Traditional and Roth IRAs

Question 1

What is the formula for determining a partial IRA tax deduction when the MAGI is within the phaseout range for an active participant?

Answer 1

129,000-[MAGI] / 20,000 x 6000

Question 2

What is the rule of thumb for the deductible amount when an odd number?

Answer 2

Bump up to the next tens place

Question 3

What are prohibited transactions with an IRA?

Answer 3

Borrowing money from an IRA
Selling property to an IRA
Receiving unreasonable compensation for managing an IRA
Using an IRA for security for a loan
Buying personal property for personal use with IRA funds

Question 4

What is the consequence for prohibited transactions with an IRA?

Answer 4

The beneficiary will have to include the FMV of assets removed in gross income
The beneficiary will also likely have to pay the 10% early withdraw fee

Question 5

What are the 3 investment exceptions which IRAs cannot be invested in?

Answer 5

Collectibles
Life insurance policies
A participant note or obligation

The IRA also cannot own S Corp stock

Question 6

What are the rules and consequences for a rollover?

Answer 6

Must roll entire amount over within 60 days to get tax free. Any amount outside the 60 day window is taxed as ordinary income and may be subject to a 10% penalty.

Question 7

What are the general characteristics of a rollover?

Answer 7

No dollar limit
Protection from creditors
Rollovers allowed to fund HSA up to the contribution limit

Question 8

What are the general options of an inherited IRA for a spouse?

Answer 8

1. The beneficiary can roll all inherited assets into their own IRA which is then treated as if the beneficiary contributed the money herself. This means the EWP is in effect and RMDs when she turns 72.
2. The beneficial can roll all assets into an inherited IRA. RMDs will start when the decedent would have turned 72 and there will never be a EWP.
3. There can be a combination of both.

Question 9

What is a stretch IRA?

Answer 9

It stretches the tax benefits of the IRA beyond the decedents lifetime. 10 year rule under the SECURE act.

Question 10

What is the rollover exception for a SIMPLE IRA?

Answer 10

You can’t rollover a SIMPLE IRA in the first two years to anything except another SIMPLE IRA

Question 11

What are the exceptions to the EWP? (DDDD IRS Child’s meal at home when 59 1/2

Answer 11

Death
Disability
Disaster
Divorce

Insurance (health premiums)
Reserve (military distribution)
Substantially equal periodic payments received annually over the life expectancy of the owner

Child: birth or adoption

Medical expenses above AGI
Education
Annuitzed payments
Levy’s by IRS

Home-first time buyer
When age 59 1/2

Question 12

What is a key aspect to a backdoor ROTH?

Answer 12

Don’t have any other traditional IRAs out there. The result would be that the IRS would only count a small percentage as an immediate conversation and a majority coming from the older traditional accounts

Question 13

What are the three considerations of a ROTH distribution? (stoplight)

Answer 13

Green light - contributions: tax free, penalty free
Yellow light - conversions: wait 5 years to ensure no EWP, unless you meet an exception
Red light - earnings: must be qualified distribution

Question 14

What is the holding period requirement for a Roth IRA?

Answer 14

5 years from Jan 1 of the year the contributions began. Only one 5 year period for contributions. For conversions, there is a 5 year period for every conversion.

Question 15

What are the withdrawals acceptable for a qualified distribution? (Denver Area Fire Department)

Answer 15

D eath
A ge 59 1/2
F irst-time home (2 year period)
D isabled

Question 16

What are the DB and DC rules for active participation?

Answer 16

DB = active if eligible
DC = active if the ER, the EE or ANY reallocated forfeitures are contributed to the account

Question 17

What is the timing rule for rollovers?

Answer 17

Only 1 per year

Question 18

What is the taxability of a Roth IRA if not held for 5 years?

Answer 18

Earnings can be taxed if not a qualified distribution (DAFD)

Question 19

Under the substantially equal periodic payments distribution, how long does one have to go with payments until they are no longer at risk at paying the 10% penalty?

Answer 19

Until they reach 59 1/2

Question 20

What are the general options of an inherited IRA for a non spouse?

Answer 20

They can take a lump-sum distribution, which would be taxed as ordinary income without any 10% penalty even if the beneficiary is under age 59½

Via trustee to trustee transfer, the beneficiary can transfer funds to an inherited IRA - no commingling. Also subject to the 10-year rule

Question 21

What accounts are subject to the 20% withholding rule and why?

Answer 21

Qualified accounts and 403(b) unless direct transfer. Taxes are withheld. IRAs and SEPs do not have 20% withheld

Question 22

What is the formula for determining the nontaxable portion of a contribution?

Answer 22

nontaxable portion =
[(nondeductible contributions prior to CY +all contributions for CY)
—————————————————————————————
(balances at end of CY + distributions received in CY)] × total distributions during current year

Question 23

What is the excise tax for not taking or taking too little RMD?

Answer 23

50%

Question 24

RMDs are required out of which accounts?

Answer 24

Traditional 401(k), Roth 401(k).
RMDs are also required out of these and traditional/Roth IRA, and qualified plans if the owner dies.

Question 25

If a participant has a Roth IRA and then starts up a Roth 401(k), what happens to the 5 year clock?

Answer 25

A separate clock starts for the 401(k)

Question 26

What is the penalty for excess contributions?

Answer 26

6%

Question 27

When is the first RMD due?

Answer 27

By April 1st of the year following your 72nd birthday