Unit 3: Traditional and Roth IRAs and Employee Benefits  

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

a)       If the taxpayer anticipates being in a lower tax bracket at date of distribution from the Roth IRA, it generally makes sense to convert.

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

c)       It is generally advantageous if the converted assets will remain in the Roth IRA for a relatively short period of time before withdrawal.

d)       If the taxpayer files as married filing separately and thereby splits income, it generally makes sense to convert.

 

2. Which of the following statements is NOT correct regarding the conversion of a traditional IRA to a Roth IRA in 2014?

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

b)       An amount in a traditional IRA may be transferred to a Roth IRA maintained by the same trustee.

c)       An amount distributed from a traditional IRA can be rolled over to a Roth IRA within 60 days of the distribution.

d)       An amount in a traditional IRA may be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA.

 

3. Carol has been researching IRAs and learning of the advantages and disadvantages of using an IRA as a retirement savings vehicle. Which of the following statements regarding an IRA is(are) CORRECT?
I. When the investments in an IRA consist solely of securities, net unrealized appreciation (NUA) treatment of a lump-sum distribution is available.
II. Eligible individuals may contribute up to $5,500 to an IRA and an additional $1,000 when age 50 or over.
III. Certain taxpayers may be eligible for an income tax credit for contributions to a traditional IRA but not a Roth IRA.
IV. Earnings on assets held in an IRA are not subject to federal income tax until withdrawn from the account. (Points : 3)

a)        I, II, III, and IV

b)        II only

c)       I and III

d)       II and IV

 

4. Which of the following statements regarding IRAs is(are) CORRECT?
I. Individual retirement accounts are funded with insurance products.
II. Individual retirement annuities are funded with securities and investment products. (Points : 3)

        a) I only
      
  b) II only
      
  c) Both I and II
      
  d) Neither I nor II

 

5. Roger is 73 years old. He has an AGI of $35,000 of which $10,000 is earned income. What amount can Roger contribute to a traditional IRA and/or a Roth IRA in 2014?

        a) Roger can contribute $6,500 to a Roth IRA only.
      
  b) A total of $6,500 in contributions may be allocated between the traditional IRA and the Roth IRA.
      
  c) Roger can contribute $6,500 to either a traditional IRA or a Roth IRA.
      
  d) Roger can no longer contribute to any IRA, as he is older than 70½ in 2014.

 

6. Which of the following statements regarding prohibited transactions by a fiduciary or an individual associated with traditional IRA accounts are CORRECT?
I. 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 1st day of the year.
II. 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 1st day of the tax year.
III. Selling property to an IRA by a fiduciary or an individual owner of the IRA is not prohibited.
IV. A 50% penalty will be assessed against an IRA owner who borrows money against her IRA.

        a) I, III, and IV
      
  b) I, II, and III
      
  c) I and II
      
  d) II and III

 

7. Which of the following is considered to be earned income for purposes of making contributions to a traditional IRA?

        a) Rental income
      
  b) Alimony received from an ex-spouse
      
  c) Interest income
      
  d) Pension income

 

8. In 2014, Nina and Bob reported the following items of income:

 

Nina

Bob

Total

Salary

$40,000

$ 0

$40,000

 

Interest Income

$  1,000

$ 200

$  1,200

Alimony received (prior to marriage)

$ 0

$10,000

$10,000

Total

$41,000

$10,200

$51,200


Neither Nina nor Bob is covered by a qualified retirement plan. They were married in December 2014. Assuming they file married filing jointly and are both age 45, what is the maximum combined tax-deductible amount, if any, that they can contribute to their traditional IRAs?

        a) $0
      
  b) $5,500
      
  c) $6,500
      
  d) $11,000

 

9. Which of the following persons could make tax-deductible contributions to a traditional IRA regardless of their adjusted gross income (AGI)?

        a) A person who participates in a Section 457 plan
      
  b) A person who participates in a SEP IRA
      
  c) A person who participates in a Section 401(k) plan
      
  d) A person who participates in a Section 403(b) plan

 

