Len is entitled to receive monthly payments of $1,500 over his life from his employer's qualified pension plan. The payments begin January 1, 2015. He contributed $71,500 to the plan prior to his retirement at age 62. Using the simplified method, how much of the payments will be included in Len's taxable income for 2015?

Question

Quizplus · Accepted Answer

To determine the taxable portion of the pension payments using the simplified method, we need to divide Len's after-tax contributions (also known as his investment in the contract) by the expected return rate. The expected return rate is based on IRS tables and Len's age at the start of the pension payments.

In this case, Len's investment in the contract is $71,500, and assuming he is 62 years old, the expected return rate is 6.3%. Therefore, his taxable income from the pension plan for 2015 will be:

($1,500 monthly payment x 12 months) - ($71,500 / (Life expectancy factor of 180 months)) x 6.3% = $14,700

So the correct answer is C, $14,700.

Len Is Entitled to Receive Monthly Payments of $1,500 Over