IRAs

Question 1

Question1) Joe has a traditional IRA with a basis of $8,800. In 2024, this was his only IRA. On December 31, 2024, he converted $44,000 of the $88,000 total value of the IRA to a Roth IRA. He files as head of household and his AGI, without the conversion, is $62,000. What amount of income will be included on Joe’s 2024 return as the result of this conversion?
A. $8,800
B. $44,000
C. $35,200
D. $39,600

Answer 1

A. $8,800
Answer (A) is incorrect.
The inclusion is the converted amount less the applicable basis ($44,000 FMV of conversion – $4,400 basis of conversion), not the individual’s basis.
B. $44,000
Answer (B) is incorrect.
The applicable basis is subtracted to determine the inclusion ($44,000 FMV of conversion – $4,400 basis of conversion).
C. $35,200
Answer (C) is incorrect.
Only half of the basis is subtracted from the converted amount because only half of the IRA value was converted.
D. $39,600
Answer (D) is correct.
Under Sec. 408A(d)(3), amounts in a regular IRA can be rolled over or converted into a Roth IRA. Generally, amounts transferred or converted from a regular IRA into a Roth IRA must be included in gross income. An individual must include in gross income distributions from a traditional IRA that would have been included had they not been converted into a Roth IRA. Additionally, an individual does not include in income any amount that is a return of basis.
Thus, Joe does not include $4,400 of his basis in the traditional IRA in his 2024 income. The amount includible in income is thus $39,600 ($44,000 FMV of conversion – $4,400 basis of conversion) (Publication 590-B).

Question 2

Question5) Gerald, age 50, withdrew $10,000 from his IRA to pay for the graduate school expenses of his son. His son’s educational expenses were $10,000, and he received a $2,000 scholarship from the university to help reduce these expenses. What amount of the withdrawal from the IRA is subject to the 10% early withdrawal tax?
A. $8,000
B. $2,000
C. $10,000
D. $0

Answer 2

A. $8,000
Answer (A) is incorrect.
Qualified educational expenses can be paid with early distributions without a penalty assessed.
B. $2,000
Answer (B) is correct.
The 10% early withdrawal tax will not apply to distributions from an IRA if the taxpayer uses the amounts to pay “qualified higher education expenses” of the taxpayer, the taxpayer’s spouse, or any child or grandchild of the taxpayer or the taxpayer’s spouse. The Committee Report clearly states that qualified higher education expenses include those related to graduate-level courses. However, the amount of qualified higher education expenses is reduced by the amount of any qualified scholarship, educational assistance allowance, or payment (other than by gift, bequest, device, or inheritance) for an individual’s educational enrollment, which is excludable from gross income.
C. $10,000
Answer (C) is incorrect.
Qualified educational expenses can be paid with early distributions without a penalty assessed.
D. $0
Answer (D) is incorrect.
Qualified educational expenses must be reduced by the amount of the scholarship and other tax-exempt support received.

Question 3

Winston turned 73 on June 1, 2024. What date must he receive his minimum distribution by?
A. None of the answers are correct.
B. June 30, 2024.
C. December 31, 2024.
D. April 15, 2025.

Answer 3

A. None of the answers are correct.
Answer (A) is correct.
A taxpayer who has a traditional IRA must begin receiving distributions by April 1 of the year following the year the taxpayer reaches age 73. Winston turned 73 in 2024, so he must begin receiving distributions on April 1, 2025.
B. June 30, 2024.
Answer (B) is incorrect.
The date a taxpayer must begin receiving contributions is April 1 of the year following the year in which the taxpayer reaches age 73.
C. December 31, 2024.
Answer (C) is incorrect.
The date a taxpayer must begin receiving contributions is April 1 of the year following the year in which the taxpayer reaches age 73.
D. April 15, 2025.
Answer (D) is incorrect.
The date a taxpayer must begin receiving contributions is April 1 of the year following the year in which the taxpayer reaches age 73.

