Tax Treatment of Individual Retirement Flashcards
1. Bill Walters is a 52-year-old single client. His modified adjusted gross income in 2022 is $202,000, and he is not an active participant in an employer-sponsored retirement plan. What is the maximum 2022 traditional IRA contribution that he may deduct?
- a. $0
- b. $2,000
- c. $6,000
- d. $7,000
Answer: d. $7,000
That’s correct! Bill may make and deduct a traditional IRA contribution in 2022 that is neither eliminated nor reduced by his relatively high modified adjusted gross income. Because he is age 50 or older, the maximum contribution allowable in 2022 includes both a regular IRA contribution of $6,000 and a catch-up contribution of an additional $1,000. Since he is not an active participant in an employer-sponsored qualified plan, his entire traditional IRA contribution is tax-deductible.
- Shirley is a 32-year-old single woman who is the office manager in a downtown law firm. Her 2022 modified adjusted gross income is $75,000, and she is an active participant in her employer’s qualified retirement plan. The “applicable dollar amount” for active participants filing a single or head of household return in 2022 is $68,000. If she makes a $6,000 traditional IRA contribution in 2022, what amount may she deduct? (Search Chapter 1)
- a. $6,000.
- b. $1,800
- c. $4,200
- d. $0
Answer: b. $1,800
- That’s correct! Although Shirley may make a full $6,000 traditional IRA contribution in 2022, her status as an active participant in an employer-sponsored qualified retirement plan coupled with her modified adjusted gross income will result in a reduction in the amount of the contribution she can deduct from her gross income. The reduction in the amount of her traditional IRA contribution that she can deduct is determined by using the following formula: Reduction of Deduction = Maximum Contribution × [(MAGI – applicable dollar amount) ÷ $10,000]. Shirley’s maximum traditional IRA contribution in 2022 is $6,000. Since her MAGI is $75,000 and the 2022 applicable dollar amount is $66,000, we can see the reduction in her deduction is $4,200 by substituting the appropriate numbers in the formula as follows: $4,200 = $6,000 × [($75,000 ? $68,000) ÷ $10,000]. Since her deduction is reduced by $4,200, the amount she may deduct is $1,800. ($6,000 ? $4,200 = $1,800)
- Shirley, divorced in 2022, is age 45. In 2022 she worked briefly in an office and earned $3,000. Her total income for the year, however, was $35,000, an amount comprised of $3,000 in earned income, $20,000 in interest and $12,000 in dividends. What is the maximum amount she may contribute to her IRA for the year? (Search Chapter 1)
- a. $0
- b. $3,000
- c. $6,000
- d. $7,000
- Which of the following changes to the IRA early distribution penalty is temporary and made by the CARES Act? (Search Chapter 1)
- a. The 10 percent penalty is waived if the taxpayer becomes disabled before the distribution occurs.
- b. The 10 percent penalty is waived if the taxpayer uses the funds for health insurance costs incurred after job loss.
- c. The 10 percent penalty is waived if the reason for a distribution is to satisfy an IRS levy.
- d. The 10 percent penalty is waived for up to $100,000 to a taxpayer diagnosed with coronavirus disease.
Answer: d. The 10 percent penalty is waived for up to $100,000 to a taxpayer diagnosed with coronavirus disease.
- That’s correct! The CARES Act allows for a withdrawal of up to $100,000 by a taxpayer diagnosed with coronavirus disease.
- Harry received a coronavirus-related distribution from his traditional IRA. What is the maximum period of time following distribution during which he must redeposit the distribution in order to avoid taxation? (Search Chapter 1)
- a. Coronavirus-related distributions are tax-free and don’t require redeposit.
- b. 60 days
- c. 1 year
- d. 3 years
Answer: d. 3 years
- That’s correct! A taxpayer who receives a coronavirus-related distribution may redeposit the distribution at any time during the three-year period beginning on the day after the date on which it was received. The redeposited distribution, for tax purposes, will be treated as if the redeposited distribution had been transferred to an eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution; in short, the amount redeposited will avoid taxation.
