Question

Jason, a 55-year-old corporate executive, wants advice as to when he can retire. His current salary is

$240,000 and he receives an annual bonus of $300,000; he also has annual stock options and restricted

stock awards valued at $100,000. His employer contributes to a cash balance pension plan as and

matches his contributions to a 401(k). Jason’s Roth IRA has a balance of $240,000. The Roth IRA’s

balance consists of the $100,000 conversion Jason made 3 years ago Jason from an old qualified plan

and $50,000 of contributions (he has paid into over the years since it’s establishment many years ago),

the rest is earnings. Jason, owns a whole life insurance policy with a $500,000 death benefit and is

considering the purchase of a term policy with a $2,000,000 death benefit. He and his wife, Brenda, also

age 55, believe they can live on an after-tax income of $180,000. Assume a federal income tax rate of

35%.

Jason and Brenda come to you because their neighbor has been telling them he must take a certain

amount of his account or he will be tax and penalized 50% on the missed distribution. They are very

concerned because they do not want to incur a 50% penalty.

You explain the mechanics of RMD calculations to them. Then they ask you what their RMD would be at

age 70.

1.

Assuming that Brenda dies in 23 years and that Jason survives her, which of the following

options is correct regarding required minimum distributions from her IRA

?

A. Jason may postpone distributions from Brenda’s IRA until she would have been 70 ½

and the he must take distributions from the IRA over his life expectancy.

B. Jason may postpone distributions from Brenda’s IRA until she would have been 70 ½

and then he must take distributions from the IRA over no more than five years.

C. Jason must begin taking distributions by the end of the year following the year of

Brenda’s death

D. Jason must begin taking distributions by the end of the year of Brenda’s death.

2. Time passes and Jason dies, widowing Brenda at age 53. She comes to you for help deciding

between taking a lump-sum distribution from her husband’s pension plan of $263,500 now or

selecting a life annuity starting when she is age 65 (life expectancy at 65 is 21 years) of $2,479/

month. Current 30yr treasuries are yielding 6 percent annually.

What would you advise her

:

1. If she takes the lump-sum distribution, she will receive $263,500 in cash now and be

able to reinvest for 34yrs, creating an annuity of $4,570/mo.

2. If she takes the lump-sum distribution she will be subject to the 10% early withdrawal

penalty.

A. 1 only

B. 2 only

C. Both 1 & 2

D. Neither 1 nor 2

3 Jason and Brenda are in your office completing their annual review. They tell you they took a

$130,000 distribution from Jason’s Roth IRA in May of this year to go on a dream vacation, make car

repairs and to help their granddaughter pay for school tuition.

They have asked you if there would be any tax or penalty owed on the distribution. What do you

advise them?

A. There would be no tax due and no penalty

B. The entire distribution would be taxed at their ordinary income tax bracket and there

would be a 10% early withdraw penalty

C. $50,000 would be taxed at ordinary income tax levels

D. There would be no tax due, but a penalty of $8,000

4

Brenda wants to contribute to her existing IRA account. What do you advise her?

A. She may contribute to the IRA and deduct her contribution

B. She may not contribute to the IRA because she is an active plan participant

C. She may contribute to the IRA but may not deduct the contribution

D. She may not contribute to the IRA because her earnings are too high

Answer 1

Generally every Assessee whose income exceeds the Basic Exemption is required to pay tax according to that respective income tax Act.

In the same manner if an employee is earning any Salary income if income exceeds the basic exemption is require to pay tax it is same for resident or non resident assessee. in case of non resident there is only one slab rate i.e what it is applicable for assessee whose age does not exceed 60 years.

In case of salaried employee what ever amount received from employer is taxable i.e salary , Bonus either it may Annual or any other type of bonus, Any Employee stock option plan, Transport Allowance , Meals Allowance, Miscellaneous Allowances or any other allowances are require to added in to the total income if the assessee.

In some cases if employee contributes for any provident fund or pension scheme then assessee will get deduction from total income because it is any one the of investment made by the assessee.

But such amount should not be withdrawn for a period of 5 years then it is not taxable even at the time of withdrawn otherwise tax will be deducted at source if amount withdrawn is more than 50000 in any finanifin year.It will be taxable as normal income in the hands is assessee.

If any assessee has not disclosed his / her income it will be penalized the rates for penalty may be different for different acts. Actually in Income tax Act 1961 if it is having an any undisclosed income or unexplained expenditure then they have to pay penalty for amount i.e 65% of that undisclosed income. But in this example they had given 50% which neighbor's said it may be correct in that act.

1)) Option D is correct

Because Brenda had died in 23 years actually people don't know who will die first either Brendha or Jason . So up to any one died should not withdraw any amount because if any one died other person will face difficulty to survive some what when comapreto previous.. So one should wait untill other person should die.

There fore I want conclude that once Brendha died he should collect amount from the end of the year in which year Brendha had died

2)) Option D is correct reason

Because she has to withdraw entire amount like option B even though it is having an penalty . Because once we will receive money we should invest entire money in one account we have to withdraw every month some fixed amount because once Jason had died she may not have any income so she may not be not be able to reinvest per month for 34 years.

So we have to withdraw and invest entire amount received and collecting some fixed amount every month helps to earn some interest income every year helps to improvement in her survival.

3))) Option B is correct .

I assumed that it is an just like an employee contribution to provident fund and employer contribution to provident fund.

Actually government is making an mandatory for certain employees and employers are require to pay like such fund accounts because it is helpful for the employees in the future.So this amount should not be withdrawn from the account untill and unless if any specific reasons mentioned by the government .

So in this case assessee has withdrawn the amount so it is liable to pay as per ordinary income earned i.e 35% and penalty also there if is mentioned by government. Actually in Income tax Act 1961 if is more than 50000 withdrawn in a financial year then they have deduct TDS Otherwise not required I think this case also in the similar situation that penalty as 10% that's why this option is correct.

4)) Option A is correct.

Any individual is able to contribute and get an deduction .

Even in the income tax 1961, as per sec 80c deduction assessee will get an maximum deduction of ₹ 150000 for making contribution to the fund . It is an one of the deduction in Sec 80C.

It is very useful for all the assessee who wants to reduce to pay tax. It is applicable for all the assessee irrespective of any age or earning huge amount or not.

My request suggestion is to that invest in that account and even we will get an some interest on that amount like in inform tax act they are providing around 8 % interest on balance amount .So Brenda can invest and take deduction.