Question

Which of the following describes the tax consequences to a corporation for establishment of a qualified retirement plan?

a. The corporation is allowed an immediate tax deduction for the amount contributed to the plan for a specific year.
b. The corporation is not allowed an immediate tax deduction until the amount contributed is included in the participant's income.
c. The corporation may only deduct a contribution of up to 10% of compensation for each eligible participant.
d. The corporation is permitted to take a deduction only for contributions that are immediately 100% vested for the plan participant.

Answer 1

The tax consequence for a corporation establishing a qualified retirement plan is that it can take an immediate tax deduction for the contributions made to the plan in that year.

Step-by-step explanation:

The tax consequences for a corporation when establishing a qualified retirement plan, such as a 401(k) or 403(b), allow for an immediate tax deduction. The correct option describing these tax consequences is: a. The corporation is allowed an immediate tax deduction for the amount contributed to the plan for a specific year. This incentive is designed to encourage businesses to provide retirement savings options.

Contributions made by the employer to such plans are tax-deductible for the corporation in the year they are made, even though the contributions may not be included in the employee's taxable income until withdrawal during retirement.

These defined contribution plans offer significant tax advantages. The employer's contributions to the retirement plan can reduce the current year's taxable income, while the earnings on investments within the plan grow tax-deferred. Retirement plans such as these are critically important for helping employees save for retirement, providing a benefit that is portable across jobs while simultaneously creating a valuable tax deduction for the corporation.