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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.

A) True
B) False

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Which of the following is not a self-employed retirement account?


A) SEP IRA
B) SEM 403(c)
C) Individual 401k
D) None of these.All of these are self-employed retirement accounts.See discussion in text.

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

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Kathy is 60 years of age and self-employed.During 2013 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 a simplified employee pension (SEP) IRA for 2013?


A) $11,152
B) $16,652
C) $56,500
D) $51,000

E) All of the above
F) None of the above

Correct Answer

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High-income taxpayers are not allowed to receive the saver's credit.

A) True
B) False

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How is a traditional 401(k) account similar to a Roth 401(k) account?


A) Employees contribute before-tax dollars to both types of accounts
B) Distributions from a traditional 401(k) account and a Roth 401(k) account are both subject to minimum distribution penalties
C) Both accounts can receive matching contributions from employers
D) Employers generally choose how funds in these accounts will be invested

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

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Kathy is 60 years of age and self-employed.During the year she reported $400,000 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 an individual 401(k) ?


A) $51,000
B) $56,500
C) $74,287
D) $79,787

E) A) and D)
F) All of the above

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Employers may choose whom they allow to participate and whom they do not allow to participate in their nonqualified deferred compensation plans.

A) True
B) False

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


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

E) B) and D)
F) B) and C)

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


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.Employees,not employers,bear the investment risk associated with the plan.

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

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


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.See discussion on nonqualified deferred compensation plans in text.

E) A) and B)
F) All of the above

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Just like distributions from qualified retirement plans,distributions from nonqualified deferred compensation plans are taxed as ordinary income to the recipient.

A) True
B) False

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


A) Employers are required to invest salary deferred by employees in investments specified by the employees.
B) Employers are required to annually fund their deferred compensation obligations to employees.
C) Employers annually deduct the amount earned by employees under the plan.
D) Employers may discriminate in terms of who they allow to participate in the plan.See discussion of nonqualified deferred compensation plans in the text.

E) A) and D)
F) C) and D)

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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.If her marginal tax rate is higher in the year of contribution than in the year of distribution,her after-tax rate of return will be higher for a traditional 401(k) plan because she will be getting the tax benefit of the deduction at a higher rate and will have to pay the tax cost of the distribution at a lower rate.

E) C) and D)
F) A) and D)

Correct Answer

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Kathy is 60 years of age and self-employed.During the year 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) ?


A) $28,652
B) $34,152
C) $51,000
D) $56,500

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

Correct Answer

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

A) True
B) False

Correct Answer

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Amy is single.During 2013,she determined her adjusted gross income was $12,000.During the year,Amy also contributed $1,500 to a Roth IRA.What is the maximum saver's credit she may claim for the year?


A) $750
B) $1,000
C) $1,500
D) $0

E) None of the above
F) All of the above

Correct Answer

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


A) are,are not
B) are,are
C) are not,are
D) are not,are not

E) A) and B)
F) A) and D)

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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.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 and he immediately contributes the $50,000 to a Roth IRA.Assuming his marginal tax rate is 25%,what amount of penalty,if any,must Tyson pay on the distribution from the traditional IRA?


A) $0.
B) $1,250.
C) $3,750.
D) $5,000.The distribution from the traditional IRA is fully taxable but is not subject to penalty because Tyson contributed the full $50,000 to a Roth IRA within 60 days from the time of withdrawal.

E) All of the above
F) A) and B)

Correct Answer

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


A) Distributions from defined contribution plans are fully taxable as ordinary income.
B) Distributions from defined contribution plans are partially taxable as ordinary income and partially nontaxable as a return of capital.
C) Distributions from defined contribution plans are fully taxable as capital gains.
D) Distributions from defined contribution plans are partially taxable as capital gains and partially nontaxable as a return of capital.The full amount of distributions from defined contribution plans is taxable as ordinary income.

E) C) and D)
F) A) and D)

Correct Answer

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Which of the following statements concerning individual 401(k) s is false?


A) In general,individual 401(k) s have higher administrative costs than SEP IRAs.
B) Employees cannot participate in individual 401(k) s.
C) Individual 401(k) s are available only to self-employed taxpayers with 100 or fewer employees.
D) Individual 401(k) s have contribution limitations.Individual 401(k) s are strictly for self-employed individuals who do not have employees.

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

Correct Answer

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