Retirement Planning Final Ch. 9

For 2020, what is the maximum amount that can be contributed to a SEP?

$57,000 For 2020, the maximum contribution for an individual to a SEP is the lesser of: 25% of compensation (compensation maximum is $285,000), or $57,000. Therefore, the maximum contribution to a SEP for 2020 is $57,000 ($285,000 maximum compensation x 25%, limited to $57,000).

Which of the following statements is/are correct regarding SEP contributions made by an employer? 1. Contributions are subject to FICA and FUTA. 2. Contributions are currently excludable from employee-participant's gross income. 3. Contributions are capped at $19,500 for 2020.

2 Only Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $19,500 for 2020. The SEP limit is 25% of covered compensation up to $57,000 for 2020.

Which statements are generally correct regarding penalties associated with IRA accounts? 1. Distributions made prior to 59½ are subject to the 10% premature distribution penalty. 2. There is a 50% excise tax on a required minimum distribution not made by April 1 of the year following the year in which age 70½ is attained (or age 72 if age 70½ is attained after December 31, 2019).

Both

Which of the following employees may be excluded from participation in a SEP? Employees covered by a collective bargaining agreement. Employees who are part time. Employees who are over the age of 65. Owner employees.

Employees covered by a collective bargaining agreement.

Jim, who is age 39, converts a $74,500 Traditional IRA to a Roth IRA in 2020. Jim's adjusted basis in the Traditional IRA is $10,000. He also makes a contribution of $6,000 to a Roth IRA in 2020 for the tax year 2020. If Jim takes a $4,000 distribution from his Roth IRA in 2021 when the account is worth $100,000, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2021 federal income tax rate is 24 percent?

$0

Nick, who is age 45, operates a landscaping business and is self-employed. He has an assistant, Louis, who has worked with him for five years. Nick is establishing a SEP for 2020 and is willing to make a contribution of 25 percent of Louis's salary to the SEP. If Nick earns $100,000 after paying Louis, his expenses, and the contribution to Louis's SEP, what is the most that he can contribute to the SEP for himself?

$18,587 $100,000 less [$100,000 x 0.9235 x 0.153 x ½] x 20% (0.25/1.25) = $18,587. Choice b left out the self employment income. Choice c is incorrect because it does not adjust the 25% to 20%. Choice d is incorrect as it multiplies by 25% instead of 20%.

A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements? 1. SEPs and qualified plans have the same funding deadlines. 2. The contribution limit for SEPs and qualified plans (defined contribution) is $57,000 for the year 2020. 3. SEPs and qualified plans have the same ERISA protection from creditors. 4. SEPs and qualified plans have different nondiscriminatory and top-heavy rules.

1 & 2 SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $57,000 for 2020 ($285,000 maximum compensation x 25%, limited to $57,000). Thus, statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.

A SEP can be established by which of the following entities? 1. S corporation.2. LLC taxed as a partnership. 3. C corporation. 1 only. 1and2. 2and3. 1,2and3.

1,2and3.

The early distribution penalty of 10 percent does not apply to IRA distributions: 1. Made after attainment of the age of 55 and separated from service. 2. Made for the purpose of paying qualified higher education costs. 3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

2 & 3

Mary and Ed, both age 33, are married, not covered by a qualified plan, and file a joint tax return. They have AGI of $164,000. Mary's mother contributed $2,000 to a Coverdell Education Savings Account for each of their two children. What is the most that Mary and Ed can contribute in total together to a Traditional IRA for 2020?

$12,000 The maximum contribution to Traditional and Roth IRAs is a total of $6,000 per person (who has not attained age 50) for 2020. The limits for the Coverdell are not related to traditional or Roth IRAs.

Mary, age 50, has an IRA with an account balance of $165,000. Mary has recently been diagnosed with an unusual disease that will require treatment costing $50,000, which she will have to pay personally. Mary's AGI will be $100,000 this year. Which of the following statements are true? 1. Mary can immediately borrow up to $50,000 from her IRA account and repay the loan within five years. 2. Mary can distribute $50,000 subject to income tax but not subject to the 10% penalty because it will be used to pay medical expenses.

Neither Statement 1 is incorrect because loans are not permitted from IRAs. Statement 2 is incorrect because only the portion of the medical expense that exceeds 7.5% of AGI (for 2020) is exempt from the 10% penalty ($50,000 - $7,500 = $42,500). However, if it were classified as a disability, then she could avoid the penalty on the entire distribution.

Which of the following people can make a deductible contribution to a traditional IRA for 2020? Person AGI Covered by Qualified Plan Marital Status 1.Dianne $100,000 Yes Married 2.Joy $50,000 Yes Single 3.Kim $280,000 No Single 4.Loretta $79,000 Yes Single

1, 2, & 3 All but Loretta may deduct a contribution made to a traditional IRA. Dianne and Joy are below the phaseout range and Kim is not covered by a qualified plan so there is no income limit. Loretta is single and covered by a plan and her AGI is above the top end of the phaseout for singles ($65,000 - $75,000) for 2020.

