Retirement: 5 Traditional, Roth and SIMPLE IRAs Flashcards
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
An IRA _____ a qualified plan and _____ covered by the Employee Retirement Income Security Act (ERISA)
a. is
b. is not
a. is not
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
The owner ____ borrow from his or her IRA
a. may
b. may not
b. may not
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Example. Conrad, a 45-year-old single individual who was not covered by an employer-sponsored retirement plan, figured that his taxable income for this year would be $60,000. Because he was eligible to contribute $5,500 to an IRA that year and deduct that sum from his taxable income, he did so, thereby lowering his taxable income to $54,500. His federal marginal tax rate was 25%, so this reduced his tax bill that year by
a. $375
b. $1,375
c. $2,375
b. $1,375 ($5,500 × 25%).
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Example. Ramona had $20,000 in corporate bonds in her IRA. These earned $1,400 in interest this year. Had they been in her regular investment account, the earnings would have been reduced by her normal tax rate of 25%, or $____.
a. $350
b. $450
c. $550
a. $350
But because the earnings occurred within her IRA, no taxes were incurred and all of her earnings were reinvested to earn even more the next year
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
An individual (taxpayer) must have compensation (earned income or alimony) and be under age 70½ to be eligible to establish a Traditional IRA
a. True
b. False
a. True
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
An individual (taxpayer) must have compensation (earned income or alimony) and be under age 70½ to be eligible to establish a Roth IRA
a. True
b. False
b. False
An individual who has compensation (earned income or alimony) and is under or over age 70½ is eligible to establish a Roth IRA.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Distribution of IRA accumulations must begin by _____ 1 of the year following the year in which the owner reaches age 70½.
a. April
b. May
c. June
a. April
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
If an excess contribution is made to an IRA, then a _% penalty tax will apply.
a. 6%
b. 10%
C. 20%
a. 6%
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Earned income, according to the IRC definition, includes which of the following:
a. unemployment compensation
b. passive income, such as interest, dividends, and pension distributions
c. capital gains
d. taxable alimony
e. deferred compensation (until it is taxed)
d. taxable alimony.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
A plan that complies with Internal Revenue Code requirements (such as IRC Section 401 rules) and
ERISA requirements.
The above is a description of which of the following:
a. Qualified plan.
b. Simplified Employee Pension (SEP).
c. Salary Reduction Simplified Employee Pension (SARSEP).
d. Savings Incentive Match Plan for Employees (SIMPLE) IRA
e. Section 403(b) Plan
a. Qualified plan.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
A pension plan established by a business on behalf of its employees; contributions are deposited into the individual retirement accounts (IRAs) of the employees. Because it is not considered a qualified plan, it is not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, it is required to comply with other more lenient requirements set forth in the IRC Section 408(k).
The above is a description of which of the following:
a. Qualified plan.
b. Simplified Employee Pension (SEP).
c. Salary Reduction Simplified Employee Pension (SARSEP).
d. Savings Incentive Match Plan for Employees (SIMPLE) IRA
e. Section 403(b) Plan
b. Simplified Employee Pension (SEP).
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
This is a plan that is available only to companies with 25 or fewer employees. What distinguishes it from other plans is the opportunity for employees to elect to contribute a portion of their pay on a pretax basis. Under current law, new accounts cannot be established. Those established prior to 1997, however, can continue to be funded. Similar to a SEP, they are not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, it is required to comply with other more lenient requirements set forth in IRC Section 408(k).
The above is a description of which of the following:
a. Qualified plan.
b. Simplified Employee Pension (SEP).
c. Salary Reduction Simplified Employee Pension (SARSEP).
d. Savings Incentive Match Plan for Employees (SIMPLE) IRA
e. Section 403(b) Plan
c. Salary Reduction Simplified Employee Pension (SARSEP).
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
A retirement plan established by a business on behalf of its employees; contributions are deposited into the individual retirement accounts (IRAs) of the employees. It allows employees to make elective contributions and requires employers to make matching contributions or non-elective contributions. Again, because they are not qualified plans, they are not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, they are required to comply with other more lenient requirements set forth in IRC Section 408(p)
The above is a description of which of the following:
a. Qualified plan.
b. Simplified Employee Pension (SEP).
c. Salary Reduction Simplified Employee Pension (SARSEP).
d. Savings Incentive Match Plan for Employees (SIMPLE) IRA
e. Section 403(b) Plan
d. Savings Incentive Match Plan for Employees (SIMPLE) IRA
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
A retirement plan that allows an employee to defer compensation and defer taxes on both that compensation and its earnings. This plan is sometimes called a tax-sheltered annuity (TSA). Employers may make additional contributions. These plans are available only to employees of public school systems and tax-exempt organizations specified in the Internal Revenue Code. This plan is also not a qualified plan and is not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, it is required to comply with certain ERISA requirements.
The above is a description of which of the following:
a. Qualified plan.
b. Simplified Employee Pension (SEP).
c. Salary Reduction Simplified Employee Pension (SARSEP).
d. Savings Incentive Match Plan for Employees (SIMPLE) IRA
e. Section 403(b) Plan
e. Section 403(b) Plan
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Phaseout Ranges for Deductible IRAs
Upper Limit - ? = Difference / Phaseout Range = % reduction * $5,500 = Deductible amount
a. Lower Limit
b. AGI
c. Gross income
b. AGI
Ex.
$118,000 Upper Limit - $108,000 AGI = $10,000 / $20,000 Phase out range = 50% * $5,500 = Deductible amount
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Example. In 2016, Martin and Edith’s adjusted gross income will be $108,000. Edith is an active participant in her employer’s qualified retirement plan, but Martin is not. They are joint tax filers. Edith may make a deductible IRA contribution of up to:
The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k
a. $2,750
b. $3,750
c. $4,750
$2,750, computed as follows:
$118,000 Upper Limit - $108,000 AGI = $10,000 / $20,000 Phase out range = 50% * $5,500 = $2,750 Deductible amount
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
What criteria are used to determine active participant status within specific retirement plans?
An individual is an active participant if the individual is eligible under plan provisions, even if the individual elected not to participate, failed to make mandatory contributions, or failed to perform the minimum service required.
a. defined benefit plan
b. profit sharing, 401(k), or stock bonus plan
c. money purchase plan or target plan
a. defined benefit plan
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
What criteria are used to determine active participant status within specific retirement plans?
An individual is an active participant if the individual’s account received an employer contribution, an employee contribution, or a forfeiture allocation.
a. defined benefit plan
b. profit sharing, 401(k), or stock bonus plan
c. money purchase plan or target plan
b. profit sharing, 401(k), or stock bonus plan
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
What criteria are used to determine active participant status within specific retirement plans?
An individual is an active participant if the individual’s account received a contribution or forfeiture allocation, regardless of whether the individual was employed at any time during the taxable year.
a. defined benefit plan
b. profit sharing, 401(k), or stock bonus plan
c. money purchase plan or target plan
c. money purchase plan or target plan
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Kathy Duggins is a 37-year-old single filer who contributed $5,500 to an IRA for this tax year. She will earn $105,000 from her employment at Sandstone Products, Inc. during the year. Sandstone Products provides a 401(k) plan, but in the three years she has been with the company, Kathy has chosen not to participate in the plan.
Is she eligible to make the $5,500 IRA contribution for this year?
a. Yes
b. No
a. Yes
She has earned income and is under age 70½.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Kathy Duggins is a 37-year-old single filer who contributed $5,500 to an IRA for this tax year. She will earn $105,000 from her employment at Sandstone Products, Inc. during the year. Sandstone Products provides a 401(k) plan, but in the three years she has been with the company, Kathy has chosen not to participate in the plan.
Is she an active participant?
a. Yes
b. No
b. No
Although her employer provides a 401(k) plan, she is not
participating and has not participated in the plan; therefore, she has no account and no “annual additions.”
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Kathy Duggins is a 37-year-old single filer who contributed $5,500 to an IRA for this tax year. She will earn $105,000 from her employment at Sandstone Products, Inc. during the year. Sandstone Products provides a 401(k) plan, but in the three years she has been with the company, Kathy has chosen not to participate in the plan.
Is she eligible to deduct the full contribution?
a. Yes
b. No
a. Yes
Since she is not an active participant, she is not subject to the deduction phaseouts, and the $5,500 contribution will be fully deductible.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Elmo Hoffman is a 49-year-old single filer. He contributed $5,500 to his IRA for this tax year. His salary from World-Wide Quality Shoes, Inc. (WWQS)
is $86,600 this year. His AGI for the year is $105,000. He has worked at WWQS for 20 years. WWQS provides a defined benefit plan for all employees who have at least one year of service, but Elmo has waived participation in the plan.
Is Elmo eligible to make the $5,500 contribution to his IRA?
a. Yes
b. No
a. Yes
He has earned income and is under age 70½.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Elmo Hoffman is a 49-year-old single filer. He contributed $5,500 to his IRA for this tax year. His salary from World-Wide Quality Shoes, Inc. (WWQS)
is $86,600 this year. His AGI for the year is $105,000. He has worked at WWQS for 20 years. WWQS provides a defined benefit plan for all employees who have at least one year of service, but Elmo has waived participation in the plan.
Is he an active participant?
a. Yes
b. No
a. Yes
He is considered an active participant because he is eligible under the plan provisions, even though he has chosen not to participate.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Elmo Hoffman is a 49-year-old single filer. He contributed $5,500 to his IRA for this tax year. His salary from World-Wide Quality Shoes, Inc. (WWQS)
is $86,600 this year. His AGI for the year is $105,000. He has worked at WWQS for 20 years. WWQS provides a defined benefit plan for all employees who have at least one year of service, but Elmo has waived participation in the plan.
Is he eligible to deduct the full contribution?
The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k
a. Yes
b. No
b. No
None of the contribution is deductible because he is an active participant and has AGI above the phaseout range.
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Susan Jones, 39, is single and an active participant in her employer’s qualified plan. Her adjusted gross income (AGI) for this year is $62,000, and she will contribute $5,500 to her IRA for this tax year. What amount is deductible?
The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k
a. $3,950 is deductible.
b. $4,950 is deductible.
c. $5,950 is deductible.
b. $4,950 is deductible.
$71,000 Upper Limit - $62,000 AGI = $9,000 Phase out range / $10,000 = 90% * $5,500 = $4,950 is deductible
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Mark Smith and his wife, Betty, both work, and they file a joint return. He is an active participant in his employer’s qualified plan. She is not an active participant in her employer’s qualified plan. Their AGI for this year is $100,000 and they will make an $11,000 IRA contribution for this year. What TOTAL amount is deductible?
The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k
a. $3,950 is deductible.
b. $4,950 is deductible.
c. $10,450 is deductible.
c. $10,450 is deductible.
$4,950 is deductible for Mark. The full amount, $5,500, is
deductible for Betty. Their total deduction is $10,450.
$118,000 Upper Limit - $100,000 AGI = $18,000 / $20,000 Phase out range = 90% * $5,500 = $4,950 is deductible
Retirement 5-1,2: Basics of IRAs and Traditional IRAs
Bobby Brinson and his unemployed wife, Laura, file a joint return. He is an active participant in his employer’s qualified plan. Laura is not an active participant, and both are under age 50. Their AGI is $140,000, and they will contribute $10,000 to their IRAs for this year. What amount is deductible?
The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k
a. $3,950 is deductible.
b. $4,950 is deductible.
c. $5,500 is deductible.
c. $5,500 is deductible.
$140,000 > $118,000; therefore, Bobby has no deduction.
Laura can deduct $5,500 as a spousal IRA contribution. Their total deduction is $5,500. Notice it is best to figure their AGI, and then deal with each spouse separately. Combine the results for the total.
Retirement 5-3: Traditional IRA Distributions
Penalty Taxes on IRA and Qualified Plan Distributions
Minimum distribution requirement
a. 6%
b. 10%
c. 50%
c. 50%
Retirement 5-3: Traditional IRA Distributions
Example. Ira Bigg turned age 70 on August 4, 2011; thus, he attained age 70½ on February 4, 2012, but he continued to work. He retired on October 7, 2013. His required beginning date for his IRA is
a. April 1, 2013
b. October 7, 2013
c. April 1, 2014
a. April 1, 2013 (i.e., April 1 of the year following the year in which he reached age 70½).
Retirement 5-3: Traditional IRA Distributions
The required distributions may be taken as either a lump sum or as periodic payments made at least annually. If the owner is living and distribution of the account is not taken as a lump sum, distribution of the entire account must be scheduled over a period that does not exceed the
a. Reasonable life expectancy
b. Calculated life expectancy
c. Applicable life expectancy
Applicable life expectancy
Applicable life expectancy is the owner’s life expectancy or the joint life expectancy of the owner and the beneficiary.
Retirement 5-3: Traditional IRA Distributions
Each year, the minimum distribution is calculated by dividing the account balance at the prior year-end by the owner’s remaining life expectancy as determined by the Uniform Table (or the Joint and Last Survivor Table if married and spouse is more than __ years younger than the owner).
a. 5
b. 10
c. 20
b. 10
Retirement 5-3: Traditional IRA Distributions
If the individual owns more than one IRA, the required minimum distribution is determined separately for each account. The total of required distributions
a. Must bet taken out of all of them proportionally
b. May be taken from any one or more of the IRAs.
b. May be taken from any one or more of the IRAs.
Retirement 5-3: Traditional IRA Distributions
If an annual distribution exceeds the minimum distribution requirement in a given year, the excess distribution _____ be carried over to the following year to reduce the minimum distribution requirement for that year.
a. may
b. may not
b. may not
Retirement 5-3: Traditional IRA Distributions
The minimum distribution requirements that apply to IRAs also apply to qualified plans; however, the required beginning date differs. With _____ distributions must begin by April 1 of the year following the year in which the individual reaches age 70½.
a. IRAs, SEPs, and SIMPLE IRAs
b. qualified plans, 403(b) plans, and 457 plans
a. IRAs, SEPs, and SIMPLE IRAs
Retirement 5-3: Traditional IRA Distributions
Example. Alice works for Titan Corporation and participates in the company’s 401(k) plan. She also has two IRA accounts, and another 401(k) account she kept with a former employer. She turns 70½ this year is not ready to retire. Which accounts require an RMD?
I. Current 401k
II. Previous 401k
III. IRAs
a. II
b. II and III
c. I, II, III
b. II and III
Since she is still working she will not have to take any required minimum distributions (RMDs) from Titan Corporation’s 401(k) plan. However, she will have RMDs from the two IRA accounts, and the 401(k) account she kept with her former employer.
Retirement 5-3: Traditional IRA Distributions
Example. Ace works for Hercules Inc. and participates in the company’s SIMPLE IRA plan. He also has an IRA account with his bank. Ace turns 70½ this year, and plans to continue working.
Which accounts require an RMD?
a. SIMPLE IRA
b. IRA
c. Both
c. Both
He will have RMDs from both the IRA with his bank and his SIMPLE IRA with Hercules. Ace cannot delay required distributions from his company’s SIMPLE IRA account, even though he is still working.
Retirement 5-3: Traditional IRA Distributions
The required minimum distribution for each distribution year is the account balance on ______ of the year prior to the distribution year, divided by the life expectancy obtained from the Uniform Table.
a. April 1st
b. April 15th
c. December 31st
c. December 31st
Retirement 5-3: Traditional IRA Distributions
In all cases, life expectancy life expectancy is determined by the Uniform Table, unless the spouse is more than __ years younger than the participant (or IRA owner). Where the spouse is more than __ years younger the Joint and Last Survivor Table is used, which takes into account the joint life expectancy of the couple. The equation below is used to calculate the required minimum distribution regardless of the table used.
a. 5
b. 10
c. 20
b. 10
Retirement 5-3: Traditional IRA Distributions
Ideally, a retirement vehicle has a named “designated beneficiary.” A designated beneficiary is a human (individual) or certain trusts that name a human(s) as the beneficiary. To be effective, the beneficiary must be designated by ______ of the year following the year of death.
a. April 15th
b. September 30th
c. December 31st
b. September 30th
Retirement 5-3: Traditional IRA Distributions
Participant Dies Before RMDs Begin
Option #1: Roll inherited assets into his or her own IRA (treat as your own)
Option #2: Transfer assets to decedent or inherited IRA
Option #3: Distribution according to 5-year rule
Option #4: Lump-sum distribution
a. Spouse Beneficiary
b. Nonspouse Beneficiary
a. Spouse Beneficiary
Retirement 5-3: Traditional IRA Distributions
Participant Dies Before RMDs Begin
Option #1: Rollover to decedent or “inherited” IRA following the death of the original participant
Option #2: Distribution according to 5-year rule
Option #3 Lump-sum distribution
a. Spouse Beneficiary
b. Nonspouse Beneficiary
b. Nonspouse Beneficiary
Retirement 5-3: Traditional IRA Distributions
Participant Dies After RMDs Begin
Option #1: Transfer assets to own IRA
Option #2: Open a decedent or inherited IRA
Option #3: Lump-sum distribution
a. Spouse Beneficiary
b. Nonspouse Beneficiary
a. Spouse Beneficiary
Retirement 5-3: Traditional IRA Distributions
Participant Dies After RMDs Begin
The required distribution period is the greater of:
- his or her fixed-term or unrecalculated life expectancy (using the Single Life Table) and then reducing by one each year, or
- the deceased IRA owner’s remaining unrecalculated actuarial life expectancy (fixed term/reduced by one year method using the Single Life Table).
a. Spouse Beneficiary
b. Nonspouse Beneficiary
b. Nonspouse Beneficiary
Retirement 5-3: Traditional IRA Distributions
Nonspousal beneficiaries _____ roll their inherited assets to an IRA in their own name
a. can
b. can not
b. can not
Retirement 5-3: Traditional IRA Distributions
Nonspouse beneficiaries must directly roll the inherited assets to an inherited IRA and use _____ age according to the IRS Single Life Expectancy Table to calculate the first year RMD
a. the decedent’s
b. their own
b. their own
Retirement 5-3: Traditional IRA Distributions
Nonspouse Beneficiary:
Additional contributions _____ be made to an inherited IRA
a. can
b. can not
b. can not
Retirement 5-3: Traditional IRA Distributions
Nonspouse Beneficiary
____ early withdrawal penalty applies to distributions prior to age 59½.
a. 10%
b. No 10%
b. No 10%
Retirement 5-3: Traditional IRA Distributions
Spouse Beneficiary
Distribution according to 5-year rule
The surviving spouse can choose to leave assets in the original account and defer receipt of distributions until the _____ year after the participant’s death. In the ____ year, however, he or she must take a distribution of the entire account balance. Remember that there is no 10% early withdrawal penalty for distributions due to death.
a. 1st
b. 5th
c. 10th
b. 5th
Retirement 5-3: Traditional IRA Distributions
Multiple Beneficiaries
Where there are multiple beneficiaries of an IRA, retirement plan, etc., the rule that requires distributions to be made based on the life expectancy of the _____
beneficiary doesn’t apply if an IRA provides a separate account for each beneficiary or if the beneficiaries are given fractional or percentage interests in the retirement arrangement and separate accounts are established no later than December 31st of the year following the year of the retirement plan owner’s
death
a. youngest
b. oldest
b. oldest
Retirement 5-3: Traditional IRA Distributions
Participant Dies After RMDs Begin
Spouse Beneficiary transfers assets to own IRA
The beneficiary _____ take an RMD for the year of death (if the account holder did not take it).
a. must
b. does not have to
a. must
Retirement 5-3: Traditional IRA Distributions
Participant Dies After RMDs Begin
Spouse Beneficiary transfers assets to own IRA
Beneficiaries who are under age 59½ will be subject to the same distribution rules as if the IRA had been theirs originally. They _____ take distributions other than RMD for the year of death without paying the 10% early
withdrawal penalty.
a. can
b. can not
b. can not
Retirement 5-3: Traditional IRA Distributions
The _____ is used for calculating minimum distributions for the owner during the owner’s life. It is used in every case except where the owner’s spouse is more than 10 years younger, where the joint life table is used instead.
a. Uniform Table
b. RMD Single Life Table
c. RMD Joint and Last Survivor Table
a. Uniform Table
Retirement 5-3: Traditional IRA Distributions
The five-year rule can always be the selected method and requires that the account be distributed in full before _____ of the year that contains the fifth anniversary of the owner’s death.
a. April 15
b. December 31
b. December 31
Retirement 5-3: Traditional IRA Distributions
Although IRC Section 72(t) specifies that distributions from IRAs taken before age 59½ generally will be subject to the 10% early withdrawal penalty, an exception is made when distributions from an IRA are made for one of the following reason:
qualified first-time home buyer
(neither taxpayer nor spouse can have had ownership in a principal residence for a two-year period prior to the date of purchase or commencement of construction) up to
a. $5,000
b. $10,000
c. $20,000
b. $10,000
Retirement 5-3: Traditional IRA Distributions
Substantially Equal Periodic Payments
For substantially equal periodic payments to be exempt from the 10% penalty, these payments:
- must continue for at least five years; or
- until the participant reaches age __, whichever is later; and
- the distribution amount may not be altered during this period
a. 59½
b. 70½
a. 59½
Retirement 5-3: Traditional IRA Distributions
Substantially Equal Periodic Payments
The annual payment is determined by dividing the account balance for the year by the applicable life expectancy obtained from the chosen life expectancy table. The participant or IRA owner must select the table from among the three alternatives: the RMD Single Life Table, the RMD Joint and Last Survivor
Table, and the Uniform Table. Each year’s result is based upon the life expectancy factor for that year and the account balance for that year. The payments are recalculated each year. When using this method, there is not a deemed modification of the series of substantially equal payments if the amount of the payment changes, as long as the method remains unchanged.
