Question 1

Which of the following taxpayers is most likely to qualify for the saver's credit?
A) A low AGI taxpayer who does not contribute to any qualified retirement plan.
B) A low AGI taxpayer who contributes to her employer's 401(k) plan.
C) A high AGI self-employed taxpayer.
D) A high AGI employee who does not contribute to any qualified retirement plan.

Accepted Answer

The saver's credit is designed to encourage low and moderate-income taxpayers to save for retirement. Therefore, a low AGI taxpayer who contributes to her employer's 401(k) plan is most likely to qualify for the saver's credit. The credit is not available to taxpayers with high AGI, regardless of whether they contribute to a qualified retirement plan or not. Similarly, a low AGI taxpayer who does not contribute to any qualified retirement plan will not qualify for the saver's credit.

Question 2

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 to an individual 401(k)?
A) $52,000
B) $57,500
C) $75,246
D) $57,746

Accepted Answer

Kathy can contribute up to $57,500, which includes the employee deferral limit of $22,500 (for those 50 and older) and the employer profit-sharing contribution of 20% of net self-employment income after expenses and self-employment tax.

Question 3

Kathy is 48 years of age and self-employed. During the year 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)?
A) $11,152
B) $16,652
C) $28,652
D) $52,000

Accepted Answer

Kathy's net self-employment income is $60,000 ($100,000 - $40,000). She can contribute up to 20% of her net earnings from self-employment, which is $12,000. Additionally, she can make an elective deferral contribution of up to $22,500 (for 2023), totaling $34,500. However, the total contribution is limited to $66,000 or 100% of compensation, whichever is less. Therefore, the maximum she can contribute is $28,652, considering the self-employment tax deduction.

Question 4

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 5

Sean (age 74 at end of 2014) retired five years ago. The balance in his 401(k) account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,750,000. In 2013, 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). $$\begin{array} { | c | c | l | } 
\hline \begin{array} { c } 
\text { Age of } \
\text { Participant }
\end{array} & \begin{array} { c } 
\text { Distribution } \
\text { Period }
\end{array} &{ \begin{array} { c } 
\text { Applicable } \
\text { Percentage }
\end{array} } \
\hline 70 & 27.4 & 3.65 \% \
\hline 71 & 26.5 & 3.77 \% \
\hline 72 & 25.6 & 3.91 \% \
\hline 73 & 24.7 & 4.05 \% \
\hline 74 & 23.8 & 4.20 \% \
\hline 75 & 22.9 & 4.37 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Sean (age 74 at end of 2014)...

Question 6

In 2014, Ryan contributes 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 in 2014 is 35 percent will he earn a higher after tax rate of return from the Roth 401(k) or the traditional 401(k)? Explain.

Accepted Answer

The answer of In 2014, Ryan contributes 10 percent of...

Question 7

Heidi invested $4,000 in her Roth 401(k) on January 1, 2006. This was her only contribution to the account. On July 1, 2014, 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 invested $4,000 in her Roth 401(k)...

Question 8

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 9

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?

Accepted Answer

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

Question 10

Kim (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). Kim 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 Kim 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 Kim'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?

Accepted Answer

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

Question 11

What is the maximum saver's credit available to any taxpayer in 2014?
A) $2,000
B) $1,000
C) $500
D) It depends on the filing status of the taxpayer

Accepted Answer

The maximum saver's credit available to any taxpayer in 2014 was $1,000 for individuals, which is 50% of up to $2,000 in contributions to retirement accounts.

Question 12

Kathy is 48 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 to an individual 401(k)?
A) $52,000
B) $57,500
C) $75,246
D) $79,787

Accepted Answer

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

Question 13

Sean (age 74 at end of 2013) retired five years ago. The balance in his 401(k) account on December 31, 2013 was $1,700,000 and the balance in his account on December 31, 2014 was $1,800,000. Using the IRS tables below, what is Sean's required minimum distribution for 2014? $$\begin{array} { | c | c | l | } 
\hline \begin{array} { c } 
\text { Age of } \
\text { Participant }
\end{array} & \begin{array} { c } 
\text { Distribution } \
\text { Period }
\end{array} &{ \begin{array} { c } 
\text { Applicable } \
\text { Percentage }
\end{array} } \
\hline 70 & 27.4 & 3.65 \% \
\hline 71 & 26.5 & 3.77 \% \
\hline 72 & 25.6 & 3.91 \% \
\hline 73 & 24.7 & 4.05 \% \
\hline 74 & 23.8 & 4.20 \% \
\hline 75 & 22.9 & 4.37 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Sean (age 74 at end of 2013)...

Question 14

In 2014, 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 2014 contributions to her 401(k) account? Assume her marginal tax rate at retirement is 35 percent.

Accepted Answer

The answer of In 2014, Christina made a one-time contribution...

Question 15

Amy is single. During 2014, 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?
A) $1,250
B) $2,500
C) $1,000
D) $0

Accepted Answer

The maximum saver's credit that Amy can claim is 50% of the first $2,000 contributed to a qualified retirement account, such as a Roth IRA. Since Amy contributed $2,500, only $2,000 of her contribution is eligible for the credit. 50% of $2,000 is $1,000, which is the maximum saver's credit she may claim.

Question 16

Amy files as a head of household. She determined her 2014 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 2014?
A) $1,000
B) $2,000
C) $2,500
D) $1,250
E) $0

Accepted Answer

For 2014, the saver's credit is not available to taxpayers with an adjusted gross income over $49,400 for head of household filers. Since Amy's AGI is $70,000, she is not eligible for the credit.

Question 17

On March 30, 2014, Rodger (age 56) was let go 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, 2014, Rodger (age 56)...

Question 18

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. Henry's vested benefit percentage is 80 percent (40 years × 2 percent for each full year). Henry retired on January 1, 2014 Henry received annual salaries of $520,000, $540,000, and $560,000 for 2011, 2012, and 2013, respectively. What is the maximum benefit Henry can receive under the plan in 2014?

Accepted Answer

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

Question 19

Kathy is 60 years of age and self-employed. During the year 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)?
A) $28,652
B) $34,152
C) $52,000
D) $57,500

Accepted Answer

Kathy can contribute up to 20% of her net self-employment income ($60,000) as an employer contribution and $30,000 as an employee contribution (since she is over 50), totaling $34,152.

Question 20

Amy is single. During 2014, 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?
A) $750
B) $1,000
C) $1,500
D) $0

Accepted Answer

The maximum saver's credit for individuals with an adjusted gross income of $12,000 or less in 2014 is 50% of the amount contributed to a qualified retirement account, up to a maximum credit of $1,000 for single filers. Since Amy contributed $1,500 to a Roth IRA, 50% of that is $750, which is the maximum saver's credit she can claim.

Quiz 13: Retirement Savings and Deferred Compensation

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

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 to an individual 401(k) ?

Kathy is 48 years of age and self-employed. During the year 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) ?

What is the maximum saver's credit available to any taxpayer in 2014?

Kathy is 48 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 to an individual 401(k) ?

Amy is single. During 2014, 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?

Amy files as a head of household. She determined her 2014 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 2014?

Kathy is 60 years of age and self-employed. During the year 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) ?

Amy is single. During 2014, 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?