Retirement Planning - Module 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 made 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, 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.

Assuming the account holder is age 40, which of these withdrawals from a traditional IRA is subject to the 10% early withdrawal penalty?

$10,000 donated directly to a qualified 501(c)(3) charity

John and Mary, both age 49, are married and file a joint income tax return for the current year (2022). 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 (2022).

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 $140,000 of Schedule C income and pays $19,782 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 2022?

$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 2022.

Gordon and Maribel each put $6,000 into their respective IRAs. Gordon's employer does not provide a qualified retirement plan. Maribel participates in a 401(k) plan at work. Their AGI is $207,000 in 2022, and they file jointly. How much of their IRA contributions will be deductible?

$4,200 The IRA rules allow an IRA deduction for individuals who are not active participants but whose spouses are, in some cases. However, that option is phased out if the couple's AGI is between $204,000 and $214,000 in 2022. With a combined AGI of $207,000, Gordon would be able to deduct $214,000 − $207,000 = $7,000; ($7,000 ÷ $10,000) × $6,000 = $4,200.

Guy and Dotty, who are both age 42, are married and file a joint tax return. Their modified adjusted gross income (MAGI) for 2022 is $130,000. 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

Stewart and Abby, both age 35, plan to contribute a total of $12,000 to their IRAs for this tax year. They both work outside the home, and they file a joint income tax return. Stewart is a teacher at the local high school and participates in a 403(b) plan. Abby's employer does not provide a retirement plan. They expect that their MAGI in 2022 will be $145,000. What amount, if any, can they deduct for their IRA contributions?

$6,000 An individual is not denied a deduction for his IRA contribution simply because of the other spouse's active participation, unless the couple's combined AGI exceeds $214,000 (2022). Based on their AGI, Abby will be able to deduct a contribution of up to $6,000 to an IRA. Since their combined AGI is too high for Stewart to make a deductible IRA contribution, he should consider contributing to a Roth IRA.

Distributions from IRAs must begin by April 1 of the year following the year in which an individual reaches age

72.

Which of the following constitutes an exception to the imposition of the 10% premature distribution penalty for distributions made from an IRA owned by an individual who is currently age 40?

A distribution in payment of qualified higher education expenses

Which of these reasons for an early distribution from an IRA is NOT an exception to the 10% penalty?

A distribution made after age 55 and separation from service with an employer

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

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

Jane Paschal, age 45. has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $500 on December 31st five years ago. She wants to know when the soonest she could begin making qualified distributions. Which one of the following statements represent what you should tell her?

Any distribution she takes after January 1st this year, will meet the five-year requirement. The clock started on January 1st five years ago, so five years will have elapsed on January 1s this year (meaning after December 31st of last year). A Roth IRA owner is required to hold the account for a minimum of five years to qualify for tax-free distributions. In addition, the owner must be at least age 59½, dead, disabled, or withdrawing up to $10,000 of Roth IRA earnings for qualified first-time homebuyer expenses. Notice that higher education expenses are NOT a reason for a qualified distribution (even though they are an exception to the 10% EWP for IRAs, but not employer Roth accounts)

Maria has a traditional IRA. She named her daughter, Faith, as beneficiary of the account. Faith was disabled in an accident five years ago. If Maria dies at age 75 (when Faith was 50), which of these statements are CORRECT?I. Faith inherits the IRA. II. Faith can transfer the inherited funds to an inherited IRA via a direct trustee-to-trustee transfer and name her own beneficiary.III. Because Faith is an eligible designated beneficiary (EDB), she is allowed to roll the IRA to her own name and circumstances. IV. Faith can make new contributions to the inherited IRA after the money is transferred into the inherited account. Since she is disabled and has no earned income, the source of these new annual contributions would have to be spousal IRA contributions or money rolled into the inherited IRA from a retirement account Faith owned previously.

I and II

Which of these is considered an active participant for determining the deductibility of traditional IRA contributions this year? A participant in a defined benefit pension plan who has just satisfied the eligibility requirements and entered the plan in the past six months A participant in a traditional Section 401(k) plan who is currently not making elective deferrals but has $100 of forfeitures reallocated to their account this year A highly compensated employee with a $500,000 account balance in a profit-sharing plan for which the plan earnings this year are $35,000 but no employer contributions, employee contributions, or reallocated forfeitures were added this year A self-employed professional with no employees maintaining a simplified employee pension (SEP) with a $10,000 account balance funded by a 20% contribution two years ago plus earnings

I and II Active participation for purposes of determining deductibility of IRA contributions differs from being covered under a qualified plan. Specifically, an employee must be contributing to the plan, having employer contributions or forfeitures reallocated on his behalf, or accruing a defined benefit before he is considered an active participant in a qualified plan for IRA purposes. The participant in Statement I has begun to accrue a benefit in the pension plan. The participant in Statement II is considered an active participant because of the forfeiture relocation. The taxpayers in Statements III and IV are not considered active participants this year because no contributions were made on their behalf this year.

Which of these statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT? Generally, if an individual or the individual's beneficiary engages in a prohibited transaction with the individual's IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year. If an individual borrows money against an IRA annuity contract, the individual must include in gross income the fair market value of the annuity contract as of the first day of the tax year. Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited. A 50% penalty will be assessed against an IRA owner who borrows money against their IRA.

I and II Engaging in a prohibited transaction at any time during the year disqualifies the entire IRA as of January 1st of that year. Statement III is incorrect. Selling property to an IRA by a fiduciary or an individual owner of the IRA is a prohibited transaction. Statement IV is incorrect. The individual may have to pay the 10% additional tax on premature distributions.

Which of the following is subject to the required minimum distribution (RMD) requirements after the account owner/plan participant dies? Traditional IRAs Roth IRAs Qualified plans

I, II, and III All of these retirement accounts are subject to RMD requirements after the account owner/plan participant dies. However, RMD requirements do not apply to Roth IRAs while the owner is alive.

Martha has inherited a traditional IRA from her mother last year that contained no after-tax contributions. She would rather not take the required minimum distributions but instead roll the distributions over into her own IRA to save for her own retirement and avoid paying income tax. Which of the following statements is CORRECT? Martha should direct the IRA trustee to make an annual direct transfer to her own traditional IRA of the required minimum distributions so the distributions remain nontaxable. To minimize current taxation, Martha should execute a direct transfer of the entire IRA into an inherited IRA.

II only Only Statement II is correct. Martha inherited the IRA from her mother, not her husband. Only surviving spouses can move inherited retirement money into their own names. Required minimum distributions may not be rolled over. To decrease current taxation, Martha should execute a direct transfer to an inherited IRA. She will, however, be required to begin required minimum distributions from the inherited IRA.

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? Contributions are made with pretax dollars. A withdrawal from the account will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first-time home purchase. Distributions are not taxable if they are attributable to disability and the account has been established for at least five years. If the account has been open for at least five years and the account owner is age 59½, distributions are penalty free and income tax free.

III and IV

In considering whether to convert a traditional IRA to the Roth IRA form, which of the following is a valid consideration?

If the source of payment for taxes due upon conversion comes from an outside source, it generally is advantageous to convert.

Which of these statements is FALSE about Roth 401(k) accounts?

Just as with any Roth IRA account, there are no required minimum distributions (RMDs) that must be made from a Roth 401(k) account.

Which of the following groups would NOT benefit from using Roth IRAs?

Low-income wage earners who need current deductions Roth IRAs offer no current deductions. Low-income wage earners needing current deductions are better served by traditional IRAs.

Which of these statements is FALSE regarding the conversion of a traditional IRA to a Roth IRA?

The IRA owner's modified adjusted gross income (MAGI) cannot exceed $100,000 in the year of the conversion.

Under the IRA minimum distribution rules, if the IRA account owner dies before distribution payments begin, what occurs?

The beneficiary can begin receiving distributions.

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.

Which of the following best describes the purpose of establishing a stretch IRA?

To extend the period of tax-deferred earnings beyond the original owner's lifetime

Which of these is CORRECT about a Roth IRA?

Withdrawals of earnings up to $10,000 from a Roth IRA for the purchase of a first home can be penalty free if the five-year holding period has been met.

Gordon is the fiduciary for a traditional IRA. He has several different investments available to him to invest the IRA assets. All of the following investments are permitted investments for a traditional IRA except

stock in Bottle, Inc., which is an S corporation.

Marian, age 62, converted $30,000 from a traditional IRA to a Roth IRA seven years ago. Last year she converted another traditional IRA with a fair market value of $35,000 to a Roth IRA. She makes no other IRA contributions. This year she took a $40,000 distribution from her Roth IRA. This distribution is treated as $30,000 from the seven year old conversion contribution and $10,000 from last year's conversion contribution, both of which were includable in her gross income when converted. As a result for this year,

the $10,000 withdrawal from last year's conversion is not subject to the 10% penalty tax First, this is a qualified distribution because the Roth IRA owner has had a Roth IRA for more than five years and she is older than 59½. Thus, there will be no tax or penalty on this distribution. Also, the conversion amounts were already included in Marian's gross income when converted. Therefore, they will not be subject to income taxes again when the converted dollars are withdrawn. The distribution allocable to the $10,000 con version contribution made last year (less than five taxable years ago) starts out as being subject to the early distribution penalty because it was withdrawn less than five 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. The withdrawal of the conversion amount from the first conversion is not subject to the 10% early withdrawal penalty because the conversion is more than five years old. Thus, if the owner would have been younger than age 59½, the withdrawal of that money would not have been subject to the early withdrawal penalty.

All of these are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA except

the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion.