Lidia, age 62, retires this year from her job as executive vice-president of Western Inc. She will receive a pension of $3,000 per month from Rollerderby's qualified pension plan. Lidia contributed $100,000 to the plan. Her contributions were never subject to tax. In addition, she will receive $1,600 per month from an annuity she purchased many years ago at a cost of $96,000. The pension and the annuity will be paid until she dies. At the date of her retirement, her life expectancy is 30 years. Which of the following statements regarding the taxability of the payments is/are correct?
I.Under the capital recovery concept, Lidia will not have to recognize any income from the annuity payment until she has recovered her $96,000 investment.
II.Lidia will not have to recognize as income the portion of each pension plan payment that is considered a return of her $100,000 contribution to the plan.
III.Lidia will not have to recognize as income the portion of each annuity payment that is a return of her $96,000 investment.
IV.Because none of the contributions were taxed, Lidia will be taxed on the entire $3,000 from the pension plan.

Question

Lidia, age 62, retires this year from her job as executive vice-president of Western Inc. She will receive a pension of $3,000 per month from Rollerderby's qualified pension plan. Lidia contributed $100,000 to the plan. Her contributions were never subject to tax. In addition, she will receive $1,600 per month from an annuity she purchased many years ago at a cost of $96,000. The pension and the annuity will be paid until she dies. At the date of her retirement, her life expectancy is 30 years. Which of the following statements regarding the taxability of the payments is/are correct?
I.Under the capital recovery concept, Lidia will not have to recognize any income from the annuity payment until she has recovered her $96,000 investment.
II.Lidia will not have to recognize as income the portion of each pension plan payment that is considered a return of her $100,000 contribution to the plan.
III.Lidia will not have to recognize as income the portion of each annuity payment that is a return of her $96,000 investment.
IV.Because none of the contributions were taxed, Lidia will be taxed on the entire $3,000 from the pension plan.
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Quizplus · Accepted Answer

Statements III and IV are correct because for the annuity, Lidia will not have to recognize as income the portion of each payment that is a return of her $96,000 investment, and since her contributions to the pension plan were never taxed, she will be taxed on the entire $3,000 monthly pension.

Lidia, Age 62, Retires This Year from Her Job as Executive