IRA IRA Rollovers and Transfers 2 — Questions and Answers
Question 1: A spouse who inherits an IRA has which unique rollover option not available to non-spouse beneficiaries?
- Rolling the inherited IRA into their own IRA (Correct answer)
- Stretching distributions over 40 years
- Avoiding all taxes on distributions
- Converting to a Roth IRA immediately
Correct answer: Rolling the inherited IRA into their own IRA
A surviving spouse can roll the inherited IRA into their own IRA, treating it as their own account and delaying RMDs until they reach RMD age.
Question 2: What is a 'conduit IRA' and why was it important historically?
- An IRA that accepts only Roth contributions
- An IRA used to hold rollover funds separately to preserve the ability to roll them back into an employer plan (Correct answer)
- An IRA shared between spouses
- An IRA with no investment restrictions
Correct answer: An IRA used to hold rollover funds separately to preserve the ability to roll them back into an employer plan
A conduit IRA held only employer plan rollover funds to preserve the option to roll them back into a new employer plan, though most employer plans now accept rollovers from commingled IRAs.
Question 3: How long does the IRS allow to complete a 60-day rollover if the delay was due to a financial institution error?
- 60 additional days
- The IRS may grant a waiver allowing more time (Correct answer)
- No extension is allowed
- 90 days total
Correct answer: The IRS may grant a waiver allowing more time
The IRS can waive the 60-day rollover requirement if the failure was due to an error beyond the taxpayer's control, such as a financial institution mistake.
Question 4: When converting a traditional IRA to a Roth IRA, what is the tax treatment of the converted amount?
- It is tax-free if held more than 5 years
- It is treated as ordinary income in the year of conversion (Correct answer)
- It is subject to 20% withholding
- It is taxed as long-term capital gains
Correct answer: It is treated as ordinary income in the year of conversion
The taxable portion of a Roth conversion is included in ordinary income in the year the conversion occurs.
Question 5: Can a non-deductible traditional IRA contribution be converted to a Roth IRA without paying taxes?
- Yes, but only on the earnings portion
- No, all conversions are fully taxable
- Yes, the after-tax basis is not taxed, but the pro-rata rule may apply (Correct answer)
- Yes, always tax-free if converted within 60 days
Correct answer: Yes, the after-tax basis is not taxed, but the pro-rata rule may apply
Only the after-tax (non-deductible) portion of the conversion is tax-free, but the pro-rata rule requires proportional taxation based on all traditional IRA balances.
Question 6: What is the 'indirect rollover' trap that can result in unexpected taxes?
- Choosing the wrong investment after the rollover
- Depositing the funds in a regular bank account instead of an IRA within 60 days
- Rolling over more than once per year
- Both B and C (Correct answer)
Correct answer: Both B and C
An indirect rollover can result in taxes if funds are deposited to a non-IRA account or not rolled over within 60 days, or if the once-per-year rule is violated.
IRA IRA Rollovers and Transfers 2
A spouse who inherits an IRA has which unique rollover option not available to non-spouse beneficiaries?