Exam 13: Retirement Savings and Deferred Compensation

Taxpayers contributing to and receiving distributions from a Roth IRA generally earn a before-tax rate of return on their contributions equal to their after-tax rate of return.

When a taxpayer receives a nonqualified distribution from a Roth 401(k) account the taxpayer contributions are deemed to be distributed first. If the amount of the distribution exceeds the taxpayer contributions, the remainder is from the account earnings.

Distributions from defined benefit plans are taxed as long-term capital gains to beneficiaries.

When employees contribute to a traditional 401(k) plan, they _____ allowed to deduct the contributions and they ______ taxed on distributions from the plan.

In 2014, Tyson (age 52) earned $50,000 of salary. Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014?

On December 1, 2014 Irene turned 71 years old. She is still working for her employer and she participates in her employer's 401(k) plan. Irene is not required to receive a minimum distribution for 2014 from her 401(k) account because she has not yet retired.

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?

During 2014 Jacob, a 19 year old full-time student, earned $4,500 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions during 2014 is $5,500. How much of a tax-deductible contribution can Jacob make to an IRA?

Both 401(k) plans and Roth 401(k) plans are forms of defined contribution plans.

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?

Taxpayers never pay tax on the earnings of a traditional 401(k) account.

Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. In the current year, Katrina defers 15 percent of her $300,000 salary. Katrina's deemed investment choice will earn 8 percent annually on the deferred compensation until she takes a lump sum distribution in 10 years. Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate to be 28 percent upon receipt on the deferred salary. What is her after-tax accumulation from the deferred salary in 10 years?

Which of the following statements is true regarding distributions from Roth 401(k) accounts?

Qualifying distributions from traditional IRAs are nontaxable while qualifying distributions from Roth IRAs are fully taxable as ordinary income.

Taxpayers withdrawing funds from an IRA before they turn 70½ are generally subject to a 10 percent penalty on the amount of the withdrawal.