Retirement Planning & IRA Estate Strategies Flashcards

Under ERISA, qualified retirement plan assets (such as 401(k) accounts) are generally protected from which of the following?

Answer: Creditor claims and bankruptcy proceedings

ERISA-qualified retirement plans provide broad creditor protection, and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 extended similar protections to IRA accounts up to an inflation-adjusted limit.

What is the annual Roth IRA contribution limit for 2024 for individuals under age 50 (subject to income limits)?

Answer: $7,000

The Roth IRA contribution limit for 2024 is $7,000 for individuals under age 50, with an additional $1,000 catch-up contribution allowed for those aged 50 and older.

A client converts $200,000 from a traditional IRA to a Roth IRA. What is the immediate federal income tax consequence?

Answer: The $200,000 is added to ordinary taxable income in the year of conversion

The full converted amount from a traditional IRA is included in ordinary taxable income in the year of conversion because the original contributions were made on a pre-tax basis.

What does the IRS 'pro-rata rule' require when an individual converts funds from a traditional IRA to a Roth IRA?

Answer: The taxable portion of the conversion is determined proportionally across all traditional IRA balances, including non-deductible contributions

The pro-rata rule prevents selectively converting only after-tax (non-deductible) IRA dollars; instead, all traditional IRA balances are aggregated to determine the taxable ratio of any conversion.

What is a 'backdoor Roth IRA' contribution strategy used by high-income earners?

Answer: Making a non-deductible traditional IRA contribution and then converting it to a Roth IRA

The backdoor Roth strategy allows high-income earners who exceed direct Roth IRA income limits to make non-deductible traditional IRA contributions and immediately convert them to a Roth IRA, subject to the pro-rata rule.

For minor children who inherit an IRA as Eligible Designated Beneficiaries (EDBs), when does the 10-year rule begin to apply?

Answer: When the child reaches the age of majority under applicable state law (generally age 21 per IRS)

Minor children classified as EDBs may use their life expectancy for RMDs until they reach the age of majority (generally 21 per IRS guidance), at which point the 10-year rule begins, requiring full distribution within 10 additional years.

What is the primary distinction between a SEP IRA and a traditional IRA that makes a SEP IRA particularly significant in estate planning for self-employed individuals?

Answer: SEP IRAs allow substantially higher annual contribution limits—up to 25% of compensation or $69,000 (2024)—creating a much larger wealth transfer vehicle

SEP IRAs allow contributions up to 25% of net self-employment compensation or $69,000 (2024), far exceeding traditional IRA limits; larger accumulated balances make them powerful wealth transfer vehicles subject to the same distribution rules as traditional IRAs.