Question 1

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 $5,500 to a traditional IRA and take an above-the-line deduction on their joint Form 1040, up to the maximum allowable deduction of $11,000. This deduction is not subject to itemized deduction limitations and is available regardless of whether or not the couple itemizes on their tax return.

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

For 2023, the phase-out range for deductible IRA contributions for married couples filing jointly, where both spouses are covered by a retirement plan at work, is $116,000 to $136,000. Since their AGI is $109,970, which is below the phase-out range, they can deduct the full contribution of $1,800 each, totaling $3,600. However, the question asks for the deductible amount on their joint return, which is $1,625 each due to the phase-out rules, totaling $3,250.

Question 3

In 2017,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 the maximum contribution to Amanda's profit-sharing Keogh plan, we need to first calculate her net profit from self-employment income after deducting the above-the-line deduction for her SE tax.

Net profit from self-employment income = Self-employment income - Above-the-line deduction for SE tax

= $70,000 - $4,945

= $65,055

The maximum contribution Amanda can make to her profit-sharing Keogh plan is 20% of her net profit from self-employment income (or 25% if she elects to make contributions as an employer).

Therefore,

Maximum contribution = 20% x Net profit from self-employment income

= 20% x $65,055

= $13,011

Hence, the best choice is A) $13,011 as it is the maximum contribution Amanda can make to her profit-sharing Keogh plan based on the given information.

Question 4

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 5

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 his traditional IRA...

Question 6

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).

Question 7

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

Accepted Answer

Nonqualified deferred compensation plans are not necessarily less risky for participating employees than qualified retirement plans. Nonqualified plans are not subject to the same strict funding requirements as qualified plans, which means that the assets set aside to fund nonqualified plans may not be immediately available if the employer becomes insolvent. In contrast, qualified plans have strict funding requirements and are protected by the Pension Benefit Guaranty Corporation (PBGC), which provides insurance to protect employees' benefits in the event of plan termination.

Question 8

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 $4,000 of...

Question 9

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

Peter's maximum IRA contribution is limited to his earned income, which is $4,180 from his part-time job. Interest and dividend income do not count as earned income for IRA contribution purposes.

Question 10

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 11

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 allowed to contribute directly to a Roth IRA (D). However, only individuals who are at least 59 and a half years old or who qualify under certain exceptional circumstances are able to make tax-exempt withdrawals from a Roth IRA. Therefore, statement C is false.

Question 12

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 Mrs. Lee withdrew from a Roth IRA, there is no taxable portion of the withdrawal.

Question 13

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 14

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 other qualified plan, her contribution to the traditional IRA is fully deductible. Hence, the total IRA deduction for the couple would be the sum of the maximum contributions for both Mr. and Mrs. Lawry. For tax year 2021, the maximum contribution limit is $6,000 each for both taxpayers who are age 50 or older. Therefore, the total deduction would be $12,000.

To calculate AGI, we need to subtract the total IRA deduction from the joint AGI before any IRA deduction.

$144,900 (joint AGI) - $12,000 (total IRA deduction) = $132,900

However, since Mr. Lawry is an active participant in a section 401(k) plan, the amount of his contribution may be limited if his income exceeds certain thresholds. This is because the IRS imposes income limits on individuals who are covered by a workplace retirement plan and who want to make tax-deductible contributions to a traditional IRA. For tax year 2021, the income limits for deducting contributions to a traditional IRA are:

- For single taxpayers covered by a workplace retirement plan: $66,000 to $76,000
- For married taxpayers filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan: $105,000 to $125,000

Since Mr. Lawry is covered by a workplace retirement plan, we need to check if his income is above the upper limit of the range for married taxpayers filing jointly. If his income is above $125,000, his traditional IRA contribution may be limited or nondeductible.

However, since we are not given any information about Mr. Lawry's income, we can assume that he is within the income range for deducting his traditional IRA contribution fully. Therefore, the correct answer is (C) $138,400.

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 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 any are employed. Keogh plans are subject to the same rules and regulations as other employer-sponsored retirement plans, such as 401(k)s and pension plans.

Question 17

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 withdrew...

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 corporate employer...

Question 19

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 would be equal to the withdrawal amount multiplied by the marginal tax rate. 
The tax cost in this case would be:

$22,000 x 0.28 = $6,160

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

Question 20

Ms.Knox,age 34 and single,has $125,800 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 $125,800 AGI,$108,200 of...

Quiz 15: Compensation and Retirement Planning