Individual Retirement Accounts Flashcards
Which of the following is compensation for the purpose of contributions to individual retirement accounts?
A. Taxable alimony and separate maintenance.
B. Foreign earned income excluded from income.
C. Deferred compensation received.
D. Pension or annuity income.
Taxable alimony and separate maintenance.
Answer (A) is correct.
Publication 590-A states that compensation is defined as earned income. It includes wages and salaries, commissions, self-employment income, and taxable alimony and separate maintenance payments. Compensation does not include earnings and profits from property, such as rental income, interest income, and dividend income or pension and annuity income.
Which of the following individual retirement accounts does NOT meet Internal Revenue Code requirements?
A. Employer and employee association trust accounts.
B. Individual savings bonds.
C. Savings incentive match plans for employees.
D. Simplified employee pension.
Individual savings bonds.
Answer (B) is correct.
An IRA is a trust or custodial account set up in the U.S. for the exclusive benefit of an individual or for the benefit of his or her beneficiaries. The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. However, previously purchased bonds may be redeemed and rolled into an IRA.
Which of the following statements is false with respect to setting up a traditional individual retirement account (IRA)?
A. An IRA cannot be set up with joint ownership of husband and wife.
B. A taxpayer may be eligible to set up an IRA for a spouse regardless of whether the spouse received compensation.
C. An individual who files a joint return and is not covered by an employer retirement plan can deduct the entire contribution to an IRA, regardless of the amount of his or her adjusted gross income, even if the spouse is covered by an employer’s plan.
D. A taxpayer cannot roll over assets from his IRA to his spouse’s IRA.
An individual who files a joint return and is not covered by an employer retirement plan can deduct the entire contribution to an IRA, regardless of the amount of his or her adjusted gross income, even if the spouse is covered by an employer’s plan.
Answer (C) is correct.
Beginning in 1998, an individual may deduct the contributions to an IRA even if his or her spouse is covered by an employer plan. However, the deduction is phased out if the couple’s AGI is more than $193,000 but less than $203,000. The deduction is eliminated if the AGI on the joint return is $203,000 or more.
In December 2016, Gail worked for ABC Co. and participated in its retirement plan. On February 1, 2019, Gail was employed by XYZ Corp., which has a qualified retirement plan. On March 1, 2019, the ABC Co. plan administrator distributed to Gail her vested share of the plan. Gail was 42 years old at the time of distribution. Which of the following will allow Gail to avoid paying taxes and penalties on her withdrawal?
A. Donate the plan funds to a charity.
B. Contribute the distribution to the XYZ Corp. plan within 60 days.
C. None of the answers are correct.
D. Deposit the plan funds in a local bank.
Contribute the distribution to the XYZ Corp. plan within 60 days.
Answer (B) is correct.
A taxpayer can avoid taxes and penalties on a distribution of assets from a qualified retirement plan if the assets are deposited into another qualified plan within 60 days (Publication 575). Section 408(d)(3)(A) allows an eligible rollover distribution from an individual retirement account to be rolled over into a qualified employer plan, a 403(b) tax-sheltered annuity, or a Sec. 457 deferred compensation plan. This is true regardless of whether the distribution IRA qualifies as a conduit IRA.
If neither you nor your spouse is covered by an employer retirement plan for any part of the year, the maximum allowable deduction for contributions to a Roth IRA is A. $0 B. $7,000 (if age 50 or older). C. $6,000 D. $6,000 or $7,000 if age 50 or older.
$0
Answer (A) is correct.
Contributions to a Roth IRA are not tax deductible, unlike in traditional IRAs. However, qualified distributions are tax free.
Martin, age 35, made an excess contribution to his traditional IRA in 2019 of $1,000, which he withdrew by April 15, 2020. Also in 2019, he withdrew the $50 income that was earned on the $1,000. Which of the following statements is true?
Martin must include the $50 in his gross income in 2019.
Martin would have to pay the 6% excise tax on the $1,050.
Martin would have to pay the 10% additional tax on the $50 as an early distribution.
Martin would have to pay the 10% additional tax on the $1,000 because he made a withdrawal.
