Chapter 13 Smart Book
9. 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 choices describe characteristics of a Roth 401(k)? (Check all that apply.)
-Contributions to the account are made with after-tax dollars. -Employers can NOT contribute matching funds to an employee's Roth account.
12. Which of the following characteristics describe defined contribution plans? (Check all that apply.)
-Employers must maintain separate accounts for each employee participating in the plan. -The employee bears the investment risk and funding responsibility. -Employees may contribute more to the plan than the employer contributes.
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 qualifying medical expenses. -Funds are used for a first-time home purchase. -Funds are used for qualified higher education expenses.
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.
26. Which of the following characteristics describe defined benefit plans? (Check all that apply.)
-The employer bears the investment risk and funding responsibility. -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.
Distribution rules for____ IRA accounts are similar to the rules for traditional____ accounts.
-traditional -401k
25. 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%
Carrie, age 38, is a florist who owns and manages a sole proprietorship. During 2020, 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 2020 tax year?
14870, The lesser of $57,000 or [$80,000 - ($80,000 x .9235 x .153 x 50%)] x .20 = $14,870.
5. 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 $ _____. (Enter your answer as a number.)
230,000
17. 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
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.
4,500
13. 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
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 1/2
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
23. 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= 7200- (.24x7200)
14. In 2020, 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 $____. (Enter your answers as numbers.)
57,000 100 19,500
For 2020, the owner of a sole proprietorship can make annual contributions to his SEP IRA for the lesser of $ ___or ___% of Schedule C income, after reducing the net income by the deduction for the employer's portion of self-employment taxes paid.
57000 20%
What is the maximum deductible contribution to an IRA in 2020 for a taxpayer under the age of 50?
6,000
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
3. 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.
24. 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
6. 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
15. The employee bears the investment risk and funding responsibility in a defined ____plan.
Contribution
21. Employers must maintain separate accounts for each employee participating in a defined____ plan.
Contribution
7. The employee bears the investment risk and funding responsibility in a defined plan.
Contribution
10. Qualified retirement plans can NOT_____ against non-executives.
Discriminate
22. 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. (Enter only one word per blank.)
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 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.
19. 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 - 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: 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- Even though contributions are NOT deductible, the maximum level of the allowed contribution may be phases out at higher levels of AGI
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
An individually managed retirement plan with tax advantages similar to an employer provided defined contribution plan is known as a(n):
IRA
16. 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
Which of the following statements is INCORRECT regarding IRAs?
Once a taxpayer reaches age 65, contributions to IRAs are not deductible.
8. Upon retirement, all distributions from defined benefit plans are taxable as _____ _____.
Ordinary Income
18. 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
4.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
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.
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 higher
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.
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.
Which of the following statements is INCORRECT regarding the saver's credit?
The credit is refundable
2. How are distributions from defined benefit plans treated for tax purposes?
The distributions are taxable as ordinary income.
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 nonqualified deferred compensation plans?
The expense/deduction is treated the same for financial accounting purposes as it is for tax purposes.
11. Which of the following statements is INCORRECT regarding defined benefit plans for 2020?
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).
20. 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.)
The year after she retires if she is 74 when she retires -The year she after reaches 72 years of age
How are distributions from nonqualified deferred compensation plans taxed to the employee?
They are taxed as ordinary income
Which type(s) of 401(k) will incur a 10% penalty on the entire distribution if the money is withdrawn early?
Traditional
Taxpayers who meet certain eligibility requirements can contribute to ____IRAs and/or ____IRAs. (Enter only one word per blank.)
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
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- 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?
Unlike traditional IRAs, Roth IRAs do not have any minimum distribution requirements.
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
Nondeductible contributions to a traditional IRA ______.
are subject to the same earned income limitations as deductible contributions
For the employee, nonqualified deferred compensation plans receive the same tax treatment as traditional defined plans.
contribution
For the employee, nonqualified deferred compensation plans receive the same tax treatment as traditional defined____ plans
contribution
The maximum contribution that a taxpayer can make into a Roth IRA is ______the allowable contribution for a traditional IRA.
equal to
The phase-out for contributions allowed to Roth IRAs is dependent upon the taxpayer's____ and____ MAGI. (Enter only one word per blank.)
filing status
To the extent the maximum deductible IRA contribution is phased out based on MAGI, taxpayers may still make ____contributions, subject to the allowable overall limit.
nondeductible
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
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). (Enter only one word per blank.)
pre post nontaxable
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
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 -made because the taxpayer is disabled -made when the taxpayer was 60 years old -used for a first-time home purchase
Contributions are not deductible and qualified distributions are not taxable from a(n) ___IRA. (Enter only one word per blank.)
Roth
Contributions are not deductible and qualified distributions are not taxable from a(n) ____IRA. (Enter only one word per blank.)
Roth
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. (Enter your answers as higher or lower and increases or decreases.)
higher decreases
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- 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
True or false: An individual 401(k) is a popular retirement plan for sole proprietorships with several employees.
False- These plans are strictly for sole proprietors and their spouses who do not have employees
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- 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.
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
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 type(s) of 401(k) will provide the taxpayer with nontaxable qualified distributions during his retirement years?
Roth
