Retire Ch 9 - IRA's and SEP's

Question 1

IRA contributions that exceed the contribution limits are subject to an excise tax of six percent.

a. True b. False

Answer 1

a. True

Question 2

Individuals who are active participants in a qualified retirement plan or SEP may be subject to a reduced maximum deductible IRA contribution.

a. True b. False

Answer 2

a. True

Question 3

Lump-sum IRA distributions may be taken at any time without being subject to penalty.

a. True b. False

Answer 3

b. False

Question 4

The saver’s credit is generally available to all taxpayers who save in a 401(k) plan or an IRA, regardless of income.

a. True b. False

Answer 4

b. False

Question 5

The distribution rules for IRA annuities are the same as for traditional IRAs.

a. True b. False

Answer 5

a. True

Question 6

As with the traditional IRA, Roth IRAs may not be funded after the owner attains the age of 701⁄2.

a. True b. False

Answer 6

b. False

Question 7

An individual may only contribute to a Roth IRA if they fall within prescribed earned income limits.

a. True b. False

Answer 7

a. True

Question 8

Individuals with high taxable incomes are permitted to convert traditional IRAs to Roth IRAs.

a. True b. False

Answer 8

a. True

Question 9

A backdoor Roth may be used by a taxpayer with high income to funnel contributions from a traditional IRA to a Roth IRA without incurring additional income tax.

a. True b. False

Answer 9

a. True

Question 10

Cash, stock, bonds, life insurance, and collectibles are all permitted investments for IRAs.

a. True b. False

Answer 10

b. False

Question 11

Funds in an IRA may be transferred to a qualified plan.

a. True b. False

Answer 11

a. True

Question 12

IRAs are exempt from creditor’s claims by ERISA.

a. True b. False

Answer 12

b. False

Question 13

Loans from an IRA are considered prohibited transactions.

a. True b. False

Answer 13

a. True

Question 14

Requirements for coverage in a SEP include an employee’s performance of service for three of the last five years.

a. True b. False

Answer 14

a. True

Question 15

Part-time employees are exempt from being included in a SEP.

a. True b. False

Answer 15

b. False

Question 16

Employer contributions to SEPs are discretionary and do not have to be made each year.

a. True b. False

Answer 16

a. True

Question 17

Employer contributions to a SEP are always 100% vested.

a. True b. False

Answer 17

a. True

Question 18

Which of the following statements is not correct about Form 8606?

The form tracks basis for contributions and conversions to Roth IRAs.
The form tracks in-plan Roth rollovers.
The form is used for distributions from Roth IRAs.
The form tracks basis for nondeductible traditional IRAs.

Answer 18

The form tracks basis for contributions and conversions to Roth IRAs.
Rationale

Statement a is not correct because Form 8606 does not track basis for contributions to Roth IRAs. The taxpayer would have to determine the basis for Roth IRAs when completing Part III of the form. The other statements are correct - it does track conversions to Roth IRAs, in-plan Roth rollovers, basis for nondeductible traditional IRAs and is used for distributions from Roth IRAs.

Question 19

Which statements are generally correct regarding penalties associated with IRA accounts in 2024?

1. Distributions made prior to 59½ are subject to the 10% premature distribution penalty.
2. There is a 25% excise tax on a required minimum distribution not made by April 1 of the year following the year in which age 73 is attained.

1 only.
2 only.
Both 1 and 2.
Neither 1 nor 2.

Answer 19

Both 1 and 2.
Rationale

Statements 1 and 2 are both correct.

SECURE 2.0 Act of 2022 increased the mandatory age to begin taking RMDs from age 72 to age 73 for those who attain age 72 after December 31, 2022, and age 73 before January 1, 2033; age 75 for those who attain age 74 after December 31, 2032. Furthermore, SECURE 2.0 Act reduced the excise tax imposed for failure to take RMDs from 50% to 25% beginning in the 2023 tax year. The excise tax can be further reduced to 10% if the taxpayer corrects the RMD shortfall and files a tax return reflecting the excise tax within prescribed time frames.

Question 20

UPDATED FOR 2024:
Solomon, age 50, established a Sec. 529 savings plan 16 years ago to save for college expenses for his son, Martin. Solomon made total contributions to the plan of $60,000 over the course of ten years, then stopped making contributions during Martin’s senior year of high school when the account value was $135,000. Due to Martin’s hard work, he received several scholarships to help cover the cost of college. Martin graduated from college with a bachelor’s degree and does not intend to further his education. There is currently $50,000 remaining in the 529 plan.
Which of the following is true regarding their ability to roll funds from the 529 plan to a Roth IRA in 2024?

The remaining $50,000 can be rolled over to Solomon’s Roth IRA without tax or penalty in 2024.

$35,000 can be rolled over to Martin’s Roth IRA in 2024.

An amount up to the annual IRA contribution limit can be rolled over to Martin’s Roth IRA in 2024.

