Retirement Unit 5

Myra, age 35, converted an $80,000 traditional IRA to a Roth IRA last year. Her adjusted basis in the traditional IRA is $20,000. She also makes a contribution of $5,000 to the same Roth IRA last year. Myra is in a combined 30% marginal tax rate. If Myra takes a $4,000 distribution from her Roth IRA this year, 2019, how much total federal tax, including penalties, is due as a result of the distribution?

$0 Although the distribution is not a qualified distribution, it will not be taxable income because it is treated as a distribution from the Roth IRA regular contributions first. Because the $4,000 distribution is not includible in gross income, nor does it relate to a conversion within the last five years, the distribution is not subject to regular income tax or the 10% early withdrawal penalty.

Mark and Melissa are married and have a combined MAGI of $125,000. Melissa is an active participant in her company's Section 401(k) plan, but Mark's employer does not offer a retirement plan. Both Mark and Melissa each make $6,000 contributions to their traditional IRAs. How much of these IRA contributions can Mark and Melissa deduct on their 2019 MFJ tax return?

$6,000 for Mark's contribution. Because Melissa is an active participant in her employer's Section 401(k) plan and their combined MAGI exceeds $123,000 (the upper end of the married filing jointly phase out range), Melissa's entire IRA contribution is nondeductible. Thus, she should make her IRA contribution to a Roth IRA instead of a non-deductible IRA. Because Mark is not an active participant, his deduction would be phased out starting at $193,000 of MAGI. Mark and Melissa's combined MAGI is only $125,000 and the couple will receive a full $6,000 deduction for Mark's IRA contribution.

An excess IRA contribution is subject to an excise tax of:

6%

Traditional individual retirement accounts (IRAs) are similar to employer-sponsored qualified retirement plans in that:

Contributions made by eligible taxpayers are excluded from current income for taxpayers who are not active participants in an employer-sponsored retirement plan. Investment income earned on funds placed under an approved IRA is tax deferred until distributed. Premature distribution rules and penalties apply in most situations.

Rollover

Contributions made from one retirement plan to another 20% withholding and 60 days to get it in otherwise taxes and penalty Always perform plan to plan (trustee to trustee) No dollar limits

IRA advantages include:

Deferral of income taxes on earnings on the assets held in an IRA. The opportunity for eligible individuals to deduct the contribution from current taxable income. Allowing individuals age 50 and older to make additional annual catch-up contributions. The ability for eligible individuals to contribute up to $6,000 to an IRA for 2019.

A stretch IRA:

Extends or stretches the period of tax-deferred earnings within an IRA possibly over several generations. Extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the original owner. Allows the IRA owner's beneficiary to name his own beneficiary upon the owner's death.

Inherited

Participant dies and leaves IRA to non-spouse beneficiary $$ goes into an inherited IRA-no further contributions are allowed Distributions must begin in yr after death unless a spouse (talked about later)

For the purposes of IRA deductions, an active participant is one who has current contributions (employer or employee) made to:

SEP IRA. SIMPLE IRA. Section 403(b) plan.

Which of the following statements regarding the differences between traditional IRAs and Roth IRAs is(are) CORRECT?

Traditional IRAs are tax-favored retirement savings plans that encourage the accumulation of savings for retirement because they allow earnings to be tax deferred until retirement. Roth IRA contributions are made on an after-tax basis, but earnings are not currently taxed and qualifying distributions are tax free.

Marilyn has a $100,000 balance in her IRA on December 31, 2018. Over the years, she made $30,000 in nondeductible contributions to this IRA. If Marilyn receives a $20,000 distribution from her IRA on May 15, 2019 and doesn't take any other distributions during 2019, how much, if any, of the distribution will be taxable?

$14,000 simply multiply the distribution by the inverse of the nontaxable percentage, 70% in this case, which equals to a $14,000 taxable distribution ($20,000 × 70%).

Guy and Dotty, who are both age 42, are married and file a joint tax return. Their MAGI for 2019 is $125,000. Dotty has already made a $6,000 contribution to her traditional IRA and has also made a $2,000 contribution to their son's Coverdell Education Savings Account this year. What is the maximum amount that may be contributed, if any, to a Roth IRA for Guy and Dotty this year given these facts?

