CHAPTER

IRAS AND SEPS

DISCUSSION QUESTIONS
1.

What is the limit on contributions to an IRA for 2014?
The following chart depicts the combined contribution limits for traditional and Roth
IRAs. In addition, individuals who have attained the age of 50 before the end of the current taxable year are also eligible to make catch-up contributions, thereby increasing the annual IRA contribution limits.
Year
2014

Annual
Limit
$5,500

Catch-Up Limit
(for those over age 50)
$1,000

Maximum
Contribution
$6,500

2.

3.

What is a spousal IRA?
An IRA for a spouse who has no earned income is generally referred to as a spousal IRA and can be established provided the other spouse has sufficient earned income. The necessary level of compensation is equal to the total amount that is to be contributed to both IRAs. Spousal IRAs can be established up to the contribution limit for the year in question ($5,500 for 2014) the catch-up contribution is also available for those individuals age 50 and over).

4.

Why is age 70½ significant to traditional IRA contributions?
Contributions to a traditional IRA are not permitted in the year, or any years after the year, in which an individual attains age 70½. This limitation for traditional IRAs does not apply to Roth IRAs. Individuals who have sufficient earned income may continue to contribute to a Roth IRA after the attainment of age 70½.

5.

132

List items of income that are considered earned income for purposes of IRA contributions.
Earned income includes any type of compensation where the individual has performed some level of services for an employer or is considered self-employed. Compensation includes earnings for W-2 employees or those individuals who are self-employed. In addition, earned income also includes alimony that is received by the taxpayer.

How are excess contributions to an IRA penalized?
Contributions that exceed the limits are subject to an excise tax of six percent. This penalty is charged each year that the excess contribution remains in the IRA. The taxpayer can avoid the excise penalty by withdrawing the excess contribution and the earnings attributable to the excess contributions by the due date of the federal income tax return (including extensions). These excess contributions rules and the penalty also apply to Roth IRAs.

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6.

Discuss the ability to deduct a contribution made to a traditional IRA given a person who is not covered by a qualified retirement plan.
An individual who is not covered and whose spouse is not covered by a qualified plan or other retirement plan at his place of employment, does not have an income limit for purposes of deducting his IRA contributions. Therefore, if an individual earns a substantial amount of income and is not covered by a qualified plan, then the individual may fully deduct his contribution (within the limit) to his IRA account.

7.

Discuss the ability to deduct a contribution made to a traditional IRA when an employee is covered by a qualified retirement plan.
For individuals or married couples filing jointly who are considered active participants of a qualified plan or other retirement plan, there is an income test, utilizing a phaseout to determine deductibility of the IRA contribution. If the taxpayer’s AGI is greater than the upper limit of the phase-out, no deduction is permitted. If the taxpayer’s AGI is less than the lower limit of the phase-out, then a full deduction is permitted. If the taxpayer’s AGI is between the limits, then the deduction is ratably phased out.

8.

Discuss the ability to deduct a contribution made to a traditional IRA given an employee covered by a qualified retirement plan who has a spouse who is not covered by a qualified retirement plan.
Simply because one spouse is covered by a qualified plan does not prohibit the other spouse from deducting a contribution to a traditional IRA. However, this ability to deduct is phased out for combined AGI between $181,000 and $191,000 and is completely phased out for AGI above $191,000.

9.

Define active participant status for purposes of deducting IRA contributions.
The deductibility of IRA contributions may be reduced if the taxpayer is an active participant in a retirement plan. An active participant is an employee who has made contributions to or has accrued benefits in any the following types of plans:
• qualified plans,
• annuity plans,
• tax sheltered annuities (403(b) plans),
• certain government plans (except 457 plans),
• simplified employee pension plans (SEPs), or
• simple retirement accounts (SIMPLEs).

10. What are the minimum distribution rules for traditional IRAs?
IRA distributions can be taken at anytime, but the required minimum distribution rules state that the distributions must (except Roth IRAs) begin by April 1st of the year following the year in which the owner attains the age of 70½. The minimum distribution rules require that IRA owners begin receiving distributions from their accounts based on their life expectancy. These rules prohibit a taxpayer from continuing to accrue tax-deferred earnings on the entire balance within their traditional IRA indefinitely.

