CRPC Retirement Income Taxation 5 — Questions and Answers
Question 1: A client aged 58 takes a distribution from her 401(k) after separating from service. She is subject to which early distribution rules?
- 10% penalty applies because she is under 59½
- No penalty because of the age-55 separation-from-service exception (Correct answer)
- No penalty because she is within 2 years of age 60
- 50% excise tax applies to the distribution
Correct answer: No penalty because of the age-55 separation-from-service exception
The age-55 rule allows penalty-free distributions from a qualified plan if separation from service occurs in or after the year the participant turns 55.
Question 2: Which of the following best describes 'basis' in a traditional IRA?
- The total market value of the IRA
- After-tax (nondeductible) contributions that have already been taxed (Correct answer)
- The original purchase price of investments inside the IRA
- The employer's matching contribution amount
Correct answer: After-tax (nondeductible) contributions that have already been taxed
Basis in a traditional IRA consists of nondeductible contributions that were made with after-tax dollars and tracked on Form 8606.
Question 3: A retiree in the 22% federal bracket receives $15,000 in qualified dividends from a taxable brokerage account. What federal rate applies to these dividends?
- 22% ordinary income rate
- 15% qualified dividend rate (Correct answer)
- 0% because retirees are exempt
- 20% net investment income surtax rate
Correct answer: 15% qualified dividend rate
Taxpayers in the 22% bracket fall in the 15% qualified dividend tax bracket for the 2024 tax year.
Question 4: A Qualified Longevity Annuity Contract (QLAC) purchased inside a traditional IRA has which of the following tax advantages?
- Income from the QLAC is permanently tax-free
- The premium used to purchase a QLAC is excluded from the RMD calculation until payouts begin (Correct answer)
- QLACs allow IRA owners to delay all RMDs indefinitely
- QLAC distributions are taxed at long-term capital gains rates
Correct answer: The premium used to purchase a QLAC is excluded from the RMD calculation until payouts begin
The QLAC premium (up to IRS limits) is excluded from the IRA balance used to compute RMDs, deferring income until the annuity start date (no later than age 85).
Question 5: Under the Net Investment Income Tax (NIIT), which retirees are subject to the additional 3.8% tax on investment income?
- All retirees with any investment income
- Single filers with MAGI exceeding $200,000 and MFJ filers exceeding $250,000 (Correct answer)
- Retirees with Social Security income above the taxable threshold
- Retirees subject to IRMAA surcharges
Correct answer: Single filers with MAGI exceeding $200,000 and MFJ filers exceeding $250,000
The 3.8% NIIT applies to net investment income for single filers with MAGI over $200,000 and married filing jointly over $250,000.
Question 6: A client rolled over a 401(k) lump-sum distribution and the plan withheld 20% for federal taxes. What must the client do to avoid taxes and penalties on the withheld amount?
- File Form 5329 to claim the withheld amount as a credit
- Deposit the full original distribution amount from personal funds within 60 days, then recover the withholding via tax refund (Correct answer)
- Accept that the 20% withholding satisfies the tax on the distribution
- Roll over only the net amount received to avoid any penalty
Correct answer: Deposit the full original distribution amount from personal funds within 60 days, then recover the withholding via tax refund
To complete a tax-free 60-day rollover, the client must deposit the entire pre-withholding amount using personal funds; the withheld 20% is recovered as a tax refund.
Question 7: Which of the following statements about state income taxation of retirement income is MOST accurate?
- All states exempt Social Security income from state income tax
- State tax treatment of retirement income varies widely; some states exempt pension or Social Security income while others fully tax it (Correct answer)
- Federal tax rules automatically apply in all states
- States cannot tax IRA distributions under federal preemption
Correct answer: State tax treatment of retirement income varies widely; some states exempt pension or Social Security income while others fully tax it
State taxation of retirement income varies significantly—some states fully exempt Social Security, pensions, or both, while others tax all retirement income as ordinary income.
CRPC Retirement Income Taxation 5
A client aged 58 takes a distribution from her 401(k) after separating from service.
She is subject to which early distribution rules?