Retirement: 5 Traditional, Roth and SIMPLE IRAs Flashcards by David Freiler

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

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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

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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%).

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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

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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

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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.

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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

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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%

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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.

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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.

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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).

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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).

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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

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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

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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

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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

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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

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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

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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

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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.

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Retirement 5-1,2: Basics of IRAs and Traditional IRAs

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.”

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Retirement 5-1,2: Basics of IRAs and Traditional IRAs

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.

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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.

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Retirement 5-1,2: Basics of IRAs and Traditional IRAs

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.

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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.)

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.

Retirement 5-4,5: Roth IRAs There are three methods available to convert a traditional IRA to a Roth IRA: The IRA owner can receive a distribution from a traditional IRA and roll it over, or contribute it, to a Roth IRA. This must be done within 60 days of the distribution. a. Rollover b. Trustee-to-trustee transfer c. Same trustee transfer

a. Rollover

Retirement 5-4,5: Roth IRAs There are three methods available to convert a traditional IRA to a Roth IRA: The IRA owner can direct the traditional IRA trustee to transfer part, or all, of the traditional IRA to the trustee of a Roth IRA. a. Rollover b. Trustee-to-trustee transfer c. Same trustee transfer

b. Trustee-to-trustee transfer

Retirement 5-4,5: Roth IRAs There are three methods available to convert a traditional IRA to a Roth IRA: If the traditional IRA trustee also offers Roth IRAs, the owner can direct the trustee to transfer part, or all, of the traditional IRA to a Roth IRA. This could also be accomplished by reclassifying the traditional IRA as a Roth IRA, rather than opening a new account or having a new contract issued. a. Rollover b. Trustee-to-trustee transfer c. Same trustee transfer

c. Same trustee transfer

Retirement 5-4,5: Roth IRAs Example. Your client, Zoe, has traditional IRA #1 with a balance of $50,000, and a total of $10,000 in after-tax contributions (nondeductible). She also has rollover IRA #2 with a balance of $110,000 with no after-tax contributions. The total account balances in the IRAs is $160,000. What is the percentage of any conversion that would be nontaxable? a. 5.25% b. 6.25% c. 7.25%

b. 6.25% $10,000/$160,000 = .0625 = 6.25% This means that 6.25% of any conversion amount will be nontaxable, and the balance (93.75%) will be taxed. Let’s say that Zoe decides to convert $25,000; 93.75% of the $25,000, which is $23,437.50, would be taxed, and the balance of $1,562.50 (6.25% of the amount) would not be taxed. Note that she cannot convert the $10,000 in after-tax contributions first, she must use a prorated amount.

Retirement 5-4,5: Roth IRAs Another option available to those who convert into a Roth IRA is to “recharacterize” the conversion, which in effect means to “undo” the conversion. If assets are converted from a traditional IRA to a Roth IRA, and then recharacterized back to a traditional IRA, they may not be reconverted back to a Roth IRA until the later of the start of the next calendar year, or __ days after the recharacterization. a. 30 b. 60 c. 90

a. 30

Retirement 5-4,5: Roth IRAs Jane Smith has three IRAs worth a total of $250,000. There is $100,000 each in two traditional IRAs, and $50,000 in a SIMPLE IRA. She has made a total of $20,000 nondeductible IRA contributions to the traditional IRAs over the years, and now wants to convert just the $20,000 into a Roth IRA. You would advise her that she must take the total of all IRAs, and calculate the ratio based on that amount. In other words, she cannot just convert the nondeductible amount. The taxable amount would be: a. $16,400 b. $17,400 c. $18,400

c. $18,400 In this case we have nondeductible contributions totaling $20,000 and the total value of all IRAs is $250,000. $20,000/$250,000 = .08, so 8% of any conversion is nontaxable, and the other 92% would then be taxable. $20,000 conversion × .92 = $18,400 taxable amount.

Retirement 5-4,5: Roth IRAs Funds within one or more Roth IRAs are treated as if in _____, categorized according to their source: annual contributions, conversions, or earnings a. individual accounts b. one pooled account

b. one pooled account

Retirement 5-4,5: Roth IRAs When distributions are made from one or more account(s), the funds are considered withdrawn according to a specific order. “Ordering” the money involves categorizing the funds based on their source or status. The funds are considered withdrawn, or “distributed,” in the following _____ a. “first-in, first-out” b. “last-in, last-out”

a. “first-in, first-out”

