Question
Gerry (age 56) and Elaine (age 54) have been married for 12 years and file a joint tax return. The couple lives in an apartment
Gerry (age 56) and Elaine (age 54) have been married for 12 years and file a joint tax return. The couple lives in an apartment in downtown Manhattan. Gerrys father, Mortey, recently retired from Del Boca Vista Corporation (DBVC) where he worked for many years.Mortey participated in DBVCs defined benefit plan. Elaine is an editor and works for Pendent Publishing earning an annual $150,000 salary in 2016. Gerry is a self-employed stand-up comedian, and had net business income of $46,000 in 2016.At the advice of their neighbor, Gerry and Elaine have come to you to for help in answering several retirement savings-related questions. (Use Exhibit 13-2, Exhibit 13-3, Exhibit 13-9) (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)
a. The DBVC defined benefit plan specifies a benefit of 1.5 percent for each year of service, up to a maximum of 30 percent (20 years of service), of the average of the employees three highest years of salary.Mortey worked for the company for 25 years and earned $75,000, $78,000, and $84,000 over his final three years of service. What is Morteys annual benefit from DBVCs defined benefit plan?
ANNUAL BENEFIT__________
b. Elaine has worked at Pendent Publishing since January 1, 2011.The company offers a defined contribution plan.It matches 100 percentof employee contributions to the plan up to 6 percent of her salary. Prior to 2016, Elaine had contributed $40,000 to the plan and her employer had contributed $28,000 to the plan.In 2016, Elaine contributed $17,000 to her traditional 401(k).
b-1. What is the amount of her employers matching contribution for 2016?
MATCHING CONTRIBUTION__________
b-2. Assuming the company uses a six-year graded vesting schedule, what is Elaines vested balance in the plan at the end of 2016 (for simplicity, disregard the plans earnings)?
VESTED ACCOUNT BALANCE_____________
c. Elaine tells you that her employer has offered her $30,000 in 10 years to defer 10 percent of her current salary (defer $15,000).Assuming that the couples marginal tax rate is currently 30 percent, they earn an after-tax rate of return of 8 percent, and they expect their marginal tax rate to be 25 percent in 10 years. (ignoring nontax factors and payroll taxes).
c-1. Should Elaine accept her companys offer?
YES OR NO________
c-2. What is the minimum amount she should be willing to accept?
MINIMUM DEFERRED COMPENSATION PAYMENT_________
d. Gerry has a SEP IRA and would like to contribute as much as possible to this account.What is the maximum contribution Gerry can make to his SEP IRA in 2016?
MAXIMUM CONTRIBUTION_________
e. Assuming Gerry had an individual 401(k), what is the maximum amount he could contribute to the plan in 2016?
MAXIMUM CONTRIBUTION____________
f. Gerry also has a traditional IRA with an account balance of $42,000.He would like to convert the traditional IRA to a Roth IRA.Gerry would like to pay the least amount of tax possible in rolling the account over.What is the least amount of tax Gerry will be required to pay on the rollover? Assume a marginal tax rate of 30%.
TAXES__________
g. Assume that Gerry rolled over his traditional IRA into a Roth IRA six years ago (rather than in 2016) and that the account now has a balance of $78,000. The couple is considering buying their first home and would like to pay as much down as possible. They have heard from their friends that they can take the funds from their Roth IRA and use it to buy their first home. What is the maximum amount they can withdraw without penalty?
MAXIMUM WITHDRAWAL_________
h. Assume that Gary and Elaine each made total contributions of $20,000 to their qualified retirement accounts in 2016.Also assume that their AGI is $38,000.What would be the amount of their savers credit for 2016?
SAVER'S CREDIT__________
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