1.16 Individual Retirement Accounts

traditional, roth

IRA ACCOUNTS ___ IRAs and ___ IRAs are tested heavily on Part 1 of the EA exam.

employer, high, phased out, traditional, deduct

If either the taxpayer or his spouse is covered by an ___ plan and his income is too ___, his deductible IRA contribution will be ___ ___ . However, as long as a taxpayer has qualifying compensation, he may contribute to a ___ IRA (although he may not be able to ___ the contribution).

secure, contribute

In prior years, there were age limits to contribute to a traditional IRA, but the age limits were abolished by the ___ Act. Starting in 2020, anyone with qualifying compensation, regardless of age, may ___ to a traditional IRA.

small, 2

RETIREMENT PLANS FOR ___ BUSINESSES We will cover retirement plans for businesses in Part ___.

compensation

The SECURE Act allows certain taxable stipends and non-tuition fellowship payments received by graduate students to be treated as "___" for IRA purposes. This provision is effective starting in the 2020 tax year.

b (Shari has 60 days to complete the rollover. If she does not complete the rollover within 60 days, the entire distribution is subject to income tax in 2020.)

5. Shari switched jobs in the middle of the year. She received a distribution in 2020 from her former employer's retirement plan and wanted to roll it over to an IRA with another bank. How long does she have to complete the indirect rollover to avoid income tx and penalties on the distribution? A. 30 days from distribution. B. 60 days from distribution. C. December 31 of that tax year. D. April 15 of the next tax year.

distributed, adjustment, gross income, higher, workplace

Traditional IRA: Amounts in a traditional IRA, including contributions and earnings, are generally not taxed until they are ___. Typically, a taxpayer can deduct his traditional IRA contributions as an ___ to ___ ___. However, the deduction is phased out at ___ income levels, when the taxpayer (or the taxpayer's spouse) is also covered by a ___ retirement plan.

child, nontaxable, passive, dividend, pension, deferred, gambling, excluded, nontaxable, medicare

NOT COMPENSATION FOR AN IRA "Compensation" for purposes of contributing to an IRA does not include: ___ support or ___ alimony, ___ rental income, ___ and interest income, ___ or annuity income, ___ compensation, Prize winnings or ___ income, Items that are ___ from income, such as certain foreign earned income and excludable foreign housing costs (except for ___ combat pay and qualified ___ waiver payments).

a (Joanne is allowed to make her retirement contribution at any time during the year up to the due date of her tax return, not including extensions. IRA contributions for 2020 must be made by April 15, 2021.)

1. Joanne e-files her 2020 tax return early, on February 27, 2021. What is the latest date that she can make a traditional IRA contribution for the 2020 tax year? A. April 15, 2021. B. February 27, 2021. C. December 31, 2021. D. October 15, 2021 (with a valid extension).

b (Rafael, cannot contribute any additional funds after April 15, 2021, the due date for filing 2020 tax returns, regardless of whether he files an extension. If contributions to a traditional IRA for the year were less than the limit, a taxpayer cannot contribute more after the original due date of the tax return to make up the difference. If Rafael wants to make an additional contribution for 2020, he must do it by the normal filing deadline of April 15, whether he files an extensions or not.)

10. Rafael, 40, earns $26,000 in wages during the year. Although he is allowed to contribute up to $6,000 to his traditional IRA, he only has enough cash to contribute $2,500. On April 30, 2021, Rafael expects to receive a big commission bonus, and wishes to make a catch-up contribution for 2020. Rafael filed an extension for his tax return, so his federal return isn't due until October 15, 2021. Which of the following statements is correct? A. Rafael can contribute an additional $3,500 on April 30, 2021, and allocate the contribution for the 2020 tax year as long as he files his tax return by the extended due date. B. Rafael cannot contribute any additional funds for the 2020 tax year past the normal tax return filing deadline (April 15). C. Rafael can make a 2020 contribution on April 30, 2021, as long as he files his return on the same day. D. Rafael cannot make a 2020 contribution to his IRA after December 31.

c (If they file jointly, Susie can contribute $6,000 (she is under 50 years of age). Ernesto can contribute $7,000, because he is over the age of 50. The SECURE Act eliminated the age limit for making contributions to a traditional IRA in 2020, so taxpayers of any age can now contribute to a traditional IRA.)

12. Ernesto, age 71, and Susie, age 49, are married and file jointly. In 2020, Ernesto earned wages of $30,000, and Susie earned $5,000. If they file jointly, how much can they contribute to their traditional IRAs? A. Susie and Ernesto can each contribute $6,000 to their respective IRA accounts. B. Susie and Ernesto can each contribute $7,000 to their respective IRA accounts. C. Susie can contribute $6,000. Ernesto can contribute $7,000. D. Susie can contribute $7,000. Ernesto cannot make an IRA contribution.

b (Since Aaron is married and lived with his wife during the year but is filing separately, he can contribute no more than $4,000, the amount of his qualifying compensation for IRA purposes.)

3. Elizabeth and Aaron are both age 63, married, and lived together all year. They both work, and each has a traditional IRA. Aaron is mostly retired, and Elizabeth still works full-time. In 2020, Aaron earned $4,000 of self-employment income from working for a popular rideshare service on the weekends. He also received $18,000 of annuity income. Elizabeth earned $52,000 in wages. They prefer to file separately. If they file MFS, what is the maximum that Aaron can contribute to his IRA? A. $1,000 B. $4,000 C. $5,500 D. $6,500

a (Unlike traditional IRAs, Roth IRAs do not require withdrawals until after the death of the owner. This is why Roth IRAs are used as an estate-planning tool. Traditional IRAs require owners to begin taking required minimum distributions (RMDS) at age 72 (but the RMD can be waived in 2020 due to the CARES Act). A Roth IRA does not require any distributions until after the owner's death.)

4. When does the IRS require the owner of a Roth IRA to start taking required minimum distributions? A. After the death of the IRA owner. B. At age 72 1/2. C. At age 72. D. Never required.

b (Fyodor's IRA contribution for 2020 is limited to $3,5000, the total amount of his wages. The interest income and the gifted money from his parents are not qualifying compensation for IRA purposes.)

7. Fyodor, age 25, is an unmarried college student working part-time. He earns $3,500 in wages during 2020. He also receives $500 of interest income and a $9,000 gift from his parents to help pay his college tuition. What is his maximum IRA contribution in 2020? A. $0 B. $3,500 C. $5,500 D. $6,500

difficulty-of-care, qualifying, non-deductible, basis

Also starting in 2020, ___ -___ -___ payments (also called "qualified Medicare waiver payments) to home healthcare workers, are considered "___ compensation" for IRA contribution purposes. This is true even if the amounts are not subject to income tax; however, the amounts contributed are ___ -___ and create ___ in the IRA.

waived, 2020, suspended, wait

CARES ACT RMD WAIVER On March 27, 2020, the CARES Act ___the RMD obligations for the ___ tax year. This special rule also includes April 1, 2020 RMDs for taxpayers who turned 70½ in 2019. Anyone who took a required minimum distribution (RMD) in 2020 also had the opportunity to recontribute those funds back into their retirement account by August 31, 2020. Example: Nixon is 76. He has been taking required minimum distributions from his traditional IRA for several years now. He takes out his RMD on March 3, 2020, as he normally does. He then learns that the CARES Act has waived the RMD requirement for 2020. He contacts his IRA trustee and asks to recontribute the amounts back into his IRA. Nixon recontributes the full amount back into his IRA on May 2, 2020. With RMDs ___ for 2020, Nixon can ___ until 2021 before he takes his next RMD.

wages, alimony, nontaxable combat

COMPENSATION FOR AN IRA To make contributions to a traditional IRA, the taxpayer must have qualifying taxable compensation, such as ___, salaries, commissions, tips, bonuses, or self-employment income. For purposes of making an IRA contribution, taxable ___ (but not child support) counts as qualifying compensation. This allows taxpayers to build retirement savings in IRAs even if they rely on alimony income for support. ___ ___ pay also qualifies as compensation for this purpose.

disaster, retirement, 2020

Congress passed the SECURE Act on December 20, 2019, which made a significant number of changes to retirement plans. Most of the retirement plan provisions in the SECURE Act did not take effect until January 1, 2020. The Consolidated Appropriations Act of 2021 (CAA 2021) was signed on December 27, 2020, and included several ___-related provisions that affected the treatment of ___ plan distributions for the ___ tax year. These changes will be covered in this chapter.

3600, 6000

Example: Falco is 35, works full-time, and earned $55,000 in wages during the year. His wife, Danielle, is 34 and earned $___ . They choose to file MFS. Therefore, Danielle is limited to a $3,600 IRA contribution, the amount of her qualifying compensation. Falco may contribute the full $___ (the limit for his age) to his own IRA account.

60, non-taxable, credit, rollover, 4b

Example: Sheldon quits his old job on September 1, 2020. On October 14, 2020, Sheldon begins a new job, which happens to be with a competitor of his old employer. He has an existing retirement account at his old employer. He decides to transfer the balance of his traditional IRA account to his new employer's retirement plan. Rather than disclose any information about his new workplace to his former boss, Sheldon decides to receive a direct distribution from his IRA of $60,000 in cash. The IRA custodian is required to apply federal income tax withholding rules to a traditional IRA distribution. Because this was an indirect rollover, Sheldon was forced to replace the amounts that were withheld with his own savings. On October 30, 2020, Sheldon deposits the entire amount of $60,000 into his new employer's retirement plan, making up the difference with his own funds. Because the transaction is completed within ___ days, it is completely ___-___, and any withheld amounts will be returned as a tax ___when he files his 2020 tax return. The rollover must be reported on Form 1040, by including "___" next to Line ___..

1099-R, 10

Form ___, Distributions from Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, etc., is used to report distributions of $___ or more from a retirement plan or an IRA.

lesser, qualifying, 6000, 7000, 50, own, one, qualifying, rollover, reservist, repayments, april 15

IRA CONTRIBUTION LIMITS The limits for contributions to an IRA in 2020 are the ___ of ___ taxable compensation (as described below) or the following amounts: $___ per taxpayer ($___ if age 50 or older) Taxpayers filing MFJ: $12,000 (or $14,000 if both spouses are age ___ or older). Each spouse must have their ___ IRA account, but in the case of married spouses that file jointly, only ___ spouse must have ___ compensation. This yearly IRA contribution limit does not apply to: ___ contributions (rolling over from one IRA account to another) Qualified ___ repayments ___ of qualified disaster distributions. Contributions can be made to a traditional IRA at any time on or before the due date of the return (not including extensions). For the 2020 tax year, a taxpayer may make an IRA contribution up until ___ ___, 2021.

100000, december 31, 1099-R, directly, constructive receipt

QUALIFIED CHARITABLE DISTRIBUTIONS (QCD) A taxpayer who is 70½ or older may choose to make a qualified charitable distribution (QCD) of up to $___ (and if filing as MFJ, the other spouse can also take a QCD up to $100,000) from his IRA to qualified charitable organizations and exclude that amount from income. QCD amounts count toward a taxpayer's RMD, but cannot be claimed as a charitable deduction. In order to qualify, the funds must come out of the taxpayer's IRA by the deadline for minimum distributions (generally ___ ___). Charitable distributions are reported on Form ___-___ for the calendar year the distribution is made. The IRA trustee must make the distribution ___ to the qualified charity (the taxpayer cannot request a distribution and then donate the money later). Likewise, any tax withholdings on behalf of the owner from an IRA distribution cannot qualify as QCDs. Example: Simone is 76. Her required minimum distribution is $9,400. Simone does not elect to waive her RMD requirement in 2020. She makes a $15,000 qualified charitable distribution from her traditional IRA account directly to her church on March 31, 2020. She does this by directing her IRA trustee to make the contribution directly to the church. The distribution is not taxable to her, because she never has ___ ___ of the funds.

after-tax, deductible, not taxed, limit

Roth IRA: Contributions to a Roth IRA are paid with ___-___ income and are not ___ . In contrast to a traditional IRA, withdrawals from a Roth IRA are generally ___ ___. Income limits apply in determining who is eligible to participate in a Roth IRA. However, there is no income ___ for taxpayers who wish to convert their traditional IRA to a Roth.

loss, would not, wages, subtracted, qualifying, 10000

SE INCOME/WAGES If a person's only qualifying compensation for the year is from self-employment and the self-employment activity generates a ___ for that year, he ___ ___ be able to contribute to an IRA. However, if the taxpayer has ___ in addition to self-employment income, a loss from self-employment would not be ___ from the wages when figuring total "___" compensation income for purposes of determining his IRA contribution. Example: Florence is 41 and earns $10,000 of wages working part-time for a library. She also works as a self-employed photographer, but her photography business has a net loss of ($5,400) for the year. Even though Florence's net income for the year is only $4,600 ($10,000 wages - $5,400 loss from self-employment), her "qualifying compensation" for purposes of an IRA contribution is still $___, the amount of her wages. This means that Florence can make a full IRA contribution of $6,000, assuming she has enough available funds to do so.

