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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

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Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $30,000, she received a distribution of the entire $30,000 balance of her traditional IRA. She retained $5,000 of the distribution to help her pay the taxes due on the distribution and she immediately contributed the remaining $25,000 to a Roth IRA. What amount of tax and early distribution penalty is she required to pay on the $30,000 distribution from the traditional IRA if her marginal tax rate is 25 percent?

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$7,500 income tax; $500 early distribution penalty. Explanation: Tatia is taxed at 25 percent on the full $30,000 distribution ($30,000 × 25%). She also must pay a 10% penalty on the $5,000 distribution she received but did not contribute to the Roth IRA ($5,000 × 10%).

Question 2

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

A) The benefits are based on a fixed formula.
B) The vesting period can be based on a graded or cliff schedule.
C) Employees bear the investment risks of the plan.
D) Employers are generally required to make annual contributions to meet expected future liabilities.

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

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Question 3

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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.

Heidi 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% penalty?

Shauna received a distribution from her 401(k) account this year. In which of the following situations will Shauna be subject to an early distribution penalty?

Riley participates in his employer's 401(k) plan. He retired in 2016 at age 75. When must Riley receive his distribution pertaining to 2016 to avoid minimum distribution penalties?

Amy files as a head of household. She determined her 2016 adjusted gross income was $70,000. During the year, she contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for 2016?

Which of the following describes a defined benefit plan?

High-income taxpayers are not allowed to receive the saver's credit.

Which of the following best describes distributions from a traditional defined contribution plan?

Shauna received a $100,000 distribution from her 401(k) account this year. Assuming Shauna's marginal tax rate is 25%, 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?

Which of the following statements regarding self-employed retirement accounts is true?

Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal.

Sean (age 74 at end of 2016) retired five years ago. The balance in his 401(k) account on December 31, 2015 was $1,700,000 and the balance in his account on December 31, 2016 was $1,800,000. Using the IRS tables below, what is Sean's required minimum distribution for 2016?

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

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

Jacob participates in his employer's defined benefit plan. He has worked for his employer for four full years. If his employer uses a five-year cliff vesting schedule, Jacob will need to work another year in order to vest in any of his defined benefit plan retirement benefits.

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 5-year cliff schedule. Joan worked 5½ years at PDEK before leaving for another opportunity. She received an annual salary of $49,000, $52,000, $58,000, $65,000, and $75,000 for years one through five respectively. Joan earned $40,000 of her $80,000 annual salary in year six. What is the vested benefit Joan is entitled to receive from PDEK for her retirement?

Qualified retirement plans include defined benefit plans but not defined contribution plans.

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%, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA?