Chapter 13 SmartBook

How are distributions from nonqualified deferred compensation plans taxed to the employee? a. They are taxed as capital gain. b. They incur FICA tax, but NOT income tax. c. They are taxed as ordinary income. d. They are NOT subject to taxation.

They are taxed as ordinary income.

In order to avoid a penalty for early distributions of a defined contribution plan, an employee can NOT take a withdrawal from the account before he meets which of the following age requirements? (Check all that apply.) a. 59 1/2 years of age b. 62 years of age c. 65 years of age d. 55 years, if he has separated from employment e. 72 years of age f. Age is irrelevant if he is retired and has had the account for more than five years

59 1/2 years of age 55 years, if he has separated from employment

Which of the following choices is a benefit to the employers of offering a nonqualified deferred compensation plan to the employees? a. The employer must fund the obligation in the current year even though payment is deferred to a future year. b. If the employer has high marginal tax rates in the current year, deferring the compensation expense to a year with lower tax rates is beneficial. c. The employers are entitled to a tax deduction for the deferred compensation in the year employees earn it even though it is deferred. d. Employers may benefit if they are able to earn a better rate of return on the deferred compensation than the rate of return they are required to pay employees participating in the plan.

Employers may benefit if they are able to earn a better rate of return on the deferred compensation than the rate of return they are required to pay employees participating in the plan.

Which type(s) of 401(k) will incur a 10% penalty on the entire distribution if the money is withdrawn early? a. Traditional b. Roth c. Traditional and Roth

Traditional

Which type(s) of 401(k) will incur a 50% penalty on the amount of the minimum required distribution if the distribution does NOT occur? a. Traditional and Roth b. Traditional c. Roth

Traditional and Roth

Contributions to a traditional 401(k) are made with _____tax dollars, while contributions to a Roth 401(k) are made with _____-tax dollars. Qualified distributions from a Roth 401(k) are _____ (taxable/nontaxable).

before after nontaxable

One nice feature of an account such as a 401(k) is that many employers will _____ the employee contributions at a stated percentage of the contribution.

match

The nondeductible penalty for an early distribution is _____ percent of the amount of the distribution. The nondeductible penalty for failing to receive a required minimum distribution is _____ percent of the required minimum distribution.

ten fifty

Which of the following types of defined contribution plans will most likely involve an employer matching the employee contributions to some degree? a. Traditional pension plans b. 401(k) plans c. Profit sharing plans d. Money purchase plans

401(k) plans

To be considered a qualified distribution from a Roth IRA, the account must have been open for at least _____ years and the taxpayer must be at least _____ years old.

5 59.5

Lauren contributed $7,200 before-tax to her 401(k). If Lauren has a 24 percent marginal rate, her after-tax cost of the contribution is $_____.

5,472

For middle- to low-income taxpayers meeting eligibility requirements, a saver's credit of up to _____% of elective contributions of up to $_____ to any qualified retirement plan may be deducted from their tax liability.

50 2,000

What type of retirement plan typically requires a significant amount of work to track employee benefits and to compute required contributions; is structured where the employer bears the investment risk; and combines the funds, rather than having each employee with a separate accounts. a. An individual retirement account b. A nonqualified retirement plan c. A defined benefit plan d. A defined contribution plan

A defined benefit plan

Which of the following statements is correct regarding IRA contributions for married taxpayers who file a joint tax return? a. A non-earning spouse's deductible contribution is limited to total earned income of both spouses reduced by contributions to the other spouse's IRAs. b. If only one spouse is an active participant in an employer's retirement plan, there is no deduction phase-out for the spouse who is not an active participant. c. The maximum deduction for the spouse with the lower amount of earned income is the same as that for unmarried taxpayers. d. Because of filing status, deductions are only allowed for one traditional IRA.

A non-earning spouse's deductible contribution is limited to total earned income of both spouses reduced by contributions to the other spouse's IRAs.

Mike just started working for a company that maintains a defined benefit retirement plan. If Mike terminates his employment within the first two years, he forfeits his retirement. If he stays for three years, he will be entitled to receive all of the funds provided to him in the account. What type of vesting schedule is used at Mike's company? a. Scheduled b. Graded c. Cliff d. Pro rated

Cliff

Which of the following characteristics describe defined contribution plans? (Check all that apply.) a. The plan specifies the amount of the distribution at retirement rather than the up-front payment the employer will make to the employee's plan. b. Employers choose how the amounts in the retirement account are invested. c. Employees may contribute more to the plan than the employer contributes. d. Employers must maintain separate accounts for each employee participating in the plan. e. The employee bears the investment risk and funding responsibility.

Employees may contribute more to the plan than the employer contributes. Employers must maintain separate accounts for each employee participating in the plan. The employee bears the investment risk and funding responsibility.

