Lesson 7: IRAs and SEPs
What is the earliest age when a participant can make an IRA catch-up contribution?
50 Catch-up contributions are permitted for those who have attained the age of 50.
All the following types of income are considered earned income for a traditional IRA contribution EXCEPT: A) income from a general partner. B) W-2 income. C) self-employment income. D) alimony resulting from a divorce agreement signed this year.
D) alimony resulting from a divorce agreement signed this year. Alimony resulting from divorce agreements prior to 2019 will count as earned income, but divorce agreements signed after 2018 (2017 TCJA) will not count as earned income. The other options qualify as earned income for purposes of IRAs.
Seth and Morgan were just married, but Seth does not work. They are both 25 years old. Morgan supports Seth with funds from her trust fund, investment income of $12,000, and her part-time earnings of $7,000 this year. If Morgan contributes $6,000 in 2020 to her Roth IRA, how much can Seth contribute to his traditional IRA?
$1,000 Seth and Morgan have combined earned income of $7,000 for the current year, which limits his ability to contribute to his IRA. $7,000 − $6,000 = $1,000.
Marleen, who is 37 years old, is an employee of Zcrypt, Inc. (Zcrypt). Zcrypt sponsors a SEP IRA and would like to contribute the maximum amount to Marleen's account for the plan year. If Marleen earns $32,000 per year, what is the maximum contribution Zcrypt can make on her behalf to the SEP IRA? A) $8,000 B) $19,000 C) $32,000 D) $57,000
A) $8,000 Contributions to a SEP IRA are limited to the lesser of 25 percent of the employee's compensation or $57,000 (2020). In this case, Marleen's compensation is $32,000, so the contribution on her behalf would be limited to 25 percent of $32,000, or $8,000.
All of the following statements concerning the income limits for contributing to IRAs are correct EXCEPT: A) The income limits only apply to taxpayers who are covered by a qualified retirement plan. B) The income limits are higher for Roth IRAs than for traditional IRAs. C) Taxpayers whose income is over the limit may still make non-deductible contributions to traditional IRAs. D) Marital filing status does not affect IRA income limits.
D) Marital filing status does not affect IRA income limits. The IRA income limits for married-filing-jointly taxpayers are about twice as high as the limits for single filers. All of the other statements are correct.
All of the following statements concerning Roth IRAs are correct EXCEPT: A) Contributions can be made to the plan after a participant has attained age 72. B) In most cases, an individual can contribute both the maximum contribution to a Roth IRA and the maximum contribution to a traditional IRA for a given tax year. C) A single taxpayer with adjusted gross income (AGI) of more than $139,000 cannot make a Roth IRA contribution for 2020. D) Contributions to a Roth IRA are never deductible.
B If the maximum is contributed to a Roth IRA, no contribution can be made to a traditional IRA maintained on behalf of the same taxpayer.
Keith converted all $100,000 in his traditional IRA to his Roth IRA on December 1, 2016. (This was his first Roth contribution or conversion). His Form 8606 from prior years shows that $20,000 of the amount converted is his basis. Keith included $80,000 (or $100,000 − $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2020, Keith made a regular contribution of $5,000 to a Roth IRA for the 2019 year. Keith took a $10,000 distribution from his Roth IRA on July 31st of 2020 to purchase a ticket for a trip on a cruise ship for his 61st birthday. How is the distribution taxed if the value of the account just before the distribution equals $120,000? A) The distribution is tax-free and penalty-free. B) The distribution is not subject to tax, but Keith will have to pay a penalty of $500. C) $1,250 of the distribution is taxable, but there is no penalty. D)$1,250 of the distribution is taxable, and there is a penalty of $500.
A) The distribution is tax-free and penalty-free. The question first requires a determination of whether or not the distribution is a qualified distribution. It is not a qualified distribution. Keith is over the age of 59½ but does not meet the 5-year rule. Therefore the distribution first comes out of contributions, then conversions, then earnings ($5,000 from contributions and $5,000 from conversions). Since he is over the age of 59½, there is no penalty assessed. The entire distribution is tax-free and not subject to a penalty.
The early distribution penalty of 10 percent applies to IRA distributions that are: A) made after the plan participant attains age 55 and is separated from service. B) made for the purpose of paying qualified higher education costs. C) paid to a designated beneficiary after the death of the account owner, who had not begun receiving minimum distributions. D) made after the onset of a disability.
A) made after the plan participant attains age 55 and is separated from service. There is a 10 percent penalty for IRA distributions made before 59½ years of age. Answer (A) would be excepted from that penalty if it were made from a qualified plan, but it is not an exception for distributions from an IRA. The other answers are exceptions to the 10 percent penalty for IRAs.
