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
1. Qualified retirement plans include defined benefit plans but not defined contribution
plans.
True

False

2. 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

3. 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

4. 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

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

False

6. 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

7. Both 401(k) plans and Roth 401(k) plans are forms of defined contribution plans.
True

False

8. 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.


9. 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 do 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.


66. Which of the following statements regarding Roth IRAs distributions is true?

A.

B.
C.
D.

A distribution is not a qualifying distribution unless the distribution is at least two y
A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 i
A Roth IRA does not have minimum distribution requirements.
The full amount of all nonqualifying distributions is subject to tax at the taxpayer'

67. 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?

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

A.
B.
C.
D.
69. Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth
IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa

established the Roth IRA 10 years ago. Over the years, she has contributed $20,000
to her account. What amount of the distribution is taxable and subject to early
distribution penalty?

A.
B.
C.
D.

13-11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


70. 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. Convinced that his marginal tax rate will increase in the future, Tyson
receives a distribution of the entire $50,000 balance of his traditional IRA and he
immediately contributes the $50,000 to a Roth IRA. Assuming his marginal tax rate is
25%, what amount of penalty, if any, must Tyson pay on the distribution from the
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. Tyson's marginal tax rate is 25%. Convinced that his marginal tax rate will
increase in the future, Tyson receives a distribution of the entire $50,000 balance of

his traditional IRA. He retains $12,500 to pay tax on the distribution and he
contributes $37,500 to a Roth IRA. What amount of income tax and penalty must
Tyson pay on this series of transactions?

A.
B.
C.
D.

$0 income tax; $0 penalty.
$12,500 income tax; $1,250 penalty.
$12,500 income tax; $3,000 penalty.
$12,500 income tax; $5,000 penalty.

72. Which of the following statements concerning traditional IRAs and Roth IRAs is true?

A.
B.
C.
D.

A taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed t
The annual contribution limits for a traditional IRA and Roth IRA are the same.
Taxpayers with high income are allowed to contribute to traditional IRAs but not t
All of these are true statements.

73. Which of the following is not a self-employed retirement account?

A.
B.

C.
D.

None of these. All of these are self-employed retirement accounts.

74. In general, which of the following statements regarding self-employed retirement
accounts is true?

A.
B.
C.
D.

SEP IRAs have higher contribution limits than individual 401(k)s if the contributing
SEP IRAs have higher contribution limits than individual 401(k)s no matter the age
Individual 401(k)s have higher contribution limits than SEP IRAs.
None of these. Both SEP IRAs and individual 401(k)s have exactly the same annua

13-12
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


75. Which of the following statements regarding self-employed retirement accounts is
true?

A.
B.
C.
D.

A self-employed taxpayer who has hired employees may not set up a SEP IRA.
A self-employed taxpayer who has hired employees may set up either a SEP IRA or
A self-employed taxpayer who has hired employees may not set up an individua
All of these statements are false.

76. Which of the following is true concerning SEP IRAs?

A.
B.
C.
D.

SEP IRAs are difficult to set up and have high administrative costs
Taxpayers may contribute unlimited amounts to SEP IRAs
Employees of the taxpayer cannot be included in SEP IRAs
Taxpayers with a SEP IRA must contribute for their employees

77. Which of the following statements concerning individual 401(k)s is false?

A.
B.
C.
D.

In general, individual 401(k)s have higher administrative costs than SEP IRAs.
Employees cannot participate in individual 401(k)s.
Individual 401(k)s are available only to self-employed taxpayers with 100 or fewe
Individual 401(k)s have contribution limitations.

78. Kathy is 60 years of age and self-employed. During 2014 she reported $100,000 of
revenues and $40,000 of expenses relating to her self-employment activities. If Kathy
has no other retirement accounts in her name, what is the maximum amount she can
contribute to a simplified employee pension (SEP) IRA for 2014?

A.
B.
C.
D.
79. Kathy is 48 years of age and self-employed. During 2014 she reported $100,000 of
revenues and $40,000 of expenses relating to her self-employment activities. If Kathy
has no other retirement accounts in her name, what is the maximum amount she can
contribute to a simplified employee pension (SEP) IRA for 2014?

A.
B.
C.
D.

13-13
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


80. Kathy is 60 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 this year to a simplified employee pension (SEP) IRA?

A.

B.
C.
D.
81. Kathy is 60 years of age and self-employed. During the year she reported $100,000
of revenues and $40,000 of expenses relating to her self-employment activities. If
Kathy has no other retirement accounts in her name, what is the maximum amount
she can contribute to an individual 401(k)?

A.
B.
C.
D.
82. Kathy is 48 years of age and self-employed. During the year she reported $100,000
of revenues and $40,000 of expenses relating to her self-employment activities. If
Kathy has no other retirement accounts in her name, what is the maximum amount
she can contribute to an individual 401(k)?

A.
B.
C.
D.
83. Kathy is 60 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)?

A.
B.
C.
D.

13-14
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


84. 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)?

A.
B.
C.
D.
85. Which of the following taxpayers is most likely to qualify for the saver's credit?

A.
B.
C.
D.

A low AGI taxpayer who does not contribute to any qualified retirement plan.
A low AGI taxpayer who contributes to her employer's 401(k) plan.
A high AGI self-employed taxpayer.
A high AGI employee who does not contribute to any qualified retirement plan

86. Amy is single. During 2014, she determined her adjusted gross income was $12,000.
During the year, Amy also contributed $2,500 to a Roth IRA. What is the maximum
saver's credit she may claim for the year?

A.
B.
C.
D.
87. Amy is single. During 2014, she determined her adjusted gross income was $12,000.
During the year, Amy also contributed $1,500 to a Roth IRA. What is the maximum
saver's credit she may claim for the year?

A.
B.
C.
D.
88. Amy files as a head of household. She determined her 2014 adjusted gross income
was $70,000. During the year, she contributed $2,500 to a Roth IRA. What is the
maximum saver's credit she may claim for 2014?

A.
B.
C.
D.
E.

13-15
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.
B.
C.
D.

It depends on the filing status of the taxpayer

Essay Questions
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?

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?

13-16
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 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?

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)?

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.

13-17
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


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.

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?

13-18
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


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?

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?

13-19
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).

13-20
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 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?

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 7 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?

13-21
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 8
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?

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?

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?

13-22
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


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?

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?

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.

13-23
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?

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?

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?

13-24
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.


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).

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)?

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?

13-25
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.