Comprtency 13 Section 2 Flashcards
- Taking additional taxable distributions from an IRA could result in a higher Medicare Part B premium
True. (LO 13-2-1)
- A deemed distribution from an IRA account could occur if the participant engaged in a prohibited transaction or pledged the IRA as collateral for a loan
True. (LO 13-2-1)
- A division of a pension benefit under a QDRO results in income tax on the entire benefit when the property is divided.
False. A QDRO property division does not trigger income tax—only distributions to the participant or alternate payee under the QDRO would trigger taxes. (LO 13-2-1)
- A qualified charity makes an excellent beneficiary of an IRA because distributions are not subject to income taxes when they are paid to the charity.
True. (LO 13-2-1)
- If a charity and the participant’s child are the primary beneficiaries of an IRA, paying out the charity’s benefit before September 30th of the year following death preserves the ability to stretch out payments over the life expectancy of the child
True. (LO 13-2-1)
- A death beneficiary who takes a withdrawal from an inherited IRA receives a tax credit for any estate taxes that were paid by the participant’s estate because of the IRA.
False. The death beneficiary receives a deduction for estate taxes paid, not a tax credit. (LO 13-2-1)
- When a life insurance policy is part of a participant’s 401(k) plan benefit, the Table 2001 amounts that have already been taxed can only be recovered if the policy is distributed to the participant as part of the benefit
True. (LO 13-2-1)
- One of the best ways to avoid the 10% early withdrawal penalty tax is to have adequate emergency funds outside the plan so that withdrawals from IRAs and other qualified plan accounts are not required
True. (LO 13-2-2)
- The exception to the 10% early withdrawal penalty tax for higher educational expenses applies to withdrawals from IRAs and 401(k) plans, but not defined benefit plans.
False. This exception only applies to IRAs, not qualified plans like a 401(k) plan. (LO 13-2-2)
10.The substantially equal periodic payment exception to the 10% early withdrawal penalty generally allows an individual to take out more than the calculated amount during the prescribed withdrawal period.
False. Distributions cannot be decreased or increased during this period except in the case of a participant that switches to the required minimum distribution approach to calculating required withdrawals. (LO 13-2-2)
11.A participant that wants to lower the amount withdrawn under the substantially equal periodic payment exception to the 10% early withdrawal penalty is likely to benefit by switching to the required minimum distribution approach to calculating required withdrawals.
True. (LO 13-2-2)
12.The 10% early withdrawal penalty is never assessed on the portion of a withdrawal from an IRA or Roth IRA.
False. This is the general rule but there is an exception for early withdrawals from a Roth IRA made within 5 years of the conversion. (LO 13-2-2)
13.The deductible medical expense exception to the 10% early withdrawal penalty tax that applies to distributions from IRAs becomes more valuable in 2013 when medical expenses become deductible when they exceed 5% of AGI.
False. In 2013 the threshold changes from 7.5% to 10%. (LO 13-2-2)
14.Joe retires at age 53 from his company that maintains a 401(k) plan. If Joe waits until age 56 to take withdrawals, any withdrawal from the 401(k) will be exempt from the 10% early withdrawal penalty tax.
False. Joe has to wait to retire until the calendar year that he attains age 55 to be eligible for the age 55 exception. (LO 13-2-2)
15.Withdrawals from an IRA qualify for the higher education expense exception to the 10% penalty tax if expenses are for the participant, spouse, children or grandchildren
True. (LO 13-2-2)
16.To qualify for the first time home buying exception to the 10% early withdrawal penalty, funds have to be withdrawn within 30 days of the purchase of the home.
False. There is a time limit, but it is 120 days. (LO 13-2-2)
17.A client can undermine the opportunity to elect NUA tax treatment by selling employer stock just prior to retirement.
True. (LO 13-2-3)
18.If a client receives a distribution that includes both cash and employer stock, the client can rollover the cash and take the stock into income, taking advantage of the NUA tax rules.
