Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap013

Chapter 13 Retirement Savings and Deferred Compensation True / False Questions Qualified retirement plans include defined benefit plans but not defined contribution plans True False Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can) contribute to an employee's plan True False The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement True False Jacob participates in his employer's defined benefit plan He has worked for his employer for four full years If his employer uses a five-year cliff vesting schedule, Jacob will need to work another year in order to vest in any of his defined benefit plan retirement benefits True False Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries True False Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal True False Both 401(k) plans and Roth 401(k) plans are forms of defined contribution plans True False Both employers and employees may contribute to defined contribution plans However, the amount that employees may contribute to the plan in a given year is limited by the tax law while the amount that employers may contribute is not True False 13-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education When an employer matches an employee's contribution to the employee's 401(k) account, the employee is immediately taxed on the amount of the employer's matching contribution True False 10 Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old by year end True False 11 Heidi retired from GE (her employer) at age 56 At the end of the year, when she was 56 years of age, Heidi received a distribution from her GE sponsored 401(k) account Because Heidi was not at least 59½ years of age at the time of the distribution, she must pay tax on the full amount of the distribution and a 10 percent penalty on the full amount of the distribution True False 12 Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty True False 13 On December 1, 2014 Irene turned 71 years old She is still working for her employer and she participates in her employer's 401(k) plan Irene is not required to receive a minimum distribution for 2014 from her 401(k) account because she has not yet retired True False 14 An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account True False 15 Employee contributions to traditional 401(k) accounts are deductible by the employee, but employee contributions to Roth 401(k) accounts are not True False 16 When a taxpayer receives a nonqualified distribution from a Roth 401(k) account the taxpayer contributions are deemed to be distributed first If the amount of the distribution exceeds the taxpayer contributions, the remainder is from the account earnings True False 17 Just like distributions from qualified retirement plans, distributions from nonqualified deferred compensation plans are taxed as ordinary income to the recipient True False 13-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 18 Participating in an employer-sponsored nonqualified deferred compensation plan is potentially risky because employers are not required to fund nonqualified plans If the employer is not able to pay the employee when the payment is due, the employee usually becomes an unsecured creditor of the employer True False 19 From a tax perspective, participating in a nonqualified deferred compensation plan is an effective tax planning strategy when the employee anticipates that her marginal tax rate will be higher when she receives the deferred compensation than when she defers the compensation True False 20 Employers may choose whom they allow to participate and whom they not allow to participate in their nonqualified deferred compensation plans True False 21 Taxpayers who participate in an employer-sponsored retirement plan are not allowed to contribute to individual retirement accounts (IRAs) True False 22 Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs) under any circumstances True False 23 Darren is eligible to contribute to a traditional 401(k) in 2014 He forgot to contribute before year end If he contributes before April 15, 2015, he is allowed to treat the contribution as though he made it during 2014 True False 24 Taxpayers never pay tax on the earnings of a traditional 401(k) account True False 25 Qualifying distributions from traditional IRAs are nontaxable while qualifying distributions from Roth IRAs are fully taxable as ordinary income True False 26 Taxpayers contributing to and receiving distributions from a Roth IRA generally earn a before-tax rate of return on their contributions equal to their after-tax rate of return True False 27 If a taxpayer's marginal tax rate is decreasing, a taxpayer contributing to a traditional IRA can earn an after-tax rate of return greater than her before-tax rate of return True False 13-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 28 A SEP IRA is an example of a self-employed retirement account True False 29 Individual 401(k) plans generally have higher contribution limits than SEP IRAs True False 30 A taxpayer can only receive a saver's credit if