Financial Planning Flashcards

A client age 62 wants tax-free and penalty-free Roth IRA earnings. Besides being over 59½, what else must be true for the distribution to be qualified?

Answer: At least 5 tax years have passed since the first contribution to any Roth IRA

A qualified Roth distribution requires age 59½ (or death/disability/first home) plus satisfying the 5-year holding period that starts with the first Roth contribution.

A client with $90,000 of pre-tax IRA money makes a $7,000 nondeductible IRA contribution and converts $7,000 to a Roth. How is the taxable part of the conversion determined?

Answer: The pro-rata rule aggregates all traditional, SEP and SIMPLE IRA balances at year-end

Under the pro-rata (aggregation) rule, basis is spread across all non-Roth IRA balances, so most of the conversion is taxable.

Under SECURE 2.0, at what age must a client born in 1955 begin required minimum distributions from a traditional IRA?

Answer: 73

SECURE 2.0 set the RMD age at 73 for those born 1951 through 1959, rising to 75 for those born in 1960 or later.

A charitably inclined 74-year-old client who takes the standard deduction must take an IRA RMD. Which strategy most efficiently lowers AGI?

Answer: Make a qualified charitable distribution directly from the IRA to the charity

A QCD is excluded from gross income and counts toward the RMD, reducing AGI even for non-itemizers.

A client is taking a lump-sum distribution from a 401(k) that holds highly appreciated employer stock. What is the main tax benefit of using the net unrealized appreciation (NUA) strategy?

Answer: The appreciation is taxed at long-term capital gain rates when the stock is sold

With NUA, only the cost basis is taxed as ordinary income at distribution, and the appreciation is taxed as long-term capital gain on sale.

Under SECURE 2.0, which requirement applies to rolling leftover 529 plan funds into the beneficiary's Roth IRA?

Answer: The 529 account must have been open for at least 15 years

529-to-Roth rollovers require a 529 open at least 15 years, are capped by the annual Roth limit, and have a $35,000 lifetime maximum.

A 67-year-old client withdraws money from a health savings account for a nonmedical vacation. What is the tax result?

Answer: Ordinary income tax applies but there is no 20% penalty

After age 65, nonmedical HSA withdrawals are taxed as ordinary income, but the 20% additional tax no longer applies.