Question 1

Kathy is 60 years of age and self-employed. During 2018, 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) for 2018? (Round your final answer to the nearest whole number)

Accepted Answer

She may contribute the lesser of (1) $55,000 or (2) $29,652 [[($60,000 − (60,000 × 0.9235 × 0.153 × 0.50)) × 20%] + $18,500]. Because she is at least 50 years of age at the end of the year, she may contribute an additional $6,000 as a catch-up adjustment. So in total she may contribute $35,652 ($29,652 + $6,000).

Question 2

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? Use Exhibit 13-1

Accepted Answer

The answer of Joan recently started her career with PDEK...

Question 3

Kathy is 48 years of age and self-employed. During 2018, 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) for 2018? (Round your final answer to the nearest whole number)

Accepted Answer

She may contribute the lesser of (1) $55,000 (2) $29,652 [[($60,000 − (60,000 × 0.9235 × 0.153 × 0.50)) × 20%] + $18,500]. Because she is not at least 50 years of age at the end of the year, she does not qualify for a catch-up contribution.

Question 4

Which of the following taxpayers is most likely to qualify for the saver's credit?

Accepted Answer

To be eligible for the saver's credit a taxpayer must contribute to a qualified retirement plan (including IRAs). Further, the credit is phased out completely for high AGI taxpayers.

Question 5

Amy is single. During 2018, 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?

Accepted Answer

$2,000 × 50% (the maximum contribution eligible for the credit multiplied by the maximum applicable percentage based on filing status and AGI).

Question 6

Heidi (age 57) invested $4,000 in her Roth 401(k) on January 1, 2010. This was her only contribution to the account. On July 1, 2018, 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?

Accepted Answer

The answer of Heidi (age 57) invested $4,000 in her...

Question 7

This year, Ryan contributed 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 8-percent 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 this year is 35 percent will he earn a higher after tax rate of return from the Roth 401(k) or the traditional 401(k)? Explain. (Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number)

Accepted Answer

The answer of This year, Ryan contributed 10 percent of...

Question 8

Amy is single. During 2018, 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?

Accepted Answer

$1,500 × 50% (her IRA contribution multiplied by the maximum applicable percentage based on filing status and AGI).

Question 9

On March 30, Rodger (age 56) was laid off 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?

Accepted Answer

The answer of On March 30, Rodger (age 56) was...

Question 10

Sean (age 74 at end of 2018) retired five years ago. The balance in his 401(k) account on December 31, 2017 was $1,700,000 and the balance in his account on December 31, 2018 was $1,800,000. Using the IRS tables below, what is Sean's required minimum distribution for 2018?

Accepted Answer

The answer of Sean (age 74 at end of 2018)...

Question 11

What is the maximum saver's credit available to any taxpayer in 2018?

Accepted Answer

The maximum saver's credit is $1,000 which is 50% of $2,000. While higher AGIs affect the credit percentage, the maximum is $1,000 no matter the taxpayer's filing status.

Question 12

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. Cars Corp. uses a five year cliff vesting schedule. Henry retired on January 1, 2018 Henry received annual salaries of $520,000, $540,000, and $560,000 for 2015, 2016, and 2017, respectively. What is the maximum benefit Henry can receive under the plan in 2018?

Accepted Answer

The answer of Henry has been working for Cars Corp....

Question 13

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?

Accepted Answer

The answer of Joan recently started her career with PDEK...

Question 14

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)?

Accepted Answer

The answer of Georgeanne has been employed by SEC Corp....

Question 15

Keisha (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). Keisha 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 Keisha 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 Keisha'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? (Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number)

Accepted Answer

The answer of Keisha (50 years of age) is considering...

Question 16

Kathy is 60 years of age and self-employed. During 2018, she reported $500,000 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) for 2018? (Round your final answer to the nearest whole number)

Accepted Answer

She may contribute the lesser of (1) $55,000 or (2) $95,837 [20% × ($400,000 − [((400,000 × 0.9235 - 128,400) × 2.9% × 50%) + (128,400 × 15.3% × 50%)])] + $18,500. Because she is at least 50 years of age at the end of the year, she may contribute an additional $6,000 as a catch-up adjustment in addition to the lesser of (1) or (2). So she may contribute $61,000 ($55,000 + $6,000).

Question 17

Kathy is 48 years of age and self-employed. During 2018 she reported $500,000 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)?

Accepted Answer

She may contribute the lesser of (1) $55,000 or (2) $95,837 [20% × ($400,000 − [((400,000 × 0.9235 - 128,400) × 2.9% × 50%) + (128,400 × 15.3% × 50%)])] + $18,500. Because she is not at least 50 years of age at the end of the year, she may not contribute an additional $6,000 as a catch-up adjustment.

Question 18

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 $12,000 contribution to her 401(k) account? Assume her marginal tax rate at retirement is 35 percent. (Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number)

Accepted Answer

The answer of Christina made a one-time contribution of $12,000...

Question 19

Sean (age 74 at end of 2018) retired five years ago. The balance in his 401(k) account on December 31, 2017 was $1,700,000 and the balance in his account on December 31, 2018 was $1,750,000. In 2018, 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).

Accepted Answer

The answer of Sean (age 74 at end of 2018)...

Question 20

Amy files as a head of household. She determined her 2018 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 2018?

Accepted Answer

Her AGI is too high to claim any saver's credit.

Quiz 13: Retirement Savings and Deferred Compensation