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104 Cards in this Set
- Front
- Back
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ID the limit for IRA contributions, both deductible and nondeductible, that applies to following:
a. single wage earner b. married couple w/ both spouses working c. married couple w/ both working, both 50+ d. married couple w/ 1 spouse working e. divorsee, 56 y.o, not working but receiving alamony |
a. lesser of 5500 or 100% of comp b. 11k, each contribs max c. total of 13 k, max + 1k each catch-up d. 5500 each, aggregate contribs to two accounts cannot exceed total conpensation of spouces; nonworking spouse's IRA is "spousal IRA" e. Lesser of 6500 or 100% of compensation (alimony is considered compensation) |
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What retirement plans must be considered when determining whether an individual has active participant status? |
-qualified pension, profit sharing, or stock bonus plans -qualified annuity plans under 403b -simplified employee pension (SEP) -SIMPLE IRA -Govt plans (not inclusing SS, railroad retirment, or 457 plans) |
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What criteria are used to determine active participant status within specific retiremnt plans?
(1) defined benefit plan (2) profit sharing, 401k, or stock bonus plan (3) money purchase plan or target plan |
1, DB- An indivusal is active if indiviudal is eligibel under provisions, even if individual elected not to participate, the mepoloyer failed to make manditory contribs, and/or failed to perform the minimum service requred 2, ps, 401, sbp- Active if the individuals acct received an employer contribution, an employee contrib, and/or a forfeiture allocation. 4, mpp, tp- Active if the indiviuals acct received a contribution or forfeiture allocation, regardless of whether th eindividual was employeed at any time during the taxible year. |
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How do individual's retiremnt plan contributions affect active participant status? |
an individual who makes voluntary or mandatory retirment plan contribs is an active participant |
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How do investment earnings affect active participant status? |
An individual is not an active participant if only earnings (no contributions or forfeitures) are allocated into his or her acct. |
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Give some examples of income that isn't "earned" |
unemployment compensation, passive income, deferred compensation, pension and annuity pmts, social security, workers comp, capital gains. |
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ID levels of modified adjusted gross income (MAGI) that determine the deductibility of IRA contribs for active participants a. single b. married jointly both active c. married jointly, one non-active d. married, seperate |
Full deduction availible up to, Partial deduction avalible for range, no deduction available for AGI above:
a. 60-70k b. 96-116k c. 181-191k d. 0-10k |
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ID levels of modified adjusted gross inocme (MAGI) that determine the deductibility of IRA contributions for nonactive participants - single - filing jointly |
- single: Fully deductibel IRA contribs are availible to individuals at all AGI levels who are not active participants, subject to contrib limit specified
- mfj: Individual who is not an active participant and who i smarried filing jointly with a spouse who is not an active participant is not subject to phase out. an individual who is not an active participant and who is married filing jointly with a spouse who is an active participant is subject to the spousal phaseout. |
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IRA contribution deadline |
April 15 of year following tax year---no extentions |
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deductible v. non v. roth
Contribution limit |
D: lesser of 5500 or 1000% of compensation---reduced by any deductible contributions
nonD: lesser of 5500 or 1000% of compensation---reduced by any nondeductible contributions
Roth: less of 5500 or 100% of comp---reduced by any contribs to other IRA types |
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d v. non v. roth
Timing and method of tax on earnings |
d: tax deferred until distribution, ord income at time of w/d
nond: tax defered til distribution, portion consists of nontaxable return of basis and taxible earnings
roth: tax free if distribution is qualifed |
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How does the law allow an excess contribution to an IRA to be corrected? |
If excess contribution is withrdrawn before 4/15 or the applicable extension, it iwll be treated as if was never contributed |
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Kathy, 37, single contribs 5500 to IRA. Earns 105k. Offers 401k, never participated.
a. Eligible to make 5500 IRA contrib? b. is she an active participant? c. is she eligible to deduct full contribution?
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a. Yes, earned income and under 70.5 b. no. She is not particpating; therefor she has no account and "annual additions". c. Yes. She is not subject to the deduction phaseouts and the 5500 contrib will be fully deductible. |
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Elmo, 49, single. contributed 5500 to IRA. Salaray is 86600. AGI for year is 105000. Worked for 20 years. DB plan for all who has 2 year of service, elmo waived participation in plan.
a. eligibel to make 5500 contrib to his IRA? b. active? c. eligible for full contrib? |
a. yes, earned income and under 70- b. yes. Eligible under the plan providsions, even thoug hhe has chosen not to participate. c. no. non of contrib is deductible because he is an active particapnt and has AGI above phaseout range |
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Mark and Alice, 74 and 73, keep working and want to contribute to IRAs this year. Each has a traditionjal, nondeductible and roth. File jointly, AGI= 110k after pension pmt of 45k from their DB plan. describe status of each of their IRAS and potential for contribs and deductions.