Bob, who is 58 years old, makes his first contribution to a Roth IRA in December of Year 1. What is the first year in which he could receive a qualified distribution from a Roth IRA? A) Year 2 B) Year 3 C) Year 5 D) Year 6
D) Year 6 A qualified distribution can only occur after a 5-year period and is made on or after the date on which the owner attains age 59½, made to a beneficiary or the estate of the owner on or after the date of the owner's death, attributable to the owner's being disabled, or made for a first-time home purchase. The 5-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The 5-year period ends on the last day of the individual's fifth consecutive taxable year beginning with the taxable year described in the preceding sentence. Therefore the first year in which a qualified distribution could occur is Year 6.
Charles, a single 29-year-old CEO of a technology start-up company, earns a $2 million base salary with a $400,000 bonus. He is not a participant in any retirement plans at work. What is the maximum deductible IRA contribution Charles can make during 2020?
$6,000 Because he is not an active participant in a retirement plan, he can contribute and deduct the maximum amount of $6,000.
All of the following statements are correct regarding simplified employee pension plan (SEP) contributions made by an employer EXCEPT: A) Contributions are subject to taxation under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). B) Contributions are currently excludable from the employee-participant's gross income. C) Contributions are capped at $57,000 for 2020. D) Contributions are capped at 25 percent of compensation for employees who earn less than $285,000.
A Employer contributions to a SEP are not subject to FICA and FUTA. Employer contributions are excluded from an employee's gross income. The SEP limit is the lesser of 25 percent of compensation and $57,000 for 2020. The maximum compensation that may be taken into account in 2020 for the purpose of SEP contributions is $285,000. Since 25 percent of $285,000 is $71,250, the maximum amount that can be contributed to a SEP in 2020 is $57,000.
Which of the following people can make a deductible contribution to a traditional IRA for 2020? Devon: AGI=$100,000; Covered by qualified plan; and files married. Gretchen: AGI= $50,000; covered by qualified plan, and files single. Destiny: AGI= $280,000; not covered under qualified plan, and files married. Aria: AGI= $79,000, covered by a qualified plan, and files single. A) Gretchen and Destiny B) Devon, Gretchen and Destiny C) Devon, Gretchen and Aria D) Devon, Gretchen, Destiny and Aria
B All but Aria may deduct a contribution made to a traditional IRA. Devon and Gretchen are below the phase-out range. Destiny is not covered by a qualified plan, so there is no income limit. Aria is single and covered by a plan, and her AGI is above the top end of the phaseout for singles ($65,000-$75,000 for 2020).
Which of the following scenarios includes a qualified distribution from a Roth IRA? A) A 60-year-old opens her first Roth IRA and 3 years later takes a distribution. B) A 40-year-old takes $10,000 from a 10-year-old Roth IRA to help pay for a second home. C) A 35-year-old becomes totally disabled and distributes $100,000 from a 6-year-old Roth IRA. D) A 55-year-old with a 30-year-old Roth distributes $5,000 to pay his daughter's preschool tuition.
C) A 35-year-old becomes totally disabled and distributes $100,000 from a 6-year-old Roth IRA. In order to be considered a qualified distribution, a Roth IRA must be open for at least 5 years and one of the following must be true: the account holder is at least 59 ½ years old, the account holder is dead and the beneficiary receives the distribution, the account holder is disabled, or the account holder is taking out up to $10,000 to help pay for a first-time home purchase. Answer (A) is incorrect because the Roth has not been open for 5 years. Answer (B) is incorrect because the distribution is for a second home. Answer (D) is incorrect because paying for preschool education is not considered a qualified distribution.
Sierra, aged 62, single, and retired receives a defined-benefit pension annuity of $1,200 per month from Mancini Corporation. She is currently working part time for Imani's Interior Design and will be paid $18,000 this year (2020). Imani's Interior Design has a 401(k) plan, but Sierra has made no contribution to the plan and neither will Imani's Interior Design this year. What is the maximum contribution that Sierra can contribute to a traditional IRA or a Roth IRA in 2020? A) $6,000 to a traditional IRA or $6,000 to a Roth IRA Correctly unselected B) $0 to a traditional IRA or $6,000 to a Roth IRA Correctly unselected C) $7,000 to a traditional IRA or $0 to a Roth IRA Correctly unselected D) $7,000 to a traditional IRA or $7,000 to a Roth IRA
D) $7,000 to a traditional IRA or $7,000 to a Roth IRA Sierra has earned income and is over 50 years old. She is not an active participant in a retirement plan, and even if she were, her adjusted gross income (AGI) is below the income limits. The maximum contribution limits for IRAs and Roth IRAs are $6,000 if a person is younger than 50 and $7,000 if a person is 50 years old or older.
Participation in which of the following plans will not be considered active participation for IRA deductibility? A) A tax-sheltered annuity B) A simplified employee pension C) A SIMPLE D) A 457 plan
D) A 457 plan The 457 plan is not considered a retirement plan under the IRA deductibility rules.
Which of the following types of income is considered earned income for a traditional IRA contribution? A) Dividends B) Rental income C) Capital gains D) Partnership income from a law firm
D) Partnership income from a law firm Dividends and capital gains are investment income. Rental income is passive. Partnership income is considered earned income if it is from active engagement of the business.