$6,000 For 2019 the maximum combined contribution to traditional and Roth IRAs (for an owner younger than age 50) is $6,000 per person annually. Dotty has already contributed the maximum amount for her traditional IRA, but they can make a further contribution of $6,000 to a Roth IRA for Guy. The $2,000 Coverdell contribution is never relevant to any retirement account contribution. Their AGI is below the Roth IRA phaseout range for a married couple ($193,000-$203,000).

Ordinary Income Taxes on all plus a _____ taxes

10%

Exceptions to Penalty

Age 59 1/2 Total Permanent Disability Medical Expenses > 10% of AGI Higher education costs for dependents and grandchildren $10K for purchase of first home of dependents and grandchildren

Which of the following statements regarding individual retirement accounts (IRAs) is(are) CORRECT?

As a general rule, if compensation is income for which the taxpayer worked in a given year, the IRA contribution can be made; whereas, if income is derived from investments or retirement income, it is not eligible income for IRA contribution purposes.

Prohibited Investments

Collectibles (art, stamps,) Gold (with exception of American Eagle Coins) Life Insurance Policies Loans

In which of the following is an IRA commonly invested?

Common stocks and other equities. Income bond funds and corporate bond funds. Certificates of deposit and money market funds. This also includes mutual funds and limited partnerships.

Roth IRA distributions are required to be treated as occurring in a specific order. What is the order in which distributions are made from a Roth IRA?

Contributions, conversions, earnings.

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA?

Distributions prior to age 59½ are not taxable if they are attributable to disability and the account has been established for at least 5 years. If the account has been open for at least 5 years and the account owner is age 59½, distributions are penalty free and income tax free. Contributions to a Roth IRA are made with after-tax dollars.

Which of the following are permissible IRA investments?

Gold coins minted by the US government. IRA funds can be invested in any type of asset, with two specific exceptions: Collectibles (e.g., works of art, rugs, antiques, stamps) and Life insurance contracts. Loans are prohibited, as are purchases from one's self. US Mint platinum coins and gold, silver, platinum or palladium bullion are acceptable investments for IRAs.

Which of the following are prohibited transactions for an IRA?

Purchasing plan assets. Pledging the IRA as security for a loan. Buying property for personal use with IRA funds. Receiving unreasonable compensation for managing the plan.

Which of the following are characteristics of a Roth IRA?

Qualified distributions are tax free. Contributions are not tax deductible.

For traditional and Roth IRA contribution purposes earned income does NOT include:

Rental income. Pension or annuity income. Interest or dividend income.

The 10% early withdrawal penalty only applies to

a distribution from a Roth IRA that is includable in gross income. The 10% early withdrawal penalty also applies to a nonqualified distribution, even if it is not then includable in gross income, to the extent it is allocable to a conversion contribution made within the 5-year period beginning with the first day of the individual's taxable year in which the conversion contribution was made.

Jason, age 61, owns a traditional IRA that he opened 25 years ago and has funded entirely with tax-deductible contributions. The assets are invested in growth mutual funds. If Jason withdraws $10,000 from the IRA this year, how will the withdrawal be taxed? The withdrawal will be:

taxed as ordinary income The 10% penalty tax doesn't apply because Jason is over 59½ years old.

All of the following statements regarding Roth IRAs for 2019 are correct

eligible individuals age 50 and older may make additional catch-up contributions of $1,000. nondeductible contributions of up to $6,000 per eligible individual may be contributed. contributions to a Roth IRA may be made for years beyond age 70½. Only taxpayers with income below certain MAGI limits are permitted to make contributions to a Roth IRA.

Any amount converted from a traditional IRA to a Roth IRA is:

not subject to the 10% early withdrawal penalty at the time of conversion.

John, age 56 and single, took an early retirement package from his employer last year and is receiving a monthly pension of $5,000 from the company's qualified pension plan. John wants to contribute the maximum amount possible to a Roth IRA for 2019, which is:

$0 Contributions to Roth IRAs, like traditional IRAs, are limited to the lesser of earned income or $6,000 for 2019. John has no earned income so he cannot make a contribution to a Roth IRA.

Scott and Gayle, who are both age 45, are married and file a joint income tax return for the current year. Scott is a self-employed architect who earns $110,000 of Schedule C income and pays $15,543 in self-employment tax. Gayle is not employed outside the home. What is the maximum deductible IRA contribution Scott and Gayle can make, if any, for 2019?

$12,000. Neither Scott nor Gayle is an active participant in an employer-sponsored retirement plan. Therefore, they can establish a traditional IRA for Scott and a spousal IRA for Gayle and contribute a deductible total of $12,000 ($6,000 each) to traditional IRAs for 2019.

Prohibited Transactions

Borrowing from IRA Selling Property to IRA Using IRA as loan security

Which of the following employees are considered active participants in their employer's plan?

John has a target benefit Keogh plan to which he contributes annually. Ian, a sole proprietor, annually contributes to a SEP plan.

Which of the following best describes the reason for establishing a stretch IRA?

To extend the period of tax-deferred earnings beyond the original owner's lifetime. A stretch IRA is used to stretch the period of tax-deferred earnings on the IRA beyond the lifetime of the original owner. The goal is to delay the distribution of assets from the IRA for as long as possible while still meeting other client needs.

John and Mary, who are both age 49, are married and file a joint income tax return for the current year (2019). John is self-employed as an engineering consultant and reports $120,000 of Schedule C net income and pays $16,955 in self-employment tax. Mary is not employed outside the home. What is the maximum deductible IRA contribution John and Mary can make this year?

$12,000 Neither John nor Mary is an active participant in an employer-sponsored retirement plan, qualified retirement plan, SEP plan, SIMPLE, or Section 403(b) plan; therefore, they can contribute and deduct $12,000 ($6,000 each) to traditional IRAs for the current year (2019).

Julie, age 35, is divorced in 2018 and received taxable alimony of $30,000 in 2019. In addition, she received $900 in earnings from a part-time job. Julie is not an active participant in an employer-sponsored retirement plan. What is the maximum deductible IRA contribution that Julie may make?

$6,000 The maximum deductible IRA contribution is $6,000 (2019). Alimony from divorces finalized prior to 2019 is considered earned income for IRA purposes. Julie is not covered by an employer-sponsored retirement plan and, therefore, is not subject to any MAGI phaseout rules. Even if she were covered by an employer-sponsored plan, her MAGI is well below the beginning of the phaseout range for a single person.

A client, age 57 and single, chose early retirement two 2 years ago and is receiving a monthly pension of $2,500 from his former employer's qualified pension plan. The client elects to work part-time for a small company and will receive $35,000 in annual compensation in 2019. This company does not cover him under an employer-sponsored retirement plan. The client wants to contribute the maximum deductible amount to an individual retirement account (IRA). The amount of the IRA contribution that he can deduct this year is:

$7,000. The client is single, over age 50, and not covered by an employer-sponsored retirement plan at his current employer. Thus, he may contribute his earned income up to $7,000 ($6,000 + $1,000 catch-up contribution for 2019) to a deductible IRA without regard to his income. There is no applicable MAGI phaseout in this situation. The fact that he is receiving distributions from his former employer's qualified pension plan does not make him an active participant in that plan for IRA purposes.

Sam has a Roth IRA valued at $100,000 on December 31, 2018. His original contribution was 9 years ago. If Sam dies in 2019, when is the distribution to his beneficiary considered a qualified distribution?

2019 The beneficiary can take a qualified distribution immediately. The five-taxable-year period is not redetermined when the owner of a Roth IRA dies. Thus, the beneficiary of the Roth IRA would have to wait only until the end of the original five-taxable-year period for the distribution to be a qualified distribution. The five year period was satisfied for this Roth IRA four years ago.

What is the first year in which a taxpayer, age 53 in 2019, may receive a qualified distribution from a Roth IRA, if he makes a $2,000 contribution to a Roth IRA on April 1, 2020, for the tax year 2019?

2024 A qualified distribution can occur only after 5 years have elapsed and must be made on or after the date on which the owner meets one of the following: attains age 59½ made to a beneficiary or the estate of the owner on or after the date of the owner's death made after the owner has become disabled made for a first-time home purchase. The 5-year period starts at the beginning of the taxable year for which the initial contribution to the Roth IRA is made. In this question, even though the contribution was made on April 1, 2020, the contribution was for tax year 2019. The 5-year holding period, therefore, begins January 1, 2019. As a result, the first year in which a qualified distribution may occur is 2024. In this case, the taxpayer will be 58 in 2024. Thus, a qualified distribution could only be taken due to death, disability, or a qualified first-time home buyer expense. Notice that a qualified distribution could not be taken for a qualified higher education expense. These expenses are an exception to the 10% penalty, but they are not eligible for a qualified distribution.

Which of the following investments can be included in an IRA without penalty?

A mutual fund that invests exclusively in gold mining stock. An international stock mutual fund. Gold coins minted in the United States by the US Treasury.

Stretch IRA

Allows a beneficiary to name his/her own beneficiary Must be established before distributions begin Father to Son to Grandson (if Son dies before Grandson then distributions are stretched).

Sherry, who is currently age 50, made only one contribution during her lifetime to her Roth IRA in the amount of $5,000 in 2011. If she were to receive a total distribution of $6,500 from her Roth IRA in 2019 to take a vacation, how would she be taxed?

Although Sherry waited 5 years, the distribution will not be classified as a qualified distribution and will be taxable to the extent of earnings and may be subject to the 10% early distribution penalty on the taxable amount.

Which of the following statements regarding distributions from Roth IRAs is (are) CORRECT?

Roth IRAs are unique in that qualifying distributions are tax-free. To qualify for tax free distributions, they must be made more than 5 years after the Roth IRA was established and distributed after the participant attains age 59½, becomes disabled, dies, or is used for first-time home purchase.

Which of the following statements regarding the tax effects of converting a traditional IRA to a Roth IRA is CORRECT?

The converted amount is treated as a taxable distribution from the IRA to the extent the distribution does not represent a return of basis.

A distribution from a Roth IRA is not subject to taxation if it is a qualified distribution or to the extent that it is a return of the owner's contributions or conversions to the Roth IRA. A qualified distribution is one that meets BOTH of the following tests:

The distribution was made after a 5-year holding period. The distribution was made for one of the following reasons: -Owner has attained age 59½. -Distribution was made to a beneficiary or the estate of the owner on or after the date of the owner's death. -Distribution was attributable to the owner's disability. -Distribution was for a first-time home buyer expense purchase.

Which of the following statements regarding individual retirement accounts is CORRECT?

Under certain conditions, if a married individual does not work or has limited compensation, his spouse can contribute up to $6,000 (2019) ($7,000 if over age 50) to a spousal IRA. Excess contributions will result in an excise tax of 6% on the excess. Contributions to an IRA or Roth IRA can be made at any time during the tax year for which the contribution relates or up to April 15 of the following year.

All of the following are prohibited investment vehicles for IRAs

antiques and artwork. life insurance. gold and silver coins of Canada.

Marian, age 62, converts $30,000 from a traditional IRA to a Roth IRA in 2013. In 2015, she converts another traditional IRA with a fair market value of $35,000 to a Roth IRA. She makes no other IRA contributions. In 2019, Marian takes a $40,000 distribution from her Roth IRA. This distribution is treated as $30,000 from the 2013 conversion contribution and $10,000 from the 2015 conversion contribution, both of which were includable in her gross income when converted. As a result, for 2019

the $10,000 withdrawal from the 2015 conversion is not subject to the 10% penalty tax. The conversion amounts were already included in Marian's gross income when converted. Therefore, they will not be subject to income taxes again when withdrawn. The distribution allocable to the $10,000 conversion contribution made in 2015 (less than five taxable years ago) starts out as being subject to the early distribution penalty because it was withdrawn less than 5 years after the conversion. However, it is not subject to the 10% penalty tax under Section 72(t) in this case because Marian is over age 59½ which is one of the exceptions to the 10% penalty.