Question 4

On April 8, 2024, Alan received a lump-sum distribution of $30,000 cash and stock worth $20,000 from his employer’s retirement plan. The stock was not stock of his employer. Alan sold the stock for $30,000, and on June 3, 2024, he rolled over $60,000 in cash to an individual retirement account ($30,000 from the original distribution and $30,000 from the sale of the stock). What is the amount of gain to be included in Alan’s gross income for 2024?
A. $0
B. $10,000
C. $20,000
D. $5,000

Answer 4

A. $0
Answer (A) is correct.
Under Sec. 408(d), a lump-sum distribution from one retirement program may be treated as a tax-free rollover if the entire amount received is reinvested in another retirement program within 60 days after receipt of the lump-sum distribution. In Alan’s case, he reinvested the entire amount received from the distribution into an IRA ($30,000 proceeds from the stock sale and the $30,000 cash). Since he did this within 60 days after the distribution, he qualifies for tax-free rollover treatment [Sec. 402(c)]. No gain is recognized.
B. $10,000
Answer (B) is incorrect.
Alan does not recognize any gain on the distribution.
C. $20,000
Answer (C) is incorrect.
Alan does not recognize any gain on the distribution.
D. $5,000
Answer (D) is incorrect.
Alan does not recognize any gain on the distribution.

Question 5

Question16) Which of the following amounts may be converted directly to a Roth IRA, provided all requirements are met?
A. Required minimum distributions from a traditional IRA.
B. Hardship distribution from a 401(k) plan.
C. Amounts in a traditional IRA inherited from a person other than a spouse.
D. Amounts in a SIMPLE IRA, and the 2-year participation period has been met.

Answer 5

A. Required minimum distributions from a traditional IRA.
Answer (A) is incorrect.
Required minimum distributions from a traditional IRA are not permissible conversions.
B. Hardship distribution from a 401(k) plan.
Answer (B) is incorrect.
Hardship distributions are not directly convertible.
C. Amounts in a traditional IRA inherited from a person other than a spouse.
Answer (C) is incorrect.
A traditional IRA inherited from a person other than a spouse is not convertible.
D. Amounts in a SIMPLE IRA, and the 2-year participation period has been met.
Answer (D) is correct.
Amounts carried in a SIMPLE IRA may be converted assuming the required 2-year participation period has been met (Publication 590-A).

Question 6

Annual contributions to a Sec. 529 Qualified Tuition account for a designated beneficiary are limited to
A. $2,500.
B. $5,000.
C. No limit.
D. $10,000.

Answer 6

A. $2,500.
Answer (A) is incorrect.
The annual contribution limit to a Sec. 529 Qualified Tuition account is not $2,500.
B. $5,000.
Answer (B) is incorrect.
The annual contribution limit to a Sec. 529 Qualified Tuition account is not $5,000.
C. No limit.
Answer (C) is correct.
No specific dollar limit is imposed on contributions to qualified tuition accounts under Sec. 529. The account must have adequate safeguards to prevent contributions in excess of amounts necessary to provide for the beneficiary’s qualified higher education expenses.
D. $10,000.
Answer (D) is incorrect.
The annual contribution limit to a Sec. 529 Qualified Tuition account is not $10,000.

Question 7

Bill correctly filed as single for 2024. The only income he earned was $93,500 as a construction engineer, and he was covered by a retirement plan at work. What is Bill’s maximum IRA deduction for 2024?
A. $200
B. $0
C. $800
D. $7,000

Answer 7

A. $200
Answer (A) is incorrect.
A partial deduction is not allowed because of the deduction phaseout.
B. $0
Answer (B) is correct.
Generally, a deduction is allowed for contributions made to an IRA. However, if an individual is covered by an employer-provided retirement plan, the allowable deduction may be less than the allowable contribution. The deduction may be reduced or eliminated, depending on the amount of income and filing status. For a single individual with modified AGI above $87,000, no deduction is allowed.
C. $800
Answer (C) is incorrect.
A partial deduction is not allowed because of the deduction phaseout.
D. $7,000
Answer (D) is incorrect.
A full deduction is not allowed for a single individual who has $77,000 or more of modified AGI and is covered by an employer retirement plan.

Question 8

Question7) Elvin is single, age 35, and has total wages of $81,000. His adjusted gross income is also $81,000 before any IRA contribution. Elvin works for the Murphy Corporation, which sponsors a retirement plan that Elvin participates in. In addition, Elvin contributes $7,000 to his IRA account. What amount can Elvin deduct on his 2024 income tax return?
A. $2,800
B. $4,200
C. $7,000
D. $0

Answer 8

A. $2,800
Answer (A) is incorrect.
The amount of $2,800 is the amount of the phased-out reduction in the deduction, not the amount of the deduction.
B. $4,200
Answer (B) is correct.
Generally, an individual may deduct IRA contributions to the extent of the lesser of $7,000 or compensation received. If an individual is covered or considered covered by an employer retirement plan and his or her modified AGI is within the phaseout range, the IRA deduction must be reduced. For single individuals, the phaseout is for modified AGI over $77,000 and less than $87,000. The phaseout amount is calculated as follows:

Thus, Elvin’s maximum allowable deduction would be $4,200 ($7,000 – $2,800). However, if any IRA deduction is allowed, at least $200 is allowed as a deduction if it does not exceed the contributions made.
C. $7,000
Answer (C) is incorrect.
The deduction is reduced for individuals with a modified AGI over $77,000.
D. $0
Answer (D) is incorrect.
A partial deduction is allowable for individuals with a modified AGI between $77,000 and $87,000.

Question 9

An investment by an IRA in which of the following assets will NOT be treated as a distribution?
A. A stamp that is appraised at over $7,000 and is over 25 years old.
B. An antique table determined by an appraiser to be worth over $14,000.
C. A painting valued at $7,000.
D. Gold bullion exceeding the minimum fineness required to satisfy a regulated futures contract.

Answer 9

A. A stamp that is appraised at over $7,000 and is over 25 years old.
Answer (A) is incorrect.
All stamps are treated as distributions.
B. An antique table determined by an appraiser to be worth over $14,000.
Answer (B) is incorrect.
All antiques are treated as distributions.
C. A painting valued at $7,000.
Answer (C) is incorrect.
All paintings are treated as distributions.
D. Gold bullion exceeding the minimum fineness required to satisfy a regulated futures contract.
Answer (D) is correct.
Investments in certain platinum coins or in any gold, silver, platinum, or palladium bullion of fineness equal to or exceeding the minimum fineness required for metals which may satisfy a regulated futures contract, subject to regulation by the Commodity Futures Trading Commission, are not considered distributions [Sec. 408(m)(3)]. However, this provision does not apply unless the bullion is in the physical possession of the IRA trustee.

Question 10

Which of the following is a true statement regarding a rollover distribution from a qualified plan to a traditional IRA?
A. To be an eligible rollover, you must rollover the entire distribution from the qualified plan.
B. If you chose the direct rollover option, the payer must generally withhold 20% of it for income tax.
C. You can deduct the distribution rolled over up to the amount of the allowable deductible contribution limit for the year.
D. A hardship distribution from a qualified plan is not an eligible rollover distribution.

