IRA IRA Distribution and Withdrawals 2 — Questions and Answers
Question 1: Which of the following medical expenses qualifies for the early IRA withdrawal penalty exception?
- Any medical expense
- Medical expenses exceeding 7.5% of AGI (Correct answer)
- Only hospital expenses
- Only prescription drug costs
Correct answer: Medical expenses exceeding 7.5% of AGI
IRA withdrawals used to pay unreimbursed medical expenses that exceed 7.5% of AGI are exempt from the 10% early withdrawal penalty.
Question 2: Can IRA distributions be rolled over back into an IRA if the account holder changes their mind?
- No, once withdrawn it cannot be returned
- Yes, within 60 days (Correct answer)
- Yes, within 30 days
- Yes, but only once every 5 years
Correct answer: Yes, within 60 days
An IRA distribution can be rolled back into an IRA within 60 days to avoid taxation and penalties.
Question 3: How is the RMD amount calculated for a traditional IRA?
- Fixed 4% of account balance
- Account balance divided by life expectancy factor from IRS tables (Correct answer)
- Account balance multiplied by your tax rate
- Same fixed dollar amount each year
Correct answer: Account balance divided by life expectancy factor from IRS tables
RMDs are calculated by dividing the prior year-end account balance by the life expectancy factor from the IRS Uniform Lifetime Table.
Question 4: Which exception to the early withdrawal penalty applies to individuals who have separated from service and are at least age 55?
- IRA exception for medical expenses
- The rule of 55 (applies to 401(k) plans, NOT IRAs) (Correct answer)
- Substantially equal periodic payments
- First-time homebuyer exception
Correct answer: The rule of 55 (applies to 401(k) plans, NOT IRAs)
The 'Rule of 55' applies to qualified plans like 401(k)s, NOT to IRAs; the comparable IRA exception is substantially equal periodic payments (SEPP).
Question 5: What is a Substantially Equal Periodic Payment (SEPP) plan used for?
- Increasing IRA contributions gradually over time
- Taking penalty-free distributions before age 59½ using IRS-approved methods (Correct answer)
- Splitting an IRA between multiple beneficiaries
- Converting a traditional IRA to Roth in equal installments
Correct answer: Taking penalty-free distributions before age 59½ using IRS-approved methods
A SEPP plan (also known as 72(t) distributions) allows account holders to take penalty-free distributions before 59½ using one of three IRS-approved calculation methods.
Question 6: In which situation can an IRA owner withdraw funds penalty-free for health insurance premiums?
- Any time they pay a health insurance premium
- While unemployed and receiving unemployment compensation for at least 12 weeks (Correct answer)
- Only if they are self-employed
- Only after age 55
Correct answer: While unemployed and receiving unemployment compensation for at least 12 weeks
IRA owners who have received unemployment compensation for at least 12 consecutive weeks can withdraw funds penalty-free to pay health insurance premiums.
IRA IRA Distribution and Withdrawals 2
Which of the following medical expenses qualifies for the early IRA withdrawal penalty exception?