RMA Taxation & Legal Considerations in Retirement 3 — Questions and Answers
Question 1: A retiree withdraws $20,000 from a traditional IRA at age 57 due to a financial hardship. What is the penalty in addition to income taxes?
- No penalty if the withdrawal is for hardship
- 10% early withdrawal penalty (Correct answer)
- 15% early withdrawal penalty
- 20% early withdrawal penalty
Correct answer: 10% early withdrawal penalty
Withdrawals from a traditional IRA before age 59½ are subject to a 10% early withdrawal penalty unless a specific exception applies.
Question 2: Which of the following is NOT a valid exception to the 10% early withdrawal penalty from an IRA?
- Substantially equal periodic payments (SEPP)
- First-time home purchase up to $10,000
- Unreimbursed medical expenses exceeding 7.5% of AGI
- General financial hardship (Correct answer)
Correct answer: General financial hardship
General financial hardship is not a recognized exception to the 10% early IRA withdrawal penalty, unlike the other options listed.
Question 3: What is the estate tax annual exclusion amount for gifts in 2024?
- $12,000 per recipient
- $15,000 per recipient
- $18,000 per recipient (Correct answer)
- $25,000 per recipient
Correct answer: $18,000 per recipient
The annual gift tax exclusion was increased to $18,000 per recipient in 2024, indexed for inflation.
Question 4: Under ERISA, who is considered a fiduciary with respect to an employee benefit plan?
- Only the plan sponsor company
- Anyone who exercises discretionary authority or control over plan management or assets (Correct answer)
- Only the investment managers of plan assets
- Only licensed financial advisers registered with the SEC
Correct answer: Anyone who exercises discretionary authority or control over plan management or assets
ERISA broadly defines a fiduciary as any person who exercises discretionary authority or control over plan management, assets, or administration.
Question 5: A surviving spouse inherits a traditional IRA from their deceased spouse. Which special option is available only to a surviving spouse?
- Stretch the IRA over their own life expectancy under the 10-year rule
- Roll the inherited IRA into their own IRA and treat it as their own (Correct answer)
- Take a lump-sum distribution without any taxes
- Convert the inherited IRA to a Roth without tax consequences
Correct answer: Roll the inherited IRA into their own IRA and treat it as their own
Surviving spouses uniquely may roll an inherited IRA into their own IRA, allowing them to defer RMDs based on their own age and beneficiary rules.
Question 6: What does the step-up in cost basis at death mean for inherited appreciated assets?
- The beneficiary owes capital gains on all appreciation during the decedent's lifetime
- The inherited asset's cost basis is reset to its fair market value at the date of death (Correct answer)
- The beneficiary must pay estate taxes on the appreciation before selling
- The cost basis carries over from the original owner with no adjustment
Correct answer: The inherited asset's cost basis is reset to its fair market value at the date of death
Assets inherited at death receive a stepped-up basis to the fair market value on the date of death, eliminating capital gains on pre-death appreciation.
Question 7: Which trust structure is commonly used to provide for a surviving spouse while ultimately preserving assets for children from a prior marriage?
- Revocable living trust
- Qualified Terminable Interest Property (QTIP) trust (Correct answer)
- Charitable remainder trust
- Grantor retained annuity trust (GRAT)
Correct answer: Qualified Terminable Interest Property (QTIP) trust
A QTIP trust provides income to the surviving spouse for life while allowing the grantor to control who ultimately inherits the remaining trust assets.
RMA Taxation & Legal Considerations in Retirement 3
A retiree withdraws $20,000 from a traditional IRA at age 57 due to a financial hardship.
What is the penalty in addition to income taxes?