What is the first year in which a single taxpayer, age 54 in 2020, could receive a qualified distribution from a Roth IRA if he made his first $3,500 contribution to the Roth IRA on April 1, 2021, for the tax year 2020?

2025 A qualified distribution can only occur after a five-year period has occurred and is made on or after the date on which the owner attains age 59½, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled, or for a first-time home purchase. The five-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The five-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. Therefore, the first year in which a qualified distribution could occur is 2025.

Mr. Reid was very active and loved to go skiing. Unfortunately, he was prone to skiing though the trees and did not believe in helmets. In March of 2020, he skied into a large pine tree that abruptly ended his life. At that time, his Roth IRA contained regular contributions of $10,000, first made in 2018, a conversion contribution of $40,000 that was made in 2017, and earnings of $10,000. He never made any distributions from his IRA. When he established this Roth IRA (his first) in 2017, he named each of his two children, Bill and Phil, as equal beneficiaries. Each child will receive one-half of each type of contribution and one-half of the earnings. Which of the following is true regarding a distribution after Mr. Reid dies?

If Bill immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty.

Roger converted all $100,000 in his traditional IRA to his Roth IRA on December 1, 2016 (his first Roth contribution or conversion). His Form 8606 from prior years shows that $20,000 of the amount converted is his basis. Roger included $80,000 ($100,000 - $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2020, Roger made a regular contribution of $5,000 to a Roth IRA for the 2019 year. Roger took a $10,000 distribution from his Roth IRA on July 31st of 2020 to purchase a ticket for a trip on a cruise ship for his 61st birthday present to himself. How is the distribution taxed if the value of the account just before the distribution equals $120,000?

No tax and no penalty The question first requires a determination of whether the distribution is a qualified distribution or not. It is not a qualified distribution. Roger is over the age of 59½ but does not meet the five year rule. Therefore, the distribution first comes out of contributions, then conversions, then earnings ($5,000 from contribution and $5,000 from conversion). Since he is over the age of 59½, there is no penalty assessed. The entire distribution is tax free and not subject to a penalty.

All the following types of income are considered earned income for a traditional IRA contribution except: a. K-1 income from an S corporation. b. W-2 income. c. Self-employment income. d. Alimony resulting from a divorce agreement signed June 1, 2018.

a. K-1 income from an S corporation.

Charles, a single 29-year-old CEO of a technology start-up company, earns a $2 million base salary with a $400,000 bonus. He is not a participant in any retirement plans at work. What is the maximum deductible IRA contribution Charles can make during 2020? a. $0.b. $1,000. c. $5,500. d. $6,000.

d. $6,000.

For the year 2020, Katy (age 35) and Stefen (age 38), a married couple, reported the following items of income: KatyStefenTotalWages$50,000- $50,000Dividend Income$2,000$1,200$3,200Cash won from lottery $500$500 $52,000$1,700$53,700 Katy is covered by a qualified plan. Stefen does not work; he makes his own wine and samples it most of the day. Assuming a joint return was filed for 2020, what is the maximum tax deductible amount that they can contribute to their IRAs?

$12,000 Because their income is less than the limit for joint income tax filers ($104,000 for 2020), they can contribute and deduct $12,000 for 2020.

Kathy (age 55) is single and was divorced from her husband in 2017. She has received the following items of income this year: Pension annuity income from QDRO$21,000 Interest and dividends $5,000 Alimony $1,000 W-2 Income $1,200 What is the most that Kathy can contribute to a Roth IRA for 2020?

$2,200 Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $6,000 for 2020. Kathy has earned income of $2,200 from the alimony and W-2 income she received. Thus, she is limited to a contribution of $2,200.

Diggs is a 47-year-old executive who earns $315,000 from his job at Acme Arrows (AA) and contributes the maximum amount to the AA 401(k) plan. He wants to make a contribution to a Roth IRA for the current year, but his compensation is over the income limit. He decides he wants to fund a Roth IRA by using the backdoor Roth technique. Assume that Diggs has a traditional IRA with a balance of $24,000 that was funded entirely with pre-tax contributions. If Diggs contributes $6,000 to a traditional IRA and then converts $6,000 to a Roth IRA, how much income will he have to pick up as a result of the conversion?

$4,800 The backdoor Roth technique is less effective when the taxpayer has funds in a traditional IRA as all IRA amounts must be aggregated. Thus, Diggs must pick up $4,800 into income [1 - ($6,000 / ($6,000 + $24,000))] x $6,000.

