Ch. 13 - Tax

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

Kyle invested in a Roth 401(k) seven years ago when he was 39 years old. He terminated employment with his company this year and received a lump-sum distribution of his Roth 401(k). Kyle's contributions to the Roth account total $32,000 and accumulated earnings on the account total $18,000. He has decided NOT to roll over the funds into another retirement account. How much tax and penalty will Kyle owe on the distribution if he has a 24% marginal tax rate. a. $0 b. $6,120 c. $11,560 d. $4,320

$6,120

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.

10; 25

Steve retired at the beginning of 2023. 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 2023 is $________.

265,000

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

3 years

In 2023, for taxpayers under 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 lessor (1) $______ or (2)______ percent of the employee's compensation for the year. Furthermore, the employee contributions to a 401(k) are limited to $_____.

66,000; 100; 22,500

For 2023, the owner of a sole proprietorship can make annual contributions to his SEP IRA for the lessor $_____ or ______% of Schedule C income, after reducing the net income by the deduction for the employer's portion of self-employment taxes paid.

66,000; 20

In 2023, a self-employed individual with sufficient income may contribute a maximum of $_____ to an individual 401(k), and if at least 50 years old at year-end may contribute a maximum of $_____.

66,000; 73,500

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

False

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 the following age requirements? (all that apply) a. 59 1/2 years of age b. 62 years of age c. 55 years, if he has separated from employment d. age is irrelevant if he is retired and has had the account for more than 5 years e. 72 years of age f. 65 years of age

a and c

Which of the following characteristics describe defined benefit plans? a. employers choose how the amounts in the retirement account are invested b. employees may contribute more to the plan than the employer contributes c. employers must maintain separate accounts for each employee participating in the plan d. the employer bears the investment risk and funding responsibility e. the plan specified the amount of the distribution at retirement, rather than the up-front payment the employer will make to the employees plan.

a, d, and e

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

a. 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 IRA after reaching the age of 72 d. taxpayers can withdraw their Roth IRA contributions tax-free anytime without paying a penalty.

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

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. a defined benefit plan b. a defined contribution plan c. a non qualified retirement plan d. an individual retirement account

a. a defined benefit plan

An important consideration for an employee trying to decide whether or not to participate in a non qualified deferred compensation plan is whether the employee can financially afford to forgo the income currently in order to put in the plan. a. true b. false

a. true

In order to avoid a penalty for failure to receive a minimum distribution from a defined contribution plan in 2023, a taxpayer must take her first minimum distribution for the later of which of the following years? (all the apply) a. the year after she begins collecting Social Security b. the year after she retires if she is 74 when she retires c. the year after she makes her final contribution d. the year after she reaches 72 years of age e. the year after she reaches 65 1/2 years of age

b and d

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

b. 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 year old a. true b. false

b. false

The after-tax rate of return on a contribution to a traditional defined contribution plan will decrease as compared to the before- tax rate of return the longer the taxpayer waits before taking distributions because increases the present value of the taxes paid on the distribution. a. true b. false

b. false

Which of the following is a characteristic of employers of offering a non qualified deferred compensation plan to the employees? a. the employers are entitled to a tax deduction in the year the employees earn the compensation even though it is deferred b. the employer does not have to fund the obligation in the current year since payment is deferred to a future year c. 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

Which of the following statements is INCORRECT regarding defined benefit plans for 2023? a. for employees who begin receiving retirement benefits in 2023, the maximum annual benefits is the lessor (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) $265,000. b. The level of benefits is a function of how well the funds were invested and the market growth over the employee's working years 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

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

how are distributions from non-qualified deferred compensation plans taxed to the employee? a. they are taxed as capital gain b. they are taxed as ordinary income c. they incur FICA tax, but not income tax d. they are NOT subject to taxation

b. they are taxed as ordinary income

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

c and d

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 year, 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. cliff c. graded d. scheduled

c. graded

When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied? a. 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 b. the employer is able to invest the matching funds directly into the employees' chosen investments for their Roth 401(k)'s. c. 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) d. 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)

c. 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)

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

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

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

c. whether the cost of the plan is deductible on the employer's tax return

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

contribution

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

contribution

Carrie, age 38, is a florist who owns and manages a sole proprietorship. During 2023, the business generated a net income of $80,000. Carrie plans to invest in a SEP IRA before the due date of her tax return. What is the maximum amount she can contribute to the plan for the 2023 tax year? a. $16,000 b. $58,000 c. $6,000 d. $14,870

d. $14,870 [80,000 - (80,000 x .9235 x .153 x 50%)] x .20 = $14,870

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. graded b. scheduled c. pro rated d. cliff

d. cliff

Qualified retirement plans can NOT _________ against non-executives.

discriminate

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

employee; three; six

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.

five; 59 1/2

For a given before-tax rate of return, the longer the taxpayer defers distributions from a traditional defined contribution plan, the _____ (higher/lower) the taxpayer's after-tax rate of return because deferring the distribution _____ (increases/decreases) the present value of the taxes paid on the distribution.

higher; decreases

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

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

pre; deduction/savings/benefit

Qualified ______ plans come in two forms. A defined ______ plan specifies the amount the employee will receive at retirement, while a defined _____ plan outlines the maximum annual amount that can be paid into the plan

retirement, benefit, contribution

two types of tax-advantaged retirement savings opportunities available to self-employment individuals are ______IRAs and ______ 401(k)'s

roth; individual

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