IRA Basic Skills 2 — Questions and Answers
Question 1: What is the penalty for withdrawing money from a traditional IRA before age 59½?
- 5% early withdrawal penalty
- 10% early withdrawal penalty (Correct answer)
- 15% early withdrawal penalty
- 20% early withdrawal penalty
Correct answer: 10% early withdrawal penalty
The IRS imposes a 10% early withdrawal penalty on distributions taken before age 59½, in addition to ordinary income taxes.
Question 2: Which type of IRA allows you to contribute after-tax dollars and withdraw funds tax-free in retirement?
- Traditional IRA
- SEP IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
A Roth IRA is funded with after-tax dollars, meaning qualified withdrawals in retirement are completely tax-free.
Question 3: At what age must traditional IRA owners begin taking Required Minimum Distributions (RMDs)?
- 70½
- 72
- 73 (Correct answer)
- 75
Correct answer: 73
As of the SECURE 2.0 Act, the RMD age was raised to 73 for individuals who turn 72 after December 31, 2022.
Question 4: Which of the following is NOT a qualifying exception to the 10% early withdrawal penalty?
- First-time home purchase up to $10,000
- Higher education expenses
- Vacation expenses (Correct answer)
- Disability
Correct answer: Vacation expenses
Vacation expenses are not a qualifying exception; the IRS only allows penalty-free early withdrawals for specific hardship situations.
Question 5: What happens to a traditional IRA contribution if your income exceeds the deductibility limit and you're covered by a workplace plan?
- The contribution is not allowed
- The contribution is fully deductible
- The contribution becomes non-deductible (Correct answer)
- The contribution is automatically converted to Roth
Correct answer: The contribution becomes non-deductible
You can still contribute to a traditional IRA, but the contribution becomes non-deductible if income exceeds certain thresholds.
Question 6: Can a spouse who does not work outside the home contribute to an IRA?
- No, you must have earned income
- Yes, through a spousal IRA funded by the working spouse's income (Correct answer)
- Yes, but only up to $1,000
- Only if married for more than 10 years
Correct answer: Yes, through a spousal IRA funded by the working spouse's income
A spousal IRA allows a non-working spouse to contribute up to the normal annual limit based on the working spouse's compensation.
Question 7: What is the term for the tax strategy of converting a traditional IRA to a Roth IRA in a low-income year?
- IRA rollover
- Roth conversion (Correct answer)
- Backdoor rollover
- IRA recharacterization
Correct answer: Roth conversion
A Roth conversion involves moving funds from a traditional IRA to a Roth IRA, triggering taxes now to enjoy tax-free growth later.
IRA Basic Skills 2
What is the penalty for withdrawing money from a traditional IRA before age 59½?