Retirement 5-4,5: Roth IRAs When distributions are made from one or more account(s), the funds are considered withdrawn according to a specific order, from three buckets: annual contributions, conversions, earnings. The first to come out is: a. earnings b. conversions c. annual contributions

c. annual contributions

Retirement 5-4,5: Roth IRAs When distributions are made from one or more account(s), the funds are considered withdrawn according to a specific order, from three buckets: annual contributions, conversions, earnings. The second to come out is: a. earnings b. conversions c. annual contributions

b. conversions

Retirement 5-4,5: Roth IRAs When distributions are made from one or more account(s), the funds are considered withdrawn according to a specific order, from three buckets: annual contributions, conversions, earnings. The third to come out is: a. earnings b. conversions c. annual contributions

a. earnings

Retirement 5-4,5: Roth IRAs When former conversions are distributed from a Roth IRA the “included as income” portion of the ______, then the “included as income” portion of the next conversion, etc. a. first or earliest conversion b. last or most recent conversion

a. first or earliest conversion

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 not qualified. a. $22,000 comes out first and is not taxable, $12,000 of the distribution is taxable and is also subject to the 10% penalty b. $12,000 comes out first and is not taxable, $22,000 of the distribution is taxable and is also subject to the 10% penalty

a. $22,000 comes out first and is not taxable, $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).

a. can The beneficiaries could withdraw up to the contribution amount made by Victor without taxation since principal comes out first, then any earnings.

Retirement 5-4,5: Roth IRAs A traditional IRA, SEP, or SIMPLE IRA (after the two-year wait) _____ be converted to a Roth IRA regardless of the owner’s modified AGI a. can b. can not

a. can Unique to the Roth IRA is the ability to accept “converted IRA” funds. A traditional IRA, SEP, or SIMPLE IRA (after the two-year wait) may be converted to a Roth IRA regardless of the owner’s modified AGI.

Retirement 5-4,5: Roth IRAs Although converted funds are not subject to the 10% early withdrawal penalty at the time of conversion, if a withdrawal of converted IRA funds is made from the Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal _____ be subject to the 10% penalty. a. would b. would not

a. would

Retirement 5-4,5: Roth IRAs Example. Your client, Zoe, has traditional IRA #1 with a balance of $50,000, and a total of $10,000 in after-tax contributions (nondeductible). She also has rollover IRA #2 with a balance of $110,000 with no after-tax contributions. The total account balances in the IRAs is $160,000, and the total amount of after-tax contributions is $10,000. How much of the conversion would be non-taxable. a. 5.25% b. 6.25% c. 7.25%

$10,000/$160,000 = .0625 = 6.25%. This means that 6.25% of any conversion amount will be nontaxable, and the balance (93.75%) will be taxed. Let’s say that Zoe decides to convert $25,000; 93.75% of the $25,000, which is $23,437.50, would be taxed, and the balance of $1,562.50 (6.25% of the amount) would not be taxed. Note that she cannot convert the $10,000 in after-tax contributions first, she must use a prorated amount.

a. 30

b. no

Retirement 5-4,5: Roth IRAs Jane Smith has three IRAs worth a total of $250,000. There is $100,000 each in two traditional IRAs, and $50,000 in a SIMPLE IRA. She has made a total of $20,000 nondeductible IRA contributions to the traditional IRAs over the years, and now wants to convert just the $20,000 into a Roth IRA. You would advise her that she must take the total of all IRAs, and calculate the ratio based on that amount. In other words, she cannot just convert the nondeductible amount. a. $17,400 would be the taxable amount b. $18,400 would be the taxable amount c. $19,400 would be the taxable amount

b. $18,400 would be the taxable amount In this case we have nondeductible contributions totaling $20,000 and the total value of all IRAs is $250,000. $20,000 /$250,000 = .08, so 8% of any conversion is nontaxable, and the other 92% would then be taxable. $20,000 conversion × .92 = $18,400 taxable amount.

Retirement 5-4,5: Roth IRAs Jim is in the 35% tax bracket and expects to be in that bracket in retirement. Jim can either fund a traditional IRA with $5,500 or put $3,575 ($5,500 – 35%) into a Roth IRA. If both earned 5% rate of return for 10 years: a. the Net distribution for the Traditional IRA would be $5,823.30 and the Roth's would be $5,823.30 b. the Net distribution for the Traditional IRA would be $7,167.14 and the Roth's would be $5,823.30

a. the Net distribution for the Traditional IRA would be $5,823.30 and the Roth's would be $5,823.30 Assuming identical rates of return, both investments will result in identical distributions net of taxes once Jim retires in 10 years. Value in 10 years IRA $8,958.92 Roth $5,823.30 Tax on distribution IRA $3,135.62 Roth $0 Net distribution IRA $5,823.30 Roth $5,823.30

Retirement 5-4,5: Roth IRAs Jim is in the 20% tax bracket and expects to be in that bracket in retirement. Jim can either fund a traditional IRA with $5,500 or put $3,575 ($5,500 – 35%) into a Roth IRA. If both earned 5% rate of return for 10 years: a. the Net distribution for the Traditional IRA would be $5,823.30 and the Roth's would be $5,823.30 b. the Net distribution for the Traditional IRA would be $7,167.14 and the Roth's would be $5,823.30

b. the Net distribution for the Traditional IRA would be $7,167.14 and the Roth's would be $5,823.30 Value in 10 years IRA $8,958.92 Roth $5,823.30 Tax on distribution IRA $1,791.78 Roth $0 Net distribution IRA $7,167.14 Roth $5,823.30

Retirement 5-4,5: Roth IRAs When a Roth IRA owner dies without having named a beneficiary, the five-year rule requires that the account be distributed in full on or before _____ of the calendar year that contains the fifth anniversary of the account owner’s death. January 1 April 1 December 31

December 31

Retirement 5-4,5: Roth IRAs If a nonspouse beneficiary has been named, the Roth IRA _____ be distributed over the life expectancy of the beneficiary. a. may b. may not

a. may

Retirement 5-4,5: Roth IRAs If a nonspouse beneficiary has been named, the Roth IRA may be distributed over the life expectancy of the beneficiary. Distributions would have to begin within _____ of the death of the Roth IRA owner. 6 months one year five years

one year

Retirement 5-4,5: Roth IRAs For beneficiaries, the assets in the Roth IRA are received tax free _____ the Roth was established at least five years prior to the distribution. a. regardless of whether b. so long as

b. so long as

Retirement 5-4,5: Roth IRAs Traditional IRAs, starting in 2005, have up to _____ in IRA assets protected from creditors in a federal bankruptcy filing because of the Bankruptcy Abuse Prevention and Consumer Act of 2005 $250,000 $500,000 $1,000,000

$1,000,000

Retirement 5-4,5: Roth IRAs Sven and Heidi, both in their twenties, are about to purchase their first home, and Sven wants to use the money he has accumulated in his Roth IRA to help with the down payment. He has contributed $12,000 over the last six years, and the account is now worth $20,000. Sven wants to know the tax implications of withdrawing the entire $20,000 for a down payment. None of the distribution would be taxed. $12,000 would not be taxed, $8,000 would be taxed $12,000 would not be taxed, $8,000 would be taxed and would incur a 10% penalty

None of the distribution would be taxed. The $12,000 in contributions is return of principal, and is not subject to taxation. The $8,000 in earnings is also not subject to taxation because it is a qualified distribution. Sven has met the five-year holding period, and the distribution is being made for a first-time homebuyer to purchase a home. The maximum homebuyer exclusion amount is $10,000, and Sven’s potentially taxable distribution of $8,000 is below this amount.

Retirement 5–6: SIMPLE IRAs Under a SIMPLE IRA plan, any employee who is reasonably expected to receive at least _____ in compensation during the year, and who received at least ______ in any two preceding years, must be considered an eligible employee. $2,500 $5,000 $10,000

$5,000.

Retirement 5–6: SIMPLE IRAs A SIMPLE IRA may only be established by companies that employ ___ or fewer employees who receive at least $5,000 of compensation from the employer during the prior calendar year. 50 100 500

100

Retirement 5–6: SIMPLE IRAs The employer may have more than 100 employees, but we only count those with $5,000 or more in compensation. If an employer ever exceeds the 100 qualified employee limit they are generally entitled to a ____ grace period during which they may continue to fund the plan. 2 year 3 year 5 year

2 year The two-year grace period is reduced to one year if the employer’s ineligibility is a result of an acquisition, disposition, or similar occurrence.

Retirement 5–6: SIMPLE IRAs The SIMPLE plan allows employees to make elective salary reduction contributions and _____ employers to make either matching or nonelective contributions a. requires b. but does not require

a. requires

Retirement 5–6: SIMPLE IRAs An employee may make elective contributions (expressed as a percentage of compensation or a dollar amount) up to $_____ (2016) a year $5,000 $12,500 $25,000

$12,500

Retirement 5–6: SIMPLE IRAs In addition, participants who have attained at least age 50 during the plan year qualify for an additional “catch-up” contribution of _____ (for 2016). $1,000 $3,000 $6,000

$3,000

Retirement 5–6: SIMPLE IRAs For a calendar year, an eligible employee may make or modify a salary reduction election during the __-day period immediately preceding January 1 of that plan year. However, for the year in which the employee first becomes eligible to make contributions, the period during which the employee may make or modify the election is a __-day period that includes either the date the employee becomes eligible or the day before. 30 60 90

Retirement 5–6: SIMPLE IRAs Employers must make either 1. a _% matching contribution or 2. a 2% non-elective contribution a. 3% b. 4%

a. 3%

Retirement 5–6: SIMPLE IRAs As an alternative to making matching contributions, an employer may choose to make a nonelective contribution of 2% of compensation for each eligible employee who has earned at least $_____ in compensation during the year. a. $2,500 b. $5,000

b. $5,000

Retirement 5–6: SIMPLE IRAs If the employer wishes to benefit the higher paid employees (which typically includes the owner), it seems that the employer would make a: a. 3% match b. 2% non-elective contribution

a. 3% match If the employer wishes to benefit the higher paid employees (which typically includes the owner), it seems that the employer would make a 3% match, as opposed to the 2% non-elective contribution.

Retirement 5–6: SIMPLE IRAs If the employer chooses to make a matching contribution to a SIMPLE IRA, the normal IRC Section 401(a)(17) $265,000 (2016) limit on compensation a. still applies b. does not apply

b. does not apply

Retirement 5–6: SIMPLE IRAs If an employee makes $400,000 and puts $12,500 (the maximum for 2016) into the SIMPLE IRA, the employer could then put _____ into the account as a matching contribution. a. $7,950 (3% of the entire $265,000) b. $12,000 (3% of the entire $400,000) c. $12,500 (the maximum for 2016)

b. $12,000 (3% of the entire $400,000) If an employee earns $450,000 and sets aside $12,500, the maximum matching contribution the employer can put in the account is $12,500.

Retirement 5–6: SIMPLE IRAs If the employer uses the 2% non-elective contribution, the $265,000 limit ____ apply a. does b. does not

a. does

Retirement 5–6: SIMPLE IRAs Salary reduction amounts ____ subject to FICA. a. are b. are not

a. are

Retirement 5–6: SIMPLE IRAs Participants may roll over distributions from one SIMPLE IRA account to another at any time a. may b. may not

a. may

Retirement 5–6: SIMPLE IRAs An individual may also roll over a distribution from a SIMPLE IRA to another individual IRA, SEP, qualified plan, TSA, or Section 457 governmental plan on a tax-free basis after a _____ has expired from the date the individual first participated in the SIMPLE IRA. a. 1 year period b. 2 year period c. 3 year period

b. 2 year period

Retirement 5–6: SIMPLE IRAs A participant who takes a distribution from a SIMPLE account before age 59½ is generally subject to the same 10% premature distribution penalty applicable to traditional IRAs. However, there is a special rule for SIMPLE IRAs: A participant who takes a distribution within two years of joining the plan is assessed a __% penalty tax if the distribution is subject to the early withdrawal penalty. a. 5% b. 10% c. 25%

c. 25%

Retirement 5–6: SIMPLE IRAs Seth, currently age 35, began participating in his employer’s SIMPLE IRA plan less than two years ago. Needing cash to purchase a new car, Seth has just taken a distribution from his SIMPLE IRA. Seth will be assessed a __% penalty on the amount distributed and he must also include the entire amount of the distribution in his taxable income for the year in which the distribution was made. a. 5% b. 10% c. 25%

c. 25%

Retirement 5–6: SIMPLE IRAs The reporting requirements for a SIMPLE plan are ____ when compared to those of traditional employer-sponsored plans. greater minimal

minimal

Retirement 5-7: The Simplified Employee Pension (SEP) Simplified Employee Pension (SEP) _____ a qualified pension plan as defined by the Internal Revenue Code is is not

is not

Retirement 5-7: The Simplified Employee Pension (SEP) SEPs are _____ accounts established by a business or tax-exempt organization on behalf of an employee. 401k IRA

IRA

Retirement 5-7: The Simplified Employee Pension (SEP) Generally, any employer, including a sole proprietor with no employees, _____ establish a SEP a. may b. may not

a. may

Retirement 5-7: The Simplified Employee Pension (SEP) The SEP is funded solely by the employee employer

employer

Retirement 5-7: The Simplified Employee Pension (SEP) Contributions to SEP-IRAs _____ tax-deductible by the employer and are not treated as current taxable income for the employee. are are not

are Although IRA accounts are not considered to be qualified, like qualified plans, contributions to SEP-IRAs are tax-deductible by the employer and are not treated as current taxable income for the employee.

Retirement 5-7: The Simplified Employee Pension (SEP) The law permits annual employer contributions to each participating employee’s SEP-IRA up to either __% of the employee’s compensation or $53,000 (for 2016), whichever is less. 10% 25% 50%

25%

Retirement 5-7: The Simplified Employee Pension (SEP) The maximum 2016 contribution for an employee with compensation of $200,000 would be a. $25,000 b. $50,000 c. $53,000

b. $50,000 $50,000—the lesser of 25% of compensation or $53,000.