a. traditional b. nond c. roth |
a. Over 70-; therefore, they are qualifed for neither a contrib or deduction b. over 70-; therefore, they are not qulifed for contrib c. Whether they are over age 70- has no bearing on Roth. Active status has no bearing. Both can contribute 6500 to roth since AGI is under phaseout. |
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a. Susan, 39, single and active in qualified plan. AGI = 61k, contrib 5500 to IRA. What amt is deductible?
b. If Susan's AGI is 65.5k, what amount of 5500 IRA contrib is deductible |
a. 70-61=9. 9/10= .9. 5500*.9=4950
b. 70-65.5=4.5k. 4.5k/10k=.45. .445*5500= 2475 round up to nearest ten |
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Mark and Betty both work, file jointly. He's active. She's not active. AGI=98k, 11k IRA contrib. What amt is deductible? |
116-98=18. 18/20=.9. .9*5500= 4950 for Mark. Full amt is deductibel for Betty. 10450 total. |
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Bobby and unemployed wife, Laura joint. He's active. Both under 50, AGI= 140k, contrib 11k. What's deductible? |
140>116, therefor no deduction. Laura can deduct 5500 as a spousal IRA contrib. Total is 5500. Figure AGI, then deal w/ each spouse seperately. |
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Shirley and Jim, marrried jointly. AGI=197. Jim makes contribs to 401k at work. Shirley's employer offers no such plan. She plans to cintribute to Roth IRA, and he'll contrib to his traditional IRA. Can they make contrib to Roth for Shirley and deductible to Jims?
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AGI=197. Shirly cannot contrib to Roth becaus eAGI is too high (181-191 phaseout). Jim cannot deduct his IRA contribution because AGI is higher than phaseout range for tradtional IRA (96-116) and he is active. Shirley can contribute (but not deduct) 5500 to a traditional IRA because AgI is above phaseout for spousal IRA nad jim is active. In fact, both can contribute to nondeducible IRA. |
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Jim quits job to paint. This year he made 100$ and didn't participate in qualifed plan. Shirley's earnings increased signiciantly, but she still doesn't have plan at work. Modified AGI= 195. She wants to contribute to her Roth or a traditional IRA, he want's to contribute to his traditional IRA. How much can they contribut eto the Roth and Traditional? |
Neither is active, deduction for Spousal IRA doesn't phase out. They can contribut eand deduct 5500 for Jims traditional IRA and can deduct 5500 for Shirley's traditional IRA. Cannot cntribute to Roth since MAGI is above phaseout (191). |
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In 2014, Buster and Prunella's AGI will be 181695. Prunella joined 401k at work and deferrs 300 bucks a month. Buster is disabled and has no income. They want to deduct the max for buster, while prunella wants to contribute the max allowed to her Roth. |
Buster's deductibel contribution under the spousal IRA is 5120 and prunella's roth contribution is the same (191-181695)/10=.9305*5500=5117.75=5120. Because roth phaseout and spousal phaseouts are the same, the calculation is the same for each. |
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Frank 53 and frieda 54 want to make max allowable deductible contribution to their traditional IRAs. Frank wors for car store as manager and frieda works there part time. They both particiapte in company' ssIMPLE IRA and AGI is 99000. What is max amount they can contribute and still take a deduction on their 2014 return? |
Both are active, phaseout is 96-116. Both 50+ elighble for 1k catchup. 116-99=17000. 17/20=.85; .85*13000=11050 deductible amount. |
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Buford and Monica marreid filing jointly. AGi= 120k. Monica has no earnings. Buford waived out of DB plan to enable the max contrib and deductible to IRAs. Advice?
a. Max allowable IRA contrib?
b. What is max deduction for total of their IRA contribs? |
a. Max IRA contrib is 11k. Since Buford cannot waive participation in dB plan to avoid active status, he's active and can't make deductibel contrib to IRA, duie to AGI >116. He can contribute 5500 to Roth. They can make and deduct 5500 spousal IRA contrib for Monica.
b. 5500 |
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IRA funds generally may be invested in a wide range of investment vehicles.
a. what three types of investments are not permitted?
b. What are the tax consequences of investing IRA funds in these three investment types? |
a. 1. Collectibles (exception: certain state or US coins) 2. Life insurance contracts. 3. Loans to "disqualifed persons" (self or related party); these are prohibited transactions.
b. 1. amt invested in collectibles is deemed distributed; thus is subject to tax and (if applicable) early withdrawl penalty 2. A purchase of LI may be deemed a distribution or prohibited transaction, depending on the circumstanses; if deemed a distribution, the investment amount is subject to tax and (if applicable) the early withdrawl penalty 3. a loan from an IRA owner to the owner or a related party is a prohibited transaction, resutling in loss of IRA status and taxation of the entire account (plus th early withrdarwl penatly, if applicalbel)
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What is tax consequense of using any part of an IRA as security of a loan? |
The entire account form which assets were used to purchase life insurance , collectibles, or used as security lsoses its IRA status and is deemed distributed. |
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When must distributions begin from IRA? |
by april 1st of the year following the year the individual attains age 70.5.
dist from qualfied palns, 403 b, and 457 may begin as late as april 1 of the year following the later of the year the individual attians age 70.5 |
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IRA minimum distributin requirments for IRA? |
it must be distributed over the life expectancy of the owner as determined using the Uniform Table.
