IRA Knowledge 5

Question 1

What is a 'Roth conversion' and what tax consequence does it trigger?

Accepted Answer

Moving funds from a traditional IRA to a Roth IRA, with the converted amount taxed as ordinary income

Answer

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?

Accepted Answer

Withdrawing up to $10,000 for a first home if you haven't owned a home in the past 2 years

Answer

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?

Accepted Answer

Non-deductible contributions made to a traditional IRA that have already been taxed

Answer

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?

Accepted Answer

Yes, but total contributions to both cannot exceed the annual limit ($7,000 in 2024 if under 50)

Answer

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?

Accepted Answer

Form 8606

Answer

Form 8606 is used to report non-deductible IRA contributions, Roth conversions, and distributions from IRAs that have a basis.

IRA - Individual Retirement Account Practice Test

IRA - Individual Retirement Account Practice Test

IRA Knowledge 5