Module 5 Traditional and Roth IRAs Flashcards

1
Q

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

A

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

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2
Q

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

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

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3
Q

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

A

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

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4
Q

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.

A

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

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5
Q

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

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

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6
Q

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

A

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

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7
Q

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

A

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

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8
Q

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

A

Tip income

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9
Q

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

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

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10
Q

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

A

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

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11
Q

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.

A

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

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12
Q

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

A

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

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13
Q

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

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

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14
Q

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

A

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

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15
Q

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

A

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

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16
Q

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

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

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17
Q

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

A

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

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18
Q

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

A

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

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19
Q

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

A

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

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20
Q

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

A

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

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21
Q

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

A

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

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22
Q

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

A

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

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23
Q

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.

A

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

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24
Q

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

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

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25
Q

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

A

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

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26
Q

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.

A

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

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27
Q

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

A

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

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28
Q

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.

A

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

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29
Q

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

A

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

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30
Q

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.

A

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

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31
Q

Karen, who attained age 51 today, wishes to take distributions from her traditional IRA under the substantially equal periodic payments rule and avoid imposition of the 10% early distribution penalty. Her life expectancy according to IRS Table I is 33.3 years. Which of the following is the minimum period over which the payments must continue to avoid the penalty?

A)
33.3 years
B)
19.5 years
C)
8.5 years
D)
5.0 years

A

8.5 years. Basically until the person reaches 59.5 years of age or 5 years (whichever is LARGER)

Once begun, payments under the substantially equal payments exception to the 10% early withdrawal penalty must continue at least until the later of 1) 5 years or 2) attainment of age 59½. In this case, Karen’s payments must continue for 8.5 years, until she attains age 59½.

LO 5.3.1

32
Q

Which of these statements regarding Roth IRAs is CORRECT?

A)
Funds from qualified pension, profit-sharing, stock bonus, Section 401(k), Section 403(b), and Section 457 plans can be converted to a Roth IRA.
B)
Amounts in a traditional IRA can be converted to a Roth IRA.
C)
All of these are correct.
D)
Distributions from one Roth IRA can be rolled over tax free to another Roth IRA.

A

All of these statements regarding rollovers of and conversions to Roth IRA funds are correct.

LO 5.4.2

33
Q

Harry, 36, started his Roth IRA three years ago, contributing $5,000. He has since made a contribution of $5,500 for each of the last two years and converted a traditional IRA of $17,000 to the Roth IRA last year. His total contributions are $16,000 plus the $17,000 conversion, and the account is now worth $36,497. Harry would like to make a withdrawal so that he can buy a new car. He wants to know what his options are and what the tax consequences would be. Which one of these statements would be the CORRECT information for Harry?

A)
If a withdrawal of converted IRA funds is made from the Roth account before five years has elapsed, it will be subject to the 10% early withdrawal penalty rules.
B)
Because Harry’s Roth IRA has not met the five-year holding period, any withdrawal would be subject to taxation and the 10% penalty.
C)
Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Because taxes have already been paid on these amounts, there are no taxes—either income taxes or penalty taxes—even if the distribution is not qualified.
D)
Withdrawals from Roth IRAs are accounted as coming from the older of conversions or contributions first.

A

A

Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Because taxes have already been paid on these amounts, there are no income taxes on the contribution or conversion amounts. However, if a withdrawal of converted IRA funds is made before five Roth years have elapsed, it is subject to the 10% penalty unless the withdrawal is for an exception. The exceptions are the normal IRA exceptions. There is no category of Roth IRA-only exceptions to the 10% EWP. If the Roth IRA earnings are withdrawn and the distribution is not “qualified,” the earnings will be subject to income taxation and may be subject to the 10% penalty depending on why the withdrawal was made.

Note: The five-year Roth IRA clock starts whenever the first dollar goes into the first Roth IRA for that person. However, the taxation of withdrawals is always contributions, then conversions, and finally earnings.

LO 5.4.2

34
Q

Which one of the following is subject to the 10% penalty tax on premature distributions from an IRA?

A)
A distribution following the owner’s death
B)
A series of substantially equal periodic payments
C)
A distribution to a 55-year-old employee following separation from service
D)
A distribution following disability

A

c

Death, Disability, Substantially equal payments (greater of 5 years or till 59.5 years old thing) are all qualifiers to withdraw penalty free from a Roth.

This type of distribution is subject to the 10% penalty for an IRA. However, the exemption from the premature distribution penalty does apply to qualified plan distributions.

LO 5.3.1

35
Q

Nick is a 45-year-old single taxpayer with MAGI of $100,000 in 2024. Nick participates in his employer’s Section 457 plan and has deferred $23,000 of his salary to the plan this year. How much of a tax-deductible traditional IRA contribution can Nick make this year?

A)
$7,000
B)
$2,500
C)
$5,000
D)
$0

A

a

A participant in a Section 457 plan is not considered an active participant for IRA tax deductibility purposes. Because Nick is not an active participant, he can make a fully deductible $7,000 contribution to a traditional IRA in 2024. If Nick were an active participant in a qualified plan, SEP, SARSEP, SIMPLE, or Section 403(b) plan, his deduction would be fully phased out at his MAGI level. However, his MAGI would still be low enough to allow contributions to a Roth IRA. Contributions to a Roth IRA begin to be phased out at $146,000 for unmarried individuals in 2024.

LO 5.1.2

36
Q

Which of these distributions from an IRA would subject the owner to the 10% early withdrawal penalty (EWP)?