a. Method 1: Required minimum distribution method.
b. Method 2: The fixed amortization method.
c. Method 3: The fixed annuitization method.
a. Method 1: Required minimum distribution method.
Retirement 5-3: Traditional IRA Distributions
Substantially Equal Periodic Payments
The annual payment is determined by amortizing in level payments the account balance over a specified number of years (determined from the selected table) and the elected interest rate. The interest rate must be less than or equal to 120% of the federal mid-term rate (the “IRS Section 7520” rate) for either of the two months prior to the month the distribution begins. Once the initial distribution amount is determined it cannot be changed. The payment is the same in all subsequent years.
a. Method 1: Required minimum distribution method.
b. Method 2: The fixed amortization method.
c. Method 3: The fixed annuitization method.
b. Method 2: The fixed amortization method.
Retirement 5-3: Traditional IRA Distributions
Substantially Equal Periodic Payments
This method determines the payment by dividing the account balance by an annuity factor that is the
present value of an annuity of $1 per year, beginning on the participant’s or owner’s age in the first distribution year. The annuity factor is derived by using the mortality table in Appendix B of Revenue Ruling 2002 and selecting the interest rate. Once the first payment is determined, it remains unchanged in the subsequent years.
a. Method 1: Required minimum distribution method.
b. Method 2: The fixed amortization method.
c. Method 3: The fixed annuitization method.
c. Method 3: The fixed annuitization method.
Retirement 5-4,5: Roth IRAs
The Five-year clock for Roth IRA contributions. The five-year “clock” starts on _____ of the year for which the contribution is made.
a. January 1st
b. April 15th
c. September 30th
a. January 1st
Retirement 5-4,5: Roth IRAs
Five-year clock for Roth IRA contributions.
For example, John Q. Investor establishes a Roth IRA and makes a deposit on April 15, 2011, for the 2010 tax year. The contribution is being made for the 2010 tax year, so the clock would be considered started on ____.
a. January 1, 2010.
b. January 1, 2011.
a. January 1, 2010.
So even though the contribution itself is being made in 2011, since it is for 2010 the five-year clock starts at the beginning of 2010. Any subsequent contributions into Roth IRA accounts would be on this initial clock—there is not a new “clock” for each contribution.
Retirement 5-4,5: Roth IRAs
Example. Zeus opened and funded a Roth IRA with Thunder Bank in 2012. In 2015, he contributed $5,000 to a new Roth with the Stupendous Credit Union.
Zeus’s five-year holding period for his 2015 contribution began in
a. 2012
b. 2015
a. 2012 even though this Stupendous Credit Union Roth IRA did not exist in 2012. (If an individual is considering funding a Roth IRA in the future, he or she may want to consider making a small contribution to a Roth IRA just to get the clock started.)
Retirement 5-4,5: Roth IRAs
Example. Beginning in 2003, Jonathan Meiklehorn, age 42, contributed $2,000 annually to a Roth IRA for 11 years. Assume that in November of 2015 he withdrew his entire account balance of $34,000 to buy a car. His account meets the five-year holding requirement, but he is not age 59½, deceased, or disabled, nor is he using the money to buy his first home. Therefore, the distribution is
a. qualified
b. not qualified
b. not qualified
He has contributed $22,000, and this amount comes out first and is not taxable. The remaining $12,000 of the distribution is taxable and is also subject to the 10% penalty. The portion of the distribution that is not taxed is not subject to the early withdrawal penalty—it is a return of principal (after-tax contributions).
Retirement 5-4,5: Roth IRAs
Example. Victor established a Roth IRA at age 60 and dies two years later. In order for his beneficiaries to avoid taxation on any earnings, they will need to
meet the five-year holding period requirement first. The beneficiaries _____ withdraw up to the contribution amount made by Victor without taxation.
a. could
b. could not
a. could; since principal comes out first, then any earnings.