 2017.

Question 22

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

Question 23

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

Question 24

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

Question 25

Which of the following describes a defined contribution plan?

A) Provides guaranteed income on retirement to plan participants.
B) Employers and employees generally may contribute to the plan.
C) Generally set up to defer income for executives and highly compensated employees but not other employees.
D) Retirement account set up to provide an individual a fixed amount of income on retirement.

Question 26

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

Question 27

Dean has earned $70,000 annually for the past five years working as an architect for WCC Inc.Under WCC'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 WCC.Dean has worked for five full years for WCC and his vesting percentage is 60%.What is Dean's vested benefit (or annual retirement benefit he has earned so far)?

A) $12,250.
B) $42,000.
C) $7,350.
D) $0.

Question 28

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

A) May discriminate against rank and file employees.
B) Deductible contributions are generally phased-out based on AGI.
C) Executives are generally ineligible to participate in these plans.
D) They are generally referred to as defined benefit plans or defined contribution plans.

Question 29

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

Question 30

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

Question 31

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.

Question 32

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

Question 33

Which of the following statements regarding vesting in a defined benefit plan is correct?

A) Under a cliff vesting schedule, a portion of an employee's benefits vest each year.
B) Under a graded vesting schedule, an employee's entire benefit vests all at the same time.
C) When an employee's benefits vest, she is entitled to participate in the employer's defined benefit plan.
D) When an employee's benefits vest, she is legally entitled to receive the vested benefits.

Question 34

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.

Question 35

Which of the following statements regarding defined benefit plans is false?

A) The benefits are based on a fixed formula.
B) The vesting period can be based on a graded or cliff schedule.
C) Employees bear the investment risks of the plan.
D) Employers are generally required to make annual contributions to meet expected future liabilities.

Question 36

Dean has earned $70,000 annually for the past 4½ 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)?

A) $12,250.
B) $42,000.
C) $7,350.
D) $0.

Question 37

Which of the following describes a defined benefit plan?

A) Provides fixed income to the plan participants based on a formula.
B) Distribution amounts determined by employee and employer contributions.
C) Allows executives to defer income for a period of years.
D) Retirement account set up by an individual.

Question 38

Qualified distributions from traditional IRAs are nontaxable while qualified distributions from Roth IRAs are fully taxable as ordinary income.

Question 39

Which of the following is a true statement regarding saving for retirement?

A) In a given year, a taxpayer may participate in either an employer-sponsored defined benefit plan or defined contribution plan but not both.
B) In 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.
C) In 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 the choices is a true statement.

Question 40

Which of the following best describes distributions from a defined benefit plan?

A) Distributions from defined benefit plans are taxable as ordinary income.
B) Distributions from defined benefit plans are partially taxable as ordinary income and partially nontaxable as a return of capital.
C) Distributions from defined benefit plans are taxable as capital gains.
D) Distributions from defined benefit plans are partially taxable as capital gains and partially nontaxable as a return of capital.

Question 41

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 59ᵗʰ birthday and she has not yet retired?

A) $0.
B) $10,000.
C) $25,000.
D) $35,000.
E) None of the choices are correct.

Question 42

Riley participates in his employer's 401(k)plan.He retired in 2017 at age 75.When must Riley receive his distribution pertaining to 2017 to avoid minimum distribution penalties?

A) April 1, 2017.
B) April 1, 2018.
C) December 31, 2017.
D) December 31, 2018.

Question 43

Which of the following statements describes how a traditional 401(k)account is similar to a Roth 401(k)account?

A) 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.
C) Both accounts can receive matching contributions from employers.
D) Employers generally choose how funds in these accounts will be invested.

Question 44

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?

A) Shauna is 60 years of age but not yet retired when she receives the distribution.
B) Shauna is 58 years of age but not yet retired when she receives the distribution.
C) Shauna is 56 years of age and retired when she receives the distribution.
D) Shauna is 69 years of age but not yet retired when she receives the distribution.

Question 45

Heidi,age 45,has contributed $20,000 in total to her Roth 401(k)account over a six-year period.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?

A) $0.
B) $10,000.
C) $12,000.
D) $18,000.
E) $30,000.

Question 46

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

A) are; are not
B) are; are
C) are not; are
D) are not; are not

Question 47

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

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

Question 48

Which of the following statements is true regarding distributions from Roth 401(k)accounts?

A) There are no minimum distribution requirements for distributions from Roth 401(k) accounts.
B) 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.
D) None of the choices is a true statement.

Question 49

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?

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

Question 50

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

A) Employer contributions to a defined contribution plan are not limited by the tax law.
B) Employee contributions to a defined contribution plan are not limited by the tax law.
C) An 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.
D) The tax laws limit the sum of the employer and employee contributions to a defined contribution plan.

Question 51

During 2017,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 2017 is $5,500.How much of a tax-deductible contribution can Jacob make to an IRA?

A) $0 (Full-time students are not allowed to participate in IRAs).
B) $500.
C) $4,500.
D) $5,500.

Question 52

Which of the following best describes distributions from a traditional defined contribution plan?

A) Distributions from defined contribution plans are fully taxable to the recipient as ordinary income.
B) Distributions from defined contribution plans are partially taxable to the recipient as ordinary income and partially nontaxable as a return of capital.
C) Distributions from defined contribution plans are fully taxable to the recipient as long-term capital gains.
D) Distributions from defined contribution plans are partially taxable to the recipient as capital gains and partially nontaxable as a return of capital.

Question 53

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

A) A taxpayer who retires at age 71 in 2017 is required to pay a minimum distribution penalty if she does not receive a distribution in 2017.
B) The minimum distribution penalty is 30% of the amount required to have been distributed.
C) A 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.
D) Taxpayers are not allowed to deduct either early distribution penalties or minimum distribution penalties.

Question 54

Riley participates in his employer's 401(k)plan.He turns 70 years of age on February 15,2016 and he plans on retiring on July 1,2018.When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

A) by April 1, 2016.
B) by April 1, 2017.
C) by April 1, 2018.
D) by April 1, 2019.

Question 55

Riley participates in his employer's 401(k)plan.He turns 69 years of age on February 15,2017,and he plans on retiring on July 1,2017.When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

A) by April 1, 2017.
B) by April 1, 2018.
C) by April 1, 2019.
D) by April 1, 2020.

Question 56

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

A) Employees can make contributions to a Roth 401(k).
B) Employers can make contributions to Roth accounts on behalf of their employees.
C) Contributions to Roth 401(k) plans are not deductible.
D) Qualified distributions from Roth 401(k) plans are not taxable.

Question 57

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

A) are; are not
B) are; are
C) are not; are
D) are not; are not

Question 58

Which of the following statements regarding defined contribution plans is false?

A) Employers bear investment risk relating to the plan.
B) Employees immediately vest in their contributions to the plan.
C) Employers typically match employee contributions to the plan to some extent.
D) An 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.

Question 59

Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?

A) Employers must fund qualified defined contribution plans but not nonqualified deferred compensation plans.
B) Qualified defined contribution plans are subject to formal vesting requirements while nonqualified deferred compensation plans are not.
C) Distributions from both types of plans are taxed at ordinary income tax rates.
D) In 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.

Question 60

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

A) Employers are required to invest salary deferred by employees in investments specified by the employees.
B) Employers are required to annually fund their deferred compensation obligations to employees.
C) Employers annually deduct the amount earned by employees under the plan.
D) Employers may discriminate in terms of who they allow to participate in the plan.

Question 61

Which of the following is true concerning SEP IRAs?

A) SEP IRAs are difficult to set up and have high administrative costs.
B) Taxpayers may contribute unlimited amounts to SEP IRAs.
C) Employees of the taxpayer cannot be included in SEP IRAs.
D) Taxpayers with a SEP IRA must contribute for their employees.

Question 62

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?

A) $0.
B) $5,000.
C) $37,500.
D) $45,000.
E) $50,000.

