Question 1

Kathy is 48 years of age and self-employed. During 2020 she reported $514,000 of revenues and $102,800 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)?

Accepted Answer

The maximum contribution to an individual 401(k) for 2020 is $57,000, which includes both employee deferral and employer profit-sharing contributions. Kathy can contribute up to $19,500 as an employee deferral (plus an additional $6,500 catch-up contribution since she is over 50) and the remainder as an employer contribution, up to the $57,000 limit.

Question 2

Kathy is 48 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)?

Accepted Answer

Kathy is eligible to contribute the lesser of $57,000 or 100% of her net self-employment income, which is $500,000 - $100,000 = $400,000. Therefore, the maximum amount she can contribute to an individual 401(k) is $57,000.

Question 3

Amy files as a head of household. She determined her 2020 adjusted gross income was $70,000. During the year, she contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for 2020?

Accepted Answer

Amy's adjusted gross income exceeds the limit for claiming the saver's credit for a head of household in 2020, which was $48,750. Therefore, she is not eligible for the credit.

Question 4

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?

Accepted Answer

The answer of Henry has been working for Cars Corporation...

Question 5

Kathy is 60 years of age and self-employed. During 2020, she reported $534,000 of revenues and $106,800 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 $28,348 in self-employment for 2020. (Round your final answer to the nearest whole number.)

Accepted Answer

The maximum amount Kathy can contribute to an individual 401(k) for 2020 is calculated as follows:
- First, we determine Kathy's net earnings from self-employment, which is calculated as revenues minus expenses. This is $534,000 - $106,800 = $427,200.
- Next, we subtract the amount Kathy contributed to a SIMPLE IRA (if any) during the year. The problem states that Kathy has no other retirement accounts in her name, so there is nothing to subtract here.
- We then calculate Kathy's maximum contribution to an individual 401(k) as 20% of her net earnings from self-employment, minus her self-employment tax deduction. The self-employment tax deduction is equal to 50% of Kathy's total self-employment tax liability, which is calculated as 15.3% of her net earnings from self-employment. So:
Maximum 401(k) contribution = 20% x $427,200 - ($28,348 x 0.5)
= $85,440 - $14,174
= $71,266

Since the maximum contribution allowed for 2020 is $63,500 ($19,500 as salary deferral and additional $6,500 as catch-up contribution), Kathy can contribute up to $63,500 to her individual 401(k) for 2020.

Question 6

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?

Accepted Answer

The answer of On March 30, Rodger (age 56)was laid...

Question 7

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 $49,600, $52,300, $58,150, $65,300, and $75,450 for years one through five, respectively. Joan earned $40,300 of her $80,600 annual salary in year six. What is the vested benefit Joan is entitled to receive from PDEK for her retirement? (Use Exhibit 13-1 ).

Accepted Answer

The answer of Joan recently started her career with PDEK...

Question 8

Christina made a one-time contribution of $16,000 to her 401(k)account, and she received a matching contribution from her employer in the amount of $4,800. Christina expects to earn a 8-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 $16,000 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.)

Accepted Answer

The answer of Christina made a one-time contribution of $16,000...

Question 9

Amy is single. During 2020, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $1,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year?

Accepted Answer

The Saver's Credit, also known as the Retirement Savings Contributions Credit, is designed to encourage low- and moderate-income individuals to save for retirement. For a single filer like Amy, with an adjusted gross income of $12,000 in 2020, she falls within the income range that qualifies for a 50% credit rate on her contribution to a Roth IRA. Therefore, the maximum credit she can claim is 50% of her $1,500 contribution, which equals $750.

Question 10

This year, Ryan contributed 10 percent of his $83,000 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.)

Accepted Answer

The answer of This year, Ryan contributed 10 percent of...

Question 11

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.)

Accepted Answer

The answer of This year, Ryan contributed 10 percent of...

Question 12

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?

Accepted Answer

The answer of Heidi (age 57)invested $4,000 in her Roth...

Question 13

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.)

Accepted Answer

The answer of Christina made a one-time contribution of $12,000...

Question 14

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

Accepted Answer

The answer of What is the maximum saver's credit available...

Question 15

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.

Accepted Answer

The answer of Joan recently started her career with PDEK...

Question 16

Amy is single. During 2020, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year?

Accepted Answer

The maximum saver's credit for an individual with an adjusted gross income of $12,000 who contributed $2,500 to a retirement account is 20% of the contribution, which is $500. However, the maximum amount of the credit that can be claimed for an individual with an adjusted gross income of $12,000 is $1,000, so Amy can claim a credit of $500 or the maximum credit of $1,000.

Question 17

On March 30, 2020 Rodger (age 56)was laid off from his employer of 30 years due to rough economic times from the coronavirus. 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?

Accepted Answer

The answer of On March 30, 2020 Rodger (age 56)was...

Question 18

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)?

Accepted Answer

The answer of Georgeanne has been employed by SEC Corporation...

Question 19

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

Accepted Answer

The saver's credit is available to taxpayers with low to moderate income who contribute to a qualified retirement plan, such as a 401(k) plan. Option B is the only choice where the taxpayer contributes to a qualified retirement plan and has a low AGI.

Question 20

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. What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution?

Accepted Answer

The answer of Heidi (age 57)invested $4,000 in her Roth...

Quiz 13: Retirement Savings and Deferred Compensation

Kathy is 48 years of age and self-employed. During 2020 she reported $514,000 of revenues and $102,800 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) ?

Kathy is 48 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) ?

Amy files as a head of household. She determined her 2020 adjusted gross income was $70,000. During the year, she contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for 2020?

Amy is single. During 2020, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $1,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year?

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

Amy is single. During 2020, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year?

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