IRA Basic Skills 3 — Questions and Answers
Question 1: Which IRA type is specifically designed for self-employed individuals and small business owners?
- Roth IRA
- Traditional IRA
- SEP IRA (Correct answer)
- Inherited IRA
Correct answer: SEP IRA
A SEP (Simplified Employee Pension) IRA allows self-employed individuals and small business owners to contribute up to 25% of compensation.
Question 2: What does it mean to 'roll over' an IRA?
- Withdraw funds and pay taxes
- Transfer funds from one retirement account to another (Correct answer)
- Convert a Roth to traditional IRA
- Split an IRA among multiple beneficiaries
Correct answer: Transfer funds from one retirement account to another
A rollover moves funds from one retirement account to another, typically without triggering taxes if done correctly within 60 days.
Question 3: How many IRA rollovers are you allowed to perform in a 12-month period?
- Unlimited
- Two
- One (Correct answer)
- Three
Correct answer: One
The IRS limits taxpayers to one indirect (60-day) IRA rollover per 12-month period across all IRAs combined.
Question 4: What is an 'inherited IRA'?
- An IRA opened with inherited money
- An IRA received from a deceased person's estate (Correct answer)
- An IRA transferred between spouses during divorce
- An IRA opened by a minor child
Correct answer: An IRA received from a deceased person's estate
An inherited IRA is one that is passed to a beneficiary upon the death of the original IRA owner.
Question 5: Which of the following investments is generally NOT allowed inside an IRA?
- Mutual funds
- Stocks
- Collectibles like coins and artwork (Correct answer)
- Bonds
Correct answer: Collectibles like coins and artwork
The IRS prohibits holding collectibles such as artwork, rugs, antiques, gems, stamps, and most coins inside an IRA.
Question 6: What is the 'backdoor Roth IRA' strategy used for?
- Avoiding all taxes on IRA distributions
- Allowing high-income earners to contribute to a Roth IRA indirectly (Correct answer)
- Splitting IRA assets between spouses
- Converting an employer plan to a Roth without taxes
Correct answer: Allowing high-income earners to contribute to a Roth IRA indirectly
The backdoor Roth involves making a non-deductible traditional IRA contribution and then converting it to a Roth, bypassing income limits.
Question 7: Which statement about Roth IRA withdrawals is correct?
- All withdrawals are taxable
- Contributions can be withdrawn anytime tax- and penalty-free (Correct answer)
- Earnings can be withdrawn anytime tax-free
- Withdrawals are only allowed after age 65
Correct answer: Contributions can be withdrawn anytime tax- and penalty-free
Roth IRA contributions (not earnings) can be withdrawn at any time without taxes or penalties since the money was already taxed.
IRA Basic Skills 3
Which IRA type is specifically designed for self-employed individuals and small business owners?