The amount ot be distributed each year is determined by dividing the prio year-end account balanc eby the life expectancy of the owner found in the Uniform Table.
***Each account mus tmeet the minimum distribution requriemtns seperately; alternatively, the total returied minimum distribution may be taken from any one or more of the accounts. |
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What is penalty for insufficent distributions from these plans? |
Taxed at 50% on amount of any shortfall |
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Assume that the owner fo an IRA dies after the minimum distribution has begun, but befor ethe entire interest in the account has been distributed. Over what time period must the balance of the IRA be distributed if the beneficary is one of the following?
1. Surviving spouse of the owner 2. non-spouse beneficary |
1. if spouse is sole beneficary, the requried minimum dist is determined by dividing th ebalance on 12/31 of the year of death by the surviving spouse's life expectancy determined by RMD single life table. Recalcuated each year.
If spouse is sole beneficiary, he or she may roll the account into his or her own IRA and delay any dist until he or she reaches age 70.5.
The surviving spouse may also choose to distribute under the 5 year rule.
2. requried min dist is determined by dividing the balance on 21/31 of the year of death by beneficary's life expectancy. Dist must begin by 12/31 of year following th eyear of owners death.
Acct may be rolled into an inherited IRA but it must be titled with beneficary's and deceased's name, and requred dists must begin by 12/31 of year following death. |
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Assume owner of IRA dies before min dist have begun. Over what time period must baleance of IRA be distributed if bene is one of following
1. surviing spouse 2. nonspouse beneficary |
1. if spouse is sole bene, requred min dist is determind by dividing balance on 12/31 of year of death by spouse's life expecanty. Recalc'd yearly. Could roll to own IRA and delay distribution until deceased spouse would have attained age 70.5 or choose to distribute under 5 year rule.
2. above, but "bene IRA" |
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Dists form IRA taxed under IRC section 72. ID three special rules for IRAs and expalin how they relate to income tax treatment of IRA distribtuins. |
a. Multiple IRAs- all IRAs of an individual are treated as one acct.
b. multiple IRA dists in one year- All distributions dirung a taxable year are treated as one distribution. However, if an individual ha smore than one IRA the minimum dist coul dbe taken from just one acct.
c. date of valuation: 12/31 of year prior to the year for which the distribution is being calculated |
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Exceptions to early distribution penalty? |
Death/disability Medical expenses in excess of 10% AGI (7.5% if account owner or spouse is 65+) Qualified higher education expenses First time homebuyer expenses up to 10k Med insuaance permiums while unemployed Qualified reservist distribution Series of substantially equal periodic payments |
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What is min dist time requirement for substantianally equal and periodic payments? And what re the three distribution methods availible? |
Dists must continue for at least 5 years oruntil age 59.5, whichever is longer.
3 dist methods availible are the required minimum distriubution method, fixed ammortization method, and fixed annutitization method. Only the requreid min dist method, whichsn't a fixed amoutn, can have paymetns vary in order to correspond with the investment performance of the account. |
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What are phaseout ranges for ROth IRA elgiiblty?
single married joint |
114-129k 181-191 |
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What needs to take place in order for a distributino from a Roth to be considered qualifed? |
acct opened for 5 years and
distribyution is made after attaining 59.5, death, or disabiliyt, or first time home buyer 10k. |
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If a dist from Roth isn't qualifed, woudl tha tmean that th edistribution would aso be subject ot the 10% early withdrawl penalty if the account owner is under 59.5? |
Not necessarily. The same exceptions to the 10% penalty that apply to traditional IRAs also apply to Roth IRAs. These include qualifeid higher education expenses, med exp in eexces of 10% (7.5% if accoutn or spouse is 65+), and equailly periodic pmts |
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Jen turned 56, she just established Roth IRA for 20X1 tax year.
a. she asks you when she could start making qualifed distributions form the aaccount. You advise her:
b. Jen contribs 15k to Roth over next three years then needs funds to replace car on 59th birthdsay. Acct is worth 28k and wants 20k out. Tax ramifications? |
a. Jenn needs to meet 5 year olding peirod and be at 59.5. If she makes a contrib for 20x1 then the 5 year clock starts on 1/1/20x1. As of 1/1/20x6 she's good (because she's also over 59.5)
b. Prinicpal comes out of IRA first and since this is a return of after tax dollars there wouldnt be tax amifications. The first 15k is untaxed, next 5 is taxed and early withdrawl penalty. See if she'd wait till 59.5, still taxed, no penalty. |
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Sven and Heidi, in 20s, buying 1st home. Sven wants to use Roth IRA. 12k contrib, now 20k. Tax implications of 20k w/d? |
None taxed. 5 year holdign period met, first time homebuyer exclusion amt is 10k. 10>8. If not met 5 years, 8k is taxable and penalty. |
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Fritz, 60, contirbuting for 5 year sto Roth 401k. Pension form former employer is only other acct. Considering retiring at 62. Plans to roll R 401k to Roth IRA to have more investmet choisces and to make it easier for him to take distribs if needed. If he were to proceed a planed, tax ramifacations? |
Met 5 year and is over 59.5 so and dist would be qualified and earnings not taxed. If he rolls thena new clock starts and needs to wait 5 years. If he doesn't wait 5 it iwll be taxed.
May want to consder opening Roth IRA w/ nominal amoun to get clock started. Then once 5 year clock met he can transfer the rest. Could leave roth 401k w employer, but limits investment choise. 70.5 RMD applys to roth 401k not IRAs. |
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ID two requiremnts that an employer must meet in order to establish a SIMPLE IRA |
a. Er mus tnot contriubute to or accrue benefits under any qualifed plan for services provided during the year (or in any ear after the qualified salary reduction arraingment takes effect)
b.100 or fewer employees earning at least 5k |
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Describe rules goverining contribs to SIMPLE IRAs by
a. employer b. eligible employee |
a. rquried to match contribs up to 3% of employee comp, or contribute a flat 2% of comp for every emplooyee. An Er using the 3% match approach may take a lower contrib in 2 of the 5 years. Matching contrib cant be less than 1%
b. EE can contribue elective deferrals up to 12k. in addition ees who are at least 50 can add 2.5k in catchup. |
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Describe advantages of SIMPLE IRA from
a. employer b. employee |
a. -contribs tax deductible - plans easy to set up - no investment responsblty - fewer restrictions and admin requirentes than traditonal pension plans - employees share in cost of funding benefits
b. -salaray deferals reduce current income - benefits are totally portable - wide range of inv options |
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Describe disadvantages of SIMPLE IRA
a. er b. ee |
a. -max annuan contribs less than qualified plan - if er adopts a simple plan, it cannot also maintain a qualifed plan -ees are immediately fully veste din er contribs
b. - max annual contrisb less than qulaifed - er cannot be more generous even fi they wanted to |
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describe "two year rule" tha differenciates SIMPLE IRA dist/roll overs from other IRAs |
A participant wh otakes a dist w/in 2 years of joining th eplan is assesed a 25% penalty tax. Start is date of plan. Over age 59.5 okay. |
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Zach, 51, works for co offers simple ira. Max overall contrib could be made to his acct for year asusming he makes 45k |
defer 12, plus 2.5 for catchup. Highest employer match is 3%*45k=1350.
1350+ 12+ 2.5= 15850 |
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Zac buys co afte rwinning lottery. Makes 300k. Max contrib? |
normal 260k limit on includible comp doesn't apply to matching contribs on SIMPLE IRAs (doesn't apply to 2% non elective contrib on SMPLE IRA). Zach can defer 12k plus 2.5 for being old. .03*300k=9k. 23,500 (first 9k matched $ for $) |
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What types of business entities eligble to establish SEP? Simplifed Employee pension? |
Any type of tax-exempt or or for profit business: sole P, C and S, or partnerhsip |
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a. Who establishes SEP and how are contribs made? b. what is max annual contib to EE's SEP? c. How is SEP distinguishible from IRA |
a. SEP established by ER; however, ER contribs are made to IRAs established for participating EEs. b. 25% up to 52k c. Higher annual contrib limit of SEP sets it apart |
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From ERs perspective, advantages of SEP? |
-easy to establish and admin -er usually ha sno responisbilty for investment results -establishng and funding plan can take place after offical end of tax year -plan is flexible regarding the contributions th employer will make, if any |
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From ER's perperspective, main disadvantages of SEP? |
- EE is automatically invested; doesn't help er retain good ees - SEP cannot make loans to participants - Many ees who dont need to be covered under a qualifed plan, such as part-time ees must be coverd under SEP, which increases costs -IRA ssets are not as througghly protected from creditors as are assets in qualifeid plans |
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Which ees are eligbel to particiapte in comapny SEP? |
Each EE 21+ earing at lesat 55- for th eyear and ahas performed services for the employer in at least three of the immediately preceeding five calandare years must be in SEP |
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describe tax treament of er contribs to ee SEP IRAs? |
Treated like qual plan. ER can deduct amt of contribs for taxable income, EES not requried to recognis econtribs in personal taxible incomes until they take distribution. Grow tax deferred. |
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Briefly descirbe pro rata and flat dolalr approaches, which ers can use to aviod discrimination in their SEP contribs
a. pr b. fd |
a. PR SEP IRA contribs are those that either give ach employee the same percentage of annual contribution or allocate a toal amount of available for contrbution according to each employee's annual compensation
b. FR contribs give each employee same dolalr amount |
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describe the dealines tha employers must observe in establishing and contributing to SEPs |
rules allow ers to establish and fund a sep any time prior to the due date of the income tax return fo rthe business, plus any extentsions |
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ID the characteristic of the SIMPLE IRA that most clearly differentiates it from the SEP? |
SiMPLE IRA gives ees an opp to create their own deffered salary to the plan. EE deferral isn't possible in SEP created after 1996. Also, ER contribs are purely discretionary in a SEP; with SiMPLE plan ERs must make matchign or nonelective contribs. |
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If ER had objective of maximizing retirmetn contribs from any source, which plan woudl be more approprate SEP or SIMPLE? |
If most have modest comp, the 12k employee deferral and 3% match under simple plan results in greater retirmetn contrib. Howver, SEP provides greater contribs with higher income,s potentially allowing up to 52k to be contributed by just one ee. |
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er's perspective, which offers greater flexibility, SEP or SiMPLE? |
SEP. Contribs are discretionary in any given year, and the percentage of compensation contributed can change also. Thus, the ER who experiences fluctuating earning si not burdoned by obnligation to make retiremtn paymetn sin period of business disteress. In contrast, SIMPLE plan obligates employer to make matching contribution. |
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1. Which one of the following employees could make a fully deductible contribution to a traditional IRA account? a. Sam, married no company plan, wife contributes to her plan; AGI is 182k b. Leah, single and ahd only earnings in her company plan during the year; AGI is 195k c. John, married, no company plan, wife DB plan w/ er; AGI is 200k |
Leah, who is single and had only earnings in her company plan during the year; her AGI is $195,000. Leah is not an active participant, so there is no AGI limitation for her and she can make a fully deductible contribution. Sam could make only a partially deductible contribution, and John is above the spousal phaseout range and cannot deduct any amount of a potential contribution. In both Sam’s and John’s case, their spouses are active participants.
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2. Investing in stocks, bonds, and life insurance is allowed in IRA accounts. tf |
False Investing in life insurance is considered a prohibited transaction, and is not allowed. Investing in life insurance, subject to certain limitations, is allowed in qualified plans. |
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3. If the only additions to a participant’s account during the year are earnings and forfeitures, then he or she would not be considered an “active participant.” tf |
False One is considered an active participant if any “new” money comes into the account, which includes employer and employee contributions, and forfeitures. |
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1. Which of the following are valid exceptions to the 10% early withdrawal penalty for IRA accounts? 1. medical expenses in excess of 5% of AGI2. permanent disability 3. qualified first-time homebuyer 4. qualified secondary and postsecondary education expenses |
II and III only Disability and first-time homebuyers are the exceptions. Medical expenses must be in excess of 10% (7.5% if you or your spouse is 65 or over), not 5%. Qualified education expenses are postsecondary only. |
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2. When calculating a required minimum distribution for an IRA account owner who is living, the Uniform Table is used unless the spouse is more than 10 years younger, in which case the RMD Joint and Last Survivor Table is used.tf |
tru |
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3. Beneficiaries of IRA accounts can use either “fixed term” or “recalculate” the required minimum distribution each year. tf |
False Only surviving spouses have the choice of recalculating the required distribution by returning to the RMD Single Life Expectancy Table each year. All other beneficiaries go to the RMD Single Life Expectancy Table for the first distribution only, and thereafter reduce the amount by “1” each year—what is called “fixed term.” |
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1. Which of the following is not true about Roth IRAs? a. contrib limits are same as traditional IRAs b. In order for a distribution to be considered qualified there is a 5-year holding requirement c. five-year holding period "clock" starts on the day when the first contribution is made d. When a tarditional IRA is converted to a Roth IRA the 10% early withdrawl penalty would not apply, even if the account owner is under age 59.5. |
c. The five-year holding period “clock” starts on the day when the first contribution is made. The five-year holding period “clock” starts on January 1st of the year for which the contribution is made, not on the day that the contribution is made. All other statements are true. |
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2. To determine Roth IRA eligibility it is important to first establish whether an individual is an active participant or not. tf |
False Active participation does not matter concerning Roth IRA eligibility, only income. |
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3. Roth conversion funds could potentially be subject to the 10% early withdrawal penalty. tf |
True Upon conversion there is no 10% early withdrawal penalty; however, if the account owner were to take a distribution of converted funds within five years of the conversion, and is under age 59½ at the time, then the 10% penalty would apply. |
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1. The $260,000 limit for includible compensation does not apply to either the 3% employer matching contribution or the 2% nonelective contribution in SIMPLE IRA plans. tf |
False The $260,000 limit does not apply to the 3% matching contribution; however, it does apply to the 2% nonelective contribution in SIMPLE IRA plans. |
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2. More SIMPLE IRAs are established by employers than SIMPLE 401(k)s. tf |
True SIMPLE IRAs are much more frequently used than SIMPLE 401(k)s. |
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3. SIMPLE IRAs require a mandatory contribution by the employer: either a 3% match (which can be reduced down to 1% in no more than 2 of the last 5 years), or a 2% nonelective contribution. tf |
True These are the employer choices, which are mandatory. One reason that a SIMPLE plan is “simple” is that there are a limited number of choices in setting up the plan. |
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1. SEP plans, since they are IRA accounts for each employee, cannot use Social Security integration. tf |
False SEP plans can use Social Security integration. |
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2. Just like qualified plans, SEPs must be established by year-end in order to be funded for that year.tf
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False One advantage of SEPs is that an employer does not need to establish it by year-end, but can wait as late as the due date of the company’s income tax return, including extensions. |
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3. The maximum contribution percentage allowed for a self-employed individual into a SEP is 20%. tf |
True A self-employed individual would be subject to the Keogh plan rules, and as such is limited to a maximum contribution amount of 20%. |
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1. An important consideration when choosing either a SEP or SIMPLE is whether the ability of employees to defer income is desired. tf |
True SIMPLEs allow employee deferrals and SEPs do not, so this is an important consideration when installing either plan. |
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2. Which of the following is not a correct statement when comparing SIMPLE IRA plans with SEPs? a. SEPs provide more flexibility for the ER b. Simple IRAs establish IRA accts for each EE, whereas a simplified employee pension plan, since it is a pension plan, has a pooled acct c. Neither a SEP nor a SIMPLE is considered to be qualified |
b. SIMPLE IRAs establish IRA accounts for each employee, whereas a Simplified Employee Pension plan, since it is a pension plan, has a pooled account. SEPs are more flexible in that employer contributions are entirely voluntary; there are no minimum employer funding requirements as is the case with SIMPLE plans. Both SIMPLEs and SEPs establish IRA accounts for each participant, so b is false. SEPs are not a classic “pension” plan, but unfortunately the term is used in the plan name. These are IRA accounts and IRAs are not qualified. |
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1. Harry, a frantic 34-year-old, contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal? a. Harry must pay tax on the 2k but there is no penalty b. Harry must pay tax and a 200$ penalty c. Harry does not have to pay any tax or penalty on the 2k distribution |
Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34. All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax-free, then earnings. Also, the IRC rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to taxable income. |
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2. Which one of the following is a correct statement about a Roth IRA? a. an individual can contribute 5500 to a regular IRA and 5500 annualy to a roth ira b. Withdrawls of up to 10k from a Roth IRA for the purchase of a first home can be penalty-free c. If a nonqualifiying distribution is made prior to 59.5 the principal is subject to the 10% penalty, but it is not considered to be taxible inocme d. As w/ conventional IRAs, distributions from a Roth IRA must begin by 4/1 of the year following the year participant reaches age 70.5 |
Withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home can be penalty-free. Withdrawals from a Roth IRA are not penalized under these circumstances if the five-year holding period has been met. |
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Norman and Brunhilda Walkueries, both age 40, are married taxpayers filing jointly. Norman earned $132 this year, and Brunhilda earned $100,000. Brunhilda is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for this tax year. |
$5,500 The maximum deductible contribution to a spousal IRA for Norman is $5,500, and the deductible amount phases out at AGI of $181,000–$191,000 for Norman, who is the nonactive participant spouse. |
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4. James and Doris Stewart will contribute a total of $11,000 to their IRAs for this tax year. They both work outside the home, and they file a joint tax return. James Stewart is a teacher at the local high school and contributes to a TSA. Doris’s employer has no retirement plan. Their adjusted gross earnings for this year will be $106,000. |
$8,250 Doris is entitled to deduct the full $5,500 spousal IRA amount. James is in the phaseout range for active spouses. $116,000 – $106,000 = $10,000; $10,000 ÷ $20,000 phaseout range = 0.5; 0.5 × $5,500 = $2,750; $2,750 + $5,500 = $8,250. Option “a” assumes that neither Doris nor James qualifies for a deduction. |
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5. Charlie Clevins contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year?