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11. When is the early withdrawal penalty applicable to traditional IRAs?
The government encourages taxpayers to leave funds in their IRAs until retirement by imposing a 10 percent early withdrawal penalty for distributions prior to age 59½.
Therefore, IRA distributions before the age of 59½ will be subject to the 10 percent penalty unless an exception applies. The following chart summarizes the exceptions to the 10 percent withdrawal penalty for distributions from IRAs or qualified plans.
Applies to Distributions from:

Both Qualified Plans & IRAs

Only Qualified Plans

Only IRAs

Exception to 10% Early Withdrawal Penalty
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•

Death
Attainment of age 59½
Disability
Substantially equal periodic payments (§ 72(t))
Medical expenses that exceed 10% of AGI
Rollover
Because of an IRS tax levy
Certain distributions to qualified military reservists called to active duty
Qualified Domestic Relations Order (QDRO)
Attainment of age 55 and separation from service
Public safety employee who separates from service after age 50
Dividend pass through from an ESOP
Higher education expenses
First time home purchase (up to $10,000)
Payment of health insurance premiums by unemployed

12. How do individual retirement annuities differ from a traditional IRA account?
An individual retirement annuity is different from a traditional IRA account because it is an annuity contract or endowment contract issued by an insurance company. In addition, it must meet certain requirements regarding transferability, nonforfeitability, premiums, and distributions.
13. Compare and contrast a traditional IRA to a Roth IRA.
Roth IRAs are very attractive because, although the contributions to a Roth IRA are not currently deductible, qualified distributions from Roth IRA accounts consist solely of non-taxable income. In other words, the tax-deferred earnings may be distributed without ever being subjected to income tax. Additionally, Roth IRAs may be funded after the owner attains the age of 70½ and are not subject to the required minimum distribution rules during the owner’s life.
Roth IRAs and traditional IRAs share many of the same features and characteristics.
The contribution limitations that apply to traditional IRAs also apply to Roth IRAs, and this limit is an aggregate limit that includes contributions to both types of IRAs.
Roth IRAs and traditional IRAs also share the same prohibited transaction rules, permitted investment rules, and definition of earned income.

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14. How does the definition of earned income for a Roth IRA compare with the definition of earned income for a traditional IRA?
Both Roth IRAs and traditional IRAs share contribution limits and use the same definition for earned income. However, taxpayers may only contribute to a Roth IRA if they fall within the prescribed income limits. For single individuals, the limit, based on AGI, ranges from $114,000 to $129,000. If a single taxpayer’s adjusted gross income is below
$114,000, then a full contribution can be made to a Roth IRA. If the taxpayer’s AGI exceeds $129,000, then the taxpayer may not contribute to a Roth IRA. If the taxpayer’s AGI falls between the limits, then the contribution limit is based on a phase-out calculation. For married taxpayers filing jointly, the AGI limit ranges from $181,000 to
$191,000, so a couple (both below the age of 50) filing jointly could contribute
$10,000 to their Roth IRAs for the year 2014 if their income is below $181,000.
15. Identify the 2014 AGI income limits for contributions to a Roth IRA.
Taxpayers can fund Roth IRAs by either making cash contributions or by converting traditional IRAs into Roth IRAs. Dollar limitations prevent contributions beyond certain income levels. As a result, high net worth taxpayers generally cannot establish or fund Roth IRAs. However, Roth IRAs are a proven powerful planning tool for taxpayers within the appropriate income limits. Conversions to a Roth IRA no longer require taxpayers to meet certain AGI limits.
Contribution
AGI Phaseout Limit ($)
Single
Married Filing Jointly
Married Filing Separate

$114,000 – $129,000
$181,000 – $191,000
$0,000 – $10,000

* Under TIPRA 2005, the Conversion AGI Limit was eliminated for tax years after 2009.

16. What are the income limits for converting a traditional IRA to a Roth IRA?
After December 31, 2009 there are no income limits for a traditional IRA conversion to a Roth IRA.
17. How can the assets of a qualified plan be converted into a Roth IRA?
In the past, conversion of assets from a qualified plan to a Roth IRA required that the assets first be converted to a traditional IRA. Then the assets could be converted from the traditional IRA to the Roth IRA. Under the Pension Protection Act of 2006, direct rollovers from qualified plans to Roth IRAs are allowed after 2007.