jointly, own, each, one, spousal, separately, own

SPOUSAL IRA CONTRIBUTIONS IRAs cannot be owned ___ . Therefore, each spouse must have their ___ IRA account. However, a married couple filing jointly may contribute to ___ of their IRA accounts, even if only ___ taxpayer has qualifying compensation. This is called a "___ IRA contribution." If married taxpayers choose to file ___, they must consider only their ___ qualifying compensation for IRA contribution purposes.

b (A 6% excise tax applies to excess contributions. The taxpayer will not have to pay the 6% tax on the excess contribution if the excess contribution and any earnings are withdrawn by the due date of his return, including extensions. If a taxpayer corrects the excess contribution in time, the 6% penalty will apply only to the earnings on the excess contribution.)

13. An "excess" contribution to an IRA is subject to an excise tax. What is the applicable excise tax rate? A. 3% B. 6% C. 10% D. 50%

a (On a jointly filed return, they are both allowed to contribute and deduct the maximum allowable for their age bracket ($6,000 each in 2020). The rental income is not qualifying compensation for IRA purposes, but William and Melissa may use their combined self-employment income to figure their maximum allowable IRA contribution. Even though Melissa's business had a net operating loss for the year, she is not required to "offset" her Schedule C losses from her wages when determining her "allowable" IRA contribution. The answer is figured as follows: William: $9,900 self-employment income + Melissa: $3,000 wages = $12,900 in total "qualifying compensation" If they file jointly, they can each contribute $6,000 to a traditional IRA for themselves ($6,000 x 2 = $12,000, which is less than the amount of their qualifying compensation).)

6. Melissa, age 41, and William, age 47, are married and file jointly. Both are self-employed and report their business income on Schedule C. William's Schedule C business has $9,900 in profits during the year. His wife, Melissa, has a loss of ($5,100) on her Schedule C. Melissa also earned $3,000 in wages from a part-time seasonal job. They also co-own a residential rental property together. The rental earned $58,000 in income during the year. What is their maximum allowable IRA contribution for 2020? A. William can contribute $6,000, and Melissa can contribute $6,000. B. William can contribute $6,000, and Melissa can contribute $3,000. C. William can contribute $6,000, and Melissa cannot contribute. D. William can contribute $7,000, and Melissa can contribute $3,000.

c (Steven may contribute $6,000 in 2020, the maximum contribution allowed for his age, because a taxpayer may elect to treat nontaxable combat pay as qualifying compensation for IRA purposes. The interest income is not considered qualifying compensation, but his wages exceed the maximum contribution amount, so he is till allowed to make the maximum contribution for the year.)

8. Steven, age 36 and single, is in the Marines. He has the following income in 2020: Nontaxable combat pay $30,500 Regular wages $2,100 Interest income $4,600 What is the maximum amount that Steven can contribute to a traditional IRA? A. $2,100 B. $4,600 C. $6,000 D. $7,000

d (The can contribute $13,000 in 2020 if they file jointly. Kristina can contribute $6,000, and Ruslan can contribute $7,000 because he is age 50. Even though Kristina only has $1,200 of qualifying compensation, she can use her husband's compensation to determine her maximum contribution (as long as they file jointly). )

9. Kristina, 48, is a full-time graduate student with $1,200 of wages. She marries Ruslan, 50, during the year. Ruslan has taxable compensation $66,000 in 2020. What is the maximum they can contribute to their traditional IRA accounts in 2020 if they file jointly? A. $1,200 B. $8,200 C. $12,000 D. $13,000

rental, interest, 3000

Example: Dalton is 54 and wants to contribute to his traditional IRA. He received $15,000 of rental income; $8,000 of interest income; and $3,000 of wages from a part-time job. The ___ and ___ income are not considered for purposes of determining his IRA contribution. Therefore, the maximum he can contribute to his traditional IRA is $___, the amount of his wages.

