CRPC Retirement Income Taxation 2 — Questions and Answers
Question 1: A married couple filing jointly has combined income of $44,000, of which $20,000 is Social Security. What percentage of their Social Security benefit is taxable?
- 0%
- 50% (Correct answer)
- 85%
- 100%
Correct answer: 50%
With combined income between $32,000 and $44,000 for MFJ, up to 50% of Social Security benefits are includible in taxable income.
Question 2: Which of the following is NOT an exception to the 10% early withdrawal penalty for distributions from a traditional IRA before age 59½?
- Disability
- First-time home purchase up to $10,000
- Separation from service at age 55 (Correct answer)
- Substantially equal periodic payments
Correct answer: Separation from service at age 55
The age-55 separation-from-service exception applies to qualified retirement plans (401k), not IRAs.
Question 3: Under the pro-rata rule, a client with a traditional IRA containing $90,000 of pre-tax funds and $10,000 of nondeductible contributions converts $20,000 to a Roth IRA. How much of the conversion is taxable?
- $2,000
- $10,000
- $18,000 (Correct answer)
- $20,000
Correct answer: $18,000
The taxable portion is 90% (pre-tax ratio) × $20,000 = $18,000, because non-deductible basis is 10% of the total $100,000 balance.
Question 4: A retiree receives a $30,000 pension that is entirely funded by employer contributions. How is this pension income taxed?
- Tax-free because it was employer-funded
- Entirely taxable as ordinary income (Correct answer)
- Taxed as long-term capital gains
- Only 50% is taxable
Correct answer: Entirely taxable as ordinary income
Pension distributions fully funded by an employer with no after-tax employee contributions are 100% taxable as ordinary income.
Question 5: What is the income threshold above which 85% of Social Security benefits may be included in taxable income for a single filer?
- $25,000
- $34,000 (Correct answer)
- $44,000
- $50,000
Correct answer: $34,000
For single filers, combined income above $34,000 triggers the 85% inclusion rate for Social Security benefits.
Question 6: Which tax form is used to report the taxable portion of pension and annuity distributions received from a qualified retirement plan?
- Form 1099-INT
- Form 1099-R (Correct answer)
- Form 1099-DIV
- Form 5498
Correct answer: Form 1099-R
Form 1099-R is issued by payers of retirement distributions and reports the gross and taxable amounts of pension and annuity income.
Question 7: A client takes a 72(t) SEPP distribution from her IRA at age 52. She then takes an additional lump-sum distribution at age 56. What is the tax consequence?
- No penalty because she is over age 55
- 10% penalty only on the lump-sum amount
- Retroactive 10% penalty on all prior SEPP distributions plus interest (Correct answer)
- No penalty because SEPP was established before 59½
Correct answer: Retroactive 10% penalty on all prior SEPP distributions plus interest
Modifying or terminating a SEPP plan before age 59½ triggers the 10% penalty retroactively on all prior SEPP distributions, plus IRS interest.
CRPC Retirement Income Taxation 2
A married couple filing jointly has combined income of $44,000, of which $20,000 is Social Security.
What percentage of their Social Security benefit is taxable?