10. Regarding an IRA, all of the following are prohibited transactions EXCEPT  

       a)  accepting rollovers to the IRA from a qualified plan
      
 b)  borrowing money from the IRA
      
 c)  using the IRA as security for a loan
      
 d)  buying property for personal use with IRA funds

 

11. What is the taxable character of distributions that are made from a Roth IRA? 

        a) Tax-deferred income when converted to a traditional IRA
      
  b) Capital gain income if the distribution meets the required holding period
      
  c) Tax-free income if the distribution meets the holding period and qualified distribution requirements
      
  d) Ordinary income if the taxpayer fails to make required minimum distributions

 

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

        a) To allow the owner to continue making contributions to a traditional IRA beyond age 70½
      
  b) To allow the owner to borrow money from the IRA without committing a prohibited transaction
      
  c) To extend the period of tax-deferred earnings beyond the original owner’s lifetime
      
  d) To enable the owner to take distributions before age 59½ without paying the 10% penalty

 

13. When is a traditional IRA appropriate?
I. A taxpayer wants to defer taxes on investment income.
II. Sheltering current compensation or earned income from taxation is a taxpayer’s goal.
III. A taxpayer wishes to accumulate assets for retirement purposes.
IV. Traditional IRAs are seen as an important supplement or alternative to a qualified pension or profit-sharing plan.  

       a)  I only
      
 b)  III only
      
 c)  II and III
      
d)  I, II, III, and IV

 

14. Which of the following statements regarding prohibited transactions in an IRA (account or annuity) is (are) CORRECT?
 
I. Generally, if an individual or the individual’s beneficiary engages in a prohibited transaction with the individual’s IRA at any time during the year, the IRA will not be treated as an IRA as of the 1st day of the year.
II. An individual (or beneficiary) must include the fair market value of all (or part, in certain cases) of the IRA assets in gross income for the year in which a prohibited transaction is discovered.  

        a) I only
      
  b) II only
      
  c) Both I and II
      
  d) Neither I nor II

 

15. Martha, age 65, opened a traditional IRA 20 years ago that has been funded solely with deductible contributions. The only assets in the IRA are individual stocks. If she withdraws $10,000 from the IRA this year, how will the distribution be taxed?  

        a) The distribution will be tax free.
      
  b) The distribution will be taxed as ordinary income.
      
  c) The 10% penalty tax will apply on the distribution and the entire distribution will be taxed as ordinary income.
      
  d) The distribution will be taxed at long-term capital gains rates.

 

16. A single taxpayer, age 54, retired 2 years ago and is receiving a pension of $600 per month from her previous employer’s qualified pension plan. She has recently taken an employment position in a small CPA firm that has no pension plan. She will receive $80,000 annually in compensation from the CPA firm as well as $7,200 from her pension plan each year. How much can she contribute, if any, to a deductible traditional IRA in the year 2014?

        a) $0
      
  b) $4,000
      
  c) $5,500
      
  d) $6,500

 

17. Which type of IRA contributions may be tax deductible to a taxpayer?
I. Contributions to traditional IRAs
II. Contributions to Roth IRAs

        a) I only
      
  b) II only
      
  c) Both I and II
      
  d) Neither I nor II

 

18. 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

        a) a real estate investment trust (REIT)
      
  b) corporate bonds
      
  c) stock in Bottle, Inc., which is an S corporation
      
  d) mutual funds

 

19. Which of the following is NOT an exception to the 10% premature distribution from a traditional IRA?  

a)       To pay acquisition costs of a first home for the participant, spouse, child, or grandchild of the participant or spouse, up to a $10,000 lifetime maximum

b)       For medical expenses exceeding 2% of the IRA owner’s AGI

c)       To pay higher education costs for the taxpayer, spouse, child, or grandchild

d)       To pay health insurance premiums if the owner is unemployed (the participant must file for unemployment compensation before this exception applies)

 

20. Which of the following investments may be held in an IRA account?  

        a) U.S. gold coin
      
  b) Canadian gold coin
      
  c) German silver coin
      
  d) South African Krugerrand

 

 

  

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