Chapter 13

Aaron retired at the age of 63. The current balance in his Roth IRA is $140,000. Aaron established the Roth IRA eight years ago. Through a rollover and annual contributions, Aaron has contributed $70,000 to his account. If Aaron receives a $60,000 distribution from the Roth IRA, what amount of the distribution is taxable? $0 $30,000 $60,000 None of the choices are correct.

$0 Qualifying distributions from a Roth IRA are not taxable.

Daniela retired at the age of 65. The current balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years ago. Through a rollover and annual contributions Daniela has contributed $80,000 to her account. If Daniela receives a $50,000 distribution from the Roth IRA, what amount of the distribution is taxable? $0. $20,000. $30,000. $50,000.

$0. Qualified distributions from a Roth IRA are not taxable.

When employees contribute to a Roth 401(k) account, they _____ allowed to deduct the contributions and they _______ taxed on distributions from the plan. are; are not are; are are not; are are not; are not

are not; are not

Lisa, age 45, needed some cash so she withdrew $50,000 from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 8 years ago. Through a rollover and annual contributions, she has contributed $80,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty? $0. $20,000. $30,000. $50,000.

$0. While this is a nonqualified distribution, the distribution is deemed to first come from account contributions. Because the distribution amount is less than the contributions, the distribution is not taxable. That is, account earnings were distributed.

Jessica retired at age 65. On the date of her retirement, the balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA on the date of retirement, what amount of the distribution is taxable? $0. $5,000. $37,500. $45,000. $50,000.

$45,000. 10% of the distribution is not taxable ($20,000 nondeductible contributions divided by balance in account of $200,000). Taxable portion is 90% so taxable amount is $45,000 ($50,000 × 90%).

Kathy is 60 years of age and self-employed. During 2018, she reported $500,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to an individual 401(k) for 2018? (Round your final answer to the nearest whole number) $55,000. $61,000. $95,837. $77,337.

$61,000. She may contribute the lesser of (1) $55,000 or (2) $95,837 [20% × ($400,000 − [((400,000 × 0.9235 - 128,400) × 2.9% × 50%) + (128,400 × 15.3% × 50%)])] + $18,500. Because she is at least 50 years of age at the end of the year, she may contribute an additional $6,000 as a catch-up adjustment in addition to the lesser of (1) or (2). So she may contribute $61,000 ($55,000 + $6,000).

Dean has earned $70,000 annually for the past five years working as an architect for WCC Inc. Under WCC's defined benefit plan (which uses a 7-year graded vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with WCC. Dean has worked for five full years for WCC and his vesting percentage is 60%. What is Dean's vested benefit (or annual retirement benefit he has earned so far)? $12,250. $42,000. $7,350. $0.

$7,350. $70,000 (average salary for the prior three years) × 17.5% (3.5% × 5 years of service) × 60% (vesting percentage).

Which of the following taxpayers is most likely to qualify for the saver's credit? A low AGI taxpayer who does not contribute to any qualified retirement plan. A low AGI taxpayer who contributes to her employer's 401(k) plan. A high AGI self-employed taxpayer. A high AGI employee who does not contribute to any qualified retirement plan.

A low AGI taxpayer who contributes to her employer's 401(k) plan.

Which of the following statements regarding self-employed retirement accounts is true? A self-employed taxpayer who has hired employees may not set up a SEP IRA. A self-employed taxpayer who has hired employees may set up either a SEP IRA or an individual 401(k). A self-employed taxpayer who has hired employees may not set up an individual 401(k). All of the choices are false.

A self-employed taxpayer who has hired employees may not set up an individual 401(k).

Riley participates in his employer's 401(k) plan. He turns 70 years of age on February 15, 2017 and he plans on retiring on July 1, 2019. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties? By April 1, 2017. By April 1, 2018. By April 1, 2019. By April 1, 2020.

By April 1, 2020.

When employees contribute to a traditional 401(k) plan, they _____ allowed to deduct the contributions and they ______ taxed on distributions from the plan. are; are not are; are are not; are are not; are not

are; are

Kathy is 60 years of age and self-employed. During 2018 she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2018? (Round your final answer to the nearest whole number) $11,152. $17,152. $61,000. $55,000.

$11,152. Her maximum contribution is the lesser of (1) $55,000 or (2) $11,152 [($60,000 − (60,000 × 0.9235 × 0.153 × 0.50)) × 20%]. There is no catch-up contribution for taxpayers at least 50 years of age at the end of the year.

Heidi, age 45, 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? $0. $10,000. $12,000. $18,000. $30,000.

$18,000. Heidi is not taxed on 40% of the distribution because this is considered a return of her nondeductible contribution. The 40% is the amount of her contributions divided by the value of the account ($20,000/$50,000). The remaining 60% ($18,000) is subject to tax and penalties. Note that the distribution is nonqualified because Heidi is not 59½ years of age at the time of the distribution (she had the Roth open for more than five years). Because she had not reached age 59½ at the time she received the distribution, she is penalized on the earnings she received in the distribution.

