Question 1

Max retired in 2015 at age 62. During the year he received distributions of $12,000 from his IRA. He made nondeductible contributions of $30,000 to the IRA in prior years and has never received a nontaxable distribution. As of December 31, 2015, the value of his IRA was $250,000. Calculate the nontaxable portion of Max's distribution.

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Question 2

Damian is age 79. He purchased a single life annuity contract that will pay him $4,000 per month for life. The expected return on the contract is:

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Question 3

What is a good rule of thumb you should use when thinking about the taxability of retirement plan distributions?

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Question 4

Hyman is age 34, single, and has AGI of $130,000. He would like to contribute to a Coverdell Education Savings Account (CESA) for his niece, Danielle. Danielle's father has already contributed $500 to a CESA in 2015. What is the maximum CESA contribution Hyman can make for Danielle in 2015?

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Question 5

What is the maximum deductible contribution that can be made to one or more deductible IRAs in each of the following instances?
a. A single person, age 41, who is not an active participant in an employer-sponsored retirement plan with AGI of $97,000.
b. A married couple, ages 33 and 34, neither of whom is an active participant in an employer-sponsored retirement plan. One spouse has W-2 income of $57,000 and the other spouse did not work.
c. A married couple, ages 44 and 48. One spouse is covered under an employer-sponsored retirement plan and the other is not. The covered spouse has W-2 income of $125,000 and the non-covered spouse has W-2 income of $32,000.

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Question 6

Paolo is age 77. He paid $240,000 for a single life annuity contract that will pay him $43,200 per year for life. The tax-free amount of the first $43,200 payment is

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Question 7

Felix is age 74 and his wife is age 73. He purchased a single life annuity contract that will pay him $80,000 per year for life. The expected return on the contract is

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Question 8

What is an annuity contract? Who are the parties to an annuity contract?

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Question 9

Pierre retired in 2015 at age 62. During the year he received distributions of $27,000 from his IRA. He made nondeductible contributions of $60,000 to the IRA in prior years and has never received a nontaxable distribution. As of December 31, 2015, the value of his IRA was $450,000. Calculate the taxable portion of Pierre's distribution.

Accepted Answer

To calculate the taxable portion of the distribution, we must calculate the amount of Pierre's IRA that consists of nondeductible contributions:

$60,000 nondeductible contributions / $450,000 IRA balance = 0.133

So 13.3% of the IRA is nondeductible contributions.

Next, we multiply the total distribution by this percentage to find the nontaxable portion:

$27,000 distribution x 0.133 = $3,591.00 nontaxable portion

Finally, we subtract the nontaxable portion from the total distribution to find the taxable portion:

$27,000 distribution - $3,591.00 nontaxable portion = $23,409.00 taxable portion

Therefore, the taxable portion of Pierre's distribution is $23,604, which is answer choice D.

Question 10

What are some of the significant tax benefits for both employees and employers associated with a qualified pension plan?

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Question 11

Heather, age 67, retired in 2015. During the year she received distributions of $14,000 from her IRA. She made nondeductible contributions of $40,000 to the IRA in prior years and has never received a nontaxable distribution. As of December 31, 2015, the value of her IRA was $250,000. Calculate the taxable portion of Heather's distribution and her tax basis in the IRA after the distribution that she will carry forward to 2016.

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Question 12

Exam Company provides a SIMPLE plan for its employees. Under the plan, employees can contribute up to 6% of their salary and Exam Corporation will match the employee's contribution up to 3% of the employee's salary. Ben, age 44, is an employee of Exam Corporation and elects to contribute the maximum amount of his $95,000 salary to the SIMPLE plan. What is the total contribution made to Ben's SIMPLE account? When does Ben's contribution vest? When does the contribution by Exam Company vest? What is the amount contributed to Ben's account if Ben's salary is $210,000?

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Question 13

Which of the following statements regarding a Coverdell Education Savings Account (CESA) is correct?

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Distributions used to pay qualified higher education expenses of the beneficiary are tax-free. This is one of the main benefits of a CESA - it allows for tax-free growth and withdrawals as long as the funds are used for qualified education expenses. Option B is incorrect because there is no requirement that the beneficiary be related to the person making contributions. Option C is incorrect because the income limit for contributing to a CESA is actually $110,000 for single filers and $220,000 for joint filers in 2021. Option D is incorrect because contributions to a CESA are not tax deductible.

Question 14

In the case of defined-contribution plans, in 2015 what are the maximum contribution limits by an employee under the age of 50 to a qualified pension plan, a 401(k) plan, a Keogh plan, SEP, and SIMPLE plan?

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Question 15

What is the maximum deductible contribution that can be made to one or more deductible IRAs in each of the following instances?
a. A single person, age 51, who is an active participant in an employer-sponsored retirement plan with AGI of $37,000.
b. A single person, age 59, who is an active participant in an employer-sponsored retirement plan with AGI of $67,000.
c. A single person, age 26, who is an active participant in an employer-sponsored retirement plan with AGI of $63,000.

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Question 16

Retirement plans can be categorized into employer-sponsored plans and individual-based plans. What is the distinction? Give examples of plans in both categories.

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Question 17

Quentin and Janelle would like to establish a Coverdell Education Savings Account (CESA) for their daughter, age 5, and their nephew (the son of Quentin's brother), age 8. Their AGI is $145,000. Quentin's brother has already contributed $1,500 to a CESA for his son.
a. What is the maximum amount Quentin and Janelle can contribute to a CESA for their daughter and their nephew?
b. If their AGI were $208,000, what is the maximum amount they can contribute to a CESA for their daughter and their nephew?

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Question 18

A pension or profit-sharing plan must not discriminate in favor of highly compensated employees. What employees meet the definition of "highly compensated" for purposes of these plans?

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Question 19

Hamden is entitled to receive monthly payments of $6,000 over his life from his employer's qualified pension plan. The payments begin January 1, 2015. He contributed $286,000 to the plan prior to his retirement at age 62. Using the simplified method, what amount of the payments will be excluded from Hamden's taxable income for 2015?

Accepted Answer

Under the simplified method, the exclusion amount is calculated by dividing the employee's total contributions by the number of anticipated payments. For someone who retires at age 62, the IRS table provides 260 anticipated payments. Thus, $286,000 / 260 = $1,100 per month is excluded. For 12 months, $1,100 x 12 = $13,200 is excluded from taxable income for 2015.

Question 20

Randy is entitled to receive monthly payments of $2,500 over his life from his employer's qualified pension plan or he can take $2,300 over his life and the life of his wife. The payments begin May 1, 2015. Randy contributed $106,000 to the plan prior to his retirement. Randy is 67 and his wife is 65. Using the simplified method, how much of the payments will be included in Randy's income for 2015 in each of the following independent situations?
a. Randy chooses to take payments of $2,500 over his life.
b. Randy chooses to take payments of $2,300 over his life and the life of his wife.

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Quiz 11: Retirement and Other Tax-Deferred Plans and Annuities: