Unit 4 - Summary of Distribution Rules from Both Qualified Plans and IRAs
Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be: A) $2,500. B) $0. C) $1,500. D) $2,000.
Answer: B There is no penalty if a participant withdraws more than the required minimum distribution.
Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty? A) When the account is fully funded with nondeductible contributions. B) A distribution taken to satisfy the terms of a court-ordered property settlement. C) When the distribution is paid in equal annual amounts over the owner's life. D) A distribution taken at age 55 if the owner is retired.
Answer: C A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.
Once reaching the age of 70-½, required minimum distributions must be taken for participants in: Keogh plans. Roth IRAs. SEP IRAs. traditional IRAs. A) I and IV. B) II only. C) I, II, III and IV. D) I, III and IV.
Answer: D The Roth IRA is the only one of these where there are no required minimum distributions once reaching age 70-½.
Under the minimum distribution rules and Uniform Table, Leslie is required to take a minimum distribution of $15,000 this year from her IRA. However, a distribution of only $10,000 has been made. What is the dollar amount of penalty that may be assessed in this situation? A) $2,500. B) $500. C) $5,000. D) $7,500.
Answer: A The penalty for failure to make the correct amount of required minimum distribution is 50% of the difference between the minimum required amount and the actual distribution. In this case, this would be 50% of $5,000 ($15,000 − $10,000) or $2,500.
Regarding the withdrawal of funds from a qualified retirement plan the employee will be taxed at the ordinary income tax rate on the cost basis with any increase being taxed as capital gain the funds may be withdrawn on retirement (as defined in the plan) and no tax need be paid on the amount withdrawn the funds may be withdrawn early by the beneficiary if the covered person dies all qualified plans must be in written form A) I and II B) I, III and IV C) I, II, III and IV D) III and IV
Answer: D In the case of death or total disability of the participant, funds can be withdrawn early from retirement plans. All qualified plans must be in written form as outlined by the Internal Revenue Code. All taxation on qualified plan withdrawals is at ordinary income tax rates, never capital gain. If all contributions are on a pre-tax basis, 100% of the funds withdrawn are taxed. If there are after-tax contributions, then the tax is due on everything above the cost basis. The only way to avoid taxes on funds withdrawn from a qualified plan is to rollover the proceeds into an IRA within the allowable 60-day period.
An individual has a substantial vested interest in his 401(k) plan at work. Which of the following is NOT an exception to the premature distribution penalty tax? A) Distribution to pay medical expenses that exceed 7.5% of adjusted gross income. B) Distribution made pursuant to a qualified domestic relations order. C) Distribution made to purchase a principal residence. D) Distribution because of an employee's death or disability.
Answer: C Although individuals can make penalty-free withdrawals from an IRA to purchase a principal residence, this exception does not apply to withdrawals from a 401(k) plan. The penalty for withdrawals from a 401(k) plan taken before age 59½ is waived only in the cases of death, disability, qualified domestic relations orders (QDROs), medical expenses, certain period payments, and corrections of excess contributions.