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18. What is a “qualified distribution” from a Roth IRA?
A qualified distribution is a distribution from a Roth IRA that satisfies both of the following tests:
1. The distribution must be made after a five-taxable-year period (which begins January 1st of the taxable year for which the first regular contribution is made to any
Roth IRA of the individual or, if earlier, January 1st of the taxable year in which the first conversion contribution is made to any Roth IRA of the individual), and
2. The distribution satisfies one of the following requirements:
•
Made on or after the date on which the owner attains the age 59½; or
•
Made to a beneficiary or estate of the owner on or after the date of the owner’s death; or
•
Is attributable to the owner being disabled; or
•
For first time home purchase (lifetime cap of $10,000 for first time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years).
19. How is a nonqualified distribution from a Roth IRA taxed?
Any amount distributed from an individual’s Roth IRA that is not a qualified distribution is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category):
• From regular contributions (i.e., the $5,500 for 2014);
• From conversion contributions, on a first-in-first-out basis; and then
• From earnings.
The significance of this distribution ordering is for distributions that are not qualified distributions. In the event a distribution is not a qualified distribution, the first layer will be return of adjusted basis (contributions), followed by conversion contributions that have also been included in the individual’s taxable income (because of the conversion). The final layer consists of the tax-deferred earnings within the Roth IRA, which will be included as taxable income.
If an individual takes a distribution that is not a qualified distribution and the amount of the distribution is neither contributed to another Roth IRA in a qualified rollover contribution nor constitutes a corrective distribution, part of the distribution may be includible in the individual’s gross income. The amount included in the owner’s gross income is the amount by which the total of all distributions (qualified or not) taken through the years exceeds the amount of the contributions and conversions to all of the individual’s Roth IRAs. Thus, distributions will generally not be taxable to the extent that total distributions do not exceed total contributions and conversions.
20. What are the minimum distribution rules relating to Roth IRAs?
Roth IRAs may be funded after the owner attains the age of 70½ and are not subject to the required minimum distribution rules during the owner’s life.

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21. What types of investments may be held in an IRA and what investments are specifically prohibited from being held in an IRA?
Although there is great freedom of investment choices, certain types of investments are prohibited and are not allowed to be held within an IRA, including life insurance and collectibles. If either life insurance or collectibles are purchased within an IRA, the value of the purchase is treated as a distribution from the IRA account and is subject to tax and/or penalty. Collectibles include all of the following:
• Any work of art
• Any rug or antique
• Any metal or gem
• Any stamp or coin
• Any alcoholic beverage
22. What types of coins are permitted IRA investments?
U.S. gold, silver, and platinum minted coins, such as American Gold, Silver, and Platinum Eagle coins, are permitted to be held in an IRA account. However, coins of foreign countries, such as South African Kugerands, are considered a collectible and are therefore not permitted. In addition, gold, silver, platinum, and palladium bullion is permitted. 23. Discuss the impact of violating the prohibited transaction rules of an IRA.
If an individual or beneficiary of an IRA engages in any of the following transactions, then the account will cease to be an IRA as of the first day of the current taxable year:
• Sale, exchange, or leasing of any property to an IRA
• Lending money to an IRA
• Receiving unreasonable compensation for managing the IRA
• Pledging the IRA as security for a loan
• Borrowing money from the IRA
• Buying property for personal use (present or future) with IRA funds
24. What are the SEP coverage requirements?
Employers that sponsor SEPs must provide benefits to almost all employees. The requirements for coverage include the following:
• Attainment of age 21 or older;
• Performance of services for three of the last five years; and
• Received compensation of at least $550 during the year.

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25. What employees may be excluded from participation in a SEP?
The participation rules for SEPs mean that an employer must cover all employees who have worked for the company for a period of three years or more and have earned more than $550 during the year. Based on this definition, even part-time employees must be covered. However, the three-year requirement allows the employer to exclude anyone who has not worked for at least three years. Therefore, if a company has high employee turnover, a SEP may be used to exclude the employees who do not remain employed for a period of at least three years.
Employees can also be excluded from participation in a SEP if they are members of any of the following groups:
• Employees covered by a union agreement if their retirement benefits were bargained for in good faith by their union and their employer.
• Nonresident alien employees who have no U.S.-source earned income from their employer. 26. What is the 2014 contribution limit for a SEP?
The limit for contributions to a SEP is the lesser of 25 percent of an employee’s compensation or $52,000 for 2014. As with qualified plans, no more than $260,000 for
2014 of compensation can be considered for purposes of contributions to a SEP. Therefore, the maximum contribution for any employee is $52,000 for 2014. It is important to understand that an employee might receive more than 25 percent of his compensation in a qualified plan through integration or cross-testing, but an employee cannot receive more than 25 percent of his compensation in a SEP.
27. How and when is a SEP established?
SEPs can be established, as well as funded, for a plan year as late as the due date of the federal income tax return in the next year including extensions. Therefore, SEPs can be established for the following entities as late as indicated below:
Entity
Sole proprietorship (Schedule C)

Due date of return

Final Extension

April 15th

October 15th

Partnership (Form 1065)

April 15th

September 15th

Corporation (Form 1120)

March 15th

September 15th

S-Corporation (Form 1120S)

March 15th

September 15th

28. What vesting options are available for a SEP?
Contributions for a SEP are made to IRAs on behalf of employees. As a result there is no vesting for employer contributions. Once the contribution is made to an employee’s
SEP-IRA, the funds within that account belong to the employee.

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29. Compare and contrast a SEP and a profit sharing plan.
Vesting
Part time employees
Set up by year end
Files Form 5500

Profit Sharing Plan
Yes
No
Yes
Yes

SEP
No
Yes
No
No

30. How are the elective deferrals into a SARSEP considered in relation to other salary deferral type plans?
An employee cannot defer more than $17,500 for 2014 of their compensation into a
SARSEP in a single year. However, those taxpayers who have attained the age of 50 by the end of the tax year may make catch-up contributions. The $17,500 for 2014 deferral limit applies to the total elective deferrals the employee makes for the year to a
SARSEP and any of the following plans:
• Cash or deferred arrangement (401(k) plan)
• Salary reduction arrangement under a tax-sheltered annuity plan (403(b) plan)
• SIMPLE IRA plan

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139

MULTIPLE CHOICE PROBLEMS
1.

Which statements are generally correct regarding penalties associated with IRA accounts? 1. Distributions made prior to 59½ are subject to the 10% premature distribution penalty.
2. There is a 50% excise tax on a required minimum distribution not made by
April 1 of the year following the year in which age 70½ is attained.
a. 1 only.
b. 2 only.
c. Both 1 and 2.
d. Neither 1 nor 2.
The correct answer is c.
Statements 1 and 2 are both correct.

2.

David took a lump-sum distribution from his employer’s qualified plan at age 56 when he terminated his service. He rolled over his distribution using a direct rollover to an IRA. Assuming David has met 10-year forward averaging requirements, which of the following is/are correct regarding tax treatment of the transaction? 1. If at age 59 he distributes the IRA, he benefits from 10-year forward averaging. 2. If he rolls the entire IRA to a new employer’s qualified plan, he may be eligible for forward averaging treatment in the future.
3. If he rolls over a portion of the IRA to a new employer’s qualified plan, he may preserve any eligibility for forward averaging on that portion that was rolled over.
4. If David immediately withdraws the entire amount from his IRA, he may benefit from 10-year forward averaging.
a. 2 only.
b. 2 and 3.
c. 2, 3, and 4.
d. 1, 2, 3, and 4.
The correct answer is b.
Statement 1 is incorrect because 10-year forward averaging is only permitted with qualified plans, not IRAs. Statements 2 and 3 are correct. His new employer’s qualified plan may or may not allow him to roll previous distributions into it. Statement 4 is incorrect because 10-year forward averaging is only permitted coming from qualified plans, not distributions from IRAs.

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3.

