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Exam 13: Retirement Savings and Deferred Compensation

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Question 1

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This year, Ryan contributed 10 percent of his $79,500 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 6-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 five decimal places and the future value and final answers to the nearest whole number.)

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Roth 401(k)after-tax accumulation: ${{[a...

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Question 2

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Which of the following best describes distributions from a defined benefit plan?

A) Distributions from defined benefit plans are taxable as ordinary income.
B) Distributions from defined benefit plans are partially taxable as ordinary income and partially nontaxable as a return of capital.
C) Distributions from defined benefit plans are taxable as capital gains.
D) Distributions from defined benefit plans are partially taxable as capital gains and partially nontaxable as a return of capital.

E) A) and B)
F) A) and C)

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Question 3

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Keisha (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). Keisha 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 Keisha 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 percent. 1)What would be Keisha'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? (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

Lisa, age 46, needed some cash so she withdrew $58,000 from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $21,600 to her account. What amount of the distribution is taxable and subject to early distribution penalty?

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 five-year cliff schedule. Joan worked five and a half years at PDEK before leaving for another opportunity. She received an annual salary of $50,200, $52,600, $58,300, $65,600, and $75,900 for years one through five, respectively. Joan earned $40,600 of her $81,200 annual salary in year six. What is the vested benefit Joan is entitled to receive from PDEK for her retirement? (Use Exhibit 13-1 ).

In 2020, Madison is a single taxpayer who is 25 years of age. During 2020, she contributed $3,000 to her employer-sponsored 401(k)account. Her 2020 AGI was $68,500 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make to her IRA?

Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?

Employees who are at least 50 yearsof age at the end of the year are allowed to contribute more to their 401(k)accounts than employees who are not 50 years old by year-end.

Shauna received a distribution from her 401(k) account this year. In which of the following situations will Shauna be subject to an early distribution penalty?

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 percent before-tax rate of return no matter which plan she contributes to. Which of the following statements is true?

Which of the following is a true statement regarding saving for retirement?

Christina made a one-time contribution of $18,500 to her 401(k)account, and she received a matching contribution from her employer in the amount of $5,300. Christina expects to earn a 7-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 $18,500 contribution to her 401(k)account? Assume her marginal tax rate at retirement is 35 percent. (Round future value factors to five decimal places and the future value and final answers to the nearest whole number.)

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 five-year cliff schedule. Joan worked five and a half 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? Use Exhibit 13-1.

A SEP IRA is an example of a self-employed retirement account.

Lisa, age 47, needed some cash so she withdrew $57,000 from her Roth IRA (not a coronavirus-related distribution) . At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $21,400 to her account. What amount of the distribution is taxable and subject to early distribution penalty?

Jessica retired at age 65. On the date of her retirement, the balance in her traditional IRA was $206,000. Over the years, Jessica had made $20,600 of nondeductible contributions and $63,000 of deductible contributions to the account. If Jessica receives a $56,000 distribution from the IRA on the date of retirement, what amount of the distribution is taxable?

Dean has earned $70,000 annually for the past four and a half years working as an architect for MWC. Under MWC's defined benefit plan (which uses a five-year cliff vesting schedule) employees earn a benefit equal to 3.5 percent of the average of their three highest annual salaries for every full year of service with MWC. What is Dean's vested benefit (or annual benefit he has earned so far) ?

Defined benefit plans specify the amount of benefit an employee will receive on retirement while defined contribution plans specify the amounts that employers and employees will (or can)contribute to an employee's plan.

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 five decimal places and the future value and final answers to the nearest whole number.)

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