2 - Individual Retirement Accounts (IRAs)

Question 1

To be eligible to establish an individual retirement account (IRA), an individual must have earned income from _______—investment income does not qualify for such a plan.

Answer 1

personal services

Question 2

An individual will cease to be eligible to make regular annual contributions to either a traditional deductible or nondeductible iRA beginning with the taxable year in which the individual attains the age of _____. Regular iRA contributions to the iRA of the nonworking spouse can no longer be made beginning within the calendar year the nonworking spouse reaches the age of ____

Answer 2

• 701⁄2
• 701⁄2

Question 3

Under a spousal IRA plan of this type, the spouses must file a _________. Originally, if one spouse had no compensation, a married couple was restricted to a combined maximum annual IRA contribution of $______. The _________ of 1996 created new spousal IRA rules effective for tax years beginning after December 31, 1996. Under the new rules, nonworking spouses were able to contribute up to $2,000. A combined maximum contribution of $4,000 was allowable—$2,000 for each spouse. Deductibility of this $4,000 was limited if the working spouse earned over _______ and participated in an employer-sponsored retirement program.

The ______ subsequently increased the limits applicable to IRAs and spousal IRAs. It also permitted each spouse to make an additional catch-up contribution if each spouse meets the age ____ threshold by the end of the tax year.

Answer 3

• joint income tax return
• $2,250
• Small Business Job Protection Act (SBJPA)
• $40,000
• Economic Growth and Tax Relief Reconciliation Act (EGTRRA)
• 50

Question 4

Individuals may deduct the full amount ($_____ in 20013, excluding catch-up contributions) of their regular annual contributions to IRAs if they do not actively participate in a ______. However, if either the taxpayer or his or her spouse is an active participant in an employer-maintained plan for any part of a plan year ending with or within the taxable year, the maximum IRA contribution deduction is reduced (but not below zero) based on __________, calculated without regard to any IRA contributions.

Answer 4

• $5,500
• qualified plan
• adjusted gross income (AGI)

Question 5

Explain why an individual might want to make iRA contributions even though they are nondeductible.

Although these contributions will be made from after-tax income, they benefit from the compounding of ________ investment income during the time they remain in the IRA.

Answer 5

tax-sheltered

Question 6

IRA contributions must be made before the due date for the individual’s filing of the ___________ for the taxable year for which the deduction is claimed, disregarding any filing extensions.

Answer 6

federal income tax return

Question 7

Any excess contribution to an IRA is subject to a nondeductible ___% excise tax in addition to current income taxation. The excise tax continues to be applied each year until the excess contribution is _____ from the iRA.

Answer 7

6%

withdrawn

Question 8

Contributions to Roth IRAs are not tax-deductible when made, but earnings accumulate ________. Withdrawals of regular annual Roth contributions are tax-free at any time since taxes have already been paid on these amounts. Withdrawals of earnings from Roth IRAs are tax-free (rather than tax-deferred) if the distribution is considered to be a _________.

Answer 8

tax-deferred

qualified distribution

Question 9

Roth IRAs permit the same regular annual contribution limit as does a traditional IRA. If a taxpayer makes regular annual contributions to any other IRAs, for instance, to either a traditional deductible or nondeductible IRA, the maximum annual contribution limit to the Roth IRA is ______________. The rules permitting a regular annual contribution to a Roth IRA are unique to this particular retirement savings vehicle. Unlike a traditional IRA, ________ contributions can be made to a Roth IRA at any age (even beyond the age of 701⁄2), provided the contributions do not exceed earned income for that particular year. The income phase out on the ability to make regular annual contributions to a Roth IRA applies even if an individual is not an active participant in an employer-sponsored retirement plan.

Answer 9

reduced by those contributions

regular annual

Question 10

A qualified distribution is a distribution that is made at least ___ years from the first of the year in which the Roth account was established and meets at least one of the following other requirements:

1. The taxpayer has attained the age of ______
2. The taxpayer is _____.
3. The taxpayer has died and payment is made to a _____ or to the individual’s _____.
4. The distribution is made to pay first-time home buyer expenses and does not exceed _____.

Answer 10

• five
• 591⁄2
• disabled
• beneficiary / estate
• $10,000

Question 11

A traditional iRA may be converted into a Roth iRA, subject to regular federal income taxation but not subject to the 10% penalty tax on ________. (Prior to ____, account owners whose modified adjusted gross income exceeded $100,000 were not eligible to convert)

Answer 11

premature distributions

2010

Question 12

There are some restrictions on investments in an IRA. The assets cannot be invested in ________ except for endowment contracts with incidental life insurance features issued before ____.

Investments in collectibles such as antiques, works of art, stamps, coins and the like are _______.

Most IRAs are invested in assets such as bank-pooled funds, savings accounts, certificates of deposit, savings and loan association accounts, mutual fund shares, exchange-traded funds (ETFs), face-amount certificates and insured credit union accounts.

A ______ IRA arrangement also can be established. Under this approach, a corporate trustee is selected and generally charges fees for the services provided. The individual is free to make the investment decisions, within some constraints.

Answer 12

• life insurance contracts
• 1979
• prohibited
• self-directed

Question 13

Key requirements of a flexible premium annuity IRA include (3)

Answer 13

• nontransferability
• nonforfeitability
• restrictions on the treatment of dividends.

Question 14

A qualified fiduciary advisor may provide personally tailored investment advice to IRA owners if the compensation for the advice provided does not _________ or is provided through ________ that is certified by an independent third party.