True. (LO 13-2-3)
19.A 30-year-old taking a distribution of employer stock that plans to sell the stock immediately then reinvest the proceeds in other retirement assets is an excellent candidate to elect NUA tax treatment
False. This individual may be better off rolling the benefit into an IRA so that the 10 percent penalty is avoided on the ordinary income portion of the distribution and taxes can be deferred on the entire value of the benefit until distributions are taken from the employer’s plan. (LO 13-2-3)
20.An IRA participant cannot invest directly in a life insurance policy but a life insurance policy distributed from a qualified plan can be rolled into an IRA.
False. IRAs cannot hold life insurance under any circumstances. (LO 13-2-4)
21.A nonspousal beneficiary that receives a death benefit from a qualified plan has 60 days to roll it into an inherited IRA.
False. A payment directly to the participant results in taxation of the entire distribution. To complete this transaction there must be a direct rollover from the qualified plan directly to the trustee of the inherited IRA. This is an important technicality as it has serious tax ramifications. (LO 13-2-4)
22.If a qualified plan benefit is rolled into another qualified plan, the amount rolled over will become subject to the qualified joint and survivor requirements that may apply to that plan.
True. A downside to a rollover to an employer provided plan is that the amount is subject to the rules of the new plan. (LO 13-2-4)
23.If an individual fails to complete an IRA rollover within 60 days an automatic extension is granted if the taxpayer transmitted the funds to a financial institution within 60 days and due to the error of the financial institution the transaction wasn’t completed until 6 months later.
True. (LO 13-2-4)
24.The general rule is that a taxpayer cannot use a rollover to substitute property by rolling over different property of the same value.
True. (LO 13-2-4)
25.Nondeductible contributions in an IRA can be rolled over into a qualified plan.
False. This is one of the few limits on rollovers. Nontaxable amounts cannot be rolled from an IRA to a qualified plan, 403(b) or 457(b) plan. (LO 13-2-4)
26.A 50-year-old that converts an IRA into a Roth IRA can completely circumvent the 10% early withdrawal penalty tax
False. Withdrawals from the converted Roth IRA made within 5 years will generally be subject to the 10% penalty. (LO 13-2-4)
27.If an IRA is converted on 6/10/2011 and is recharacterized on 10/14/2012 the account can be reconverted 11/15/2012.
True. (LO 13-2-4)
28.In January of 2005, Joe established his first Roth IRA making a contribution for 2004. He converted a traditional IRA into a second Roth IRA in February 2012, when he was age 60. Distributions from the second Roth IRA in March of 2012 are qualified tax-free distributions
True. Joe has satisfied the 5-year rule because of the rule that measures 5 years from the first day of the year for which the first Roth IRA was established. He is 60 so has satisfied a trigger event as well. (LO 13-2-5)
29.Under the Roth IRA ordering rules, the first amounts withdrawn from a Roth IRA are considered earnings.
False. The first amounts withdrawn are considered regular Roth IRA contributions. (LO 13-2-5)
30.If earnings are distributed from a Roth IRA as part of a nonqualified distribution, the earnings are taxed in the same manner as a withdrawal from a traditional IRA
True. (LO 13-2-5)
31.When determining the tax treatment of a nonqualified withdrawal from a Roth IRA, all of the taxpayer’s Roth IRAs are aggregated (except for inherited Roth IRAs).
True. (LO 13-2-5)
32.A nonqualified withdrawal taken directly from a Roth account in a 401(k) plan that does not exceed total contributions will be tax-free.
False. Nonqualified distributions from Roth accounts are taxed differently than Roth IRAs. They are subject to a pro-rata recovery rule. (LO 13-2-5)
- Sylvia dies while still employed as a participant in a 401(k) plan. A portion of her account was invested in a life insurance contract. Assuming the policy had a face value of $100,000, a cash value of $25,000, and $5,000 of accumulated Table 2001 amounts, how much of the $100,000 death proceeds is taxable income to Sylvia’s heir? (LO 13-2-1) A. $0 B. $20,000 C. $70,000 D. $100,000
- The answer is B. The $75,000 pure term portion of the death benefit is tax-free ($100,000 minus the $25,000 cash value). In addition the $5,000 of Table 2001 amounts can be recovered by the beneficiary, meaning that $80,000 is tax-free and $20,000 is taxable.
