1. Juan has worked for the ABC Company for 23 years. The defined benefit plan pays 2% of an employee’s average of his or her high five highest years of income. Juan’s average is $60,000. How much will he receive each month if he retires this year? Show your work. (6.5 pts.)
2. Ryan, who is 50, is employed by Best Mutual Funds (BMF) and participates in its profit sharing Section 401(k) plan. The plan allocates contributions based on relative compensation and is not integrated with Social Security. Ryan’s current annual compensation is $80,000, and he has elected to defer 5% of compensation into the Section 401(k) plan. Including Ryan, 35 workers with a total covered payroll of $1.8 million participate in the plan and have elected to defer a total of $72,000 (4% of payroll). What is the maximum deductible contribution to the profit sharing plan BMF can make? Show your work. (6.5 pts.)
3. The XYZ Company has two employees: John, who earns $300,000 annually, and his assistant, Sally, age 26, who has worked for John for four years. Sally earns $40,000 annually. XYZ has a profit-sharing plan with Section 401(k) provisions using the longest allowed graded vesting. Sally’s total account balance of $5,500 in the plan consists of the following:
• Employee contributions: $1,500
• Employer contributions: $2,000
• Earnings on employee contributions: $800
• Earnings on employer contributions: $1,200
How much could Sally take with her if she terminated employment with XYZ this year (after four years of employment)? Show your work. (6.5 pts.)
4. If the actual deferral percentage (ADP) for non-highly compensated employees is 9%, what is the maximum actual deferral percentage for highly compensated employees? Show your work. (6.5 pts.)
5. Ed, 53 and Albert, 52, own EA Contractors. They have five employees ranging in age from 20-32. Ed and Albert realize they are behind on their retirement preparation and they want to start a retirement plan for the company. As contractors, they have a lot of turnover, so the main goal is really to provide for Ed and Albert’s retirement situations, so they want a plan that will favor them over the rank-and-file. They are not willing to commit to annual contributions, but they would like the chance to make substantial contributions when the company has good years. Which of the following plans would you recommend to EA Contractors?
a. Defined benefit plan c. 401(k)
b. Money purchase plan d. Age-based profit-sharing plan
Why did you pick this type of retirement plan?
6. Kaitlyn is interested in starting a simplified employee pension (SEP) to help her save for retirement. If she makes $50,000 of self-employment income, what is the maximum amount of dollars she could contribute to a SEP this year? Assume the self-employment tax would be $7,065 each year. Show your work. (6.5 pts.)
7. You are a highly valued executive at your firm. The founding owner is talking about retiring in 3-5 years. There is a rumor he might be selling to a competitor and you are concerned about your employment situation if there is a merger or your firm is acquired. Your board is worried it will lose its best executives in the meantime. They asked you for input on which type of deferred compensation plan they should offer. Which type of deferred compensation plan would you recommend to help retain the current executives by giving explicit assurance if the firm is sold or merged into a larger organization?
a. A restricted stock plan c. A Rabbi Trust
b. A junior stock plan d. A stock appreciation right
Why did you select this arrangement?
8. This year Nicholas, 48, has been employed by both NGL Company and Rice Services, which are unrelated companies. He initially worked for the NGL Company then left for a job with Rice Services. Both companies sponsor Section 401(k) plans. Nicholas earned $30,000 at NGL and $40,000 at Rice Services. He qualified to participate in both plans. Nicholas's spouse, Kelly, 50, earns $75,000 and wants to invest for retirement in an IRA. She participates in a Section 457 plan and defers $14,000 per year. What is the maximum total of elective deferrals that Nicholas can make to his companies' retirement plans, and what amount can Kelly contribute to her IRA and deduct for income tax purposes for 2023? (6.5 pts.)
Nicholas to his Rice Services 401(k) $__________
Kelly to her IRA $__________
9. Your client retired from the ABC Company at age 56 because ABC had a defined benefit plan that they thought would provide them with sufficient income for retirement. However, at age 57 they desperately need $30,000 to help their child. They do not have an emergency fund or any savings. Which of these sources should they use to obtain the $30,000?
a. The client’s ABC 401(k)
b. The spouse’s XYZ 401(k). The spouse is 56 and still working for XYZ, Inc.
c. The client’s IRA
d. The spouse’s non-qualified variable annuity with a $50,000 gain.
Justify your selection:
10. Ted and Margaret, ages 40 and 38, plan to contribute $13,000 to their IRAs for 2023. They are both employed and file a joint tax return. Ted is an active participant in his employer’s qualified retirement plan, but Margaret is not eligible for her employer’s plan. Their MAGI is $123,600. What amount, if any, can they deduct for their IRA contributions for 2023? Show your work. (6.5 pts.)
11. Mark and Christine, both age 36, file their taxes jointly. Mark has been out of work going to school for over 18 months. He earned $1,746 this year doing odd jobs. Christine earned $84,000 this year and is an active participant in the 401(k) plan at work. She contributed $2,700 to her IRA and the maximum to Mark’s IRA for 2023. How much can they deduct for their IRA contributions? Show your work. (6.5 pts.)