A)
For medical expenses exceeding 2% of the IRA owner’s AGI
B)
To pay higher education costs for the taxpayer, spouse, child, or grandchild
C)
To pay health insurance premiums if the owner is unemployed (participant must file for unemployment compensation before this exception applies)
D)
To pay acquisition costs of a first home for the participant, spouse, child, or grandchild of the participant or spouse, up to a $10,000 lifetime maximum

A

a

The exception is for medical expenses exceeding 7.5% of the owner’s AGI (for taxpayers who have not attained age 59½).

LO 5.3.1

37
Q

What is the significance of an investment in life insurance for an IRA?

A)
It is not recommended for an IRA owner over age 50 because the cash value of the policy may not build to a sufficient level by the time of the owner’s retirement.
B)
It may be recommended to generate high returns, but cannot represent more than 25% of the total account value.
C)
It is not recommended because an investment in life insurance may be considered a prohibited transaction, resulting in loss of IRA status for the account.
D)
It may be recommended to generate high returns, but cannot represent more than 50% of the total account value.

A

c

IRAs are not permitted to invest in life insurance or loans; such an investment is generally a prohibited transaction and would result in the account losing its IRA status.

LO 5.1.1

38
Q

Fred has been researching IRAs and learning of the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of these 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.
In 2024, eligible individuals may contribute up to $7,000 to an IRA and an additional $1,000 when age 50 or over.
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)
I, II, III, and IV
B)
II and IV
C)
II only
D)
I and III

A

ii iv

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

39
Q

Jane, age 56, has $500,000 in a traditional IRA rollover account from her previous employer’s profit-sharing plan. She left her former employer when she was 55. She also receives a monthly retirement pension from her previous employer’s qualified plan of $30,000 per year. Jane needs an extra $20,000 per year from her IRA to meet her living expenses until her Social Security payments begin at age 62. Which of the following is CORRECT?

Since Jane is under age 59½, she cannot avoid having to pay a mandatory 10% penalty tax on any amounts withdrawn from her IRA.
Jane will have to report the $20,000 withdrawal as ordinary income on her personal income tax return.
Jane can avoid the 10% penalty tax if she takes the distributions as substantially equal periodic payments.
Jane will owe income tax on the $20,000, but she will not have to pay the 10% EWP because she separated from service after attaining age 55.
A)
II and III
B)
I and IV
C)
II only
D)
I only

A

ii iii

While taxpayers under age 59½ may pay a penalty tax on IRA distributions, there are methods of avoiding the penalty, as stated in Statement III. The income from the IRA would be fully taxable as ordinary income on her return. The exception to the 10% EWP for separation from service after attaining age 55 only applies to qualified plans and 403(b)s. Finally, note that Jane moved all her employer retirement plan money into her IRA with you after she retired at 55. Now she will owe the 10% EWP on this distribution. Jane might forgive you for moving all the money and then subjecting her to the 10% EWP, but Tarzan will not be happy about it at all. In fairness to Tarzan, Jane’s lawyer will also go ape over the 10% EWP. Finally, your E&O insurance company will sympathize with Jane’s lawyer and that cannot be good for you. The moral of the story is to leave some money in the employer’s plan (if possible) until the client is 59½. Fortunately, in this situation, you documented that you told Jane about this possibility and she said she would never take money from the new IRA until she was 59½. Also, her former employer’s plan did not allow ex-employees to remain in the plan. That calmed Tarzan’s nerves and he kept his $5 million account with you.

LO 5.3.1

40
Q

Which of the following types of plans can be designed to provide for the deferral of taxable income for the participant’s retirement?

Roth IRA account
SIMPLE 401(k)
Nondeductible traditional IRA account
Nonqualified deferred compensation plan
A)
I, II, III, and IV
B)
I and II
C)
III and IV
D)
I, II, and III

A

all

point is, they’re not talking about deferring income taxes, they’re talking about deferring taxes in general. roth ira’s are taxable going in, but they DEFER taxes on income from investments that would have normally been taxable.

Each of the plans listed may be designed to provide for the deferral of taxable income in various ways. The plans avoid income tax on the annual growth of the asset. A SIMPLE 401(k) and nonqualified deferred compensation plans also defer taxation on the initial amount contributed to the plan. While a Roth IRA may totally avoid all income taxes after the contribution, earnings from a Roth IRA may be subject to income taxes if a withdrawal is not a qualified distribution.

LO 5.4.3

41
Q

Teresa, 37, recently terminated her employment with Applied Dynamicals Inc. The company had no qualified plan, but she has a Roth IRA created by rolling over $25,800 from her traditional IRA 20 months ago. Her Roth account has a balance of $30,000. As a result of her layoff, she needed some cash, and so she requested that her mutual fund company send her $5,500 by check, made in her name. Which one of the following statements best describes the distribution requirements that will directly affect the amount she receives on her distribution check?

A)
The distribution will be income tax free and without any premature distribution penalty because it is less than her conversion contribution.
B)
The 20% mandatory withholding requirement will apply.
C)
Teresa will owe income tax and the 10% early withdrawal penalty on the $5,500.
D)
The distribution will be income tax free because it is less than her conversion contribution.

A

d

the 10% penalty will be owed because it didn’t make it to the five year conversion clock deadline (20 months was the time)

In this case, the mandatory withholding requirement will not apply because the payment is made from an IRA, not an employer retirement plan. The distribution will be income tax free because it is less than her conversion contribution and she paid the tax at the time of conversion. However, she will be assessed a 10% early withdrawal penalty because the distribution is from a converted IRA, five years has not elapsed, and the withdrawal does not meet any of the exceptions to the early withdrawal penalty from an IRA.

LO 5.4.2

42
Q

Which of these statements regarding IRA distributions is CORRECT?

A)
A withdrawal of earnings from an IRA to reduce mortgage indebtedness is exempt from the 10% EWP.
B)
Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty.
C)
Distributions from an IRA following separation from service after attaining age 55 but before age 59½ are exempt from the 10% early withdrawal penalty.
D)
Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty and taxation.

A

b

Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty.

LO 5.3.1

43
Q

Norman and Brenda (both age 36) are married taxpayers filing jointly. Norman earned $132 this year, and Brenda earned $100,000. Brenda is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for this tax year.

How much, if any, can be contributed to a spousal IRA and deducted for Norman for this year?

A)
$140
B)
$200
C)
$7,000
D)
$132

A

c

They’re married, so even though he had only earned $132 in individual income, the MAGI is based on their joint income of $100,132. He’s not an active participant in a company retirement plan, so that means his threshold is $230,000-$240,000 (2024) [This would’ve been $215,000-$225,000 in 2023’s numbers]. They are under the 230k-240k threshold and as a result he can contribute the max of 7,000 in his case.

The maximum deductible contribution to a spousal IRA for Norman is $7,000, and the deductible amount phases out at AGI of $230,000–$240,000 for Norman, who is the nonactive participant spouse.

LO 5.1.2

44
Q

Mark and Christine, both age 36 in 2024, file their taxes jointly. Mark has been out of work for over 18 months. He earned $1,746 this year doing odd jobs. Christine earned $84,000 this year and is an active participant in the 401(k) plan at work. She contributed $2,700 to her IRA and the maximum to Mark’s IRA for this year.

How much can they deduct for their IRA contributions?

A)
$4,446
B)
$0
C)
$9,700
D)
$7,000

A

c

She already made her contribution of $2,700 this year. Mark would be contributing the maximum amount of $7,000 because joint income supersedes the individual earned income necessity to contribute to an IRA.

The maximum contribution for spousal IRAs is $7,000 for 2024. The combined contribution for the husband and wife, however, cannot exceed the total compensation of both spouses. Also, the deduction cannot exceed the contribution. While she has plenty of earned income to cover them both, she only contributed $2,700 to her IRA. Thus, she can only deduct $2,700. Because she is an active participant, you must check to see if her deduction is being phased out. In this case, their combined income is well below the start of the phaseout range for the active participant and even further below the phaseout range for the spouse who is not an active participant.

LO 5.1.2

45
Q

Mark and Melissa, ages 43 and 39, are married and have a combined MAGI of $145,000. Melissa is an active participant in her company’s Section 401(k) plan, but Mark’s employer does not offer a retirement plan. Both Mark and Melissa each make $7,000 contributions to their traditional IRAs. How much of these IRA contributions can Mark and Melissa deduct on their 2024 MFJ tax return?

A)
$14,000 for both contributions
B)
$7,000 for Mark’s contribution
C)
Mark’s contribution is not deductible
D)
$3,000 for Melissa’s contribution

A

B

Phaseout for MAGI 2024 IRAs is 123k-143k for active members of employee plans. They made 145k, so someone’s not gonna get a deduction if they’re active. Mark is NOT an active member, so his threshold shoots up to 230-240k (2024) while Melissa is an active member so her threshold stays at 123-143k. She’s above her threshold, he’s not above his, so she cannot deduct and makes an after-tax contribution, while he can deduct and makes a deductible contribution.

Because Melissa is an active participant in her employer’s Section 401(k) plan and their combined MAGI exceeds $143,000 (the upper end of the married filing jointly phaseout range for 2024), Melissa’s entire IRA contribution is nondeductible. Thus, she should make her IRA contribution to a Roth IRA instead of a nondeductible IRA. Because Mark is not an active participant, his deduction would be phased out starting at $230,000 of MAGI. Mark and Melissa’s combined MAGI is only $145,000, and the couple will receive a full $7,000 deduction for Mark’s IRA contribution.

LO 5.1.2

46
Q

Which of the following statements regarding distributions from Roth IRAs is CORRECT?

Qualified distributions from Roth IRAs are tax-free.
To qualify for tax-free distributions, they must be made more than five years after the Roth IRA was established and distributed after the participant attains age 59½, becomes disabled, dies, or uses the withdrawal for a first-time home purchase with a $10,000 lifetime maximum.
A)
I only
B)
Both I and II
C)
Neither I nor II
D)
II only

A

both

For a distribution to be qualified, two things need to have happened.

1 The distribution must be made more than five years after the Roth IRA was established.
2 A qualifying event must have happened. So one of these:
-Reaches 59.5 y/o
-Withdraws up to $10k for a first-time home purchase. (Lifetime maximum is 10k)
-Becomes disabled
-Dies

47
Q

Which of the following persons could make tax-deductible contributions to a traditional IRA regardless of their modified adjusted gross income (MAGI)?

A)
A person who participates in a Section 403(b) plan
B)
A person who participates in a SEP IRA
C)
A person who participates in a Section 457 plan
D)
A person who participates in a Section 401(k) plan

A

C

Participation in a 457 plan does NOT trigger the “is an Active member of a company sponsored retirement plan”. You get to keep the higher thresholds of $230k-$240k as though you are not an active member.

The answer is a person who participates in a Section 457 plan. A person who participates in a qualified plan, SEP IRA, or Section 403(b) plan may not be able to make tax deductible IRA contributions if the participant’s MAGI exceeds certain limits. Participation in a Section 457 plan does not subject a person to these limitations.

LO 5.1.2

48
Q

What is the first year in which a taxpayer who is age 50 in 2024 may receive a qualified distribution from a Roth IRA, if he makes an initial $2,000 contribution to a Roth IRA on April 1, 2024, for the tax year 2023?