Robin and Robbie, both age 45, are married and filed a joint return for 2014.
Robbie earned a salary of $90,000 in 2014 and is covered by his employer’s 401(k) plan. Robbie and Robin earned interest of $30,000 in 2014 from a joint savings account. Robin is not employed, and the couple had no other income. On April
15, 2015, Robbie contributed $5,500 to an IRA for himself and $5,500 to an IRA for Robin. The maximum allowable IRA deduction on the 2014 joint return is:
a. $1,500.
b. $4,500.
c. $5,500.
d. $11,000.
The correct answer is c.
The ability to deduct the IRA contribution depends on the individual’s income and whether the individual has a qualified plan. Based on the information provided in the problem, Robin and Robbie have an AGI of $120,000 ($90,000 salary + $30,000 interest income). Since Robbie has a qualified plan, they cannot deduct the contribution for him because his income exceeds the AGI phaseout of $96,000 – $116,000 for
2014. Robin, on the other hand, can deduct her contribution because she does not have a qualified plan and their joint income is less than the $181,000 to $191,000 phaseout. Therefore, Robin’s deduction is $5,500. She can use Robbie’s earned income as her own.

4.

Amy, divorced and age 55, received taxable alimony of $50,000 in 2014. In addition, she received $1,800 in earnings from a part-time job. Amy is not covered by a qualified plan. What was the maximum deductible IRA contribution that
Amy could have made for 2014?
a. $1,800.
b. $2,800.
c. $5,500.
d. $6,500.
The correct answer is d.
The deductible IRA contribution limit is $5,500 for 2014. The additional catch-up amount, for over age 50, is $1,000 for 2014. Alimony counts as earned income for IRA purposes. She is not covered by a qualified plan and therefore is not subject to AGI phaseouts. Therefore the total is $6,500 for 2014.

5.

Which of the following statements is not correct about Form 8606?
a. The form tracks basis for contributions and conversions to Roth IRAs.
b. The form tracks in-plan Roth rollovers.
c. The form is used for distributions from Roth IRAs.
d. The form tracks basis for nondeductible traditional IRAs.
The correct answer is a.
Statement a is not correct because Form 8606 does not track basis for contributions to
Roth IRAs. The taxpayer would have to determine the basis for Roth IRAs when comMULTIPLE CHOICE PROBLEMS

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pleting Part IV of the form. The other statements are correct - it does track conversions to Roth IRAs, in-plan Roth rollovers, basis for nondeductible traditional IRAs and is used for distributions from Roth IRAs.
6.

For the year 2014, Katy (age 35) and Stefen (age 38), a married couple, reported the following items of income:

Wages
Dividend income
Cash won from lottery

Katy
$50,000
$2,000
$52,000

Stefen
-$1,200
$500
$1,700

Total
$50,000
$3,200
$500
$53,700

Katy is covered by a qualified plan. Stefen does not work, he makes wine and drinks all day. Assuming a joint return was filed for 2014, what is the maximum tax deductible amount that they can contribute to their IRAs?
a. $2,500.
b. $5,500.
c. $7,500.
d. $11,000.
The correct answer is d.
Because their income is less than the limit for joint income tax filers, they can contribute and deduct $11,000 for 2014.
7.

Which of the following cannot be held in an IRA account as an investment?
a. A U.S. gold coin.
b. Option contracts (calls).
c. Variable life insurance.
d. Municipal bonds.
The correct answer is c.
Life insurance is not permitted in IRA accounts. All of the other choices are permissible.

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8.

Phillip, who is currently age 52, made his only contribution to his Roth IRA in
2014 in the amount of $5,500. If he were to receive a total distribution of $11,000 from his Roth IRA in the year 2019 to purchase a new car, how would he be taxed?
a. Since Phillip waited five years, the distribution will be classified as a
“qualified distribution” and will therefore not be taxable or subject to the 10% early distribution penalty.
b. Since Phillip waited five years, the distribution will be classified as a
“qualified distribution” and will therefore not be taxable but will be subject to the 10% early distribution penalty.
c. Although Phillip waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable and will be subject to the 10% early distribution penalty.
d. Although Phillip waited five years, the distribution will not be classified as a “qualified distribution” and will therefore be taxable to the extent of earnings and will be subject to the 10% early distribution penalty on the amount that is taxable.
The correct answer is d.
A distribution from a Roth IRA is not includible in the owner’s gross income if it is a qualified distribution or to the extent that it is a return of the owner’s contributions to the Roth IRA. A qualified distribution is one that meets BOTH of the following tests:
The distribution was made after a five-taxable-year period, and
The distribution was made for one of the following reasons:
•
Owner has attained age 59½.
•
Distribution was made to a beneficiary or the estate of the owner on or after the date of the owner’s death.
•
Distribution was attributable to the owner’s disability.
•
Distribution was for a first-time home purchase.
The 10 percent early withdrawal penalty under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent early withdrawal penalty under IRC § 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution, and if the distribution is made within the five-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made. MULTIPLE CHOICE PROBLEMS

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9.

