Module 5 Traditional and Roth IRAs Flashcards
John and Mary, both age 48, are married and file a joint income tax return for 2024. John is self-employed as an engineering consultant and reports $135,000 of Schedule C net income. He is thinking about starting a retirement plan for his firm. Mary is a full-time homemaker and is not employed outside the home. What is the maximum deductible IRA contribution John and Mary can make this year?
A)
$7,000
B)
$8,000
C)
$0
D)
$14,000
D
Neither John nor Mary is an active participant in an employer-sponsored retirement plan. They can contribute and deduct $7,000 each for 2024. While Mary has no earned income, a spousal IRA may be established and funded on the basis of John’s compensation.
LO 5.1.2
Rhett is 65 years old and is retiring from Widgets Inc. Rhett has a Section 401(k) plan with Widgets Inc., as well as a traditional IRA that he established 12 years ago. He is currently looking at his distribution and rollover options regarding his retirement plans. Which of the following distributions or rollovers from retirement plans or IRAs are subject to the 20% withholding rule?
A partial distribution from a qualified plan paid directly to the participant.
A trustee-to-trustee transfer of a defined contribution plan to an IRA.
A distribution from an IRA when the individual intends to reinvest within 60 days.
A distribution from an IRA when the individual has no intention to reinvest within 60 days in a qualified retirement vehicle.
A)
I only
B)
II and III
C)
II and IV
D)
I, III, and IV
A
notice how the dude has a 401k and an IRA. Meaning the first one is subject to the 20% withholding rule. The second one is a straight up transfer trustee-to-trustee, which isn’t subject to that anyway. third and fourth are dealing with IRAs which don’t have that 20% withholding on them.
Distributions from IRAs, SIMPLE IRAs, and SEP plans are never subject to the 20% withholding rule. Statement I is correct because the distribution is being made to the participant (not a trustee-to-trustee transfer or a direct rollover in which the check is sent to the person, but it is made out to the next custodian and, thus, the person has no option to spend the money). Trustee-to-trustee transfers and direct rollovers are not subject to mandatory withholding.
LO 5.2.1
Which of the following is considered to be earned income for purposes of making contributions to a traditional IRA?
A)
Interest income
B)
Tip income
C)
Rental income
D)
Pension income
B
The answer is tip income. Earned income does not include rental income, pension income, or interest income, but does include tip income.
LO 5.1.1
John, age 56 and single, took an early retirement package from his employer last year and is receiving a monthly pension of $5,000 from the company’s qualified pension plan. John wants to contribute the maximum amount possible to a Roth IRA for 2024, which is
A)
$4,000.
B)
$8,000.
C)
$7,000.
D)
$0.
D
Wasn’t sure if this was a question about the general case of Roth IRA contribution limits, or a question about his specific situation. Annoying question phrasing.
John has no earned income, so he cannot make a contribution to a Roth IRA.
LO 5.4.1
Which one of these reasons for an IRA withdrawal would owe the 10% early withdrawal penalty?
A)
The purchase of an automobile
B)
Medical expenses in excess of 7.5% of AGI
C)
A disaster withdrawal for $18,000
D)
A family emergency withdrawal of $1,000
A
Summary of some exceptions to EWP:
Dies/Disabled
Med Expenses >7.5% of AGI
59.5 age reached
Emergency withdrawals up to $1,000 (SECURE 2.0)
Federally declared disaster withdrawal up to $22,000 lifetime max (SECURE 2.0)
Money withdrawn to purchase an automobile would be subject to the 10% early withdrawal penalty. If a participant dies or becomes disabled, there is no penalty for an early withdrawal. Distributions for medical expenses in excess of 7.5% of AGI allow the participant to avoid the 10% early withdrawal penalty for those who are under age 59½. A withdrawal for any medical or any other expenses for those over age 59½ would not be subject to the early withdrawal penalty because the person is over 59½ anyway. SECURE 2.0 added exceptions for disaster distributions ($22,000 lifetime maximum) and emergency withdrawals up to $1,000.
LO 5.3.1
Tom’s ex-spouse, Dorinda, wants to save for her retirement years. What is the amount Dorinda can contribute to a Roth IRA for 2024? Her only income is $24,000 in child support and $3,600 of alimony from her 2018 divorce. Dorinda is 40.
A)
$7,000
B)
$3,600
C)
$0
D)
$8,000
B
Think about it. Divorce dates:
End of 2018 and prior, alimony was taxable, which means it’s viewed as earned income (which is ridiculous on its own but still the case).
Beg of 2019 and forward, alimony is no longer taxable, which means it’s not viewed as earned.
Of the money Dorinda receives, only $3,600—the portion of the payments that can be attributed to alimony from a pre-2019 divorce settlement—qualifies as earned income for the purposes of a Roth IRA contribution. The definition for earned income is the same as for a traditional IRA. Please note that divorces finalized during and after 2019 will not include alimony as tax deductible to the payer and taxable to the receiver. As such, this will not be considered earned income. This divorce happened before this Tax Reform Act, and thus follows the old rules.
LO 5.4.1
What is the first year in which a taxpayer, age 52 , may receive a qualified distribution from a Roth IRA, if they open their first Roth IRA with a $2,000 contribution to a Roth IRA on April 1, 2024, for the tax year 2023?
A)
2030
B)
2025
C)
2024
D)
2028
D
5 year clock after the TAX YEAR in which it was opened for. It was opened for the 2023 tax year, so the fifth year following would be 2028.
24 (1), 25 (2), 26 (3), 27 (4), 28 (5).
A qualified distribution can occur only after five years have elapsed, and it also must be made for one of the following reasons: (1) on or after the date on which the owner attains age 59½, (2) it must be made to a beneficiary or the estate of the owner on or after the date of the owner’s death, (3) because the owner has become disabled, or (4) it can be made for a first-time home purchase. The five-year period starts at the beginning of the taxable year for which the initial contribution to the Roth IRA is made. In this question, though the contribution was made on April 1, 2024, the contribution was for tax year 2023. The five-year holding period, therefore, begins January 1, 2023. As a result, the first year in which a qualified distribution may occur is 2028. Note that in 2028 the person will be age 57. Thus, the qualified distribution would be limited to the other qualifying events (death, disability, and first-time homebuyer/builder/rebuilder).
LO 5.4.2
Which of these is considered earned income for purposes of making contributions to a traditional IRA?
A)
Interest income
B)
Tip income
C)
Rental income
D)
Pension income
Tip income
All of these statements regarding Roth IRAs for 2024 are CORRECT except
A)
only taxpayers with income above certain MAGI limits are permitted to make contributions to a Roth IRA.
B)
contributions to a Roth IRA are not restricted by age.
C)
someone with a lot of money in traditional IRAs would be the best candidate for a backdoor Roth IRA.
D)
eligible individuals age 50 and older may make additional catch-up contributions of $1,000.
A
Only taxpayers with income below (not above) certain MAGI limits are permitted to make contributions to a Roth IRA. There is no age restriction for Roth IRA contributions. Someone with no traditional IRA money is the best candidate for a backdoor Roth IRA because the nondeductible IRA will be mostly an after-tax contribution. Thus, the owner will not be income taxed on the vast majority of the conversion. To be precise, the owner will only be income taxed on any gain in the account at the conversion. On the other hand, if the owner already has a lot of traditional IRA money, then the nondeductible basis from the backdoor IRA contribution will be very small compared to the large amount of deductible money in the aggregate IRA balance.
LO 5.4.1
Which of these statements regarding the tax effects of converting a traditional IRA to a Roth IRA is CORRECT?
The converted amount is treated as a taxable distribution from the traditional IRA.
The 10% premature penalty applies if the owner is not at least 59½ years old.
