Question 1

Which of the following is true concerning SEP IRAs?
A) SEP IRAs are difficult to set up and have high administrative costs
B) Taxpayers may contribute unlimited amounts to SEP IRAs
C) Employees of the taxpayer cannot be included in SEP IRAs
D) Taxpayers with a SEP IRA must contribute for their employees

Accepted Answer

SEP IRAs (Simplified Employee Pension Individual Retirement Accounts) are relatively easy to set up and have lower administrative costs compared to other retirement plans. Taxpayers may contribute up to 25% of their net earnings from self-employment, or 20% of their net earnings from self-employment if they are employed by someone else. However, taxpayers who have a SEP IRA must also contribute a proportional amount for their eligible employees. Therefore, option D is the correct statement. Option B is incorrect as there is a limit to the contribution. Option A is also incorrect as SEP IRAs are relatively easy to set up with lower costs. Option C is incorrect as eligible employees can be included in a SEP IRA plan.

Question 2

Kathy is 60 years of age and self-employed. During 2014 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 a simplified employee pension (SEP) IRA for 2014?
A) $11,152
B) $16,652
C) $57,500
D) $52,000

Accepted Answer

The maximum contribution to a SEP IRA is 25% of net earnings from self-employment, which is calculated as $60,000 ($100,000 revenues - $40,000 expenses) minus the self-employment tax deduction. The self-employment tax is approximately 15.3%, so the deduction is about $4,590. Thus, the net earnings are $55,410, and 25% of that is $13,852. However, the maximum contribution is capped at $52,000 for 2014, but since 25% of net earnings is less, the correct answer is $11,152.

Question 3

Kathy is 48 years of age and self-employed. During 2014 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 a simplified employee pension (SEP) IRA for 2014?
A) $11,152
B) $16,652
C) $57,500
D) $52,000

Accepted Answer

The answer of Kathy is 48 years of age and...

Question 4

Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 8 years ago. Through a rollover and annual contributions, she has contributed $80,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?
A) $0
B) $20,000
C) $30,000
D) $50,000

Accepted Answer

Since Lisa received a distribution from her Roth IRA, she has already paid taxes on the contributions and the earnings in the account. Therefore, there are no taxes or penalties associated with the distribution, as long as Lisa is over the age of 59.5 and the account has been established for at least 5 years, which both conditions are met in this case.

Question 5

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Tyson's marginal tax rate is 25%. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions?
A) $0 income tax; $0 penalty.
B) $12,500 income tax; $1,250 penalty.
C) $12,500 income tax; $3,000 penalty.
D) $12,500 income tax; $5,000 penalty.

Accepted Answer

The distribution from the traditional IRA is fully taxable ($50,000 × 25%). Tyson must pay a 10% penalty on the portion of the distribution that he did not contribute to a Roth IRA ($12,500 × 10%).

Question 6

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA and he immediately contributes the $50,000 to a Roth IRA. Assuming his marginal tax rate is 25%, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA?
A) $0.
B) $1,250.
C) $3,750.
D) $5,000.

Accepted Answer

The distribution from the traditional IRA is fully taxable but is not subject to penalty because Tyson contributed the full $50,000 to a Roth IRA within 60 days from the time of withdrawal.

Question 7

Which of the following statements regarding traditional IRAs is true?
A) Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year.
B) Taxpayers with high income are not allowed to contribute to traditional IRAs.
C) Taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct contributions to a traditional IRA regardless of their AGI.
D) A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

Accepted Answer

The answer of Which of the following statements regarding traditional...

Question 8

Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA). Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?
A) $3,000 income tax; $2,000 early distribution penalty
B) $3,000 income tax; $0 early distribution penalty
C) $0 income tax; $2,000 early distribution penalty
D) $0 income tax; $0 early distribution penalty

Accepted Answer

Bryan will owe income tax on the $20,000 distribution at his marginal ordinary income tax rate of 15%, resulting in $3,000 of income tax. However, since the distribution was made to cover medical expenses that exceed 10% of his adjusted gross income, Bryan will qualify for an exception to the early distribution penalty and will not owe the additional $2,000 penalty.

Question 9

In 2014, Jessica retired at the age of 65. The current balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA, what amount of the distribution is taxable?
A) $0
B) $5,000
C) $37,500
D) $45,000
E) $50,000

Accepted Answer

The taxable portion of the distribution is calculated by subtracting the proportion of nondeductible contributions from the total distribution. The nondeductible contributions are $20,000 out of a total of $200,000, so 10% of any distribution is non-taxable. Therefore, 90% of the $50,000 distribution, or $45,000, is taxable.

Question 10

Which of the following statements concerning individual 401(k)s is false?
A) In general, individual 401(k)s have higher administrative costs than SEP IRAs.
B) Employees cannot participate in individual 401(k)s.
C) Individual 401(k)s are available only to self-employed taxpayers with 100 or fewer employees.
D) Individual 401(k)s have contribution limitations.

Accepted Answer

Individual 401(k)s, also known as solo 401(k)s, are designed for self-employed individuals and business owners with no employees, not for those with up to 100 employees.

Question 11

Kathy is 60 years of age and self-employed. During the year she reported $400,000 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 this year to a simplified employee pension (SEP) IRA?
A) $52,000
B) $57,500
C) $57,746
D) $288,729

Accepted Answer

The answer of Kathy is 60 years of age and...

Question 12

Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $20,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?
A) $0
B) $5,000
C) $30,000
D) $50,000

Accepted Answer

The answer of Lisa, age 45, needed some cash so...

Question 13

Which of the following statements regarding self-employed retirement accounts is true?
A) A self-employed taxpayer who has hired employees may not set up a SEP IRA.
B) A self-employed taxpayer who has hired employees may set up either a SEP IRA or an individual 401(k).
C) A self-employed taxpayer who has hired employees may not set up an individual 401(k).
D) All of these statements are false.

Accepted Answer

The answer of Which of the following statements regarding self-employed...

Question 14

Daniela retired at the age of 65. The current balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years ago. Through a rollover and annual contributions Daniela has contributed $80,000 to her account. If Daniela receives a $50,000 distribution from the Roth IRA, what amount of the distribution is taxable?
A) $0
B) $20,000
C) $30,000
D) $50,000

Accepted Answer

Since Daniela established her Roth IRA more than 5 years ago and is over the age of 59.5, all withdrawals are considered qualified distributions and are tax-free. Therefore, the entire $50,000 distribution is not taxable.

Question 15

Which of the following statements regarding Roth IRAs is false?
A) Contributions to Roth IRAs are not deductible.
B) Qualifying distributions from Roth IRAs are not taxable.
C) Whether or not they participate in an employer-sponsored retirement plan, taxpayers are allowed to contribute to Roth IRAs as long as their AGI does not exceed certain thresholds.
D) Taxpayers who are married and file separately are not allowed to contribute to a Roth IRA.

Accepted Answer

Taxpayers who are married and file separately are allowed to contribute to a Roth IRA, but their AGI cannot exceed certain thresholds.

Question 16

Which of the following statements concerning traditional IRAs and Roth IRAs is true?
A) A taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed to contribute to a traditional IRA after reaching 70½ years of age.
B) The annual contribution limits for a traditional IRA and Roth IRA are the same.
C) Taxpayers with high income are allowed to contribute to traditional IRAs but not to Roth IRAs.
D) All of these are true statements.

Accepted Answer

All of the statements are true.

Question 17

Which of the following statements regarding IRAs is false?
A) Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make deductible contributions to a traditional IRA.
B) The ability to make deductible contributions to a traditional IRA and nondeductible contributions to a Roth IRA may be subject to phase-out based on AGI.
C) A taxpayer may contribute to a traditional IRA in 2015 but deduct the contribution in 2014.
D) Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full proceeds when they receive distributions from the IRA.

Accepted Answer

The answer of Which of the following statements regarding IRAs...

Question 18

In general, which of the following statements regarding self-employed retirement accounts is true?
A) SEP IRAs have higher contribution limits than individual 401(k)s if the contributing taxpayer is at least 50 years of age at year end.
B) SEP IRAs have higher contribution limits than individual 401(k)s no matter the age of the contributing taxpayer.
C) Individual 401(k)s have higher contribution limits than SEP IRAs.
D) None of these. Both SEP IRAs and individual 401(k)s have exactly the same annual contribution limits.

Accepted Answer

Individual 401(k)s have higher contribution limits than SEP IRAs. As of 2021, the maximum contribution limit for an individual 401(k) is $58,000 ($64,500 if age 50 or older), while the maximum contribution limit for a SEP IRA is $58,000, regardless of age.

Question 19

Which of the following statements regarding Roth IRAs distributions is true?
A) A distribution is not a qualifying distribution unless the distribution is at least two years after the taxpayer has opened the Roth IRA.
B) A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not subject to an early distribution penalty.
C) A Roth IRA does not have minimum distribution requirements.
D) The full amount of all nonqualifying distributions is subject to tax at the taxpayer's marginal tax rate.

Accepted Answer

A Roth IRA does not have minimum distribution requirements, making it a valuable retirement savings option for those who may not need the funds immediately and wish to continue to accumulate tax-free earnings. Choices A, B, and D are incorrect statements.

Question 20

Which of the following is not a self-employed retirement account?
A) SEP IRA
B) SEM 403(c)
C) Individual 401(k)
D) None of these. All of these are self-employed retirement accounts.

Accepted Answer

SEM 403(c) is not a self-employed retirement account. The correct name for this type of account is SARSEP (Salary Reduction Simplified Employee Pension plan), which is a type of SEP IRA. The other options (SEP IRA, Individual 401(k), and other types of IRA) are all self-employed retirement accounts.

Quiz 13: Retirement Savings and Deferred Compensation

Which of the following is true concerning SEP IRAs?

Which of the following statements regarding traditional IRAs is true?

Which of the following statements concerning individual 401(k) s is false?

Which of the following statements regarding self-employed retirement accounts is true?

Which of the following statements regarding Roth IRAs is false?

Which of the following statements concerning traditional IRAs and Roth IRAs is true?

Which of the following statements regarding IRAs is false?

In general, which of the following statements regarding self-employed retirement accounts is true?

Which of the following statements regarding Roth IRAs distributions is true?

Which of the following is not a self-employed retirement account?