A)
2029
B)
2024
C)
2028
D)
2033

A

C

2023 is the start year
2024 (1)
2025 (2)
2026 (3)
2027 (4)
2028 (5) this is the first year he can take a qualified distribution (assuming he fits one of the other qualifiers: death, disability, first time homeowner loan, and the other one)

A qualified distribution can occur only after five years have elapsed and must be made for one of the following reasons:

The owner has attained age 59½
The distribution is made to a beneficiary or the estate of the owner on or after the date of the owner’s death
The owner has become disabled
The distribution is 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. In this case, the taxpayer will be age 54 in 2028. Thus, a qualified distribution could only be taken due to death, disability, or a qualified first-time homebuyer expense. Notice that a qualified distribution could not be taken for a qualified higher education expense. These expenses are an exception to the 10% penalty, but they are not eligible for a qualified distribution. That means distributions of earnings (not contributions or conversions) for college expenses before age 59½ would be taxable income.

LO 5.4.2

49
Q

Chester is 50 years old. Ten years ago he opened a Roth IRA by converting $10,000. Over the years he has contributed another $20,000 to his Roth IRA. His first Roth IRA contribution was eight years ago. Today his Roth IRA is worth $45,000. Which of the following are true concerning his Roth IRA and distributions from it?

His five-year Roth IRA clock started with his first contribution eight years ago.
The most he could withdraw for a distribution that was not a qualified distribution without paying income tax is $30,000.
Distributions from a Roth IRA are accounted for as coming from the oldest investment first and then following in chronological order.
The most he could withdraw from his Roth IRA this year to pay off debts without paying the 10% early withdrawal penalty (EWP) is $30,000.
A)
I and II
B)
II and III
C)
I and IV
D)
II and IV

A

II IV

Five year clock started at the opening of the Roth account, not at the time of first contribution.
The most he could withdraw without getting EWP or Income taxes is 30,000: $20k of this is from contributions, and $10k is from conversions which are five years are treated as contributions (it’s been ten years since conversion so he’s good).
Distributions from a Roth IRA are NOT treated chronologically, this question is an example of that, because his initial money in the account was converted funds, and this was followed by contributions. IRC says contributions are ALWAYS withdrawn first from a Roth IRA, not necessarily the first funds in the account.
Same thing with the $30k as above, since he’s taking out only his contributions (10k was converted and is now contributions), he won’t have to pay the EWP 10%.

Statements II and IV are correct. His five-year Roth IRA clock started 10 years ago when he opened his Roth IRA with a conversion—not eight years ago with a contribution. Distributions from a Roth IRA are accounted for as coming from contributions first. After all contributions are withdrawn, further withdrawals are accounted for as coming from conversions. The oldest conversion amount is the first conversion amount to be withdrawn. Thus, Chester has the ability to withdraw $30,000 from his Roth IRA for any reason without being subject to income tax. The first $20,000 withdrawn would come from his contributions. This contribution money will never be subject to income taxes or the 10% EWP. The next $10,000 would come from his conversion 10 years ago. This money would not be subject to income taxes because the income tax on the $10,000 was paid when the money was converted to the Roth IRA 10 years ago. Because the conversion is more than five years old, withdrawals on this $10,000 of conversion money are also free of any early withdrawal penalty.

LO 5.4.2

50
Q

Which of these methods of converting pretax retirement plan distributions to a Roth IRA is permitted?

A)
An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days after the distribution.
B)
An amount from a qualified plan can be transferred directly to a Roth IRA.
C)
Assets in a traditional IRA can be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA.
D)
All of these.

A

D

Pretax retirement plan contributions can be converted to a Roth IRA by any of four methods:

-An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days after the distribution.
-An amount in a traditional IRA can be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA.
-An amount in a traditional IRA can be transferred to a Roth IRA maintained by the same trustee.
-Amounts in a qualified plan described in IRC Section 401(a) can be converted directly to a Roth IRA.
LO 5.4.2

51
Q

This isn’t a question just a reminder, mark as purple.

Four methods for conversion from Pre-Tax accounts to Roth.

-An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days after the distribution.
-An amount in a traditional IRA can be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA.
-An amount in a traditional IRA can be transferred to a Roth IRA maintained by the same trustee.
-Amounts in a qualified plan described in IRC Section 401(a) can be converted directly to a Roth IRA.
LO 5.4.2

A

That^

52
Q

Blake and Margaret are married, file their income taxes separately, and are both age 59½. Blake makes elective deferrals into his employer’s Section 401(k) plan. Margaret works for a nonprofit and makes elective deferrals to her employer’s Section 403(b) plan. In 2024, Blake has a MAGI of $45,000 and Margaret has a MAGI of $40,000. Which of the following statements regarding Blake and Margaret and their retirement planning is FALSE?

A)
Blake and Margaret may make a deductible contribution to an IRA in 2024.
B)
Because Margaret participates in a Section 403(b) plan, she is considered an active participant.
C)
Blake is an active participant.
D)
Blake and Margaret cannot make a deductible contribution to an IRA in 2024.

A

A

MARRIED FILED SEPARATELY

If both spouses are active participants in an employer-sponsored retirement plan, contributions to an IRA are phased out when married and filing separately if the individual’s MAGI exceeds $10,000 (not indexed).

LO 5.1.2

53
Q

Which of the following statements is CORRECT regarding a nondeductible IRA?

A)
If a person is an active participant, qualification for contributions to nondeductible IRAs would depend upon AGI and filing status of the taxpayer.
B)
A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead.
C)
Nondeductible IRAs are just another name for a Roth IRA.
D)
To qualify for a nondeductible IRA, a person’s AGI must be below a specified amount. If the AGI is within the phaseout range, they may make a partial contribution. If the AGI is above certain limits, which vary depending upon the filing status of the taxpayer, contributions to a nondeductible IRA are prohibited.