Answer 10

A. To be an eligible rollover, you must rollover the entire distribution from the qualified plan.
Answer (A) is incorrect.
The taxpayer does not have to roll over the entire distribution from one qualified plan to another. (S)he has the option of a rollover of a part of the distribution.
B. If you chose the direct rollover option, the payer must generally withhold 20% of it for income tax.
Answer (B) is incorrect.
A rollover is not taxable until distributions are received.
C. You can deduct the distribution rolled over up to the amount of the allowable deductible contribution limit for the year.
Answer (C) is incorrect.
Rollovers are not deductible.
D. A hardship distribution from a qualified plan is not an eligible rollover distribution.
Answer (D) is correct.
Generally, a rollover is a tax-free distribution of cash or other assets from one retirement plan to another retirement plan. A rollover from one qualified plan must be to another qualified plan. If the taxpayer does not make a direct transfer of assets from one retirement plan to another, but instead withdraws assets from the plan, the taxpayer must deposit the assets into another qualified plan within 60 days of the withdrawal in order to avoid taxes and penalties. A rollover cannot be deducted, and income tax is not assessed on a rollover, until distributions are received. Most distributions are qualified distributions; however, the following are exceptions:
Required minimum distributions
Hardship distributions
Any series of substantially periodic distributions
Corrective distributions due to excess contributions
A loan treated as a distribution
Dividends on employee securities
The cost of life insurance coverage

Question 11

Thad Manning is a single taxpayer under age 50. For the year, Thad earned a salary of $234,000 from his job at Rocky Top Corporation. This was his only source of income for the year. What is the maximum contribution Thad can make to a Roth IRA for the year?
A. $7,000
B. $4,200
C. $0
D. $8,000

Answer 11

C. $0
Answer (C) is correct.
Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for single taxpayers with adjusted gross income (AGI) between $146,000 and $161,000. Since Thad’s AGI exceeds $161,000, Thad is not allowed any portion of the $7,000 maximum yearly contribution. The $7,000 limit represents the total yearly threshold for contributions to all IRAs.

Question 12

What are the phaseout ranges for a single taxpayer and a taxpayer filing MFJ for a contribution to a Roth IRA?

Answer 12

$146000 - $161000 Single
$230000 - $240000 MFJ

Question 13

Under a Sec. 529 plan, up to $10,000 per year may be used by a designated beneficiary to pay
A. Services for a special needs beneficiary.
B. Expenses associated with apprenticeship programs.
C. Tuition at a public, private, or religious elementary or secondary school.
D. Qualified student loans.

Answer 13

A. Services for a special needs beneficiary.
Answer (A) is incorrect.
There is not a limit on expenses for special-needs services incurred in connection with the enrollment or attendance of a special-needs beneficiary.
B. Expenses associated with apprenticeship programs.
Answer (B) is incorrect.
Certain expenses associated with apprenticeship programs registered and certified by the Secretary of Labor under the National Apprenticeship Act may be paid from a Sec. 529 account. The apprenticeship provisions apply to repayments up to $10,000 per individual. This $10,000 is a lifetime amount, not an annual limit.
C. Tuition at a public, private, or religious elementary or secondary school.
Answer (C) is correct.
Tuition expenses at an elementary or secondary public, private, or religious school, up to a total amount of $10,000 per year, are eligible to be paid from a Sec. 529 account.
D. Qualified student loans.
Answer (D) is incorrect.
Up to $10,000 may be used to pay principal and interest on student loans as well as the debt of beneficiaries’ siblings. The $10,000 cap is a lifetime, not annual, limit.

Question 14

Kimberly, age 30, a full-time student with no taxable compensation, married Michael, age 30, during 2024. For the year, Michael had taxable compensation of $35,000. He plans to contribute and deduct $7,000 to his traditional IRA. If he and Kimberly file a joint return, how much may each deduct in 2024 for contributions to their individual traditional IRAs and what is the compensation Kimberly uses to figure her contribution limit?

