Chapter 13

The maximum amount of a deductible IRA in 2019 for a taxpayer under the age of 50 is $(1), and it is a deduction (2) (for/from) AGI.

1. 6,000 2. for

Select all that apply 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.)

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

The maximum contribution that a taxpayer can make into a Roth IRA is ______the allowable contribution for a traditional IRA.

equal to

The acronym IRA refers to a(n) (1) (2) (3) which has tax characteristics similar to employer sponsored (4) plans.

1. individual 2. retirement 3. account 4. 401(k)

Select all that apply Which of the following issues are characteristic of defined benefit plans? (Check all that apply.)

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.

Which of the following statements is INCORRECT regarding defined benefit plans for 2019?

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

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?

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

In order to avoid paying a penalty on the conversion of a traditional IRA to a Roth IRA, the rollover must be completed within (1) days.

1. 60

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.

False

Which of the following statements is INCORRECT regarding IRAs?

Once a taxpayer reaches age 65, contributions to IRAs are not deductible.

True or false: Sole proprietors can contribute to their own SEP IRAs regardless of whether they contribute to their employee's accounts.

False

For 2019, the owner of a sole proprietorship can make annual contributions to his SEP IRA for the lesser of $(1) or (2)% of Schedule C income, after reducing the net income by the deduction for the employer's portion of self-employment taxes paid.

1. 56000 2. 20

Taxpayers are allowed to rollover funds from a deductible traditional IRA to a Roth IRA without paying a penalty if the rollover is completed within (1) days from the withdrawal from the traditional IRA. The amount of the rollover is (2)% taxable as (3) income.

1. 60 2. 100 3. ordinary

Taxpayers must receive their first required minimum distribution from a traditional IRA by (1) 1st of the year following the year in which they reach (2) years of age.

1. April 2. 70 1/2

Two types of tax-advantaged retirement savings opportunities available to self-employment individuals are (1) IRAs and (2) 401(k)'s.

1. SEP 2. individual

For the employee, nonqualified deferred compensation plans receive the same tax treatment as traditional defined (1) plans.

1. contribution

The process of becoming legally entitled to retirement benefits is known as (1). The most restrictive schedule for this process for defined benefit plans is either a (2)-year "cliff" or a (3)-year graded schedule.

1. vesting 2. 5 3. 7

When a nonqualified distribution is received from a Roth IRA, what is the deemed order of the funds distributed?

First from taxpayer contributions; second from account earnings

Carrie, age 38, is a florist who owns and manages a sole proprietorship. During 2019, 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 2019 tax year?

$14,870

Contributions to a traditional 401(k) are made with (1)-tax dollars, while contributions to a Roth 401(k) are made with (2)-tax dollars. Qualified distributions from a Roth 401(k) are (3) (taxable/nontaxable). (Enter only one word per blank.)

1. before 2. after 3. nontaxable

Employers must maintain separate accounts for each employee participating in a defined (1) plan.

1. contribution

When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied?

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).

Other than the taxation differences, what is another advantage of Roth IRAs over traditional IRAs?

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

For a given before-tax rate of return, the longer the taxpayer defers distributions from a traditional defined contribution plan, the (1) (higher/lower) the taxpayer's after-tax rate of return because deferring the distribution (2) (increases/decreases) the present value of the taxes paid on the distribution. (Enter your answers as higher or lower and increases or decreases.)

1. higher 2. decreases

One nice feature of an account such as a 401(k) is that many employers will (1) the employee contributions at a stated percentage of the contribution.

1. match

Qualified (1) plans come in two forms. A defined (2) plan specifies the amount the employee will receive at retirement, while a defined (3) plan outlines the maximum annual amount that can be paid into the plan.

1. retirement 2. benefit 3. contribution

The transfer of funds from a traditional IRA to a Roth IRA is called a(n) (1).

1. rollover

Which of the following types of defined contribution plans will most likely involve an employer matching the employee contributions to some degree?

401(k) plans

Qualified distributions from Roth 401(k) accounts are those made after the account has been open for ______ taxable years and the employee is at least ______ years of age.

5; 59 1/2

Which of the following choices is a benefit to the employers of offering a nonqualified deferred compensation plan to the employees?

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.

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?

Graded

Which of the following statements is INCORRECT regarding the saver's credit?

The credit is refundable.

Select all that apply In order to avoid a penalty for failure to receive a minimum distribution from a defined contribution plan, a taxpayer must take her first minimum distribution for the later of which of the following years? (Check all that apply.)

The year after she retires The year she after reaches 70 1/2 years of age

Nondeductible contributions to a traditional IRA ______.

are subject to the same earned income limitations as deductible contributions

Select all that apply Assuming the taxpayer has owned a Roth IRA account for over 5 years, qualifying distributions include a $10,000 distribution ______. (Check all that apply.)

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

When a taxpayer makes nondeductible IRA contributions, ______.

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

Select all that apply Which of the following characteristics describe defined contribution plans? (Check all that apply.)

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

Qualified retirement plans can NOT (1) against non-executives.

1. discriminate

How are distributions from defined benefit plans treated for tax purposes?

The distributions are taxable as ordinary income.

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 $(1).