A)
II only
B)
Both I and II
C)
Neither I nor II
D)
I only
I only
Only Statement I is correct. When a traditional IRA is converted to a Roth IRA, the converted amount is treated as a taxable distribution and is included in the owner’s gross income. The 10% penalty does not apply to the conversion amount when converted, regardless of the owner’s age. However, if the taxable portion of the converted amount is withdrawn within five years of the conversion, then the taxable portion of the conversion is treated as coming out first when the converted amount is withdrawn. This taxable amount would be subject to the early withdrawal rules and penalized 10% unless an exception applies. The point of this rule is to protect Roth conversions from being sham transactions intended to get around the 10% early withdrawal penalty.
The law treats withdrawals of converted amounts that are more than five years past the conversion date the same as contributions except they remain in the conversion category (the conversion bucket).
LO 5.4.2
Harry, age 34, contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal?
A)
Harry must pay tax and a $200 penalty.
B)
This would be a prohibited transaction.
C)
Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only age 34.
D)
Harry must pay tax on the $2,000, but there is no penalty.
c
roth distributions always(!) come from contributions first, then conversions, then growth.
All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax free and income tax-free conversions, then earnings. Also, the IRC rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to taxable income and the withdrawal of converted money before five Roth years have elapsed.
LO 5.4.2
Ted and Margaret, ages 40 and 38, plan to contribute $14,000 to their IRAs for the current tax year. They are both employed and file a joint tax return. Ted is an active participant in his employer’s qualified retirement plan, but Margaret is not eligible for her employer’s plan. Their MAGI for the current tax year is $130,050. What amount, if any, can they deduct for their 2024 IRA contributions?
A)
$0
B)
$11,540
C)
$7,000 (Margaret’s contribution only)
D)
$14,000
B
Important to note, this is asking about 2024 MAGI phaseouts, not 2023.
2023 MAGI phaseouts for active participation and Trad IRAs: 116k-136k
2024 MAGI phaseouts for active participation and Trad IRAs: 123k-143k
Notice how it always stays at $20k spread, that’s important going forward.
Since Ted is an “active participant” and their AGI falls within the phaseout range for married joint filers ($123,000–$143,000), their $14,000 IRA contribution will be only partially deductible. The upper AGI limit of $143,000 minus their AGI of $130,050 equals $12,950; $12,950 ÷ $20,000 = .6475. And .6475 × $7,000 (the maximum contribution) = $4,532.50 for Ted. This is bumped up to $4,540 for Ted. Add $7,000 for Margaret = $11,540. For test taking purposes, there is no need to actually calculate the number for this question. They are in the phaseout range for active participants, but only one spouse is an active participant. Thus
the nonactive participant spouse can deduct the full amount, but the active participant spouse cannot do the full amount; and
because of this, the answer must be higher than $7,000 and lower than $14,000 because they are both younger than 50 this year. There is only one answer in this range, so it must be the correct answer.
If there were two or more answers within the range, the exact number must be calculated.
Finally, if a person is not allowed to deduct an IRA contribution, the next option would be to contribute to a Roth IRA if income allows. Why would anyone want to make a nondeductible IRA contribution if they were eligible to make a Roth IRA contribution?
LO 5.1.2
Durango Mining already offers a traditional 401(k) plan for its employees, and is considering adding the ability to contribute to a Roth 401(k) to its plan. Which of these would be true if Durango were to offer both a traditional 401(k) plan and a Roth 401(k) plan to its employees?
A)
As of 2024, employer Roth accounts are treated the same as Roth IRAs regarding required minimum distributions.
B)
The Roth 401(k) plan can restrict participation based upon income limits.
C)
Employer matching contributions can only be made as traditional, deductible contributions.
D)
The aggregate deferral limit for all employees, taking into account both the traditional and Roth 401(k) plans, would be $30,500 in 2024.
A
Roth 401k has the same RMD rules as Roth IRAs - you don’t need to take them while you’re alive.
As of 2024, employer Roth accounts have the same RMD rules as Roth IRAs. A Roth 401(k) is different from a Roth IRA in that all employees can make Roth 401(k) contributions while a high earner would be phased out of making a Roth IRA contribution. No employer contribution of any type may be made to a Roth account because the employer decided that. However, a worker can elect to have an employer contribution treated as a Roth contribution. That means the worker is income taxed on the employer Roth contribution and then that money is employer Roth money in the worker’s name. Also, workers with an employer Roth account can do an in-plan Roth conversion of any type of money. It would be best to wait on the in plan Roth conversion or elect to treat an employer contribution as a Roth contribution until the employee was fully vested. Only workers age 50 and older can defer $30,500 in 2024.