Retirement 5-7: The Simplified Employee Pension (SEP) The maximum contribution for an employee with $250,000 of compensation would be a. $25,000 b. $53,000 c. $62,500

b. $53,000 The maximum contribution for an employee with $250,000 of compensation would be $53,000—the lesser of 25% of compensation ($62,500) or $53,000

Retirement 5-7: The Simplified Employee Pension (SEP) Each employee who is: - age 21 or over - who earns at least $___ (for 2016) during the current year - has performed services for the employer in at least three of the five immediately preceding calendar years must participate in the SEP a. $400 b. $500 c. $600

c. $600

Retirement 5-7: The Simplified Employee Pension (SEP) Comparison of SEPs, IRAs, and DC Plans - Employee is 100% vested - April 15 contribution deadline (but SEP includes extensions) - Withdrawals after age 59½ - Distributions taxed at ordinary income tax rates a. Provisions Shared with IRAs b. Provisions Shared with Defined Contribution Plans c. Provisions Unique to SEPs

a. Provisions Shared with IRAs | - Employee owns IRA

Retirement 5-7: The Simplified Employee Pension (SEP) Comparison of SEPs, IRAs, and DC Plans -25% employer contribution deduction limit (same as profit sharing plan). Plan may allow SARSEP if established prior to 1997 -Coverage tests required -Top-heavy rules apply -Controlled group/affiliated service group rules apply -Integration with Social Security permitted -Maximum includible compensation of $265,000 (2016) a. Provisions Shared with IRAs b. Provisions Shared with Defined Contribution Plans c. Provisions Unique to SEPs

b. Provisions Shared with Defined Contribution Plans

Retirement 5-7: The Simplified Employee Pension (SEP) Comparison of SEPs, IRAs, and DC Plans Special eligibility requirements: - Age 21 - Service during three of past five years - Compensation at least $600 in 2016 (indexed) - Fully discretionary contributions - No forfeitures a. Provisions Shared with IRAs b. Provisions Shared with Defined Contribution Plans c. Provisions Unique to SEPs

c. Provisions Unique to SEPs

Retirement 5-8: SEP Versus SIMPLE Maximum employee contribution - $0 a. SEP b. SIMPLE IRA

a. SEP

Retirement 5-8: SEP Versus SIMPLE Maximum employee contribution - 100% of compensation up to $12,500 (as indexed in 2016)* ($15,500 for persons who have attained at least age 50 in 2016) a. SEP b. SIMPLE IRA

b. SIMPLE IRA

Retirement 5-8: SEP Versus SIMPLE Employer contributions -Discretionary contributions -Lesser of either 25% of compensation or $53,000 (only first $265,000 of income considered for 2016) a. SEP b. SIMPLE IRA

a. SEP

Retirement 5-8: SEP Versus SIMPLE Employer contributions - Nondiscretionary matching or nonelective contributions a. SEP b. SIMPLE IRA

b. SIMPLE IRA

Retirement 5-8: SEP Versus SIMPLE Employer eligibility - No limit on number of employees a. SEP b. SIMPLE IRA

a. SEP

Retirement 5-8: SEP Versus SIMPLE Employer eligibility -Limited to businesses of 100 or fewer employees who earned at least $5,000 the preceding year a. SEP b. SIMPLE IRA

b. SIMPLE IRA

Retirement 5-8: SEP Versus SIMPLE Employee eligibility - Age 21 and over - Performed service during three of the immediately five preceding years - Earned at least $600 (2016) during the current year a. SEP b. SIMPLE IRA

a. SEP

Retirement 5-8: SEP Versus SIMPLE Employee eligibility - No age requirement - Received at least $5,000 during any two prior years - Reasonably expected to receive $5,000 during the current year a. SEP b. SIMPLE IRA

b. SIMPLE IRA

Retirement 5-4,5: Roth IRAs 1. Harry, a frantic 34-year-old, 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? Harry must pay tax on the $2,000, but there is no penalty. Harry must pay tax and a $200 penalty. Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34.

Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34. All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax-free, then earnings. Also, the IRC rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to taxable income.

Retirement 5-4,5: Roth IRAs 2. Which one of the following is a correct statement about a Roth IRA? An individual can contribute $5,500 annually to a regular IRA and $5,500 annually to a Roth IRA. Withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home can be penalty-free. If a nonqualifying distribution is made prior to age 59½, the principal is subject to the 10% penalty, but it is not considered to be taxable income. As with conventional IRAs, distributions from a Roth IRA must begin by April 1 of the year following the year the participant reaches age 701⁄2.

Withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home can be penalty-free. Withdrawals from a Roth IRA are not penalized under these circumstances if the five-year holding period has been met.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 3. Norman and Brunhilda Walkueries are married taxpayers filing jointly. Norman earned $132 this year, and Brunhilda earned $100,000. Brunhilda 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? $0 $132 $3,250 $4,125 $5,500

$5,500 The maximum deductible contribution to a spousal IRA for Norman is $5,500, and the deductible amount phases out at AGI of $184,000–$194,000 for Norman, who is the nonactive participant spouse.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 4. James and Doris Stewart will contribute a total of $11,000 to their IRAs for this tax year. They both work outside the home, and they file a joint tax return. James Stewart is a teacher at the local high school and contributes to a TSA. Doris's employer has no retirement plan. Their adjusted gross earnings for this year will be $106,000. What amount, if any, can they deduct for their IRA contributions? $0 $5,500 $8,800 $11,000

$8,800 Doris is entitled to deduct the full $5,500 spousal IRA amount and James is in the phaseout range for active spouses: $118,000 – $106,000 = $12,000; $12,000 ÷ $20,000 phaseout range = 0.6; 0.6 × $5,500 = $3,300; $3,300 + $5,500 = $8,800. Option "a" assumes that neither Doris nor James qualifies for a deduction.

Retirement 5-4,5: Roth IRAs 5. Charlie Clevgins 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? He must pay taxes and a penalty on the full distribution. He will pay neither taxes nor a penalty. He only pays ordinary taxes, because Roth IRA distributions are not subject to a penalty. He cannot make any withdrawals, because the money has not been in the Roth IRA for five years or longer.

He will pay neither taxes nor a penalty. The distribution is not qualified because Charlie is under age 591⁄2, 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.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 6. Joanie Singleton is a married taxpayer. She and her husband, Johnny, file jointly and have a combined AGI of $112,000. Johnny is covered by his employer's profit sharing plan. No employer contribution was made for this plan year, but Johnny's account balance increased by $1,200 due to investment earnings. Joanie does not have a plan where she works. If they contribute $11,000 to their IRAs for this year, what amount, if any, can they deduct? $0 $800 $5,500 $11,000

$11,000 Because he's not active, Johnny receives the full $5,500 deduction. The IRA deduction for Joanie is also $5,500, since she is not active. The total deduction is $11,000.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 7. Lucy received a $1,200 profit sharing contribution this year. Lucy and George are married, filing jointly. George is an artist who had no earnings this year. Their combined AGI for this year is $199,000. How much of their $11,000 IRA contribution can they deduct? $0 $200 $5,500 $11,000

$0 Lucy's status is active, since she did receive an annual addition. Their AGI is greater than the phaseout limit, so Lucy cannot make a deductible contribution. George has the full spousal deduction available, but the spousal IRA is also phased out because their AGI is greater than $194,000. Lucy and George's total deduction is zero. Option "a" correctly states that they do not qualify for any deduction.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 9. Allen Baker, a single taxpayer with AGI of $75,000, is covered by his employer's profit sharing/401(k) plan. During the current plan year, no employer contribution was made, and Allen did not make any salary reduction contributions to the 401(k) portion of the plan. Allen's account balance increased by $120 this year, which was attributable to investment earnings of $80 and forfeitures of $40. If he contributes $5,500 to his IRA for this year, what is the amount of his allowable IRA deduction? $0 $600 $1,200 $5,500

$0 Allen is "active" because of the forfeiture allocation. Since his AGI is over the maximum phaseout amount of $71,000, he is not entitled to any deduction.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 10. John Jonglemeier is married and his spouse is not employed. They file jointly and their AGI is $107,000. Each has contributed $5,500 to an IRA. John waived participation in the defined benefit plan at work when he became eligible. What is the amount of their IRA deduction? $0 $5,500 $8,530 $11,000

$8,530 Calculating: $118,000 – $107,000 = $11,000; ($11,000 ÷ $20,000) × $5,500 = $3,025 deduction for John since he is active. Even though he waived participation, being eligible for the defined benefit plan makes him active. His wife is allowed the spousal deduction of $5,500. Their total deduction is $8,525 which is rounded up to the nearest $10. Option "a" assumes that they do not qualify for any deduction.

Retirement 5-3: Traditional IRA Distributions 11. Which one of the following is not exempt from the 10% penalty tax on premature distributions from an IRA? a series of substantially equal periodic payments a distribution following the owner's death a distribution to a 55-year-old employee following separation from service a distribution following disability a distribution for medical expenses not in excess of deductible medical expenses

a distribution to a 55-year-old employee following separation from service This type of distribution is not exempt from the 10% penalty for an IRA. The exemption does apply to qualified plan distributions, however.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 12. Ken and Barbie file jointly. Both work, and their combined AGI is $103,000. This year, Ken's profit sharing account earned over $4,000, but the company made no contributions, Ken made no contributions, and there were no forfeitures. Barbie declined to participate in her company's defined benefit plan because she wants to accumulate and manage her own retirement money. (Her current accrued benefit at age 65 under the plan is $240 per month.) How much of their $11,000 IRA contribution can they deduct? $0 $7,500 $9,630 $11,000

$9,630 Barbie's status is active. She cannot decline active status, even if she declines participation in a defined benefit plan. Ken's status is not active since he received no annual additions. His available IRA deduction is $5,500 and hers is $118,000 – $103,000 = $15,000; ($15,000 ÷ $20,000) × $5,500 = $4,125, which we round up to the nearest $10.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 13. George and Mabel Treetops each put $5,500 into their respective IRAs. George's employer does not provide a qualified retirement plan. Mabel participates in a 401(k) plan at work. Their AGI is $185,000, and they file jointly. How much of their IRA contributions will be deductible? $0 $4,950 $5,500 $11,000

$4,950 The IRA rules allow an IRA deduction for individuals who are not active participants but whose spouses are, in some cases. However, that option is phased out if the couple's AGI is between $184,000 and $194,000. With a combined AGI of $185,000, George Treetops would be able to deduct $194,000 – $185,000 = $9,000; ($9,000 ÷ $10,000) × $5,500 = $4,950

Retirement 5-3: Traditional IRA Distributions 14. The "required beginning date" (RBD) for IRA distributions is which one of the following? April 1 of the year in which age 701⁄2 was attained April 15 of the year in which age 701⁄2 was attained April 15 of the year following the year in which age 701⁄2 was attained April 1 of the year following the year in which age 701⁄2 was attained

April 1 of the year following the year in which age 701⁄2 was attained By definition, the required beginning date for IRA distributions is April 1 of the year following the year in which the participant or IRA owner turns age 701⁄2. Option "d" is the correct definition.

Retirement 5-3: Traditional IRA Distributions 15. Which one of the following statements regarding IRA distributions is correct? Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty and taxation. Distributions from an IRA following separation from service after age 54 are exempt from the 10% early withdrawal penalty.

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

Retirement 5-3: Traditional IRA Distributions 16. Which one of the following statements is correct regarding a nondeductible IRA? 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. If a person is an active participant, qualification for contributions to nondeductible IRAs would depend upon AGI and filing status of the taxpayer. A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead.

A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead. A person may always choose not to deduct their IRA contribution regardless of AGI or whether or not the person is an active participant.

Retirement 5-3: Traditional IRA Distributions 17. For purposes of determining if an individual may contribute to an IRA, alimony received is considered to be earned compensation. passive income, such as interest or dividends, is considered to be earned compensation. workers' compensation or unemployment compensation are considered to be earned compensation.

alimony received is considered to be earned compensation. For IRA purposes, alimony is earned income.

Retirement 5-4,5: Roth IRAs 18. Jane Pascheon has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $500 on December 31, 2010. She wants to know when she can begin making qualified distributions. Which one of the following statements would represent what you would tell her? Any distribution she takes after January 1, 2015, will meet the five-year requirement. After December 31, 2015, the five years will have elapsed, and she could begin making qualified distributions as soon as she attains 591⁄2. Any distributions for medical expenses in excess of 10% would qualify as a tax-free distribution after satisfying the five-year holding period even if she has not attained age 591⁄2.

Any distribution she takes after January 1, 2015, will meet the five-year requirement. The clock started on January 1, 2010, so five years will have elapsed on January 1, 2015. A Roth IRA owner is required to hold the account for a minimum of five years to qualify for tax-free distributions. In addition, the owner must be at least age 591⁄2.

Retirement 5–6: SIMPLE IRAs 19. Which of the following employer contribution choices would not be allowed in a SIMPLE IRA plan? 100% match on the first 3% of employee compensation 100% match on the first 2% of employee compensation 2% nonelective contribution 3% nonelective contribution

3% nonelective contribution Employers must match 3% of compensation, but can reduce it in two of five years to no lower than 1%, so option 2 is possible. The only nonelective choice is 2% of compensation.

Retirement 5–6: SIMPLE IRAs 20. Priscilla works for Acme Motors, which offers a SIMPLE IRA plan with a 3% employer match. Priscilla is expected to earn $40,000 this year, and is trying to pay down debt that she has so she is only going to contribute $500 to the SIMPLE plan this year. What is the contribution total that will be deposited into her SIMPLE plan this year? $500 $1,000 $1,300 $1,700

$1,000 The employer will match dollar-for-dollar the first $1,200 that Priscilla contributes (3% of $40,000). Since she is only contributing $500, then the company will only contribute $500 for a total of $1,000. In effect, Priscilla is "leaving money on the table."

Retirement 5–6: SIMPLE IRAs 21. Employers can establish SIMPLE IRA plans up until which date? December 31st for that calendar year October 1st for that calendar year A SIMPLE IRA can be set up as late as the due date (including extensions) of the business's income tax return for that year.

October 1st for that calendar year Employers have until October 1st to establish a plan for that calendar year. This is to allow plenty of time in order for employees to receive the required 60-day notice and time frame in which to decide if they want to participate in the plan or not.

Retirement 5–6: SIMPLE IRAs 22. The maximum employee deferral limit in 2016 for SIMPLE IRAs is $12,500, with an age 50 catch-up of $2,500 also available. $12,500, with an age 50 catch-up of $3,000 also available. $18,000, with an age 50 catch-up of $6,000 also available.

$12,500, with an age 50 catch-up of $3,000 also available. The deferral amount is $12,050, and the age 50 catch-up is $3,000.

Retirement 5-7: The Simplified Employee Pension (SEP) 23. Which one of the following employees could not be excluded from participating in a SEP? John, age 23, who started with the company last year and makes $15,000 part-time Vincent, age 40, who worked for the company up until five years ago, and was recently rehired again part-time Victoria, age 37, who started with the company four years ago and makes at least $1,000 each year working during the Christmas holidays James, age 50, who has been working full-time for two years and makes $75,000

Victoria, age 37, who started with the company four years ago and makes at least $1,000 each year working during the Christmas holidays The minimum eligibility requirements for a SEP are (1) attainment of age 21, (2) compensation of at least $600, and (3) performing services for at least three of the last five years. Only Victoria meets all three requirements; the other employees do not have enough service.

Retirement 5-7: The Simplified Employee Pension (SEP) 24. The maximum contribution to a SEP for an owner of a sole proprietorship is the lesser of 20% of compensation or $53,000 (2016). 25% of compensation, or $53,000 (2016). 100% of compensation, or $53,000 (2016).

20% of compensation or $53,000 (2016). If the business is unincorporated (and you are working with a sole proprietor or greater than 10% owner of a partnership) then the Keogh rules apply. If 25% (the maximum allowed) is being contributed on behalf of the common-law employees, then only 20% can be contributed on behalf of the owner. Contributions to a SEP cannot exceed $53,000 in 2016.

Retirement 5-8: SEP Versus SIMPLE 25. Which one of the following statements is correct regarding comparison of a SEP and SIMPLE IRA? A SEP will always allow a potentially higher overall contribution amount than a SIMPLE IRA for an employee, regardless of income level. If both plans were effective in 2016, employees could defer more into a SEP than a SIMPLE IRA. There is no limit on the number of employees in a SEP, but only businesses with no more than 100 employees with $5,000 or more in compensation during the preceding calendar year could establish a SIMPLE IRA.

There is no limit on the number of employees in a SEP, but only businesses with no more than 100 employees with $5,000 or more in compensation during the preceding calendar year could establish a SIMPLE IRA. Although SEPs allow up to 25% of compensation to be deferred on behalf of employee, a lower-paid employee could benefit more from a SIMPLE, since the employee is allowed to defer income into the SIMPLE plan, and is not limited to just 25% of compensation. For example, you could have an employee earning $12,000, and he or she could defer all of it into the SIMPLE plan, whereas if the employer contributed to a SEP the contribution amount would only be $3,000 (25% of $12,000).

Retirement 5-7: The Simplified Employee Pension (SEP) 26. Salary reduction SEPs, called SARSEPs, may still be around because they were grandfathered in, but no new plans have been allowed to be established since 1997. allow the employer a deduction for employer contributions up to 25% plus any salary deferrals made by employees. could only be used by employers with no more than 100 employees.

may still be around because they were grandfathered in, but no new plans have been allowed to be established since 1997. SARSEPs that were established prior to 1997 were grandfathered and may still be operating, but no new plans have been allowed to be established since 1997.

Retirement 5-1,2: Basics of IRAs and Traditional IRAs 27. Which one of the following is a correct statement about an inherited IRA? Any beneficiary of an IRA account can now roll over the account into an IRA in their own name. A non-spouse beneficiary could take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59 1/2. If the deceased was under 70 1/2 a non-spouse beneficiary could retitle the account "Mary Jones as beneficiary of Tom Jones," and use the life expectancy of the beneficiary with RMDs starting no later than December 31 following the date of death.

A non-spouse beneficiary could take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59 1/2.

Retirement 5-7: The Simplified Employee Pension (SEP) 28. Which one of the following statements is correct regarding a SEP IRA? Flat rate SEP IRA contributions give each employee the same percentage of the annual contribution. A SEP can be arranged to allow participants to take a loan as long as it does not exceed the lessor of $50,000 or 50% of the vested benefit. Any employee who is age 21 or older, earning $7.50 per hour, who works as little as two hours per week and who has done so for three years is eligible to participate.

Any employee who is age 21 or older, earning $7.50 per hour, who works as little as two hours per week and who has done so for three years is eligible to participate. Any employee who is age 21 or over and who earns at least $600 (2016, indexed) during the current year, and has performed services in at least three of the five immediately preceding calendar years must participate in the SEP.

Retirement 5-4,5: Roth IRAs 29. Harry, a single professor who is age 36, started his Roth IRA three years ago, contributing $5,000. He has since made a contribution of $5,500 each year 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 the following statements would be the correct information for Harry? Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Since 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. If a withdrawal of converted IRA funds is made from the Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal may be subject to the 10% penalty. Since Harry's Roth IRA has not met the five-year holding period, any withdrawal would be subject to taxation and the 10% penalty.

If a withdrawal of converted IRA funds is made from the Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal may be subject to the 10% penalty.

Retirement 5–6: SIMPLE IRAs 30. Which of the following statements correctly describes a SIMPLE IRA? Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty. Employee deferrals are limited to $12,500 (2016), and employer contributions are limited to 15% of compensation. To offer a SIMPLE IRA, an employer can have no more than 25 employees earning a minimum of $5,000.

Withdrawals from a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty.