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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 with the Roth IRA from which the distribution is occurring and the distribution must be for one of the qualified reasons.
b. The Roth IRA owner must have met the five-year period with the Roth IRA from which the distribution isoccurring or the distribution must be for one of the qualified reasons.
c. The Roth IRA owner must have met the five-year period or the distribution must be for one of the qualifiedreasons.
d. The Roth IRA owner must have met the five-year period and the distribution must be for one of the qualified reasons.

A

d. 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 thedistribution will be tax-free; penalty-free only if the Roth IRA owner is age 59½ or older.
b. If both the five-year period and the qualified reason requirements are met, the earnings portion ofthe distribution will be tax-and penalty-free.
c. If either the five-year period or the qualified reason requirement is met, the earnings portion of the distributionwill be tax-and penalty-free.
d. If either the five-year period or the qualified reason requirement is met, the earnings portion of the distribution will be tax-free.

A

b. 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.
b. The Roth IRA owner has met the five-year period and the distribution occurred after the Roth IRA owner reachedage 59½.
c. The Roth IRA owner has met the five-year period and the distribution occurred after the Roth IRA owner became disabled.
d. The Roth IRA owner has met the five-year period and the distribution occurred after the Roth IRA owner passed away.

A

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. Earnings
b. Conversion and retirement plan rollover contributions
c. Regular contributions

A

Regular contributions

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5
Q

Based on Roth IRA ordering rules, which type of assets are removed last?
a. Earnings
b. Conversion and retirement plan rollover contributions
c. Regular contributions

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-free at any time, for any reason, and penalty-free if an exception applies.
b. Regular contributions are distributed tax-free at any time, for any reason, and penalty-free if the Roth IRA owner is age 59½ or older.
c. Regular contributions are distributed tax-and penalty-free at any time, for any reason.
d. Regular contributions are subject to income tax but are penalty-free if an exception applies.

A

c. 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 plan rollover contributions are distributed tax-free and penalty-free at any time, for any reason.
b. 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.
c. Distributions of conversion and retirement plan rollover contributions are subject to income tax, but are penalty-free if an exception applies.
d. Conversion and retirement plan rollover contributions are distributed tax-free at any time, but are subject to the 10% early distribution penalty tax at any time, unless an exception applies.

A

b. 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.
b. Earnings are distributed tax-and penalty-free at any time, for any reason.
c. Earnings are subject to income tax if the Roth IRA owner has a nonqualified distribution and are always penalty-free.
d. Earnings are distributed tax-free at any time, but are subject to the 10% early distribution penalty tax if the earnings are withdrawn within five years of the Roth IRA’s establishment, unless an exception applies.

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)
  • 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 (QUALIFIED REASON over 591/2)
  • 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
(pRior year recharacterization - MADE in 2023, corrected in 2024)

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

(pRior year recharacterization - MADE FOR 2023, corrected IN 2024)

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

(in the calendar year AFTER the year the contribution WAS DEPOSITED – not YEAR FOR)

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

(MADE & CORRECTED IN SAME YEAR = 8; UNDER AGE 59 1/2 = 1) *Doesn’t matter what tax year the deposit was FOR on excess

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

(MADE & CORRECTED IN SAME YEAR = 8) *Doesn’t matter what tax year the deposit was FOR on excess

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 tax return due date, plus extensions.
b. October 15 of the year after the year the contribution is for.
c. The individual’s tax return due date, plus extensions; if the individual files timely, the deadline is extended to October 15.
d. As long as the IRA owner resolves the excess and removes the net income attributable, there is no deadline.

A

c. 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 (have to qualify to be able to make 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 (BEFORE deadline)

Box 1 1099-R = Gross Distribution

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

Box 2a=Taxable Amount

36
Q

What are the tax consequences of a recharacterization?
a. The amount recharacterized is taxable in the year it is distributed.
b. The amount recharacterized plus the NIA is taxable in the year it is distributed.
c. The NIA is taxable in the year it is distributed.
d. There are no tax consequences.

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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