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Exam 13: Retirement Savings and Deferred Compensation

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Question 31

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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 6 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?

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1) After-tax accumulation in Roth 401(k)...

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Question 32

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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?

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$1,500 taxable porti...

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Question 33

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Employee contributions to traditional 401(k) accounts are deductible by the employee, but employee contributions to Roth 401(k) accounts are not.

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?

Just like distributions from qualified retirement plans, distributions from nonqualified deferred compensation plans are taxed as ordinary income to the recipient.

When employees contribute to a Roth 401(k) account, they _____ allowed to deduct the contributions and they _______ taxed on distributions from the plan.

High-income taxpayers are not allowed to receive the saver's credit.

Kathy is 48 years of age and self-employed. During the year she reported $400,000 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) ?

Taxpayers who participate in an employer-sponsored retirement plan are not allowed to contribute to individual retirement accounts (IRAs).

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.

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?

Which of the following best describes distributions from a defined benefit plan?

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.

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? $\begin{array} { | c | c | l | } \hline \begin{array} { c } \text { Age of } \\\text { Participant }\end{array} & \begin{array} { c } \text { Distribution } \\\text { Period }\end{array} &{ \begin{array} { c } \text { Applicable } \\\text { Percentage }\end{array} } \\\hline 70 & 27.4 & 3.65 \% \\\hline 71 & 26.5 & 3.77 \% \\\hline 72 & 25.6 & 3.91 \% \\\hline 73 & 24.7 & 4.05 \% \\\hline 74 & 23.8 & 4.20 \% \\\hline 75 & 22.9 & 4.37 \% \\\hline\end{array}$

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.

Henry has been working for Cars Corp. for 40 years and 4 months. Cars Corp. provides a defined benefit plan for its employees. Under the plan, employees receive 2 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 × 2 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?

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

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.

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) ?

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.