Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Retirement > Chapter 9 - IRAs and SEPs > Flashcards

Chapter 9 - IRAs and SEPs Flashcards

1
Q

Define Active Participant

A

Individuals who participate in a qualified plan under IRC 401(a), a 403(b) plan, a government retirement plan, a SEP, or a SIMPLE. Participating means receiving benefit under the plan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define Adjusted Basis (AB)

A

The portion of a distribution that is not subject to income tax. Usually the return of after-tax contributions or nondeductible contributions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define Adjusted Gross Income (AGI)

A

A tax return amount that includes an individual’s income less certain deductions, known as “above-the-line” deductions. AGI is calculated before subtracting the standard of itemized deductions and the personal and dependency exemptions. The calculated AGI affects the deductibility of traditional IRA contribution and the ability to make Roth IRA contributions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Define Alimony

A

Support payments from one ex-spouse to the other. Alimony received is considered earned income for purposes of making IRA contributions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define Contributions

A

Payments to an IRA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Define Conversion

A

When a traditional IRA is converted to a Roth IRA. At the date of conversion, an individual includes the fair market value of the traditional IRA into the individual’s adjusted gross income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define Custodians

A

Brokerage company, bank, or mutual fund company that holds an individual’s IRA.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define Earned Income

A

Any type of compensation where the individual has performed some level of service for an employer or is considered self-employed, plus alimony received.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define Individual Retirement Account (IRA)

A

Two general types under the present law: traditional IRAs, to which both deductible and nondeductible contributions may be made, and Roth IRAs, to which only nondeductible contributions may be made.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Define IRA Annuity

A

An annuity contract or endowment contract issued by an insurance company that follows many of the same rules for deductibility of premium payments and the limits for premium payments as a traditional IRA.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define Phaseout

A

The AGI range that will affect the deductibility of IRA contributions and an individual’s ability to make contributions to a Roth IRA.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define Pre-1974 Capital Gain Treatment

A

A special taxation treatment for lump-sum distributions from qualified plans that treat the distribution attributable to pre-1974 participation in the plan as long-term capital gain.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define Prohibited Transaction

A

Transactions that an owner or beneficiary is not permitted to engage in with an IRA.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define Qualified Distribution

A

A distribution from a Roth IRA that is made after a five-taxable year period and on account of the account owner’s death, disability, attainment of age 59 1/2, or first-time home buyer home purchase.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Define Qualified Domestic Relations Order (QDRO)

A

A court order related to divorce, property settlement, or child support that can divide a participant’s interest in a qualified plan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define Recharacterization

A

Transferring a contribution and its attributable earnings from a traditional IRA to a Roth IRA or vice-versa. The recharacterization must occur by the tax return filing date including extensions for the year of the recharacterization.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Define Required Minimum Distribution (RMD)

A

A minimum amount that must be withdrawn from a qualified plan after the participant attains the age 70 1/2. The amount is calculated using either the uniform distribution table, the single life expectancy table, or joint life expectancy tables.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Define Roth IRA

A

An IRA created by the Taxpayer Relief ACt of 1997. Contributions to a Roth IRA are nondeductible and qualified distributions are excluded from an individual’s taxable income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Define SARSEP

A

Salary Reduction Simplified Employee Pension. A plan that can no longer be established byt allowed employees to defer a portion of their current salary into a SEP-IRA in a similar fashion to a 401(k) plan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Define Simplified Employee Pension (SEP)

A

A practical retirement plan alternative to a qualified plan that can be used by small businesses and sole proprietorships. It follows many of the same limits as qualified plans but may require the employer to cover more employees.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Define Spousal IRA

A

An IRA created on behalf of a spouse who does not have the necessary earned income to make a contribution to an IRA of their own but can borrow earned income from their spouse.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Define 10-year Forwarding Average

A

A method of income tax calculation for certain lump-sum distribution from qualified plans that divides the taxable portion of the lump-sum distribution by 10 and applies the result to the 1986 individual income tax rates. The resulting calculation is then multiplied by 10 to determine the total income tax due on the distribution.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Define Traditional IRA

A

An IRA that may accept deductible and nondeductible contributions and whose assets grow tax-deferred until distribution.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are the key differences between IRAs, SEPs, and SIMPLEs from qualified plans?

A
  • IRAs, SEPs, and SIMPLEs are not subject to the same federal reporting requirements as qualified plans.
  • Lump sum distributions options such as NUA, pre-74 capital gain treatment, and 10 year forward averaging are not permitted for distributions from IRAs, SEPs, SIMPLEs, and 403(b) plans.
  • These plans do not have the same nonalienation of benefits protection found under ERISA.
  • These plans, with the exception of the 403(b) plan, are not permitted to offer loans to participants.
  • Whereas qualified plan typically have vesting schedules for contributions made by the employer on behalf of the employee, other tax-advantaged plans always provide for 100% besting, with the exception of some employer contributions to 403(b) plans.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What two forms can IRAs take?

