Retirement Plans

If a distribution is taken from an Individual Retirement Account after age 59 1/2: A 100% of the distribution is taxed at the ordinary income tax rate B 100% of the distribution is taxed at the long term capital gains rate C part of the distribution is taxed at the ordinary income tax rate and part is taxed at the long term capital gains rate D no tax is due on the distribution

A. Distributions from regular IRAs are 100% taxable as ordinary income in most circumstances (since, for the vast majority of people, the contribution is tax deductible). Please note, however, that high earning persons who are also covered by another qualified retirement plan can make a contribution; but they cannot take a tax deduction for the contribution. In this case, any distributions take after age 59 1/2 are taxable as ordinary income only on the amount above the original contributions made.

For the year 2022, the maximum contribution that an individual can make to an IRA is: A $6,000 B $7,000 C $7,500 D $8,500

A. For the year 2022, the maximum individual contribution to an IRA is the lesser of 100% of income or $6,000.

Which of the following is a precious metal investment that is permitted in an IRA account? A platinum B copper C zinc D steel

A. Precious metals bullion investments are permitted in an IRA. This includes gold, silver, platinum, and palladium bullion.

All of the following are plan fiduciaries under ERISA EXCEPT the: A trustee of the plan B attorney that provides legal advice to the plan C investment adviser to the plan D individual that has discretion over the administration of the plan

B. ERISA requires that a fiduciary be named in each plan document. The fiduciary is a person who exercises discretion or control over the plan. There can be multiple plan fiduciaries - for example, the plan trustee, investment adviser(s) and those individuals that exercise discretion in the administration of the plan, are all fiduciaries. The fiduciaries can only act in the best interests of the plan participants - the beneficiaries. Attorneys, accountants and actuaries are not plan fiduciaries when acting solely in their professional capacities - since they don't have discretion or control over plan assets

Who can make a tax-deductible contribution to a Traditional IRA? A 13-year old girl who has $2,500 of earnings in her custodial account B 33-year old woman who earns $200,000 as a department manager who is eligible to contribute to her company's 401(k) plan C 14-year old boy who earned $2,000 working on a newspaper route after school D 41-year old socialite who receives payments of $100,000 per year from her trust fund

C. A true, but not widely known, fact about Traditional IRAs is that contributions can be made by anyone who has "earned income" regardless of his or her age. Thus, a child can make IRA contributions based on income earned (Choice C). Contributions to IRAs must be made from earned income, and income in a custodial account is "portfolio income" - not earned income. Higher earners who are covered by other qualified plans can make contributions, but they are not tax deductible, making Choice B false. Contributions can only be made based on "earned income," not on portfolio income in a trust fund, making Choice D false.

A person must begin to make withdrawals from an IRA: A the day after reaching age 59 ½ B 2 months after reaching age 72 C by April 1st of the year following the year the individual reaches age 72 D 9 months following the date the individual reaches age 72

C. Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 72.

Which of the following statements concerning 403(b) plans are TRUE? I Investments are limited to annuities II An employee who elects salary deferral to a 403(b) plan cannot elect salary deferral to another retirement plan III A 403(b) plan can provide only for employee contributions without employer contributions IV Deferrals to a 401(k) plan reduce the amount that an employee can defer to a 403(b) plan A I and II only B I and III only C II and III only D III and IV only

D. A 403(b) plan is typically invested in annuities or mutual funds but can also be invested in life insurance. The "big kahuna" of 403(b) plans is "TIAA-CREF" - Teacher's Insurance Annuity Association - College Retirement Equity Fund. TIAA-CREF administers retirement plans for not-for-profits, including school systems, universities and hospitals. Its name gives you the clue as to which investments are permitted in 403(b) plans. The permitted investments are life insurance, fixed annuities, variable annuities and mutual funds. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager. If an employee is eligible to participate in both a 401(k) plan and a 403(b) plan, the $20,500 contribution limit in 2022 is applied to both of these combined. Thus, if $10,250 is contributed to a 401(k) plan, that person could only contribute $10,250 to a 403(b). Both 401(k) and 403(b) plans can provide for employee contributions without employer contributions or can provide for employee contributions and matching employer contributions. (Also note that TIAA-CREF shortened its name in 2016 to simply TIAA, but knowing the original name helps with test questions!)

