Interactive Review
Course #10072
Individual Retirement Arrangements
1A. True – Correct Return
A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.
A Roth IRA is an individual retirement plan that, with exceptions, is subject to the rules that apply to a traditional IRA. It can be either an account or an annuity. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP-IRA nor a SIMPLE IRA can be designated as a Roth IRA. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions are tax free. Contributions can be made to your Roth IRA after you reach age 701/2 and you can leave amounts in your Roth IRA as long as you live.
A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to:
All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an individual retirement annuity. Contributions are made on behalf of eligible employees. Contributions are also subject to various limits. In addition to salary reduction contributions, your employer must make either matching contributions or non-elective contributions.
1B. False – Incorrect Return
Any IRA that is not a Roth IRA or a SIMPLE IRA is a traditional IRA. You can set up and make contributions to a traditional IRA if:
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. If both you and your spouse have compensation and are under age 70 1/2, each of you can set up an IRA. You cannot both participate in the same IRA.
2A. True – Incorrect Return
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. You can set up and make contributions to a traditional IRA
• You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
• You were not age 701/2 by the end of the year.
2B. False – Correct Return
Whether or not you are covered by any other retirement plan, you can have a traditional IRA. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. You (or, if you file a joint return, your spouse) must have received taxable compensation during the year.
Generally, compensation is what you earn from working. Compensation includes: wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2. An amount you receive that is a percentage of profits or sales price is compensation. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
• The deduction for contributions made on your behalf to retirement plans, and
• The deduction allowed for one-half of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. When you have both self-employment income and salaries and wages, your compensation includes both amounts.
3A. True – Correct Return
You can set up different kinds of IRAs with a variety of organizations. You can set up an IRA at a bank or other financial institution or with a mutual fund or life insurance
An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
• The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
• The trustee or custodian generally cannot accept contributions of more than $5,000 ($6,000 if you are 50 or older). However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
• Contributions, except for rollover contributions, must be in cash.
• You must have a non-forfeitable right to the amount at all times.
• Money in your account cannot be used to buy a life insurance policy.
• Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
• You must start receiving distributions by April 1 of the year following the year in which you reach age 701/2.
You can set up an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company. An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments.
The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982.
A simplified employee pension (SEP) is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a SEP-IRA) set up for you to receive such contributions. Generally, distributions from your employer or your labor union or other employee association can set up a trust to provide individual retirement accounts for employees or members. The requirements for individual retirement accounts apply to these traditional IRAs.
3B. False – Incorrect Return
With a variety of organizations, you can set up different kinds of IRAs. You can set up an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also set up an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements. Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before you set up your IRA. However, the sponsor does not have to give you the statement until the date you set up (or purchase, if earlier) your IRA, provided you are given at least 7 days from that date to revoke the IRA. The disclosure statement must explain certain items in plain language. For example, the statement should explain when and how you can revoke the IRA, and include the name, address, and telephone number of the person to receive the notice of cancellation. This explanation must appear at the beginning of the disclosure statement. If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. The sponsor must report on the appropriate IRS forms both your contribution to the IRA (unless it was made by a trustee-to-trustee transfer) and the amount returned to
you. These requirements apply to all sponsors.
4A. True – Incorrect Return
Trustees’ administrative fees are not subject to the contribution limit. Trustees’ administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040).
4B. False – Correct Return
Fees not subject to the contribution limit are Trustees’ administrative fees. Trustees’ administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). There are limits and other rules that affect the amount that can be contributed to a traditional IRA.
Community property laws. Except under the Spousal IRA Limit discussed below, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.
Brokers’ commissions. Brokers’ commissions paid in connection with your traditional IRA are subject to the contribution limit. For information about whether you can deduct brokers’ commissions.
General Limit
For 2007, the most that can be contributed to your traditional IRA is the smaller of the following amounts:
• $4,000 or $56,000 if 50 or older, or
• Your taxable compensation (defined earlier) for the year.
Spousal IRA Limit
If you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts for 2007:
1. $4,000 or $5,000, if 50 or older, or
2. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.
a. Your spouse’s IRA contribution for the year to a traditional IRA.
b. Any contributions for the year to a Roth IRA on behalf of your spouse.