she contributes to a qualified retirement account True False 31 High-income taxpayers are not allowed to receive the saver's credit True False Multiple Choice Questions 32 Which of the following statements is true regarding employer-provided qualified retirement plans? A B C D May discriminate against rank and file employees Deductible contributions are generally phased-out based on AGI Executives are generally ineligible to participate in these plans They are generally referred to as defined benefit plans or defined contribution p 33 Which of the following describes a defined benefit plan? A B C D Provides fixed income to the plan participants based on a formula Distribution amounts determined by employee and employer contributions Allows executives to defer income for a period of years Retirement account set up by an individual 34 Which of the following statements regarding defined benefit plans is false? A B C D 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 13-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 35 Which of the following statements regarding vesting in a defined benefit plan is correct? A B C D Under a cliff vesting schedule, a portion of an employee's benefits vest each ye Under a graded vesting schedule, an employee's entire benefit vests all at the sa When an employee's benefits vest, she is entitled to participate in the employer's When an employee's benefits vest, she is legally entitled to receive the vested b 36 Dean has earned $70,000 annually for the past five years working as an architect for MWC Inc Under MWC'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 MWC Dean has worked for five full years for MWC and his vesting percentage is 60% What is Dean's vested benefit (or annual retirement benefit he has earned so far)? A B C D 37 Dean has earned $70,000 annually for the past 4½ years working as an architect for MWC Under MWC's defined benefit plan (which uses a 5-year cliff 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 MWC What is Dean's vested benefit (or annual benefit he has earned so far)? A B C D 38 Which of the following best describes distributions from a defined benefit plan? A B C D Distributions from defined benefit plans are fully taxable as ordinary income Distributions from defined benefit plans are partially taxable as ordinary income a Distributions from defined benefit plans are fully taxable as capital gains Distributions from defined benefit plans are partially taxable as capital gains and 39 Which of the following is a true statement regarding saving for retirement? A B C D In a given year, a taxpayer may participate in either an employer-sponsored define In a given year, a taxpayer who receives salary as an employee and also receives In a given year, a taxpayer may contribute to an IRA (either traditional or Roth) or None of these is a true statement 13-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 40 Which of the following describes a defined contribution plan? A B C D Provides guaranteed income on retirement to plan participants Employers and employees generally may contribute to the plan Generally set up to defer income for executives and highly compensated employe Retirement account set up to provide an individual a fixed amount of income on 41 Which of the following statements regarding defined contribution plans is false? A B C D Employers bear investment risk relating to the plan Employees immediately vest in their contributions to the plan Employers typically match employee contributions to the plan to some exten An employer's vesting schedule is used for employers' contributions in determinin 42 Which of the following statements regarding contributions to defined contribution plans is true? A B C D Employer contributions to a defined contribution plan are not limited by the tax Employee contributions to a defined contribution plan are not limited by the tax An employee who is at least 60 years of age as of the end of the year may contrib The tax laws limit the sum of the employer and employee contributions to a defin 43 When employees contribute to a traditional 401(k) plan, they _ allowed to deduct the contributions and they taxed on distributions from the plan A B C D 44 When employees contribute to a Roth 401(k) account, they _ allowed to deduct the contributions and they _ taxed on distributions from the plan A B C D 45 How is a traditional 401(k) account similar to a Roth 401(k) account? A B C D Employees contribute before-tax dollars to both types of accounts Distributions from a traditional 401(k) account and a Roth 401(k) account are both Both accounts can receive matching contributions from employers Employers generally choose how funds in these accounts will be invested 13-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 46 Which of the following best describes distributions from a traditional defined contribution plan? A B C D Distributions from defined contribution plans are fully taxable as ordinary incom Distributions from defined contribution plans are partially taxable as ordinary inco Distributions from