Chapter 13 Retirement Savings and Deferred Compensation

| November 9, 2018


Henry has
been working for Cars Corp. for 40 years and 4 months. Cars Corp. provides a
defined benefit plan for its employees. Under the plan, employees receive 2
percent of the average of their three highest annual salaries for each full
year of service. Henry’s vested benefit percentage is 80 percent (40 years ×
2 percent for each full year). Henry retired on January 1, 2014 Henry
received annual salaries of $520,000, $540,000, and $560,000 for 2011, 2012,
and 2013, respectively. What is the maximum benefit Henry can receive under
the plan in 2014?


has been employed by SEC Corp. for the last 2½ years. Georgeanne participates
in SEC’s 401(k) plan. During her employment, Georgeanne has contributed
$6,000 to her 401(k) account. SEC has contributed $3,000 to Georgeanne’s
401(k) account (it matched 50 cents of every dollar contributed). SEC uses a
three-year cliff vesting schedule. If Georgeanne were to quit her job with
SEC, what would be her vested benefit in her 401(k) account (assume the
account balance is $9,000)?


In 2014,
Christina made a one-time contribution of $12,000 to her 401(k) account, and
she received a matching contribution from her employer in the amount of
$4,000. Christina expects to earn a 6-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
2014 contributions to her 401(k) account? Assume her marginal tax rate at
retirement is 35 percent.


In 2014, Ryan
contributes 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 in 2014 is 35
percent will he earn a higher after tax rate of return from the Roth 401(k)
or the traditional 401(k)? Explain.


On March 30,
2014, Rodger (age 56) was let go from his employer of 30 years due to rough
economic times. During his 30 years of employment, Rodger contributed
$300,000 to his traditional 401(k) account. When Rodger was let go, his 401(k)
account balance was $900,000 (this included both employer matching and
account earnings). Rodger immediately withdrew $40,000 to use as an emergency
savings fund. What amount of tax and early distribution penalties must Rodger
pay on the $40,000 withdrawal if his ordinary marginal tax rate is 28


invested $4,000 in her Roth 401(k) on January 1, 2006. This was her only
contribution to the account. On July 1, 2014, when the account balance was
$6,000, she received a nonqualified distribution of $4,500. What is the
taxable portion of the distribution and what amount of early distribution
penalty will Heidi be required to pay on the distribution?


Sean (age 74
at end of 2013) retired five years ago. The balance in his 401(k) account on
December 31, 2013 was $1,700,000 and the balance in his account on December
31, 2014 was $1,800,000. Using the IRS tables below, what is Sean’s required
minimum distribution for 2014?



Sean (age 74
at end of 2014) retired five years ago. The balance in his 401(k) account on
December 31, 2013 was $1,700,000 and the balance in his account on December
31, 2014 was $1,750,000. In 2013, Sean received a distribution of $50,000
from his 401(k) account. Assuming Sean’s marginal tax rate is 25 percent,
what amount of the $50,000 distribution will Sean have left after paying
income tax on the distribution and paying any minimum distribution penalties
(use the IRS table below in determining the minimum distribution penalty, if



Kim (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). Kim 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
Kim 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%.

1) What would be Kim’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?


executive compensation package allows her to participate in the company’s
nonqualified deferred compensation plan. In 2014, Katrina defers 20 percent
of her $400,000 salary. Katrina’s deemed investment choice will earn 7
percent annually on the deferred compensation until she takes a lump sum
distribution in 10 years. Katrina’s current marginal tax rate is 30 percent
and she expects her marginal tax rate will be 35 percent upon receipt of the
deferred salary. What is her after-tax accumulation from the deferred salary
in 10 years?

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