Which statement is TRUE after a Traditional IRA is converted into a Roth IRA? A Upon conversion, income tax must be paid on the current value of the IRA B A 10% penalty tax is assumed upon conversion C At retirement, 100% of the distribution from the Roth IRA will be taxable D At age 72, distributions from the Roth IRA must commence

A. A Traditional IRA can be converted into a Roth IRA. This is done as a "rollover" and, if the contributions previously made into the IRA were deductible; then tax must now be paid on these amounts (but no penalty tax is imposed). The benefit of converting to a Roth IRA is that all distributions are not taxable; and distributions do not have to commence at age 72 (as compared to a Traditional IRA where distributions are taxable; and distributions must commence at age 72). The "conversion" rule was put into the tax code as a potential "money grab" by the Federal Government. If the government can get people to convert their Traditional IRAs to Roth IRAs, it gets tax dollars NOW, instead of later. And that would help reduce the federal deficit! Also note that there is no earnings limit on those who can convert their Traditional IRAs to Roth IRAs.

What is the earliest age where funds can be distributed from a 401(k) without a tax penalty? A 55 B 59 1/2 C 65 D 72

A. A little known rule for both 401(k) and 403(b) plans is that if an employee quits or is terminated between the ages of 55 to 59 1/2, the "Rule of 55" can be applied. This IRS rule allows the terminated employee to take payments in equal installments over his or her life expectancy and avoid the 10% penalty tax. Note that regular income tax must still be paid.

All of the following statements are true about Individual Retirement Accounts EXCEPT: A all contributions reduce the individual's taxable income B contributions are allowed based solely upon personal service income C contributions may be made if the individual is covered by another type of retirement plan D to remain tax deferred, distributions from other retirement plans must be rolled over within 60 days

A. Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan; however, they may not be tax deductible if the person's income is too high (making Choice A wrong). IRA "rollover" rules allow pension plan distributions rolled over into an IRA within 60 days to remain tax deferred.

The President of a company that has a qualified plan under ERISA has the opportunity to buy a piece of land at a large discount. The President wants to buy the land personally at a discount and sell it to the company pension plan as an investment asset at fair market value. The company will use the site for a business purpose because it intends to build a new corporate office on the site. Which statement is TRUE? A This is a prohibited transaction between the plan and a party-in-interest B This transaction is permitted because the asset is being sold to the plan at fair market value C This transaction is permitted because land is a permitted investment under ERISA guidelines D This transaction is prohibited because qualified plans can only invest in securities

A. ERISA specifies prohibited transactions between the plan trustee and so-called "parties-in-interest." A "party-in-interest" is any fiduciary, counsel or employee of the plan; or any employer whose employees are covered by the plan. The prohibited transactions include: Sale, exchange or lease of property between the plan and a "party-in-interest;" Loan between the plan and a "party-in-interest;" Furnishing of goods, services or facilities between the plan and a "party-in-interest;" Transfer of plan assets to a "party-in-interest" or use of plan assets by a "party-in-interest."

If the owner of a 401(k), age 60, borrows $50,000 from the account to pay for unexpected expenses. After 5 years, the unpaid loan balance is $20,000. The tax consequence will be: A $20,000 taxable ordinary income B $20,000 taxable ordinary income plus a 10% penalty tax C $30,000 taxable ordinary income D $30,000 taxable ordinary income plus a 10% penalty tax

A. If any portion of the loan is not repaid, the unpaid amount becomes taxable income, and if the account owner is under age 59 1/2, then the 10% penalty tax applies as well.

Money purchase retirement plans: I are qualified plans under ERISA II are non-qualified plans under ERISA III must be funded annually by the employer IV are not required to be funded annually by the employer A I and III B I and IV C II and III D II and IV

A. In a money purchase retirement plan, which is a qualified plan under ERISA, the employer sets up the plan and contributes a fixed percentage of each employee's income annually, capped at 25% (statutory rate; 20% effective rate) up to $61,000 maximum in 2022). Regardless of whether the employer is profitable or not, it must make the annual contribution - and this is deductible to the employer. The benefit to the employee is knowing the exact amount that will be contributed each year. This is really a variation of a defined contribution plan under ERISA - and there are no employee contributions to this type of plan.

Under ERISA rules, the IPS for a qualified retirement plan does which of the following? A The IPS establishes the plan's investment objectives, asset allocations, performance projections and risk limitations B The IPS identifies the transactions that are prohibited under the plan's investment policies C The IPS identifies anyone who is a party-in-interest and related prohibitions on self-dealing using plan assets D The IPS identifies the investment alternatives offered under Rule 404(c) that, when combined with each other, tend to minimize risk through diversification

A. The IPS is the Investment Policy Statement. Advisers to retirement plans must follow the IPS, which details the plan's investment strategy and limitations. It includes the plan's investment policy and objective; the strategic asset allocations assigned to each asset class and the permitted tactical variance; the expected performance with comparison to a relevant benchmark index; and it sets risk limitations on the investment manager.

When could a 59-year old man withdraw funds from a Traditional IRA without incurring the 10% penalty tax? A As long as the funds are used for higher education purposes B If the funds are withdrawn over a 3-year time window C If the funds are used for energy-saving home reconstruction D If the funds are used for dependent child care

A. There are permitted exceptions where funds can be withdrawn from a Traditional IRA prior to age 59 1/2 without penalty. They are: Unreimbursed Medical Expenses (above 7.5% of Adjusted Gross Income); Medical Insurance (only if one is unemployed); Disability; Death (the IRA assets can be distributed to a beneficiary with only regular tax paid); Higher Education Expense; First-Time Homeowner (up to $10,000 can be withdrawn); and Rollover into Another Qualified Plan.

All of the following are acceptable investments in an Individual Retirement Account EXCEPT: A Variable annuities B U.S. Minted Gold Coins C Real Estate D Mortgages

A. U.S. Minted gold coins can be held as an investment in an IRA account as can gold and silver bullion (however, the long term merits of such an investment can be debated). All securities can be purchased, including stock options. Also, real estate that is not personally used and mortgage investments are permitted. The purchase of a tax-exempt or tax-deferred security such as a variable annuity is absolutely inappropriate. Because of their tax benefit, these investments offer a lower return than taxable investments. Because the IRA account itself is a "tax-deferred" envelope, the appropriate investments are those that give the highest return (for the level of risk assumed), which will build value tax-deferred.

An employer would set up a defined benefit plan for 15 or more employees in order to: A diversify plan assets B maximize plan participation C permit employees to choose specific investments D shift investment risk to employees

B. In a defined benefit (DB) plan, every employee that is full time, age 21 with at least 1 year of service, is included at the employer's expense. In a defined contribution (DC) plan, most of which are salary reduction plans, the employee contributes a portion of his or her salary and this amount is deductible to the employee (for example, a 401(k) plan is a salary reduction DC plan). In a DC plan, the employee can choose to participate, or may choose not to participate, each year. Thus, DB plans maximize employee participation, since all eligible employees are included in the plan, at the employer's expense. One could argue that Choice A is also good, since employer managed DB plans tend to be broadly diversified, whereas salary reduction DC plan investments are chosen by the employee who may, or may not, fully diversify his or her portfolio. However, Choice B is better. Because salary reduction DC plans allow employees to make investment decisions, these plans shift investment risk to the employee. In contrast, DB plans keep investment risk with the employer, since the plan must pay the "defined benefit" at retirement, regardless of the performance of the portfolio funding the plan.

Which statement concerning a 403(b) plan is TRUE? A The amount of employer contributions is determined annually by an actuary B Employees may contribute by electing an amount of salary deferral C Employer contributions are generally a fixed percentage of compensation D Employer contributions are limited to the amount that is deductible each year

B. In essence, a 403(b) plan is equivalent to a 401(k) plan, with the difference being that 401(k) plans are established by for-profit companies, while 403(b) plans are established by not-for-profit organizations. Employees of not-for-profit institutions contribute to a 403(b) plan by means of salary deferral, with the maximum permitted contribution being the same as for 401(k) plans ($20,500 in 2022). Employer contributions are generally made as matching contributions that match a portion of the employee contributions - the same as for 401(k) plans. Employer contributions to either 403(b) or 401(k) plans are not determined by an actuary - these are defined contribution plans, not defined benefit plans. The actual matching amount is set by the plan sponsor. Matching employer contributions are not limited to the amount that is deductible because the organizations are non-profit and thus, do not deduct matching contributions made.