defined contribution plans are fully taxable as capital gains Distributions from defined contribution plans are partially taxable as capital gains 47 Shauna received a distribution from her 401(k) account this year In which of the following situations will Shauna be subject to an early distribution penalty? A B C D Shauna is 60 years of age but not yet retired when she receives the distribution Shauna is 58 years of age but not yet retired when she receives the distribution Shauna is 56 years of age and retired when she receives the distribution Shauna is 69 years of age but not yet retired when she receives the distributio 48 Shauna received a $100,000 distribution from her 401(k) account this year Assuming Shauna's marginal tax rate is 25%, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59 th birthday and she has not yet retired? A B C D E 49 Riley participates in his employer's 401(k) plan He retired in 2014 at age 75 When must Riley receive his distribution pertaining to 2014 to avoid minimum distribution penalties? A B C D December 31, 201 December 31, 201 50 Riley participates in his employer's 401(k) plan He turns 70 years of age on February 15, 2013 and he plans on retiring on July 1, 2015 When must Riley receive his first distribution from the plan to avoid minimum distribution penalties? A B C D 13-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 51 Riley participates in his employer's 401(k) plan He turns 69 years of age on February 15, 2014, and he plans on retiring on July 1, 2014 When must Riley receive his first distribution from the plan to avoid minimum distribution penalties? A B C D 52 Which of the following statements is true regarding taxpayers receiving distributions from traditional defined contribution plans? A B C D A taxpayer who retires at age 71 in 2014 is required to pay a minimum distribution The minimum distribution penalty is 30% of the amount required to have been di A taxpayer who receives a distribution from a retirement account before she is 55 Taxpayers are not allowed to deduct either early distribution penalties or minimum 53 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? A B C D If Jenny's marginal tax rate in the year of contribution is higher than her marginal If Jenny's marginal tax rate in the year of contribution is lower than her marginal ta Jenny will earn the same after-tax rate of return no matter which plan she contri Jenny is not allowed to make a one-time contribution to either plan 54 Which of the following statements regarding Roth 401(k) accounts is false? A B C D Employees can make contributions to a Roth 401(k) Employers can make contributions to Roth accounts on behalf of their employee Contributions to Roth 401(k) plans are not deductible Qualified distributions from Roth 401(k) plans are not taxable 55 Which of the following statements is true regarding distributions from Roth 401(k) accounts? A B C D There are no minimum distribution requirements for distributions from Roth 401(k Qualified distributions are subject to taxation A taxpayer receiving a nonqualified distribution from a Roth 401(k) account may b None of these is a true statement 13-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 56 Heidi has contributed $20,000 in total to her Roth 401(k) account over a six year period In 2014, 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? A B C D E 57 Which of the following is true concerning employer funding of nonqualified deferred compensation plans? A B C D Employers are required to invest salary deferred by employees in investments spe Employers are required to annually fund their deferred compensation obligations t Employers annually deduct the amount earned by employees under the plan Employers may discriminate in terms of who they allow to participate in the pl 58 Which of the following statements concerning nonqualified deferred compensation plans is true? A B C D If an employer doesn't have the funds to pay the employee, the employee become These plans can be an important tax planning tool for employers if they expect the These plans can be an important tax planning tool for employees who expect the Distributions are taxed at the same tax rate as long-term capital gains 59 Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false? A B C D Employers must fund qualified defined contribution plans but not nonqualified defe Qualified defined contribution plans are subject to formal vesting requirements wh Distributions from both types of plans are taxed at ordinary income tax rates In terms of tax consequences to the employee, earnings on qualified plans (excep 60 During 2014 Jacob, a 19 year old full-time student, earned $4,500 during the year and was not eligible to participate in an employer-sponsored retirement plan The general limit for deductible contributions during 2014 is $5,500 How much of a taxdeductible contribution can Jacob make to an IRA? A B C D $0 (Full-time students are not allowed to participate in IRAs) 13-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 61 Which of the following statements