LO 5.4.3
Which of the following statements is CORRECT regarding penalties related to IRAs?
For contributions in excess of the annual limits, the IRS imposes a penalty of 10% of the excess amount until the excess is withdrawn.
One of the exceptions from the 10% early withdrawal penalty (pre-59½) is a distribution to fund a first-time home purchase (subject to a lifetime maximum of $10,000). Income taxes still apply.
The 10% early withdrawal penalty does not apply if withdrawals are made to pay for qualified higher education expenses.
Failure to begin receiving distributions by December 31 of the year following the year the taxpayer attains age 73 will result in a penalty tax of 25%.
A)
I only
B)
II and III
C)
II and IV
D)
I, II, III, and IV
II III
The penalty for excess contributions to an IRA is 6%. The 10% penalty for distributions before age 59½ does not apply to withdrawals made for qualified higher education expenses or first-time home purchase ($10,000 lifetime max). The required beginning date for minimum distributions is April 1 of the following year following the year in which the account holder attains age 73, not December 31. SECURE 2.0 raised the initial age for RMDs to 73 for 2023 on. It also decreased the penalty for RMD shortfalls from 50% to 25%. Finally, SECURE 2.0 further reduced the penalty for the shortfall to 10% if the shortfall is promptly removed.
LO 5.3.1
David, a 63-year-old investor, wants to know which of these penalties he might be subject to at some point if he continues tax-deductible contributions to his traditional IRA. The applicable penalties are
a 10% early distribution penalty.
a 25% minimum distribution penalty.
a 6% penalty on excess contributions.
a 6% penalty on excess withdrawals.
A)
II, III, and IV
B)
I, II, and IV
C)
I and III
D)
II and III
D
Statement I is incorrect. Because David is over age 59½, he will not be subject to the early withdrawal penalty. Statement II is correct. If David does not begin taking minimum distributions by the required beginning date, he will be subject to the 25% minimum distribution penalty. This can be dropped to 10% if he will withdraw the shortfall promptly. Statement III is correct. If David contributes more than the permitted amount to an IRA, he will be subject to a 6% penalty on the excess contribution. Statement IV is incorrect. There is no penalty for excess withdrawals. The IRS loves the revenue large traditional retirement account withdrawals bring in.
LO 5.1.2
Which of these is CORRECT in stating the rules regarding distributions from an IRA plan?
The annuity rules govern an IRA distribution that includes nondeductible and deductible contributions.
At the IRA owner’s death, the account balance exceeding the greater of $150,000 is included in the decedent’s gross estate.
A distribution attributable to contributions to a Roth IRA is subject to the premature distribution penalty tax, if withdrawn before age 59½.
Distributions related to the death of the IRA owner are exempt from the early withdrawal penalty.
A)
I and IV
B)
I, III, and IV
C)
II, III, and IV
D)
I, II, and III
A
I don’t fucking understand this at all.
Section 72 annuity rules relating to the recovery of the participant’s cost basis still apply to an IRA distribution consisting of deductible and nondeductible contributions. (The Small Business Job Protection Act of 1996 provided a simplified method of cost basis recovery for qualified plans and TSA annuities; however, the provisions for IRAs were not affected.) Death is an exception to the premature distribution penalty.
Option II is wrong because the total balance of an IRA will be included in the owner’s gross estate; however, if the spouse is the beneficiary, the marital deduction will be available. Option III is wrong because withdrawals of Roth IRA contributions are never, under any circumstance, subject to income taxes. Nor are withdrawn Roth IRA contributions ever subject to the 10% EWP. With a Roth IRA, nonqualifying distribution amounts that exceed contributions and conversions (meaning taking a distribution of earnings) are income taxed and subject to the 10% EWP rules. Finally, a distribution of converted money is never income taxed (because this principal was income taxed at the conversion), but it is subject to the 10% EWP rules for five Roth years. This may be the only time the income tax rules penalize money that is not subject to income taxes. This tax oddity tries to prevent abusing conversions by using them to dodge the 10% EWP.