A

B

A person may always choose not to deduct her IRA contribution, regardless of AGI or whether or not the person is an active participant. Roth IRA contributions are not deductible; however, Roth IRAs and nondeductible IRAs are different types of IRAs.

LO 5.1.2

54
Q

Al and Susan, both age 42, are married and file a joint income tax return. Al earned $153 this year and Susan earned $90,000. Susan is an active participant in an employer-sponsored qualified plan. Susan contributed $1,500 to her IRA for this year.

How much, if any, can be deducted for a maximum contribution to a spousal IRA for Al for 2024?

A)
$200
B)
$7,000
C)
$160
D)
$153

A

7000

The maximum deductible contribution for a spousal IRA for Al is $7,000 in 2024. Susan has more than enough earned income to cover them both.

LO 5.1.2

55
Q

Which of these statements is FALSE about Roth 401(k) accounts?

A)
Employer Roth plans like a Roth 401(k) or a Roth 403(b) are under the same required minimum distribution rules as other types of employer plans.
B)
Unlike traditional Roth IRA accounts that have phaseouts based upon income, there are no income restrictions applicable to participation in a Roth 401(k).
C)
A Roth 401(k) has a larger age 50 catch-up than a Roth IRA.
D)
Even if a Roth 401(k) participant already has a Roth IRA account, a new five-year clock is required for the Roth 401(k).

A

A

SECURE 2.0 made the RMD treatment of Roth IRAs and employer Roth accounts exactly the same. There is a new clock that is started for a Roth 401(k) account, even if the participant already has a Roth IRA account. However, if a participant transfers the Roth 401(k) into a Roth IRA, then the Roth IRA clock will be the one that applies, not the Roth 401(k) clock.

LO 5.4.3

56
Q

Clara, age 50, opened a Roth IRA in Year 1 and made a $5,000 contribution for that year. In Years 2, 3, and 4, she made additional annual contributions of $5,000. Clara died in Year 4 after making her contribution for that year. The beneficiary is her son, Josh, who has asked his financial planner when he may take a total distribution from Clara’s Roth IRA penalty free and tax free. What should the planner tell him?

A)
Because the distribution is made to Josh as a beneficiary upon Clara’s death, the distribution can be taken immediately without incurring a penalty or income taxes.
B)
A new five-year holding period began with the year of Clara’s death (Year 4), and Josh must wait until January 1 of Year 9 for a tax-free and penalty-free distribution.
C)
Josh may roll over Clara’s Roth IRA to his own Roth IRA and is not required to take distributions during his lifetime.
D)
The required five-year holding period that began in Year 1 with Clara’s first contribution to the Roth IRA must be satisfied for a distribution to be penalty free and tax free.

A

D

Remember for Roth IRAs two things must be satisfied for penalty free and taxation free withdrawals.

5 Year rule

AND one of these

Death of the Roth account owner
Disability
$10k for first time home
Whatever the other one was*

Any distribution must satisfy the five-year holding period that began in Year 1 with Clara’s first contribution to the Roth IRA to be tax free and penalty free. A nonspouse beneficiary cannot roll over the inherited Roth IRA into his own Roth IRA and forego the required distributions.

LO 5.4.2

57
Q

Natalie opened a Roth IRA in March 2015 and made a contribution of $4,000 for the year 2014. She is now 53, and the account has grown to $9,000. Natalie is going back to college, and wants to make a withdrawal this year of the entire amount. You would advise her that

A)
her entire amount will not be taxed because she has meet the five-year holding period requirement and her $5,000 in earnings are being used for postsecondary education expenses.
B)
her contribution of $4,000 will not be taxed as a return of principal; however, the $5,000 in earnings will be taxed, including the early withdrawal penalty tax, because she has not met the five-year holding requirement and is under age 59½.
C)
her contribution amount of $4,000 will not be taxed or penalized; however, her $5,000 in earnings will be taxed because she is under age 59½, but the earnings will be exempt from the early withdrawal penalty tax because they are being used for postsecondary education.
D)
her entire withdrawal amount will be assessed the early withdrawal penalty tax because she is under age 59½, and the earnings will also be subject to income taxes.

A

C

Her basis won’t be taxed or penalized because it’s after the five year rule (2014 was a while back).
But the earnings (5000) will be taxable as she has not gotten the second Roth IRA qualifier in there: death, disability, first time homeownership, or 59.5 y/o reached.
Since it’s an IRA, withdrawals for educational purposes are exempt from the EWP. So she’ll just pay income taxes on it.

Natalie has met the five-year requirement (the clock would have started on January 1, 2014); however, she is not yet age 59½ so she will be taxed on any earnings only, not the contribution amount. Fortunately, she will not have to pay the 10% early withdrawal penalty tax because there is an exception to this penalty for IRA accounts if the funds are being used for qualified education expenses.

LO 5.4.2

58
Q

Which of these statements regarding contributions to a traditional IRA is CORRECT?

A)
Deductible contributions to an employed individual’s IRA and an unemployed spouse’s spousal IRA are limited to the lesser of 100% of earned income or $3,000.
B)
There are no restrictions on the deductibility of contributions, provided the individual is an active participant in an employer-sponsored retirement plan.
C)
Alimony and rental income are considered earned income for the purposes of making a deductible contribution to a traditional IRA.
D)
A taxpayer who is considered an active participant in an employer-sponsored retirement plan may also be eligible to contribute the maximum amount to a traditional IRA.

A

D

this one’s pretty straight forward

The answer is a taxpayer who is considered an active participant in an employer-sponsored retirement plan may also be eligible to contribute the maximum amount to a traditional IRA. A taxpayer with at least $7,000 ($8,000 if 50 or older) in compensation (earned income) may contribute the maximum amount to a traditional IRA, even if the taxpayer is an active participant in an employer-sponsored retirement plan. The deductible amount of the contribution, if any, will depend on applicable phase-out thresholds.

LO 5.1.1

59
Q

Which of the following statements regarding the differences between traditional IRAs and Roth IRAs is CORRECT?

Traditional IRAs are tax-favored retirement savings plans that encourage the accumulation of savings for retirement because they allow earnings to be tax deferred until retirement.
Roth IRA contributions are made on an after-tax basis, but earnings are not currently taxed, and qualifying distributions are tax free.
A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II

A

both

60
Q

When is a traditional IRA inappropriate?

A)
Sheltering current compensation or earned income from taxation is a taxpayer’s goal.
B)
A client wants to accumulate assets for short term financial objectives.
C)
Traditional IRAs are seen as an important supplement or alternative to a qualified pension or profit-sharing plan.
D)
A taxpayer wants to defer taxes on investment income.

A

b

The answer is that a client who wishes to accumulate assets for short term financial objectives is not appropriate for an IRA. Appropriate uses for a traditional IRAs are long-term accumulation for retirement purposes and taxpayers wanting to defer taxes on investment income. Traditional IRAs are seen as an important supplement or alternative to a qualified pension or profit-sharing plan.

LO 5.1.1

61
Q

Which of the following is CORRECT in relation to a nonqualified distribution from a Roth IRA?

A)
A nonqualified distribution from a Roth IRA held for five years will not be subject to ordinary income tax or an early withdrawal penalty because the holding period requirement has been satisfied.
B)
A nonqualified distribution attributable to a conversion within five years will be subject to ordinary income tax and an early withdrawal penalty.
C)
Regular contributions will be deemed the first distributed and will never be subject to income tax or an early withdrawal penalty.
D)
A nonqualified distribution will always incur a penalty.

A

c

Contributions don’t care about five year rule, they are ALWAYS exempt from taxes and EWP.

A distribution from a Roth IRA, qualified or nonqualified, will be attributed as first coming from regular contributions, and that amount will never be subject to income tax or an early withdrawal penalty. A nonqualified distribution will only be subject to penalty if the distribution is attributable to earnings or to a conversion within five years. A distribution attributed to a conversion within five years is subject to an early withdrawal penalty, but is not subject to regular income tax. A distribution from a Roth IRA must meet both the five year-holding period requirement and one of the other qualified circumstances (death, disability, first-time home purchase, age 59½).

LO 5.4.2

62
Q

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)
Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account.
B)
When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available.
C)
An IRA owner can use their IRA as collateral for a loan.
D)
Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA but not for a Roth IRA.

A

a

earnings on assets within an IRA are not taxed until you take them out.
NUA is only for qualified accounts taking out lump sums.
IRA can absolutely NOT take out a loan or else it risks losing its status as an IRA.
you don’t get a tax credit from contributions to an IRA, you just get to deduct it from your income.

Earnings on assets held in an IRA are not subject to federal income tax until they are withdrawn from the account. Net unrealized appreciation (NUA) treatment of a lump-sum distribution is not available for IRA investments. If an individual uses their Individual Retirement Account as collateral for a loan, the amount pledged is a prohibited transaction and thus is treated as a withdrawal. If an Individual Retirement Annuity is pledged as collateral for a loan, then the entire account balance is treated as a withdrawal. 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

62
Q

All of these are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA except

A)
any portion of an IRA can be converted to a Roth IRA.
B)
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.
C)
the Roth IRA conversion becomes more and more appropriate the longer the period of distributions.
D)
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.

A

b

In theory, you want the money coming out of the roth to be when you have a high tax bracket, to make the tax you paid for it to get in there seem like a better deal.

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.

LO 5.4.3

62
Q

Charlie contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year?

A)
He must pay taxes and a penalty on the full distribution.
B)
He cannot make any withdrawals, because the money has not been in the Roth IRA for five years or longer.
C)
He will pay neither taxes nor a penalty.
D)
He only pays ordinary taxes, because Roth IRA distributions are not subject to a penalty.

A

c

no taxes. roth ira’s are aggretated similarly to regular ira’s. so his total contribution is 4k, and the amount withdrawn is less than that. since contributions across all roths are aggregated and those come first, then that means no earnings were withdrawn.

The distribution is not qualified because Charlie is under age 59½, and he is withdrawing the money before the waiting period of five tax years. None of the withdrawal, however, is included in Charlie’s taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). No penalty applies since the withdrawal is not taxable.

LO 5.3.1

62
Q

Ray died this year at age 73, and his wife, Mary, 55, is the designated beneficiary on his Roth IRA. Ray’s Roth IRA was established three years ago. Which of these statements is CORRECT?

Ray was not subject to required minimum distributions from his Roth IRA during his lifetime.
If Mary chooses to distribute the entire balance of the Roth IRA this year, a portion of the distribution may be subject to regular income tax.
A)
I only
B)
Both I and II
C)
Neither I nor II
D)
II only

A

Both

Statement I: Correct. Roth IRA owners are not required to take minimum distributions during their lifetime.

Statement II: Correct. Mary needs to hold the IRA for two more years to meet the five-year requirement for tax-free distributions. If distributed now, earnings are taxed as regular income, but contributions are not taxed or penalized. Conversion amounts are not taxed again but are subject to the 10% early withdrawal penalty if withdrawn within five years. However, there is no 10% penalty due to the death.

