## Taxation of Individuals

Business

## Quiz 13 :

Retirement Savings and Deferred Compensation

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Q04 Q04 Q04

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.

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True False

Q11 Q11 Q11

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.

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True False

Q18 Q18 Q18

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.

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True False

Q19 Q19 Q19

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.

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True False

Q36 Q36 Q36

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 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)?

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Multiple Choice

Q37 Q37 Q37

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)?

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Multiple Choice

Q48 Q48 Q48

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?Free

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Multiple Choice

Q53 Q53 Q53

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 percent before-tax rate of return no matter which plan she contributes to. Which of the following statements is true?

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Multiple Choice

Q56 Q56 Q56

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 percent penalty?

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Multiple Choice

Q60 Q60 Q60

During 2019, 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 2019 is $6,000. How much of a tax-deductible contribution can Jacob make to an IRA?

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Multiple Choice

Q63 Q63 Q63

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 percent, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?

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Multiple Choice

Q64 Q64 Q64

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?

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Multiple Choice

Q67 Q67 Q67

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?

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Multiple Choice

Q68 Q68 Q68

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 eight 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?

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Multiple Choice

Q69 Q69 Q69

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?

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Multiple Choice

Q70 Q70 Q70

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 percent, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA?

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Multiple Choice

Q71 Q71 Q71

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. 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?

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Multiple Choice

Q78 Q78 Q78

Kathy is 60 years of age and self-employed. During 2019 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 2019? (Round your final answer to the nearest whole number.)

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Multiple Choice

Q79 Q79 Q79

Kathy is 48 years of age and self-employed. During 2019 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 2019? (Round your final answer to the nearest whole number.)

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Multiple Choice

Q80 Q80 Q80

Kathy is 60 years of age and self-employed. During 2019 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 2019? Assume she pays $27,192 in self-employment for 2019. (Round your final answer to the nearest whole number.)

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Multiple Choice

Q81 Q81 Q81

Kathy is 60 years of age and self-employed. During 2019, 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 2019? Assume she paid $8,478 of self-employment tax for 2019. (Round your final answer to the nearest whole number.)

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Multiple Choice

Q82 Q82 Q82

Kathy is 48 years of age and self-employed. During 2019, 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 2019? Assume she paid $8,478 of self-employment tax for 2019. (Round your final answer to the nearest whole number.)

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Multiple Choice

Q83 Q83 Q83

Kathy is 60 years of age and self-employed. During 2019, 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 2019? Assume she pays $27,192 in self-employment for 2019. (Round your final answer to the nearest whole number.)

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Multiple Choice

Q84 Q84 Q84

Kathy is 48 years of age and self-employed. During 2019 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)?

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Multiple Choice

Q90 Q90 Q90

Joan recently started her career with PDEK Accounting, LLP, which provides a defined benefit plan for all employees. Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service. Plan benefits vest under a five-year cliff schedule. Joan worked four and a half years at PDEK before leaving for another opportunity. She received an annual salary of $49,000, $52,000, $58,000, and $65,000 for years one through four, respectively. Joan earned $35,000 of her $70,000 annual salary in year five. What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

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Q91 Q91 Q91

Joan recently started her career with PDEK Accounting, LLP, which provides a defined benefit plan for all employees. Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service. Plan benefits vest under a five-year cliff schedule. Joan worked five and a half years at PDEK before leaving for another opportunity. She received an annual salary of $49,000, $52,000, $58,000, $65,000, and $75,000 for years one through five, respectively. Joan earned $40,000 of her $80,000 annual salary in year six. What is the vested benefit Joan is entitled to receive from PDEK for her retirement? Use Exhibit 13-1.

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Q92 Q92 Q92

Henry has been working for Cars Corp. for 40 years and four months. Cars Corp. provides a defined benefit plan for its employees. Under the plan, employees receive 2 percent of the average of their three highest annual salaries for each full year of service. Cars Corp. uses a five-year cliff vesting schedule. Henry retired on January 1, 2019. Henry received annual salaries of $520,000, $540,000, and $560,000 for 2016, 2017, and 2018, respectively. What is the maximum benefit Henry can receive under the plan in 2019?

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Q93 Q93 Q93

Georgeanne has been employed by SEC Corp. for the last two and a half years. Georgeanne participates in SEC's 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)?

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Q94 Q94 Q94

Christina made a one-time contribution of $12,000 to her 401(k)account, and she received a matching contribution from her employer in the amount of $4,000. Christina expects to earn a 6-percent before-tax rate of return on her account balance. Assuming Christina withdraws the entire balance in 25 years when she retires, what is Christina's after-tax accumulation from the $12,000 contribution to her 401(k)account? Assume her marginal tax rate at retirement is 35 percent. (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

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Q95 Q95 Q95

This year, Ryan contributed 10 percent of his $75,000 annual salary to a Roth 401(k)account sponsored by his employer, XYZ. XYZ offers a dollar-for-dollar match up to 10 percent of the employee's salary. The employer contributions are placed in a traditional 401(k)account on the employee's behalf. Ryan expects to earn an 8-percent before-tax rate of return on contributions to his Roth and traditional 401(k)accounts. Assuming Ryan leaves the funds in the accounts until he retires in 25 years, what are his after-tax accumulations in the Roth 401(k)and in the traditional 401(k)accounts if his marginal tax rate at retirement is 30 percent? If Ryan's marginal tax rate this year is 35 percent, will he earn a higher after-tax rate of return from the Roth 401(k)or the traditional 401(k)? Explain. (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

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Q96 Q96 Q96

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

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Q97 Q97 Q97

Heidi (age 57)invested $4,000 in her Roth 401(k)on January 1, 2011. This was her only contribution to the account. On July 1, 2019, when the account balance was $6,000, she received a nonqualified distribution of $4,500. What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution?

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Q98 Q98 Q98

Sean (age 74 at end of 2019)retired five years ago. The balance in his 401(k)account on December 31, 2018, was $1,700,000 and the balance in his account on December 31, 2019, was $1,800,000. Using the IRS tables below, what is Sean's required minimum distribution for 2019?

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Q99 Q99 Q99

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 30 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.)

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Q102 Q102 Q102

In 2019, Madison is a single taxpayer who is 25 years of age. During 2019, she contributed $3,000 to her employer-sponsored 401(k)account. Her 2019 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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Q103 Q103 Q103

Carmello and Leslie (ages 34 and 35, respectively)are married and want to contribute to a Roth IRA. In 2019, their AGI totaled $42,000 before any IRA-related transactions. Of the $42,000, Carmello earned $35,000 and Leslie earned $7,000. 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?

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Q104 Q104 Q104

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.

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Q105 Q105 Q105

Ryan, age 48, received an $8,000 distribution from his traditional IRA to pay for medical expenses. 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?

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Q106 Q106 Q106

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

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Q107 Q107 Q107

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?

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Q109 Q109 Q109

Yvette is a 44-year-old self-employed contractor (no employees). During 2019, 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.)

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