Retirement: 5 Traditional, Roth and SIMPLE IRAs Flashcards Preview

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Flashcards in Retirement: 5 Traditional, Roth and SIMPLE IRAs Deck (160)
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1

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

An IRA _____ a qualified plan and _____ covered by the Employee Retirement Income Security Act (ERISA)

a. is

b. is not

a. is not

2

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

The owner ____ borrow from his or her IRA

a. may

b. may not

b. may not

3

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Example. Conrad, a 45-year-old single individual who was not covered by an employer-sponsored retirement plan, figured that his taxable income for this year would be $60,000. Because he was eligible to contribute $5,500 to an IRA that year and deduct that sum from his taxable income, he did so, thereby lowering his taxable income to $54,500. His federal marginal tax rate was 25%, so this reduced his tax bill that year by

a. $375

b. $1,375

c. $2,375

b. $1,375 ($5,500 × 25%).

4

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Example. Ramona had $20,000 in corporate bonds in her IRA. These earned $1,400 in interest this year. Had they been in her regular investment account, the earnings would have been reduced by her normal tax rate of 25%, or $____.

a. $350

b. $450

c. $550

a. $350

But because the earnings occurred within her IRA, no taxes were incurred and all of her earnings were reinvested to earn even more the next year

5

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

An individual (taxpayer) must have compensation (earned income or alimony) and be under age 70½ to be eligible to establish a Traditional IRA

a. True

b. False

a. True

6

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

An individual (taxpayer) must have compensation (earned income or alimony) and be under age 70½ to be eligible to establish a Roth IRA

a. True

b. False

b. False

An individual who has compensation (earned income or alimony) and is under or over age 70½ is eligible to establish a Roth IRA.

7

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Distribution of IRA accumulations must begin by _____ 1 of the year following the year in which the owner reaches age 70½.

a. April

b. May

c. June

a. April

8

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

If an excess contribution is made to an IRA, then a _% penalty tax will apply.

a. 6%

b. 10%

C. 20%

a. 6%

9

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Earned income, according to the IRC definition, includes which of the following:

a. unemployment compensation

b. passive income, such as interest, dividends, and pension distributions

c. capital gains

d. taxable alimony

e. deferred compensation (until it is taxed)

d. taxable alimony.

10

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

A plan that complies with Internal Revenue Code requirements (such as IRC Section 401 rules) and
ERISA requirements.

The above is a description of which of the following:

a. Qualified plan.

b. Simplified Employee Pension (SEP).

c. Salary Reduction Simplified Employee Pension (SARSEP).

d. Savings Incentive Match Plan for Employees (SIMPLE) IRA

e. Section 403(b) Plan

a. Qualified plan.

11

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

A pension plan established by a business on behalf of its employees; contributions are deposited into the
individual retirement accounts (IRAs) of the employees. Because it is not considered a qualified plan, it is not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, it is required to comply with other more lenient requirements set forth in the IRC
Section 408(k).

The above is a description of which of the following:

a. Qualified plan.

b. Simplified Employee Pension (SEP).

c. Salary Reduction Simplified Employee Pension (SARSEP).

d. Savings Incentive Match Plan for Employees (SIMPLE) IRA

e. Section 403(b) Plan

b. Simplified Employee Pension (SEP).

12

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

This is a plan that is available only to companies with 25 or fewer employees. What distinguishes it from other plans is the opportunity for employees to elect to contribute a portion of their pay on a pretax basis. Under current law, new accounts cannot be established. Those established prior to 1997, however, can continue to be funded. Similar to a SEP, they are not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, it is required to comply with other more lenient requirements set forth in IRC Section 408(k).

The above is a description of which of the following:

a. Qualified plan.

b. Simplified Employee Pension (SEP).

c. Salary Reduction Simplified Employee Pension (SARSEP).

d. Savings Incentive Match Plan for Employees (SIMPLE) IRA

e. Section 403(b) Plan

c. Salary Reduction Simplified Employee Pension (SARSEP).

13

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

A retirement plan established by a business on behalf of its employees; contributions are deposited into the individual retirement accounts (IRAs) of the employees. It allows employees to make elective contributions and requires employers to make matching contributions or non-elective contributions. Again, because they are not qualified plans, they are not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, they are required to comply with other more lenient requirements set forth in IRC Section 408(p)

The above is a description of which of the following:

a. Qualified plan.

b. Simplified Employee Pension (SEP).

c. Salary Reduction Simplified Employee Pension (SARSEP).

d. Savings Incentive Match Plan for Employees (SIMPLE) IRA

e. Section 403(b) Plan

d. Savings Incentive Match Plan for Employees (SIMPLE) IRA

14

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

A retirement plan that allows an employee to defer compensation and defer taxes on both that compensation and its earnings. This plan is sometimes called a tax-sheltered annuity (TSA). Employers may make additional contributions. These plans are available only to employees of public school systems and tax-exempt organizations specified in the Internal Revenue Code. This plan is also not a qualified plan and is not required to meet the stringent requirements of the Internal Revenue Code and ERISA that apply to qualified plans; however, it is required to comply with certain ERISA requirements.

The above is a description of which of the following:

a. Qualified plan.

b. Simplified Employee Pension (SEP).

c. Salary Reduction Simplified Employee Pension (SARSEP).

d. Savings Incentive Match Plan for Employees (SIMPLE) IRA

e. Section 403(b) Plan

e. Section 403(b) Plan

15

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Phaseout Ranges for Deductible IRAs

Upper Limit
- ?
= Difference
/ Phaseout Range
= % reduction
* $5,500
= Deductible amount

a. Lower Limit

b. AGI

c. Gross income

b. AGI

Ex.

$118,000 Upper Limit
- $108,000 AGI
= $10,000
/ $20,000 Phase out range
= 50%
* $5,500
= Deductible amount

16

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Example. In 2016, Martin and Edith’s adjusted gross income will be $108,000. Edith is an active participant in her employer’s qualified retirement plan, but Martin is not. They are joint tax filers. Edith may make a deductible IRA contribution of up to:

The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k

a. $2,750

b. $3,750

c. $4,750

$2,750, computed as follows:

$118,000 Upper Limit
- $108,000 AGI
= $10,000
/ $20,000 Phase out range
= 50%
* $5,500
= $2,750 Deductible amount

17

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

What criteria are used to determine active participant status within specific retirement plans?

An individual is an active participant if the individual is eligible under plan provisions, even if the individual elected not to participate, failed to make mandatory contributions, or failed to perform the minimum service required.

a. defined benefit plan

b. profit sharing, 401(k), or stock bonus plan

c. money purchase plan or target plan

a. defined benefit plan

18

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

What criteria are used to determine active participant status within specific retirement plans?

An individual is an active participant if the individual’s account received an employer contribution, an employee contribution, or a forfeiture allocation.

a. defined benefit plan

b. profit sharing, 401(k), or stock bonus plan

c. money purchase plan or target plan

b. profit sharing, 401(k), or stock bonus plan

19

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

What criteria are used to determine active participant status within specific retirement plans?

An individual is an active participant if the individual’s account received a contribution or forfeiture allocation, regardless of whether the individual was employed at any time during the taxable year.

a. defined benefit plan

b. profit sharing, 401(k), or stock bonus plan

c. money purchase plan or target plan

c. money purchase plan or target plan

20

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Kathy Duggins is a 37-year-old single filer who contributed $5,500 to an IRA for this tax year. She will earn $105,000 from her employment at Sandstone Products, Inc. during the year. Sandstone Products provides a 401(k) plan, but in the three years she has been with the company, Kathy has chosen not to participate in the plan.

Is she eligible to make the $5,500 IRA contribution for this year?

a. Yes

b. No

a. Yes

She has earned income and is under age 70½.

21

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Kathy Duggins is a 37-year-old single filer who contributed $5,500 to an IRA for this tax year. She will earn $105,000 from her employment at Sandstone Products, Inc. during the year. Sandstone Products provides a 401(k) plan, but in the three years she has been with the company, Kathy has chosen not to participate in the plan.

Is she an active participant?

a. Yes

b. No

b. No

Although her employer provides a 401(k) plan, she is not
participating and has not participated in the plan; therefore, she has no account and no “annual additions.”

22

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Kathy Duggins is a 37-year-old single filer who contributed $5,500 to an IRA for this tax year. She will earn $105,000 from her employment at Sandstone Products, Inc. during the year. Sandstone Products provides a 401(k) plan, but in the three years she has been with the company, Kathy has chosen not to participate in the plan.

Is she eligible to deduct the full contribution?

a. Yes

b. No

a. Yes

Since she is not an active participant, she is not subject to the deduction phaseouts, and the $5,500 contribution will be fully deductible.

