CRPC Retirement Income Taxation 4 — Questions and Answers
Question 1: A client receives $18,000 per year from a pension. He contributed $30,000 after-tax to the plan. Using the Simplified Method with 240 expected payments, what is his monthly tax-free exclusion?
- $75
- $100
- $125 (Correct answer)
- $150
Correct answer: $125
$30,000 ÷ 240 payments = $125 per month excluded from taxable income.
Question 2: IRMAA (Income-Related Monthly Adjustment Amount) affects retirees by surcharging which of the following?
- Federal income tax on Social Security
- Medicare Part B and Part D premiums (Correct answer)
- Required minimum distributions
- Roth IRA withdrawal amounts
Correct answer: Medicare Part B and Part D premiums
IRMAA adds income-based surcharges to Medicare Part B and Part D premiums for retirees whose MAGI exceeds certain thresholds.
Question 3: A client withdraws $20,000 from her 401(k) at age 45 due to a total and permanent disability. What is the tax treatment?
- Tax-free and penalty-free
- Taxable as ordinary income but no 10% penalty (Correct answer)
- Taxable as ordinary income plus 10% penalty
- Taxable as capital gains but no penalty
Correct answer: Taxable as ordinary income but no 10% penalty
Disability is an exception to the 10% early withdrawal penalty, so the distribution is taxable as ordinary income but avoids the additional 10% penalty.
Question 4: Which of the following retirement income sources is generally exempt from federal income taxation?
- Traditional 401(k) distributions
- Roth IRA qualified distributions (Correct answer)
- Pension income from a private employer
- Required minimum distributions from a traditional IRA
Correct answer: Roth IRA qualified distributions
Qualified Roth IRA distributions are federal income tax-free because contributions were made with after-tax dollars and the account meets age and holding period requirements.
Question 5: A client has a traditional IRA with $200,000 and a Roth IRA with $100,000. His total RMD for the year is $8,000. From which account(s) can the RMD be taken?
- From the Roth IRA only
- From the traditional IRA only, or any combination of traditional IRAs (Correct answer)
- From either account in any proportion
- From the larger account only
Correct answer: From the traditional IRA only, or any combination of traditional IRAs
RMDs apply only to traditional IRAs (and other pre-tax accounts); Roth IRAs are not subject to RMDs during the owner's lifetime.
Question 6: What is the 'still working exception' as it relates to RMDs from a 401(k) plan?
- Allows deferral of RMDs past age 73 if the participant is still employed by the plan sponsor and is not a 5% owner (Correct answer)
- Exempts all 401(k) assets from RMDs indefinitely while employed
- Allows IRA RMDs to be deferred if the participant is still employed
- Reduces RMD amounts by 50% for active employees
Correct answer: Allows deferral of RMDs past age 73 if the participant is still employed by the plan sponsor and is not a 5% owner
The still-working exception permits non-5% owners who remain employed to defer RMDs from their current employer's plan past age 73.
Question 7: A client age 70 receives a $5,000 qualified charitable distribution (QCD) from her traditional IRA. What is the tax treatment of the QCD?
- Taxable income with a charitable deduction offsetting it
- Excluded from gross income and counts toward her RMD (Correct answer)
- Excluded from gross income but does not count toward her RMD
- Tax-free only if she itemizes deductions
Correct answer: Excluded from gross income and counts toward her RMD
QCDs up to $105,000 (2024) are excluded from gross income and count toward satisfying the IRA owner's RMD for the year.
CRPC Retirement Income Taxation 4
A client receives $18,000 per year from a pension.
He contributed $30,000 after-tax to the plan.
Using the Simplified Method with 240 expected payments, what is his monthly tax-free exclusion?