Enrolled Agent > EA - Part 1: Individuals > Unit 16: Individual Retirement Accounts > Flashcards

Unit 16: Individual Retirement Accounts Flashcards

Examine the contribution limits, tax treatment, and withdrawal rules for various IRAs. (77 cards)

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1
Q

What are the primary differences between a Traditional IRA and a Roth IRA?

A
  • Traditional IRA contributions are generally deductible and taxed upon distribution, whereas Roth IRA contributions are made with after-tax income and are not taxed upon withdrawal.
  • Traditional IRAs require minimum distributions at a certain age, while Roth IRAs do not.
  • Income limits apply in determining who is eligible to participate in a Roth IRA.
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2
Q

What is the contribution limit for IRA accounts in 2025?

A

The lesser of:

  • Qualifying taxable compensation
  • $7,000 per taxpayer ($8,000 if age 50 or older)
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3
Q

What types of income qualify as compensation for IRA contribution purposes?

A
  • Wages, salaries, commissions, tips, bonuses
  • Self-employment income
  • Taxable alimony
  • Nontaxable combat pay
  • Difficulty-of-care payments
  • Certain taxable stipends and non-tuition fellowship payments
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4
Q

Which types of income do not qualify as compensation for IRA contributions?

A
  • Child support or nontaxable alimony
  • Passive rental income
  • Dividend and interest income
  • Pension or annuity income
  • Deferred compensation
  • Prize winnings or gambling income
  • Non-taxed sources like certain foreign earned income
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5
Q

True or False:

Roth IRAs require participants to start taking minimum distributions at a certain age.

A

False

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6
Q

What is the purpose of Form 1099-R?

A

To report distributions of $10 or more from a retirement plan or an IRA.

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7
Q

What is a ‘backdoor’ Roth IRA?

A

A method where a taxpayer opens a traditional IRA, makes a non-deductible contribution, and then converts the funds to a Roth IRA in the same year.

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8
Q

What is the deadline for making a traditional IRA contribution for the 2025 tax year?

A

April 15, 2026

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9
Q

What is the income phaseout range for Roth IRA contributions for Single filers in 2025?

A

$150,000 – $165,000

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10
Q

Can a taxpayer with only self-employment losses still contribute to an IRA?

A

No

IRA contributions require earned income. A net self-employment loss means the taxpayer has no earned income to support a contribution.

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11
Q

What is a spousal IRA contribution?

A

A married couple filing jointly may contribute to each of their IRA accounts even if only one taxpayer has qualifying compensation.

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12
Q

What determines the deductibility of a traditional IRA contribution?

A
  • Income
  • Filing status
  • Coverage by an employer retirement plan

Roth IRA contributions are never tax-deductible.

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13
Q

What is Form 8606 used for?

A

To report nondeductible contributions to a traditional IRA.

It reflects a taxpayer’s cumulative nondeductible contributions, which is the taxpayer’s ‘basis in the IRA.’

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14
Q

What happens if nondeductible IRA contributions are not reported properly?

A

All future withdrawals from the IRA may be taxable unless the taxpayer can prove nondeductible contributions were made.

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15
Q

What income phaseout range applies to single filers covered by an employer plan for IRA deductions in 2025?

A
  • $79,000 or less: Full deduction
  • More than $79,000 but less than $89,000: Partial deduction
  • $89,000 or more: No deduction
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16
Q

For a married couple filing jointly, what is the MAGI range for a partial IRA deduction if one spouse is covered by an employer plan?

A

More than $236,000 but less than $246,000.

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17
Q

What is the maximum contribution limit in 2025 for individuals over 50?

A

$8,000

This includes a $1,000 catch-up contribution.

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18
Q

What is the penalty for early withdrawal from a traditional IRA before age 59½?

A

A 10% early withdrawal penalty in addition to regular income tax.

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19
Q

What are some exceptions to the 10% early withdrawal penalty for traditional IRA distributions.