Cara, who is 42 years old, had some unexpected medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on her tax return), she received a $10,000 distribution from her traditional IRA (she has only made deductible contributions to the IRA). Assuming her marginal ordinary income tax rate is 22%, what amount of taxes and/or early distribution penalties will Cara be required to pay on this distribution? $2,200 income tax; $100 early distribution penalty $2,200 income tax; $1,000 early distribution penalty $2,200 income tax; $0 early distribution penalty $0 income tax; $0 early distribution penalty

$2,200 income tax; $0 early distribution penalty Because the IRA distribution was used for qualified medical expenses it is not subject to the 10 percent early distribution penalty but the full amount of the distribution is subject to the regular income tax ($10,000 × 22%).

Janna received a $90,000 distribution from her traditional 401(k) account this year. Assuming Janna's marginal tax rate is 24%, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 60th birthday and she has not yet retired? $0 $21,600 $30,600 None of the choices are correct.

$21,600 She must pay $21,600 of income tax on the distribution ($90,000 × 24%), but no 10% early distribution penalty because she was over 59 ½ on the date of the distribution and she had not yet retired.

During year 2018, Rebekah, a 20-year-old full-time student, earned $3,400 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions during 2018 is $5,500. How much of a tax-deductible contribution can she make to an IRA? $0 (Full-time students are not allowed to participate in IRAs) $3,400 $5,500 $8,900

$3,400 Tax deductible contributions are limited to the lesser of $5,500 or the amount of earned income.

Amy is single. During 2018, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $1,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year? $750. $1,000. $1,500. $0.

$750. $1,500 × 50% (her IRA contribution multiplied by the maximum applicable percentage based on filing status and AGI).

Which of the following statements regarding traditional IRAs is true? Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year. Taxpayers with high income are not allowed to contribute to traditional IRAs. Taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct contributions to a traditional IRA regardless of their AGI. A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

Riley participates in his employer's 401(k) plan. He retired in 2018 at age 75. When must Riley receive his distribution pertaining to 2018 to avoid minimum distribution penalties? April 1, 2018. April 1, 2019. December 31, 2018. December 31, 2019.

April 1, 2019.

Shannon participates in her employer's 401(k) plan. She turns 68 years of age on February 15, year 1, and she plans on retiring on May 1, year 2. When must Shannon receive her first distribution from the plan to avoid minimum distribution penalties? April 1, year 1 April 1, year 2 April 1, year 3 April 1, year 4

April 1, year 4 To avoid minimum distribution penalties the taxpayer must receive the first distribution by no later than April 1 of the year after the employee turns 70 ½ or the year after the year in which employee retires (if later). Because Shannon turns 70 ½ years of age in year 3 (after she retires), she must receive her first distribution no later than April 1, year 4 to avoid minimum distribution penalties

Which of the following statements regarding defined benefit plans is false? The benefits are based on a fixed formula. The vesting period can be based on a graded or cliff schedule. Employees bear the investment risks of the plan. Employers are generally required to make annual contributions to meet expected future liabilities.

Employees bear the investment risks of the plan.

Which of the following statements regarding Roth 401(k) accounts is false? Employees can make contributions to a Roth 401(k). Employers can make contributions to Roth accounts on behalf of their employees. Contributions to Roth 401(k) plans are not deductible. Qualified distributions from Roth 401(k) plans are not taxable.

Employers can make contributions to Roth accounts on behalf of their employees.

Which of the following is true concerning employer funding of nonqualified deferred compensation plans? Employers are required to invest salary deferred by employees in investments specified by the employees. Employers are required to annually fund their deferred compensation obligations to employees. Employers annually deduct the amount earned by employees under the plan. Employers may discriminate in terms of who they allow to participate in the plan.

Employers may discriminate in terms of who they allow to participate in the plan.

Jenny (35 years old) is considering making a one-time contribution to either a traditional 401(k) plan or to a Roth 401(k) plan. She plans to withdraw the account balance when she retires in 40 years. Jenny expects to earn a 7% before-tax rate of return no matter which plan she contributes to. Which of the following statements is true? If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan. If Jenny's marginal tax rate in the year of contribution is lower than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan. Jenny will earn the same after-tax rate of return no matter which plan she contributes to. Jenny is not allowed to make a one-time contribution to either plan.

If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.

In general, which of the following statements regarding self-employed retirement accounts is true? In general, SEP IRAs have higher contribution limits than individual 401(k)s if the contributing taxpayer is at least 50 years of age at year end. In general, SEP IRAs have higher contribution limits than individual 401(k)s no matter the age of the contributing taxpayer. In general, Individual 401(k)s have higher contribution limits than SEP IRAs. None of the choices are true. In general, both SEP IRAs and individual 401(k)s have exactly the same annual contribution limits.

In general, Individual 401(k)s have higher contribution limits than SEP IRAs.