LO 5.3.1
Which of these are characteristics of a Roth IRA?
Qualified distributions are tax free.
Contributions are not tax deductible.
All distributions from a Roth IRA are tax-free after five-years.
Contributions are tax deductible.
A)
II and III
B)
I, II, and III
C)
I, III, and IV
D)
I and II
D
Taxpayers may not deduct Roth IRA contributions from their current taxable income; however, qualified distributions are received tax free by the owner. Qualified distributions must pass both the five-Roth years holding period test and also be for a correct reason (death, age 59½, first-time home owner’ expenses, or disability).
LO 5.4.1
Roth IRA distributions are required to be treated as occurring in a specific order. What is the order in which distributions are made from a Roth IRA?
A)
Contributions, earnings, conversions
B)
Contributions, conversions, earnings
C)
Earnings, conversions, contributions
D)
Conversions, contributions, earnings
B
Any amount distributed from an individual’s Roth IRA is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category):
From regular contributions (e.g., a $4,000 contribution in the current year)
From conversion contributions, on a first-in, first-out basis
From earnings
All distributions from an individual’s Roth IRA made during one taxable year are aggregated.
LO 5.4.2
Based on IRS regulations, the minimum distribution rules for IRAs and qualified retirement plans do what?
They impose a 20% penalty on the amount by which a distribution falls short of the required minimum distribution (RMD).
They have a required beginning date of age 59½.
They make it easier to calculate the minimum distribution amount based on the participant’s life expectancy.
They require the participant to determine a beneficiary by the required minimum distribution (RMD) beginning date.
A)
III only
B)
I and IV
C)
I, II, and III
D)
I and II
III only
Based on IRS regulations, minimum distribution rules have been simplified by providing a uniform table that can be used by all participants (except when a spouse is more than 10 years younger) to determine the minimum distribution required during their lifetimes. This makes it easier to calculate the RMD because participants would neither need to determine their beneficiary by the required minimum distribution beginning date, nor would they have to decide whether to recalculate their life expectancies each year. SECURE 2.0 lowered the RMD shortfall penalty from 50% to 25%. In fact, this penalty can be lowered to 10% of the shortfall if withdrawn promptly. The required beginning date is April 1 of the year after the year the account owner turns age 73 for traditional IRAs and qualified plan participant owners of more than 5% of the company. The required beginning date for Section 403(b) plans, Section 457 plans, and qualified plans is April 1 of the year after the employee retires. It is advisable for the owner of an IRA or qualified plan account to name an individual as beneficiary, but there is no requirement that such a beneficiary be determined before the owner attains age 73.
LO 5.4.2
Which of these is NOT subject to 20% mandatory federal income tax withholding if a rollover is not a transfer or direct rollover?
IRA rollovers
Section 403(b) plan/tax-sheltered annuity (TSA) rollovers
Money purchase pension plan rollovers
Profit-sharing plan rollovers
A)
I only
B)
I, II, III, and IV
C)
II, III, and IV
D)
I, II, and III
I only
Of those listed, only IRAs are not subject to 20% withholding (regardless of the type of rollover). In contrast, all qualified plan and Section 403(b) plan distributions require withholding in the absence of a direct trustee-to-trustee transfer. SEP plans, while not listed, are a type of IRA and thus do not require 20% withholding.
LO 5.3.1
Distributions from a Roth IRA are qualified distributions if the five-year holding period has been met as well as what else?
