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Exam 13: Retirement Savings and Deferred Compensation

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Question 51

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Jenny (35 years old) is considering making a one-time contribution to either a traditional 401(k) plan or to a Roth 401(k) plan. She plans to withdraw the account balance when she retires in 40 years. Jenny expects to earn a 7 percent before-tax rate of return no matter which plan she contributes to. Which of the following statements is true?

A) If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
B) If Jenny's marginal tax rate in the year of contribution is lower than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
C) Jenny will earn the same after-tax rate of return no matter which plan she contributes to.
D) Jenny is not allowed to make a one-time contribution to either plan.

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

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Question 52

Multiple Choice

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Which of the following statements is true regarding distributions from Roth 401(k) accounts?

A) There are no minimum distribution requirements for distributions from Roth 401(k) accounts.
B) Qualified distributions are subject to taxation.
C) A taxpayer receiving a nonqualified distribution from a Roth 401(k) account may be taxed on a portion but not all of the distribution.
D) None of the choices are correct.

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

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Question 53

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Kathy is 60 years of age and self-employed. During 2020, 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 2020? Assume she paid $8,478 of self-employment tax for 2020. (Round your final answer to the nearest whole number.)

Heidi retired from GE (her employer)at age 56. At the end of the year, when she was 56 years of age, Heidi received a distribution from her GE-sponsored 401(k)account. Because Heidi was not at least 59½ years of age at the time of the distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution.

Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

Yvette is a 44-year-old self-employed contractor (no employees). During 2020, 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.)

Sean (age 74 at end of 2020)retired five years ago. The balance in his 401(k)account on December 31, 2019, was $1,700,000 and the balance in his account on December 31, 2020, was $1,800,000. Using the Treasury tables below, what is Sean's required minimum distribution for 2020?

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?

Heidi, age 45, has contributed $20,000 in total to her Roth 401(k) account over a six-year period. When her account was worth $50,000 and Heidi was in desperate need of cash, Heidi received a $30,000 nonqualified distribution from the account. How much of the distribution will be subject to income tax and 10 percent penalty?

Yvette is a 44-year-old self-employed contractor (no employees). During 2020, her Schedule C net income was $504,000. 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.)

Which of the following is true concerning SEP IRAs?

Employers may choose whom they allow to participate and whom they do not allow to participate in their nonqualified deferred compensation plans.

Both traditional 401(k)plans and Roth 401(k)plans are forms of defined contribution plans.

Shauna received a $100,000 distribution from her 401(k) account this year. Assuming Shauna's marginal tax rate is 25 percent, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59 ^th birthday and she has not yet retired?

Amy is single. During 2020, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year?

Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were above the 7.5% of AGI threshold and 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?

Kathy is 60 years of age and self-employed. During 2020 she reported $118,000 of revenues and $43,600 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 a SEP IRA for 2020? (Round your final answer to the nearest whole number.)

This year, Ryan contributed 10 percent of his $75,000 annual salary to a Roth 401(k)account sponsored by his employer, XYZ. XYZ offers a dollar-for-dollar match up to 10 percent of the employee's salary. The employer contributions are placed in a traditional 401(k)account on the employee's behalf. Ryan expects to earn an 8-percent before-tax rate of return on contributions to his Roth and traditional 401(k)accounts. Assuming Ryan leaves the funds in the accounts until he retires in 25 years, what are his after-tax accumulations in the Roth 401(k)and in the traditional 401(k)accounts if his marginal tax rate at retirement is 30 percent? If Ryan's marginal tax rate this year is 35 percent, will he earn a higher after-tax rate of return from the Roth 401(k)or the traditional 401(k)? Explain. (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

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