A. I only.
B. I and III only.
C. I, II, and III only.
D. III and IV only.
I and III only.
Answer (B) is correct.
Premature distributions are amounts withdrawn from an IRA or annuity before a taxpayer reaches age 59 1/2. The additional tax on premature distributions is equal to 10% of the amount of premature distribution that must be included in gross income. Therefore, both I and III are true statements, making this the best choice of the listed options.
For traditional individual retirement accounts (IRAs) for tax year 2019, which of the following is true?
A. The Roth IRA contribution is deductible for a spousal IRA.
B. Contributions may be made up to the due date of the return including extensions.
C. If your spouse is covered by a retirement plan and you are not, your traditional IRA deduction is not limited if your modified AGI on a joint return is less than $193,000.
D. The modified AGI limitation range for joint filers was not changed.
If your spouse is covered by a retirement plan and you are not, your traditional IRA deduction is not limited if your modified AGI on a joint return is less than $193,000.
Answer (C) is correct.
After 1997, an individual may deduct the contributions to an IRA even if his or her spouse is covered by an employer plan. However, the deduction is phased out if the couple’s AGI is more than $193,000 but less than $203,000. The deduction is eliminated if the AGI on the joint return is $203,000 or more.
Mr. Knox wants to make contributions to an IRA (spousal IRA) for his wife. For Mr. Knox to be eligible to make such contributions, all of the following requirements must be met EXCEPT
A. They must be married at the end of the tax year.
B. He must have compensation that must be included in his income for the tax year.
C. His wife must have no taxable compensation for the tax year.
D. They must file a joint return for the tax year.
His wife must have no taxable compensation for the tax year.
Answer (C) is correct.
Section 219(c) provides rules for deducting contributions to a spousal IRA. If one spouse is eligible to make deductible IRA contributions, the other spouse may contribute up to $6,000 if a joint return is filed. The additional $6,000 spousal IRA deduction is available even if the other spouse has compensation for the year, provided the amount of compensation (if any) of the spouse for whom the election is being made is less than the gross income of the other spouse. Therefore, it is not a requirement that the wife have no compensation for the tax year.
Generally, which of the following rules apply to both traditional IRAs and Roth IRAs?
A. Non-rollover contributions are generally limited to $6,000 each year or 100% of compensation, whichever is less.
B. Contributions are always nondeductible.
C. Contributions may not be made for the tax year in which you reach age 70 1/2, or for years thereafter.
D. Contribution phaseout limits are the same for both traditional IRA and Roth IRAs.
Non-rollover contributions are generally limited to $6,000 each year or 100% of compensation, whichever is less.
Answer (A) is correct.
Both the traditional and Roth IRAs generally restrict contributions to the lesser of $6,000 or all of an individual’s taxable compensation (Publication 590-A).
With regard to IRAs, which of the following is considered earned compensation? A. Rental income. B. Taxable alimony. C. Deferred compensation. D. Annuity income.
Taxable alimony.
Answer (B) is correct.
Section 219(f) defines compensation as earned income. This includes wages, salaries, commissions, self-employment income, and taxable alimony.
Frank wants to borrow from his qualified plan for some improvements to his principal residence. Frank’s present value of his vested accrued benefit is $80,000. How much can Frank borrow from his plan without receiving treatment as a distribution? A. $10,000 B. $80,000 C. $40,000 D. $50,000
$40,000
Answer (C) is correct.
A loan will not be treated as a distribution to the extent loans to the employee do not exceed the lesser of $50,000 or the greater of half of the present value of the employee’s vested accrued benefit under such plan, or $10,000. Frank’s vested accrued benefit had a present value of $80,000. Frank’s loan is limited to $40,000, the lesser of $50,000, or the greater of $40,000 ($80,000 × 1/2), or $10,000.
Elvin is single, age 35, and has total wages of $68,000. His adjusted gross income is also $68,000 before any IRA contribution. Elvin works for the Murphy Corporation, which sponsors a retirement plan that Elvin participates in. In addition, Elvin contributes $6,000 to his IRA account. What amount can Elvin deduct on his 2019 income tax return? A. $0 B. $3,600 C. $6,000 D. $2,400
$3,600
Answer (B) is correct.
Generally, an individual may deduct IRA contributions to the extent of the lesser of $6,000 or compensation received. If an individual is covered or considered covered by an employer retirement plan and his or her modified AGI is within the phaseout range, the IRA deduction must be reduced. For single individuals, the phaseout is for modified AGI over $64,000 and less than $74,000. The phaseout amount is calculated as follows:
$68,00 - $64,000 / $74,000 - $64,000 * $6,000 = $2,400
Thus, Elvin’s maximum allowable deduction would be $3,600 ($6,000 – $2,400). However, if any IRA deduction is allowed, at least $200 is allowed as a deduction if it does not exceed the contributions made.
For 2019, Mr. and Mrs. White filed a joint income tax return. Mr. White’s salary was $36,000, Mrs. White’s was $20,000, and their modified adjusted gross income was $107,000. Mr. White was covered by his employer’s retirement plan. Mrs. White’s employer did not have a retirement plan. Mr. White contributed $6,000 to an individual retirement account (IRA), and Mrs. White contributed $1,500 to an IRA. What is the maximum IRA deduction each is entitled to take for 2019?
Mr. White
Mrs. White
A. $0 $1,500 B. $6,000 $250 C. $4,800 $1,500 D. $6,000 $1,500
$4,800
$1,500
Answer (C) is correct.
Generally, an individual may deduct IRA contributions to the extent of the lesser of $6,000 or compensation received. If an individual is covered or considered covered by an employer retirement plan and his or her modified AGI is within the phaseout range, the IRA deduction must be reduced. A spouse may deduct up to $6,000 of an IRA contribution, even if the other spouse is covered by an employer retirement plan. Therefore, Mrs. White may deduct the entire $1,500. However, Mr. White’s deduction will be limited. For married couples filing jointly, the deduction is phased out for taxpayers with a modified AGI between $103,000 and $123,000. The phaseout amount is calculated as follows:
$107,000 - $103,000 / $123,000 - $103,000 * $6,000 = $1,200
Thus, Mr. White’s maximum allowable deduction is $4,800 ($6,000 – $1,200).
Jacob was born on March 1, 1945. He is an unmarried participant in a qualified employer-sponsored plan. He retired in 2018. As of December 31, 2017, his account balance was $300,000. As of December 31, 2018, his account balance was $325,000. His applicable distribution periods are 24.7 and 23.8, respectively. What is Jacob’s required minimum distribution (RMD) due on the second payment? A. $13,158 B. $13,145 C. $12,146 D. $12,605
$13,145 Answer (B) is correct. The required minimum distribution for each year is calculated by dividing the account balance as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy. The required beginning date is April 1 of the calendar year following the participant’s retirement (since Jacob’s retirement date is later than age 70 1/2). Jacob retired in 2018. His second required minimum distribution due is $13,145, calculated as follows: Distribution Calculation No. RMD Date Relevant Balance Date (Dec. 31) Relevant Age (Dec. 31) Balance ÷ Life Expectancy RMD Amount 1st Apr. 1, 2019 2017 2018: 73 $300,000 ÷ 24.7 $12,146 2nd Dec. 31, 2019 2018 2019: 74 ($325,000 – $12,146) ÷ 23.8 $13,145
Jamal and Ronee Smith are married and filed a joint return for 2019. Jamal is 45 years old, and Ronee is 46 years old. Jamal earned a salary of $60,000 in 2019 from his job at Sunshine Corporation. Ronee earned $6,000 from her part-time job at Rain Corporation. On May 1, 2019, Jamal contributed $6,000 to a Roth IRA for himself. What is the maximum contribution Ronee may make in 2019 to her Roth IRA? A. $1,000 B. $7,000 C. $0 D. $6,000
$6,000
Answer (D) is correct.
Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for joint filers with adjusted gross income (AGI) between $193,000 and $203,000. Since the Smiths’ AGI does not exceed $193,000, Ronee is permitted her maximum contribution of $6,000 for a total yearly IRA contribution of $12,000 for the married couple.
Peter and Jill are married and file a joint return. In 2019, Jill was a media relations manager for a large firm and earned $98,000; Peter owns a graphic design business that showed a net profit of $500 for 2019. In 2019, Jill was covered by an employer’s plan and Peter was not. Their annual gross income was $198,000. What is the maximum deductible amount that Peter can contribute to a traditional IRA? A. $500 B. $3,000 C. $0 D. $6,000
$3,000
Answer (B) is correct.
In general, the maximum deduction for a contribution to a traditional IRA is the lesser of taxable compensation for the year or $6,000 ($7,000 for taxpayers age 50 and older). However, if a joint return is filed and one spouse is covered, phaseouts may be applied based on the couple’s AGI. In this instance, a partial deduction is permitted. With the couple’s AGI of $198,000, Peter is allowed a $3,000 {[($198,000 AGI – $193,000 phaseout limit) ÷ 10,000] × $6,000 maximum deduction} deductible contribution (Publication 590-A).
Which of the following are examples of prohibited transactions with a traditional IRA?
A. Selling property to it.
B. Using it as security for a loan.
C. Buying property for personal use with your IRA funds.
D. All of the answers are correct.
All of the answers are correct.
Answer (D) is correct.
Prohibited transactions with a traditional IRA include selling property to it, using it as security for a loan, and buying property for personal use with IRA funds.
Margaret is fully vested. She will receive Social Security benefits at retirement but has no other retirement plan coverage. Her present and past employers have not had retirement plans available. In 2019, she files as single, and her earnings are $67,000. Also in 2019, she contributes $6,000 to a traditional IRA. How much of the $6,000 contribution may she deduct? A. $1,800 B. $6,000 C. $4,200 D. $0
$6,000
Answer (B) is correct.
Margaret is able to take a full $6,000 deduction for her contribution to an IRA. She is not a member of a retirement plan; thus, her deduction is not reduced.
Tony and Janet are married filing a joint return. In 2019, Tony’s taxable compensation is only $1,500, and Janet’s compensation is $58,500. Tony contributed all $1,500 of his earnings to a Roth IRA. Neither Tony nor Janet is covered by a retirement plan. What is the maximum amount the couple may deduct for traditional IRA contributions for the two of them if they are both under age 50? A. $12,000 B. $10,500 C. $2,250 D. $0
$10,500
Answer (B) is correct.
Contributions to the Roth IRA are nondeductible, but income can be accumulated tax free. The contribution amount is the same as the amount for a deductible IRA, and the total contribution to both deductible and nondeductible IRAs cannot exceed $6,000 per taxpayer. If a joint return is filed and a taxpayer makes less than his or her spouse, the taxpayer may still contribute the lesser of (1) the sum of his or her compensation and the taxable compensation of the spouse, reduced by the amount of his or her IRA deduction, or (2) $6,000. Thus, the total combined contributions to an IRA and a spouse’s IRA can be as much as $12,000 for the year. Generally, a deduction is allowed for contributions that are made to an IRA. If neither spouse was covered for any part of the year by an employer retirement plan, the entire contribution may be deducted.
An investment by an IRA in which of the following assets will NOT be treated as a distribution?
A. An antique table determined by an appraiser to be worth over $12,000.
B. A stamp that is appraised at over $6,000 and is over 25 years old.
C. A painting valued at $6,000.
D. Gold bullion exceeding the minimum fineness required to satisfy a regulated futures contract.
Gold bullion exceeding the minimum fineness required to satisfy a regulated futures contract.
Answer (D) is correct.
Investments in certain platinum coins or in any gold, silver, platinum, or palladium bullion of fineness equal to or exceeding the minimum fineness required for metals which may satisfy a regulated futures contract, subject to regulation by the Commodity Futures Trading Commission, are not considered distributions [Sec. 403(m)(3)]. However, this provision does not apply unless the bullion is in the physical possession of the IRA trustee.
Sunnie is single and does not actively participate in her employer’s pension plan. She received taxable compensation of $3,500 in Year 1 and $4,500 in Year 2. Her modified adjusted gross income was $26,000 in both years. For Year 1, she contributed $6,000 to her IRA but deducted only $3,500 on her income tax return. For Year 2, she contributed $2,000 but deducted $4,500 on her income tax return. Based on this information, which of the following statements is true?
A. Sunnie should claim an IRA deduction of only $1,500 for Year 2.
B. Sunnie must pay an excise tax on the excess contribution for Year 1 and also for Year 2 since she did not withdraw the excess.
C. Sunnie will be assessed a 10% tax for early withdrawals when she withdraws the excess contribution.
D. Sunnie must pay an excise tax for Year 1 on the $2,500 excess contribution made in Year 1, but since she properly treated the Year 1 excess contribution as part of her Year 2 deduction, she does not owe the excise tax for Year 2.
Sunnie must pay an excise tax for Year 1 on the $2,500 excess contribution made in Year 1, but since she properly treated the Year 1 excess contribution as part of her Year 2 deduction, she does not owe the excise tax for Year 2.
Answer (D) is correct.
Section 408 limits contributions to an IRA to the lesser of $6,000 ($7,000 if aged 50 or older) or the amount of compensation includible in the taxpayer’s gross income. Sunnie’s Year 1 contributions should have been limited to $3,500. She therefore had $2,500 of excess contributions in Year 1 ($6,000 – $3,500). Under Sec. 4973, a nondeductible 6% excise tax is imposed on excess contributions to an IRA. Under Sec. 219(b), the deduction for contributions to an IRA is limited to the lesser of $6,000 or the amount of compensation that must be included in gross income. Sunnie’s $3,500 deduction in Year 1 was correct. In Year 2, Sunnie contributed only $2,000 but deducted $4,500. Under Sec. 219(f)(6), Sunnie may treat the $2,500 unused contributions from Year 1 as having been made in Year 2. Therefore, her allowable deduction for IRA contributions in Year 2 is $4,500.
With regard to excess contributions to a traditional IRA, which of the following statements is false?
A. If the excess contribution for a year is not withdrawn by the date a taxpayer’s return is due, the taxpayer is subject to an 8% tax.
B. If a taxpayer has an excess contribution in his or her IRA as a result of a rollover, and the excess occurred because the taxpayer had incorrect information required to be supplied by the plan, the taxpayer can withdraw the excess contribution.
C. Generally, an excess contribution is the amount contributed to an IRA that is more than the smaller of the following amounts: (1) a taxpayer’s taxable compensation or (2) $6,000 ($7,000 if age 50 or older).
D. A taxpayer may deduct from gross income, in the first year available, the amount of the excess contribution in the IRA, from the preceding years up to the difference between the maximum amount that is deductible in the year and the amount actually contributed during the year.
If the excess contribution for a year is not withdrawn by the date a taxpayer’s return is due, the taxpayer is subject to an 8% tax.
Answer (A) is correct.
In general, if the excess contribution for a year and any earnings on it are not withdrawn by the due date of the return, the taxpayer is subject to a 6% tax.
A taxpayer has an excess accumulation in her IRA for the year. It is due to a reasonable error, and the taxpayer has taken steps to remedy the insufficient distribution. Which of the following statements best describes the course of action this taxpayer should take with regard to the excise tax on an excess accumulation?
A. Avoid having to pay the tax or send a statement by withdrawing the excess accumulation by the due date of the tax return.
B. Do not pay the penalty tax with the return. Instead, attach a statement to the return explaining the situation and wait for the IRS to respond.
C. Pay the penalty in full. There is no relief from the penalty tax for reasonable cause.
D. Pay the penalty tax that is due with the return, attach a written statement to the return explaining the situation, and wait for the IRS to approve by sending a refund of the penalty tax that was paid.
Pay the penalty tax that is due with the return, attach a written statement to the return explaining the situation, and wait for the IRS to approve by sending a refund of the penalty tax that was paid.
Answer (D) is correct.
The IRS can waive the excise tax if it is satisfied that there was a reasonable error and that reasonable remedial steps have been taken by the taxpayer. To make a waiver request, a taxpayer must file Form 5329, pay excise tax owed, and attach a written explanation showing when excess accumulation was removed or what the taxpayer has done to have it withdrawn. Any tax paid will be refunded if the waiver is granted.