- Arthur, age 50, needs to take a withdrawal from his IRA and would like to avoid the 10% early withdrawal penalty tax using the substantially equal periodic payment exception. Which of the following statements concerning this exception as it applies to Arthur is correct? (LO 13-2-2) A. Arthur will have to take withdrawals for at least 5 years but can make changes after that. B. If Arthur elects the amortization method, he can make a one-time change to the required minimum distribution approach. C. Once the distribution amount is calculated, Arthur will be able to increase but not decrease withdrawals each year. D. Arthur can continue to make contributions to the same IRA after withdrawals have begun.
- The answer is B. A is incorrect as Arthur will have to take withdrawals for 9½ years until he attains age 59½. C is incorrect since Arthur can neither increase nor decrease the required amount. D is incorrect since the rules require that there are no additional contributions, transfers or other changes to the account once the substantially equal periodic payments have begun.
- Which of the following statements concerning the exceptions to the 10 percent early withdrawal penalty tax is correct? (LO 13-2-2) A. The age 55 exception only applies to distributions from IRAs. B. To comply with the disability exception, the individual only has to demonstrate that he or she can continue in the same occupation. C. The deductible medical expense exception becomes easier to qualify for beginning in 2013. D. The death benefit exception applies to all distributions made to an adult child beneficiary.
- The answer is D. A is incorrect as the age 55 exception only applies to qualified plans and 403(b) annuities. B is incorrect as the disability exception requires that the individual be unable to sustain any gainful activity. C is incorrect as the deductible medical expense exception becomes more difficult to qualify for in 2013, as the threshold increases from 7.5% to 10% of adjusted gross income.
- Karen, age 65, is a 401(k) plan participant who is terminating employment. She will receive a distribution that includes $250,000 in cash and $150,000 of stock, which had a value of $50,000 when it was allocated to her account. She is in the 25 percent tax bracket and is not going to sell the stock for a number of years. What is the tax treatment if she rolls the cash into an IRA and takes the stock into income? (LO 13-2-3) A. $0 B. $12,500 C. $25,500 D. $37,500
- The answer is B. Karen pays tax (at a 25% tax rate) on $50,000, the value of the stock when it was allocated to her account. Since she has over age 59 ½, she does not pay the 10% early withdrawal penalty tax.
- Bud, age 60, has a single Roth IRA (for 8 years) with a current value of $35,000 and $25,000 of contributions. If Bud withdraws all $35,000 to pay for his son’s $35,000 college tuition and is subject to a 25 percent Federal income tax rate, how much does he pay in Federal income and penalty taxes? (LO 13-2-5) A. $0 B. $2,500 C. $3,500 D. $6,250
- The answer is A. The withdrawal is a qualifying withdrawal making it exempt from income taxes
- Junior, age 40, has two Roth IRAs. One is valued at $20,000 and has $10,000 of contributions. The other was converted last year and income taxes were paid on the entire $100,000 converted. Today, the account is worth $110,000. Considering Federal income taxes and penalty taxes and a 25% tax rate, how much in taxes will be paid if Junior withdraws $30,000 from the converted Roth IRA. (LO 13-2-5) A. $0 B. $2,000 C. $5,000 D. $7,000
- The answer is B. The first $10,000 is considered a return of contributions. The next $20,000 represents converted amounts that have been taxed. These are not subject to income taxes but will be subject to the 10% early withdrawal penalty tax.