A

Individual Retirement Accounts

Individual Retirement Annuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Who is eligible to make catch up contributions to IRAs?

A

Individuals who have attained the age of 50 before the end of the current taxable year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is the contribution rules when a person has a traditional and a Roth IRA?

A

The contribution limits are combined for both traditional and Roth IRAs.

28
Q

What are the annual contributions to an IRA limited to? (Not looking for a number)

A

The lesser of an individual’s earned income or the annual limit in effect.

29
Q

What are examples of earned income? 4

A
  • W-2 income
  • Schedule C net income
  • K-1 income from a partnership (or an LLC taxed as a partnership) where the partner is a material participant
  • Alimony
30
Q

What are examples that do not qualify as earned income? 11

A
  • Earnings and profits from property, such as rental income, interest income, and dividend income
  • Capital gains
  • Pension and annuity income
  • Deferred compensation received (compensation payments postponed from a past year)
  • Income from a partnership for which you do not provide services that are a material income producing factor
  • Any amounts excluded from income, such as foreign income and housing costs
  • Unemployment benefits
  • Investment returns as a limited partner in a partnership
  • Income flowing from an S-Corp via Schedule K-1
  • Social Security Benefits
  • Workers compensation.
31
Q

When can a person no longer contribute to a traditional IRA? Roth?

A
  • In the year or any years after the year in which an individual attains age 70 1/2.
  • As long as you have sufficient earned income to continue contributions.
32
Q

What happens to excess contributions made to an IRA?

A

Contributions that exceed the limits are subject to an excise tax penalty of 6%. This penalty is charged each year that the excess contribution remains in the IRA.

33
Q

When can contributions be made to an IRA?

A

For a tax year contributions can be made up until April 15th (regardless of any extensions). TV

34
Q

What form are contributions limited to when contributing to an IRA (or Roth)

A

Cash

35
Q

What factors affect the deductibility of IRA contributions (assuming they are allowed)?

A
  • Coverage or participation in a qualified plan or other retirement plan
  • The amount of the individual’s AGI
36
Q

How does an individual being an active participant affect deductibility or contributions to a traditional IRA?

A

If they are not an active participant, there is no AGI limit regarding deductibility. If they are, there are AGI limits that include a phaseout that depend on filing status.

37
Q

How is the reduction of the tax deduction calculated when a person’s AGI is in the range for phaseout?

A

Reduction = Contribution Limit * ((AGI - Lower Limit)/10,000*)
*20,000 for joint returns.

38
Q

What types of plans that if participated in, would make a individual an active participant?

A
  • Qualified Plan
  • Annuity Plan
  • Tax Sheltered Annuity (403(b) plan)
  • Certain Government Plans
  • Simplified Employee Pension Plans (SEPs)
  • Simple Retirement Accounts (SIMPLEs)
39
Q

What gives a person an adjusted basis in their IRA?

A

If they made an after-tax contribution

40
Q

How do after-tax contributions to IRAs affect withdrawal?

A

They make withdrawals consist partially of account earnings that have not been subject to income tax and partially return of adjusted basis for which the individual has already paid income tax.

41
Q

What is the formula that determines how much of a withdrawal is a return of adjusted basis?

A

Ration of AB = AB before withdrawal / FMV of account at withdrawal.

42
Q

When must distributions begin out of a traditional IRA?

A

By April 1st of the year following the years in which the owner attains the age of 70 1/2.

43
Q

What is the penalty when RMDs are not taken?

A

The distributions required but not taken is subject to a 50% excise tax.

44
Q

When would an IRA owner be hit with a 10% penalty?

A

If they took a distribution from their IRA before age 59 1/2 that did not meet one the exceptions.

45
Q

What are exceptions to the 10% penalty that apply to both qualified plans and IRAs? 8

A
  • Death
  • Attainment of age 59 1/2
  • Disability
  • Substantially equal period payments (§72(t))
  • Medical expenses that exceed 10% of AGI
  • Rollover
  • Because of an IRS tax levy
  • Certain distributions to qualified military reservists called to active duty?
46
Q

What are exceptions to the 10% penalty that apply to qualified plans but not IRAs? 4

A
  • Qualified Domestic Relations Order (QDRO)
  • Attainment of age 55 or separation from service
  • Public safety employee who separates from service after age 50
  • Dividend pass through from an ESOP
47
Q

What are exceptions to the 10% penalty that apply to IRAs but not qualified plans? 3

A
  • Higher education expenses
  • First time home purchase (up to $10,000)
  • Payment of health insurance premiums by unemployed
48
Q

What higher education expenses are allowed to be an exception with a 10% penalty from an IRA?

A 
Expenses for the benefit of the:
-taxpayer, 
-taxpayer's spouse, 
-child, or 
-grandchild at an eligible educational institution.  
Qualified Expenses include:
-Tuition
-Fees
-Books
-Supplies
-Room and board (if student is at least half time)
49
Q

What first time home purchase details that make it allowable to be an exception with a 10% penalty from an IRA?

A

Applies up to a lifetime maximum of $10,000 for the acquisition of a home for the:

  • Taxpayer,
  • Taxpayer’s spouse,
  • Child,
  • Grandchild, or
  • Ancestor of such taxpayer or taxpayer’s spouse

A first time homebuyer is defined as an individual (and if married, the individual’s spouse) that had no present ownership interest in a principal residence during the 2-year period ending on the date of acquisition of the principal residence to which the exception applies.

50
Q

When does the 10”% penalty exception apply to health insurance premiums paid by an unemployed individual?

A

The individual must have received unemployment compensation for 12 consecutive weeks under and federal or state unemployment compensation law.

The exception ends when the individual has regained employment and has been employed for 60 days.

51
Q

What limits apply to an Individual Retirement Annuity?

A

The annual premiums cannot exceed $5,500. The premiums cannot be fixed.

52
Q

When would a Roth IRA have RMD rules?

A

Only after death of the owner.

53
Q

How can individual’s fund a Roth IRA?

A
  • Making cash contributions

- By converting traditional IRAs or qualified plan balances into Roth IRAs.

54
Q

What time of accounts are allowed a Roth option?

A

IRAs
401(k) plans
403(b) plans
457 plans

55
Q

What tests must a distribution from a Roth IRA satisfy to be considered qualified?

A

1 The distribution must be made after a five-taxable-year period (which begins January 1st of the taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, January 1st of the taxable year in which the first contribution is made to any Roth IRA of the individual), and

  1. The distribution satisfies one of the following four requirements:
    - made on or after the date on which the owner attains age 59 1/2;
    - made to a beneficiary or estate of the owner on or after the date of the owner’s death;
    - is attributable to the owner being disabled; or
    - for first time home purchase
56
Q

How could someone who hasn’t met the 5 year requirement for Roth IRAs, be able to take out money tax free from their Roth?

A

By taking distributions from the contribution and conversion layers of the Roth (not the earnings layer)

57
Q

Any amount distributed from an individual’s Roth IRA that is not a qualified distribution is treated as being made in what order (determined as of the end of a taxable year and exhausting each category before moving onto the next category)?

A
  1. From regular contributions
  2. From conversion contributions on a first-in-first-out basis, and then
  3. from earnings
58
Q

Why might a conversion level of a Roth IRA that is not subject to tax as part of a nonqualified distribution be subject to the 10% penalty?

A

If it were taken out within 5 years of conversion and is not for an exception.

59
Q

What are two important distinctions when comparing Roth and Traditional IRAs?

A
  1. unlike IRAs, an individual can make a contribution to a Roth IRA after the age of 70 1/2, and
  2. the RMD distribution rules do not apply to Roth IRAs during the life of the original account owner, but, like traditional IRAs, do apply to beneficiaries.
60
Q

What two types of investments are not allowed in an IRA?

A

Life insurance and collectables.

Collectables include all of the following:

  • Any work of art,
  • Any rug or antique
  • Any metal or gem
  • Any stamp or coin, and
  • Any alcoholic beverage.
61
Q

What is the 60-day period relating to IRAs?

A

It is how long you have after you take money out of an IRA to roll it over into the same or another IRA before it is taxed as ordinary income.

62
Q

What transactions are prohibited in an IRA?

A
  • Selling, exchanging, or leasing of any property to an IRA
  • Lending money to an IRA
  • Receiving unreasonable compensation for managing an IRA
  • Pledging an IRA as security for a loan,
  • Borrowing money from an IRA, or
  • Buying property for personal use (present or future) with IRA funds.
63
Q

What happens if a prohibited transaction does take place inside an IRA?

A

The account ceases to be an IRA as of the beginning of the year and the entire balance in the IRA is treated as having been distributed.

64
Q

What are the requirements for an employee to participant in a SEP?

A
  • Attainment of age 21 or older,
  • Performance of service for three of the last five years, and
  • Received compensation of at least $550 during the year.
65
Q

Employees can be excluded from participation in a SEP if they are members of what groups?

A
  • Employees covered by a union agreement if their retirement benefits were bargained for in good faith by their union and their employer
  • Nonresident alien employees who have no U.S. source earned income from their employee.
66
Q

How does when a SEP can be established differ from a qualified plan?

A

They can be established up until the date their company returns are due (including extensions) as opposed to December 31st for qualified plans.

67
Q

What steps must an employer complete to establish a SEP?

A
  1. A formal written agreement to provide benefits to all eligible employee must be executed.
  2. All eligible employees must be given notice about the SEP.
  3. A SEP-IRA (the receptacle account) must be set up for each eligible employee.

Retirement (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions