Chapter 9 Flashcards
Mr. Reid was very active and loved to go skiing. Unfortunately, he was prone to skiing though the trees and did not believe in helmets. In March of 2023, he skied into a large pine tree that abruptly ended his life. At that time, his Roth IRA contained regular contributions of $10,000, first made in 2021, a conversion contribution of $40,000 that was made in 2020, and earnings of $10,000. He never made any distributions from his IRA. When he established this Roth IRA (his first) in 2020, he named each of his two children, Spencer and JJ, as equal beneficiaries. Each child will receive one-half of each type of contribution and one-half of the earnings. Which of the following is true regarding a distribution after Mr. Reid dies?
If Spencer immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty.
What is the first year in which a single taxpayer, age 55 in 2023, could receive a qualified distribution from a Roth IRA if he made his first $3,500 contribution to the Roth IRA on April 1, 2024, for the tax year 2023?
2028
Roger converted all $100,000 in his traditional IRA to his Roth IRA on December 1, 2019 (his first Roth contribution or conversion). His Form 8606 from prior years shows that $20,000 of the amount converted is his basis. Roger included $80,000 ($100,000 - $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2023, Roger made a regular contribution of $5,000 to a Roth IRA for the 2022 year. Roger took a $10,000 distribution from his Roth IRA on July 31st of 2023 to purchase a ticket for a trip on a cruise ship for his 61st birthday present to himself. How is the distribution taxed if the value of the account just before the distribution equals $120,000?
The distribution is tax-free and penalty-free.
Gloria, divorced and age 55, received taxable alimony of $72,000 in 2023. In addition, she received $7,000 in earnings from a part-time job. Gloria is not covered by a qualified plan. What was the maximum deductible IRA contribution that Gloria could have made for 2023?
$7,500
Which of the following statements is/are correct regarding SEP contributions made by an employer (assume the employee did not make a Roth election)?
1. Contributions are subject to FICA and FUTA.
2. Contributions are currently excludable from employee-participant’s gross income.
3. Contributions are capped at $22,500 for 2023.
2 Only
For 2023, what is the maximum amount that can be contributed to a SEP?
$66,000
Delores, age 62, single, and retired, receives a defined benefit pension annuity of $1,200 per month from Bertancinni Corporation. She is currently working part time for Deanna’s Interior Design and will be paid $18,000 this year (2023). Deanna’s Interior has a 401(k) plan, but Delores has made no contribution to the plan, and neither will Deanna this year. Can Delores contribute to a traditional IRA or a Roth IRA for the year and what is the maximum contribution for 2023?
$7,500 to a traditional IRA or $7,500 to a Roth IRA.
Doreen (age 55) is single and was divorced from her spouse in 2017. She has received the following items of income this year:
Pension annuity income from QDRO $21,000
Interest and dividends $5,000
Alimony $1,000
W-2 Income $1,200
What is the most that Doreen can contribute to a Roth IRA for 2023?
$2,200
Diggs is a 47-year-old executive who earns $315,000 from his job at Acme Arrows (AA) and contributes the maximum amount to the AA 401(k) plan. He wants to make a contribution to a Roth IRA for the current year, but his compensation is over the income limit. He decides he wants to fund a Roth IRA by using the backdoor Roth technique. Assume that Diggs has a traditional IRA with a balance of $24,000 that was funded entirely with pre-tax contributions. If Diggs contributes $6,500 to a traditional IRA and then converts $6,500 to a Roth IRA, how much income will he have to pick up as a result of the conversion?
$5,115
For the year 2023, Katy (age 35) and Perry (age 38), a married couple, reported the following items of income:
Katy Perry Total
Wages $50,000 - $50,000
Div Income$2,000 $1,200 $3,200
Cash lottery – $500 $500
$52,000 $1,700 $53,700
Katy is covered by a qualified plan. Perry does not work; he makes his own wine and samples it most of the day. Assuming a joint return was filed for 2023, what is the maximum tax-deductible amount that they can contribute to their IRAs?
$13,000
Darla is an employee of Scallywags, Inc. During 2023, Scallywags implemented a SEP IRA plan which allows employees to elect Roth contributions to the plan. If Darla makes this election, which of the following best identifies the tax treatment of contributions to the plan?
Contributions to Darla’s SEP IRA will be tax deductible to Scallywags and taxable to Darla.
Nick, who is age 45, operates a landscaping business and is self-employed. He has an assistant, Loren, who has worked with him for five years. Nick is establishing a SEP for 2023 and is willing to make a contribution of 25 percent of Loren’s salary to the SEP. If Nick earns $100,000 after paying Loren, his expenses, and the contribution to Loren’s SEP, what is the most that he can contribute to the SEP for himself?
$18,587
Roxanne, age 50, has an IRA with an account balance of $165,000. Roxanne has recently been diagnosed with an unusual disease that will require treatment costing $50,000, which she will have to pay personally. Roxanne’s AGI will be $100,000 this year. Which of the following statements are true?
1. Roxanne can immediately borrow up to $50,000 from her IRA account and repay the loan within five years.
2. Roxanne can distribute $50,000 subject to income tax but not subject to the 10% penalty because it will be used to pay medical expenses.
Neither 1 nor 2
Which of the following individuals can take a distribution from an IRA without penalty?
Ashlin, age 55, who was recently diagnosed with a terminal illness. Ashlin’s doctor expects her to live no more than 72 months
Axel, who is currently age 52, made his only contribution to his Roth IRA in 2023 in the amount of $6,500. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2028 to purchase a new car, how would he be taxed?
Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable.
