Suppose taxpayers were given a new option under the tax law for retirement fundi

Question

Suppose taxpayers were given a new option under the tax law for retirement funding. The new option requires that they forgo a current tax deduction for pension plan contributions. Any contribution would accumulate in the pension fund free of tax, and distributions from the plan to beneficiaries would also be tax free.

How would the following option compare to the one above:

a. Pension plan contributions give rise to current tax deductions.

b. Penion plan distributions are taxed at the ordinary tax rates that apply at the time distributions are made.

c. Distributions are taxed at a rate above the rate at which contributions are deductible and taxpayers receive a tax credit or pay additional tax equal to the difference in tax rates multiplied by the penion plan contributions.

Explanation / Answer

Answer will be option A ) Pension plan contributions give rise to current tax deductions

Reason: As you will not claim current year tax deductions, your Adjusted taxable income will be higher then in case if you would have deducted those Tax deductions.Thus, Resulting in higher Tax at current period

Further there is no tax on distribution of such pension so option b and c are not applicable

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.