regarding traditional IRAs is true? A B C D Once a taxpayer reaches age 55 years of age she is allowed to contribute an addit Taxpayers with high income are not allowed to contribute to traditional IRAs Taxpayers who participate in an employer-sponsored retirement plan are allowed A single taxpayer with no earned income is not allowed to deduct contributions to 62 Which of the following statements regarding IRAs is false? A B C D Taxpayers who participate in an employer-sponsored retirement plan may be allow The ability to make deductible contributions to a traditional IRA and nondeductible A taxpayer may contribute to a traditional IRA in 2015 but deduct the contributio Taxpayers who have made nondeductible contributions to a traditional IRA are tax 63 Bryan, who is 45 years old, had some surprise medical expenses during the year To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA) Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution? A B C D $3,000 income tax; $2,000 early distribution penalty $3,000 income tax; $0 early distribution penalty $0 income tax; $2,000 early distribution penalty $0 income tax; $0 early distribution penalty 64 In 2014, Jessica retired at the age of 65 The current 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 $50,000 distribution from the IRA, what amount of the distribution is taxable? A B C D E 65 Which of the following statements regarding Roth IRAs is false? A B C D Contributions to Roth IRAs are not deductible Qualifying distributions from Roth IRAs are not taxable Whether or not they participate in an employer-sponsored retirement plan, taxpa Taxpayers who are married and file separately are not allowed to contribute to a 13-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 89 What is the maximum saver's credit available to any taxpayer in 2014? A$ 2, 0 B$ 1, 0 C$ 0 D It de pe nd s on th e fili ng st at us of th e ta xp ay er The maximum saver's credit is $1,000 which is 50% of $2,000 While higher AGIs affect the credit percentage, the maximum is $1,000 no matter the taxpayer's filing status AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 13-06 Compute the saver's credit Level of Difficulty: Medium Topic: Saver's credit Essay Questions 13-235 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 90 Joan recently started her career with PDEK Accounting, LLP which provides a defined benefit plan for all employees Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service Plan benefits vest under a 5-year cliff schedule Joan worked 4½ years at PDEK before leaving for another opportunity She received an annual salary of $49,000, $52,000, $58,000 and $65,000 for years one through four, respectively Joan earned $35,000 of her $70,000 annual salary in year five What is the vested benefit Joan is entitled to receive from PDEK for her retirement? $0 Feedback: Under a 5-year cliff vesting schedule, employees not vest in any benefits until they have worked for five full years Joan worked for 4½ years so she is not entitled to a benefit AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-01 Describe the tax and nontax aspects of employer-provided defined benefit plans from both the employer's and employee's perspective Level of Difficulty: Easy Topic: Defined benefit plans 91 Joan recently started her career with PDEK Accounting, LLP which provides a defined benefit plan for all employees Employees receive 1.5 percent of the average of their three highest annual salaries for each full year of service Plan benefits vest under a 5-year cliff schedule Joan worked 5½ years at PDEK before leaving for another opportunity She received an annual salary of $49,000, $52,000, $58,000, $65,000, and $75,000 for years one through five respectively Joan earned $40,000 of her $80,000 annual salary in year six What is the vested benefit Joan is entitled to receive from PDEK for her retirement? $4,950 Feedback: Joan worked for more than five years so she is fully vested in her benefit from the plan Joan's vested benefit is calculated as follows: [($58,000 + $65,000 + $75,000)/3] × (1.5% × years) × 100% vesting AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-01 Describe the tax and nontax aspects of employer-provided defined benefit plans from both the employer's and employee's perspective Level of Difficulty: Medium Topic: Defined benefit plans 13-236 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 92 Henry has been working for Cars Corp for 40 years and months Cars Corp provides a defined benefit plan for its employees Under the plan, employees receive percent of the average of their three highest annual salaries for each full year of service Henry's vested benefit percentage is 80 percent (40 years × percent for each full year) Henry retired on January 1, 2014 Henry received annual salaries of $520,000, $540,000, and $560,000 for 2011, 2012, and 2013, respectively What is the maximum benefit Henry can receive under the plan in 2014? $210,000 (maximum annual benefit limitation set by the government) Feedback: Without consideration of the benefit limitation that