13000, 50, jointly

Example: Derrick, 49, and Elaine, 51, are married and file jointly. Derrick works as a paramedic and makes $76,000 per year. Elaine is a homemaker and has no taxable income. Even though Elaine has no qualifying compensation, they may contribute to her IRA account. Their combined maximum contribution is $___. Derrick may contribute $6,000 to his IRA, and Elaine may contribute $7,000 to her IRA because she is over ___ years old. This special rule only applies if married taxpayers file ___.

taxable, distributions, 72, 10, death, lump, 10, income, waived

Example: Desmond, age 73, and Nanette, age 61, are married. Both spouses have traditional IRA accounts. On February 1, 2020, Desmond dies, and his wife inherits his IRA account. Rather than take a distribution from her late husband's account, Nanette decides to do a spousal rollover of the entire account balance into her own IRA. The rollover is not a ___ event, and Nanette is not required to take any minimum ___ from the account until she reaches age ___ (presuming that she reaches her 72nd birthday). Any other beneficiary: For any other beneficiaries, the account balance must generally be fully distributed by the ___-year period after the ___ of the IRA owner. Example: Crystal, who was unmarried and had no children, died on May 30, 2020. At the time of her death, Crystal had a traditional IRA worth $200,000. The beneficiary of her IRA is her step-brother, Rudy, age 42. Rudy is not disabled. Rudy can choose to distribute the IRA as a ___ sum, or he has ___ years to distribute the balance and pay the tax. No matter what type of distribution he chooses, the amounts he withdraws from the inherited IRA will be subject to ___ tax. However, the 10% early withdrawal penalty is ___ for a beneficiary of an IRA when the original IRA owner has died, (regardless of how old the beneficiary is).

april 1, 2022, december 31, 2022, 5329, excise

Example: Gabrielle's 70th birthday was July 1, 2019. She does not have to start taking required minimum distributions until reaching age 72. Her first RMD is not due until April 1 of the year after she turns age 72. Gabrielle will turn 72 on July 1, 2021. She must take her first RMD (for 2021) by ___ ___, ___, and her second RMD (for 2022) by ___ ___, ___. If Gabrielle fails to take her RMD by the deadline, she must file Form ___, Additional Taxes on Qualified Plans, to report the ___ tax that applies as a result of her failure to take the RMD.

20, add funds, credit, direct, does not

INDIRECT ROLLOVERS It is not uncommon for employees to roll funds from one retirement plan to another, especially after a job change. An "indirect" rollover of a retirement account may be requested when an employee changes jobs or leaves a job to start an independent business, but does not want to share information with his former employer. With an indirect rollover, the employer generally withholds ___% of the amount that is pending transfer in order to pay the taxes due. This withholding is mandatory, even if the taxpayer intends to roll it over. If the taxpayer does roll it over and wants to defer tax on the entire taxable portion, he will be forced to ___ ___from other sources equal to the amount of tax withheld. This money is returned as a tax ___ for the year when the rollover process is completed. Note: In order to avoid this mandatory 20% withholding, a taxpayer may request a "___ rollover." The distribution is then made directly from the custodian or trustee for the employer-sponsored plan to the custodian for the employee's IRA or his new employer's retirement plan. Under this option, the 20% mandatory withholding ___ ___ apply.

nontaxable, not limited, not limited, directly, 60, taxation

ROLLOVERS A rollover is a transfer from one retirement plan to another retirement plan or account. If executed properly, most rollovers are ___ events. A taxpayer can make only one rollover from an IRA to another IRA in any twelve-month period, regardless of the number of IRAs the taxpayer owns. There are two exceptions to this rule: Trustee-to-trustee transfers between IRAs are ___ ___. Rollovers from a traditional IRA to a Roth IRA are ___ ___. With a direct rollover, the funds from the taxpayer's current retirement account are transferred ___ to a new retirement plan. This is also called a "trustee-to-trustee" transfer. With an indirect rollover, it is up to the employee to redeposit the funds into the new IRA or another qualifying retirement account within the mandatory ___-day period to avoid penalty. A rollover from a traditional IRA to a Roth IRA is more commonly called a "Roth conversion," but it is still a type of rollover. In this case, the conversion will result in ___ of any previously untaxed amounts in the traditional IRA that were rolled over into a Roth IRA.