- Joan, age 35, is a stay-at-home mother who has no earned income; her husband’s earned income is $250,000. Although she is married she files a separate federal income tax return. What is the maximum contribution that may be made in 2022 to her spousal individual retirement account? (Search Chapter 1)
- a. $0
- b. $2,000
- c. $6,000
- d. $7,000
Answer: a. $0
- That’s correct! Although the participant in a spousal IRA is not required to meet the earned income requirement for contribution to an IRA, a spousal IRA is available only if the participant is married and filing federal income tax on a joint basis. Because Joan is married and files a separate federal income tax return, she is not eligible for a spousal IRA.
1. Sheila, age 45, worked occasionally in an office in 2022, earned $4,000 during the year and made no traditional IRA contribution. What is the maximum deductible contribution she can make to her Roth IRA?
(Search Chapter 2)
- a. $0
- b. $4,000
- c. $7,000
- d. $6,000
Answer: a. $0
That’s correct! Assuming that an individual is not ineligible to make a Roth IRA contribution because of his or her high income, and is not old enough to make a catch-up contribution, the maximum Roth IRA contribution he or she can make in 2022 is the lesser of $6,000 or 100% of compensation. However, that contribution is nondeductible and is reduced by any contribution to a traditional IRA for the same year.
2. Allen is age 45, files a joint federal income tax return with his wife and has a modified adjusted gross income of $210,000 in 2022. What is the maximum Roth IRA contribution he may make in 2022 when the applicable dollar amount is $204,000?
- a. $0
- b. $2,400
- c. $3,600
- d. $6,000
Answer: b. $2,400
That’s correct! The maximum contribution that may be made to a Roth IRA is reduced for a married taxpayer filing a joint federal income tax form, based on the individual’s modified adjusted gross income. By substituting the appropriate values in the formula, we can see that Allen’s maximum contribution-normally limited to $6,000 in 2022-is reduced by $3,600. Thus, he may make a maximum Roth IRA contribution of $2,400. ($6,000 ? $3,600 = $2,400) The formula for the reduction is as follows: $3,600 = [($210,000 ? $204,000)/$10,000] × $6,000.
3. Arthur worked for his employer until he retired at age 75. At what age must he begin receiving required minimum distributions from his Roth IRA?
(Search Chapter 2)
- a. At age 72
- b. At age 65
- c. At age 75
- d. No lifetime minimum distributions from a Roth IRA are required at any age during the owner’s lifetime
Answer: d. No lifetime minimum distributions from a Roth IRA are required at any age during the owner’s lifetime
- That’s correct! Unlike traditional IRAs, Roth IRAs are not subject to required minimum distribution (RMD) rules during the owner’s lifetime. Funds contributed to and accumulated within a Roth IRA can remain in the account as long as the owner wishes during his or her lifetime, even after age 72. Because qualified Roth distributions create no tax liability for the Roth IRA owner (nor provide benefit for the federal coffers), there is no requirement that Roth IRAs must distribute their funds during the owner’s lifetime.
4. Audrey, age 42, contributed $30,000 to a Roth IRA she established eight years ago and has never previously taken a withdrawal. Her current account value is $45,000. How much income, if any, must she recognize if she withdraws $25,000?
- a. $0
- b. $5,000
- c. $15,000
- d. $25,000
Answer: a. $0
- That’s correct! Since non-qualified distributions from a Roth IRA are subject to FIFO tax treatment, her entire cost basis is recovered tax-free before any taxable gain is deemed distributed. Because her cost basis is $30,000, all of her $25,000 withdrawal is considered a tax-free recovery of basis.
5. Helen, age 60, made total contributions of $60,000 to a Roth IRA she established 15 years ago. Five years ago she withdrew $10,000 tax-free. How much income must she recognize if she takes a complete distribution from the Roth IRA this year when its value is $90,000?
(Search Chapter 2)
- a. $0
- b. $30,000
- c. $40,000
- d. $90,000
Answer: a. $0
That’s correct! The distribution from Helen’s Roth IRA is a qualified distribution and is entirely tax-free. A qualified distribution from a Roth IRA is one that is made no earlier than five years after the year for which the owner made his or her first Roth IRA contribution and (a) the individual is age 59 1/2 or older; (b) the distribution is a qualified first-time homebuyer distribution; (c) the individual is disabled; or (d) the distribution is made to a beneficiary on or after the individual’s death.