a. he mus tpay taxes and a penalty b. he will pay neither taxes nor a penalty c. he only pays ordinary taxes, because roth ira distributions are not subject to a penalty d. he cannot make any withdrawls, because the money has not been in the Roth IRA for five years or longer |
He will pay neither taxes nor a penalty. The distribution is not qualified because Charlie is under age 59½, and he is withdrawing the money before the waiting period of five tax years. None of the withdrawal, however, is included in Charlie’s taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). No penalty applies since the withdrawal is not taxable. |
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Joanie Singleton is a married taxpayer. She and her husband, Johnny, file jointly and have a combined AGI of $141,000. Johnny is covered by his employer’s profit sharing plan. No employer contribution was made for this plan year, but Johnny’s account balance increased by $1,200 due to investment earnings. Joanie does not have a plan where she works. If they contribute $11,000 to their IRAs for this year, what amount, if any, can they deduct? |
$11,000 Because he’s not active, Johnny receives the full $5,500 deduction. The IRA deduction for Joanie is also $5,500, since she is not active. The total deduction is $11,000. |
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7. Lucy received a $1,200 profit sharing contribution this year. Lucy and George are married, filing jointly. George is an artist who had no earnings this year. Their combined AGI for this year is $199,000. How much of their $11,000 IRA contribution can they deduct? |
$0 Lucy’s status is active, since she did receive an annual addition. Their AGI is greater than the phaseout limit, so Lucy cannot make a deductible contribution. George has the full spousal deduction available, but the spousal IRA is also phased out because their AGI is greater than $191,000. Lucy and George’s total deduction is zero. Option “a” correctly states that they do not qualify for any deduction. |
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8. Sally and Joe are married, filing jointly. Their combined AGI is $145,000. Sally and Joe are both active participants in their employers’ plans. After making the maximum deductible IRA contributions, they wish to use the remaining available IRA contribution amounts for contributions to their Roth IRAs. How much will they contribute to their Roth IRAs? |
$11,000 |
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9. Allen Baker, a single taxpayer with AGI of $75,000, is covered by his employer’s profit sharing/401(k) plan. During the current plan year, no employer contribution was made, and Allen did not make any salary reduction contributions to the 401(k) portion of the plan. Allen’s account balance increased by $120 this year, which was attributable to investment earnings of $80 and forfeitures of $40. If he contributes $5,500 to his IRA for this year, what is the amount of his allowable IRA deduction?
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$0 Allen is “active” because of the forfeiture allocation. Since his AGI is over the maximum phaseout amount of $70,000, he is not entitled to any deduction. |
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10. John Jonglemeier is married and his spouse is not employed. They file jointly and their AGI is $107,000. Each has contributed $5,500 to an IRA. John waived participation in the defined benefit plan at work when he became eligible. What is the amount of their IRA deduction?
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$7,980 $116,000 – $107,000 = $9,000; ($9,000 ? $20,000) ? $5,500 = a $2,475 deduction for John since he is active. Even though he waived participation, being eligible for the defined benefit plan makes him active. His wife is allowed the spousal deduction of $5,500. Their total deduction is $7,975, which is rounded up to the nearest $10. |
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11. Which one of the following is not exempt from the 10% penalty tax on premature distributions from an IRA? a. a series of substantially equal periodic payments b. a distribution following the owner's death c. a distribution to a 55 y.o employee following separation from service d. a dsitribution following disability e. a distribution for medical expenses not in excess of deductible medical expenses |
c. a distribution to a 55-year-old employee following separation from service This type of distribution is not exempt from the 10% penalty for an IRA. The exemption does apply to qualified plan distributions, however. |
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12. Ken and Barbie file jointly. Both work, and their combined AGI is $103,000. This year, Ken’s profit sharing account earned over $4,000, but the company made no contributions, Ken made no contributions, and there were no forfeitures. Barbie declined to participate in her company’s defined benefit plan because she wants to accumulate and manage her own retirement money. (Her current accrued benefit at age 65 under the plan is $240 per month.) How much of their $11,000 IRA contribution can they deduct?
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$9,080 Barbie’s status is active. She cannot decline active status, even if she declines participation in a defined benefit plan. Ken’s status is not active since he received no annual additions. His available IRA deduction is $5,500 and hers is $116,000 – $103,000 = $13,000; ($13,000 ? $20,000) ? $5,500 = $3,575, which we round up to the nearest $10. |
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13. George and Mabel Treetops each put $5,500 into their respective IRAs. George’s employer does not provide a qualified retirement plan. Mabel participates in a 401(k) plan at work. Their AGI is $183,000, and they file jointly. How much of their IRA contributions will be deductible?
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$4,400 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 $181,000 and $191,000. With a combined AGI of $180,000, George Treetops would be able to deduct $191,000 – $183,000 = $8,000; ($8,000 ? $10,000) ? $5,500 = $4,400. |
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14. The “required beginning date” (RBD) for IRA distributions is which one of the following?
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April 1 of the year following the year in which age 70½ was attained
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15. Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. tf |
True Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. |
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16. A person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead. tf |
True A person may always choose not to deduct their IRA contribution. |
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17. For purposes of calculating the amount an individual may contribute to an IRA, alimony received is considered to be earned compensation. tf |
True For IRA purposes, alimony is earned income. |
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18. Jane Pascheon has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $500 on December 31, 2009. Any distribution she takes after January 1, 2014, will meet the five-year requirement. tf |
True The clock started on January 1, 2009, so five years will have elapsed on January 1, 2014. 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. |
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19. Which of the following employer contribution choices would not be allowed in a SIMPLE IRA plan? a. 100% match on the first 3% of ee compensation b. 100% match on first 2% c. 2% nonelective contribution d. 3% nonelective contribution |
d 3% nonelective contribution Employers must match 3% of compensation, but can reduce it in two of five years to no lower than 1%, so option 2 is possible. The only nonelective choice is 2% of compensation. |
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20. Priscilla works for Acme Motors, which offers a SIMPLE IRA plan with a 3% employer match. Priscilla is expected to earn $40,000 this year, and is trying to pay down debt that she has so she is only going to contribute $500 to the SIMPLE plan this year. What is the contribution total that will be deposited into the plan for her this year?
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$1,000 The employer will match dollar-for-dollar the first $1,200 that Priscilla contributes (3% of $40,000). Since she is only contributing $500, then the company will only contribute $500 for a total of $1,000. In effect Priscilla is “leaving money on the table.” |
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21. Employers can establish SIMPLE IRA plans up until December 31st for that calendar year. tf |
False Employers have until October 1st to establish a plan for that calendar year. This is to allow plenty of time in order for employees to receive the required 60-day notice and time frame in which to decide if they want to participate in the plan or not. |
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22. The maximum employee deferral limit for SIMPLE IRAs is $12,000, with an age 50 catch-up of $2,000 also available. tf |
False The deferral amount is $12,000, but the age 50 catch-up is $2,500, not $2,000. |
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23. Which one of the following employees could not be excluded from participating in a SEP? a. Jon, 23, started w/ company last year and amkes 15k part time b. Vince, 40, worked for the co up until 5 years ago, and recently rehired again part time c. Victoria, 37, who staretd w/ the company four years ago and makes at least 1000 each yearh working during the xmas hollidays d. James, 50, who has been working full time for two years and makes 75k |
c Victoria, age 37, who started with the company four years ago and makes at least $1,000 each year working during the Christmas holidays The minimum eligibility requirements for a SEP are (1) attainment of age 21, (2) compensation of at least $550, and (3) performing services for at least three of the last five years. Only Victoria meets all three requirements; the other employees do not have enough service. |
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24. The maximum contribution to a SEP for an owner of a sole proprietorship is 20%. tf |
True If the business is unincorporated (and you are working with a sole proprietor or greater than 10% owner of a partnership) then the Keogh rules apply. If 25% (the maximum allowed) is being contributed on behalf of the common-law employees, then only 20% can be contributed on behalf of the owner. |
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25. A SEP will always allow a potentially higher overall contribution amount than a SIMPLE for an employee, regardless of income level. tf |
False Although SEPs allow up to 25% of compensation to be deferred on behalf of employee, a lower-paid employee could benefit more from a SIMPLE, since the employee is allowed to defer income into the SIMPLE plan, and is not limited to just 25% of compensation. For example, you could have an employee earning $12,000, and he or she could defer all of it into the SIMPLE plan, whereas if the employer contributed to a SEP the contribution amount would only be $3,000 (25% of $12,000). |
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26. Salary reduction SEPs, called SARSEPs, may still exist because they were grandfathered in, but no new plans have been allowed to be established since 1997. tf |
True SARSEPs had to have been established prior to 1997, and were replaced by SIMPLE plans. |
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27. Any beneficiary of an IRA account can now roll over the account into an IRA in their own name. tf |
False Only surviving spouses have this alternative. Other beneficiaries can roll over the account into an IRA, but it is not in their name alone, it would be set up as a beneficiary account, such as “Frank Chaos as beneficiary of Frieda Chaos.” |
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28. Which one of the following rules does not apply to Roth IRAs? a. participant must have earned income b. participant must meet required minimum distributions c. contributions are not limited or phased out by active participation d. qualified distributions are tax-free |
b The participant must meet required minimum distribution rules. The required minimum distribution rules do not apply to Roth IRAs. |
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29. Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Since taxes have already been paid on these amounts, there are no taxes—either income taxes or penalty taxes—even if the distribution is not qualified. tf |
False There are no taxes of any kind on the contribution amounts withdrawn. However, on any conversion amounts withdrawn there can be a 10% early withdrawal penalty tax if the account owner is under age 59½. |
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30. If an individual has both a Roth 401(k) and a Roth IRA account, they will each have their own five-year “clocks.” tf |
True Each Roth 401(k) and Roth IRA account has its own five-year “clock.” |