1. 5472

Distribution rules for (1) IRA accounts are similar to the rules for traditional (2) accounts.

1. traditional 2. 401(k)

Taxpayers who meet certain eligibility requirements can contribute to (1) IRAs and/or (2) IRAs.(Enter only one word per blank.)

1. traditional 2. Roth

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 defined benefit plan

In 2019, 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 lesser of (1) $(1) or (2) (2) percent of the employee's compensation for the year. Furthermore, the employee contributions are limited to $(3).

1. 56,000 2. 100 3. 19,000

Which one of the following taxpayers is eligible to take the saver's credit, assuming they all meet the income restrictions?

Sam is 19 years old and has been out of school for over a year. He is working as a cashier, and is no longer a dependent of his parents.

What is the tax and penalty effects of nonqualified distributions of Roth 401(k) accounts?

The account earnings are fully taxable and subject to the 10 percent penalty, but the account contributions are nontaxable.

What are the tax and penalty effects of nonqualified distributions of Roth IRAs?

The account earnings are fully taxable and subject to the 10% penalty, but the account contributions are nontaxable.

Why are individually managed retirement plans, such as traditional or Roth IRAs, not very attractive to small business owners?

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

The formula for determining how much of a distribution from a traditional IRA consisting of nondeductible and deductible contributions is nontaxable is ______.

nondeductible contributions ÷ total account balance at the time of distribution

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 ______.

used to pay for higher education expenses

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.

$6,120

Contributions to traditional defined contribution plans can be made with (1)-tax dollars, which reduces the overall cost because of the tax (2) on the contribution.

1. before 2. savings

The employee bears the investment risk and funding responsibility in a defined (1) plan.

1. contribution

While the maximum deductible contribution to a traditional IRA for a unmarried taxpayer under 50 is $6,000 in 2019, the deductible amount may be reduced based upon the taxpayer's (1) income for the year.

1. earned

The nondeductible penalty for an early distribution is (1) percent of the amount of the distribution. The nondeductible penalty for failing to receive a required minimum distribution is (2) percent of the required minimum distribution.

1. 10 2. 50

Steve retired at the beginning of 2019. He worked for a company with a defined benefit plan. The plan provides for retirement benefits at a rate of 2% 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 $400,000. The maximum benefit Steve can receive from his retirement plan in 2019 is $(1).

1. 225,000

Caden is 62 years old and has a traditional IRA with a balance of $220,000. Of that amount, $66,000 is from nondeductible contributions made while Caden was working. Earnings on the nondeductible contributions equal $20,600. If Caden withdraws $15,000 from his IRA this year, $(1) will NOT be subject to taxation.

1. 4,500

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?

Cliff

Select all that apply Which of the following choices describe characteristics of a Roth 401(k)? (Check all that apply.)

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

False

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.

False

Which of the following statements is correct?

In order to contribute to an IRA, taxpayers must meet certain eligibility requirements.

Which of the following statements regarding Roth IRAs is NOT correct?

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?

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

When a taxpayer converts a deductible traditional IRA to a Roth IRA in a rollover, what are the tax implications?

The entire amount of the rollover is taxed as ordinary income.

Which of the following choices is a characteristic of a qualified retirement plan?

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

How are distributions from nonqualified deferred compensation plans taxed to the employee?

They are taxed as ordinary income.

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.

True

Upon retirement, all distributions from defined benefit plans are taxable as (1) (2).

1. ordinary 2. income

For middle- to low-income taxpayers meeting eligibility requirements, a saver's credit of up to (1)% of elective contributions of up to $(2) to any qualified retirement plan may be deducted from their tax liability.

1. 50 2. 2000

Thomas is a sole proprietor under 50 years of age who plans to contribute to his individual 401(k). For 2019 he can contribute the lesser of $(1) or (2)% of Schedule C net income minus the deduction for the employer's portion of the self-employment taxes paid plus and additional $(3) (considered the employee's contribution).

1. 56000 2. 20 3. 19000

Contributions are not deductible and qualified distributions are not taxable from a(n) (1) IRA. (Enter only one word per blank.)

1. roth

Select all that apply Which of the following characteristics describe SEP IRAs? (Check all that apply.)

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

Which of the following is a characteristic of employers of offering a nonqualified deferred compensation plan to the employees?

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 eligibility for the saver's credit?

Individuals who participate in employer-sponsored retirement plans are NOT eligible for the credit.

The phase-out for contributions allowed to Roth IRAs is dependent upon the taxpayer's (1) (2) and MAGI. (Enter only one word per blank.)

1. filing 2. status

What is the maximum deductible contribution to an IRA in 2019 for a taxpayer under the age of 50?

$6,000

To be considered a qualified distribution from a Roth IRA, the account must have been open for at least (1) years and the taxpayer must be at least (2) years old.

1. 5 2. 59 1/2

Assuming a taxpayer has sufficient earned income to contribute the maximum allowed to a traditional IRA, the deductible IRA contribution may be phased-out based on (1) status and modified (2) (3) income. (Enter only one word per blank.)

1. filing 2. adjusted 3. gross

True or 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 deferring the distribution increases the present value of the taxes paid on the distribution.

False