IRA Basic Skills 5 — Questions and Answers
Question 1: What penalty applies if you fail to take your Required Minimum Distribution (RMD) from a traditional IRA?
- 10% of the missed amount
- 25% excise tax on the amount not withdrawn (Correct answer)
- Flat $500 fine
- Loss of tax-deferred status
Correct answer: 25% excise tax on the amount not withdrawn
The IRS imposes a 25% excise tax (reduced to 10% if corrected promptly) on the amount that should have been withdrawn as an RMD.
Question 2: Can you contribute to both a traditional IRA and a Roth IRA in the same tax year?
- No, you must choose one
- Yes, but total contributions across both cannot exceed the annual limit (Correct answer)
- Yes, each account has its own separate limit
- Only if you are over age 50
Correct answer: Yes, but total contributions across both cannot exceed the annual limit
You can contribute to both a traditional and a Roth IRA in the same year, but your combined contributions cannot exceed the annual IRS limit.
Question 3: What is the deadline to make an IRA contribution for a given tax year?
- December 31 of that tax year
- January 31 of the following year
- The tax filing deadline (typically April 15) of the following year (Correct answer)
- March 31 of the following year
Correct answer: The tax filing deadline (typically April 15) of the following year
You have until the federal tax filing deadline, generally April 15, to make IRA contributions for the prior tax year.
Question 4: Which of the following circumstances allows a penalty-free early IRA withdrawal?
- Buying a luxury car
- Paying off credit card debt
- Paying health insurance premiums while unemployed (Correct answer)
- Taking a vacation abroad
Correct answer: Paying health insurance premiums while unemployed
Unemployed individuals who pay health insurance premiums may qualify for a penalty-free early IRA withdrawal under IRS hardship exceptions.
Question 5: What is the primary advantage of a Roth IRA over a traditional IRA for young investors?
- Higher contribution limits
- Immediate tax deduction
- Tax-free growth over many decades (Correct answer)
- No income restrictions
Correct answer: Tax-free growth over many decades
Young investors benefit most from Roth IRAs because tax-free compounding over a long time horizon can result in significantly more wealth.
Question 6: If a non-spouse beneficiary inherits a traditional IRA, what rule generally applies under the SECURE Act?
- They can keep the IRA indefinitely
- They must withdraw all funds within 10 years (Correct answer)
- They must convert it to a Roth IRA
- They must take RMDs based on the original owner's age
Correct answer: They must withdraw all funds within 10 years
Under the SECURE Act, most non-spouse beneficiaries must fully distribute inherited IRA assets within 10 years of the original owner's death.
Question 7: What does the term 'excess contribution' mean in relation to IRAs?
- Contributing more than your income allows
- Contributing more than the IRS annual limit (Correct answer)
- Contributing to too many IRA accounts
- Contributing during a year you have no earned income
Correct answer: Contributing more than the IRS annual limit
An excess contribution occurs when you deposit more into your IRA than the IRS annual contribution limit allows, triggering a 6% excise tax.
IRA Basic Skills 5
What penalty applies if you fail to take your Required Minimum Distribution (RMD) from a traditional IRA?