Solomon and Martin are not eligible to roll funds from the 529 plan to a Roth IRA in 2024.

Answer 20

An amount up to the annual IRA contribution limit can be rolled over to Martin’s Roth IRA in 2024.

Rationale

The SECURE 2.0 Act of 2022 allows funds from long-term 529 savings plans to be rolled over tax and penalty free into a Roth IRA maintained for the benefit of the designated beneficiary of the 529 plan (for distributions made after December 31, 2023).

To qualify, the 529 plan must have been open for at least 15 years. Only contributions (and earnings on those contributions) made more than five years prior to the distribution qualify.

The rollover amount is limited to the annual IRA contribution limit (the lesser of $7,000 (in 2024) or earned income) less any IRA contributions made for the year.

In addition, there is a lifetime limit of $35,000 that may be rolled into the Roth IRA under this provision.

Question 21

UPDATED FOR 2024:

Lorna, who is age 39, converts a $74,500 Traditional IRA to a Roth IRA in 2024. Lorna’s adjusted basis in the Traditional IRA is $10,000. She also makes a contribution of $7,000 to a Roth IRA in 2024 for the tax year 2024.
If Lorna takes a $4,000 distribution from her Roth IRA in 2025 when the account is worth $100,000, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2025 federal income tax rate is 24 percent?

$0.
$400.
$960.
$1,360.

Answer 21

$0.

Rationale

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;
* From conversion contributions, on a first-in-first-out basis; and
* From earnings.

Lorna’s $4,000 distribution comes from the “contribution” layer, and is therefore, not subject to tax or penalty.

All distributions from all of an individual’s Roth IRAs made during a taxable year are aggregated.

The 10% additional tax under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income.

The 10% additional tax under IRC §72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution and if the distribution is made within the five-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made.

Question 22

A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements?

1. SEPs and qualified plans have the same funding deadlines.
2. The contribution limit for SEPs and qualified plans (defined contribution) is $69,000 per employee for the year 2024.
3. SEPs and qualified plans have the same ERISA protection from creditors.
4. SEPs and qualified plans have different nondiscriminatory and top-heavy rules.

1 only.
1 and 2.
2 and 4.
1, 2, 3, and 4

Answer 22

1 and 2.
Rationale

SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $69,000 for 2024 ($345,000 maximum compensation x 25%, limited to $69,000).

Thus, statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and top-heavy rules.

Question 23

Robbie and Robin, both age 45, are married and filed a joint return for 2024. Robin earned a salary of $120,000 in 2024 and is covered by her employer’s 401(k) plan.
The employer made a 2% nonelective contribution to the plan on her behalf in 2024. Robbie and Robin earned interest of $50,000 in 2024 from a joint savings account. Robbie is not employed, and the couple had no other income. On April 15, 2025, Robin contributed $7,000 to an IRA for herself and $7,000 to an IRA for Robbie.

The maximum allowable IRA deduction on the 2024 joint return is:

$0.
$5,850.
$7,000.
$14,000

Answer 23

7,000.
Rationale

The ability to deduct the IRA contribution depends on the individual’s income and whether the individual is an active participant in an employer-sponsored retirement plan.

Based on the information provided in the question, Robin and Robbie have an AGI of $170,000 ($120,000 salary + $50,000 interest income). Since Robin is an active participant in a qualified plan, they cannot deduct the contribution for her because their income exceeds the AGI phaseout of $123,000 – $143,000 for 2024.

Robbie, on the other hand, can deduct his contribution because he is not covered by an employer-sponsored plan and their joint income is less than the $230,000 to $240,000 phaseout. Therefore, Robbie’s deduction is $7,000. He can use Robin’s earned income as his own.

Question 24

Axel, who is currently age 52, made his only contribution to his Roth IRA in 2024 in the amount of $7,000. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2029 to purchase a new car, how would he be taxed?

Since Axel waited five years, the distribution will be classified as a “qualified distribution” and will therefore not be taxable or subject to the 10% early distribution penalty.

Since Axel waited five years, the distribution will be classified as a “qualified distribution” and will therefore not be taxable but will be subject to the 10% early distribution penalty.

Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable and will be subject to the 10% early distribution penalty.

Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable.

Answer 24

Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable.

Rationale

A distribution from a Roth IRA is not includible in the owner’s gross income if it is a qualified distribution or to the extent that it is a return of the owner’s contributions to the Roth IRA. A qualified distribution is one that meets BOTH of the following tests:

The distribution was made after a five-taxable-year period, and the distribution was made for one of the following reasons:
* Owner has attained age 59½.
* Distribution was made to a beneficiary or the estate of the owner on or after the date of the owner’s death.
* Distribution was attributable to the owner’s disability.
* Distribution was for a first-time home purchase.

The 10 percent early withdrawal penalty under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent early withdrawal penalty under IRC § 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, and if the distribution is made within the five-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made.

Question 25

Mr. Reid was very active and loved to go skiing. Unfortunately, he was prone to skiing though the trees and did not believe in helmets. In March of 2024, he skied into a large pine tree that abruptly ended his life.
At that time, his Roth IRA contained regular contributions of $10,000, first made in 2022, a conversion contribution of $40,000 that was made in 2021, and earnings of $10,000. He never made any distributions from his IRA. When he established this Roth IRA (his first) in 2021, he named each of his two children, Spencer and JJ, as equal beneficiaries. Each child will receive one-half of each type of contribution and one-half of the earnings.
Which of the following is true regarding a distribution after Mr. Reid dies?

If Spencer immediately takes out all $30,000 from the Roth IRA, the entire distribution will be characterized as ordinary income.

If JJ immediately takes out all $30,000 from the Roth IRA, the entire distribution will not be taxable because it is a qualified distribution from a Roth IRA.

If Spencer immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty.

If JJ immediately takes out all $30,000 from the Roth IRA, he will have a penalty of $2,500, in addition to paying income tax on the earnings.

Answer 25

If Spencer immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty.

Rationale

The question first requires a determination of whether the distribution is a qualified distribution or not.
While death is one of the two prongs, the five-year rule as not been met. Thus, the distribution is not a qualified distribution.

Each of the choices deals with a full distribution by the beneficiary, which makes the problem a bit easier.

A full distribution will result in the earnings being taxable.

The earnings represent 16.67% of the value of the account and thus, $5,000 will be taxable. No penalty is assessed after death of the owner.

Question 26

Tommy and Gina, both age 33, are married, both covered by a qualified plan, and file a joint tax return. They have AGI of $164,000.

What is the most that Tommy and Gina can contribute in total together to their traditional IRAs for 2024?

$0.
$1,000.
$7,000.
$14,000.

Answer 26

14,000.
Rationale

The maximum contribution to traditional and Roth IRAs is a total of $6,500 per person (who has not attained age 50) for 2024.

Tommy and Gina’s AGI is above the upper phaseout limit ($123,000 – $143,000 in 2024) for those who are MFJ and both covered by a plan at work.

Therefore, they cannot deduct their contribution.

They can still make a nondeductible contribution to a traditional IRA, although a better choice may be to contribute to a Roth IRA since their AGI is below the Roth phaseout range ($230,000 - $240,000 in 2024).

Question 27

What is the first year in which a single taxpayer, age 55 in 2024, could receive a qualified distribution from a Roth IRA if he made his first $3,500 contribution to the Roth IRA on April 1, 2025, for the tax year 2024?

2027.
2028.
2029.
2030.

Answer 27

2029.
Rationale

A qualified distribution can only occur after a five-year period has occurred and is made on or after the date on which the owner attains age 59½, made to a beneficiary or the estate of the owner on or after the date of the owner’s death, attributable to the owner’s being disabled, or for a first-time home purchase. The five-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The five-year period ends on the last day of the individual’s fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. Therefore, the first year in which a qualified distribution could occur is 2029.

Question 28

Which of the following individuals can take a distribution from an IRA without penalty?

Ashlin, age 55, who was recently diagnosed with a terminal illness.

Ashlin’s doctor expects her to live no more than 72 months.

Dallas, age 56, who separated from service from his employer last month.

Jared, whose daughter was born 14 months ago.
Lyndi, a 48-year-old public safety employee with 25 years of service.

Answer 28

Ashlin, age 55, who was recently diagnosed with a terminal illness. Ashlin’s doctor expects her to live no more than 72 months.

Rationale

The SECURE 2.0 Act of 2022 added a penalty exception for terminal illnesses expected to result in death within 84 months. This penalty exception applies to both IRAs and qualified plans. Options b and d are penalty exceptions for qualified plans only (not IRAs). Option c is incorrect because the penalty exception for qualified birth or adoption distributions requires that the distribution occur within one year after the birth of the child or finalization of adoption.

Question 29

Roger converted all $100,000 in his traditional IRA to his Roth IRA on December 1, 2022 (his first Roth contribution or conversion). His Form 8606 from prior years shows that $20,000 of the amount converted is his basis. Roger included $80,000 ($100,000 - $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2024,
Roger made a regular contribution of $5,000 to a Roth IRA for the 2023 year.
Roger took a $10,000 distribution from his Roth IRA on July 31st of 2024 to purchase a ticket for a trip on a cruise ship for his 61st birthday present to himself.
How is the distribution taxed if the value of the account just before the distribution equals $120,000?

The distribution is tax free and penalty free.

The distribution is not subject to tax, but he will have to pay a penalty of $500.

$1,250 of the distribution is taxable but there is no penalty.

$1,250 of the distribution is taxable and there is a penalty of $500.

Answer 29

The distribution is tax free and penalty free.
Rationale

The question first requires a determination of whether the distribution is a qualified distribution or not.

It is not a qualified distribution.

Roger is over the age of 59½ but does not meet the five-year rule.

Therefore, the distribution first comes out of contributions, then conversions, then earnings ($5,000 from contribution and $5,000 from conversion).

Since he is over the age of 59½, there is no penalty assessed. The entire distribution is tax free and not subject to a penalty.

Question 30

Doreen (age 55) is single and was divorced from her spouse in 2017. She has received the following items of income this year:

Pension annuity income from QDRO $21,000
Interest and dividends $5,000
Alimony $1,000
W-2 Income $1,200

What is the most that Doreen can contribute to a Roth IRA for 2024?

$1,200.
$2,200.
$7,000.
$8,000.

Answer 30

2,200.

Rationale

Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $7,000 for 2024.

Doreen has earned income of $2,200 from the alimony and W-2 income she received. Thus, she is limited to a contribution of $2,200.

The other $26,000 of income is not earned income and therefore is unavailable for contributions to any IRA.

An additional catch-up contribution of $1,000 for 2024 is permitted for individuals who have attained age 50 by the close of the tax year. Her total remains at $2,200 because that is all the earned income she has.

Note: Alimony resulting from divorce agreements after 2018 is not income or earned income (TCJA 2017).

Question 31

or 2024, what is the maximum amount that can be contributed to a SEP?

$16,000.
$23,000.
$30,500.
$69,000.

Answer 31

$69,000.

Rationale

For 2024, the maximum contribution for an individual to a SEP is the lesser of:

25% of compensation (compensation maximum is $345,000), or $69,000.

Therefore, the maximum contribution to a SEP for 2024 is $69,000 ($345,000 maximum compensation x 25%, limited to $69,000

Question 32

The early distribution penalty of 10 percent does not apply to IRA distributions:

1. Made after attainment of the age of 55 and separated from service.
2. Made for the purpose of paying qualified higher education costs.
3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.

1 only.
1 and 3.
2 and 3.
1, 2, and 3.

Answer 32

2 and 3.

Rationale

The first statement is incorrect because it is an exception to the 10% penalty for qualified plan distributions, not from IRAs. The second and third statements are correct exceptions for IRAs.

Question 33

Darla is an employee of Scallywags, Inc. During 2024, Scallywags implemented a SEP IRA plan which allows employees to elect Roth contributions to the plan. If Darla makes this election, which of the following best identifies the tax treatment of contributions to the plan?

Darla’s employee salary deferrals will be taxable income to her, and the contribution made by Scallywags will be tax free to Darla.

Contributions made by Scallywags to Darla’s SEP IRA will be taxable to Scallywags and tax free for Darla.

Contributions made by Scallywags will be tax deductible for Scallywags and tax free for Darla.

Contributions to Darla’s SEP IRA will be tax deductible to Scallywags and taxable to Darl

Answer 33

Contributions to Darla’s SEP IRA will be tax deductible to Scallywags and taxable to Darla.

Rationale

For taxable years beginning after December 29, 2022, the SECURE 2.0 Act (Sec. 601) permits employers to adopt a SEP allowing employees to elect Roth tax treatment of employer contributions. An employee who elects Roth treatment will be currently taxed on the employer contribution to the SEP Roth IRA but will enjoy the tax-free distribution regime of the Roth IRA. Only employers may make contributions to a SEP IRA or SEP Roth IRA (with the exception of grandfathered SARSEP plans). When the employee elects Roth tax treatment, the contribution remains tax deductible by the employer.

Note that the Roth contribution made by the employer is taxable income to the employee (reported on Form 1099-R) but is not classified as wages. Therefore, the employer contribution is not subject to withholding, FICA, or FUTA. The employee may need to increase withholding or make estimated tax payments to avoid underpayment of taxes.

Question 34

UPDATED FOR 2024:

Delores, age 62, single, and retired, receives a defined benefit pension annuity of $1,200 per month from Bertancinni Corporation. She is currently working part time for Deanna’s Interior Design and will be paid $18,000 this year (2024). Deanna’s Interior has a 401(k) plan, but Delores has made no contribution to the plan, and neither will Deanna this year. Can Delores contribute to a traditional IRA or a Roth IRA for the year and what is the maximum contribution for 2024?

$7,000 to a traditional IRA or $7,000 to a Roth IRA.

$0 to a traditional IRA or $7,000 to a Roth IRA.

$8,000 to a traditional IRA or $0 to a Roth IRA.

$8,000 to a traditional IRA or $8,000 to a Roth IRA.

Answer 34

$8,000 to a traditional IRA or $8,000 to a Roth IRA.
Rationale

Delores has earned income and is over age 50. She is not an active participant in a retirement plan and even if she were, her AGI is below the income limit

Question 35

UPDATED FOR 2024:

Jack and Jill, both age 43, are married, made $20,000 each, and file a joint tax return. Jill has made a $7,000 contribution to her traditional IRA account and has made a contribution of $2,000 to a Coverdell education savings account for 2024.

What is the most that can be contributed to a Roth IRA for Jack for 2024?

$0.
$5,000.
$7,000.
$14,000.

Answer 35

$7,000.
Rationale

The maximum combined contribution to traditional and Roth IRAs is $7,000 per person (who has not attained age 50) for 2024. Therefore, Jack and Jill would have a total of $7,000 each to allocate between traditional and Roth IRAs. Jill has already contributed the maximum amount; however, Jack could still contribute $7,000 for himself. The Coverdell education savings account (formerly known as an Education IRA) is not included in the $7,000 limit.

Question 36

Gloria, divorced and age 55, received taxable alimony of $72,000 in 2024. In addition, she received $7,000 in earnings from a part-time job. Gloria is not covered by a qualified plan.

What was the maximum deductible IRA contribution that Gloria could have made for 2024?

$2,000.
$3,000.
$7,000.
$8,000.

Answer 36

$8,000.
Rationale

The deductible IRA contribution limit is $7,000 for 2024. The additional catch-up amount, for over age 50 or over, is $1,000 for 2024. Alimony counts as earned income for IRA purposes for any divorce or separation agreement executed prior to 2019 (2017 TCJA). For divorces after 2018, alimony received is not taxable income. Since the question states that her alimony is taxable, we can deduce that the divorce occurred prior to 2019. She is not covered by a qualified plan and therefore is not subject to AGI phase-outs. Therefore, the total is $8,000 for 2024.

Question 37

Roxanne, age 50, has an IRA with an account balance of $165,000. Roxanne has recently been diagnosed with an unusual disease that will require treatment costing $50,000, which she will have to pay personally. Roxanne’s AGI will be $100,000 this year.

Which of the following statements are true?

1. Roxanne can immediately borrow up to $50,000 from her IRA account and repay the loan within five years.
2. Roxanne can distribute $50,000 subject to income tax but not subject to the 10% penalty because it will be used to pay medical expenses.

1 only.
2 only.
Both 1 and 2.
Neither 1 nor 2

Answer 37

Neither 1 nor 2.
Rationale

Statement 1 is incorrect because loans are not permitted from IRAs. Statement 2 is incorrect because only the portion of the medical expense that exceeds 7.5% of AGI is exempt from the 10% penalty ($50,000 - $7,500 = $42,500). However, if it were classified as a disability, then she could avoid the penalty on the entire distribution.

Question 38

Which of the following cannot be held in an IRA account as an investment?

A U.S. gold coin.
Option contracts (calls).
Variable life insurance.
Municipal bonds.

Answer 38

Variable life insurance.
Rationale

Life insurance is not permitted in IRA accounts. All of the other choices are permissible.

Question 39

Nick, who is age 45, operates a landscaping business and is self-employed. He has an assistant, Loren, who has worked with him for five years. Nick is establishing a SEP for 2024 and is willing to make a contribution of 25 percent of Loren’s salary to the SEP.

If Nick earns $100,000 after paying Loren, his expenses, and the contribution to Loren’s SEP, what is the most that he can contribute to the SEP for himself?

$18,587.
$20,000.
$23,234.
$25,000.

Answer 39

18,587.

Rationale

$100,000 Net Self-Employment Income
x 0.9235 Multiply: 92.35%
$92,350 Equals: Net Earnings Subject to Self-Employment Tax
x 15.3% Multiply: 15.3% up to $168,600 +2.9% over $168,600
$14,130 Equals: Self-Employment Tax

$100,000 Net Self-Employment Income
$7,065 Minus: 1/2 of Self-Employment Taxes (50% x $14,130)
$92,935 Equals: Adjusted Net Self-Employment Income
x 0.20 Multiply: Self-Employment Contribution Rate
$18,587 Equals: Self-Employed Individual’s Qualified Plan Contribution

Question 40

Diggs is a 47-year-old executive who earns $315,000 from his job at Acme Arrows (AA) and contributes the maximum amount to the AA 401(k) plan. He wants to make a contribution to a Roth IRA for the current year, but his compensation is over the income limit. He decides he wants to fund a Roth IRA by using the backdoor Roth technique.

Assume that Diggs has a traditional IRA with a balance of $24,000 that was funded entirely with pre-tax contributions.

If Diggs contributes $7,000 to a traditional IRA and then converts $7,000 to a Roth IRA, how much income will he have to pick up as a result of the conversion?

$0.
$1,580.
$5,419.
$7,000.

Answer 40

$5,419.
Rationale

The backdoor Roth technique is less effective when the taxpayer has funds in a traditional IRA as all IRA amounts must be aggregated.
Thus, Diggs must pay tax on $5,419 income [1 - ($7,000 ÷ ($7,000 + $24,000))] x $7,000

Question 41

David took a lump-sum distribution from his employer’s (XYZ Company) qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David held company stock in the qualified plan, which of the following is/are correct regarding tax treatment of the transaction?

1. If at age 59 he distributes the IRA, he benefits from net unrealized appreciation tax treatment.
2. If he rolls the entire IRA to a new employer’s qualified plan, he may be eligible for net unrealized appreciation on the XYZ company stock in the future.
3. If he rolls over all the qualified plan assets except the XYZ stock to the IRA, he may qualify for NUA treatment on the company stock.
4. If David immediately withdraws the entire amount from his IRA, he may benefit from net unrealized appreciation.

3 only.
2 and 3.
2, 3, and 4.
1, 2, 3, and 4.

Answer 41

3 only.
Rationale

Statement 1 is incorrect because net unrealized appreciation is only permitted with qualified plans, not IRAs.

Statement 2 is incorrect. NUA treatment is only available for stock in the current employer. Once the XYZ qualified plan assets were transferred to the IRA, the opportunity for NUA treatment was lost.

Statement 3 is correct. He can rollover all assets in the qualified plan, excluding the company stock, and still benefit from NUA treatment on the company stock if it is distributed in the same tax year as the IRA rollover.

Statement 4 is incorrect because net unrealized appreciation is only permitted coming from qualified plans, not distributions from IRAs.

Question 42

Which of the following people can make a deductible contribution to a traditional IRA for 2024?

Person AGI Covered by

Qualified Plan Marital Status
1. Dianne $110,000 Yes Married
2. Joy $70,000 Yes Single
3. Kim $280,000 No Married
4. Loretta $89,000 Yes Single

2 and 3.
1, 2, and 3.
1, 2, and 4.
1, 2, 3, and 4

Answer 42

1, 2, and 3.

Rationale

All but Loretta may deduct a contribution made to a traditional IRA.

Dianne and Joy are below the phaseout range and Kim is not covered by a qualified plan so there is no income limit.

Loretta is single and covered by a plan and her AGI is above the top end of the phaseout for singles ($77,000 - $87,000 for 2024).

Question 43

Which of the following statements is/are correct regarding SEP contributions made by an employer (assume the employee did not make a Roth election)?

1. Contributions are subject to FICA and FUTA.
2. Contributions are currently excludable from employee-participant’s gross income.
3. Contributions are capped at $23,000 for 2024.

1 only.
2 only.
1 and 2.
1, 2, and 3.

Answer 43

2 only.

Rationale

Statement 2 is the only correct response.

Statements 1 and 3 are incorrect.

Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deferral limits are $23,000 for 2024. The SEP limit is 25% of covered compensation up to $69,000 for 2024.

Note: The maximum compensation that may be taken into account in 2024 for purposes of SEP contributions is $345,000. Therefore, the maximum amount that can be contributed to a SEP in 2024 is $69,000 (25% x $345,000, limited to $69,000).

Question 44

For the year 2024, Katy (age 35) and Perry (age 38), a married couple, reported the following items of income:
Katy Perry Total
Wages $50,000 - $50,000
Dividend Income $2,000 $1,200 $3,200
Cash won from lottery $500 $500
$52,000 $1,700 $53,700

Katy is covered by a qualified plan. Perry does not work; he makes his own wine and samples it most of the day.
Assuming a joint return was filed for 2024, what is the maximum tax-deductible amount that they can contribute to their IRAs?

$7,000.
$8,000.
$8,700.
$14,000.

Answer 44

$14,000.

Rationale

Because their income is less than the limit for joint income tax filers ($123,000 - $143,000 for 2024 for Katy; $230,000 - $240,000 for 2024 for Perry), they can contribute and deduct $14,000 for 2024.

Question 45

Which statements are generally correct regarding penalties associated with IRA accounts in 2023?

1. Distributions made prior to age 591⁄2 are subject to the 10% premature distribution penalty.
2. There is a 25% excise tax on a required minimum distribution not made by April 1 of the year following the year in which age 73 is attained.

a. 1 only.
b. 2 only.
c. Both 1 and 2.
d. Neither 1 nor 2

Answer 45

The correct answer is c.
Statements 1 and 2 are both correct.

SECURE 2.0 Act of 2022 increased the mandatory age to begin taking RMDs from age 72 to age 73 for those who attain age 72 after December 31, 2022 and age 73 before January 1, 2033; age 75 for those
who attain age 74 after December 31, 2032.

Furthermore, SECURE 2.0 Act reduced the excise tax imposed for failure to take RMDs from 50% to 25% beginning in the 2023 tax year.

The excise tax can be further reduced to 10% if the taxpayer corrects the RMD shortfall and files a tax return reflecting the excise tax within prescribed time frames.

Question 46

David took a lump-sum distribution from his employer’s (XYZ Company) qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David held company stock in the qualified plan, which of the following is/are correct regarding tax treatment of the transaction?