When are losses on securities positions held in a Roth IRA deductible to the owner of the account? A Only when distributions are taken from the Roth IRA after the age of 59 1/2 B Only if the Roth IRA is liquidated and the investments are sold for less than their cost basis C Only if the customer dies or is disabled prior to the age of 59 1/2 D Under no circumstances

B. Losses on securities positions that were purchased and then sold within a Traditional IRA or a Roth IRA are not deductible. The only way that losses can be deducted on a Traditional or Roth IRA is for the owner to close out all IRA accounts of that type (either Traditional or Roth) and sell the securities positions in all the accounts for less than their cost basis. Then the customer will have a deductible loss. This is only likely to be of interest to a customer where the securities positions in the account have lost a great amount of value, and if the customer has other offsetting capital gains - so this is a very rare event. However, it is a tested item on the exam!

Which statements about 403(b) plans are TRUE? I Employee contributions are made with "pre-tax" dollars and distributions are 100% taxable II Employee contributions are made with "post-tax" dollars and distributions are tax free III 403(b) plans are available only to "for-profit" organizations IV 403(b) plans are available only to "not-for-profit" organizations A I and III B I and IV C II and III D II and IV

B. 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. The plans allow for investment in tax-deferred annuity contracts that can be funded by mutual fund purchases, as well as by traditional fixed or variable annuities. With these plans, contributions are tax-deductible and distributions are 100% taxable.

A QDRO is a(n): A property settlement agreed to and signed by the parties involved in a divorce B judgment, order, or decree issued by a state court approving a property settlement agreement C automatic 50/50 division of marital assets pursuant to a signed property settlement agreement D an order issued in a probate proceeding begun after the death of the participant

B. A QDRO (Qualified Domestic Relations Order) is a court order in a divorce or separation agreement that divides the assets of an ERISA pension plan (which can only be in 1 person's name) among an "alternate payee" or "alternate payees." The alternate payee can be the former spouse, a child or a dependent. The actual division of the retirement account value is based on whether the account was established before or after the marriage. If it was established after the marriage, then the plan assets are generally split 50/50. If the retirement account was established before the marriage, then the division is based on the asset increases after the date of marriage.

The alternate payee under a QDRO can be all of the following EXCEPT: A spouse B sibling C child D dependent

B. A QDRO (Qualified Domestic Relations Order) is a court order in a divorce or separation agreement that divides the assets of an ERISA pension plan (which can only be in 1 person's name) among an "alternate payee" or "alternate payees." The alternate payee can be the former spouse, a child or a dependent. The alternate payee cannot be a sibling.

The defining characteristic of a 401(k) account is funding by: A tax-deductible employer contribution B employee salary deferral C non-tax deductible employer contribution D non-tax deductible employee contribution

B. Both 401(k) and 403(b) accounts are funded by voluntary employee contributions that are excluded from the employee's taxable income. These contributions grow tax deferred until distributions are taken. Thus, the employee is deferring taking the portion of his or her salary that is the contribution amount.

ERISA regulations cover: I public sector retirement plans II private sector retirement plans III federal government employee retirement plans A I only B II only C III only D I, II, III

B. ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated.

Pension funds are prohibited from using which investment strategy? A Purchase government and agency securities B Sell short government and agency securities C Sell covered call contracts D Buy puts on stock positions

B. Pension funds and all retirement plans cannot trade on margin; only cash accounts (fully paid positions) are permitted. They can buy securities fully paid, can buy puts on fully paid positions and can sell calls against fully paid positions for premium income. They cannot buy securities on margin, cannot sell short and cannot sell naked calls or puts, because all these are margin transactions.

A couple earning $50,000 per year makes an annual contribution of $6,000 to a Traditional IRA in 2022. Which statement is TRUE? A This couple can contribute a maximum of $3,000 to a Roth IRA B This couple can contribute a maximum of $6,000 to a Roth IRA C This couple can contribute a maximum of $12,000 to a Roth IRA D This couple is prohibited from contributing to a Traditional Individual Retirement Account in that year

B. The maximum permitted contribution to a Traditional IRA or Roth IRA for a couple is $12,000 total in 2022. This can be divided between the 2 types of accounts. In this case, since $6,000 was contributed to the Traditional IRA, another $6,000 can be contributed to a Roth IRA in 2022.