Which of the following choices describe characteristics of a Roth 401(k)? (Check all that apply.) a. The portion of the distribution that represents a return of the employee contribution is nontaxable, but the earnings on the account are taxable. b. Employers can NOT contribute matching funds to an employee's Roth account. c. Contributions to the account are made with after-tax dollars. d. Distributions are fully taxable as ordinary income.

Employers can NOT contribute matching funds to an employee's Roth account. Contributions to the account are made with after-tax dollars.

True or false: One difference between traditional IRAs and Roth IRAs is that there is no phase-out based on AGI for contributions to a Roth IRA. a. True b. False

False Even though contributions are NOT deductible, the maximum level of the allowed contribution may be phased out at higher levels of AGI.

True or false: Individuals participating in a defined contribution plan who are at least 50 years of age by the end of the year have contribution limits that are lower than individuals less than 50 years old. a. True b. False

False Individuals who are 50 or over can contribute more since they are closer to retirement and may need to "catch up" in their later years.

True or false: An individual 401(k) is a popular retirement plan for sole proprietorships with several employees. a. True b. False

False These plans are strictly for sole proprietors and their spouses who do not have employees.

Mike just started working for a company that maintains a defined benefit retirement plan. If Mike terminates his employment within the first two years, he forfeits his retirement. If he stays for three years, he will be entitled to receive 20% of the funds provided to him in the account. If he is employed with the company for 6 years, he will be entitled to receive 80% of the funds. What type of vesting schedule is used at Mike's company? a. Pro rated b. Graded c. Scheduled d. Cliff

Graded

An individually managed retirement plan with tax advantages similar to an employer provided defined contribution plan is known as a(n): a. vested plan b. pension plan c. IRA d. 401(k)

IRA

Which of the following statements regarding Roth IRAs is NOT correct? a. Roth IRAs are NOT subject to phase-out rules that limit their contribution level. b. There are NO minimum distribution requirements for Roth IRAs. c. Taxpayers can continue to contribute to Roth IRAs after reaching the age of 72. d. Taxpayers can withdraw their Roth IRA contributions tax-free anytime without paying a penalty.

Roth IRAs are NOT subject to phase-out rules that limit their contribution level.

Which of the following statements is correct regarding the saver's credit? a. The credit is provided in addition to any deduction taken on the contribution. b. The credit is available for individuals contributing to traditional and Roth IRAs, but NOT to those contributing to employer-sponsored plans. c. The maximum amount of the contribution eligible for the credit is $6,000 d. The credit is refundable.

The credit is provided in addition to any deduction taken on the contribution.

Which of the following choices is a characteristic of a qualified retirement plan? a. The plan must be a defined contribution plan to be considered a qualified retirement plan. b. The plan can be funded with future operations rather than current contributions. c. The plan must be a defined benefit plan to be considered a qualified retirement plan. d. The plan may NOT discriminate against the rank-and-file employees.

The plan may NOT discriminate against the rank-and-file employees.

Which of the following characteristics describe SEP IRAs? (Check all that apply.) a. The sole proprietor must contribute to employees' SEP IRAs based on their respective compensation levels. b. SEP IRAs have high administrative costs. c. Sole proprietors age 50 or older can make "catch up" contributions to their plans. d. SEP IRAs are generally good plans for small businesses with a relatively large number of employees. e. SEP IRAs are easy to set up.

The sole proprietor must contribute to employees' SEP IRAs based on their respective compensation levels. SEP IRAs are easy to set up.

In order to avoid a penalty for failure to receive a minimum distribution from a defined contribution plan in 2021, a taxpayer must take her first minimum distribution for the later of which of the following years? (Check all that apply.) a. The year she after reaches 72 years of age b. The year after she retires if she is 74 when she retires c. The year after she begins collecting Social Security d. The year after she makes her final contribution e. The year after she reaches 65 1/2 years of age

The year she after reaches 72 years of age The year after she retires if she is 74 when she retires

True or false: An important consideration for an employee trying to decide whether or not to participate in a nonqualified deferred compensation plan is whether the employee can financially afford to forgo the income currently in order to put it in the plan. a. True b. False

True He should also consider whether the expected rate of return on the deferred funds equals or exceeds the amount he could generate by collecting and investing the funds now.

Other than the taxation differences, what is another advantage of Roth IRAs over traditional IRAs? a. Contributions to Roth IRAs are not subject to any income requirements. b. Since Roth IRAs are NOT deductible, they are not subject to the maximum contribution ceiling that traditional IRAs have. c. Unlike traditional IRAs, Roth IRAs do NOT incur a 10% penalty for unqualified distributions of earnings. d. Unlike traditional IRAs, Roth IRAs do not have any minimum distribution requirements.

Unlike traditional IRAs, Roth IRAs do not have any minimum distribution requirements.

