RIA Retirement Planning 1 — Questions and Answers

Question 1: A Traditional IRA contribution may be tax-deductible depending on:

The investor's age only
Whether the investor or spouse has access to a workplace retirement plan and their income level (Correct answer)
The number of dependents claimed
The state in which the investor resides

Correct answer: Whether the investor or spouse has access to a workplace retirement plan and their income level

Traditional IRA deductibility phases out for those covered by workplace retirement plans above certain income thresholds.

Traditional IRA contributions are always allowed up to the annual limit, but deductibility depends on: (1) whether the taxpayer or spouse is covered by an employer-sponsored retirement plan and (2) modified adjusted gross income (MAGI). If neither is covered by a plan, the full contribution is deductible regardless of income. If covered by a plan, deductibility phases out above MAGI thresholds (which are adjusted annually). Non-deductible contributions are still allowed.

Question 2: The primary advantage of a Roth IRA over a Traditional IRA is:

Immediate tax deduction on contributions
Tax-free growth and tax-free qualified withdrawals in retirement (Correct answer)
No contribution limits
Mandatory annual distributions

Correct answer: Tax-free growth and tax-free qualified withdrawals in retirement

Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free.

The Roth IRA's key advantage is tax-free growth. Contributions are made with after-tax dollars (no immediate deduction), but qualified withdrawals (after age 59½ and 5-year holding period) are completely tax-free. Unlike Traditional IRAs, Roth IRAs have no required minimum distributions (RMDs) during the owner's lifetime, making them excellent estate planning tools. Roth is generally advantageous for those expecting higher future tax rates.

Question 3: Required Minimum Distributions (RMDs) from Traditional IRAs must begin by:

Age 59½
Age 65
April 1 of the year following the year the account holder turns 73 (Correct answer)
Retirement, regardless of age

Correct answer: April 1 of the year following the year the account holder turns 73

Under SECURE Act 2.0, RMDs must begin by April 1 following the year an account holder turns 73.

SECURE Act 2.0 (2022) raised the RMD age to 73 (for those born 1951-1959) and will increase to 75 for those born in 1960 or later. The first RMD must be taken by April 1 of the year following the year you turn 73 (but subsequent RMDs must be taken by December 31 of each year). Failing to take RMDs results in a 25% excise tax (reduced from 50% by SECURE 2.0) on the amount that should have been distributed.

Question 4: A 401(k) plan offers which key tax advantage?

Contributions are made with after-tax dollars only
Pre-tax contributions reduce current taxable income, with taxes deferred until withdrawal (Correct answer)
All growth is permanently tax-exempt
Contributions can be withdrawn tax-free at any age

Correct answer: Pre-tax contributions reduce current taxable income, with taxes deferred until withdrawal

Traditional 401(k) contributions are made pre-tax, reducing current taxable income with taxes deferred until retirement withdrawal.

Traditional 401(k) contributions reduce current taxable income dollar-for-dollar (up to the annual limit). The investments grow tax-deferred, meaning no annual taxes on dividends or gains. At retirement, withdrawals are taxed as ordinary income. This deferral can be advantageous if the investor is in a lower tax bracket during retirement. Roth 401(k) options allow after-tax contributions for tax-free withdrawals.

Question 5: The 'stretch IRA' strategy was largely eliminated by:

The Pension Protection Act of 2006
The Tax Cuts and Jobs Act of 2017
The SECURE Act of 2019 (Correct answer)
The Dodd-Frank Act of 2010

Correct answer: The SECURE Act of 2019

The SECURE Act (2019) eliminated the stretch IRA for most non-spouse beneficiaries, requiring inherited IRA distributions within 10 years.

Before the SECURE Act (2019), non-spouse IRA beneficiaries could 'stretch' RMDs over their lifetime, providing decades of tax-deferred growth. The SECURE Act eliminated this for most non-spouse beneficiaries (with exceptions for eligible designated beneficiaries like minor children, disabled individuals, and chronically ill individuals), requiring all inherited IRA assets to be distributed within 10 years. This significantly impacts estate planning strategies using IRAs.

Question 6: SEP-IRA plans are primarily designed for:

Large corporation employees only
Self-employed individuals and small business owners (Correct answer)
Government employees
Non-profit organizations exclusively

Correct answer: Self-employed individuals and small business owners

Simplified Employee Pension (SEP) IRAs are designed for self-employed individuals and small business owners seeking a simple, high-contribution retirement plan.

SEP-IRAs allow self-employed individuals and small business owners to contribute up to 25% of compensation (up to the annual dollar limit, adjusted each year) for themselves and eligible employees. They are administratively simple (no annual IRS filings required), have high contribution limits, and are flexible (contributions are discretionary year to year). However, all eligible employees must receive the same percentage contribution as the owner.

RIA Retirement Planning 1

A Traditional IRA contribution may be tax-deductible depending on: