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IRA Institute > Roth Distributions & Recharacterizations > Flashcards

Roth Distributions & Recharacterizations Flashcards

1
Q

What are the requirements for a Roth IRA distribution to be qualified?

A

The Roth IRA owner must have met the five-year period and the distribution must be for one of the qualified reasons.

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2
Q

What are the tax advantages of a qualified distribution?

A

If both the five-year period and the qualified reason requirements are met, the earnings portion of the distribution will be tax-and penalty-free.

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3
Q

What is a nonqualified Roth IRA distribution?

A

Either the five-year period, one of the qualified reasons, or both, have not been met.

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4
Q

Based on Roth IRA ordering rules, which type of assets are removed first?

A

Regular contributions

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5
Q

Based on Roth IRA ordering rules, which type of assets are removed last?

A

Earnings

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6
Q

What are the tax and penalty consequences for distributing regular contributions from a Roth IRA?

A

Regular contributions are distributed tax-and penalty-free at any time, for any reason.

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7
Q

What are the tax and penalty consequences for distributing conversion and retirement plan rollover contributions from a Roth IRA?

A

Conversion and retirement plan rollover contributions are distributed tax-free at any time, but are subject to the 10% early distribution penalty tax if withdrawn within five years OF THE CONVERSION OR retirement plan ROLLOVER, unless an exception applies.

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8
Q

What are the tax and penalty consequences for distributing earnings from a Roth IRA?

A

Earnings are distributed tax-and penalty-free if the Roth IRA owner has a qualified distribution.Earnings are subject to income tax and the 10% early distribution penalty tax if the IRA owner has a nonqualified distribution, unless a penalty tax exception applies.

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9
Q

Chris King’s Roth IRA balance is as follows.
$2,000 regular contribution for 2022
$2,000 regular contribution for 2023
$10,000 taxable conversion in 2023
$1,600 Roth IRA earnings
On July 20, 2024, Chris, age 75, took a complete distribution from his Roth IRA to pay for a vacation. What are the tax consequences of his distribution?

A

-2022 and 2023 regular contributions are distributed tax-and penalty-free
- 2023 conversion contribution is distributed tax-and penalty-free (OVER AGE 59 1/2,EVEN THOUGH 5 YEAR WAITING PERIOD HASN’T BEEN MET)
- earnings are subject to income tax but ARE penalty-free. (OVER AGE 59 1/2, NO EARLY WITHDRAWAL PENALTY)

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10
Q

Sandra Ray’s Roth IRA balance is as follows.
$2,000 regular contribution for 2018
$15,000 taxable conversion in 2019
$10,000 taxable conversion in 2020
$6,000 Roth IRA earnings
On March 31, 2024, Sandra, age 37, took a complete distribution from her Roth IRA to purchase a car. What are the income tax and penalty tax implications of her distribution?

A

-2018 regular contribution is distributed tax-and penalty-free
- 2019 conversion contribution is distributed tax-and penalty-free (5 YEARS SINCE CONVERSION, EVEN THOUGH NON QUALIFIED)
- 2020 conversion contribution is distributed tax-free but is subject to the early distribution penalty TAX (5 YEARS SINCE CONVERSION HAS NOT BEEN MET)
- earnings are subject to income tax and the early distribution penalty tax (NON QUALIFIED, NO EXCEPTION)

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11
Q

Vanessa Graves’ Roth IRA balance is as follows.
$2,000 regular contribution for 2021
$2,000 regular contribution for 2022
$2,000 regular contribution for 2023
$10,000 taxable conversion in 2023
$2,000 Roth IRA earnings
On September 15, 2024, Vanessa, age 45, took a complete distribution from her Roth IRA to pay for her child’s college tuition.What are the tax consequences of her distribution?

A
  • 2021, 2022, and 2023 regular contributions are distributed tax-and penalty-free
  • 2023 conversion contribution is distributed tax-and penalty-free (QUALIFIED REASON)
  • earnings are subject to income tax (5 YEARS HAS NOT BEEN MET) but are penalty-free (QUALIFIED REASON) .
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12
Q

Sally Cooper’s Roth IRA balance is as follows.
$2,000 regular contribution for 2019
$2,000 regular contribution for 2023
$10,000 taxable conversion in 2023
$3,000 Roth IRA earnings
On March 2, 2024, Sally, age 48, took a complete distribution from her Roth IRA because of disability. What are the tax consequences of her distribution?