Nondeductible contributions to a traditional IRA ______. a. may be made for the same amount as deductible contributions, effectively allowing taxpayers to double their total contribution b. are subject to the same earned income limitations as deductible contributions c. can be made without need of earned income d. may not be made to a spousal IRA

are subject to the same earned income limitations as deductible contributions

Qualified retirement plans can NOT _____ against non-executives.

discriminate

For defined contributions plans, the employee is immediately vested in the _____ (employee/employer) contributions and any earnings on those contributions. The remaining funds may be vested over time. The most restrictive schedule for this process for defined benefit plans is either a ____-year "cliff" or a _____-year graded schedule.

employee three six

Upon retirement, all distributions from defined benefit plans are taxable as _____ _____.

ordinary income

When a taxpayer makes nondeductible IRA contributions, ______. a. the earnings grow tax-free until a distribution is received. Upon distribution, only the earnings are taxable, not the contributions b. none of the distributions from the account will be taxable c. the earnings grow tax-free until a distribution is received. Upon distribution, both the earnings and contributions are taxable d. the earnings on these contributions are taxed as ordinary income annually

the earnings grow tax-free until a distribution is received. Upon distribution, only the earnings are taxable, not the contributions

Taxpayers who meet certain eligibility requirements can contribute to _____ IRAs and/or _____ IRAs.

traditional Roth

Steve retired at the beginning of 2020. He worked for a company with a defined benefit plan. The plan provides for retirement benefits at a rate of 3% of the last three years' average compensation for every year of service. Steve had worked for this company for 30 years when he retired. His average salary for the last three years was $700,000. The maximum benefit Steve can receive from his retirement plan in 2020 is $_____.

230,000

Wicker Rockers, Inc. is planning to offer a defined contribution plan for its employees. The company would like to incorporate a "cliff" vesting schedule for the employer contributions into the plan. What is the minimum vesting period the company can choose for a "cliff" vesting schedule? a. 7 years b. 5 years c. 3 years d. 6 years

3 years

True or False: If only one spouse is an active participant in an employer sponsored retirement plan, the non-participating spouse can maximize his or her allowed IRA deduction by choosing the married filing separately status. a. True b. False

False Under these conditions, choosing the married filing separately status will prohibit a deduction for either spouse if MAGI is $10,000 or more. The phase-out is much less restrictive when filing jointly.

In 2020, for taxpayers under the age 50 at year-end, the sum of the employee and employer contributions to an employee's defined contribution account(s) is limited to the lesser of (1) $_____ or (2) _____ percent of the employee's compensation for the year. Furthermore, the employee contributions to a 401(k) are limited to $_____.

57,000 100 19,500

For 2020, the owner of a sole proprietorship can make annual contributions to his SEP IRA for the lesser $_____ or _____% of Schedule C income, after reducing the net income by the deduction for the employer's portion of self-employment taxes paid.

57,000 20

The maximum amount of a deductible IRA in 2020 for a taxpayer under the age of 50 is $_____, and it is a deduction _____ (for/from) AGI.

6,000 for

Which of the following issues are characteristic of defined benefit plans? (Check all that apply.) a. A significant amount of work is required to keep track of employee benefits and calculate required contributions. b. Each employee has a separate account. c. Funding costs are typically more significant for defined benefit plans than other types of plans. d. The investment risk is borne by the employee rather than the employer.

A significant amount of work is required to keep track of employee benefits and calculate required contributions. Funding costs are typically more significant for defined benefit plans than other types of plans.

How are distributions from defined benefit plans treated for tax purposes? a. The distributions are taxable as ordinary income. b. The amount that represents a return of the contributions made to the fund is tax-exempt and the amount from earnings of the fund is ordinary income. c. The distributions are taxable as capital gain. d. The amount that represents a return of contributions made to the fund is capital gain and the amount from earnings of the fund is ordinary income.

The distributions are taxable as ordinary income.

Which type(s) of 401(k) will provide the taxpayer with nontaxable qualified distributions during his retirement years? a. Roth b. Traditional c. Traditional and Roth

Roth

Which of the following statements regarding Roth IRAs is NOT correct? a. Taxpayers can withdraw their Roth IRA contributions tax-free anytime without paying a penalty. b. Roth IRAs are NOT subject to phase-out rules that limit their contribution level. c. There are NO minimum distribution requirements for Roth IRAs. d. Taxpayers can continue to contribute to Roth IRAs after reaching the age of 72.

Roth IRAs are NOT subject to phase-out rules that limit their contribution level.

Which of the following is a characteristic of employers of offering a nonqualified deferred compensation plan to the employees? a. If the employer has high marginal tax rates in the current year, deferring the compensation expense to a year with lower tax rates is beneficial. b. The employer does not have to fund the obligation in the current year since payment is deferred to a future year. c. The employers are entitled to a tax deduction in the year the employees earn the compensation even though it is deferred.

The employer does not have to fund the obligation in the current year since payment is deferred to a future year.

Which of the following statements is INCORRECT regarding defined benefit plans for 2020? a. The level of benefits is a function of how well the funds were invested and the market growth over the employee's working years. b. For employees who begin receiving retirement benefits in 2020, the maximum annual benefit is the lesser of (1) 100 percent of the average of the three highest years of compensation, limited to the annual compensation limitation for each of the three years or (2) $230,000. c. Distributions from defined benefit plans are ordinary income to the taxpayer. d. The formula for determining benefits is usually a function of years of service and recent compensation levels.

The level of benefits is a function of how well the funds were invested and the market growth over the employee's working years.

Assuming the taxpayer has owned a Roth IRA account for over 5 years, qualifying distributions include a $10,000 distribution ______. (Check all that apply.) a. used for a first-time home purchase b. made to a beneficiary after the death of the taxpayer c. made because the taxpayer is disabled d. used to pay off the 50-year-old taxpayer's delinquent debt e. used to pay college tuition for the taxpayer's daughter f. made when the taxpayer was 60 years old

used for a first-time home purchase made to a beneficiary after the death of the taxpayer made because the taxpayer is disabled made when the taxpayer was 60 years old

The process of becoming legally entitled to retirement benefits is known as _____. The most restrictive schedule for this process for defined benefit plans is either a ____-year "cliff" or a _____-year graded schedule.

vesting five seven

The maximum contribution that a taxpayer under the age of 50 at year end can make into a Roth IRA is $_____ which is _____ (equal to/higher than/lower than) the allowable contribution for a traditional IRA.

6000 equal to

A 40-year old taxpayer has owned a Roth IRA for more than 5 years. A $10,000 distribution will be considered nonqualified if the distribution was ______. a. used to pay for higher education expenses b. made because the taxpayer is disabled c. used to pay qualifying acquisition costs as a first-time homebuyer d. made to a beneficiary after the death of the taxpayer

used to pay for higher education expenses

Two types of tax-advantaged retirement savings opportunities available to self-employment individuals are _____ IRAs and _____ 401(k)'s.

SEP individual

Tax-advantaged retirement savings plans, such as _____ IRAs and _____ 401(k)s, provide small business owners a way to save for retirement with plans that provide _____ contribution limits than other individually managed plans.

SEP individual larger

Why are individually managed retirement plans, such as traditional or Roth IRAs, not very attractive to small business owners? a. The contribution levels are relatively low compared to employer-provided plans. b. These plans are NOT tax deductible for their businesses, while employer-provided plans are deductible as business expenses. c. Small business owners do NOT receive the same tax advantages as other individuals investing in these plans.

The contribution levels are relatively low compared to employer-provided plans.

Which of the following statements is INCORRECT regarding the saver's credit? a. The maximum percentage of the contribution that can be used to calculate the credit is 50%. b. The maximum amount of the contribution eligible for the credit is $2,000. c. The credit is refundable. d. The credit is provided to middle- and low-income taxpayers to encourage retirement savings.

The credit is refundable.

When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied? a. The employee can elect to pay income tax on the amount of the employer's contribution, so that the matching funds can be applied in the Roth 401(k). b. The matching funds must be put in a traditional 401(k) for the employee because employers can NOT make contributions to a Roth 401(k). c. The employer is able to invest the matching funds directly into the employees' chosen investments for their Roth 401(k)'s. d. The employee will lose the matching funds if a Roth 401(k) is chosen because the employer is NOT allowed to invest in that type of account.

The matching funds must be put in a traditional 401(k) for the employee because employers can NOT make contributions to a Roth 401(k).

When deciding whether or not to participate in a nonqualified deferred compensation plan, which of the factors below does NOT need to impact the employee's decision? a. Whether the cost of the plan is deductible on the employer's tax return b. Whether the employee can afford to defer part of the current salary c. Whether the benefits expected to be received will be adequate to provide for the expected costs during retirement d. Whether the expected rate of return on the deferred salary will equal or exceed the rate of return that could be earned if they had the money now

Whether the cost of the plan is deductible on the employer's tax return

Contributions to traditional defined contribution plans can be made with _____-tax dollars, which reduces the overall cost because of the tax _____ on the contribution.

before savings

Employers must maintain separate accounts for each employee participating in a defined _____ plan.

contribution

For the employee, nonqualified deferred compensation plans receive the same tax treatment as traditional defined _____ plans.

contribution

The employee bears the investment risk and funding responsibility in a defined _____ plan.

contribution

The phase-out for contributions allowed to Roth IRAs is dependent upon the taxpayer's _____ _____ and MAGI.

filing status