amount would be $432,000 = $540,000 (average salary) × 80 percent (vested benefit) Calculated as follows: Average of ($520,000, $540,000, $560,000) = $540,000 80 percent (40 years of service × percent for each year) × 100 percent (100 percent vested after years) = 80 percent AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-01 Describe the tax and nontax aspects of employer-provided defined benefit plans from both the employer's and employee's perspective Level of Difficulty: Medium Topic: Defined benefit plans 93 Georgeanne has been employed by SEC Corp for the last 2½ years Georgeanne participates in SEC's 401(k) plan During her employment, Georgeanne has contributed $6,000 to her 401(k) account SEC has contributed $3,000 to Georgeanne's 401(k) account (it matched 50 cents of every dollar contributed) SEC uses a three-year cliff vesting schedule If Georgeanne were to quit her job with SEC, what would be her vested benefit in her 401(k) account (assume the account balance is $9,000)? $6,000 Feedback: Georgeanne fully vests in her own contributions, but does not vest in any of her employer's contributions because she has not worked for three full years AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Medium Topic: Defined contribution plans 13-237 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 94 In 2014, Christina made a one-time contribution of $12,000 to her 401(k) account, and she received a matching contribution from her employer in the amount of $4,000 Christina expects to earn a 6-percent before-tax rate of return on her account balance Assuming Christina withdraws the entire balance in 25 years when she retires, what is Christina's after-tax accumulation from the 2014 contributions to her 401(k) account? Assume her marginal tax rate at retirement is 35 percent $44,636 Feedback: ($16,000 × 1.0625) - (68,670 × 35%) The future value factor for 25 years, 6%, is 4.29187 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Medium Topic: Defined contribution plans 95 In 2014, Ryan contributes 10 percent of his $75,000 annual salary to a Roth 401(k) account sponsored by his employer, XYZ XYZ offers a dollar-for-dollar match up to 10 percent of the employee's salary The employer contributions are placed in a traditional 401(k) account on the employee's behalf Ryan expects to earn an 8percent before-tax rate of return on contributions to his Roth and traditional 401(k) accounts Assuming Ryan leaves the funds in the accounts until he retires in 25 years, what are his after-tax accumulations in the Roth 401(k) and in the traditional 401(k) accounts if his marginal tax rate at retirement is 30 percent? If Ryan's marginal tax rate in 2014 is 35 percent will he earn a higher after tax rate of return from the Roth 401(k) or the traditional 401(k)? Explain Roth 401(k) after-tax accumulation: $51,364 Traditional 401(k) after-tax accumulation: $35,955 Higher after-tax rate of return from the traditional 401(k) The after-tax rate of return on the traditional 401(k) is higher than the return on the Roth because Ryan gets a tax benefit of the deductible contribution on the traditional 401(k) at a marginal tax rate of 35 percent and only pays tax on the income at 30 percent at retirement Thus, after taxes, he earns a rate of return above the percent before tax rate of return he earns on a Roth 401(k) Feedback: Roth 401(k): $7,500 × 1.0825; Traditional 401(k): ($7,500 × 1.0825) × (1 - 30%); The future value factor for 25 years, 8%, is 6.84848 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Hard Topic: Defined contribution plans 13-238 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 96 On March 30, 2014, Rodger (age 56) was let go from his employer of 30 years due to rough economic times During his 30 years of employment, Rodger contributed $300,000 to his traditional 401(k) account When Rodger was let go, his 401(k) account balance was $900,000 (this included both employer matching and account earnings) Rodger immediately withdrew $40,000 to use as an emergency savings fund What amount of tax and early distribution penalties must Rodger pay on the $40,000 withdrawal if his ordinary marginal tax rate is 28 percent? Tax is $11,200 ($40,000 × 28%); Penalty is $0 Feedback: Rodger owes income tax on the distribution ($40,000 × 28%) but no penalty because he is over age 55 and is no longer employed AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Medium Topic: Defined contribution plans 97 Heidi invested $4,000 in her Roth 401(k) on January 1, 2006 This was her only contribution to the account On July 1, 2014, when the account balance was $6,000, she received a nonqualified distribution of $4,500 What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution? $1,500 taxable portion of distribution; $150 penalty Feedback: See computation below: AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Medium Topic: Defined contribution plans 13-239 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 98 Sean (age 74 at end of 2013) retired five years ago The balance in his 401(k) account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,800,000 Using the IRS tables below, what is Sean's required minimum distribution for 2014? For 2014, his required minimum distribution is $71,400 ($1,700,000 × 4.2%) Feedback: This is determined by his age at the end of the year of distribution (74) and the balance in his account at the end of the year prior to the distribution (2013) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Medium Topic: Defined contribution plans 13-240 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 99 Sean (age 74 at end of 2014) retired five years ago The balance in his 401(k) account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,750,000 In 2013, Sean received a distribution of $50,000 from his 401(k) account Assuming Sean's marginal tax rate is 25 percent, what amount of the $50,000 distribution will Sean have left after paying income tax on the distribution and paying any minimum distribution penalties (use the IRS table below in determining the minimum distribution penalty, if any) $26,800 remaining after taxes and penalty ($50,000 distribution minus $12,500 of income tax minus $10,700 penalty) Feedback: Sean must pay $12,500 of income tax ($50,000 distribution × 25% marginal tax rate) He also must pay a penalty of $10,700 His required minimum distribution is $71,400 ($1,700,000 × 4.2% (from the table)) This is determined by his age at the end of the year of distribution (74) and the balance in his account at the end of the year prior to the distribution (2013) Because his distribution was only $50,000, he must pay a 50% penalty on $21,400 ($71,400 - 50,000); the amount by which his distribution was short of the required distribution Thus, his penalty is $10,700 ($21,400 × 50%) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Hard Topic: Defined contribution plans 13-241 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 100 Kim (50 years of age) is considering whether to participate in her company's Roth 401(k) or traditional 401(k) This year, she plans to invest either $4,000 in a Roth 401(k) or $5,000 in a traditional 401(k) Kim plans on leaving the contribution in the retirement account for 20 years when she will receive a distribution of the entire balance in the account Her employer does not have a matching program for employee contributions to retirement accounts Assume Kim can earn a percent before tax return in either account and that she anticipates that in 20 years her tax rate will be 30% 1) What would be Kim's after-tax accumulation in 20 years if she contributes $4,000 to a Roth 401(k) account? 2) What would be her after-tax accumulation in 20 years if she contributes $5,000 to a traditional 401(k) account? 1) After-tax accumulation in Roth 401(k) is $12,829 ($4,000 × 1.0620); 2) After-tax accumulation in traditional 401(k) is $11,225 = [($5,000 × 1.06 20) × (1 - 3)] The future value factor for 20 years, 6%, is 3.20714 Feedback: See computations above AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-02 Explain and determine the tax consequences associated with employer-provided defined contributions plans; including traditional 401(k) and Roth 401(k) plans Level of Difficulty: Medium Topic: Defined contribution plans 101 Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan In 2014, Katrina defers 20 percent of her $400,000 salary Katrina's deemed investment choice will earn percent annually on the deferred compensation until she takes a lump sum distribution in 10 years Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate will be 35 percent upon receipt of the deferred salary What is her after-tax accumulation from the deferred salary in 10 years? $102,292 Feedback: $80,000 ($400,000 × 20% deferred salary) × 1.07 10 × (1 - 35) = $102,292 After-tax = $102,292 The future value factor for 10 years, 7%, is 1.96715 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-03 Describe the tax implications of deferred compensation from both the employer's and employee's perspective Level of Difficulty: Medium Topic: Nonqualified deferred compensation 13-242 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 102 Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan In the current year, Katrina defers 15 percent of her $300,000 salary Katrina's deemed investment choice will earn percent annually on the deferred compensation until she takes a lump sum distribution in 10 years Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate to be 28 percent upon receipt on the deferred salary What is her after-tax accumulation from the deferred salary in 10 years? $69,949 Feedback: $45,000 ($300,000 × 15% deferred salary) $45,000 × 1.08 10 × (1 - 28) = $69,949 The future value factor for 10 years, 8%, is 2.15892 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-03 Describe the tax implications of deferred compensation from both the employer's and employee's perspective Level of Difficulty: Medium Topic: Nonqualified deferred compensation 103 In 2014, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income) Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014? $3,500 