Jim, who is age 39, converts a $74,500 Traditional IRA to a Roth IRA in 2014.
Jim’s adjusted basis in the Traditional IRA is $10,000. He also makes a contribution of $5,500 to a Roth IRA in 2014 for the tax year 2014. If Jim takes a
$4,000 distribution from his Roth IRA in 2015 when the account is worth
$100,000, how much total federal income tax, including penalties, is due as a result of the distribution assuming his 2015 federal income tax rate is 28 percent?
a. $0.
b. $224.
c. $800.
d. $1,120.
The correct answer is a.
Any amount distributed from an individual’s Roth IRA is treated as made in the following order (determined as of the end of a taxable year and exhausting each category before moving to the following category):
•
From regular contributions;
•
From conversion contributions, on a first-in-first-out basis; and
•
From earnings.
All distributions from all of an individual’s Roth IRAs made during a taxable year are aggregated. The 10 percent additional tax under IRC § 72(t) applies to any distribution from a Roth IRA includible in gross income. The 10 percent additional tax under IRC
§ 72(t) also applies to a nonqualified distribution, even if it is not then includible in gross income, to the extent it is allocable to a conversion contribution and if the distribution is made within the five-taxable-year period beginning with the first day of the individual’s taxable year in which the conversion contribution was made.

10. Jack and Jill, both age 43, are married, made $20,000 each, and file a joint tax return. Jill has made a $5,500 contribution to her Traditional IRA account and has made a contribution of $2,000 to a Coverdell Education Savings Account for
2014. What is the most that can be contributed to a Roth IRA for Jack for 2014?
a. $0.
b. $2,000.
c. $5,500.
d. $11,000.
The correct answer is c.
The maximum combined contribution to traditional and Roth IRAs is $5,500 per person (who has not attained age 50) for 2014. Therefore, Jack and Jill would have a total of $11,000 to allocate between traditional and Roth IRAs. Jill has already contributed the maximum amount; however, Jack could still contribute $5,500 for himself. The
Coverdell Education Savings Account (formerly known as an Education IRA) is not included in the $5,500 limit.

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11. Ah and Ha, both age 33, are married, not covered by a qualified plan, and file a joint tax return. They have AGI of $164,000. Ah’s mother contributed $2,000 to a
Coverdell Education Savings Account for each of their two children. What is the most that Ah and Ha can contribute in total together to a Traditional IRA for
2014?
a. $0.
b. $1,000.
c. $5,500.
d. $11,000.
The correct answer is d.
The maximum contribution to Traditional and Roth IRAs is a total of $5,500 per person (who has not attained age 50) for 2014. The limits for the Coverdell are not related to traditional or Roth IRAs.
12. What is the first year in which a single taxpayer, age 54 in 2014, could receive a qualified distribution from a Roth IRA if he made his first $3,500 contribution to the Roth IRA on April 1, 2015, for the tax year 2014?
a. 2017
b. 2018.
c. 2019.
d. 2020.
The correct answer is c.
A qualified distribution can only occur after a five-year period has occurred 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 for a first-time home purchase. The five-year period begins at the beginning of the taxable year of the initial contribution to a Roth IRA. The five-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 2019.

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13. Kathy (age 55) is single, recently divorced, and has received the following items of income this year:
Pension annuity income from QDRO
Interest and dividends
Alimony
W-2 Income

