Question 1

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.

Accepted Answer

This statement is true. The IRS allows individuals to make contributions to a traditional 401(k) account up until the tax filing deadline (April 15th of the following year) and still treat it as if it was made during the previous tax year. This is known as the "grace period". Therefore, Darren can still make a contribution for the 2017 tax year before April 15, 2018, and receive the tax benefits for the 2017 tax year.

Question 2

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

Accepted Answer

The saver's credit is only available to taxpayers with incomes below certain thresholds. For 2021, the income limit for the credit is $66,000 for married filing jointly, $49,500 for head of household, and $33,000 for all other filers. Taxpayers with income above these limits are not eligible for the saver's credit.

Question 3

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

Accepted Answer

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a type of retirement account specifically created for self-employed individuals or small business owners.

Question 4

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

Accepted Answer

Taxpayers who participate in an employer-sponsored retirement plan can still contribute to an IRA, but their contribution may not be fully tax-deductible depending on their income level.

Question 5

Which of the following describes a defined contribution plan?

Accepted Answer

A defined contribution plan is a retirement savings plan in which both employers and employees can contribute money towards the plan, but the ultimate benefit is not guaranteed and depends on the contributions made and investment performance. The other options describe a defined benefit plan (A and D) or a discriminatory plan (C).

Question 6

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

Accepted Answer

Taxpayers do pay taxes on the earnings of a traditional 401(k) account, but these taxes are deferred until the money is withdrawn during retirement.

Question 7

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)?

Accepted Answer

$7,350: $70,000 (average salary for the prior three years) × 17.5% (3.5% × 5 years of service) × 60% (vesting percentage).

Question 8

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

Accepted Answer

Employer-provided qualified retirement plans can either be defined benefit plans, which promise a specific benefit upon retirement, or defined contribution plans, which specify the amount that can be contributed to the plan. These plans cannot discriminate against rank and file employees and may offer eligibility to executives depending on the specific plan. Deductible contributions to these plans are subject to contribution limits, rather than being phased-out based on AGI.

Question 9

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

Accepted Answer

Individual 401(k) plans allow for higher contribution limits of up to $57,000 in 2020 ($63,500 for those over age 50), while SEP IRAs have a contribution limit of up to $57,000 or 25% of an employee's compensation (whichever is lower) in 2020.

Question 10

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

Accepted Answer

Taxpayers who participate in an employer-sponsored retirement plan may be eligible to deduct some or all of their contributions to an IRA, depending on their income level and filing status. However, there are limitations on the amount that can be deducted.

Question 11

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.

Accepted Answer

This is because contributions to Roth IRA accounts are made with after-tax income, unlike traditional IRA accounts where contributions are made with pre-tax income. Therefore, the earnings on investments within a Roth IRA are not subject to taxes upon withdrawal, resulting in a before-tax rate of return that is equivalent to the after-tax rate of return.

Question 12

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

Accepted Answer

The Saver's Credit is a tax credit for eligible taxpayers who make contributions to a qualified retirement account, such as an IRA, 401(k), or 403(b). Therefore, a taxpayer must contribute to a qualified retirement account to receive the credit.

Question 13

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

Accepted Answer

When an employee's benefits vest, she is legally entitled to receive the vested benefits. Vesting in a defined benefit plan refers to the accumulation of non-forfeitable rights to receive retirement benefits. Cliff and graded vesting schedules refer to the rate at which an employee's benefits vest over a certain period of time. However, regardless of the vesting schedule, once an employee's benefits have fully vested, she has a legal right to receive those benefits upon retirement.

Question 14

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.

Accepted Answer

When a taxpayer's marginal tax rate is decreasing, the tax benefit of contributing to a traditional IRA also decreases. However, if the after-tax rate of return on the traditional IRA investments is greater than the before-tax rate of return, the taxpayer can still earn a higher overall return on her investment.

Question 15

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

Accepted Answer

Defined benefit plans typically place the investment risks on the employer, not the employees. The other statements are true.

Question 16

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)?

Accepted Answer

$0: To vest under a 5-year cliff vesting schedule, the employee must have completed five full years of service with the employer. With a cliff vesting schedule the employee is either 100% vested or 0% vested.

Question 17

Which of the following describes a defined benefit plan?

Accepted Answer

A defined benefit plan provides a fixed income to the plan participants based on a formula, typically based on a combination of factors including years of service and salary history.

Question 18

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

Accepted Answer

This statement is incorrect. Qualified distributions from Roth IRAs are actually tax-free, not taxable as ordinary income.

Question 19

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

Accepted Answer

None of the choices is a true statement.

Explanation for each option:
A) A taxpayer may participate in both an employer-sponsored defined benefit plan and defined contribution plan in the same year, as long as the plans allow it and the required contribution limits are not exceeded.
B) A taxpayer who receives both salary as an employee and self-employment income may participate in an employer-sponsored plan and contribute to a self-employed retirement plan in the same year, as long as the contribution limits are not exceeded.
C) A taxpayer may contribute to both an IRA (either traditional or Roth) and a self-employment retirement account in the same year, as long as the contribution limits are not exceeded.

Question 20

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

Accepted Answer

Distributions from defined benefit plans are generally taxable as ordinary income.

Quiz 13: Retirement Savings and Deferred Compensation