IRA IRA Contribution Rules 2 — Questions and Answers
Question 1: What happens if an individual contributes more than the allowed IRA limit in a given year?
- The excess is automatically refunded
- A 6% excise tax is imposed on the excess amount (Correct answer)
- The IRA is disqualified
- A 10% penalty applies
Correct answer: A 6% excise tax is imposed on the excess amount
The IRS imposes a 6% excise tax each year on excess IRA contributions until they are corrected.
Question 2: Can a non-working spouse contribute to an IRA if the other spouse has earned income?
- No, only working individuals can contribute
- Yes, through a spousal IRA (Correct answer)
- Only if they file separately
- Only if they are age 59½ or older
Correct answer: Yes, through a spousal IRA
A spousal IRA allows a non-working spouse to contribute based on the working spouse's earned income, provided they file jointly.
Question 3: What is the maximum IRA contribution if a taxpayer's earned income is $3,000 for the year?
- $7,000
- $6,500
- $3,000 (Correct answer)
- $0
Correct answer: $3,000
IRA contributions cannot exceed the lesser of the annual limit or the taxpayer's earned income, so the maximum would be $3,000.
Question 4: Which form is used to report IRA contributions to the IRS?
- Form 1099-R
- Form 5498 (Correct answer)
- Form 8606
- Form W-2
Correct answer: Form 5498
Form 5498 is issued by the IRA custodian to report contributions, rollovers, and the fair market value of the IRA.
Question 5: How are non-deductible traditional IRA contributions tracked for tax purposes?
- Form 1099-R
- Form 5498
- Form 8606 (Correct answer)
- Schedule D
Correct answer: Form 8606
Form 8606 is used to track non-deductible traditional IRA contributions to establish basis and avoid double taxation on withdrawals.
Question 6: A self-employed individual with a SEP-IRA can ALSO contribute to a traditional or Roth IRA.
- False, they are mutually exclusive
- True, but only if income allows (Correct answer)
- True, always
- False, unless the SEP-IRA is empty
Correct answer: True, but only if income allows
A self-employed person with a SEP-IRA can also contribute to a traditional or Roth IRA, subject to income and eligibility rules.
IRA IRA Contribution Rules 2
What happens if an individual contributes more than the allowed IRA limit in a given year?