$21,000
$5,000
$1,000
$1,200

What is the most that Kathy can contribute to a Roth IRA for 2014?
a. $1,200.
b. $2,200.
c. $5,500.
d. $6,500.
The correct answer is b.
Contributions to Roth IRAs, as well as traditional IRAs, are limited to the lesser of earned income or $5,500 for 2014. Kathy has earned income of $2,200 from the alimony and W-2 income she received. Thus, she is limited to a contribution of $2,200.
The other $26,000 of income is not earned income and therefore is unavailable for contributions to any IRA.
Note: An additional catch-up contribution of $1,000 for 2014 is permitted for individuals who have attained age 50 by the close of the tax year. Her total remains at $2,200 because that is all the earned income she has.
14. Which of the following statements is/are correct regarding SEP contributions made by an employer?
1. Contributions are subject to FICA and FUTA.
2. Contributions are currently excludable from employee-participant’s gross income. 3. Contributions are capped at $17,500 for 2014.
a. 1 only.
b. 2 only.
c. 1 and 2.
d. 1, 2, and 3.
The correct answer is b.
Statement 2 is the only correct response. Statements 1 and 3 are incorrect. Employer contributions to a SEP are not subject to FICA and FUTA. The 401(k) elective deferral limit and the SARSEP deductible limits are $17,500 for 2014. The SEP limit is 25% of covered compensation up to $52,000 for 2014.
Note: The maximum compensation that may be taken into account in 2014 for purposes of SEP contributions is $260,000. Therefore, the maximum amount that can be contributed to a SEP in 2014 is $52,000 (25% x $260,000, limited to $52,000).

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15. For 2014, what is the maximum amount that can be contributed to a SEP?
a. $10,000.
b. $17,500.
c. $18,000.
d. $52,000.
The correct answer is d.
For 2014, the maximum contribution for an individual to a SEP is the lesser of:
25% of compensation (compensation maximum is $260,000), or $52,000.
Therefore, the maximum contribution to a SEP for 2014 is $52,000 ($260,000 maximum compensation x 25%, limited to $52,000).
16. A SEP is not a qualified plan and is not subject to all of the qualified plan rules.
However, it is subject to many of the same rules. Which of the following are true statements? 1. SEPs and qualified plans have the same funding deadlines.
2. The contribution limit for SEPs and qualified plans (defined contribution) is $52,000 for the year 2014.
3. SEPs and qualified plans have the same ERISA protection from creditors.
4. SEPs and qualified plans have different nondiscriminatory and top-heavy rules. a. 1 only.
b. 1 and 2.
c. 2 and 4.
d. 1, 2, 3, and 4.
The correct answer is b.
SEPs and qualified plans can be funded as late as the due date of the return plus extensions. The maximum contribution for an individual to a SEP is $52,000 for 2014
($260,000 maximum compensation x 25%, limited to $52,000). Thus, statements 1 and 2 are correct. Qualified plans are protected under ERISA. IRAs and SEPs do not share this protection. Both types of plans have the same nondiscriminatory and topheavy rules.1

1.IRC §416(i)(6).

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17. Mary, age 50, has an IRA with an account balance of $165,000. Mary has recently been diagnosed with an unusual disease that will require treatment costing
$50,000, which she will have to pay personally. Mary’s AGI will be $100,000 this year. Which of the following statements are true?
1. Mary can immediately borrow up to $50,000 from her account and repay within five years.
2. Mary can distribute $50,000 subject to income tax but not subject to the
10% penalty because it will be used to pay medical expenses.
a. 1 only.
b. 2 only.
c. Both 1 and 2.
d. Neither 1 nor 2.
The correct answer is d.
Statement 1 is incorrect because loans are not permitted from IRAs. Statement 2 is incorrect because only the portion of the medical expense that exceeds 10% of AGI is exempt from the 10% penalty ($50,000 - $10,000 = $40,000). However, if it were classified as a disability, then she could avoid the penalty on the entire distribution.
18. Delores, age 62, single, and retired, receives a defined benefit pension annuity of
$1,200 per month from Bertancinni Corporation. She is currently working part time for Deanna’s Interior Design and will be paid $18,000 this year (2014).
Deanna’s Interior has a 401(k) plan, but Delores has made no contribution to the plan and neither will Deanna this year. Can Delores contribute to a traditional
IRA or a Roth IRA for the year and what is the maximum contribution?
a. $5,500 to a traditional IRA or $5,500 to a Roth IRA.
b. $0 to a traditional IRA or $5,500 to a Roth IRA.
c. $6,500 to a traditional IRA or $0 to a Roth IRA.
d. $6,500 to a traditional IRA or $6,500 to a Roth IRA.
The correct answer is d.
Delores has earned income and is over 50. She is not an active participant and even if she were, she is below the income limits.

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19. Which of the following people can make a deductible contribution to a traditional
IRA for 2014?

1.
2.
3.
4.

Person
Dianne
Joy
Kim
Loretta

AGI
$90,000
$50,000
$280,000
$75,000

Covered by
Qualified Plan
Yes
Yes
No
Yes

Marital
Status
Married
Single
Married
Single

a. None.
b. 1, 2, and 3.
c. 1, 2, and 4.
d. 1, 2, 3, and 4.
The correct answer is b.
All but Loretta may deduct a contribution to a traditional IRA. Dianne and Joy are below the phaseout range and Kim is not covered by a qualified plan so there is no income limit. Loretta is single and covered by a plan and her AGI is above the top end of the phaseout for singles ($60,000 – $70,000) for 2014.
20. The early distribution penalty of 10 percent does not apply to IRA distributions:
1. Made after attainment of the age of 55 and separated from service.
2. Made for the purpose of paying qualified higher education costs.
3. Paid to a designated beneficiary after the death of the account owner who had not begun receiving minimum distributions.
a. 1 only.
b. 1 and 3.
c. 2 and 3.
d. 1, 2, and 3.
The correct answer is c.
The first statement is incorrect because it is an exception to the 10% penalty for qualified plan distributions, not from IRAs. The second and third statements are correct exceptions for IRAs.

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21. Nick, who is age 45, operates a landscaping business and is self-employed. He has an assistant, Louis, who has worked with him for five years. Nick is establishing a
SEP for 2014 and is willing to make a contribution of 25 percent of Louis’s salary to the SEP. If Nick earns $100,000 after paying Louis, his expenses, and the contribution to Louis’s SEP, what is the most that he can contribute to the SEP for himself? a. $18,587.
b. $20,000.
c. $23,234.
d. $25,000.
The correct answer is a.
Choice a is correct. $100,000 less [$100,000 x 0.9235 x 0.153 x ½] x 20% (0.25/1.25)
= $18,587. Choice b left out the self employment income. Choice c is incorrect because it does not adjust the 25% to 20%. Choice d is incorrect as it multiplies by 25% instead of 20%.
22. Roger converted all $100,000 in his traditional IRA to his Roth IRA on December
1, 2010. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. Roger included $80,000 ($100,000 - $20,000) in his gross income on his Form 1040 for the year. On April 5th, 2014, Roger made a regular contribution of $5,000 to a Roth IRA for the 2013 year. Roger took a $10,000 distribution from his Roth IRA on July 31st of 2014 to purchase a ticket for a trip on a cruise ship for his 61st birthday present to himself. 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 he 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.
The correct answer is a.
The question first requires a determination of whether the distribution is a qualified distribution or not. Roger is over the age of 59½ but does not meet the five year rule.
Therefore, the distribution first comes out of contributions, then conversions, then earnings. 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.

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23. Mr. Reid was very active and loved to go skiing. Unfortunately, he was prone to skiing though the trees and did not believe in helmets. In March of 2014, he skied into a large pine tree that abruptly ended his life. At that time, his Roth IRA contained regular contributions of $10,000, first made in 2012, a conversion contribution of $40,000 that was made in 2011, and earnings of $10,000. He never made any distributions from his IRA. When he established this Roth IRA
(his first) in 2011, he named each of his two children, Bill and Phil, as equal beneficiaries. Each child will receive one-half of each type of contribution and one-half of the earnings. Which of the following is true regarding a distribution after Mr. Reid. dies?
a. If Bill immediately takes out all $30,000 from the Roth IRA, the entire distribution will be characterized as ordinary income.
b. If Phil immediately takes out all $30,000 from the Roth IRA, the entire distribution will not be taxable because it is a qualified distribution from a Roth IRA.
c. If Bill immediately takes out all $30,000 from the Roth IRA, $5,000 of the distribution will be characterized as ordinary income, but he will not have to pay a penalty.
d. If Phil immediately takes out all $30,000 from the Roth IRA, he will have a penalty of $2,500, in addition to paying income tax on the earnings. The correct answer is c.
The question first requires a determination of whether the distribution is a qualified distribution or not. While death is one of the two prongs, the five year rule as not been met. Thus, the distribution is not a qualified distribution. Each of the choices deals with a full distribution by the beneficiary, which makes the problem a bit easier. A full distribution will result in the earnings being taxable. The earnings represent 16.67% of the value of the account and thus, $5,000 will be taxable.

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