Question 1

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

Accepted Answer

Nonqualified deferred compensation plans are generally considered to be riskier for participating employees than qualified retirement plans, as they are not subject to the same legal protections and may be subject to the employer's financial solvency. The other options listed are benefits of nonqualified deferred compensation plans - they may discriminate in favor of highly compensated employees, there is no limit on the amount of compensation that can be provided, and employers do not have to expend cash to fund the plan.

Question 2

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 is equal to the amount of the withdrawal multiplied by Mr. Thano's marginal tax rate on ordinary income. Thus, the tax cost is $22,000 x 0.28 = $8,360. Option C is the correct answer.

Question 3

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 4

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 5

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 eligible employees through the plan.

Question 6

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 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

- Both Mr. and Mrs. Lawry make the maximum contribution to their traditional IRAs, which is $6,000 each. This reduces their joint AGI by $12,000 ($6,000 + $6,000).
- Mr. Lawry is an active participant in a section 401(k) plan, so his contribution to the 401(k) plan reduces their joint AGI further. The maximum contribution to a 401(k) plan for someone age 60 is $26,000. Assuming Mr. Lawry contributes the maximum, their joint AGI is reduced by $26,000.
- Mrs. Lawry is not an active participant in any other qualified plan, so her contribution to her traditional IRA does not reduce their joint AGI further.
- Their joint AGI after the IRA and 401(k) contributions is $144,900 - $12,000 - $26,000 = $106,900.
- However, they need to add back the amount of Mr. Lawry's 401(k) contribution to determine their AGI. Therefore, their AGI is $106,900 + $26,000 = $132,900.
- Finally, they are both over age 50, so they can each take advantage of a $1,000 "catch-up" contribution to their traditional IRAs. This reduces their taxable income further, by a total of $2,000 ($1,000 + $1,000).
- Therefore, their AGI is $132,900 - $2,000 = $130,900.
- However, they also both qualify for the IRA deduction and are under the income limit, which is $104,000 for a married couple filing jointly in 2021.
- Therefore, their AGI is reduced by an additional $12,000 ($6,000 + $6,000).
- The final AGI is $130,900 - $12,000 = $118,900.
- Choice C) $138,400 is the correct answer as it represents their initial AGI with the deductions of both Mr. and Mrs. Lawry's traditional IRA contributions, but before Mr. Lawry's 401(k) contribution.

Question 8

Ms. Knox, age 34 and single, has $123,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.

Accepted Answer

The answer of Ms. Knox, age 34 and single, has...

Question 9

In 2015, 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 calculate Amanda's maximum contribution to her profit-sharing Keogh plan, we need to follow these steps:

1. Calculate Amanda's net self-employment income:
Net self-employment income = Self-employment income - Above-the-line deduction for SE tax
Net self-employment income = $70,000 - $4,945
Net self-employment income = $65,055

2. Calculate Amanda's maximum contribution limit:
Maximum contribution limit = 20% of net self-employment income
Maximum contribution limit = 0.20 x $65,055
Maximum contribution limit = $13,011

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

Question 10

Mrs. Pike's 2015 compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement in 2019. Which of the following statements is true?

Accepted Answer

Mrs. Pike must include only the current salary of $325,000 in her 2015 gross income, as the $75,000 deferred compensation is not taxable until it is received in 2019. Her employer can only deduct the $325,000 paid in 2015.

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

Question 12

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 13

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 have access to an employer-sponsored retirement plan, they can make deductible contributions to a traditional IRA up to $5,500 each ($6,500 each if they are over 50 years old). They can also take an above-the-line deduction on their joint Form 1040 for the entire amount of their contributions, up to the limit of $11,000 ($13,000 if they are over 50). Therefore, option B is correct. Options A and D are incorrect because the couple cannot take an itemized deduction for their traditional IRA contributions. Option C is incorrect because the limit for traditional IRA contributions is $5,500, not $2,750.

Question 14

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 15

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 16

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

Accepted Answer

This statement is false. While individuals can make tax-exempt withdrawals from a Roth IRA, they must be at least 59½ years old and have held the account for at least five years.

Question 17

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 passive income (interest, dividends, and rental income) and a loss from a new business. Since the loss from the new business reduces her AGI to below the IRA contribution limit, she is not eligible to make any IRA contributions for the year. Therefore, the correct choice is A) $0.

Question 18

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 19

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

Roth IRA withdrawals are generally tax-free as long as the account has been open for at least 5 years and the withdrawals are qualified distributions. Mrs. Lee opened her account in 2000, so it has been open for more than 5 years. Additionally, she only withdrew $10,000, which is less than her total contributions to the account of $50,000. Therefore, the entire withdrawal is not taxable.

Question 20

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. With a 33% marginal tax rate, the tax cost of the distribution is 33% x $20,000 = $6,600. Therefore, the correct answer is B, $8,600 (which includes the $20,000 for the car).

Quiz 15: Compensation and Retirement Planning