- John inherits an IRA account from Uncle Milt. Uncle Milt’s estate paid estate taxes as a result of the IRA account. Which of the following statements is (are) correct about the tax treatment of withdrawals. (LO 13-2-1) I. John will pay income taxes with each withdrawal but will get a prorated income tax deduction based on the estate taxes paid. II. John will be able to roll the inherited IRA into his own IRA as a way to defer having to pay any income taxes. A. I only B. II only C. Both I and II D. Neither I nor II
- The answer is A. B is incorrect as nonspousal beneficiaries cannot roll benefits into their own IRAs
- Which of the following statements about electing to take advantage of the net unrealized appreciation (NUA) tax treatment is (are) correct? (LO 13-2-3) I. Since the 10% early withdrawal penalty applies to the portion of the distribution subject to ordinary income tax, electing the special tax treatment is more advantageous once an individual has attained age 59½. II. Electing the special tax treatment, instead of rolling the benefit into an IRA, is beneficial for an individual planning to spend the proceeds from the sale of the stock in the near future. A. I only B. II only C. Both I and II D. Neither I nor II
- The answer is C. Statement I is correct since the 10% early withdrawal penalty no longer applies after attainment of age 59½. Statement II is correct since in almost all cases the long-term capital gains rate is lower than the ordinary income rate, making the election appropriate for anyone planning to sell and spend the proceeds of the employer stock.
- Which of the following statements concerning Roth Conversions is (are) correct? (LO 13-2-4)
I. If an IRA is converted on 6/10/2011 and is recharacterized on 10/14/2011 the account can be reconverted 11/15/2011.
II. A participant can convert a 401(k) plan benefit into a Roth IRA.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
- The answer is B. Statement I is incorrect, the reconversion cannot occur until 1/1/2012, the first day of the year following the conversion
- All the following statements concerning rollovers from a qualified profit-sharing plan are correct EXCEPT (LO 13-2-4) A. A participant should elect a direct rollover to avoid income tax withholding. B. A nonspousal death beneficiary can elect a direct transfer to an inherited IRA. C. A participant should elect a regular rollover in order to substitute property that will be rolled over. D. A spousal beneficiary can elect a direct rollover to his or her own IRA.
- The answer is C. The rules do not allow for the rollover of substitute property.
Which of the following statements concerning the exceptions to the 10 percent early withdrawal penalty tax is correct?
A. In order to qualify for a SEPP distributions must continue for the shorter of 5 years or to age 59 ½.
B. The death benefit exception only applies to distributions to a surviving spouse.
C. To qualify for the higher education expense exception, withdrawals must be used to pay college education expenses within 120 days of the withdrawal.
D. To comply with the disability exception, the individual has to demonstrate that he or she is not able to pursue any gainful employment.
D A = LONGER of 5 years or age 591/2
B: DB exception applies to all beneficiaries.
C: No time limit
28.In January of 2005, Joe established his first Roth IRA making a contribution for 2004. He converted a traditional IRA into a second Roth IRA in February 2012, when he was age 60. Distributions from the second Roth IRA in March of 2012 are qualified tax-free distributions
True. Joe has satisfied the 5-year rule because of the rule that measures 5 years from the first day of the year for which the first Roth IRA was established. He is 60 so has satisfied a trigger event as well. (LO 13-2-5)
31.When determining the tax treatment of a nonqualified withdrawal from a Roth IRA, all of the taxpayer’s Roth IRAs are aggregated (except for inherited Roth IRAs).
True. (LO 13-2-5)
- Which of the following statements concerning the exceptions to the 10 percent early withdrawal penalty tax is correct? (LO 13-2-2) A. The age 55 exception only applies to distributions from IRAs. B. To comply with the disability exception, the individual only has to demonstrate that he or she can continue in the same occupation. C. The deductible medical expense exception becomes easier to qualify for beginning in 2013. D. The death benefit exception applies to all distributions made to an adult child beneficiary.
- The answer is D. A is incorrect as the age 55 exception only applies to qualified plans and 403(b) annuities. B is incorrect as the disability exception requires that the individual be unable to sustain any gainful activity. C is incorrect as the deductible medical expense exception becomes more difficult to qualify for in 2013, as the threshold increases from 7.5% to 10% of adjusted gross income.
