IRA Knowledge 5 — Questions and Answers
Question 1: What is a 'Roth conversion' and what tax consequence does it trigger?
- Moving funds from a Roth to a traditional IRA with no tax due
- Moving funds from a traditional IRA to a Roth IRA, with the converted amount taxed as ordinary income (Correct answer)
- A tax-free exchange between two Roth accounts at different brokerages
- Converting after-tax 401(k) contributions to a Roth without any tax
Correct answer: Moving funds from a traditional IRA to a Roth IRA, with the converted amount taxed as ordinary income
A Roth conversion moves pre-tax traditional IRA funds into a Roth IRA, and the converted amount is included in ordinary taxable income for that year.
Question 2: Which scenario qualifies as a penalty-free first-time homebuyer exception for IRA withdrawals?
- Purchasing any home, regardless of prior ownership history
- Withdrawing up to $10,000 for a first home if you haven't owned a home in the past 2 years (Correct answer)
- Withdrawing any amount for a first home purchase with no dollar cap
- Using IRA funds for a down payment on a second home
Correct answer: Withdrawing up to $10,000 for a first home if you haven't owned a home in the past 2 years
The IRS allows a lifetime exception of up to $10,000 for first-time home purchases, defined as not owning a home in the prior 2 years.
Question 3: What does 'IRA basis' refer to?
- The market value of all assets held in the IRA
- Non-deductible contributions made to a traditional IRA that have already been taxed (Correct answer)
- The original purchase price of investments inside the IRA
- The total amount of earnings in the IRA
Correct answer: Non-deductible contributions made to a traditional IRA that have already been taxed
IRA basis refers to non-deductible contributions in a traditional IRA — amounts already taxed — which are tracked using IRS Form 8606 to avoid double taxation.
Question 4: Can an IRA owner contribute to both a traditional IRA and a Roth IRA in the same tax year?
- No, you must choose one type per year
- Yes, but total contributions to both cannot exceed the annual limit ($7,000 in 2024 if under 50) (Correct answer)
- Yes, and each account has its own separate annual limit
- No, contributing to a Roth disqualifies you from any traditional IRA that year
Correct answer: Yes, but total contributions to both cannot exceed the annual limit ($7,000 in 2024 if under 50)
You can contribute to both a traditional and Roth IRA in the same year, but your combined total contributions cannot exceed the annual IRA limit.
Question 5: What IRS form is used to report non-deductible traditional IRA contributions and Roth conversions?
- Form 1099-R
- Form 5498
- Form 8606 (Correct answer)
- Schedule D
Correct answer: Form 8606
Form 8606 is used to report non-deductible IRA contributions, Roth conversions, and distributions from IRAs that have a basis.
Question 6: Which of the following people is eligible to contribute to a Roth IRA?
- A retiree with $80,000 in Social Security income and no earned income
- A single 45-year-old with $120,000 in wages and no workplace retirement plan (Correct answer)
- A single filer with $200,000 in W-2 wages
- A dependent child with no earned income
Correct answer: A single 45-year-old with $120,000 in wages and no workplace retirement plan
A single filer earning $120,000 in wages is well within the Roth IRA income phase-out range and has earned income, making them fully eligible.
Question 7: What happens to an IRA if the account holder dies without naming a beneficiary?
- The IRA automatically transfers to the surviving spouse
- The IRA passes through the estate and is subject to probate (Correct answer)
- The IRA is forfeited to the federal government
- The IRA is split equally among all living relatives
Correct answer: The IRA passes through the estate and is subject to probate
Without a named beneficiary, the IRA passes through the deceased's estate, subjecting it to probate and potentially faster distribution rules.
IRA Knowledge 5
What is a 'Roth conversion' and what tax consequence does it trigger?