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Exam 13: Retirement Savings and Deferred Compensation

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Question 61

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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.

E) A) and B)
F) B) and C)

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Question 62

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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 modified AGI does not exceed certain thresholds.
D) Married taxpayers who file separately are not allowed to contribute to Roth IRAs.

E) A) and D)
F) B) and D)

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Question 63

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

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

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.

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?

What is the maximum saver's credit available to any taxpayer in 2020?

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

Retired taxpayers over 59½ years of age at the end of the year must receiverequired minimum distributions from defined contribution plans or they are subject to a penalty, unless the distribution requirement is waived under the CARES Act.

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

Heidi (age 57)invested $4,000 in her Roth 401(k)on January 1, 2012. This was her only contribution to the account. On July 1, 2020, when the account balance was $6,000, she received a nonqualified distribution of $4,500 (not a coronavirus-related distribution). What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution?

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).

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 (not a coronavirus-related distribution). 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?

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.)

Shauna received a distribution from her 401(k) account in 2021. In which of the following situations will Shauna be subject to an early distribution penalty?

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?

Darren is eligible to contribute to a traditional 401(k)in 2020. He forgot to contribute before year-end. If he contributes before April 15, 2021, he is allowed to treat the contribution as though he made it during 2020.

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?

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) ?

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?