Chapter 13 Smartbook

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 50

When an employee receives an early distribution from an employer-sponsored defined contribution retirement plan, he can avoid the __ percent penalty by electing to __ __ the distribution into an individually managed retirement plan.

10 Roll Over

Steve retired at the beginning of 2021. 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 2021 is $__

230000

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?

3 years

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

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, $ will NOT be subject to taxation.

4500

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

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 2000

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 $__

5472

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.)

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

In 2021, 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) $__ or (2) __percent of the employee's compensation for the year. Furthermore, the employee contributions to a 401(k) are limited to $__

58000 100 19500

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

The maximum contribution that a taxpayer under age 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

The maximum amount of a deductible IRA in 2021 for a taxpayer under the age of 50 is $, and it is a deduction (for/from) AGI.

6000 For

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

Which of the following statements is correct regarding IRA contributions for married taxpayers who file a joint tax return?

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.

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

April 72

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

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

In order to lower administrative costs associated with employee retirement plans and switch the investment risk of investments to the employee, many employers are switching to defined __ plans

Contribution

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 3 6

Which of the following is the same between between nonqualified deferred compensation plans (NQDC) and qualified retirement plans?

Employee contributions to the plans are tax deductible (i.e. paid with before-tax dollars).

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.

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

Employers choose how the amounts in the retirement account are invested, 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. The employer bears the investment risk and funding responsibility.

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.

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

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

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 Reason: The after-tax rate of return will increase more compared to the before-tax rate of return by deferring the distribution because the present value of the taxes will decrease

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 status and modified income.

Filing Adjusted Gross

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

Filing Status

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

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

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

Which of the following situations involving an early distribution of an IRA would result in an exception where the taxpayer would NOT incur the 10% penalty? (Check all that apply.)

Funds are used for a first-time home purchase. Funds are used for qualified higher education expenses. Funds are used for qualifying medical expenses.

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

The traditional 401(k) plans will generate (higher/lower) after-tax rates of return than the Roth 401(k) plans when taxpayers' marginal tax rates decrease from the time of the contribution to the time of the distribution.

Higher

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

Defined benefit plans typically have (higher/lower) funding costs than defined contribution plans, and the investment risk is assumed by the (employee/employer).

Higher Employer

Matt and Sarah are selling their home and moving to a new neighborhood. Sarah is going to start college in the fall. She did NOT attend college after high school and is now embarking on her degree. Matt was injured recently in a motorcycle accident and the couple has some very high medical expenses that are coming due. They have considered liquidating their traditional IRAs in order to cover some of these costs. Which types of expenditures can they make from funds in their IRAs without incurring a 10% penalty for early withdrawal?

Higher education and medical expenses

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

Individual Retirement Accounts 401k

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.

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

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

Ordinary Income

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

Contributions are not deductible and qualified distributions are not taxable from a(n) IRA

Roth

Which type(s) of 401(k) will provide the taxpayer with nontaxable qualified distributions during his retirement years?

Roth

Qualified distributions from which of the following types of accounts will NOT increase AGI?

Roth 401(k)

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 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. Reasons You Cant Claim: If you are a dependent, Under 18, Full-time student

If an employee takes an early distribution from an employer's qualified retirement plan, how can she avoid the 10 percent penalty that will be assessed on the withdrawal?

She can elect to roll over or deposit the amount withdrawn into an individually managed retirement plan.

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.

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.

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

The distributions are taxable as ordinary income.

Which of the following statements is INCORRECT regarding nonqualified deferred compensation plans?

The expense/deduction is treated the same for financial accounting purposes as it is for tax purposes.

Which of the following statements is INCORRECT regarding defined benefit plans for 2021?

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 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).

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.

Distribution rules for IRA accounts are similar to the rules for traditional accounts.

Traditional 401k

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

Traditional Roth

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?

Traditional and Roth

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.

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 5 7

Nondeductible contributions to a traditional IRA ______.

are subject to the same earned income limitations as deductible contributions

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

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

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

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