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23 Mar 2018

Kathleen, age 56, works for MH, Inc. in Dallas, Texas. Kathleen contributes to a Roth 401k and MH contributes to a traditional 401k on her behalf. Kathleen has contributed $22,500 to her Roth 401k over the past six years. The current balance in the Roth 401k account is $37,500 and the balance in her traditional 401k is $26,250. Kathleen needs cash because she is taking a month of vacation to travel the world. Answer the following questions relating to distributions from Kathleen's retirement accounts assuming her marginal tax rate for ordinary income is 28%.

A) If Kathleen receives a $3,750 distribution from her traditional 401k account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

B) If Kathleen receives a $3,750 distribution from her Roth 401k account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

C) If Kathleen retires from MH and the she receives a $3,750 distribution from her traditional 401k account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

D) If Kathleen retires from MH and the she receives a $3,750 distribution from her Roth 401k account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

E) Assume the original facts except that Kathleen is 60 years of age, not 56. If Kathleen receives a $3,750 distribution from her Roth 401k (without retiring), how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

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Jean Keeling
Jean KeelingLv2
24 Mar 2018

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Jenny age, 55 wants to convert $18,000 balance in her traditional IRA account into Roth IRA after paying necessary taxes. In addition, she plans to deposit $5000 (post tax) into Roth IRA. How much can Jenny withdraw from Roth IRA after 5 years (when she is 60)? Assume expected return of 10% and marginal tax rate of 28%.

A.$28,925

B $26,389

C. $28,500

D. $27,634

Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions), and her IRA is now worth $38,000. She is trying to decide whether she should roll over her traditional IRA into a Roth IRA. Her current marginal tax rate is 25 percent. 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 4.8 percent on her retirement accounts and a 3.8 percent 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. (Round "Future value factor" to 4 decimal places. Round final answers to the nearest whole dollar amount.)

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

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

c. Assume the same facts as in part (b), except that she earns a 2.8 percent after-tax rate of return on investments outside of the retirement accounts.

The Federal tax code allows businesses but not individuals to deduct the cost of health insurance premiums from their taxable income. Consider a company named HeadBook that could either spend $5000 on an insurance policy for an employee named Vanessa or could increase her annual salary by $5000 instead.

a. As far as the tax code is concerned, HeadBook will increase its expenses by $5000 in either case. If it pays for the policy, it incurs a $5000 health care expense. If it raises Vanessa’s salary by $5000, it incurs $5000 of salary expense. If HeadBook is profitable and pays corporate profit taxes at a marginal 35 percent rate, by how much will HeadBook’s tax liability be reduced in either case?

The firm will pay $ less in taxes.

b. Suppose that Vanessa pays personal income tax at a marginal 20 percent rate. If HeadBook increases her salary by $5000, how much of that increase will she have after paying taxes on that raise? $

If Vanessa can only devote what remains after paying taxes on the $5000 to purchasing health insurance, how much will she be able to spend on health insurance for herself? $

c. If HeadBook spends the $5000 on a health insurance policy for Vanessa instead of giving it to her as a raise, how many more dollars will HeadBook be able to spend on Vanessa’s health insurance than if she had to purchase it herself after being given a $5000 raise and paying taxes on that raise? $

d. Would Vanessa prefer to have the raise or to have HeadBook purchase insurance for her? (Click to select)Vanessa would prefer to have a raise in her annual salary.Vanessa would prefer to have HeadBook purchase insurance for her.

Would HeadBook have any profit motive for denying Vanessa her preference? (Click to select)NoYes

e. Suppose the government changes the tax law so that individuals can now deduct the cost of health insurance from their personal incomes. If Vanessa gets the $5000 raise and then spends all of it on health insurance, will her tax liability change? (Click to select)NoYes

How much will she be able to spend on health insurance? $

Will she now have a preference for HeadBook to buy insurance on her behalf? (Click to select)YesNo

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