23

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Elmo Hoffman is a 49-year-old single filer. He contributed $5,500 to his IRA for this tax year. His salary from World-Wide Quality Shoes, Inc. (WWQS)
is $86,600 this year. His AGI for the year is $105,000. He has worked at WWQS for 20 years. WWQS provides a defined benefit plan for all employees who have at least one year of service, but Elmo has waived participation in the plan.

Is Elmo eligible to make the $5,500 contribution to his IRA?

a. Yes

b. No

a. Yes

He has earned income and is under age 70½.

24

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Elmo Hoffman is a 49-year-old single filer. He contributed $5,500 to his IRA for this tax year. His salary from World-Wide Quality Shoes, Inc. (WWQS)
is $86,600 this year. His AGI for the year is $105,000. He has worked at WWQS for 20 years. WWQS provides a defined benefit plan for all employees who have at least one year of service, but Elmo has waived participation in the plan.

Is he an active participant?

a. Yes

b. No

a. Yes

He is considered an active participant because he is eligible under the plan provisions, even though he has chosen not to participate.

25

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Elmo Hoffman is a 49-year-old single filer. He contributed $5,500 to his IRA for this tax year. His salary from World-Wide Quality Shoes, Inc. (WWQS)
is $86,600 this year. His AGI for the year is $105,000. He has worked at WWQS for 20 years. WWQS provides a defined benefit plan for all employees who have at least one year of service, but Elmo has waived participation in the plan.

Is he eligible to deduct the full contribution?

The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k

a. Yes

b. No

b. No

None of the contribution is deductible because he is an active participant and has AGI above the phaseout range.

26

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Susan Jones, 39, is single and an active participant in her employer’s qualified plan. Her adjusted gross income (AGI) for this year is $62,000, and she will contribute $5,500 to her IRA for this tax year. What amount is deductible?

The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k

a. $3,950 is deductible.

b. $4,950 is deductible.

c. $5,950 is deductible.

b. $4,950 is deductible.

$71,000 Upper Limit
- $62,000 AGI
= $9,000 Phase out range
/ $10,000
= 90%
* $5,500
= $4,950 is deductible

27

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Mark Smith and his wife, Betty, both work, and they file a joint return. He is an active participant in his employer’s qualified plan. She is not an active participant in her employer’s qualified plan. Their AGI for this year is $100,000 and they will make an $11,000 IRA contribution for this year. What TOTAL amount is deductible?

The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k

a. $3,950 is deductible.

b. $4,950 is deductible.

c. $10,450 is deductible.

c. $10,450 is deductible.

$4,950 is deductible for Mark. The full amount, $5,500, is
deductible for Betty. Their total deduction is $10,450.

$118,000 Upper Limit
- $100,000 AGI
= $18,000
/ $20,000 Phase out range
= 90%
* $5,500
= $4,950 is deductible

28

Retirement 5-1,2: Basics of IRAs and Traditional IRAs

Bobby Brinson and his unemployed wife, Laura, file a joint return. He is an active participant in his employer’s qualified plan. Laura is not an active participant, and both are under age 50. Their AGI is $140,000, and they will contribute $10,000 to their IRAs for this year. What amount is deductible?

The 2016 limits are:
$61k - $71k
$98k - $118k
$184 - $194k

a. $3,950 is deductible.

b. $4,950 is deductible.

c. $5,500 is deductible.

c. $5,500 is deductible.

$140,000 > $118,000; therefore, Bobby has no deduction.
Laura can deduct $5,500 as a spousal IRA contribution. Their total deduction is $5,500. Notice it is best to figure their AGI, and then deal with each spouse separately. Combine the results for the total.

29

Retirement 5-3: Traditional IRA Distributions

Penalty Taxes on IRA and Qualified Plan Distributions

Minimum distribution requirement

a. 6%

b. 10%

c. 50%

c. 50%

30

Retirement 5-3: Traditional IRA Distributions

Example. Ira Bigg turned age 70 on August 4, 2011; thus, he attained age 70½ on February 4, 2012, but he continued to work. He retired on October 7, 2013. His required beginning date for his IRA is

a. April 1, 2013

b. October 7, 2013

c. April 1, 2014

a. April 1, 2013 (i.e., April 1 of the year following the year in which he reached age 70½).