A
  • 2019 and 2023 regular contributions are distributed tax-and penalty-free
  • 2023 conversion contribution is distributed tax-and penalty-free (QUALIFIED REASON)
  • earnings are distributed tax-and penalty-free (5 YEARS MET & QUALIFIED REASON).
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13
Q

Tim Hewitt’s Roth IRA balance is as follows.
$3,000 regular contribution for 2016
$10,000 taxable conversion in 2021
$75,000 taxable conversion in 2022
$8,000 Roth IRA earnings
On June 2, 2024, Tim, age 53, took a complete distribution from his Roth IRA to purchase a coffee shop. What are the tax consequences of his distribution?

A
  • 2016 regular contribution is distributed tax-and penalty-free
  • 2021 and 2022 conversion contributions are distributed tax-free but are subject to the early distribution penalty tax (LESS THAN 5 YEARS SINCE CONVERSION, NON QUALIFIED REASON)
  • earnings are subject to income tax and the early distribution penalty tax (NON QUALIFIED)
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14
Q

Rhonda Cain’s Roth IRA balance is as follows.
$50,000 taxable conversion in 2017
$75,000 taxable rollover from 401(k) plan in 2021
$7,000 Roth IRA earnings
On October 14, 2024, Rhonda, age 61, took a complete distribution from her Roth IRA to pay for some home repairs. What are the tax consequences of her distribution?

A
  • 2017 conversion contribution is distributed tax-and penalty-free
  • 2021 rollover contribution is distributed tax-and penalty-free (TAXABLE CONVERSION)
  • earnings are distributed tax-and penalty-free (QUALIFIED DISTRIBUTIONS 5 YEARS MET, OVER 59 1/2)
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15
Q

Which IRS reporting code is used to report a Roth IRA distribution when the IRA owner has met the five-year period at this financial organization and the distribution was for one of the following reasons: age 59½, death, or disability?

A

Q

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16
Q

Which IRS reporting code is used to report a Roth IRA early distribution?

A

J

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17
Q

Which IRS reporting code is used to report a Roth IRA distribution when the IRA owner has not met the five-year period at this financial organization and the distribution was for one of the following reasons: age 59½, death, or disability?

A

T

18
Q

Max, age 34, made a $8,000 contribution to his Traditional IRA for 2024. Is this a true excess or a deemed excess?

A

True Excess

19
Q

Mary, a 46-year-old single Roth IRA owner made a $7,000 contribution for 2024. She has earned income of $125,000 and modified adjusted gross income of $164,000. Is this a true excessor a deemed excess?

A

True Excess

20
Q

Bobby, a 23-year-old single Traditional IRA owner made a $7,000 contribution for 2024. He has earned income of $5,000 and modified adjusted gross income of $15,000. Is this a true excess or a deemed excess?

A

True Excess - earned only $5k for the year, cannot contribute over earned income

21
Q

Alice, an 84-year-old married Roth IRA owner made a $8,000 contribution for 2024. She has earned income of $68,000 and joint modified adjusted gross income of $91,000. Is this a true excess or a deemed excess?

A

Deemed Excess

22
Q

On August 3, 2023, Maria deposited $6,000 in her IRA. On that day, the balance of her IRA, before the contribution, was $12,800. On August 29, 2024, Maria discovers she was ineligible for a 2023 IRAcontribution and decides to remove the $6,000 contribution underthe excess contribution rules. Consequently, she must distribute the $6,000 excess contribution plus the NIA. No other contributionsor distributions have been made.
On August 29, 2024, Maria’s IRA balance is $19,125. She will incur a$50 loss of investment penalty when she prematurely surrenders the IRA investment to distribute the excess. Maria filed her 2023 taxes timely. What is the adjusted opening balance?

A

$12,800 + $6,000 = $18,800
FMV before contribution + any contributions made

23
Q

On August 3, 2023, Maria deposited $6,000 in her IRA. On that day,the balance of her IRA, before the contribution, was $12,800. On August 29, 2024, Maria discovers she was ineligible for a 2023 IRA contribution and decides to remove the $6,000 contribution under the excess contribution rules. Consequently, she must distribute the $6,000 excess contribution plus the NIA. No other contributions or distributions have been made.
On August 29, 2024, Maria’s IRA balance is $19,125. She will incur a$50 loss of investment penalty when she prematurely surrenders the IRA investment to distribute the excess. Maria filed her 2023 taxes timely. Applying the formula, what is the adjusted closing balance?

A

$19,125 + $0.00 = $19,125

Adjusted closing balance (balance before w/d + distributions) = 19,125
Minus fees - 50

24
Q

On August 3, 2023, Maria deposited $6,000 in her IRA. On that day,the balance of her IRA, before the contribution, was $12,800. OnAugust 29, 2024, Maria discovers she was ineligible for a 2023 IRAcontribution and decides to remove the $6,000 contribution underthe excess contribution rules. Consequently, she must distributethe $6,000 excess contribution plus the NIA. No other contributionsor distributions have been made.
On August 29, 2024, Maria’s IRA balance is $19,125. She will incur a$50 loss of investment penalty when she prematurely surrenders the IRA investment to distribute the excess. Maria filed her 2023 taxes timely. Applying the formula, what is the total earnings?

A

$19,025 - $18,800 = $275 total earnings

Adjusted closing balance = 19,125 + 0 distributions
Minus fees - 50 = 19,075
Adjusted opening balance = 12,800 + 6000 = 18,800

25
Q

On August 3, 2023, Maria deposited $6,000 in her IRA. On that day, the balance of her IRA, before the contribution, was $12,800. On August 29, 2024, Maria discovers she was ineligible for a 2023 IRA contribution and decides to remove the $6,000 contribution under the excess contribution rules. Consequently, she must distribute the $6,000 excess contribution plus the NIA. No other contributions or distributions have been made.
On August 29, 2024, Maria’s IRA balance is $19,125. She will incur a $50 loss of investment penalty when she prematurely surrenders the IRA investment to distribute the excess. Maria filed her 2023 taxes timely. Applying the formula, what is the NIA?

A

($6,000 x $275) / $18,800 = $87.77

Contribution = $6k
Adjusted closing balance = 19,125 + 0 distributions
Minus fees- 50 = 19,075
Adjusted opening balance = 12,800 + 6000 = 18,800
Total earnings = 19,075 - 18,800 = $275

26
Q

Debbie, age 29, made a contribution to her Roth IRA on June 3,2023. On July 2, 2024, Debbie recharacterizes the contribution to a Traditional IRA. What distribution code is used?

A

Code R

27
Q

George, age 45, makes a prior-year Traditional IRA contribution for tax year 2023 on March 20, 2024. On April 14, 2024, George recharacterizes the contribution to a Roth IRA. What distribution code is used?

A

Code R

28
Q

James, age 62, made a Traditional IRA contribution on June 20,2023. On March 14, 2024, James removes the contribution as an excess. What distribution code is used?

A

Code P

29
Q

Leonard, age 56, made a Traditional IRA contribution on March 20,2024, for 2023. On September 14, 2024, Leonard removes the contribution as an excess. What distribution code is used?

A

Code 81

30
Q

Christine, age 60, made a Traditional IRA contribution on February 20, 2024, for 2023. On March 28, 2024, Christine removes the contribution as an excess. What distribution code is used?

A

Code 8

31
Q

What is the amount of the excess contribution penalty tax?

A

6%

32
Q

What is the deadline to timely remove an excess contribution?

A

The individual’s tax return due date, plus extensions; if the individual files timely, the deadline is extended to October 15.

33
Q

What are the two methods of correcting a Traditional or Roth IRA excess contribution after the deadline?

A

Carry forward (redesignate) the excess contribution or remove the excess contribution

34
Q

What should the financial organization enter in Box 1 of Form 1099-R to report a Traditional or Roth IRA excess contribution removed before the correction deadline?

A

Amount of excess contribution removed plus NIA

35
Q

What should the financial organization enter in Box 2a of Form1099-R to report a Traditional or Roth IRA excess contribution removed before the correction deadline?

A

NIA

36
Q

What are the tax consequences of a recharacterization?

A

There are no tax consequences.

37
Q

T/F The IRA owner must notify the financial organizations holding the distributing IRA and the receiving IRA of his election to recharacterize the contribution.

A

True

38
Q

When reporting of a recharacterization, does the original contribution need to be corrected?

A

The reporting of the original contribution is NOT corrected.

39
Q

What should the financial organization enter in Box 1 of Form 1099-R to report a recharacterization?

A

Gross distribution amount (contribution plus NIA)

40
Q

What should the financial organization enter in Box 2a of Form1099-R to report a recharacterization?

A

$0.00

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