6. Henry, age 47, took a total distribution from the Roth IRA he established ten years ago. Since starting the IRA he has made contributions of $40,000 and has never taken a distribution. What is Henry’s income tax liability, if any, assuming the account value is $75,000 at the time of distribution, Henry is in a 22% income tax bracket and no exception to the premature distribution tax penalty applies?
(Search Chapter 2)
- a. $0
- b. $3,500
- c. $7,700
- d. $11,200
Answer: d. $11,200
That’s correct! Since Henry’s distribution from the Roth IRA is a non-qualified distribution, the $35,000 gain on the account must be recognized for tax purposes. In Henry’s 22% income tax bracket, his regular tax liability resulting from the distribution is $7,700. ($35,000 × 22% = $7,700) However, in addition to that regular tax liability, an income tax penalty of $3,500 will be imposed because the distribution occurred before his age 59½ and no exception to the premature distribution tax penalty applied. Accordingly, Henry’s total income tax liability resulting from his non-qualified Roth IRA distribution is $11,200.
Test Scored 100%
1. Bill Walters, an age 42 single filer, is not a participant in his employer’s retirement plan. His total maximum traditional IRA contribution for 2022 is $6,000. Since his modified adjusted gross income is $169,000, how much of the $6,000 traditional IRA contribution is tax deductible?
(Search Chapter 1)
- a. None
- b. $500
- c. $3,000
- d. $6,000
My Answer: d. $6,000
Test
2. Jane has an income of $40,000, consisting of $30,000 of stock dividends, $8,000 of interest, $1,500 of capital gains and $500 of tips. What is the maximum amount she is permitted to contribute to a traditional IRA in 2022?
(Search Chapter 1)
- a. Zero
- b. $500
- c. $2,000
- d. $3,000
My Answer: b. $500
Test
3. In order to make a contribution to which of the following IRAs is the individual not required to have earned income?
(Search Chapter 1)
- a. Spousal IRA
- b. Traditional IRA
- c. Roth IRA
- d. SEP IRA
My Answer: a. Spousal IRA
Test
4. Pat is a 40-year-old participant in her employer’s 401(k) plan. In 2022, she deferred $5,000 in the plan, and her employer matched her contribution 100%. She also made a Roth IRA contribution of $1,000. What is the maximum additional amount she may contribute to a traditional IRA in 2022 when the IRA limit is $6,000?
(Search Chapter 1)
- a. Zero
- b. $1,000
- c. $5,000
- d. $6,000
My Answer: c. $5,000
Test
5. Simone, age 35, made a $6,000 contribution to both her Roth IRA and her traditional IRA in 2022, not realizing that she is required to reduce her contribution to a traditional IRA by the amount contributed to a Roth IRA. What, if any, annual excise tax penalty is assessed until she removes the excess contribution?
(Search Chapter 1)
- a. Zero
- b. $360
- c. $400
- d. $1,500
My Answer: b. $360
Test
6. What is the highest modified adjusted gross income that a single individual may have and still make a maximum Roth IRA contribution in 2022?
(Search Chapter 2)
- a. $40,000
- b. $55,000
- c. $129,000
- d. $204,000
My Answer: c. $129,000
Test
7. What is the highest modified adjusted gross income that a married individual filing a joint federal tax return may have and still make a maximum Roth IRA contribution in 2022?
(Search Chapter 2)
- a. $40,000
- b. $55,000
- c. $129,000
- d. $204,000
My Answer: d. $204,000
Test
8. What is the minimum modified adjusted gross income that a married individual filing separately may have and still be ineligible to make a Roth IRA contribution of any amount?
(Search Chapter 2)
- a. $10,000
- b. $50,000
- c. $99,000
- d. $150,000
My answer: a. $10,000
Test
9. Barbara Rosen, age 35, made a $6,000 contribution to her traditional IRA in 2022. Assuming she is not ineligible solely because of her income, how much may she contribute to her Roth IRA in 2022?
(Search Chapter 2)
- a. Zero
- b. $6,000
- c. $2,000
- d. $3,000
My Answer: a. Zero
Test
10. Until what age may an individual continue to make contributions to a Roth IRA?
(Search Chapter 2)
- a. Age 59½
- b. Age 65
- c. Age 72
- d. There is no limiting age beyond which an eligible individual may not make a Roth IRA contribution
My Answer: d. There is no limiting age beyond which an eligible individual may not make a Roth IRA contribution