A
  • First-time home purchase, up to $10,000 can be withdrawn penalty-free
  • Qualified education expenses
  • Death or disability
  • Terminal illness
  • Health insurance premiums
  • IRS levy
  • Substantially equal periodic payments (SEPP)
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20
Q

Which types of early distributions from retirement plans allow repayment within three years, letting taxpayers amend returns to recover taxes paid?

A
  • Emergency personal expense distributions
  • Terminal illness distributions
  • Domestic abuse victim distributions
  • Qualified birth and adoption distributions
  • Qualified disaster distributions
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21
Q

What is the age at which Required Minimum Distributions (RMDs) must begin according to the SECURE 2.0 Act?

A

73

The age will increase to 75 in 2033.

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22
Q

What is the penalty for failing to take a required RMD, and how can it be reduced?

A
  • 25% penalty for failure to take RMD
  • Reduced to 10% if corrected within two years

The penalty was reduced from 50% by the Secure Act 2.0.

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23
Q

At what age can a taxpayer make a Qualified Charitable Distribution (QCD) from an IRA?

A

70½

A QCD can be made up to $108,000 in 2025, can count toward an RMD, but cannot be claimed as a charitable deduction.

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24
Q

What are the conditions for a Roth IRA distribution to be considered ‘qualified’?

A
  • Must satisfy a five-year period
  • Taxpayer must be at least 59½

Exceptions include disability or death of the IRA owner.