After many years as a bachelor, Buddy, age 50, married Penny, age 63. Penny’s only income was $10,800 of Social Security. They filed a joint return for year 2019 with a modified adjusted gross income of $150,000. Buddy is covered by a retirement plan at work, where he receives compensation of $123,000. He wishes to contribute to an IRA for himself and for Penny. Which of the following will provide them the greatest allowable tax benefit?
A. He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to Penny’s IRA.
B. He may contribute $7,000 to each IRA and take a deduction of $7,000 for each IRA.
C. He may contribute $7,000 to each IRA but take no deduction for either IRA.
D. He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to his IRA.
He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to Penny’s IRA.
Answer (A) is correct.
If covered for any part of the year by an employer retirement plan and no social security payments were received by the individual, the IRA contribution deduction is completely eliminated if the AGI is greater than $123,000 (married filing jointly). However, since Penny received no taxable compensation, the contribution to her IRA is completely deductible. The deduction is $6,000 plus an additional $1,000 for taxpayers age 50 or older. (Publication 590-A.)
In general, a taxpayer over age 50 may make which of the following in a given tax year?
A $7,000 contribution to a Roth IRA.
A $7,000 contribution to a traditional IRA.
A. I and II.
B. II only.
C. I or II.
D. I only.
I or II.
Answer (C) is correct.
In total, a taxpayer over the age of 50 may make contributions to either Roth IRAs or traditional IRAs, provided the total contributions do not exceed $7,000. For instance, $2,500 could be contributed to a Roth IRA, allowing a maximum $4,500 contribution to a traditional IRA for the year.
Which of the following is true regarding contributions to a Roth IRA?
A. Contributions may be made regardless of age, provided other requirements are met.
B. Contributions may be deducted if you are not covered under a retirement plan.
C. Contributions may be deducted if you are within certain income limits.
D. Contributions may not be deducted, but earnings are taxable when distributed.
Contributions may be made regardless of age, provided other requirements are met.
Answer (A) is correct.
Publication 590-A states that, unlike deductible IRAs, individuals are allowed to make contributions to the Roth IRA after reaching age 70 1/2. Also, amounts can be left in the Roth IRA as long as the taxpayer lives.
Diane, single and age 49, made a $5,000 contribution to her traditional IRA in 2019. Her compensation for 2019 was $4,000. She filed a Form 4868 for an extension until October 15, 2020, to file her 2019 return. In order to avoid the 6% additional tax on excess contributions, Diane must do which of the following?
A. Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by December 31, 2019.
B. Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by April 15, 2020.
C. File an election to deduct the $1,000 on her 2020 return by attaching a statement to her 2019 return.
D. Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by October 15, 2020.
Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by October 15, 2020.
Answer (D) is correct.
Generally, an excess contribution is the amount contributed to an IRA that is more than the lesser of its compensation received or $6,000 ($7,000 for taxpayers age 50 and older). A 6% excise tax is imposed each year on excess amounts that remain in an IRA at the end of each tax year. The tax can be avoided if the excess contribution and the interest earned on it are withdrawn before the due date (including extensions) of the tax return. Thus, Diane must withdraw the $1,000 excess contribution and all interest earned on it by October 15, 2020, to avoid the tax on the excess contribution.
Alice and Mike file a joint return for 2019 on April 15, 2020. Alice, who is a nonworking spouse, is 49. Both Alice and Mike contributed $2,000 each to a traditional IRA, although they qualified to contribute the maximum amount. They filed their return timely. On June 1, 2020, Mike’s mother gave each of them $1,000. What additional amount of the gift may Alice and Mike contribute to each of their IRAs for the year 2019? A. $500 B. $1,000 C. $0 D. $4,000
$0
Answer (C) is correct.
Contributions to Alice and Mike’s IRA must be made during the 2019 tax year or made before the filing deadline in 2020. Therefore, Alice and Mike’s 2019 tax year deadline for an IRA contribution for the 2019 tax year was April 15, 2020. Any contributions made after April 15, 2020, are treated as contributed in the 2020 tax year [Sec. 219 (f)(3)].
Generally, an IRA contribution is limited to the lesser of $6,000 in 2019 or the taxpayer’s compensation. However, which of the following items is NOT treated as compensation for this limitation?
A. Taxable alimony.
B. Wages earned by an individual under the age of 18.
C. Commissions.
D. Self-employment loss.
Self-employment loss.
Answer (D) is correct.
Compensation is defined as earned income. It includes
Wages and salaries,
Commissions,
Self-employment income, and
Taxable alimony and separate maintenance payments.
Self-employment loss is not considered income for the purposes of contributing to an IRA.
Which of the following amounts may be converted directly to a Roth IRA, provided all requirements are met?
A. Hardship distribution from a 401(k) plan.
B. Amounts in a traditional IRA inherited from a person other than a spouse.
C. Amounts in a SIMPLE IRA, and the 2-year participation period has been met.
D. Required minimum distributions from a traditional IRA.
Amounts in a SIMPLE IRA, and the 2-year participation period has been met.
Answer (C) is correct.
Amounts carried in a SIMPLE IRA may be converted assuming the required 2-year participation period has been met (Publication 590-A).
In 2019, MaryAnn, a nonworking spouse, files a joint return with Jack, who is not covered by a pension plan at work. Their AGI is $50,000, and Jack plans to contribute $5,500 to a traditional IRA. MaryAnn, who is 51, wishes to contribute to an IRA. What is the maximum amount she can contribute? A. $7,000 B. $5,500 C. $6,000 D. $0
$7,000
Answer (A) is correct.
Under Sec. 408(a)(1), the maximum contribution to an IRA that can be made every year is the lesser of the compensation received or $6,000. Individuals age 50 and older at the end of the year can contribute an additional $1,000. If Jack and MaryAnn file a joint return, they are eligible to contribute the $6,000 on MaryAnn’s behalf and the additional $1,000 for being over 50 years of age.
Thad Manning is a single taxpayer under age 50. For the year, Thad earned a salary of $172,000 from his job at Rocky Top Corporation. This was his only source of income for the year. What is the maximum contribution Thad can make to a Roth IRA for the year? A. $0 B. $1,500 C. $6,000 D. $7,000
$0
Answer (A) is correct.
Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for single taxpayers with adjusted gross income (AGI) between $122,000 and $137,000. Since Thad’s AGI exceeds $137,000, Thad is not allowed any portion of the $6,000 maximum yearly contribution. The $6,000 limit represents the total yearly threshold for contributions to all IRAs.
Which of the following would be an allowable investment for a traditional IRA?
A. One-ounce silver coins minted by the U.S. Treasury Department.
B. Stamps that have been issued by the United States Postal Service.
C. All of the answers are correct.
D. An oil painting certified by an art expert as being an authentic original by a Dutch master artist.
One-ounce silver coins minted by the U.S. Treasury Department.
Answer (A) is correct.
Generally, an IRA is prohibited from investing in collectibles. However, an IRA may hold platinum coins as well as gold, silver, or platinum bullion. Thus, 1-ounce silver coins minted by the U.S. Treasury Department are considered an allowable investment for a traditional IRA.
With regard to a spousal IRA, which of the following statements is false?
A. The compensation of the two spouses must be equal to or greater than the amount of the combined IRA contributions.
B. The taxpayers must be married at the end of the tax year.
C. Spouses can own an IRA account jointly.
D. A joint return must be filed.
Spouses can own an IRA account jointly.
Answer (C) is correct.
Each spouse on a joint return can contribute to an IRA as long as the combined taxable compensation is equal to or greater than the combined IRA contributions. A taxpayer must be under age 70 1/2 to contribute to an IRA. Each spouse has his or her own IRA.
All of the following types of income are considered earned compensation in determining whether an individual retirement account can be set up and contributions made EXCEPT
A. Taxable alimony.
B. Partnership income of an active partner providing services to the partnership.
C. Self-employment income.
D. Rental income from a property in which the taxpayer has active participation.
Rental income from a property in which the taxpayer has active participation.
Answer (D) is correct.
Section 219(f) defines compensation as earned income. Rental income is not generally considered earned income; rather, it is treated as a passive form of income.