Statement I is correct. Roth IRA owners are not required to take minimum distributions from their IRA during their lifetime. In fact, even if this dealt with a traditional IRA, he died before his required beginning date because his required beginning date is April 1st of next year. Statement II is correct. Mary would need to hold the IRA two additional years to satisfy the five-year holding period required for tax-free distributions. If distributed this year, any amount attributed to earnings would be subject to regular income tax. Any amounts attributed to contributions would not be income taxed. Nor would the contribution amount be subject to the 10% early withdrawal penalty because contribution amounts withdrawn are never subject to the 10% EWP. Any conversion amount withdrawn would not be subject to income taxes because the income taxes were paid when the conversion was made. Thus, conversion amounts that are withdrawn from Roth IRAs are never subject to income taxes again because that would be double taxation. However, this particular Roth IRA is three years old, so withdrawals of conversion amounts would be subject to the 10% EWP rules. In this case, however, there would be no 10% EWP because the distribution is due to a death.

LO 5.4.2

62
Q

Which of the following statements regarding the conversion of a traditional IRA consisting entirely of deductible contributions and earnings 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.
Taxpayers who are age 73 and older may not convert a traditional IRA to a Roth IRA.
If the converted assets from the traditional IRA will not remain in the Roth IRA for a relatively long time, conversion is generally advisable.
A)
I, II, and IV
B)
I only
C)
II and III
D)
I, III, and IV

A

I only

Converted amount is treated as a taxable distribution. Basically it gets added to your gross income for the year (and therefore is TAXED).
No EWP on roth conversions.
There is no age limit for roth conversions.
You generally want to keep your assets in a roth for a while to accrue gains which are not taxable given the five year rule and one other qualifier.

Only Statement I is correct. When a traditional IRA is converted to a Roth IRA, the converted amount from an IRA consisting entirely of deductible contributions and earnings is treated as a taxable distribution and is included in the owner’s gross income. Statement II is incorrect. The 10% penalty does not apply, regardless of the owner’s age. Statement III is incorrect. There is no age limitation that applies to conversion of a traditional IRA to a Roth IRA. Statement IV is incorrect. If the converted assets from the traditional IRA will remain in the Roth IRA for a relatively long time, conversion is generally advisable.

LO 5.4.2

62
Q

Which of these individuals can make a deductible contribution to an IRA in 2024?

Person Marital Status AGI Covered by Pension Plan?
Jane Single $53,000 Yes
Joe Married $100,000 No
Betty Single $20,000 Yes
Mary Sue Married $40,000 Yes
A)
All of them
B)
Joe and Betty
C)
Joe, Betty, and Mary Sue
D)
Betty and Mary Sue

A

all

All these individuals can make deductible contributions to an IRA. Joe is not an active participant in an employer retirement plan, and his adjusted gross income (AGI) is below $230,000 in 2024. Thus, even if his spouse was an active participant, he would be able to deduct his IRA contribution. The other people all have AGIs that are below the start of the contribution phaseout.

LO 5.1.1

63
Q

Which of these investments can be included in an IRA without penalty?

A mutual fund that invests exclusively in gold mining stock
An international stock mutual fund
An investment-grade piece of art
Gold coins minted in the United States by the U.S. Treasury
A)
II and III
B)
II and IV
C)
I, II, and IV
D)
I, II, III, and IV

A

I II IV

AS LONG AS THE GOLD COINS ARE MINTED BY THE US TREASURY, WE ALL GOOD. Regular ass gold coins are not allowed, same as other collectibles.

Collectibles (art) are prohibited as an IRA investment. Such investments result in penalties because they are treated as a taxable IRA distribution. Gold coins are an exception to the collectibles rule and are permitted as an investment, as are stock mutual funds.

LO 5.1.2

63
Q

Which of these are CORRECT statements pertaining to IRA rollover requirements?

If an IRA account is distributed directly to the IRA participant, the original IRA custodian must withhold 20% from the proceeds.
An IRA rollover must be completed within 60 days following the distribution date.
An IRA account may be rolled over to another IRA once a year (365 days).
Trustee-to-trustee IRA transfers may be made as often as the IRA owner wishes.
A)
I, II, and III
B)
I, III, and IV
C)
II, III, and IV
D)
II and IV

A

II III IV

IRA is never subject to 20% withholding.
IRA Rollovers have to be completed within 60 days following the distribution date (not the check receiving date). This is the one where they mail you a check or deposit it in the bank account.
An IRA can be rolled over to another IRA only once per year (365 days).
Trustee-to-Trustee can happen as often as you like.

Once a year, an IRA owner may roll over his account to a new IRA within 60 days after distribution from the original IRA. Transfers may be made as often as desired. The 20% withholding requirement does not apply to IRA distributions; the 20% mandatory withholding applies to eligible rollover distributions made directly to the plan participant from employer-sponsored qualified retirement plans or TSAs.

LO 5.2.1

64
Q

Which of these statements regarding the 10% Section 72(t) early distribution penalty is false?

A)
The 10% penalty applies to distributions that are made from a qualified plan, a Section 403(b) plan, a traditional IRA, or a simplified employee pension (SEP) plan.
B)
The 10% tax usually applies only to the taxable portion of the distribution. If a distribution includes amounts that have been previously subject to tax, such as after-tax employee contributions, the nontaxable portion of the distribution is exempt from the 10% penalty tax.
C)
A 10% penalty is imposed on the taxable amount of a distribution made to a participant that has not yet attained age 59½, unless a specific exception applies. Taxpayers must include the appropriate amount of the distribution in their taxable income.
D)
The penalty does not apply to any distribution from a Roth IRA.

