Chapter 13 Retirement Savings and Deferred Compensation

67. [LO 4] Harriet and Harry Combs (both 37 years old) are married and both want to contribute to a Roth IRA. In 2014, their AGI is $50,000. Harriet earned $46,000 and Harry earned $3,000.

a. How much can Harriet contribute to her Roth IRA if they file a joint return?

b. How much can Harriet contribute if she files a separate return?

c. How much can Harry contribute to his Roth IRA if they file separately?

68. Michael is single and 35 years old. He is a participant in his employer’s sponsored retirement plan. How much can Michael contribute to a Roth IRA in each of the following alternative situations?

a. Michael’s AGI is $50,000 after he contributed $3,000 to a traditional IRA.

b. Michael’s AGI is $80,000 before any IRA contributions.

c. Michael’s AGI is $135,000 before any IRA contributions.

.

69. [LO 4] George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and his IRA is now worth $25,000. He is planning on transferring (or rolling over) the entire balance into a Roth IRA account. George’s marginal tax rate is 25 percent.

a. What are the tax consequences to George if he takes $25,000 out of the traditional IRA and puts the entire amount into a Roth IRA?

b. What are the tax consequences to George if he takes $25,000 out of the traditional IRA, pays the taxes due from the traditional IRA distribution, and contributes the remaining distribution to the Roth IRA?

c. What are the tax consequences to George if he takes $25,000 out of the traditional IRA, keeps $10,000 to pay taxes and to make a down payment on a new car, and contributes the remaining distribution to the Roth IRA?

70. (LO4) Jimmer has contributed $15,000 to his Roth IRA and the balance in the account is $18,000. In the current year, Jimmer withdrew $17,000 from the Roth IRA to pay for a new car. If Jimmer’s marginal ordinary income tax rate is 25 percent, what amount of tax and penalty, if any, is Jimmer required to pay on the withdrawal in each of the following alternative situations?

a. Jimmer opened the Roth account 44 months before he withdrew the $17,000 and Jimmer is 62 years of age.

b. Jimmer opened the Roth account 44 months before he withdrew the $17,000 and Jimmer is age 53.

c. Jimmer opened the Roth account 76 months before he withdrew the $17,000 and Jimmer is age 62.

d. Jimmer opened the Roth account 76 months before he withdrew the $17,000 and Jimmer is age 53.

71. [LO 4] {Planning} John is trying to decide whether to contribute to a Roth IRA or traditional IRA. He plans on making the maximum $5,000 contribution (assume this is the maximum amount) to whichever plan he decides to fund. He currently pays tax at a 30 percent marginal income tax rate but he believes that his marginal tax rate in the future will be 28 percent. He intends to leave the money in the Roth IRA or traditional IRA accounts for 30 years and he expects to earn a 6 percent before-tax rate of return on the account.

a. How much will John accumulate after taxes if he contributes to a Roth IRA (consider only the funds contributed to the Roth IRA)?

b. How much will John accumulate after taxes if he contributes to a traditional IRA (consider only the funds contributed to the traditional IRA)?

c. Without doing any computations, explain whether the traditional IRA or the Roth IRA will generate a greater after-tax rate of return.

72. [LO 4] Over the past three years, Sherry has contributed a total of $12,000 to a Roth IRA account ($4,000 a year). The current value of the Roth IRA is $16,300. In the current year, Sherry withdraws $14,000 of the account balance to purchase a car. Assuming Sherry is in a 25 percent marginal tax bracket, how much of the $14,000 withdrawal will she retain after taxes to fund her car purchase?

73. [LO 4] Seven years ago, Halle (currently age 41) contributed $4,000 to a Roth IRA account. The current value of the Roth IRA is $9,000. In the current, year Halle withdraws $8,000 of the account balance to use as a down payment on her first home. Assuming Halle is in a 25 percent marginal tax bracket, how much of the $8,000 withdrawal will she retain after taxes to fund her house down payment?

74. (LO4) {Planning} {Research} Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and her IRA is now worth $50,000. She is trying to decide whether she should roll over her traditional IRA into a Roth IRA. Her current marginal tax rate is 25%. She plans to withdraw the entire balance of the account in 20 years and she expects to earn a before-tax rate of return of 5% on her retirement accounts and a 4% after-tax rate of return on all investments outside of her retirement accounts. For each of the following alternative scenarios indicate how much more or less Yuki will accumulate after taxes in 20 years if she rolls over her traditional IRA into a Roth IRA. Be sure to include the opportunity cost of having to pay taxes on the rollover.

a. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 35%.

b. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 20%.

c. Assume the same facts as in b. except that she earns a 3% after-tax rate of return on investments outside of the retirement accounts?

d. In general terms, reconcile your answer from part b. with your answer to part c.

75. [LO 4] {Research} Sarah was contemplating making a contribution to her traditional individual retirement account for 2014. She determined that she would contribute $5,500 to her IRA and she deducted $5,500 for the contribution when she completed and filed her 2014 tax return on February 15, 2015. Two months later, on April 15, Sarah realized that she had not yet actually contributed the funds to her IRA. On April 15, she went to the post office and mailed a $5,500 check to the bank holding her IRA. The bank received the payment on April 17. In which year is Sarah’s $5,500 contribution deductible?

76. [LO 5] {Planning} Elvira is a self-employed taxpayer who turns 42 years old at the end of the year (2014). In 2014, her net Schedule C income was $120,000. This was her only source of income. This year, Elvira is considering setting up a retirement plan. What is the maximum amount Elvira may contribute to the self-employed plan in each of the following situations?

a. She sets up a SEP IRA.

b. She sets up an individual 401(k).

77. [LO 5] {Planning} Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2014). In 2014, her net Schedule C income was $120,000. This was her only source of income. This year, Hope is considering setting up a retirement plan. What is the maximum amount Hope may contribute to the self-employed plan in each of the following situations?

a. She sets up a SEP IRA.

b. She sets up an individual 401(k).

78. [LO 5] {Planning} Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2014). During 2014, her net Schedule C income was $300,000. This was her only source of income. This year, Rita is considering setting up a retirement plan. What is the maximum amount Rita may contribute to the self-employed plan in each of the following situations?

a. She sets up a SEP IRA.

b. She sets up an individual 401(k).

79. [LO 5] Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2014). In2014, his net Schedule C income was $300,000. This was his only source of income. This year, Reggie is considering setting up a retirement plan. What is the maximum amount he may contribute to the self-employed plan in each of the following situations?

a. He sets up a SEP IRA.

b. He sets up an individual 401(k).

80. [LO 6] Desmond is 25 years old and he participates in his employer’s 401(k) plan. During the year, he contributed $3,000 to his 401(k) account. What is Desmond’s 2014 saver’s credit in each of the following alternative scenarios?

a. Desmond is not married and has no dependents. His AGI after deducting his 401(k) contribution is $34,000

b. Desmond is not married and has no dependents. His AGI after deducting his 401(k) contribution is $17,500.

c. Desmond files as a head of household and has AGI of $44,000.

d. Desmond and his wife file jointly and report an AGI of $30,000 for the year.

81. [LO 6] Penny is 57 years old and she participates in her employer’s 401(k) plan. During the year, she contributed $2,000 to her 401(k) account. Penny’s AGI is $27,000 after deducting her 401(k) contribution. What is Penny’s 2014 saver’s credit in each of the following alternative scenarios?

a. Penny is not married and has no dependents.

b. Penny files as a head of household and she has three dependents.

c. Penny files as a head of household and she has one dependent.

d. Penny is married and files a joint return with her husband. They have three dependents.

e. Penny files a separate tax return from her husband. She claims two dependent children on her return.