IRA Certified IRA Services Professional 5 — Questions and Answers
Question 1: What is a prohibited transaction in the context of IRAs, and what is the primary consequence?
- An investment loss; the loss is reimbursed by the IRS
- A self-dealing transaction between the IRA and a disqualified person; the IRA loses its tax-exempt status (Correct answer)
- A late RMD; a 10% penalty applies
- A failed rollover; the amount is treated as a contribution
Correct answer: A self-dealing transaction between the IRA and a disqualified person; the IRA loses its tax-exempt status
A prohibited transaction under IRC 4975 involves self-dealing between the IRA and a disqualified person, which disqualifies the IRA and treats all assets as distributed on the first day of the year.
Question 2: Who is considered a 'disqualified person' for IRA prohibited transaction purposes?
- Any person who has traded with the IRA custodian
- The IRA owner, their spouse, lineal descendants and ancestors, and fiduciaries (Correct answer)
- Only the IRA owner and their spouse
- Any individual with power of attorney
Correct answer: The IRA owner, their spouse, lineal descendants and ancestors, and fiduciaries
Disqualified persons include the IRA owner, their spouse, ancestors, lineal descendants and their spouses, fiduciaries, and certain service providers.
Question 3: Under SECURE 2.0, what new provision allows employers to make matching contributions to an employee's Roth IRA or designated Roth account?
- Roth Catch-Up Mandate
- Optional Roth employer matching (Correct answer)
- Automatic Roth enrollment
- Roth Safe Harbor
Correct answer: Optional Roth employer matching
SECURE 2.0 allows employers to offer employees the option to receive employer matching contributions as Roth (after-tax) rather than pre-tax contributions.
Question 4: An IRA owner fails to take their full RMD by December 31. What is the excise tax rate on the shortfall under SECURE 2.0?
- 50%
- 25%, reducible to 10% if corrected timely (Correct answer)
- 10%
- 6%
Correct answer: 25%, reducible to 10% if corrected timely
SECURE 2.0 reduced the RMD excise tax from 50% to 25%, further reducible to 10% if the missed RMD is corrected within the correction window.
Question 5: What is the primary purpose of IRS Form 5498?
- To report IRA distributions to the account owner
- To report IRA contributions, rollovers, RMD information, and fair market value to the IRS (Correct answer)
- To calculate the taxable portion of IRA withdrawals
- To report excess contributions
Correct answer: To report IRA contributions, rollovers, RMD information, and fair market value to the IRS
Form 5498 is filed by the IRA custodian to report contributions, rollovers, conversions, RMD requirements, and the December 31 fair market value of the account.
Question 6: Which of the following correctly describes a 'recharacterization' of an IRA contribution?
- Converting a Traditional IRA to a Roth IRA
- Transferring a contribution plus earnings from one IRA type to another as if originally made to the second type (Correct answer)
- Withdrawing an excess contribution with net income attributable
- Rolling over an IRA to an employer plan
Correct answer: Transferring a contribution plus earnings from one IRA type to another as if originally made to the second type
A recharacterization treats a contribution as if it had originally been made to a different IRA type by transferring the contribution plus net income attributable by the tax deadline.
Question 7: A surviving spouse who inherits an IRA has a unique option not available to other beneficiaries. What is it?
- Contributing to the inherited IRA without limit
- Rolling the inherited IRA into their own IRA and treating it as their own (Correct answer)
- Avoiding all RMDs indefinitely
- Converting the inherited IRA to a 401(k)
Correct answer: Rolling the inherited IRA into their own IRA and treating it as their own
A surviving spouse may roll the inherited IRA into their own IRA, allowing them to delay RMDs until they reach their own RMD beginning date.
IRA Certified IRA Services Professional 5
What is a prohibited transaction in the context of IRAs, and what is the primary consequence?