Tax Planning Strategies Flashcards

A high-income client wants to contribute to a Roth IRA but exceeds the income limits. Which strategy allows an indirect Roth contribution?

Answer: Backdoor Roth: nondeductible traditional IRA contribution followed by conversion

Roth conversions have no income limit, so a nondeductible traditional IRA contribution can be converted to a Roth.

What rule can make a backdoor Roth conversion partially taxable if the client has other pre-tax IRA balances?

Answer: The pro-rata (aggregation) rule

All traditional, SEP, and SIMPLE IRA balances are aggregated, so conversions include a proportional share of pre-tax money.

A 55-year-old professional with high, stable income wants to shelter more than a 401(k) allows. Which plan typically permits the largest deductible contributions?

Answer: Cash balance defined benefit plan

Cash balance plans are defined benefit plans whose actuarially determined contributions can far exceed defined contribution limits for older owners.

A qualified charitable distribution (QCD) can be made directly from an IRA once the owner reaches what age?

Answer: 70½

QCDs are available starting at age 70½, even though RMDs now begin later.

An investor sells stock at a loss and buys substantially identical stock 20 days later. What is the tax result?

Answer: The loss is disallowed and added to the basis of the new shares

Under the wash sale rule, a loss is disallowed if substantially identical securities are bought within 30 days before or after the sale, and the loss adjusts the new basis.

A self-employed client with no employees wants to maximize retirement contributions on modest net earnings. Which plan usually allows a larger contribution than a SEP-IRA at the same income?

Answer: Solo 401(k)

A Solo 401(k) permits both an employee elective deferral and an employer profit-sharing contribution, exceeding SEP limits at lower incomes.

When is a Roth conversion generally most tax-efficient?

Answer: In a year when the client's taxable income is unusually low

Converting during low-income years lets the converted amount be taxed at lower marginal rates.