Question 1

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

Because Mrs. Lee withdrew funds from a Roth IRA (where contributions are made with after-tax dollars), and the account had a balance of $76,600 at year-end, there is no taxable portion of the $10,000 withdrawal.

Question 2

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 taxable portion of the distribution is $70,000 - $50,000 = $20,000. With a 33% marginal tax rate, the tax cost of the distribution is 33% x $20,000 = $6,600. Therefore, the correct answer is B, $8,600 (which includes the $20,000 for the car).

Question 3

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

Accepted Answer

Nonqualified deferred compensation plans may offer certain tax advantages and flexibility for employers, but they are generally considered riskier for participating employees than qualified retirement plans. This is because nonqualified plans are not protected by federal pension laws like the Employee Retirement Income Security Act (ERISA), meaning that the funds could be at risk if the employer goes bankrupt or otherwise cannot fulfill its obligations. Choices A, B, and D are all potential benefits of nonqualified plans, such as allowing greater contributions for highly compensated employees, no limits on the amount of contributions, and lower initial costs for employers since they do not have to fund the plan with cash immediately.

Question 4

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

Accepted Answer

This statement is false. While contributions to a Roth IRA are nondeductible and a Roth IRA is tax exempt, individuals cannot make tax-exempt withdrawals from a Roth IRA until age 59 1/2 or until they have owned the account for at least 5 years. If withdrawals are made before these requirements are met, taxes and penalties may apply.

Question 5

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...

Question 6

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

The answer of Peter is a 20-year old college student...

Question 7

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

Accepted Answer

Roth IRAs are not subject to the age-based minimum distribution requirement.

Question 8

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 $108,970.

Accepted Answer

For 2023, the IRA deduction phase-out range 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 $108,970, which is below the phase-out range, they can deduct a portion of their contributions. The deductible amount is calculated based on the phase-out formula, resulting in a partial deduction of $1,085.

Question 9

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 up to $6,000 to a traditional IRA for 2020 (assuming no catch-up contributions) and take an above-the-line deduction of up to $6,000 each on their joint Form 1040. This deduction is not subject to itemization limitations and can be taken regardless of whether they itemize or take the standard deduction. Therefore, they can contribute a total of $12,000 and take an above-the-line deduction of $12,000 on their joint return. Option B is the closest to this correct answer. Option A is incorrect because the total deduction cannot exceed the total contribution. Option C is incorrect because each individual can contribute up to $6,000. Option D is incorrect because the above-the-line deduction is not subject to itemization.

Question 10

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

Accepted Answer

Mr. Paul is too old to contribute to a traditional IRA and has too much AGI to contribute to a Roth IRA.

Question 11

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 12

Ms. Knox, age 34 and single, has $121,800 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 13

Mr. and Mrs. Lawry, both age 60, each make the maximum contribution to their traditional IRAs. 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 fully deductible. However, since Mrs. Lawry is not an active participant in any other qualified plan, her traditional IRA contribution is fully deductible. Therefore, their combined IRA deduction is the sum of Mrs. Lawry's fully deductible contribution and Mr. Lawry's partially deductible contribution.

The maximum contribution for each of them is $6,000 (assuming both are under age 70½). Mrs. Lawry's contribution is fully deductible, so their combined IRA deduction is $6,000 (for Mrs. Lawry) + $2,000 (for Mr. Lawry's partially deductible contribution) = $8,000.

Subtracting this from their joint AGI before any IRA deduction gives $144,900 - $8,000 = $136,900. However, since they are both over age 50, they are each eligible for an additional $1,000 catch-up contribution, making their total IRA contributions $14,000.

Their combined AGI is thus $144,900 - $14,000 = $138,900, or $138,400 rounded to the nearest hundred. Therefore, the correct answer is (C).

Question 14

Mrs. Pike's 2013 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 must include only the current salary of $325,000 in her 2013 gross income, as the $75,000 deferred compensation is not taxable until it is received. Her employer can deduct the $325,000 salary paid in 2013.

Question 15

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 16

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

Since Mr. Thano has a 28% marginal tax rate on ordinary income, he will have to pay 28% of the $22,000 withdrawal as taxes. Therefore, the tax cost of the withdrawal is 0.28 x $22,000 = $6,160. The correct answer is (C).

Question 17

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's AGI includes both interest and dividend income as well as rental income, both of which are considered passive income sources. However, her loss from the new business is considered an active income source. This means that she is not eligible to make a tax-deductible contribution to a traditional IRA as her AGI exceeds the phase-out limit for single filers in 2021, which is $76,000. Therefore, her maximum IRA contribution is $0.

Question 18

Which of the following statements regarding Keogh plans is false?

Accepted Answer

A self-employed person with a Keogh plan is required to provide retirement benefits to his or her employees through the plan. Keogh plans are designed for self-employed individuals, but if they have employees, the plan must include benefits for them as well.

Question 19

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 20

In 2013, 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

Amanda's maximum contribution to her Keogh plan is calculated as 20% of her net earnings from self-employment after the deduction for self-employment tax. Her net earnings are $70,000 - $4,945 = $65,055. Therefore, 20% of $65,055 is $13,011.

Quiz 15: Compensation and Retirement Planning