Chapter 13, 14

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Liberty University *

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401

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Accounting

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Apr 3, 2024

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Chapter 13  Qualified ___ plans come in two forms. A defined ___ plan specifies the amount the employee will receive at retirement, while a defined ___ plan outlines the maximum annual amount that can be paid into the plan. – retirement; benefit; contribution  Which of the following statements is INCORRECT regarding defined benefit plans for 2023? – the level of benefits is a function of how well the funds were invested and the market growth over the employee’s working years  The process of becoming legally entitled to retirement benefits is known as ___. The most restrictive schedule for this process for defined benefit plans is either a ___- year "cliff" or a ___- year graded schedule. – vesting; five; seven  How are distributions from defined benefit plans treated for tax purposes? – the distributions are taxable as ordinary income  What type of retirement plan typically requires a significant amount of work to track employee benefits and to compute required contributions; is structured where the employer bears the investment risk; and combines the funds, rather than having each employee with a separate accounts. – a defined benefit plan  Qualified retirement plans can NOT ___ against non-executives. – discriminate  Which of the following characteristics describe defined benefit plans? – employers chose how the amounts in the retirement account are invested; the employer bears the investment risk and funding responsibility; the plan specifies the amount of the distribution at retirement, rather than the up-front payment the employer will make to the employee’s plan  Steve retired at the beginning of 2023. He worked for a company with a defined benefit plan. The plan provides for retirement benefits at a rate of 3% of the last three years' average compensation for every year of service. Steve had worked for this company for 30 years when he retired. His average salary for the last three years was $700,000. The maximum benefit Steve can receive from his retirement plan in 2023 is $___. – 265000  Mike just started working for a company that maintains a defined benefit retirement plan. If Mike terminates his employment within the first two years, he forfeits his retirement. If he stays for three years, he will be entitled to receive all of the funds provided to him in the account. What type of vesting schedule is used at Mike's company? – cliff  One nice feature of an account such as a 401(k) is that many employers will ___ the employee contributions at a stated percentage of the contribution. – match  Upon retirement, all distributions from defined benefit plans are taxable as ___ ___. – ordinary income  Which of the following issues are characteristic of defined benefit plans? – a significant amount of work is required to keep track of employee benefits and calculate required contributions; funding costs are typically more significant for defined benefit plans than other types of plans  The employee bears the investment risk and funding responsibility in a defined ___ plan. – contribution  In 2023, for taxpayers under age 50 at year-end, the sum of the employee and employer contributions to an employee's defined contribution account(s) is limited to the lesser of (1) $___ or (2) ___ percent of the employee's compensation for the year. Furthermore, the employee contributions to a 401(k) are limited to $___. – 66000; 100; 22500  Which of the following types of defined contribution plans will most likely involve an employer matching the employee contributions to some degree? – 401(k) plans  How are distributions from defined benefit plans treated for tax purposes? – the distributions are taxable as ordinary income

 For defined contribution plans, the employee is immediately vested in the ___ (employee/employer) contributions and any earnings on those contributions. The remaining funds may become vested over time. The most restrictive schedule for this process is either a ___-year "cliff" or a ___-year graded schedule. – employee; three; six  Contributions to traditional defined contribution plans can be made with ___-tax dollars, which reduces the overall cost because of the tax ___ on the contribution. – before; savings  Individuals participating in a defined contribution plan who are at least 50 years of age by the end of the year have contribution limits that are lower than individuals less than 50 years old. – false  In order to avoid a penalty for failure to receive a minimum distribution from a defined contribution plan in 2023, a taxpayer must take her first minimum distribution for the later of which of the following years? – the year after she retires if she is 74 when she retires; the year after she reaches 72 years of age  Wicker Rockers, Inc. is planning to offer a defined contribution plan for its employees. The company would like to incorporate a "cliff" vesting schedule for the employer contributions into the plan. What is the minimum vesting period the company can choose for a "cliff" vesting schedule? – 3 years  The after-tax rate of return on a contribution to a traditional defined contribution plan will decrease as compared to the before-tax rate of return the longer the taxpayer waits before taking distributions because deferring the distribution increases the present value of the taxes paid on the distribution. – false  Lauren contributed $7,200 before-tax to her 401(k). If Lauren has a 24 percent marginal rate, her after-tax cost of the contribution is $___. – 5472  Contributions to a traditional 401(k) are made with ___-tax dollars, while contributions to a Roth 401(k) are made with ___-tax dollars. Qualified distributions from a Roth 401(k) are ___. – pre; after; nontaxable  In order to avoid a penalty for early distributions of a defined contribution plan, an employee can NOT take a withdrawal from the account before he meets which of the following age requirements? – 55 years, if he has separated from employment; 59 ½ years of age  Kyle invested in a Roth 401(k) seven years ago when he was 39 years old. He terminated employment with his company this year and received a lump-sum distribution of his Roth 401(k). Kyle's contributions to the Roth account total $32,000 and accumulated earnings on the account total $18,000. He has decided NOT to roll over the funds into another retirement account. How much tax and penalty will Kyle owe on the distribution if he has a 24% marginal tax rate. – 6120  For a given before-tax rate of return, the longer the taxpayer defers distributions from a traditional defined contribution plan, the ___ (higher/lower) the taxpayer's after-tax rate of return because deferring the distribution ___ (increases/decreases) the present value of the taxes paid on the distribution. – higher; decreases  When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied? – the matching funds must be put in a traditional 401(k) for the employee because employers can NOT make contributions to a Roth 401(k)  The nondeductible penalty for an early distribution is ___ percent of the amount of the distribution. The nondeductible penalty for failing to receive a required minimum distribution is ___ percent of the required minimum distribution. – 10; 25  Qualified distributions from Roth 401(k) accounts are those made after the account has been open for ______ taxable years and the employee is at least ______ years of age. – 5; 59 ½  Which type(s) of 401(k) will incur a 10% penalty on the entire distribution if the money is withdrawn early? – traditional

 For the employee, nonqualified deferred compensation plans receive the same tax treatment as traditional defined ___ plans. – contribution  Which of the following choices describe characteristics of a Roth 401(k)? – employers can NOT contribute matching funds to an employee’s Roth account; contributions to the account are made with after-tax dollars  When deciding whether or not to participate in a nonqualified deferred compensation plan, which of the factors below does NOT need to impact the employee's decision? – whether the cost of the plan is deductible on the employer’s tax return  Which of the following is a characteristic of employers of offering a nonqualified deferred compensation plan to the employees? – the employer does not have to fund the obligation in the current year since payment is deferred to a future year  Which type(s) of 401(k) will provide the taxpayer with nontaxable qualified distributions during his retirement years? – Roth  How are distributions from nonqualified deferred compensation plans taxed to the employee? – they are taxed as ordinary income  Which of the following statements is correct? – in order to contribute to an IRA, taxpayers must meet certain eligibility requirements  An important consideration for an employee trying to decide whether or not to participate in a nonqualified deferred compensation plan is whether the employee can financially afford to forgo the income currently in order to put it in the plan. – true  Which of the following choices is a benefit to the employers of offering a nonqualified deferred compensation plan to the employees? – employers may benefit if they are able to earn a better rate of return on the deferred compensation than the rate of return they are required to pay employees participating in the plan  Which type(s) of 401(k) will incur a 25% penalty on the amount of the minimum required distribution if the distribution does NOT occur? – traditional and Roth  The maximum of a deductible IRA in 2023 for a taxpayer under the age of 50 is $___, and it is a deduction ___ AGI. – 6500; for  An individually managed retirement plan with tax advantages similar to an employer provided defined contribution plan is known as a(n): - IRA Which of the following statements is correct regarding IRA contributions for married taxpayers who file a joint tax return? – a non-earning spouse’s deductible contribution is limited to total earned income of both spouses reduced by contributions to other spouse’s IRAs  Assuming a taxpayer has sufficient earned income to contribute the maximum allowed to a traditional IRA, the deductible IRA contribution may be phased out based on ___ and modified ___ ___. – filing; adjusted gross  Caden is 62 years old and has a traditional IRA with a balance of $220,000. Of that amount, $66,000 is from nondeductible contributions made while Caden was working. Earnings on the nondeductible contributions equal $20,600. If Caden withdraws $15,000 from his IRA this year, $___ will NOT be subject to taxation. – 4500  Matt and Sarah are selling their home and moving to a new neighborhood. Sarah is going to start college in the fall. She did NOT attend college after high school and is now embarking on her degree. Matt was injured recently in a motorcycle accident and the couple has some very high medical expenses that are coming due. They have considered liquidating their traditional IRAs in order to cover some of these costs. Which types of expenditures can they make from funds in their IRAs without incurring a 10% penalty for early withdrawal? – higher education and medical expenses

 If only one spouse is an active participant in an employer sponsored retirement plan, the non- participating spouse can maximize his or her allowed IRA deduction by choosing the married filing separately status. – false  Distribution rules for ___ IRA accounts are similar to the rules for traditional ___ accounts. – traditional; 401k  The formula for determining how much of a distribution from a traditional IRA consisting of nondeductible and deductible contributions is nontaxable is ______. – nondeductible contributions/total account balance at the time of distribution  Which of the following situations involving an early distribution of an IRA would result in an exception where the taxpayer would NOT incur the 10% penalty? – funds are used for a first- time home purchase; funds are used for qualified higher education expenses; funds are used for qualifying medical expenses  The maximum contribution that a taxpayer can make into a Roth IRA is ______the allowable contribution for a traditional IRA. – equal to  The phase-out for contributions allowed to Roth IRAs is dependent upon the taxpayer's ___ ___ and MAGI. – filing status  Taxpayers must receive their first required minimum distribution from a traditional IRA by ___ 1st of the year following the year in which they reach ___ years of age. – April; 72  Assuming the taxpayer has owned a Roth IRA account for over 5 years, qualifying distributions include a $10,000 distribution ______. – used for a first-time home purchase; made when the taxpayer was 60 yrs old; made to a beneficiary after the death of the taxpayer; made because the taxpayer is disabled  Contributions are not deductible and qualified distributions are not taxable from a(n) ___ IRA. – Roth  One difference between traditional IRAs and Roth IRAs is that there is no phase-out based on AGI for contributions to a Roth IRA. – false  What are the tax and penalty effects of nonqualified distributions of Roth IRAs? – the account earnings are fully taxable and subject to the 10% penalty, but the account contributions are nontaxable  Which of the following statements regarding Roth IRAs is NOT correct? – Roth IRAs are NOT subject to phase-out rules that limit their contribution level  A 40-year old taxpayer has owned a Roth IRA for more than 5 years. A $10,000 distribution will be considered nonqualified if the distribution was ___ - was used to pay for higher education expenses  The maximum contribution that a taxpayer under age 50 at year end can make into a Roth IRA is $___ which is ___ ___ (equal to/higher than/lower than) the allowable contribution for a traditional IRA. – 6500; equal to  Why are individually managed retirement plans, such as traditional or Roth IRAs, not very attractive to small business owners? – the contribution levels are relatively low compared to employer-provided plans  When a nonqualified distribution is received from a Roth IRA, what is the deemed order of the funds distributed? – first from taxpayer contributions; second from account earnings  Carrie, age 38, is a florist who owns and manages a sole proprietorship. During 2023, the business generated a net income of $80,000. Carrie plans to invest in a SEP IRA before the due date of her tax return. What is the maximum amount she can contribute to the plan for the 2023 tax year? – 14870  Other than the taxation differences, what is another advantage of Roth IRAs over traditional IRAs? – unlike traditional IRAs, Roth IRAs do not have any minimum distribution requirements

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