In: Accounting
1. Alicia has been working for JMM Corp. for 32 years. Alicia participates in JMM’s defined benefit plan. Under the plan, for every year of service for JMM she is to receive 2 percent of the average salary of her three highest years of compensation from JMM. She retired on January 1, 2018. Before retirement, her annual salary was $570,000, $600,000, and $630,000 for 2015, 2016, and 2017. What is the maximum benefit Alicia can receive in 2018?
2.Brooklyn has been contributing to a traditional IRA for seven years (all deductible contributions) and has a total of $30,000 in the account. In 2018, she is 39 years old and has decided that she wants to get a new car. She withdraws $20,000 from the IRA to help pay for the car. She is currently in the 24 percent marginal tax bracket. What amount of the withdrawal, after tax considerations, will Brooklyn have available to purchase the car?
Answer No. 1-
Years of Service of Alicia in JMM Corp.- 32 years
Average salary of three highest years of compensation-
(570000+600000+630000)/3= $600,000
Since Alicia has been working with JMM Corp. for 32 years and average of highest salary of three years is $600,000. As per the plan, Alicia is to receive 2% of $600,000 for 32 years. The same is calculated as-
Maximum benefit= ((2% X 600000) X 32)= $384,000
Alicia can receive maximum benefit of $384,000 under defined benefit plan in 2018.
Answer No. 2-
Brooklyn has been making deductible contributions to traditional IRA for seven years and has a total of $30,000 in the account. At the age of 39, she has withdrawn $20,000 to get a new car.
All the withdrawals made before the age of 591/2 attract penalty of 10% and tax liability as per the applicable tax rates. In the given case, Brooklyn had made a withdrawal of $20,000 which will be taxable @ 24% and penalty @ 10% shall be imposed.
Tax= 20,000 X 24%= $4,800
Penalty= 20,000 X 10%= $2,000
Total amount= $6,800
Amount of withdrawl available to purchase the car-
Withdrawl amount before penalty and tax consideration=
$20,000
Less: Tax Amount= ($4,800)
Less: Penalty Amount= ($2,000)
Amount of withdrawl available to purchase the car= (20,000-4,800-2,000)= $13,200