Question 63

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?

A) $0.
B) $5,000.
C) $30,000.
D) $50,000.

Question 64

Which of the following is not a self-employed retirement account?

A) SEP IRA.
B) SEM 403(c).
C) Individual 401(k).
D) None of the choices are correct. All of the choices are self-employed retirement accounts.

Question 65

Kathy is 60 years of age and self-employed.During 2017 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 2017? (Round your final answer to the nearest whole number)

A) $11,152.
B) $17,152.
C) $60,000.
D) $54,000.

Question 66

Which of the following statements regarding Roth IRAs distributions is true?

A) A distribution is not a qualified distribution unless the distribution is at least two years after the taxpayer has opened the Roth IRA.
B) A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not subject to an early distribution penalty.
C) A Roth IRA does not have minimum distribution requirements.
D) The full amount of all nonqualified distributions is subject to tax at the taxpayer's marginal tax rate.

Question 67

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?

A) $0 income tax; $0 penalty.
B) $12,500 income tax; $1,250 penalty.
C) $12,500 income tax; $3,000 penalty.
D) $12,500 income tax; $5,000 penalty.

Question 68

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?

A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

Question 69

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

A) A taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed to contribute to a traditional IRA after reaching 70½ years of age.
B) The annual contribution limits for a traditional IRA and Roth IRA are the same.
C) Taxpayers with high income are allowed to contribute to traditional IRAs but not to Roth IRAs.
D) All of the choices are true.

Question 70

Which of the following statements regarding Roth IRAs is false?

A) Contributions to Roth IRAs are not deductible.
B) Qualified distributions from Roth IRAs are not taxable.
C) Whether 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.
D) Taxpayers who are married and file separately are not allowed to contribute to Roth IRAs.

Question 71

Which of the following statements regarding traditional IRAs is true?

A) Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year.
B) Taxpayers with high income are not allowed to contribute to traditional IRAs.
C) Taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct contributions to a traditional IRA regardless of their AGI.
D) A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

Question 72

Kathy is 48 years of age and self-employed.During 2017 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 2017? (Round your final answer to the nearest whole number)

A) $11,152.
B) $17,152.
C) $60,000.
D) $54,000.

Question 73

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 2017 but deduct the contribution on her 2016 tax return.
D) Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full proceeds when they receive distributions from the IRA.

Question 74

In general,which of the following statements regarding self-employed retirement accounts is true?

A) In general, 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) In general, SEP IRAs have higher contribution limits than individual 401(k)s no matter the age of the contributing taxpayer.
C) In general, Individual 401(k)s have higher contribution limits than SEP IRAs.
D) None of the choices are true. In general, both SEP IRAs and individual 401(k)s have exactly the same annual contribution limits.

Question 75

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

A) A self-employed taxpayer who has hired employees may not set up a SEP IRA.
B) A self-employed taxpayer who has hired employees may set up either a SEP IRA or an individual 401(k).
C) A self-employed taxpayer who has hired employees may not set up an individual 401(k).
D) All of the choices are false.

Question 76

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?

A) $0.
B) $1,250.
C) $3,750.
D) $5,000.

Question 77

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 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?

A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

Question 78

Kathy is 60 years of age and self-employed.During 2017 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 a simplified employee pension (SEP)IRA for 2017? (Round your final answer to the nearest whole number)

A) $54,000.
B) $60,000.
C) $77,351.
D) $369,400.

Question 79

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?

A) $3,000 income tax; $2,000 early distribution penalty.
B) $3,000 income tax; $0 early distribution penalty.
C) $0 income tax; $2,000 early distribution penalty.
D) $0 income tax; $0 early distribution penalty.

Question 80

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

A) In general, individual 401(k)s have higher administrative costs than SEP IRAs.
B) Employees of the taxpayer cannot participate in individual 401(k)s.
C) Individual 401(k)s are available only to self-employed taxpayers with 100 or fewer employees.
D) Individual 401(k)s have contribution limitations.