Feedback: Deductible contributions to an IRA are limited to the lesser of $5,500 or earned income AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Easy Topic: Individual retirement accounts 13-243 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 104 In 2014, Tyson (age 52) earned $50,000 of salary Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014? $6,500 Feedback: The maximum deductible contribution to an IRA in 2014 is $5,500 Taxpayers who are at least 50 years of age at the end of the year may deduct an additional $1,000 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Easy Topic: Individual retirement accounts 105 In 2014, Madison is a single taxpayer who is 25 years of age During 2014, she contributed $3,000 to her employer sponsored 401(k) account Her 2014 AGI was $64,500 (before considering IRA deductions) What is the maximum deductible contribution, if any, that Madison can make her to IRA? $3,250 Feedback: Because she participates in an employer-sponsored retirement plan, her contribution is subject to phase out Before phase-out, the maximum deductible contribution is $5,500 Because her AGI is 45 percent of the way through the $60,000 - $70,000 phase-out range for a single taxpayer (4,500/10,000), her deductible contribution is phased-out or reduced by $2,250 ($5,000 × 45) Thus, the maximum deductible contribution is $3,250 ($5,500 - 2,250) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Hard Topic: Individual retirement accounts 13-244 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 106 Carmello and Leslie (ages 34 and 35, respectively) are married and want to contribute to a Roth IRA In 2014, their AGI totaled $42,000 Of the $42,000, Carmello earned $35,000 and Leslie earned $7,000 How much can each spouse contribute to a Roth IRA if they file jointly? How much can each spouse contribute to a Roth IRA if they file separately? If they file jointly, each spouse can contribute $5,500 If they file separately, Carmello cannot contribute to a Roth IRA and Leslie can contribute $1,650 Feedback: If the couple files jointly, Carmello and Leslie can each contribute $5,500 to Roth IRAs because their AGI is below the beginning of the phase out range ($181,000) However, if they file separately, contributions are phased out for AGI between $0 and $10,000 Because Carmello's AGI exceeds $10,000 he is not allowed to contribute Because Leslie's AGI is 70 percent of the way through the phase-out range, she must phase out or reduce the $5,500 contribution by 70 percent Consequently, she is allowed to contribute $1,650 ($5,500 - 70% × 5,500) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Medium Topic: Individual retirement accounts 107 Cassandra, age 33, has made deductible contributions to her traditional IRA over the years When the balance in her IRA was $40,000, Cassandra received a distribution of $34,000 from her IRA in order to purchase a new car How much of the $34,000 distribution will she have remaining after paying income taxes and early distribution penalties on the distribution? Her marginal tax rate is 25 percent $22,100 Feedback: She must pay $8,500 income taxes on the distribution ($34,000 × 25%) In addition, she must pay a 10 percent early distribution penalty of $3,400 ($34,000 distribution × 10%) This leaves her with $22,100 after tax and penalties ($34,000 - $8,500 taxes - $3,400 penalties) to purchase the car AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Medium Topic: Individual retirement accounts 13-245 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 108 Ryan, age 48, received an $8,000 distribution from his traditional IRA to pay for medical expenses Ryan has made only deductible contributions to the IRA and his marginal tax rate is 28 percent What amount of taxes and early distribution penalties will Ryan be required to pay on the distribution? $2,240 tax; $0 penalty Feedback: The full distribution is subject to income tax at 28 percent ($8,000 × 28% = $2,240) However, because the distribution was used to pay qualified medical expenses, it is not subject to the 10-percent early distribution penalty AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Easy Topic: Individual retirement accounts 109 Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years When her account balance was $32,000, she transferred the entire $32,000 out of her traditional IRA and immediately into a Roth IRA Her current marginal tax rate is 25 percent What amount of tax and penalty is she required to pay on this rollover? $8,000 tax; $0 penalty Feedback: She is taxed on the full amount transferred out of the traditional IRA ($32,000 × 25%) Because she transferred the entire balance into a Roth IRA within the required time period, she is not required to pay an early distribution penalty AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Medium Topic: Individual retirement accounts 13-246 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 110 Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years When her account balance was $30,000, she received a distribution