10, income tax, medical, unemployed, dies, education, first, levy, reservist, normal

10% PENALTY ON EARLY DISTRIBUTIONS A taxpayer may withdraw funds at any time from a traditional IRA account. However, distributions before age 59½ may be subject to an extra ___ % excise tax, in addition to normal ___ ___ on the amount distributed. There are several exceptions to the general rule for early distributions. An individual may not have to pay the additional 10% tax in the following situations: To the extent the taxpayer has unreimbursed ___ expenses that exceed 7.5% of adjusted gross income, The distributions do not exceed the cost of the taxpayer's medical insurance while ___, The taxpayer becomes disabled or ___, The distributions are not more than qualified higher ___ expenses, The distributions are used to buy, build, or rebuild a ___ home (up to $10,000), The distributions are used to pay the IRS due to a ___, Made as part of a series of substantially equal periodic payments, The distributions are made to a qualified ___ (an individual called up to active duty), Qualified disaster distributions (for FEMA disasters other than COVID-19). Coronavirus-related distributions up to $100,000 (COVID-related distributions), for the 2020 tax year only. Qualified birth and adoption distributions starting in tax year 2020 due to the SECURE Act. Even though distributions in these situations will not be subject to the additional 10% tax, they will be subject to income tax at the taxpayer's ___ rates.

b (Vadik may convert his traditional IRA to a Roth IRA, but he will owe income tax on the conversion. If he wished to convert all or a portion of his traditional IRA to a Roth IRA, he is required to pay income taxes on the amount of pre-tax (deductible) contributions converted, as well as the growth in value resulting from earnings on those contributions. After the funds are converted to a Roth IRA, additional earnings are tax-free, and distributions are generally not subject to tax. However, penalties apply if he withdraws from the Roth IRA within five years of the conversion. The conversion is reported on Form 8606, Nondeductible IRAs.)

11. Vadik, age 42, has a traditional IRA account. He wants to convert his traditional IRA to a Roth IRA. Which of the following statements is correct? A. Vadik can convert his traditional IRA to a Roth IRA and the transaction is tax-free. B. Vadik can convert his traditional IRA to a Roth IRA. Income tax must be paid on the conversion. C. Vadik can rollover his traditional IRA to Roth IRA only if his income is under $150,000. D. Vadik cannot convert his traditional IRA to a Roth IRA because he is under 59 1/2 years of age.

b (Nichelle's maximum contribution for 2020 is $5,300. Only her wage income qualifies as "compensation" for the purposes of an IRA contribution. The annuity income, rental income, and interest income do not qualify.)

14. Nichelle is single, age 63, and has the following taxable income in 2020: Annuity income $15,600 W-2 Wages $5,300 Interest Income $2,800 Passive rental income from a residential rental $26,000 What is the maximum amount that Nichelle can contribute to her traditional IRA in 2020? A. $3,000 B. $5,300 C. $6,000 D. $7,000

c (Gwendolyn cannot deduct her IRA contribution. Contributions to a traditional IRA who participates in an employer-sponsored retirement plan are allowed, but their deductibility is phased out at higher income thresholds. When MAGI reaches a certain threshold, the taxpayer's traditional IRA contribution is not deductible. In 2020, unmarried filers who participate in an employer plan and have a MAGI of more than $75,000 are not allowed to make deductible IRA contributions. If Gwendolyn makes nondeductible contributions to her traditional IRA, she must attach Form 8606, Nondeductible IRAs, to her tax return.)

15. Gwendolyn, age 38, is single and has no dependents. She contributes $6,000 to a traditional IRA, and she also participates in her employer's 401(k) plan. She has a modified adjusted gross income of $239,000 in 2020. Which of the following is correct regarding her IRA contribution? A. It is fully deductible. B. It is partially deductible. C. It is not deductible. D. It is subject to a 6% excise tax.

a (Distributions made prior to age 59 1/2 are subject to a 10% early withdrawal penalty, (if not exception applies). Some exception that allow early distributions from an IRA, as well as from qualified retirement plans, including the following: •Distributions made to a beneficiary or estate after death. •Distributions made because of permanent disability. •Distributions to the extent of medical expenses (medical expenses that exceed 7.5%-of-AGI), whether or not the taxpayer itemizes deductions for the year. •Distributions made due to an IRS levy. •Qualified disaster distributions •Qualified coronavirus distributions. The distributions listed above are not subject to the early distribution penalty.)

16. Which of the following distributions from a traditional IRA is subject to an additional 10% penalty? A. Distributions made prior to age 59 1/2. B. Distributions made after age 70 1/2. C. Distributions made to a beneficiary after the IRA owner's death. D. Distributions made due to an IRS levy.

b (Assuming Alfred has sufficient qualifying compensation; he could contribute $3,500 to his traditional IRA ($2,5000 + $3,500 = $6,000). The 2020 maximum for contributions to all types of IRAs is $6000 per taxpayer (for taxpayers under the age of 50). Taxpayers are allowed to have different types of IRA accounts, but the maximum contribution limits apply to their total contributions for the year.)

2. Alfred is 42 and unmarried. He earned $48,000 in wages during the year. He has a Roth IRA and a traditional IRA with two different financial institutions. In 2020, he contributed $2,500 to his Roth IRA. He also wants to contribute to his traditional IRA account. What is the maximum he can contribute to a traditional IRA in 2020? A. $0 B. $3,500 C. $4,000 D. $5,000

ceases, distributed, self-directed

PROHIBITED TRANSACTIONS (2) Although occurrences of prohibited transactions are rare, the consequences can be catastrophic. If a prohibited transaction occurs at any time during the year, normally, the account ___ to be treated as an IRA, and its assets are treated as if having been wholly ___ on the first day of the year. Note: Prohibited transactions are rare occurrences, and they generally only occur when a taxpayer has a "___-___" IRA. A self-directed IRA is a type of account that offers a taxpayer the ability to use his retirement funds to make almost any type of investment without requiring a financial institution or another custodian.

beneficiary, stretch IRAs, 10

DISTRIBUTIONS FROM INHERITED IRAS Inherited IRAs are subject to special rules. Following the death of an IRA owner, the IRA usually passes to a ___. The SECURE Act made major changes to the treatment of inherited retirement plans, starting in 2020. The SECURE Act changes apply to both traditional IRAs and Roth IRAs. Note: Before the SECURE Act, beneficiaries of inherited IRAs could choose a lump sum withdrawal or stretch the withdrawal of required minimum distributions over their life expectancy. The SECURE Act abolishes "___ ___" for most non-spousal beneficiaries. In most cases, the inherited IRA must now be fully distributed to the beneficiary within ___ years after the original owner passes away. There are no required minimum distributions during the ten years, however, all the amounts must be distributed from the inherited account by the end of the tenth year following the year of the original owner's death. If a beneficiary does not distribute the balance of the account by the end of the tenth year following the year of death, a 50% excise tax will apply to any amount not distributed. Under the SECURE Act, there are now two classifications of designated beneficiaries for an IRA. The Act distinguishes between an "eligible designated beneficiary" and other beneficiaries who inherit an account or IRA. An "eligible designated beneficiary" includes: A surviving spouse, A disabled or chronically ill individual, A minor child of the IRA owner (but not a grandchild), or An individual who is not more than 10 years younger than the account owner. Spousal Beneficiary: Surviving spouses have the most flexibility. Surviving spouses have the same options they had before the SECURE Act. A surviving spouse can elect to treat the IRA as his own by changing the ownership designation or roll over the IRA balance to his own IRA account or certain other types of retirement plans. The surviving spouse can also choose to take distributions over their own life expectancy.

entire, excess, 100000, taxable income

Example: Zamir, age 40, has a self-directed IRA account. The fair market value of Zamir's traditional IRA was $300,000 as of January 1. He had previously made $200,000 of nondeductible contributions to his IRA, so that was his basis in the account. On January 10, Zamir borrowed $150,000 from his IRA to purchase a vacation home for himself. This is a prohibited transaction, and Zamir's ___ IRA account will no longer be treated as an IRA from the date of the withdrawal. Since the FMV of the IRA on the first day of the year, $300,000, is greater than Zamir's basis, $200,000, the ___ amount of $___ is reported as ___ ___. Zamir would also be subject to the additional 10% penalty on the entire amount, for withdrawing funds before the age of 59½.

taxable, rollovers, charitable, nondeductible, basis, any time, penalty, earnings, 10, five

IRA DISTRIBUTIONS Distributions from a traditional IRA are generally ___ in the year they are received, subject to the following exceptions: ___ to another retirement plan Qualified ___ distributions directly to a qualified charity (must be a trustee-to-trustee transfer), Distributions of ___ contributions. ROTH Distributions: The rules are different for Roth IRA distributions. A taxpayer can withdraw their regular Roth IRA contributions (their ___, but not the earnings) at ___ ___ and at any age with no ___ or tax. However, withdrawing ___ before age 59½ may result in a ___% early withdrawal penalty. In order to qualify for completely tax-free and penalty- free withdrawal, Roth IRA distributions generally must meet a ___-year holding requirement and occur after age 59½, although there are exceptions for disability or death of the IRA owner.