A

D

notice how it says FALSE?
yea me neither this time

The early distribution penalty does apply to certain nonqualified distributions from a Roth IRA. All other statements are correct.

LO 5.4.2

65
Q

John has been contributing to his IRA for 17 years because his former employer did not offer a retirement plan. If his new employer offers a tax-sheltered annuity (TSA), simplified employee pension (SEP), or 457 plan, into which of these could he potentially roll his IRA?

Another IRA
His TSA
A SEP
A 457 plan

A)
II and III
B)
I and II
C)
I, II, III, and IV
D)
I only

A

C

An IRA may be rolled to another IRA, TSA, SEP, qualified plan, or governmental 457 plan that accounts for such rollovers separately. The reason a governmental 457 would need to account for an IRA rollover separately is that a 457 plan is not normally subject to the 10% EWP. However, a distribution of money from a 457 plan that came from an account that was subject to the 10% EWP would be subject to the EWP.

LO 5.2.1

66
Q

Miguel and Barb, ages 47 and 44, respectively, file jointly. Both work, and their combined AGI for 2024 is $125,000. This year, Miguel’s profit-sharing account earned over $4,000, but the company made no contributions, Miguel made no contributions, and there were no forfeitures. Barb is accruing benefits in her company’s defined benefit plan. Her current accrued benefit at age 65 under the plan is $2,000 per month. How much of their $14,000 IRA contribution can they deduct?

A)
$14,000
B)
$8,400
C)
$13,300
D)
$7,000

A

C

No money went into Miguel’s account, so he’s inactive which uses 230k-240k. Barb is active and their income is 2,000 into the 123k-143k active range, which means 10% of BARB’s contribution is taxable. Which means that 700 of the 14000 is taxed and 13,300 is deductible.

Barb is an active participant. Miguel is not an active participant because he did not receive any annual addition. His available IRA deduction is $7,000 and hers is $143,000 − $125,000 = $18,000; ($18,000 ÷ $20,000) × $7,000 = $6,300. The choice of $0 assumes that neither individual qualifies for a deduction.

LO 5.1.2

67
Q

If nondeductible contributions have been made to an IRA, then distributions from the IRA

A)
The nondeductible portion of the IRA is treated as a Roth IRA.
B)
would be tax free up to the amount of the nondeductible contributions.
C)
would be based upon first-in first-out to determine if any of the distribution would be taxable.
D)
are only partially taxable.

A

d

A portion of these distributions is considered to be a nontaxable return of contribution.

LO 5.1.2

68
Q

Dorinda, age 45, was divorced in 2017. Due to an inheritance, she finds she doesn’t really need the money she gets from her ex-spouse as part of the divorce agreement. She receives $40,000 of child support and $3,600 of alimony in 2024. She wants to save the alimony for her retirement years. What is the amount that Dorinda can contribute to a traditional IRA?

A)
$2,400
B)
$0
C)
$7,000
D)
$3,600

A

d

Alimony from pre-2019 divorces is considered earned income for the purpose of making a contribution to an IRA. Child support is not considered earned income for IRA contribution purposes. Because this is the only income she receives that is considered earned income, she may make a contribution of 100% of earned income up to a maximum contribution of the lesser of $7,000 (2024) to a traditional IRA, or $3,600, the amount of her alimony. Note: Divorces finalized during and after 2019 fall under the rules that 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 prior to this Tax Reform Act and thus follows the old rules.

LO 5.1.1

69
Q

Which of these statements is FALSE about Roth 401(k) accounts?

A)
A Roth 401(k) is under the same RMD rules as a traditional 401(k).
B)
Even if a Roth 401(k) participant already has a Roth IRA account, a new five-year clock is required for the Roth 401(k).
C)
Contributions to Roth IRAs are subject to income limits, but any employee can contribute to a Roth 401(k) regardless of how much they make.
D)
Roth 401(k) accounts allow larger contributions than Roth IRAs.

A

a

Starting in 2024, employer Roth accounts are under the same RMD rules as Roth IRAs, not the same rules as a traditional employer account as was true until 2024. There is a new clock that is started for a Roth 401(k) account, even if the participant already has a Roth IRA account. However, if a participant transfers the Roth 401(k) into a Roth IRA, then the Roth IRA clock will be the one that applies, not the Roth 401(k) clock. All Roth accounts have RMDs after the original owner dies. However, since there is no required beginning date (RBD) for any type of Roth account, people who inherit a Roth account are always under the RMD rules for deaths prior to the RBD. Thus, even if Grandpa passes away at 105, his beneficiary will be under the rules for deaths prior to the RBD.

LO 5.4.3

70
Q

Which of these are prohibited transactions for an IRA?

The owner purchasing IRA assets from the IRA
Pledging the IRA as security for a loan
Buying property for personal use with IRA funds
Receiving unreasonable compensation for managing the plan
A)
I and II
B)
III and IV
C)
I, II, III, and IV
D)
I, II, and III

A

All statements are prohibited transactions. Prohibited transactions for IRA assets include the owner purchasing assets from the IRA, pledging the IRA as security for a loan, buying property for personal use with IRA funds, receiving unreasonable compensation for managing the plan, borrowing money from an IRA, selling property to the plan, and using IRA assets to buy personal-use property.

LO 5.1.1

71
Q

Todd has made total contributions of $75,000 to his traditional IRA, of which $15,000 were nondeductible contributions. Todd is age 60 and is considering taking a $20,000 distribution from his IRA, which was worth $155,000 at the end of the year. This will be the only distribution from his IRA this year. How much of the distribution will be taxable to Todd?

A)
$18,286
B)
$5,000
C)
$16,000
D)
$20,000

A

idk idc

it’s the pro rata rule or smthn