Quiz: Individual Retirement Plans

Which of the following will happen if a traditional IRA owner dies before all of the funds in his or her account have been paid out? A. The balance will be paid to the beneficiary and taxed as ordinary income B. The balance will be paid to the beneficiary tax free but taxed to the owner's estate. C. The balance will be paid to the deceased owner's estate, which then is responsible for paying estate taxes on it. D. The balance is forfeited to the financial institution providing the IRA.

A. The balance will be paid to the beneficiary and taxed as ordinary income If a traditional IRA owner dies before the funds in his or her account have been fully paid out, they will be paid and taxed to the beneficiary.

If a person receives funds directly from a qualified pension plan and intends to roll them over to an IRA, within how many days must the rollover be completed? A. 90 days B. 60 days C. 30 days D. 75 days

B. 60 days If a person receives funds directly from a qualified plan and plans to transfer them to an IRA rollover account, he or she has 60 days to complete the rollover transaction. If the funds are not deposited within 60 days, they are subject to income tax and a penalty tax.

Steve, age 72, owns an IRA. The required minimum distribution (RMD) for Steve this year was $6,000, but he only withdrew $4,000. What, if any, penalty tax will Steve have to pay? A. $0 B. $2,000 C. $600 D. $1,000

D. $1,000 Failure to take an RMD results in a stiff penalty: 50 percent of the difference between the amount that was taken and the amount that should have been taken. Since an additional $2,000 should have been distributed, the tax owed is $1,000 (i.e., 50 percent of $2,000).

Generally speaking, which of the following most correctly describes the taxation of a Roth IRA qualified distribution? A. Distributions are generally tax free. B. Distributions may or may not be subject to income tax, depending on whether or not the IRA owner tax-deducted the IRA's contributions. C. Distributions may or may not be subject to income tax, depending on the IRA owner's income level. D. Distributions are generally subject to income tax.

A. Distributions are generally tax free. The tax treatment of a Roth IRA distribution is the same for everyone and is not dependent on the owner's income level.

Which statement about Roth IRAs is correct? A. Contributions, but not earnings, are received tax free when withdrawn. B. Contributions to a Roth IRA cannot be deducted. C. Earnings on contributions are taxed at capital gains tax rates when withdrawn. D. Contributions to a Roth IRA are deductible if the IRA owner meets the adjusted gross income limits.

B. Contributions to a Roth IRA cannot be deducted. No income tax is imposed on distributions from a Roth IRA. Interest and earnings grow in the account tax free and are also tax free when distributed.

Jessica, age 48, owns a traditional IRA that she funded with tax-deducted contributions and which is now worth $300,000. Which of the following correctly describes the tax consequences of converting her IRA to a Roth IRA? A. She would have to pay income taxes and a 10 percent early withdrawal penalty on the entire $300,000. B. She would have to pay income taxes on the entire $300,000. C. She would have to pay income taxes only on the portion of the $300,000 representing interest growth. D. She would have to pay income taxes only on the portion of the $300,000 representing the tax-deducted contributions.

B. She would have to pay income taxes on the entire $300,000. If Jessica converts her traditional IRA to a Roth IRA, she must pay taxes on the full amount, since it was funded with tax-deducted contributions.

People can start making catch-up contributions to a traditional IRA only if they are: A. not eligible to contribute to a Roth IRA B. age 50 and older C. not covered by a qualified employer plan D. age 62 and older

B. age 50 and older People age 50 or older can make additional "catch-up" contributions to a traditional IRA or a Roth IRA.

Paul, who owns a Roth IRA worth $100,000, turned age 72 last year. Which statement correctly describes his distribution options? A. Paul must take his first required minimum distribution (RMD) by April 1 of this year. B. Paul is not required to take any distributions from his Roth IRA, but as a practical matter he should because Roth IRA funds cannot be passed on to heirs. C. Paul can delay the first RMD for five years. D. Paul is not required to take any distributions from his Roth IRA.

D. Paul is not required to take any distributions from his Roth IRA. A Roth IRA does not require mandatory distributions, and funds can be passed on to beneficiaries and heirs income tax free.