4. IRA Distributions and Annuities

Question 1

Traditional IRA and Roth IRA distributions are taxed differently. True or False

Answer 1

True. Traditional is taxed as ordinary income whereas Roth is nontaxable income.

Question 2

Taking a distribution from traditional IRA are taxable income if taxpayer took a deduction for the contribution when made. True or False

Answer 2

True. traditional IRA are always taxable whether or not they deducted the contribution when made.

Question 3

When a taxpayer reaches 73, what must they start taking by April 1 of the following year?

Answer 3

The year after they reach 73, they need to take a RMD (required minimum distribution).

Question 4

Can taxpayers deduct contributions to an Roth IRA?

Answer 4

No because Rota IRA are never taxable.

Question 5

When are Roth IRA taxable?

Answer 5

they are taxable if the distribution is nonqualified Roth distribution.

Question 6

For Roth IRA distributions, what is considered first and then second?

Answer 6

Distributions from Roth IRAs come from principal (contributions) first then from earnings.

Question 7

If the Roth IRA distribution is NONDEDUCTIBLE traditional IRA distribution then it’s principal contributions are taxable or non taxable and its earnings are taxable or non taxable

Answer 7

1. principal contributions are NON TAXABLE
2. earnings are TAXABLE

Question 8

If the Roth IRA distribution is DEDUCTIBLE traditional IRA distribution then it’s principal contributions are taxable or non taxable and its earnings are taxable or non taxable

Answer 8

1. principal contributions are TAXABLE
2. earnings are TAXABLE

Question 9

If the Roth IRA distribution is QUALIFIED IRA distribution then it’s principal contributions are taxable or non taxable and its earnings are taxable or non taxable

Answer 9

1. principal contributions are NONTAXABLE
2. earnings are NONTAXABLE

Question 10

If the Roth IRA distribution is DEDUCTIBLE traditional IRA distribution then it’s principal contributions are taxable or non taxable and its earnings are taxable or non taxable

Answer 10

1. principal contributions are NONTAXABLE
2. earnings are TAXABLE

Question 11

What is the tax rule for a qualified Roth distribution for a person over 59 1/2?

Answer 11

Taxpayer would have to pass the 5 year test (distribution has to be 5 years after first contribution). Once 5 year rule is satisfied, the distribution is nontaxable. If less than 5 years then principle is non taxable while the earning are taxable.

Question 12

What is the tax penalty for early withdrawal of an IRA prior to 59.5 yrs old?

Answer 12

There is a 10% premature distribution tax in additional to regular income tax.

Question 13

What are some exceptions of the premature distribution tax?

Answer 13

1. if distribution used to buy first home
2. used for medical insurance if unemployed (min of 12 consecutive weeks)
3. medical expense if over % of AGI floor
4. Disability (perm or indefinite only)
5. Education
6. Adoption of child (5K max)
7. Disaster (22K max per disaster)
8. Death of terminal illness

Question 14

What happens when you rollover from traditional IRA to a Roth IRA?

Answer 14

Amount transferred is taxed as if it was a distribution. Ordinary income.

If amounts are contributed within 60 days after withdrawal from Trad IRA to Roth IRA. If not then taxpayer pays 10 early withdrawal.

Question 15

What are annuities?

Answer 15

It’s a contract between a taxpayer and insurance company where taxpayer pays a lump sum or series of pmts and in return gets regular annuity payments over time.

Question 16

What are the two basic types of annuities?

Answer 16

1. Period fixed annuities - payments are received over a fixed period of time
2. Life annuities - payments are received over the taxpayer’s lifetime.

Question 17

For the Life Annuity payments, what happens when the taxpayer lives beyond the IRS estimated life expectancy factor?

Answer 17

The additional amounts received are taxable. If taxpayer dies before receiving the expected number of payments, the total unrecovered amount is deducted from their last income tax return.