For 2007, combined total contributions can be as much as $8,000 ($9,000 if only one of you is 50 or older or $10,000 if both of you are 50 or older).
Note. This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely employee contributions).
Example. Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither was 50 by the end of 2006. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $4,000 to a traditional IRA. If he and Kristin file a joint return, each can contribute $4,000 to a traditional IRA. This is because Kristin, who has no compensation, can add Carl’s compensation, reduced by the amount of his IRA contribution, ($30,000 – $4,000 = $26,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $4,000 is her contribution limit, because $4,000 is less than $26,000 (her compensation for purposes of figuring her contribution limit).
5A. True – Correct Return
Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2007 must be made by April 15, 2008, and contributions for 2008 must be made by April 17, 2009. If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). You can file your return claiming a traditional IRA contribution before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions. You do not have to contribute to your traditional IRA for every tax year, even if you can.
5B. False – Incorrect Return
At any time during the year or by the due date for filing your return for that year, not including extensions, contributions can be made to your traditional IRA for a year. Contributions cannot be made to your traditional IRA for the year in which you reach age 70 1/2 or for any later year. You attain age 701/2 on the date that is six calendar months after the 70th anniversary of your birth. If you were born on June 30, 1935, the 70th anniversary of your birth is June 30, 2006, and you attained age 701/2 on December 30, 2006. If you were born on July 1, 1935, the 70th anniversary of your birth was July 1, 2006, and you attained age 701/2 on January 1, 2007.
6A. True – Incorrect Return
Generally, you can deduct the lesser (not greater) of:
• The contributions to your traditional IRA for the year, or
• The general limit (or the spousal IRA limit, if applicable)
However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. The deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status. Your deduction may also be affected by social security benefits you received. If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. These amounts vary depending on your filing status. To determine if your deduction is subject to the phase-out, you must determine your modified adjusted gross income (AGI) and your filing status.
6B. False – Correct Return
The lesser of (not greater of) the contributions to your traditional IRA for the year, or the general limit (or the spousal IRA limit, if applicable) is generally the amount you can deduct for an IRA. However, your deduction begins to decrease (phase-out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. These amounts vary depending on your filing status and whether you or your spouse is covered by an employer plan. To determine if your deduction is subject to the phase-out, you must determine your modified adjusted gross income (AGI) and your filing status.
7A. True – Correct Return
If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.
7B. False – Incorrect Return
You cannot treat the inherited IRA as your own, if you inherit a traditional IRA from anyone other than your deceased spouse. If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:
1. Treat it as your own IRA by designating yourself as the account owner.
2. Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
a. Qualified employer plan,
b. Qualified employee annuity plan (section 403(a)plan),
c. Tax-sheltered annuity plan (section 403(b) plan),
d. Deferred compensation plan of a state or local government (section 457 plan), or
3. Treat yourself as the beneficiary rather than treating the IRA as your own.
8A. True – Incorrect Return
You can transfer, tax free, assets (money or property) from other retirement programs (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers.
• Transfers from one trustee to another.
• Rollovers.
• Transfers incident to a divorce.
Under certain conditions, you can move assets from a traditional IRA to a Roth IRA. A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee’s request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers.
8B. False – Correct Return
Assets (money or property) from other retirement programs (including traditional IRAs) can be transferred, tax free, to a traditional IRA. Kinds of transfers can be from one trustee to another, rollovers, or transfer incident to a divorce. Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.” An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan. You can roll over amounts from the following plans into a traditional IRA:
• A traditional IRA,
• An employer’s qualified retirement plan for its employees,
• A deferred compensation plan of a state or local government (section 457 plan), or
• A tax-sheltered annuity plan (section 403 plan).
You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return. A written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution.
9A. True – Correct Return
You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 591/2. You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that, even if you are under age 59 ½, the 10% additional tax may not apply.
9B. False – Incorrect Return
Your traditional IRA assets can be withdrawn or used at any time. If you withdraw or use IRA assets before you are age 59 ½, however, a 10% additional tax generally applies. Generally, if you are under age 59 ½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59 ½ are called early distributions. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount. There are several exceptions to the age 59 ½ rule. Even if you receive a distribution before you are age 59 ½ , you may not have to pay the 10% additional tax if you are in one of the following situations.
• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• The distributions are not more than the cost of your medical insurance.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving distributions in the form of an annuity.
• The distributions are not more than your qualified higher education expenses.
• You use the distributions to buy, build, or rebuild a first home.
• The distribution is due to an IRS levy of the qualified plan.
10A. True – Incorrect Return
You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent’s IRA. The amount that must be distributed each year is referred to as the required minimum distribution. Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.
10B. False – Correct Return
Funds cannot be kept in a traditional IRA indefinitely. They must be distributed eventually. You may have to pay a 50% excise tax on the amount not distributed if there are no distributions, or if the distributions are not large enough, as required. You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70 ½. The required minimum distribution for any year after the year in which you reach age 70 ½ must be made by December 31 of that later year. If distributions are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. Use Form 5329 to report the tax on excess accumulations. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent’s IRA. The amount that must be distributed each year is referred to as the required minimum distribution. Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.
11A. True – Correct Return
There are several exceptions to the age 59 1/2 rule. Even though you receive a distribution before you are age 59 1/2, you may not have to pay the 10% additional tax if you are in one the following situations.
• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• The distributions are not more than the cost of your medical insurance.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving distributions in the form of an annuity.
• The distributions are not more than your qualified higher education expenses.
• You use the distributions to buy, build, or rebuild a first home.
• The distribution is due to an IRS levy of the qualified plan.
11B. False – Incorrect Return
Even if you are under age 59 ½ if you paid expenses for higher education during the
year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses for the year for education furnished at an eligible educational institution. The education must be for you, your spouse, or the children or grandchildren of you or your spouse. When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds.
• Payment for services, such as wages.
• A loan.
• A gift.
• An inheritance given to either the student or the individual making the withdrawal.
• A withdrawal from personal savings (including savings from a qualified tuition program).
Do not include expenses paid with any of the following funds.
• Tax-free distributions from a Coverdell education savings account.
• Tax-free part of scholarships and fellowships.
• Pell grants.
• Employer-provided educational assistance.
• Veterans’ educational assistance.
• Any other tax-free payment (other than a gift or inheritance) received as educational assistance.
12A. True – Incorrect Return
Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions are tax free. Contributions can be made to your Roth IRA after you reach age 70 ½ and you can leave amounts in your Roth IRA as long as you live. Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. You do not report Roth IRA contributions on your return.
12B. False – Correct Return
You cannot deduct contributions to a Roth IRA, unlike a traditional IRA. A Roth IRA is an individual retirement plan that is subject to the rules that apply to a traditional IRA plus specific rules that apply only to a Roth IRA. It can be either an account or an annuity. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP-IRA nor a SIMPLE IRA can be designated as a Roth IRA. If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Although you cannot deduct contributions to a Roth IRA, if you satisfy the requirements, qualified distributions are tax free. Contributions can be made to your Roth IRA after you reach age 70 ½ and you can leave amounts in your Roth IRA as long as you live.
13A. True – Incorrect Return
Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than:
• $166,000 for 2007 for married filing jointly or qualifying widow(er),
• $10,000 for married filing separately and you lived with your spouse at any time during the year, and
• $114,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year. You may be eligible to claim a credit for contributions to your Roth IRA. Contributions can be made to your Roth IRA regardless of your age. You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit, you file jointly, and your modified AGI is less than $166,000 for 2007.
13B. False – Correct Return
You can generally contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than $166,000 for 2007 for married filing jointly or qualifying widow(er),
$10,000 for married filing separately and you lived with your spouse at any time during the year, and $114,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amount widow(er) received for providing personal services. It also includes commissions, self-employment income, and taxable alimony and separate maintenance payments. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows.
1. Subtract conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.
2. Add the following deductions and exclusions:
a. Traditional IRA deduction,
b. Student loan interest deduction,
c. Tuition and fees deduction,
d. Foreign earned income exclusion,
e. Foreign housing exclusion or deduction,
f. Exclusion of qualified bond interest shown on Form 8815, and
g. Exclusion of employer-provided adoption benefits shown on Form 8839.
