Question 1

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

Accepted Answer

A)  are; are not 
B)  are; are 
C)  are not; are 
D)  are not; are not

Question 2

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 3

Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs) under any circumstances.

Accepted Answer

A) True 
 B)False

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements regarding vesting in a defined benefit plan is correct?

Accepted Answer

A)  Under a cliff vesting schedule, a portion of an employee's benefits vest each year. 
B)  Under a graded vesting schedule, an employee's entire benefit vests all at the same time. 
C)  When an employee's benefits vest, she is entitled to participate in the employer's defined benefit plan. 
D)  When an employee's benefits vest, she is legally entitled to receive the vested benefits.

Question 6

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 7

Which of the following is true concerning SEP IRAs?

Accepted Answer

A)  SEP IRAs are difficult to set up and have high administrative costs 
B)  Taxpayers may contribute unlimited amounts to SEP IRAs 
C)  Employees of the taxpayer cannot be included in SEP IRAs 
D)  Taxpayers with a SEP IRA must contribute for their employees

Question 8

Which of the following statements concerning nonqualified deferred compensation plans is true?

Accepted Answer

A)  If an employer doesn't have the funds to pay the employee, the employee becomes an unsecured creditor of the employer. 
B)  These plans can be an important tax planning tool for employers if they expect their marginal tax rate to decrease over time. 
C)  These plans can be an important tax planning tool for employees who expect their marginal tax rate to increase over time. 
D)  Distributions are taxed at the same tax rate as long-term capital gains.

Question 9

In general, which of the following statements regarding self-employed retirement accounts is true?

Accepted Answer

A)  SEP IRAs have higher contribution limits than individual 401(k)s if the contributing taxpayer is at least 50 years of age at year end. 
B)  SEP IRAs have higher contribution limits than individual 401(k)s no matter the age of the contributing taxpayer. 
C)  Individual 401(k)s have higher contribution limits than SEP IRAs. 
D)  None of these. Both SEP IRAs and individual 401(k)s have exactly the same annual contribution limits.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements regarding defined contribution plans is false?

Accepted Answer

A)  Employers bear investment risk relating to the plan. 
B)  Employees immediately vest in their contributions to the plan. 
C)  Employers typically match employee contributions to the plan to some extent. 
D)  An employer's vesting schedule is used for employers' contributions in determining the amount of the plan benefits the employee is entitled to receive on retirement.

Question 12

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Tyson's marginal tax rate is 25%. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions?

Accepted Answer

A)  $0 income tax; $0 penalty. 
B)  $12,500 income tax; $1,250 penalty. 
C)  $12,500 income tax; $3,000 penalty. 
D)  $12,500 income tax; $5,000 penalty.

Question 13

Which of the following statements regarding defined benefit plans is false?

Accepted Answer

A)  The benefits are based on a fixed formula 
B)  The vesting period can be based on a graded or cliff schedule 
C)  Employees bear the investment risks of the plan 
D)  Employers are generally required to make annual contributions to meet expected future liabilities

Question 14

The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

In 2014, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014?

Accepted Answer

The answer of In 2014, Tyson (age 22) earned $3,500...

Question 17

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

Accepted Answer

A)  $2,000 
B)  $1,000 
C)  $500 
D)  It depends on the filing status of the taxpayer

Question 18

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 19

An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account.

Accepted Answer

A) True 
 B)False

Question 20

Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA). Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?

Accepted Answer

A)  $3,000 income tax; $2,000 early distribution penalty 
B)  $3,000 income tax; $0 early distribution penalty 
C)  $0 income tax; $2,000 early distribution penalty 
D)  $0 income tax; $0 early distribution penalty

Exam 13: Retirement Savings and Deferred Compensation

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

Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs) under any circumstances.

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.

Which of the following statements regarding vesting in a defined benefit plan is correct?

Which of the following is true concerning SEP IRAs?

Which of the following statements concerning nonqualified deferred compensation plans is true?

In general, which of the following statements regarding self-employed retirement accounts is true?

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

Which of the following statements regarding defined contribution plans is false?

Which of the following statements regarding defined benefit plans is false?

The standard retirement benefit an employee will receive under a defined benefit plan depends on the number of years of service the employee provides, but does not consider the amount of the employee's compensation near retirement.

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

In 2014, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014?

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

An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account.