IRA
Deduction
Compensation for
Kimberly to Figure
IRA Contribution Limit
A.
IRADeduction
$5,500
Compensation forKimberly to FigureIRA Contribution Limit
$35,000
B.
IRADeduction
$7,000
Compensation forKimberly to FigureIRA Contribution Limit
$35,000
C.
IRADeduction
$7,000
Compensation forKimberly to FigureIRA Contribution Limit
$28,000
D.
IRADeduction
$2,000
Compensation forKimberly to FigureIRA Contribution Limit
$35,000

Answer 14

A.
IRADeduction
$5,500
Compensation forKimberly to FigureIRA Contribution Limit
$35,000
Answer (A) is incorrect.
The limit on IRA deductions is $7,000.
B.
IRADeduction
$7,000
Compensation forKimberly to FigureIRA Contribution Limit
$35,000
Answer (B) is incorrect.
The $35,000 of compensation is reduced by Michael’s IRA contribution.
C.
IRADeduction
$7,000
Compensation forKimberly to FigureIRA Contribution Limit
$28,000
Answer (C) is correct.
Under Sec. 219(c), if a joint return is filed and a taxpayer makes less than his or her spouse, the taxpayer may still contribute the lesser of:
The sum of his or her compensation and the taxable compensation of the spouse, reduced by the amount of the spouse’s IRA contribution and contributions to a Roth IRA, or
$7,000 ($8,000 if over age 50).
Kimberly is still eligible to deduct the full $7,000 for her IRA contribution. However, the income is based upon Michael’s $35,000 income reduced by his $7,000 IRA contribution.
D.
IRADeduction
$2,000
Compensation forKimberly to FigureIRA Contribution Limit
$35,000
Answer (D) is incorrect.
The limit on IRA deductions is $7,000, and Michael’s compensation limit is reduced by his $7,000 contribution for a total compensation limit of $28,000.

Question 15

Generally, the excess contribution to an IRA is subject to a tax. Which of the following is true?
A. You will not have to pay the 6% tax if you withdraw the excess contribution and any income earned on the excess contribution before the date your tax return for the year is due, including extensions.
B. You will not have to pay the 6% tax if you withdraw only the earnings on the excess contribution for the current year and subsequent years as well.
C. You will not have to pay the 6% tax if you withdraw the excess contribution and the earnings on the excess contribution are less than 6%.
D. The 6% tax is due on both the excess contributions and any income earned on the excess contribution.

Answer 15

A. You will not have to pay the 6% tax if you withdraw the excess contribution and any income earned on the excess contribution before the date your tax return for the year is due, including extensions.
Answer (A) is correct.
An excess contribution to an IRA for any year is the amount over the maximum amount of deductible and nondeductible contributions that are allowable for that year. In the event of an excess contribution, the law imposes 6% tax as a penalty (Sec. 4973). The amount of the excess contribution is taxed, but it cannot exceed 6% of the value of the IRA at the close of the tax year.
B. You will not have to pay the 6% tax if you withdraw only the earnings on the excess contribution for the current year and subsequent years as well.
Answer (B) is incorrect.
The taxpayer must also withdraw the excess contribution to avoid the 6% penalty.
C. You will not have to pay the 6% tax if you withdraw the excess contribution and the earnings on the excess contribution are less than 6%.
Answer (C) is incorrect.
The taxpayer must withdraw both the earnings from the excess contribution and the excess contribution itself.
D. The 6% tax is due on both the excess contributions and any income earned on the excess contribution.
Answer (D) is incorrect.
Only the amount of the excess contribution is taxed at 6%. Income earned on the excess contribution qualifies as a premature distribution and is subject to an additional tax of 10% on that distribution.

Question 16

Mr. Knox wants to make contributions to an IRA (spousal IRA) for his wife. For Mr. Knox to be eligible to make such contributions, all of the following requirements must be met EXCEPT
A. His wife must have no taxable compensation for the tax year.
B. They must be married at the end of the tax year.
C. He must have compensation that must be included in his income for the tax year.
D. They must file a joint return for the tax year.

Answer 16

A. His wife must have no taxable compensation for the tax year.
Answer (A) is correct.
Section 219(c) provides rules for deducting contributions to a spousal IRA. If one spouse is eligible to make deductible IRA contributions, the other spouse may contribute up to $7,000 if a joint return is filed. The additional $7,000 spousal IRA deduction is available even if the other spouse has compensation for the year, provided the amount of compensation (if any) of the spouse for whom the election is being made is less than the gross income of the other spouse. Therefore, it is not a requirement that the wife have no compensation for the tax year.

