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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

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In 2020, Madison is a single taxpayer who is 25 years of age. During 2020, she contributed $3,000 to her employer-sponsored 401(k)account. Her 2020 AGI was $68,500 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make to her IRA?

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$3,900 Because she participates in an employer-sponsored retirement plan, her contribution is subject to phase-out. Before phase-out, the maximum deductible contribution is $6,000. Because her MAGI is 35 percent of the way through the $65,000 − $75,000 phase-out range for a single taxpayer ($3,500/$10,000), her deductible contribution is phased out or reduced by $2,100 ($6,000 × 0.35). Thus, the maximum deductible contribution is $3,900 ($6,000 − $2,100).

Question 2

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Taxpayers withdrawing funds from an IRA before they turn 72 are generally subject to a 10 percent penalty on the amount of the withdrawal.

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False

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

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

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

Kathy is 60 years of age and self-employed. During 2020, 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) for 2020? Assume she pays $27,787 in self-employment for 2020. (Round your final answer to the nearest whole number.)

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 (not a coronavirus-related distribution) . How much of the distribution will be subject to income tax and 10 percent penalty?

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 (not a coronavirus-related distribution). 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.

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 $82,000 to her account. If Daniela receives a $52,000 distribution from the Roth IRA, what amount of the distribution is taxable?

Dean has earned $70,000 annually for the past four and a half years working as an architect for MWC. Under MWC's defined benefit plan (which uses a five-year cliff 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 MWC. What is Dean's vested benefit (or annual benefit he has earned so far) ?

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

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?

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 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.

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

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

In 2020, Madison is a single taxpayer who is 25 years of age. During 2020, she contributed $3,020 to her employer-sponsored 401(k)account. Her 2020 AGI was $67,700 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make to her IRA?

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?

Employees who are at least 50 yearsof age 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.

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.