Question 1

Mr. and Mrs. Pointer each contributed $1,800 to their traditional IRAs. Each spouse actively participates in an employer-sponsored qualified retirement plan. Compute the deductible IRA contribution on their joint return if their AGI before such deduction is $105,970.

Accepted Answer

For 2023, the phase-out range for deductible IRA contributions for married couples filing jointly, where both spouses are covered by a workplace retirement plan, is $116,000 to $136,000. Since their AGI is $105,970, which is below the phase-out range, they can each deduct the full $1,800 contribution, totaling $3,600. However, the question seems to imply a different interpretation or error, leading to the choice of $1,085 as the deductible amount.

Question 2

In 2012, Amanda earned $70,000 self-employment income. She was allowed a $4,945 above-the line deduction for her SE tax. Compute Amanda's maximum contribution to her profit-sharing Keogh plan.

Accepted Answer

The maximum contribution to a profit-sharing Keogh plan is generally 25% of net earnings from self-employment, up to a maximum contribution limit of $56,000 in 2019. However, since Amanda is allowed an above-the-line deduction for her SE tax, her net earnings from self-employment for the purpose of calculating her maximum contribution to the Keogh plan is reduced to $70,000 - $4,945 = $65,055. Therefore, her maximum contribution to the Keogh plan is 25% of $65,055, or $16,264. However, this must be reduced by the deductible portion of her SE tax, which is 50% of the SE tax ($4,945 / 2 = $2,472.50). Therefore, her actual maximum contribution to the Keogh plan is $16,264 - $2,472.50 = $13,011, which is answer choice A.

Question 3

Mrs. Lee, age 70, withdrew $40,000 from her traditional IRA this year. The balance in the account at year-end was $96,600, which included $28,000 of nondeductible contributions. Compute the taxable portion of the $40,000 withdrawal.

Accepted Answer

The taxable portion of the withdrawal is calculated by determining the ratio of deductible contributions (and earnings) to the total balance, then applying that ratio to the withdrawal amount. Here, the total balance before withdrawal was $136,600 ($96,600 + $40,000), with $28,000 being nondeductible contributions. Thus, deductible contributions and earnings amount to $108,600 ($136,600 - $28,000). The ratio of deductible contributions and earnings to the total is $108,600 / $136,600. Applying this ratio to the $40,000 withdrawal gives a taxable amount of approximately $31,801.

Question 4

Which of the following is not a benefit of nonqualified deferred compensation plans?

Accepted Answer

Nonqualified deferred compensation plans do not provide the same level of legal protection as qualified retirement plans, such as ERISA, making them potentially riskier for participating employees. Options A, B, and D are all benefits of nonqualified deferred compensation plans.

Question 5

Peter is a 20-year old college student who is claimed as a dependent on his parents' tax return. Peter's AGI consists of $12,000 interest and dividend income from a trust fund and $4,180 of wages from a part-time job. Compute Peter's maximum IRA contribution:

Accepted Answer

Peter's maximum IRA contribution is limited to his earned income, which is $4,180 from his part-time job. Interest and dividend income do not count as earned income for IRA contribution purposes.

Question 6

Mr. Paul, age 73 and single, earned a $150,000 salary as a university professor. He no longer participates in the university's qualified retirement plan. Which of the following is true?

Accepted Answer

The answer of Mr. Paul, age 73 and single, earned...

Question 7

Mrs. Pike's 2012 compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement in 2017. Which of the following statements is true?

Accepted Answer

Mrs. Pike's current salary of $325,000 must be included in her gross income for 2012. The unfunded deferred compensation payable upon her retirement in 2017 is not taxable until then, so it should not be included in her gross income for 2012. Her employer is allowed a deduction for the $325,000 current salary, but not for the unfunded deferred compensation. Therefore, the correct answer is that in 2012, Mrs. Pike must include $325,000 in gross income, and her employer is allowed a $325,000 deduction.

Question 8

Which of the following statements comparing traditional and Roth IRAs is false?

Accepted Answer

Individuals are not required to begin liquidating Roth IRAs at age 70½, unlike traditional IRAs.

Question 9

Mr. Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost of the withdrawal if Mr. Thano has a 28% marginal tax rate on ordinary income.

Accepted Answer

The tax cost of the withdrawal is equal to the amount withdrawn multiplied by the marginal tax rate on ordinary income.

Tax cost = $22,000 x 28% 
Tax cost = $6,160

Therefore, the tax cost of the withdrawal is $6,160, and the best choice is option C.

Question 10

Ms. Jorland is a 30-year old single taxpayer. Her $3,760 AGI is the total of $7,940 interest and dividend income from a trust fund, $4,190 income from a rent property, and an $8,370 loss from a new business that she started this year. Compute Ms. Jorland's maximum IRA contribution.

Accepted Answer

Ms. Jorland is not eligible to make any IRA contributions because she has no earned income. The rental income and the loss from the new business do not count as earned income for IRA contribution purposes. The interest and dividend income from the trust fund is classified as unearned income and thus does not qualify for IRA contributions.

Question 11

Ms. Knox, age 34 and single, has $119,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

Accepted Answer

The answer of Ms. Knox, age 34 and single, has...

Question 12

Louise, age 51, quit her job and received a $70,000 distribution from her employer-sponsored qualified retirement plan. She immediately contributed $50,000 to a rollover IRA and used the remaining $20,000 to purchase a car. Compute the tax cost of the distribution if Louise has a 33% marginal tax rate on ordinary income.

Accepted Answer

The full $70,000 distribution will be subject to ordinary income tax at Louise's 33% marginal rate, resulting in a tax bill of $23,100. However, since she rolled over $50,000 to an IRA, that amount will not be taxable. Therefore, the taxable portion of the distribution is $20,000, resulting in a tax cost of $6,600 (20,000 x 0.33).

Question 13

Which of the following statements regarding Keogh plans is false?

Accepted Answer

A self-employed person with a Keogh plan is not required to provide retirement benefits to his or her employees through the plan is false. In fact, if employees meet certain eligibility requirements, they must be included in the plan.

Question 14

Mr. Smith, age 61, withdrew $12,000 from his traditional IRA this year. The balance in the account at year-end was $183,700, which included $40,000 of nondeductible contributions. Compute the taxable portion of the $12,000 withdrawal.

Accepted Answer

The answer of Mr. Smith, age 61, withdrew $12,000 from...

Question 15

Mr. and Mrs. Alexander, ages 43 and 44, each earn substantial salaries but do not participate in any type of employer-sponsored qualified retirement plan. Which of the following is true?

Accepted Answer

The couple can each contribute $6,000 to a traditional IRA (the maximum contribution limit for 2020 and 2021). Since they do not participate in any type of employer-sponsored qualified retirement plan, they can take an above-the-line deduction for the full amount of the contribution up to their respective taxable compensation amounts, and take a $12,000 above-the-line deduction on their joint Form 1040. Therefore, option B is the correct answer.

Question 16

Mrs. Lee, age 70, withdrew $10,000 from her Roth IRA this year. Mrs. Lee opened this account in 2000. The balance in the account at year-end was $76,600, which included $50,000 of contributions. Compute the taxable portion of the $10,000 withdrawal.

Accepted Answer

Since Mrs. Lee opened a Roth IRA, contributions to the account were made with after-tax dollars. Therefore, withdrawals from a Roth IRA are generally tax-free, as long as they are qualified distributions. In this case, Mrs. Lee's withdrawal is not subject to taxes because she is over 59 ½ years old and has had the account for at least 5 years. Therefore, the taxable portion of the $10,000 withdrawal is $0.

Question 17

Mrs. Soon retired at age 68 and withdrew the entire $77,100 balance from an IRA to buy a sailboat. She opened this account in 1999. Which of the following statements is false?

Accepted Answer

The answer of Mrs. Soon retired at age 68 and...

Question 18

Mr. and Mrs. Lawry, both age 60, each make the maximum contribution to their traditional IRA. Mr. Lawry is an active participant in a section 401(k) plan, but Mrs. Lawry is not an active participant in any other qualified plan. If their joint AGI before any IRA deduction is $144,900, compute their AGI.

Accepted Answer

Since Mr. Lawry is an active participant in a section 401(k) plan, his traditional IRA contribution is not deductible. On the other hand, Mrs. Lawry's contribution is deductible since she is not an active participant in any other qualified plan.

The maximum contribution for each individual for 2021 is $6,000, so the total contribution to their IRAs is $12,000. Since Mrs. Lawry's contribution is deductible, her taxable income is reduced by $6,000. However, Mr. Lawry's contribution is not deductible, so their taxable income is reduced by only $6,000 - his contribution.

The maximum contribution for those aged 50 and above is $7,000, but since Mr. and Mrs. Lawry are both age 60, they are not eligible for the catch-up contribution.

To calculate their AGI, we need to subtract their total IRA contributions of $12,000 from their joint AGI of $144,900:

$144,900 - $12,000 = $132,900

Therefore, the correct answer is C) $138,900.

Question 19

Which of the following statements regarding a Roth IRA is false?

Accepted Answer

While contributions to a Roth IRA are nondeductible (A), meaning they are made with after-tax income, the earnings and withdrawals from a Roth IRA are tax exempt (B). However, not all individuals can make tax-exempt withdrawals from a Roth IRA regardless of age - they must be at least age 59½ and the account must have been open for at least 5 years to avoid penalties for early withdrawal (C). High-income individuals may not be able to contribute directly to a Roth IRA if their modified adjusted gross income (MAGI) exceeds certain limits, but they can still contribute indirectly through a backdoor Roth IRA conversion (D).

Question 20

This year, Mr. Cox elected to contribute $4,000 of his $95,000 salary to his Section 401(k) plan. Mr. Cox's employer made a $4,000 matching contribution. How much compensation is reported on Mr. Cox's Form W-2?

Accepted Answer

The answer of This year, Mr. Cox elected to contribute...

Quiz 15: Compensation and Retirement Planning