of the entire $30,000 balance of her traditional IRA She retained $5,000 of the distribution to help her pay the taxes due on the distribution and she immediately contributed the remaining $25,000 to a Roth IRA What amount of tax and early distribution penalty is she required to pay on the $30,000 distribution from the traditional IRA if her marginal tax rate is 25 percent? $7,500 income tax; $500 early distribution penalty Feedback: Tatia is taxed at 25 percent on the full $30,000 distribution ($30,000 × 25%) She also must pay a 10% penalty on the $5,000 distribution she received but did not contribute to the Roth IRA ($5,000 × 10%) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-04 Determine the tax consequences of traditional and Roth Individual Retirement Accounts and explain the difference between them Level of Difficulty: Medium Topic: Individual retirement accounts 111 Gordon is a 52-year-old self-employed contractor (no employees) During 2014, his Schedule C net income was $88,000 What is the maximum amount that Gordon can contribute to (1) a SEP IRA and (2) an individual 401(k)? (Round your answers to the nearest whole number) SEP IRA = $16,357; Individual 401(k) = $39,357 Feedback: SEP IRA maximum contribution is lesser of (1) $52,000 or (2) $16,357 [($88,000 - (88,000 × 9235 × 153 × 5)) × 20%] Individual 401(k) maximum contribution is the lesser of (1) $52,000 or (2) $33,857 [[($88,000 - (88,000 × 9235 × 153 × 5)) × 20%] + $17,500] Because Gordon has reached age 50 by the end of the year he may deduct an additional $5,500 In total, the maximum contribution is $39,357 (33,857 + 5,500) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-05 Describe retirement savings options available to self-employed taxpayers and compute the limitations for deductible contributions to retirement accounts for self-employed taxpayers Level of Difficulty: Medium Topic: Self-employed retirement accounts 13-247 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 112 Yvette is a 44-year-old self-employed contractor (no employees) During 2014, her Schedule C net income was 400,000 Assuming Yvette has no contributions to other retirement plans What is the maximum amount that Yvette can contribute to (1) a SEP IRA and (2) an individual 401(k)? SEP IRA = $52,000; Individual 401(k) = $52,000 Feedback: SEP IRA maximum contribution is lesser of (1) $52,000 or (2) $77,478 [20% × $400,000 - [((400,000 × 9235 - 117,000) × 2.9% × 50%) + (117,000 × 15.3% × 50%)]] Individual 401(k) maximum contribution is the lesser of (1) $52,000 (2) $94,978 [20% × $400,000 - [((400,000 × 9235 - 117,000) × 2.9% × 50%) + (117,000 × 15.3% × 50%)]] + $17,500 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-05 Describe retirement savings options available to self-employed taxpayers and compute the limitations for deductible contributions to retirement accounts for self-employed taxpayers Level of Difficulty: Hard Topic: Self-employed retirement accounts 113 Scott and his wife Leanne (ages 39 and 37 respectively) earned $50,000 in 2014 Scott was able to contribute $2,400 ($200/month) to his employer sponsored 401(k) What amount of saver's credit can Scott and Leanne claim in 2014? $200 Feedback: $2,000 (maximum contribution amount) × 10 percent (applicable percentage for joint filers with AGI from $39,000 to $60,000) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-06 Compute the saver's credit Level of Difficulty: Medium Topic: Saver's credit 114 Deborah (single, age 29) earned $25,000 in 2014 Deborah was able to contribute $1,800 ($150/month) to her employer sponsored 401(k) What is the total saver's credit that Deborah can claim for 2014? $180 Feedback: $1,800 (contribution amount) × 10 percent (applicable percentage for single filers with AGI from $19,501 to $30,000) AACSB: Reflective Thinking 13-248 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-06 Compute the saver's credit Level of Difficulty: Medium Topic: Saver's credit 115 Aiko (single, age 29) earned $40,000 in 2014 He was able to contribute $1,800 ($150/month) to his employer sponsored 401(k) What is the total saver's credit that Aiko can claim for 2014? $0 Feedback: Single taxpayers with AGI in excess of $30,000 are not allowed to claim any saver's credit AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Learning Objective: 13-06 Compute the saver's credit Level of Difficulty: Medium Topic: Saver's credit 13-249 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... traditional IRA with a current balance of $50,000 The balance consists of $30,000 of deductible contributions and $20,000 of account earnings Convinced that his marginal tax rate will increase in the... 401(k) account and a Roth 401(k) account are both Both accounts can receive matching contributions from employers Employers generally choose how funds in these accounts will be invested 13-6 Copyright... traditional IRA? A B C D 71 Tyson (48 years old) owns a traditional IRA with a current balance of $50,000 The balance consists of $30,000 of deductible contributions and $20,000 of account earnings