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Exam 13: Retirement Savings and Deferred Compensation

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Question 41

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Dean has earned $70,000 annually for the past four and a half years working as an architect for MWC. Under MWC's defined benefit plan (which uses a five-year cliff vesting schedule) employees earn a benefit equal to 3.5 percent 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) ?

A) $12,250.
B) $42,000.
C) $7,350.
D) $0.

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

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Question 42

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Kathy is 60 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) $30,152.
B) $36,152.
C) $56,000.
D) $62,000.

E) All of the above
F) A) and C)

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Question 43

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

Carmello and Leslie (ages 34 and 35, respectively)are married and want to contribute to a Roth IRA. In 2019, their AGI totaled $42,000 before any IRA-related transactions. Of the $42,000, Carmello earned $35,000 and Leslie earned $7,000. How much can each spouse contribute to a Roth IRA if they file jointly? How much can each spouse contribute to a Roth IRA if they file separately?

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 seven-year graded vesting schedule) employees earn a benefit equal to 3.5 percent 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 percent. What is Dean's vested benefit (or annual retirement benefit he has earned so far) ?

Aiko (single, age 29)earned $40,000 in 2019. He was able to contribute $1,800 ($150/month)to his employer-sponsored 401(k). What is the total saver's credit that Aiko can claim for 2019? Exhibit 13-8

Cassandra, age 33, has made deductible contributions to her traditional IRA over the years. When the balance in her IRA was $40,000, Cassandra received a distribution of $34,000 from her IRA in order to purchase a new car. How much of the $34,000 distribution will she have remaining after paying income taxes and early distribution penalties on the distribution? Her marginal tax rate is 25 percent.

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

On December 1, 2019, Irene turned 71 years old. She is still working for her employer and she participates in her employer's 401(k)plan. Irene is not required to receive a minimum distribution for 2019 from her 401(k)account because she has not yet retired.

Which of the following statements concerning nonqualified deferred compensation plans is true?

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.

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. Tyson's marginal tax rate is 25 percent. 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. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions?

Which of the following statements concerning individual 401(k) s is false?

Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return) , he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA) . Assuming his marginal ordinary income tax rate is 15 percent, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?

Yvette is a 44-year-old self-employed contractor (no employees). During 2019, her Schedule C net income was $500,000. Assume Yvette has no contributions to other retirement plans. What is the maximum amount that Yvette can contribute to (1)a SEP IRA and (2)an individual 401(k)? (Round your answers to the nearest whole number.)

When employees contribute to a traditional 401(k) plan, they ________ allowed to deduct the contributions and they ________ taxed on distributions from the plan.

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

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 four and a half years at PDEK before leaving for another opportunity. She received an annual salary of $49,000, $52,000, $58,000, and $65,000 for years one through four, respectively. Joan earned $35,000 of her $70,000 annual salary in year five. What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. In the current year, Katrina defers 15 percent of her $300,000 salary. Katrina's deemed investment choice will earn 8 percent annually on the deferred compensation until she takes a lump-sum distribution in 10 years. Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate to be 28 percent upon receipt on the deferred salary. What is her after-tax accumulation from the deferred salary in 10 years? (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

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