If the distributions are due to the owner’s death or disability
If the distributions are used for buying, building, or rebuilding a first-time home (up to $10,000 lifetime maximum)
If the owner has attained the age of 59½
If the distributions are used for college tuition costs
A)
I and IV
B)
I, II, III, and IV
C)
I, II, and III
D)
II and III
I II III
Only Statement IV is incorrect. A qualified distribution from a Roth IRA is a distribution after the five-year holding period has been met and the distribution satisfies one of the following four requirements: attainment of the age of 59½; death; disability; or first-time home purchase up to $10,000. College tuition is not a qualified special purpose distribution. However, it is an exception for the 10% early withdrawal penalty. Thus, with a Roth distribution for college costs, only the earnings would be subject to income tax after all contribution and conversion amounts were withdrawn.
LO 5.4.2
A single taxpayer, age 58, retired two years ago and is receiving a pension of $2,000 per month from her previous employer’s qualified pension plan. She has recently taken an employment position in a small CPA firm that has no retirement plan. She will receive $12,000 annually in compensation from the CPA firm as well as the $24,000 from her pension plan each year. What is the maximum amount of deductible contributions, if any, that she may make to a traditional IRA for 2024?
A)
$8,000
B)
$7,000
C)
$4,000
D)
$0
8000
She is not currently covered by an employer-sponsored retirement plan and, therefore, can contribute the lesser of earned income ($12,000) or $8,000 ($7,000 + $1,000 catch-up) for 2024.
LO 5.1.2
Grant, age 51 today, made an initial contribution of $4,000 to a Roth IRA seven years ago. He made subsequent contributions of $6,000 annually for the next four years. This year, Grant took a $50,000 distribution from his Roth IRA to purchase a boat. Which of these statements regarding this distribution is CORRECT?
A)
It is taxable because it was within 10 taxable years from the date of initial contribution.
B)
It is income tax free because it was made after 5 taxable years, and Grant is over age 50.
C)
It is partially taxable because Grant was not age 59½, disabled, the distribution was not made to a beneficiary or Grant’s estate after his death, or used for a first-time home purchase.
D)
It is income tax free because it was made after 5 taxable years from the date of initial contribution.
C
Although Grant took the distribution after five taxable years from the date of initial contribution, he did not meet one of the other requirements for a qualified distribution from his Roth IRA (made after the individual attained age 59½, attributed to being disabled, made to a beneficiary or estate of an individual on or after the individual’s death, or used for a first-time home purchase). In this case, the first $24,000 is counted against his contributions. Thus, there is no tax or penalty on $24,000. There are no conversions, so the rest of the distribution is earnings and thus subject to income tax and the 10% early distribution rules.
LO 5.4.2
All of these are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA except
A)
the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion.
B)
the Roth IRA conversion becomes more appropriate the longer the period before distributions.
C)
one advantage of a conversion to the Roth IRA is that the Roth IRA will not be subject to required minimum distributions (RMD) during the life of the original owner.
D)
any portion of an IRA can be converted to a Roth IRA.
A
The answer is the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion. The Roth IRA conversion is more appropriate when the income tax rate is the same or higher at the time of distribution than at the time of conversion. Also, the more time the money can grow income tax-free, the better.
LO 5.4.2
Marilyn had a $105,000 balance in her IRA on December 31st of last year. Over the years, she made $30,000 in nondeductible contributions to this IRA. If Marilyn received a $20,000 distribution from her IRA on May 15th of this year, and does not take any other distributions this year, how much of the distribution will be taxable? Her balance at the end of this year is $80,000.
A)
$30,000
B)
$20,000
C)
$6,000
D)
$14,000
d
Or, simply multiply the distribution by the inverse of the nontaxable percentage—70%, in this case—which equals to a $14,000 taxable distribution ($20,000 × 70%). Note that you cannot know the exact amount that will be income taxed on the day you take the distribution because the formula uses the account value at the end of the year.
LO 5.3.1
Carol has been researching IRAs and learning of the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of these statements regarding an IRA is CORRECT?
A)
When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available.
B)
Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA, but not for a Roth IRA.
C)
Traditional IRAs are never subject to required minimum distributions while the original owner is alive.
D)
Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account.
d
NUA treatment of a lump-sum distribution is not available for IRA investments. Roth IRAs owned by the original owner are never subject to required minimum distributions (RMDs) while the original owner is alive. People who inherit a Roth IRA do have RMDs and they are always under the “simple 10-year rule” as will be covered in Module 6. Traditional IRA owners must start RMDs at age 73. A major change that started for 2024 is treat employer Roth accounts (Roth 401(k)s, etc) are under the same RMD rules as Roth IRAs. Certain low- and moderate-income taxpayers may be eligible for an income tax credit for contributions to either a traditional IRA or a Roth IRA.
LO 5.1.1
Sam has a Roth IRA valued at $100,000. His original contribution was nine years ago. If Sam dies this year, when would the distribution to his beneficiary be considered a qualified distribution?
A)
Next year
B)
When the beneficiary is 59½
C)
This year
D)
When the beneficiary has held the account for five years
This year
The beneficiary can take a qualified distribution immediately. The five-taxable-year period is not restarted when the owner of a Roth IRA dies. Thus, the beneficiary of the Roth IRA would have to wait only until the end of the original five-taxable-year period for the distribution to be a qualified distribution. The five-year period was satisfied for this Roth IRA four years ago.
LO 5.4.2
An amount converted from a traditional IRA to a Roth IRA is
A)
subject to the 10% early withdrawal penalty at the time of conversion.
B)
included in taxable income if it is a return of basis.
C)
not subject to the 10% early withdrawal penalty at the time of conversion.
D)
not included in gross income.
C
Any amount converted from a traditional IRA to a Roth IRA is not subject to the 10% early withdrawal penalty at the time of conversion and is included in taxable income except for any amount that already had a basis due to nondeductible contributions. All other amounts in the distribution are included in gross income for the year in which the distribution occurs.
LO 5.4.2
Carol has been researching IRAs to learn the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of these statements regarding an IRA is CORRECT?
When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available.
IRAs are not allowed to invest in S corporations.
Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA but not a Roth IRA.
Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account.
A)
II only
B)
I and III
C)
I, II, III, and IV
D)
II and IV
II IV
IRA’s cannot invest in S-Corporations.
IRA’s cannot have NUA - that’s only for qualified accounts.
Statements II and IV are correct. Statement I is incorrect. NUA treatment of a lump-sum distribution is not available for IRA investments. Statement III is incorrect. Certain taxpayers may be eligible for an income tax credit for contributions to both a traditional IRA and a Roth IRA.
LO 5.1.1
Which one of these is CORRECT regarding Roth IRAs?
A)
If a nonqualifying distribution is made before age 59½, the principal is subject to the 10% penalty but is not considered taxable income.
B)
As with conventional IRAs, required minimum distributions must begin from a Roth IRA by April 1 of the year following the year the participant reaches age 73.
C)
Withdrawals of earnings up to $10,000 from a Roth IRA for the purchase of a first home are tax free and penalty free if the withdrawals are made at least five years after the first contribution to the Roth IRA.
D)
The five-year holding period test for conversions ends five years and a day after the conversion.
c
If a nonqualified distribution is made, the tax and penalty usually only applies to the earnings of the Roth IRA. The tax never applies to withdrawals of contributions or conversions, but the withdrawal of conversion money is subject to the 10% EWP rules for five Roth years from the conversion. The RMD rules that mandate distributions from traditional IRAs beginning for age 73 do not apply to Roth IRAs while they are held by the original owner. However, people inheriting a Roth IRA are subject to RMDs going forward. Starting in 2024, employer Roth accounts have the same RMD rules and Roth IRAs. Finally, the five Roth years holding period test for conversions ends on January 1st of the next year after the fifth Roth year since the conversion. For example, you converted traditional IRA money into Roth money on December 7, 2024. Thus, the five year holding period test for the conversion started on January 1, 2024. The five-year window ends on January 1, 2029 because the five years ran from January 1, 2024 through December 31, 2028. Note that the five-year holding period for a conversion on January 10, 2024 would also end on January 1, 2029. Thus, conversions late in a year are favored over conversions earlier in the year in the sense that they both complete their five year holding period at the same time.
LO 5.4.2