A "top heavy" retirement plan is: A permitted under ERISA rules and contributions are tax deductible B permitted under ERISA rules and contributions are not tax deductible C permitted under ERISA rules as long as all assets are held by a trustee D prohibited under ERISA rules

B. Under ERISA, a "top heavy" retirement plan is one that disproportionately favors upper level employees by giving them excessive retirement benefits that are not available to lower level employees. If a plan is deemed to be "top heavy," then the contributions will not be tax deductible, making the plan non-tax qualified.

A Traditional IRA cannot invest in: A ETFs B Annuities C Exquisite art D Real estate

C. This is an example of a question where knowing too much will hurt you! Collectibles and artwork cannot be held as an investment in an IRA - period. Generally, real estate can also not be held in an IRA, because the plan trustee will not allow it. However, self-directed IRAs do permit real estate as an investment, however the IRA owner cannot derive a personal benefit from this, such as living in the real estate (so there is no "self-dealing" going on here). You don't see real estate being held in Traditional IRAs very often because, after age 72, when RMDs (Required Minimum Distributions) must be made, the question is, how do you liquidate the real estate to make the RMDs? ETFs are stocks and can be held in an IRA. Annuities can be purchased in an IRA, but are generally not viewed as suitable because they already build tax-deferred, so why buy them in a tax-deferred vehicle? However, sometimes annuities are purchased in a Traditional IRA when an individual is nearing the age of RMDs, with the annuity payments set up to meet the RMD requirement each year.

When can a tax deduction be taken for amounts that have been contributed to a Roth IRA? A Under no circumstances B Only if the account holder is not covered by another qualified retirement plan and earns more than the amounts listed in the income phase-out schedule C Only if all of the account holder's Roth IRAs are closed and the amount withdrawn from all accounts is less than 100% of the amounts contributed D Only if the contribution amounts are made based on that individual's earned income and have not been made based on portfolio income

C. This is an obscure tax rule! Roth IRA contributions are not deductible and earnings build tax-free. As long as the assets in the account are held for at least 5 years and distributions commence after age 59 ½, the distributions are not taxable. Roth IRAs have income phase-out rules and are not available to high earners. Normally, over time, the Roth IRA account value will grow. However, if there are losses in the account due to lousy investments, an investor might wonder how to deduct those losses. The only way to do this is to liquidate all Roth IRA accounts owned by the individual (including any accounts with gains). All contributions made represent the tax basis. If the proceeds of the withdrawal are less than this amount, this is a tax-deductible loss and is deducted as an itemized miscellaneous deduction on that individual's Form 1040.

A couple has been married for 30 years - the wife is 65 years old and the husband is 55 years old. The wife dies unexpectedly, and the husband inherits her IRA. He has no need for the money and wants to pass it along to his grandchildren upon his death. The best action for the husband to take is to: A maintain his wife's IRA account B take the proceeds from the wife's IRA account as a lump sum distribution C roll the proceeds from the wife's IRA into his own IRA account D transfer the assets into an inherited IRA account

C. Upon death of an IRA holder, there are generally 3 options for a surviving spouse: Transfer the assets into an inherited IRA Roll over the assets in the IRA into the beneficiary's IRA Disclaim the IRA The IRA account cannot be maintained after the owner dies, so Choice A is not possible. If the proceeds are taken as a lump sum distribution, they are taxable at that point. This does not meet the husband's objective of giving the funds to his grandchildren upon his death. If the husband rolls over the IRA proceeds into his IRA, the funds remain tax-deferred. Since he is only 55, he has another 17 years of tax-deferred growth in the account before RMDs (Required Minimum Distributions) must be taken starting at age 72. This better meets his requirement to pass the funds to his grandchildren upon his death. If the husband transfers the assets into an inherited IRA account, distributions must be made over 10 years. These distributions are taxable, so they do not meet the husband's objective of giving the funds to his grandchildren upon his death. If the husband disclaims the bequest (not given as a choice), then the assets would go immediately to any other beneficiaries named in the wife's will.