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25
What is the **60-day rule** regarding an **indirect IRA rollovers**?
The taxpayer must **redeposit the funds** into a new IRA or qualifying retirement account within **60 days** to avoid **tax and penalties**.
26
# True or False: Direct rollovers are limited to one per year.
False ## Footnote Unlike indirect rollovers, direct rollovers (trustee-to-trustee transfers) are not limited to one per year.
27
What must a taxpayer do if they receive both **property** and **cash** in a **rollover distribution**?
Any part of the cash or property can be rolled over, but to defer tax, the **same property** must be rolled over—unless it is **sold** and the **proceeds** are rolled over within **60 days**. The taxpayer cannot keep the property and roll over cash instead.
28
What is an '**Eligible Designated Beneficiary**' (EDB) in the context of inherited IRAs?
* A surviving spouse * A disabled or chronically ill individual * A minor child of the IRA owner * A beneficiary not more than 10 years younger than the IRA owner ## Footnote EDBs have more flexibility when inheriting IRAs.
29
# True or False: Under the **SECURE Act**, **non-EDB beneficiaries** must withdraw all funds from an **inherited IRA** within **10 years**.
True ## Footnote This 10-year rule also applies to beneficiaries that are entities (trusts, estates, charities and other organizations).
30
What can a **surviving spouse** do with an **inherited IRA**?
* Treat the IRA as their **own** * **Roll over** the balance to their own account * Take distributions over their **own life expectancy**
31
What happens when a taxpayer **converts** a **traditional** IRA to a **Roth** IRA?
Any previously **untaxed amounts** in the traditional IRA are included in **taxable income** in the **year of conversion**.
32
What is a **prohibited transaction** in the context of an **IRA**?
* Using an IRA as **security or collateral** for a loan * Buying **property for personal use** with IRA funds * **Borrowing money** from the IRA * **Selling**, **leasing**, or **exchanging property** to the IRA account * Accepting **unreasonable compensation** for managing IRA assets * Granting account fiduciaries to use account assets for their **own gain** * **Transferring plan assets**, lending money or providing goods and services to "**disqualified persons**"
33
What is the **excise tax rate** for **overcontributions** to an IRA?
6%
34
Which type of IRA conversion **cannot be reversed** under the Tax Cuts and Jobs Act?
Roth IRA conversion
35
How is a **Roth IRA conversion** reported for tax purposes?
On **Form 8606**, in the year the conversion occurs. The taxable portion must be included in gross income.
36
# True or False: Non-spousal beneficiaries can convert an inherited traditional IRA to a Roth IRA.
False
37
What happens if a **prohibited transaction** occurs in an IRA?
The account ceases to be treated as an **IRA**, and its assets are treated as if **distributed on the first day** of the year.
38
What constitutes a **prohibited transaction** in a **self-directed IRA**?
It occurs when the account holder engages in certain types of transactions with their IRA, such as **borrowing money** from it, using it as **security for a loan**, or investing in **prohibited assets** like life insurance contracts and collectibles. ## Footnote Prohibited transactions can disqualify an IRA, resulting in the entire account being treated as distributed and subject to applicable taxes and penalties.
39
Which investments are **prohibited** in an **IRA**?
* Collectibles such as artwork, jewelry, antiques, and more * Most precious metals or coins (with exceptions for certain U.S. minted coins) * S corporation stock * Life insurance contracts * Real estate held for personal use ## Footnote While real estate can be held in an IRA, it must not be used personally by the account holder or related persons.
40
What is the main feature of a **Simplified Employee Pension** plan? | (SEP-IRA)
It allows **employers** to make contributions directly to individual **SEP-IRA accounts** for themselves and eligible employees. Only the employer contributes, and employees cannot contribute.
41
What is a **SIMPLE plan**, and how can it be structured?
A SIMPLE plan allows **employees** to make **salary reduction contributions**, and employers can contribute matching or non-elective contributions. It can be structured as a **SIMPLE IRA** or a **SIMPLE 401(k)** plan.
42
What are the two basic types of **qualified retirement plans**?
* Defined contribution plans * Defined benefit plans ## Footnote Each type has different rules and structures, with defined contribution plans providing individual accounts and defined benefit plans promising a specified benefit amount.
43
What is a **defined contribution plan**?
It provides **individual accounts** for participants, with benefits based on **contributions**, **investment income or losses**, and **allocations of forfeitures**. ## Footnote Examples include profit-sharing plans, 401(k) plans, 403(b) plans, and 457 plans.
44
What are the general conditions under which **distributions** from **qualified plans** can be made?
* The taxpayer **dies**, becomes **disabled**, or has a **severance** from employment * The plan **terminates** without a successor plan * The taxpayer reaches age **59½** * The taxpayer incurs **significant financial hardship**
45
What is a **hardship distribution** in a **retirement plan**?
An **early withdrawal** from a retirement plan, such as a **401(k)**, **403(b)** and **457(b)** because of an immediate and heavy financial need, such as medical or funeral expenses. ## Footnote These distributions are limited to elective deferrals and are subject to income tax and possibly an early withdrawal penalty.
46
What are the **income tax implications** of distributions from a Traditional IRA vs. a Roth IRA?
Distributions from a **Traditional IRA** are taxed as **ordinary income**, whereas qualified distributions from a **Roth IRA are not taxed**.
