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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

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Which of the following statements regarding contributions to defined contribution plans is true?

A) Employer contributions to a defined contribution plan are not limited by the tax law.
B) Employee contributions to a defined contribution plan are not limited by the tax law.
C) An employee who is at least 60 years of age as of the end of the year may contribute more to a defined contribution plan than an employee who has not reached age 60 by year-end.
D) The tax laws limit the sum of the employer and employee contributions to a defined contribution plan.

E) A) and D)
F) B) and C)

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Question 2

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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.)

A) $11,152.
B) $30,152.
C) $36,152.
D) $56,000.

E) None of the above
F) A) and D)

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Question 3

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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?

Employee contributions to traditional 401(k)accounts are deductible by the employee, but employee contributions to Roth 401(k)accounts are not.

Which of the following statements concerning traditional IRAs and Roth IRAs is true?

When an employer matches an employee's contribution to the employee's 401(k)account, the employee is immediately taxed on the amount of the employer's matching contribution.

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?

Just like distributions from qualified retirement plans, distributions from nonqualified deferred compensation plans are taxed as ordinary income to the recipient.

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?

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

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

Which of the following statements regarding traditional IRAs is true?

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

In 2019, Tyson (age 52)earned $50,000 of salary. Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2019?

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?

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

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?

Which of the following statements regarding Roth 401(k) accounts is false?

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?

In 2019, Tyson (age 22)earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2019?