The CEO of a company is the trustee of that company's 401(k) Plan. The CEO wants to take a loan from the 401(k) and use the proceeds to make a capital investment in the company. The plan fiduciary: A can allow the transaction because the proceeds of the loan benefit the company B can allow the transaction because it was initiated by a plan trustee, who must act in the plan's best interests C cannot allow the transaction because it is prohibited under ERISA D cannot allow the transaction because loans from 401(k) plans are prohibited

C. ERISA prohibits certain transactions between qualified plans and "interested persons" (trustees, fiduciaries, plan service providers, officers and directors of the company that sponsor the plan, etc.). These prohibited transactions include the: sale or lease of property to the plan; lending of money; furnishing of goods and services to the plan. The CEO cannot borrow money from the plan - the transaction is prohibited. Also note that if the CEO were a plan participant, the CEO could borrow money from his or her 401(k) on the same terms and conditions as any other plan participant - but this is not what the question is about!

Retirement plans that must comply with ERISA requirements include all of the following EXCEPT: A Defined benefit plans B Profit sharing plans C Federal Government plans D Payroll deduction savings plans

C. ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated. The listing of plans that must comply with ERISA include: Profit sharing plans Defined contribution plans Defined benefit plans Tax deferred annuity plans Payroll deduction savings plans

What type of real estate can be held in an Individual Retirement Account? A Personal residence B Vacation home C Rental property D Any of the above

C. Real estate can be owned in an IRA as an investment only. Personal use real property cannot be owned in an IRA - this is a "so-called" prohibited transaction.

Which of the following are settlor functions in a pension plan established under ERISA? I Choosing the type of plan II Amending or changing plan options III Terminating a plan IV Acting as investment manager for the plan A I and II only B III and IV only C I, II, III D I, II, III, IV

C. The "settlor" function of an ERISA plan is to make the business decisions for the plan. These include: choosing the type of plan or plan options; amending the plan or changing plan options; requiring employee contributions (e.g., a 401(k) plan); terminating a plan. The settlor is usually a business executive of the company that establishes the plan. The plan fiduciary is usually an independent trustee. In addition, the investment managers to the plan are fiduciaries. Fiduciaries have control or can exercise investment discretion over the plan.

Which statement is TRUE about the use of index option strategies by managers of pension plans subject to ERISA requirements? A Index option trades are permitted without restriction B Index option trades are permitted only if the options are broad based and exchange traded C Index option trades are permitted only if such transactions conform with the objectives stated in the plan document D Index option trades are prohibited under ERISA legislation

C. There is no prohibition on the trading of options by retirement plans subject to ERISA (Employee Retirement Income Security Act) regulation. However, before a plan may engage in options trades, it must adopt a policy, in the plan document, of permitting options transactions. It is common for large pension plans to use index options contracts to hedge positions (by buying index puts) and to generate extra income by selling index call contracts.

An offer of a tax-qualified variable annuity would be an unethical practice, if made to which of the following individuals? A A school teacher B A hospital technician C A church administrator D A telephone operator

D. Tax-qualified annuities are offered via 403(b) plans and are available only to employees of not-for-profit entities such as hospitals; universities and school systems. Contributions are made by the employee and are deductible to the employee. Such a plan must be established by the not-for-profit employer. Telephone companies are "for profit" entities and cannot establish 403(b) plans. The "big kahuna" of 403(b) plans is "TIAA" - as in Teachers Insurance Annuity Association." TIAA administers most 403(b) plans of colleges, universities, school systems and hospitals across the United States.

If a defined benefit plan is terminated due to the bankruptcy of a company and it has an unfunded pension liability, the shortfall will be covered by: A FDIC B SIPC C PBGC D CFTC

If a defined benefit plan is terminated due to the bankruptcy of a company and it has an unfunded pension liability, the shortfall will be covered by: A FDIC B SIPC C PBGC D CFTC

A 25-year old single customer earns $70,000 per year at a corporation. He contributes the maximum amount to his company's 401(k) plan and wants to put money aside on a tax-deferred basis for the 1st time purchase of a house in 7 years. During that time, the customer contributes to a Roth IRA. If a $10,000 distribution is taken after 3 years for a 1st time home purchase, it will be: A non-taxable B subject to a 10% penalty tax C subject to tax on any portion of the distribution attributable to earnings in the account but not to the 10% penalty tax D 100% taxable and is also subject to a 10% penalty tax

The first $10,000 of 1st time home purchase expenses can be withdrawn from an IRA prior to age 59 1/2 without having to pay the 10% penalty tax. However, regular income tax is still due. However, if a Roth IRA is held for more than 5 years, any distributions used to pay for 1st time home purchase expenses up to $10,000 are not subject to either regular income tax or the 10% penalty tax!