The Department of Labor (DOL) believes computer models should, with few exceptions, be required to model all investment options under a plan or through an IRA. However, it is not reasonable to expect that all computer models would be capable of modeling the entire universe of investment options. Accordingly, a model would not fail to meet the conditions of the DOL regulation merely because it limits its buy recommendations to those investment options that can be bought through the plan or IRA. In such instances, the plan participant or IRA beneficiary must be ______ of the model’s limitations in advance of the recommendations.

Answer 14

• vary with the investment option chosen
• a computer model
• fully informed

Question 15

Two examples of prohibited transactions under the employee Retirement income security Act (ERISA) for individual retirement savings plans.

1. An individual who owns an ______ and borrows any money under or by use of that annuity contract; and
2. An individual who holds an IRA and uses all or any portion of the account as ______.

Answer 15

1. individual retirement annuity
2. security for a loan

Question 16

Distribution from a traditional IRA must commence no later than ____ of the calendar year after the calendar year in which the individual attains the age of ____. Although SBJPA no longer requires participants in qualified plans to begin receiving distributions after attaining that age if they are still employed, _______ and _____ are exempted from these modified distribution rules. Therefore, the holder of a traditional IRA must still commence distributions following attainment of the age of _____. Distribution may be in the form of a _______, _______, or ________ not to exceed the life expectancy of the individual or the joint life expectancy of the individual and a designated beneficiary. If the owner of the traditional IRA dies before the entire interest is distributed, the required distribution to the beneficiary depends upon whether distributions to the traditional IRA owner had already been required to start by the date he or she died.

Answer 16

• April 1
• 701⁄2
• 5% owners / IRA holders
• 701⁄2
• lump sum / a life annuity or joint life annuity / periodic payments

Question 17

If traditional IRA assets are not distributed at least as rapidly as described above, an excise tax will be levied. This excise tax will be ___% of the excess accumulation. The excess accumulation is the difference between the amount that was distributed during the year and _______________

Answer 17

• 50%
• the amount that should have been distributed

Question 18

List conditions under which iRA premature distributions (distributions taken prior to the age of 591⁄2) are exempt from the 10% penalty tax.

The penalty does not apply to distributions made on account of the IRA owner’s ______ or ______. Subject to certain payment patterns, an exception exists for _________ made at least annually over the life or life expectancy period of the individual or joint lives or life expectancies of the individual and a beneficiary.

Also, the 10% penalty tax does not apply if a withdrawal is made because of an ___________ on the account to collect taxes and if a withdrawal is made to an alternate payee pursuant to a qualified domestic relations order (QDRO).

In addition, subject to certain limits and conditions, the penalty does not apply to distributions taken to pay (4):

Answer 18

death / disability

substantially equal periodic payments

IRS levy

• medical expenses
• health insurance premiums after separation of employment
• qualifying education expenses
• first-time home buyer expenses (limited to $10,000).

Question 19

Eligible rollover distributions may include any distribution except a ____________, or any distribution that is part of a series of substantially equal periodic payments over the IRA owner’s life, life expectancy or a period of at least _____ years.

If an individual rolls over to an IRA a distribution that is not eligible to be rolled over, a __% excise tax may be imposed on the amount rolled over until it is removed. (Rollovers generally occur when an employee changes a job or retires.)

Answer 19

required minimum distribution

ten

6%

Question 20

There are two methods of making rollover contributions to an IRA—a ________ and a ________.

Answer 20

direct rollover

regular or indirect rollover

Question 21

In a _________, the individual instructs the plan trustee or contract issuer to transfer funds directly to the IRA.

Answer 21

direct rollover

Question 22

In a ___________, the individual receives a check for the eligible rollover distribution from the plan trustee or the contract issuer (net of the required 20% federal income tax withholding) and within ___ days of receipt contributes up to the amount of the eligible rollover distribution as a rollover contribution to an IRA.

Answer 22

regular rollover

60

Question 23

One distinguishing characteristic of an employer-sponsored IRA is the fact that no requirement exists that this type of account must be __________ or be ___________ in benefits. The contributions to the IRA may be made as additional compensation or by payroll deduction.

Any amount contributed by an employer to an IRA is taxable to the employee as _________. The employee is then eligible for the IRA tax deduction up to the allowable annual dollar limitation for a given year, unless the “active participation in a qualified plan” rules apply, in which case the contributions may be nondeductible in whole or in part.

In addition, the same reporting, disclosure and fiduciary requirements applicable to qualified plans under ERISA may apply to an employer sponsoring an IRA plan if the employer endorses the IRA. However, the ______(3)_________ rules of ERISA do not apply. Each participant is always ____% vested in his or her IRA.

Answer 23

made available to all employees / nondiscriminatory

additional compensation income

participation, funding and vesting

100%

Question 24

When an employer sponsoring a qualified plan, 403(b) arrangement or governmental 457(b) plan adds an IRA feature to its plan, these add-on accounts or annuities are deemed to be either a traditional or a Roth IRA. They are not subject to the normal rules applicable to the particular retirement plan to which they are attached. They are, however, subject to the ______ and other requirements generally applicable to IRAs under the Internal Revenue Code.

Answer 24

deemed IRAs

reporting

Question 25

in an effort to encourage lower- and middle-income workers to save for their retirement, a graded nonrefundable tax credit applicable to the first $_______ retirement contributions is available to ________.

Retirement plan contributions eligible for the credit include contributions to traditional and Roth iRAs as well as __________ made to simplified employee pensions (sePs), savings incentive match plan for employees (simPles), 401(k)s, 403(b)s and eligible governmental 457(b) plans.

Answer 25

$2,000

eligible taxpayers

elective contributions