CRPC Retirement Income Taxation 3 — Questions and Answers
Question 1: A client aged 60 receives a lump-sum distribution from his employer's qualified plan and his employer's stock has Net Unrealized Appreciation (NUA) of $40,000. How is the NUA taxed when he later sells the stock?
- As ordinary income in the year of distribution
- As long-term capital gains when the stock is sold (Correct answer)
- As ordinary income when the stock is sold
- Tax-free due to the employer stock exclusion
Correct answer: As long-term capital gains when the stock is sold
NUA is taxed as long-term capital gains in the year the employer stock is sold, regardless of how long the stock is held after distribution.
Question 2: Which of the following Roth IRA distributions would be fully tax-free and penalty-free?
- Earnings withdrawn at age 57, account opened 6 years ago
- Earnings withdrawn at age 62, account opened 3 years ago
- Earnings withdrawn at age 61, account opened 5 years ago
- Earnings withdrawn at age 64, account opened 6 years ago (Correct answer)
Correct answer: Earnings withdrawn at age 64, account opened 6 years ago
A qualified Roth IRA distribution requires the owner to be at least 59½ AND the account to have been open for at least 5 tax years.
Question 3: A client inherits a traditional IRA from a non-spouse. Under the SECURE Act 2.0 rules, what is the maximum time frame for distributing the inherited IRA?
- 5 years
- 10 years (Correct answer)
- Life expectancy of the beneficiary
- No required distribution timeline
Correct answer: 10 years
The SECURE Act generally requires most non-spouse beneficiaries to fully distribute inherited IRAs within 10 years of the original owner's death.
Question 4: When using the Simplified Method to determine the tax-free portion of an annuity from a qualified plan, what is the key input used to calculate the exclusion ratio?
- The employee's age at retirement
- The employee's after-tax contributions and expected number of payments (Correct answer)
- The total account balance at retirement
- The employer's matching contribution history
Correct answer: The employee's after-tax contributions and expected number of payments
The Simplified Method divides the employee's cost basis (after-tax contributions) by the expected number of payments based on age to determine the monthly tax-free exclusion amount.
Question 5: A traditional IRA owner turns 73 in 2024. She has three traditional IRAs. How must she satisfy her RMD obligation?
- Take a separate RMD from each IRA
- Calculate the total RMD and take it from any one or combination of IRAs (Correct answer)
- Roll all IRAs into one before taking the RMD
- Delay the RMD until April 1 of the following year
Correct answer: Calculate the total RMD and take it from any one or combination of IRAs
For traditional IRAs, the total RMD across all IRAs can be aggregated and withdrawn from any one or combination of the owner's IRAs.
Question 6: Which of the following correctly describes the tax treatment of a non-qualified annuity distribution using the exclusion ratio?
- Earnings are distributed first and taxed as ordinary income (LIFO)
- A pro-rata portion of each payment is tax-free based on the ratio of basis to expected total return (Correct answer)
- The entire distribution is tax-free once basis is recovered
- All gains are taxed at long-term capital gains rates
Correct answer: A pro-rata portion of each payment is tax-free based on the ratio of basis to expected total return
The exclusion ratio for non-qualified annuities allocates a tax-free portion of each annuity payment based on basis divided by total expected return.
Question 7: A 65-year-old client converts $50,000 from a traditional IRA to a Roth IRA. Which of the following consequences is CORRECT?
- The $50,000 is subject to a 10% early withdrawal penalty
- The $50,000 is added to ordinary income in the year of conversion (Correct answer)
- The conversion is tax-free if completed within 60 days
- The client must wait 5 years before accessing the converted funds penalty-free
Correct answer: The $50,000 is added to ordinary income in the year of conversion
A Roth conversion is a taxable event; the converted amount is added to ordinary income in the year of the conversion.
CRPC Retirement Income Taxation 3
A client aged 60 receives a lump-sum distribution from his employer's qualified plan and his employer's stock has Net Unrealized Appreciation (NUA) of $40,000.
How is the NUA taxed when he later sells the stock?