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Exam 13: Retirement Savings and Deferred Compensation

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Question 41

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Jenny (35 years old) is considering making a one-time contribution to either a traditional 401(k) plan or to a Roth 401(k) plan.She plans to withdraw the account balance when she retires in 40 years.Jenny expects to earn a 7% before-tax rate of return no matter which plan she contributes to.Which of the following statements is true?

A) If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
B) If Jenny's marginal tax rate in the year of contribution is lower than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
C) Jenny will earn the same after-tax rate of return no matter which plan she contributes to.
D) Jenny is not allowed to make a one-time contribution to either plan.

E) None of the above
F) C) and D)

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Question 42

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Deborah (single,age 29)earned $25,000 in 2017.Deborah was able to contribute $1,800 ($150/month)to her employer sponsored 401(k).What is the total saver's credit that Deborah can claim for 2017? Exhibit 13-9 in the text

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$180
$1,800 (contribution amou...

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Question 43

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Which of the following describes a defined contribution plan?

Aiko (single,age 29)earned $40,000 in 2017.He was able to contribute $1,800 ($150/month)to his employer sponsored 401(k).What is the total saver's credit that Aiko can claim for 2017? Exhibit 13-9 in the text

Kim (50 years of age)is considering whether to participate in her company's Roth 401(k)or traditional 401(k).This year,she plans to invest either $4,000 in a Roth 401(k)or $5,000 in a traditional 401(k).Kim plans on leaving the contribution in the retirement account for 20 years when she will receive a distribution of the entire balance in the account.Her employer does not have a matching program for employee contributions to retirement accounts.Assume Kim can earn a 6 percent before tax return in either account and that she anticipates that in 20 years her tax rate will be 30%.(Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number) 1)What would be Kim's after-tax accumulation in 20 years if she contributes $4,000 to a Roth 401(k)account? 2)What would be her after-tax accumulation in 20 years if she contributes $5,000 to 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? (Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number)

Kathy is 60 years of age and self-employed.During 2017 she reported $500,000 of revenues and $100,000 of expenses relating to her self-employment activities.If Kathy has no other retirement accounts in her name,what is the maximum amount she can contribute to a simplified employee pension (SEP) IRA for 2017? (Round your final answer to the nearest whole number)

From a tax perspective,participating in a nonqualified deferred compensation plan is an effective tax planning strategy when the employee anticipates that her marginal tax rate will be higher when she receives the deferred compensation than when she defers the compensation.

Which of the following statements regarding Roth IRAs is false?

Amy is single.During 2017,she determined her adjusted gross income was $12,000.During the year,Amy also contributed $2,500 to a Roth IRA.What is the maximum saver's credit she may claim for the year?

Jacob participates in his employer's defined benefit plan.He has worked for his employer for four full years.If his employer uses a five-year cliff vesting schedule,Jacob will need to work another year in order to vest in any of his defined benefit plan retirement benefits.

Dean has earned $70,000 annually for the past five years working as an architect for WCC Inc.Under WCC's defined benefit plan (which uses a 7-year graded vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with WCC.Dean has worked for five full years for WCC and his vesting percentage is 60%.What is Dean's vested benefit (or annual retirement benefit he has earned so far) ?

Shauna received a $100,000 distribution from her 401(k) account this year.Assuming Shauna's marginal tax rate is 25%,what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59ᵗʰ birthday and she has not yet retired?

This year,Ryan contributed 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 this year is 35 percent will he earn a higher after tax rate of return from the Roth 401(k)or the traditional 401(k)? Explain.(Round future value factors to 5 decimal places and the future value and final answers to the nearest whole number)

Employee contributions to traditional 401(k)accounts are deductible by the employee,but employee contributions to Roth 401(k)accounts are not.

When an employer matches an employee's contribution to the employee's 401(k)account,the employee is immediately taxed on the amount of the employer's matching contribution.

Individual 401(k)plans generally have higher contribution limits than SEP IRAs.

Kathy is 60 years of age and self-employed.During 2017,she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities.If Kathy has no other retirement accounts in her name,what is the maximum amount she can contribute to an individual 401(k) for 2017? (Round your final answer to the nearest whole number)

Which of the following statements regarding traditional IRAs is true?

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