47
# Fill in the blanks: Nontaxable combat pay is considered \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ for IRA contribution purposes.
qualifying compensation
48
Which **exception** allows up to $10,000 to be withdrawn **penalty-free** from a traditional IRA for a specific purpose?
First-time home purchase ## Footnote The funds can be used for buying, building, or rebuilding a first home.
49
What is the age at which **Required Minimum Distributions** (RMDs) must begin according to the SECURE 2.0 Act?
Age 73 increasing to age 75 in 2033.
50
How many **indirect rollovers** from an IRA to another IRA are allowed in a twelve-month period?
One
51
What distribution rule generally applies to **inherited IRAs** for **non-spousal** beneficiaries?
The inherited IRA generally must be **fully distributed within 10 years** of the original owner's death.
52
What is an **IRA recharacterization**?
Treats the original contribution as if it had been made to a different type of IRA, but **Roth** conversions cannot be **recharacterized**.
53
# True or False: If an IRA is used as security for a loan, the pledged amount is treated as a distribution.
True ## Footnote Only the amount used as security for the loan is treated as a distribution from the IRA as of the first day of the year that the loan was made.
54
What is the **consequence** of self-dealing with an IRA-owned property?
The IRA is deemed immediately **disqualified** as of the first day of the taxable year in which the prohibited transaction occurred.
55
What does '**code G**' in Box 7 of Form 1099-R indicate?
An eligible rollover distribution to an IRA.
56
Name one type of **contribution** that does not count towards the yearly IRA contribution limit.
* Rollover contributions * Qualified reservist repayments * Repayments of qualified disaster distributions (QDDs)
57
# True or False: There is an age limit to contribute to a traditional IRA.
False
58
What is a **Qualified Charitable Distribution**? | (QCD)
A distribution of up to $108,000 from an IRA to a qualified charity that can be excluded from income. ## Footnote The taxpayer must be 70½ or older, and the distribution must be made directly to the charity.
59
Can a taxpayer claim a **charitable deduction** for a QCD?
No, the distribution is excluded from income and cannot be claimed as a deduction.
60
What is the **mandatory withholding** for an indirect rollover from an employer-sponsored plan?
20% of the distribution amount.
61
What happens to a **minor child's EDB** status when they turn 21?
The 10-year payout rule begins.
62
Can high-income taxpayers **convert** a traditional IRA to a Roth IRA?
Yes, there is no longer an income threshold on Roth IRA conversions.
63
Who are considered 'family members' for the purposes of **prohibited transaction** rules?
* Taxpayer's spouse * Parents * Grandparents * Children * Grandchildren * Spouses of the taxpayer's children and grandchildren ## Footnote Family members do not include in-laws, cousins, aunts, uncles, siblings, and stepsiblings.
64
What is a **Trump Account**?
A tax-advantaged savings account to **encourage long-term savings** for children, established by a parent, legal guardian, or authorized individual.
65
What requirements must be met for a child to qualify for the $1,000 **Treasury pilot contribution** to a Trump Account?
* Be born between January 1, 2025, and December 31, 2028 * Be a U.S. citizen * Have a valid work-eligible Social Security Number * Be expected to be the qualifying child of the authorized individual making the election
66
When can contributions to a **Trump Account** begin?
July 4, 2026
67
What is the **maximum annual contribution** limit to a Trump Account during the growth period?
$5,000 ## Footnote Employer contributions are limited to $2,500 and are excluded from the employee’s gross income but count toward the $5,000 annual contribution limit.
68
What happens to a Trump Account when the beneficiary turns 18?
The growth period ends, and the account becomes subject to the standard rules applicable to a traditional IRA.
69
What is the **contribution limit** for employer contributions to a **SEP-IRA** plan in 2025?
The lesser of 25% of the employee's compensation or $70,000.
70
What is the **deferral limit** for employees in a **SIMPLE** plan for 2025?
$16,500
71
What is the **total contribution cap** for 401(k), 403(b), or governmental 457(b) plans in 2025?
$23,500
72
What is the '**super catch-up**' contribution limit for employees aged 60-63 under the SECURE 2.0 Act?
$11,250 ## Footnote This allows a total contribution of up to $34,750 for 2025.
73
Are distributions from qualified retirement plans included in net investment income for **NIIT** purposes?
No ## Footnote Distributions from qualified retirement plans are not included in net investment income but are considered for determining the modified adjusted gross income threshold.
74
When must **required minimum distributions** (RMDs) begin from pre-tax defined contribution plans?
By **April 1 of the year** following the year the taxpayer retires or reaches age 73, whichever is later. ## Footnote 5% business owners must begin RMDs at age 73 regardless of retirement.
75
What is a **defined benefit plan**?
A **retirement plan** promising a specified benefit amount or annuity based on formulas considering years of service and earnings history. ## Footnote Contributions are not optional and are based on actuarial calculations.
76
# True or False: Distributions from traditional IRAs and Roth IRAs have the same withdrawal restrictions as qualified plans.
False ## Footnote Withdrawals from traditional IRAs and Roth IRAs are permitted at any time, unlike qualified plans which have restrictions.
77
What is the **maximum loan amount** allowed from a qualified plan?
The lesser of $50,000 or 50% of the vested account balance. ## Footnote The loan must typically be repaid within five years with at least quarterly payments.
EA - Part 1: Individuals
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