Robin and Robbie, both age 45, are married and filed a joint return for 2020. Robbie earned a salary of $100,000 in 2020 and is covered by his employer's 401(k) plan. Robbie and Robin earned interest of $30,000 in 2020 from a joint savings account. Robin is not employed, and the couple had no other income. On April 15, 2021, Robbie contributed $6,000 to an IRA for himself and $6,000 to an IRA for Robin. The maximum allowable IRA deduction on the 2020 joint return is:

$6,000 The ability to deduct the IRA contribution depends on the individual's income and whether the individual has a qualified plan. Based on the information provided in the problem, Robin and Robbie have an AGI of $130,000 ($100,000 salary + $30,000 interest income). Since Robbie has a qualified plan, they cannot deduct the contribution for him because his income exceeds the AGI phaseout of $104,000 - $124,000 for 2020. Robin, on the other hand, can deduct her contribution because she does not have a qualified plan and their joint income is less than the $196,000 to $206,000 phaseout. Therefore, Robin's deduction is $6,000. She can use Robbie's earned income as her own.

Jack and Jill, both age 43, are married, made $20,000 each, and file a joint tax return. Jill has made a $6,000 contribution to her Traditional IRA account and has made a contribution of $2,000 to a Coverdell Education Savings Account for 2020. What is the most that can be contributed to a Roth IRA for Jack for 2020?

$6,000 The maximum combined contribution to traditional and Roth IRAs is $6,000 per person (who has not attained age 50) for 2020. Therefore, Jack and Jill would have a total of $12,000 to allocate between traditional and Roth IRAs. Jill has already contributed the maximum amount; however, Jack could still contribute $6,000 for himself. The Coverdell Education Savings Account (formerly known as an Education IRA) is not included in the $6,000 limit.

Amy, divorced and age 55, received taxable alimony of $50,000 in 2020. In addition, she received $1,800 in earnings from a part-time job. Amy is not covered by a qualified plan. What was the maximum deductible IRA contribution that Amy could have made for 2020?

$7,000 alimony is earned income and over 50

Delores, age 62, single, and retired, receives a defined benefit pension annuity of $1,200 per month from Bertancinni Corporation. She is currently working part time for Deanna's Interior Design and will be paid $18,000 this year (2020). Deanna's Interior has a 401(k) plan, but Delores has made no contribution to the plan and neither will Deanna this year. Can Delores contribute to a traditional IRA or a Roth IRA for the year and what is the maximum contribution for 2020?

$7,000 to a traditional IRA or $7,000 to a Roth IRA. She is over the age of 50

David took a lump-sum distribution from his employer's qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David has met 10-year forward averaging requirements, which of the following is/are correct regarding tax treatment of the transaction? 1. If at age 59 he distributes the IRA, he benefits from 10-year forward averaging. 2. If he rolls the entire IRA to a new employer's qualified plan, he may be eligible for forward averaging treatment in the future. 3. If he rolls over a portion of the IRA to a new employer's qualified plan, he may preserve any eligibility for forward averaging on that portion that was rolled over. 4. If David immediately withdraws the entire amount from his IRA, he may benefit from 10-year forward averaging.

2 & 3 Statement 1 is incorrect because 10-year forward averaging is only permitted with qualified plans, not IRAs. Statements 2 and 3 are correct. His new employer's qualified plan may or may not allow him to roll previous distributions into it. Statement 4 is incorrect because 10-year forward averaging is only permitted coming from qualified plans, not distributions from IRAs

Phillip, who is currently age 52, made his only contribution to his Roth IRA in 2020 in the amount of $6,000. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2025 to purchase a new car, how would he be taxed?

Although Phillip waited five years, the distribution will not be classified as a "qualified distribution" and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable.

Which of the following statements is NOT correct about Form 8606?

The form tracks basis for contributions and conversions to Roth IRAs.

Which of the following cannot be held in an IRA account as an investment?

Variable life insurance

Bob, who is 58 years old, makes his first contribution to a Roth IRA in December of Year 1. What is the first year in which he could receive a qualified distribution from a Roth IRA? Year2. Year3. Year5. Year6.

Year6.

Marleen, who is 37 years old, is an employee of Zcrypt, Inc. (Zcrypt). Zcrypt sponsors a SEP IRA and would like to contribute the maximum amount to Marleen's account for the plan year. If Marleen earns $32,000 per year, what is the maximum contribution Zcrypt can make on her behalf to the SEP IRA? a. $8,000 b. $19,000. c. $32,000. d. $57,000.

a. $8,000

What is the earliest age that an IRA catch-up contributions can be made? a. 45. b. 50. c. 60. d. 65.

b. 50.

Seth and Morgan were just married, but Seth does not work. They are both 25 years old. Morgan supports Seth with funds from her trust fund, investment income of $12,000, and her part-time earnings of $7,000 this year. If Morgan contributes $6,000 in 2020 to her Roth IRA, how much can Seth contribute to his traditional IRA? a. $0.b. $250. c. $1,000. d. $6,000.

c. $1,000. only $7000 of earned income, and 6,000 was already contributed

Participation in which of the following plans will not be considered active participation for purposes of IRA deductibility? a. Tax sheltered annuity. b. Simplified employee pension. c. SIMPLE. d. 457 plan.

d. 457 plan.

Which of the following types of income is considered earned income for a traditional IRA contribution? a. Dividends. b. Rental income. c. Capital gains. d. Partnership income from a law firm.

d. Partnership income from a law firm.