Financial Advisor Tax Planning Strategies for Financial Advisors 5 — Questions and Answers
Question 1: A self-employed client earns $200,000 in net self-employment income. Which retirement account allows the highest potential annual contribution?
- Solo 401(k) (Correct answer)
- SEP-IRA
- SIMPLE IRA
- Traditional IRA
Correct answer: Solo 401(k)
A Solo 401(k) allows both employee elective deferrals (up to $23,000 in 2024) plus a 25% employer profit-sharing contribution, often exceeding the SEP-IRA's 25% limit alone at higher income levels.
Question 2: Which IRS provision allows a taxpayer to spread a large IRA distribution over three years for tax purposes following a federally declared disaster?
- Qualified Disaster Distribution rules under SECURE 2.0 (Correct answer)
- Section 72(t) substantially equal periodic payments
- Net unrealized appreciation (NUA) treatment
- 72(p) loan offset rules
Correct answer: Qualified Disaster Distribution rules under SECURE 2.0
SECURE 2.0 Act provisions allow qualifying disaster-related distributions up to $22,000 to be included in income ratably over three years and repaid to avoid tax.
Question 3: A client is in the 37% tax bracket and holds a large position in employer stock inside their 401(k). What strategy could dramatically reduce taxes upon distribution?
- Roll only the employer stock to a taxable account using Net Unrealized Appreciation (NUA) treatment (Correct answer)
- Do a full Roth conversion of the 401(k) immediately
- Take the entire distribution at once to get it over with
- Roll all assets to a traditional IRA and delay distributions
Correct answer: Roll only the employer stock to a taxable account using Net Unrealized Appreciation (NUA) treatment
NUA treatment allows the cost basis of employer stock to be taxed as ordinary income while the appreciation (NUA) is taxed at the lower long-term capital gains rate when the stock is later sold.
Question 4: What is the 'wash sale' rule and how does it affect tax-loss harvesting?
- It disallows a loss if substantially identical securities are purchased within 30 days before or after the sale (Correct answer)
- It requires all harvested losses to be used within the same tax year
- It limits loss deductions to $3,000 per year against ordinary income
- It prevents selling securities held less than one year for a loss
Correct answer: It disallows a loss if substantially identical securities are purchased within 30 days before or after the sale
The wash sale rule disallows the tax loss if the investor buys a substantially identical security within the 30-day window before or after the sale, so advisors must purchase a different but similar fund.
Question 5: A married couple's combined income is $500,000. Which additional Medicare surtax applies to their net investment income?
- 3.8% Net Investment Income Tax (NIIT) (Correct answer)
- 0.9% Additional Medicare Tax
- Both 3.8% NIIT and 0.9% Additional Medicare Tax
- No additional Medicare taxes apply above the standard rate
Correct answer: 3.8% Net Investment Income Tax (NIIT)
The 3.8% NIIT applies to the lesser of net investment income or the amount MAGI exceeds the threshold ($250,000 MFJ); wage income above $250,000 MFJ is subject to the 0.9% Additional Medicare Tax separately.
Question 6: Which of the following correctly describes the income limit phaseout for deducting a traditional IRA contribution for an active retirement plan participant filing as Married Filing Jointly (2024)?
- Phaseout begins at $123,000 and ends at $143,000 of MAGI (Correct answer)
- Phaseout begins at $77,000 and ends at $87,000 of MAGI
- There is no phaseout; all married filers can deduct IRA contributions
- Phaseout begins at $230,000 and ends at $240,000 of MAGI
Correct answer: Phaseout begins at $123,000 and ends at $143,000 of MAGI
For 2024, a married couple filing jointly where both spouses are covered by a workplace plan see the deduction phased out between $123,000 and $143,000 of modified AGI.
Question 7: A client turns 73 in 2024 and has multiple traditional IRAs. How must Required Minimum Distributions (RMDs) be taken?
- Calculate RMDs separately for each IRA but aggregate and withdraw from any one or combination of IRAs (Correct answer)
- Take RMDs from each IRA individually in exact proportion
- Combine all IRA balances and take one RMD from only the largest IRA
- RMDs are not required until age 75 under SECURE 2.0
Correct answer: Calculate RMDs separately for each IRA but aggregate and withdraw from any one or combination of IRAs
IRA owners must calculate an RMD for each traditional IRA separately using prior year-end balances, but may then satisfy the total obligation by withdrawing any combination from one or more of their IRAs.
Financial Advisor Tax Planning Strategies for Financial Advisors 5
A self-employed client earns $200,000 in net self-employment income.
Which retirement account allows the highest potential annual contribution?