AFTR Retirement Accounts and Tax Treatment 2 — Questions and Answers
Question 1: A taxpayer converts a traditional IRA to a Roth IRA. How is the converted amount treated for federal income tax purposes?
- It is tax-free
- It is taxable as ordinary income in the year of conversion (Correct answer)
- It is taxable as capital gains
- It is deferred until withdrawals begin
Correct answer: It is taxable as ordinary income in the year of conversion
The pre-tax amount converted from a traditional IRA to a Roth IRA is included in gross income as ordinary income in the year of conversion.
Question 2: Which of the following is NOT a qualifying exception to the 10% early distribution penalty from an IRA?
- Total and permanent disability
- First-time home purchase (up to $10,000)
- Higher education expenses
- Purchase of a vacation home (Correct answer)
Correct answer: Purchase of a vacation home
The purchase of a vacation home does not qualify as an exception to the early distribution penalty; only a first-time home purchase up to $10,000 qualifies.
Question 3: What is the maximum annual employer contribution to a SEP-IRA for an employee in 2024, expressed as a percentage of compensation?
- 15%
- 20%
- 25% (Correct answer)
- 30%
Correct answer: 25%
SEP-IRA contributions are limited to 25% of an employee's compensation or $69,000 (2024 limit), whichever is less.
Question 4: Under the pro-rata rule, how are distributions from a traditional IRA that contains both deductible and nondeductible contributions taxed?
- Only deductible amounts are taxed
- Only nondeductible amounts are taxed
- A proportional part of each distribution is taxable based on the ratio of pre-tax to total IRA funds (Correct answer)
- Distributions are always 50% taxable
Correct answer: A proportional part of each distribution is taxable based on the ratio of pre-tax to total IRA funds
The pro-rata rule requires taxpayers to calculate the taxable portion of each distribution based on the ratio of pre-tax amounts to total IRA value across all traditional IRAs.
Question 5: A 73-year-old taxpayer fails to take their required minimum distribution. What excise tax applies to the shortfall under the SECURE 2.0 Act?
- 10%
- 25% (Correct answer)
- 50%
- 75%
Correct answer: 25%
SECURE 2.0 reduced the excise tax for failing to take RMDs from 50% to 25%, further reducible to 10% if corrected within a correction window.
Question 6: Which of the following retirement plans allows both employee and employer contributions and is typically offered by small businesses with 100 or fewer employees?
- SEP-IRA
- SIMPLE IRA (Correct answer)
- Solo 401(k)
- Defined benefit plan
Correct answer: SIMPLE IRA
The SIMPLE IRA allows both employee salary deferrals and employer matching or nonelective contributions and is designed for employers with 100 or fewer employees.
Question 7: Qualified distributions from a Roth IRA require the account to have been open for at least how many years?
- 2 years
- 3 years
- 5 years (Correct answer)
- 10 years
Correct answer: 5 years
To receive qualified distributions from a Roth IRA tax-free, the account must satisfy the 5-year holding period and the taxpayer must be at least age 59½ or meet another qualifying condition.
AFTR Retirement Accounts and Tax Treatment 2
A taxpayer converts a traditional IRA to a Roth IRA.
How is the converted amount treated for federal income tax purposes?