IRA Knowledge 3

Question 1

What is a 'backdoor Roth IRA' strategy used for?

Accepted Answer

Allowing high earners who exceed Roth income limits to indirectly contribute to a Roth IRA

Answer

A backdoor Roth IRA involves making a non-deductible traditional IRA contribution and then converting it to a Roth, bypassing income limits.

Question 2

What is the 5-year rule for Roth IRA earnings?

Accepted Answer

Earnings can be withdrawn tax-free only if the account has been open at least 5 years and you are 59½ or older

Answer

The 5-year rule requires a Roth IRA to be open for at least 5 years before earnings can be withdrawn tax-free, combined with meeting the age requirement.

Question 3

How are traditional IRA contributions treated for tax purposes if you are covered by a workplace retirement plan and earn above the phase-out threshold?

Accepted Answer

They are non-deductible but grow tax-deferred

Answer

If you're covered by a workplace plan and exceed income limits, traditional IRA contributions are non-deductible but still grow tax-deferred.

Question 4

Which statement about IRA rollovers is correct?

Accepted Answer

You are limited to one indirect (60-day) rollover per 12-month period across all IRAs

Answer

The IRS limits indirect (60-day) rollovers to once per 12-month period across all of an individual's IRAs combined.

Question 5

What happens if you fail to complete a 60-day IRA rollover within the deadline?

Accepted Answer

The distribution is treated as taxable income and may be subject to a 10% penalty

Answer

Missing the 60-day rollover window makes the distribution taxable income, and if under age 59½, the 10% early withdrawal penalty also applies.

IRA - Individual Retirement Account Practice Test

IRA - Individual Retirement Account Practice Test

IRA Knowledge 3