loan, vacation, IRA loan, selling, unreasonable, siblings

PROHIBITED TRANSACTIONS Generally, a prohibited transaction is the "improper use" of an IRA by the owner, a beneficiary, or a disqualified person (typically a fiduciary or family member). Prohibited transactions related to an IRA include: Using the IRA as security or collateral for a ___, Buying property for personal use with IRA funds (for example, using IRA funds to buy a ___ home the IRA owner or his family will use), Personally borrowing money from the IRA (i.e., there is no such thing as an "___ ___," although some types of retirement plans do allow limited borrowing, traditional IRAs do not) ___, leasing, or exchanging property to the IRA account, Accepting ___ compensation for managing IRA assets, Granting account fiduciaries to obtain, use, or borrow against account assets for their own gain, Transferring plan assets, lending money, or providing goods and services to "disqualified persons," usually a close family member, or a business that a close family member owns and controls. For the purposes of the prohibited transaction rules, "family members" includes the taxpayer's spouse, parents, grandparents, children; and grandchildren and spouses of the taxpayer's children and grandchildren. Family members do not include in-laws, cousins, friends, aunts, uncles, ___, and stepsiblings.

insurance, collectibles, baseball, metals, S, life, personal, use, Treasury, prohibited, disqualified, distributed

PROHIBITED TRANSACTIONS (3) Prohibited IRA Investments: Almost any type of investment is permissible inside an IRA, including stocks, bonds, mutual funds and even real estate. However, there are some investments that are prohibited. For example, the law does not permit IRA funds to be invested in life ___ contracts or ___. If the taxpayer invests in any of these prohibited investments using IRA funds, it is treated as a prohibited transaction. The following investments are prohibited: Collectibles and jewelry, such as: artwork, antiques, porcelain, ___ cards, uncut gemstones, or comic books, Precious ___, coins, and gemstones ___ corporation stock, ___ insurance contracts, Real estate held for personal use (real property can be held in an IRA as long as the investments are not in the taxpayer's ___ name, and not used for personal ___, such as a vacation home used by the taxpayer). There is a narrow exception for investments in gold and silver coins minted by the U.S. ___ Department. Investments in certain gold, silver, palladium, and platinum bullion are also allowable. Example: Darren has a self-directed traditional IRA. Without consulting his retirement advisor, Darren decides to purchase a piece of artwork as an investment using his IRA funds. Darren has engaged in a ___ transaction. The IRA is deemed immediately ___, and the entire amount in the IRA is deemed ___ in the year that he purchases the collectible with IRA funds.

december 31, 2019, permanent, april 1, 72, must, december 31, 50

RMDS Required Minimum Distributions (RMDs) from Traditional IRAs A person cannot keep funds in a traditional IRA account indefinitely. However, the SECURE Act raised the required minimum distribution (RMD) age from 70 ½ to 72 for taxpayers turning 70½ after ___ ___, ___. This is a ___ change. The first RMD payment can be delayed until ___ ___ of the year following the year the taxpayer turns ___. The distribution for each subsequent year ___ be made by ___ ___. The amount of each RMD is based on IRS tables. Failure to take a required RMD can result in an excise penalty equal to ___% of the amount that the taxpayer should have withdrawn but did not.

deductible, tax-free, no effect, required minimum distributions, dies, age, high-income

ROTH IRAS Roth IRAs and traditional IRAs have many differences, but they are both used for retirement planning. Unlike a traditional IRA, none of the contributions to a Roth IRA are ___, but qualified distributions are generally ___-___ at the time of withdrawal. The major differences between a Roth IRA and a traditional IRA are as follows: Contributions to a Roth IRA are not deductible by the taxpayer, and participation in an employer plan has ___ ___ on the taxpayer's contribution limits. There are no ___ ___ ___(RMDs) from a Roth IRA. No distributions are required until a Roth IRA owner ___. Roth IRA contributions can be made at any ___. Income limits apply, which means ___-___earners may be prohibited from contributing to a Roth IRA.