Question 17

Paul, a full-time graduate student at a state university, incurred the following expenses related to his attendance in the current year:
Off-campus housing
$7,800
Utilities
$3,200
Books, fees, and supplies
2,500
Computer entertainment software
700
Internet access
350
Paul’s tuition was paid through scholarships. Annual housing allowance for the university is $10,000. How much of Paul’s expenses may be paid with Sec. 529 funds?
A. $14,550
B. $2,500
C. $10,300
D. $12,850

Answer 17

A. $14,550
Answer (A) is incorrect.
The computer entertainment software is not an eligible Sec. 529 expense. Additionally, the amount spent on room and board is limited.
B. $2,500
Answer (B) is incorrect.
The amount spent for books, fees, and supplies are eligible costs. However, they are not the only eligible costs listed.
C. $10,300
Answer (C) is incorrect.
Both off-campus rent and utilities are eligible expenses limited by the housing allowance of the educational institution. Additionally, purchase of internet access or related services are qualified expenses.
D. $12,850
Answer (D) is correct.
If a student lives off campus, (s)he can use Sec. 529 funds to cover the cost of rent and utilities up to the college’s housing allowance. Cost of internet access is also a qualified expense.Thus, the eligible expenses include $10,000 of the housing and utility costs, (i.e., the $11,000 total limited to the $10,000 allowance by the university) $2,500 for books, fees, and supplies, and $350 for internet access.

Question 18

Gina, who is single, received taxable compensation of $1,700 in 2023 and $2,500 in 2024. She did not actively participate in a pension plan. She contributed $2,000 in 2023 and $2,000 in 2024 to her IRA. On March 18, 2024, she withdrew $300 of her 2023 contribution plus the interest accumulated on it from her IRA and did not deduct that amount on her 2023 tax return. Based on this information, what is the amount of her excess contributions subject to the 6% tax?
A. $0
B. $800
C. $500
D. $300

Answer 18

A. $0
Answer (A) is correct.
In general, an individual who withdraws an excess contribution made during a tax year and the interest earned on it before the return due date will not be subject to the excess contributions tax. This rule is available only for individuals who did not take a deduction for the amount of the excess contribution.
B. $800
Answer (B) is incorrect.
The amount was withdrawn before the due date of the reC. $500
Answer (C) is incorrect.
The amount was withdrawn before the due date of the return.
D. $300
Answer (D) is incorrect.
The amount was withdrawn before the due date of the return.

Question 19

Larry and Marge Strong are married and living together. They have decided to file joint federal income tax returns for 2024. Larry is an active participant in his employer’s pension plan. Marge is not an active participant in any plan. Each contributed $7,000 to an individual retirement account (IRA) on February 1, 2025. Larry and Marge have a combined adjusted gross income of $232,000. The deductible portion of Marge’s compensation to her IRA is
A. $5,600
B. $1,400
C. $0
D. $7,000

Answer 19

A. $5,600
Answer (A) is correct.
The Taxpayer Relief Act of 1997 revised the limits for deductions for active plan participants. Since Larry is an active plan participant, and his income exceeds the phaseout range provided in Sec. 219(g)(3) for active plan participants, he is not allowed a deduction. However, since Marge is not an active plan participant, she may deduct her contribution, as long as she does not exceed the AGI limits in Sec. 219(g)(7). When one spouse is not an active plan participant, the IRA phaseout occurs when the couple’s AGI is between $230,000 and $240,000. Since the combined AGI of Larry and Marge equals $232,000, the phaseout limit applies. The reduction in the deduction is determined as follows:

Thus, the deduction is limited to $5,600 ($7,000 – $1,400).