1. If at age 59 he distributes the IRA, he benefits from net unrealized appreciation tax treatment.
2. If he rolls the entire IRA to a new employer’s qualified plan, he may be eligible for net unrealized appreciation on the XYZ company stock in the future.
3. If he rolls over all of the qualified plan assets except the XYZ stock to the IRA, he may qualify for NUA treatment on the company stock.
4. If David immediately withdraws the entire amount from his IRA, he may benefit from net unrealized appreciation.

a. 3 only.
b. 2 and 3.
c. 2, 3, and 4.
d. 1, 2, 3, and 4.

Answer 46

The correct answer is a.

Statement 1 is incorrect because net unrealized appreciation is only permitted with qualified plans, not IRAs.

Statement 2 is incorrect. NUA treatment is only available for stock in the current employer. Once the XYZ qualified plan assets were transferred to the IRA, the opportunity for NUA treatment was lost.

Statement 3 is correct. He can rollover all assets in the qualified plan, excluding the company stock, and still benefit from NUA treatment on the company stock if it is distributed in the same tax year as the IRA
rollover.

Statement 4 is incorrect because net unrealized appreciation is only permitted coming from qualified plans, not distributions from IRAs

Question 47

Robbie and Robin, both age 45, are married and filed a joint return for 2023. Robin earned a salary of $100,000 in 2023 and is covered by her employer’s 401(k) plan. The employer made a 2% nonelective contribution to the plan on her behalf in 2023. Robbie and Robin earned interest of $40,000 in 2023 from a joint savings account. Robbie is not employed, and the couple had no other income. On April 15, 2024, Robin contributed $6,500 to an IRA for herself and $6,500 to an IRA for Robbie.
The maximum allowable IRA deduction on the 2023 joint return is:

a. $0.
b. $5,850.
c. $6,500.
d. $13,000.

Answer 47

The correct answer is c.

The ability to deduct the IRA contribution depends on the individual’s income and whether the individual is an active participant in an employer-sponsored retirement plan. Based on the information
provided in the question, Robin and Robbie have an AGI of $140,000 ($100,000 salary + $40,000 interest income).

Since Robin is an active participant in a qualified plan, they cannot deduct the contribution for her because their income exceeds the AGI phaseout of $116,000 – $136,000 for 2023.

Robbie, on the other hand, can deduct his contribution because he is not covered by an employer-sponsored plan and their joint income is less than the $218,000 to $228,000 phaseout. Therefore, Robbie’s deduction is $6,500. He can use Robin’s earned income as his own.

Question 48

Gloria, divorced and age 55, received taxable alimony of $72,000 in 2023. In addition, she received $7,000 in earnings from a part-time job. Gloria is not covered by a qualified plan. What is the maximum deductible IRA contribution that Gloria can make for 2023?

a. $2,000.
b. $3,000.
c. $6,500.
d. $7,500.

Answer 48

The correct answer is d.

The deductible IRA contribution limit is $6,500 for 2023. The additional catch-up amount, for age 50 or over, is $1,000 for 2023.

Alimony counts as earned income for IRA purposes for any divorce or
separation agreement executed prior to 2019 (2017 TCJA). For divorces after 2018, alimony received is not taxable income. Since the question states that her alimony is taxable, we can deduce that the divorce
occurred prior to 2019. She is not covered by a qualified plan and therefore is not subject to AGI phaseouts.

Therefore the total is $7,500 for 2023.

Question 49

Axel, who is currently age 52, made his only contribution to his Roth IRA in 2023 in the amount of $6,500. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2028 to purchase a new car, how would he be taxed?

a. Since Axel waited five years, the distribution will be classified as a “qualified distribution” and will therefore not be taxable or subject to the 10% early distribution penalty.

b. Since Axel waited five years, the distribution will be classified as a “qualified distribution” and will therefore not be taxable but will be subject to the 10% early distribution penalty.

c. Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable and will be subject to the 10% early distribution penalty.

d. Although Axel waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable.

Answer 49

The correct answer is d.

A distribution from a Roth IRA is not includible in the owner’s gross income if it is a qualified distribution or to the extent that it is a return of the owner’s contributions to the Roth IRA. A qualified distribution is one that meets both of the following tests:
The distribution was made after a five-taxable-year period, and
The distribution was made for one of the following reasons:
* Owner has attained age 59½.
* Distribution was made to a beneficiary or the estate of the owner on or after the date of the
owner’s death.
* Distribution was attributable to the owner’s disability.
* Distribution was for a first-time home purchase.
The 10 percent early withdrawal penalty under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income.

The 10 percent early withdrawal penalty under IRC § 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, and if the distribution is made within the five-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made

Question 50

Question

Robin and Robbie, both age 35, are married and filed a joint return for 2024. Robbie earned a salary of $142,000 in 2024 and defers $6,000 to his employer’s 401(k) plan. Robbie and Robin earned interest of $15,000 in 2024 from a joint savings account. Robin is not employed, and the couple had no other income. On April 15, 2024, Robbie contributed $7,000 to an IRA for himself and $7,000 to an IRA for Robin.

The maximum allowable IRA deduction on the 2024 joint return is:

A. $1,625
B. $3,250
C. $7,000
D. $14,000

Answer 50

The correct answer is C.

Anyone with earned income can contribute to an IRA, but the ability to deduct the IRA contribution depends on the individual’s AGI and whether the individual is an active participant in a qualified plan.

Since Robbie has a qualified plan, they cannot deduct the contribution for him due to his income of $151k ($142k - $6k + $15k) which exceeds the AGI phaseout of $123,000 - $143,000 for 2024.

Robin, on the other hand, can deduct her contribution because she does not have a qualified plan and their joint income $157k ($142k + $15k) is less than the $230,000 to $240,000 phaseout for the spouse of an active participant. Therefore, Robin’s deduction is $7,000. She can use Robbie’s earned income as her own for the contribution as she is not employed.

Question 51

Amy was divorced in 2017 and is currently age 55. She received alimony of $51,000 in 2024. In addition, she received $1,800 in earnings from a part-time job. Amy is not covered by a qualified plan.

What was the maximum deductible IRA contribution that Amy could have made for 2024?

A. $1,800
B. $2,250
C. $7,000
D. $8,000

Answer 51

The correct answer is D.

The deductible IRA contribution limit is $7,000 for 2024. The additional catch-up amount, for over age 50, is $1,000 for 2024.

Alimony counts as earned income for IRA purposes for divorces finalized prior to 12/31/18 (Pre TCJA).

She is not covered by a qualified plan and therefore is not subject to AGI phaseouts.

Therefore, the total is $8,000 for 2024.

Question 52

Jim, who is age 39, converts a $72,000 Traditional IRA to a Roth IRA in 2022.
Jim’s adjusted basis in the Traditional IRA is $10,000.
He also makes a contribution of $4,000 to a Roth IRA in 2023 for the tax year 2022.
If Jim takes a $4,000 distribution from his Roth IRA in 2024, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2024 federal income tax rate is 22 percent?

A. $0
B. $400
C. $880
D. $1,280

Answer 52

Solution: The correct answer is A.

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;
• From conversion contributions, on a first-in-first-out basis; and
• From earnings.

All distributions from all of an individual’s Roth IRAs made during a taxable year are aggregated. The 10 percent additional tax under IRC Section 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent additional tax under IRC Section 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution and if the distribution is made within the 5-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made.

Question 53

Jack and Jill, both age 43, are married, made $20,000 each, and file a joint tax return. Jill has made a $7,000 contribution to her Traditional IRA account and has made a contribution of $2,000 to a Coverdell Education Savings Account for 2024.

What is the most that can be contributed to a Roth IRA for Jack for 2024?

A. $0
B. $3,000
C. $7,000
D. $14,000

Answer 53

Solution: The correct answer is C.

The maximum combined contribution to Traditional and Roth IRAs is $7,000 per person (who has not attained age 50) for 2024.

Therefore, Jack and Jill would have a total of $14,000 to allocate between Traditional and Roth IRAs.

Jill has already contributed the maximum amount; however, Jack could still contribute $7,000 for himself.

The Coverdell Education Savings Account (formerly known as an Education IRA) is not included in the $7,000 limit.

Question 54

Question

Which of the following statements is/are correct regarding SEP contributions made by an employer?

Contributions are subject to FICA and FUTA.

Contributions are currently excludable from employee-participant’s        gross income.

Contributions are capped at $23,000 for 2024.

A. 1 only
B. 2 only
C. 1 and 2
D. 1, 2, and 3

Answer 54

The correct answer is B.

Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA.

The 401(k) elective deferral limit and the SARSEP deductible limits are $23,000 for 2024. The SEP limit is 25% of covered compensation up to $69,000 for 2024.

Note: The maximum compensation that may be taken into account in 2024 for purposes of SEP contributions is $345,000. Therefore, the maximum amount that can be contributed to a SEP in 2024 is $69,000 (25% x $345,000, limited to $69,000).

Question 55

A SEP is not a qualified plan and is not subject to all of the qualified plan rules. However, it is subject to many of the same rules. Which of the following are true statements?

SEPs and qualified plans have the same funding deadlines (due date of return plus extensions).

The contribution limit for SEPs and qualified plans (defined contribution) is $69,000 for the year 2024.

SEPs and qualified plans have the same ERISA protection from creditors.

SEPs and qualified plans have different nondiscriminatory and top-heavy rules.

A. 1 only
B. 1 and 2
C. 2 and 4
D. 1, 2, 3, and 4

Answer 55

solution: The correct answer is B.

SEPs and qualified plans can be funded as late as the due date of the return plus extensions.

The maximum contribution for an individual to a SEP is $69,000 for 2024 ($345,000 maximum compensation x 25%, limited to $69,000).

Thus, statements 1 and 2 are correct.

Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection.

Both types of plans have the same nondiscriminatory and top-heavy rules.