Question 1

Jason Inc. maintains a qualified profit-sharing plan for its employees. This year, Jason contributed $2,300 to Ms. Preston's profit-sharing account. Which of the following statements is true?

Accepted Answer

Employer contributions to a qualified profit-sharing plan are tax-deductible for the employer and are not included in the employee's gross income until distributions are taken.

Question 2

Which of the following statements regarding Keogh plans is false?

Accepted Answer

A self-employed person with a Keogh plan is required to provide retirement benefits to his or her employees through the plan. If the plan is a defined-benefit plan, the self-employed person must provide the same benefits to all employees. If the plan is a defined-contribution plan, the self-employed person may have some flexibility in terms of which employees are eligible to participate and how much they contribute.

Question 3

Which of the following statements concerning qualified retirement plans is false?

Accepted Answer

All of these statements concerning qualified retirement plans are true, therefore none of them are false.

Question 4

In 2020, Amanda earned $70,000 self-employment income. She was allowed a $4,945 above-the line deduction for her SE tax. Compute Amanda's maximum contribution to her profit-sharing Keogh plan.

Accepted Answer

To compute Amanda's maximum contribution to her profit-sharing Keogh plan, we need to follow these steps:

1. Calculate Amanda's net self-employment earnings:

$70,000 (self-employment income) - $4,945 (above-the-line deduction for SE tax) = $65,055 (net self-employment earnings)

2. Calculate Amanda's maximum contribution to her profit-sharing Keogh plan:

$65,055 x 0.20 (maximum contribution percentage for profit-sharing Keogh plan) = $13,011

Therefore, Amanda's maximum contribution to her profit-sharing Keogh plan is $13,011.

Option A is the correct answer.

Question 5

Ms. Jorland is a 30-year old single taxpayer. Her $3,760 AGI is the total of $7,940 interest and dividend income from a trust fund, $4,190 income from a rent property, and an $8,370 loss from a new business that she started this year. Compute Ms. Jorland's maximum IRA contribution.

Accepted Answer

Ms. Jorland's AGI is already fully accounted for by her interest and dividend income, rental income, and business loss. She has no additional income available to contribute to an IRA.

Question 6

Mrs. Lee, age 70, withdrew $40,000 from her traditional IRA this year. The balance in the account at year-end was $96,600, which included $28,000 of nondeductible contributions. Compute the taxable portion of the $40,000 withdrawal.

Accepted Answer

The taxable portion of the withdrawal is calculated by determining the ratio of deductible contributions (and earnings) to the total balance, then applying that ratio to the withdrawal amount. Here, the total balance before withdrawal was $136,600 ($96,600 + $40,000), with $28,000 being nondeductible contributions. Thus, deductible contributions and earnings amount to $108,600 ($136,600 - $28,000). The ratio of deductible contributions and earnings to the total is $108,600 / $136,600. Applying this ratio to the $40,000 withdrawal gives a taxable amount of approximately $31,801.

Question 7

Mr. and Mrs. Alexander, ages 43 and 44, each earn substantial salaries but do not participate in any type of employer-sponsored qualified retirement plan. Which of the following is true?

Accepted Answer

The couple can each contribute up to $6,000 to a traditional IRA for a total of $12,000, and take an above-the-line deduction on their joint Form 1040. This deduction is not subject to the same limitations as an itemized deduction and will reduce their taxable income, resulting in a lower tax bill.

Question 8

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 membership dues to academic organizations. Her employer reimbursed her only for the $1,000 membership dues. Which of the following statements is true?

Accepted Answer

The $1,500 paid for the journal subscriptions is considered a nondeductible personal expense under current tax law.

Question 9

This year, Mrs. Pike's compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement at age 66. Which of the following statements is true?

Accepted Answer

Mrs. Pike must include only her current salary of $325,000 in gross income for this year. The unfunded deferred compensation is not included in her gross income until it is paid out upon retirement. Her employer can only deduct the $325,000 salary paid this year.

Question 10

Which of the following is not a benefit of nonqualified deferred compensation plans?

Accepted Answer

Nonqualified deferred compensation plans are generally riskier for participating employees than qualified retirement plans because there is no guarantee that the employer will be able to satisfy its obligations under the plan. If the employer becomes financially distressed or files for bankruptcy, the employee's deferred compensation may be at risk. Additionally, nonqualified plans do not have the same legal protections as qualified plans, such as those provided by ERISA. Options A, B, and D are benefits of nonqualified deferred compensation plans.

Question 11

This year, Mr. Cox elected to contribute $4,000 of his $95,000 salary to his Section 401(k) plan. Mr. Cox's employer made a $4,000 matching contribution. How much compensation is reported on Mr. Cox's Form W-2?

Accepted Answer

The compensation reported on Mr. Cox's Form W-2 is his salary minus his 401(k) contribution, which is $95,000 - $4,000 = $91,000. The employer's matching contribution is not included in the W-2 compensation.

Question 12

Ms. Knox, age 34 and single, has $129,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

Accepted Answer

Ms. Knox is over age 50, so she can make a catch-up contribution of $1,000 to her Roth IRA. Her maximum contribution is $6,000 ($5,000 regular contribution + $1,000 catch-up contribution). However, her AGI is over the phase-out limit for Roth IRA contributions, so her maximum contribution is reduced by $3,678. Therefore, her maximum contribution is $6,000 - $3,678 = $2,322.

Question 13

Which of the following statements comparing traditional and Roth IRAs is false?

Accepted Answer

Individuals are required to start taking Required Minimum Distributions (RMDs) from traditional IRAs at age 72, but Roth IRAs do not require withdrawals during the owner's lifetime.

Question 14

Louise, age 51, quit her job and received a $70,000 distribution from her employer-sponsored qualified retirement plan. She immediately contributed $50,000 to a rollover IRA and used the remaining $20,000 to purchase a car. Compute the tax cost (and premature withdrawal penalty, if applicable) of the distribution if Louise has a 32% marginal tax rate on ordinary income.

Accepted Answer

The $50,000 contribution to a rollover IRA is not subject to any tax or penalty since it is a direct rollover from her employer-sponsored retirement plan to an IRA. However, the $20,000 used to purchase a car is considered a distribution subject to taxation and potential penalties.

The tax cost of the distribution is computed as follows:
$20,000 distribution x 0.32 = $6,400
There is no mention of any exception to the early withdrawal penalty, so we assume it applies. The premature withdrawal penalty is 10% of the distribution amount, or $2,000.

Therefore, the total cost to Louise is $6,400 in taxes plus $2,000 in penalties, for a total of $8,400. The correct answer is B.

Question 15

Mr. Paul, age 63 and single, earned a $260,000 salary (AGI) as a university professor. He does not participate in the university's qualified retirement plan. Which of the following is true?

Accepted Answer

Since Mr. Paul does not participate in the university's qualified retirement plan, he can make a deductible contribution to a traditional IRA. The contribution limit for individuals over 50 is $7,000, which includes a $1,000 catch-up contribution. Contributions to a Roth IRA are not deductible and have income limits that would disqualify Mr. Paul based on his AGI.

Question 16

Mr. Smith, age 61, withdrew $12,000 from his traditional IRA this year. The balance in the account at year-end was $183,700, which included $40,000 of nondeductible contributions. Compute the taxable portion of the $12,000 withdrawal.

Accepted Answer

The answer of Mr. Smith, age 61, withdrew $12,000 from...

Question 17

Mr. and Mrs. Lawry, both age 60, each make the maximum contribution to their traditional IRAs. Mr. Lawry is an active participant in a section 401(k) plan, but Mrs. Lawry is not an active participant in any other qualified plan. If their joint AGI before any IRA deduction is $144,900, compute their AGI.

Accepted Answer

Since Mr. Lawry is an active participant in a section 401(k) plan, his contribution to the traditional IRA is not deductible. However, Mrs. Lawry's contribution is fully deductible as she is not an active participant in any other qualified plan. Therefore, the couple can deduct only Mrs. Lawry's contribution to their traditional IRA from their joint AGI.

The maximum contribution for each person for the tax year 2020 is $6,000. Thus, the total contribution for the couple is $12,000. As Mrs. Lawry's contribution is fully deductible and Mr. Lawry's contribution is not, only $6,000 can be deducted from their joint AGI of $144,900.

Therefore, their AGI is $144,900 - $6,000 = $138,900.

Hence, the correct answer is option C.

Question 18

Mr. Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost(and premature withdrawal penalty, if applicable) of the withdrawal if Mr. Thano has a 37% marginal tax rate on ordinary income.

Accepted Answer

The tax cost is computed by multiplying the amount of the withdrawal by the marginal tax rate: 
$22,000 x 37% = $8,140. In addition to the tax cost, there may also be a premature withdrawal penalty of 10% imposed by the IRS on individuals who withdraw from a qualified retirement plan before age 59 1/2. However, since Mr. Thano's age is not given in the problem, we cannot determine if this penalty applies in this case. Therefore, the correct answer is only C.

Question 19

Peter is a 20-year-old college student. His AGI consists of $12,000 interest and dividend income from a trust fund and $4,180 of wages from a part-time job. Compute Peter's maximum IRA contribution:

Accepted Answer

Peter's maximum IRA contribution is limited to his earned income, which in this case is $4,180 from his part-time job. Interest and dividend income are not considered earned income for IRA contribution purposes.

Question 20

Mr. and Mrs. Pointer, ages 45 and 46, each contributed the maximum $6,000 to their traditional IRAs. Each spouse actively participates in an employer-sponsored qualified retirement plan. Compute the deductible IRA contribution on their joint return if their AGI before such deduction is $112,970.

Accepted Answer

For taxpayers who are covered by a retirement plan at work, the deduction for contributions to a traditional IRA is phased out at certain income levels. For married couples filing jointly, where both spouses are covered by a retirement plan at work, the phase-out range for 2023 is $109,000 to $129,000. Since Mr. and Mrs. Pointer's AGI is $112,970, they are within the phase-out range. The exact amount of their deductible contribution is calculated based on where they fall within this range. Given the information, the correct calculation results in a deductible amount of $6,618. This takes into account the phase-out rules and their specific AGI.

Quiz 15: Compensation and Retirement Planning