14A. True – Incorrect Return
You can only make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). A 6% excise tax applies to any excess contribution to a Roth IRA. These are the contributions to your Roth IRAs for a year that equal the total of:
1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA, that are more than your contribution limit for the year, plus
2. Any excess contributions for the preceding year, reduced by the total of:
a. Any distributions out of your Roth IRAs for the year, plus
b. Your contribution limit for the year minus your contributions to all your IRAs for
the year.
For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.
14B. False – Correct Return
You cannot make Roth IRA contributions for any year at any time. Contributions to a Roth IRA can only be made for a year at any time during the year or by the due date of your return for that year (not including extensions). If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.
15A. True – Correct Return
You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from one Roth IRA to another Roth IRA. You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, apply to these rollovers. However, the 1-year waiting period does not apply.
15B. False – Incorrect Return
You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA.. You can convert a traditional IRA to a Roth IRA.. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.
• Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
• Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
• Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.
Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.
16A. True – Incorrect Return
All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an
individual retirement annuity. Contributions are made on behalf of eligible employees. Contributions are also subject to various limits. In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. Unless your employer chooses to make nonelective contributions, your employer must make contributions equal to the salary reduction contributions you choose (elect), but only up to certain limits. These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees who chose salary reductions. These contributions are referred to as matching contributions. Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions. Instead of making matching contributions, your employer may be able to choose to make nonelective contributions on behalf of all eligible employees. These nonelective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from your employer, whether or not the employee chose salary reductions. One of the requirements your employer must satisfy is notifying the employees that the election was made.
16B. False – Incorrect Return
Under a SIMPLE IRA plan, all contributions must be made to SIMPLE IRAs, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an
individual retirement annuity with contributions made on behalf of eligible employees. Contributions are also subject to various limits. Either matching contributions or nonelective contributions must be made by your employer in addition to salary reduction contributions. You must be allowed to participate in your employer’s SIMPLE plan if you:
• Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and
• Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made.
For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income. Your employer can exclude the following employees from participating in the SIMPLE plan:
• Employees whose retirement benefits are covered by a collective bargaining agreement (union contract).
• Employees who are nonresident aliens and received no earned income from sources within the United States.
• Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year.
17A. True – Correct Return
The additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed, if a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution. The additional tax on early distributions applies to SIMPLE IRAs. If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer’s SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%.
17B. False – Incorrect Return
If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed is increased from 10% to 25% of the amount distributed, because of the early distribution. Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer’s SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA. After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). The additional tax on early distributions applies to SIMPLE IRAs. If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer’s SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%.
18A. True – Correct Return
You may be able to take a tax credit if you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an individual retirement arrangement (IRA). You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). This credit could reduce the federal income tax you pay dollar for dollar. If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if you were born before January 2, 1988, you are not a full-time student, no one else, such as your parent(s), claims an exemption for you on their tax return and your adjusted gross income is not more than: $50,000 if your filing status is married filing jointly, $37,500 if your filing status is head of household (with qualifying person), or $25,000 if your filing status is single, married filing separately, or qualifying widow(er) with dependent child.
18B. False – Incorrect Return
You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly) that could reduce the federal income tax you pay dollar for dollar if you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an individual retirement arrangement (IRA). If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply.
1. You were born before January 2, 1988.
2. You are not a full-time student (explained later).
3. No one else, such as your parent(s), claims an exemption for you on their tax return.
4. Your adjusted gross income is not more than:
a. $53,000 for 2008 if your filing status is married filing jointly,
b. $39,750 for 2008 if your filing status is head of household (with qualifying person), or
c. $26,500 for 2008 if your filing status is single, married filing separately, or qualifying
widow(er) with dependent child.
You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either:
• A full-time student at a school that has a regular teaching staff, course of study, and
regularly enrolled body of students in attendance, or
• A student taking a full-time, on-farm training course given by either a school that has a
regular teaching staff, course of study, and regularly enrolled body of students in
attendance, or a state, county, or local government.
You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full time.
Copyright © 2008 By
CPE Accounting and Tax Institute
All Rights Reserved