12. Jane, 53, has retired and taken a full distribution from her employee stock ownership plan (ESOP). Over the years, her employer made a total of $40,000 in contributions into the plan for her, and the stock is currently valued at $110,000. What are the tax implications of the distribution that Jane has taken? (6.5 pts.)
a. Explain Jane’s income tax situation when the shares are were withdrawn. What amount will be subject to income taxes as ordinary income?
Will she be subject to capital gains at the time of the distribution if she retains the shares? Yes/No
Will she owe any type of penalty? Yes/No If so, what will the penalty be in dollars?
The penalty will be $________
b. What would happen if Jane sold all the shares for $111,000 six months after the distribution? How would the transaction be classified? Give the dollar amount for each category.
$________ of ordinary income
$________ of short-term capital gains
$________ of long-term capital gains
c. What would happen if she sold all the shares for $244,000 ten years after the distribution?
$________ of ordinary income
$________ of short-term capital gains
$________ of long-term capital gains
d. What would her heir’s basis be if she held the stock until she passed away and the stock was worth $400,000 at her death?
Justify your answer.
13. Cindy attains age 73 on February 1, 2023. If Cindy no longer works for the employer-sponsor of the plan, by when must she begin taking required minimum distributions (RMDs) from her Section 401(k)
plan? Give the month, day, and year. Justify your answer. (6.5 pts.)
14. Carl, 78, has been receiving required minimum distributions (RMDs) from his qualified plan. His RMD for this year is $8,000. Carl has only taken $6,000 in distributions this year. If he fails to take the full RMD by December 31, 2023, what is the maximum amount of the penalty he must pay? Show your work. (6.5 pts.)
15. Kim, 44, has been a participant in her employer’s profit-sharing plan for fifteen years. This year, she withdraws $16,000 (20% of her account balance) as a hardship withdrawal from the plan to cover her son’s first year in college. What are the consequences of this withdrawal? She is in the 22% MTB. How much will she owe the federal government? Give the actual amount the federal government will receive and justify your answer. (6.5 pts.)
16. Your client is considering how to pay for the last year of her child’s college tuition. Her 401(k) balance is $87,000 and she has never borrowed from her retirement account before. How much of a loan could she take from her 401(k)? Justify your answer. (6.5 pts.)
17. After his divorce at age 49, Fred changed the beneficiary of his IRA to his estate. If Fred died in a car crash on April 1, 2023 at age 53, how long would his beneficiaries be able to stretch his IRA? Fred has two healthy adult children. (6.5 pts.) Give the exact date (month, day, and year) by which the inherited IRA is required to have the entire account distributed to avoid a penalty on the RMD shortfall.
18. Jack will turn 67, his full retirement age (FRA), on August 2nd of this year and begin drawing $2,475 per month in Social Security benefits. He earns $4,160 per month and plans to continue working as long as he is able. He has asked his advisor about the reduction in Social Security since his older brother told him his benefit will be reduced if he continues working. Does a benefit reduction apply to him? If so, how does it apply? Justify your response. (6.5 pts.)
19. Use the following information about Jim and Faith, a married couple, to answer the question that follows.
• Jim and Faith are both 40 and are planning to retire at 62.
• They estimate that their annual income need at retirement will be $51,000 in today’s dollars.
• They expect to receive $18,000 (in today’s dollars) annually from Social Security starting at 62. They want to include this amount in their retirement needs analysis.
• Assume that Social Security benefits will be adjusted for inflation.
• After discussions with their financial planner, they feel confident that they can earn a 6.5% after-tax
return on their investments and would like to assume that inflation will always average 3.25%.
• Life expectancy tables are provided in IRS Regulations Section 1.401(a)(9)-9. RMD Single Life
Table—Life Expectancy indicates a factor of 23.5 years at age 62. RMD Joint Life and Last
Survivor Table—Life Expectancy indicates a factor of 29.0 years at age 62.
• Due to a history of longevity in both their families, Jim and Faith would like to assume a retirement
period of 35 years.
What amount of assets will they need at the beginning of their retirement period to fund an annual income need that increases annually with inflation? Show your work. (6.5 pts.)
20. Use the following information about Ken and Susan, a married couple, to answer the question that follows.
• Ken and Susan are both 32 and are planning to retire at 62.
• They estimate that they will need a lump sum of $4.3 million at retirement to provide the inflation adjusted income stream required during their retirement years.
• They project that their current assets will grow to a value of $3.1 million by their first year of retirement.
• They feel they can earn a 6% after-tax return on their investments and would like to assume that inflation will average 4% over the long term.
• They want to fund their retirement by making level annual payments.
• They would like to assume a 26-year period of retirement.
What additional annual end-of-year level savings will Ken and Susan need to deposit during their preretirement years to meet their goal? Show your work. (6.5 pts.)
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