Review Questions Module 1
TRADITIONAL IRAS

Unless otherwise noted, assume the following questions relate to participants under age 50.


  For an investor in the 28% tax bracket, a contribution of $5,000 to a deductible IRA results in an immediate tax savings of:

   a.   0
   b.   $140
   c.   $560
   d.   $1,400



   The Internal Revenue Service will tax income in a traditional IRA when it is:

   I.   earned in the account
   II.   transferred from one custodian to another
   III.   rolled over from one custodian to another
   IV.   withdrawn from the account

   a.   I only
   b.   IV only
   c.   II and III only
   d.   I, II and III only



  For tax year 2011, an IRA can be established anytime between:

   a.   April 15, 2011  and  April 15, 2012
   b.   January 1, 2011 and December 31, 2011
   c.   January 1, 2011 and April 15, 2012
   d.   April 15, 2011 and December 31, 2011




  All of the following are considered "earned income" EXCEPT:

   a.   wages
   b.   salary
   c.   dividends
   d.   commissions

  Mary Jackson, age 52, works part-time at a local department store during the Christmas season.  She earned $2,500. She has no other earnings.   How much may she may contribute to an IRA?

   a.   0
   b.   $2,000
   c.   $2,500
   d.   $3,000



  Dr. Knight,  a retired dentist aged 73, earned $6,500 speaking at a seminar in 2011.  How much may he contribute to a traditional IRA?

   a.   0
   b.   $4,000
   c.   $5,000
   d.   $6,500





  Mr. Brady, age 45, earned $60,000 in 2011.  By mistake, Mr. Brady contributed $6,000 to his IRA for tax year 2011.  Mr. Brady must pay a penalty of:

   a.   0
   b.   $60
   c.   $120
   d.   $180


  John and Mary Smith report joint taxable income of $120,500 in 2011.  John  earns $115,500.  He is covered by his company's  pension plan.  Mary  works part-time as a secretary for her church. She is not covered by any pension.   She earned $5,000.   They may contribute:

   I.   $5,000 to John's non-deductible IRA
   II.   $5,000 to John's deductible IRA
   III.   $5,000 to Mary's non-deductible IRA
   IV.   $5,000 to Mary's deductible IRA

   a.   I and III
   b.   I and IV
   c.   II and III
   d.   II and IV


  John and Mary Smith report joint taxable income of $202,500 in 2011.  John  earns $197,500, and is covered by a pension plan.  Mary earned $5,000 as a secretary for her church. She is not covered by any pension.  They may contribute:

   I.   $5,000 to John's non-deductible IRA
   II.   $5,000 to John's deductible IRA
   III.   $5,000 to Mary's non-deductible IRA
   IV.   $5,000 to Mary's deductible IRA

   a.   I and III
   b.   I and IV
   c.   II and III
   d.   II and IV

 John Morgan, 47-year old a single taxpayer, has worked for XYZ Corporation for two years, earning $95,000 per year.  XYZ offers a qualified pension plan.  John's pension benefits will be fully vested next year.  For 2011, John may:


   a.   contribute $5,000 to a non-deductible IRA
   b.   contribute $5,000 to a deductible IRA
   c.   contribute $5,000 to an IRA, of which $1,250 is deductible
   d.   not contribute to an IRA


   Jim Polk, a single taxpayer, is covered by an employer-provided pension plan.  He earns $67,000 in 2011.  If he contributed $5,000 to an IRA, how much of this contribution would be deductible?

   a.   0
   b.   $1,000
   c.   $4,000
   d.   $5,000



   Which of the following statements are true?

      I.         An individual may transfer an IRA between custodians no more than once per year
     II.     There are no limits on transfers between custodians of IRAs
     III.     An individual may rollover an IRA between custodians no more than once per year
     IV.     There are no limits on rollovers between custodians on IRAs

     a.     I and III only
     b.     I and IV only
     c.     II and III only
     d.     II and IV only






  Bunker Hunt, age 53, established an Individual Retirement Account with fully deductible contributions.  He withdraws $10,000 from his IRA , buys an airline ticket to Monte Carlo, plays roulette, winning $100,000, and returns home a week later.       He then redeposits $10,000 into an IRA.  Which of the following is true?

     a.     The withdrawal is fully taxable as capital gains.
     b.     The withdrawal is fully taxable as ordinary income and subject to a 10% penalty.
     c.     Only the earnings portion of the withdrawal is taxable as ordinary income.      
     d.     There is no tax consequence to the withdrawal.



    Which of the following is an example of an IRA rollover:

     a.     movement of IRA assets directly from a bank custodian to a brokerage firm custodian
     b.     movement of pension plan assets from the plan's trustee to an IRA custodian
     c.     withdrawal of IRA assets from a bank custodian and subsequent deposit with a brokerage firm custodian
     d.     movement of assets from a Keogh plan's trustee to an IRA custodian



    Robert Cratchet, age 65, is retiring.  He elects to receive $375,000 as a lump sum distribution from his employer's pension plan.  Which of the following is a reason for rolling over the lump sum into an IRA?

     a.     to eliminate taxes on the distribution
     b.     to delay taxes on the distribution
     c.     to receive current income from the IRA
     d.     federal law requires rollover of lump sum distributions into an IRA


 Mr. Franklin, age 53, established an IRA and made deductible contributions annually from 1982 until 1986.   Due to the Tax Reform Act of 1986, current contributions would be non-deductible.  Because of this, Mr. Franklin has not contributed to the IRA since 1986.  The account has grown in value to $80,000.  Mr. Franklin is laid off from his present job.  As part of his severance package, he receives a lump sum distribution from his      employer's pension plan.  Mr. Franklin is seeking another job with retirement benefits.  His best course of action is to:

     a.     accept the lump sum distribution and pay taxes on it
     b.     roll the lump sum distribution into his existing IRA
     c.     establish a new IRA to accept the rollover distribution
     d.     use income averaging methods to calculate the taxes owed on distribution


     All of the following are acceptable investments in an Individual  Retirement Account EXCEPT:

     a.     preferred stocks
     b.     zero coupon bonds
     c.     variable annuity contracts
     d.     term life insurance policy


    Which of the following investments is permitted in an IRA?

     a.     stamp collection
     b.     limited edition lithographs
     c.     US Gold Eagle coins
     d.     Canadian Maple Leaf gold coins



     The most popular investments in self-directed IRAs are:

     a.     common stocks
     b.     corporate bonds
     c.     mutual funds
     d.     certificates of deposit


     All of the following mutual funds would be suitable for a conservative IRA investor EXCEPT:

     a.     mutual funds investing in corporate bonds
     b.     mutual funds investing in utility stocks
     c.     mutual funds investing in US government bonds
     d.     mutual funds investing in municipal bonds



    Investors concerned with the effects of inflation would most likely invest their IRA assets in:

     a.     corporate bond mutual fund
     b.     zero coupon bonds
     c.     mutual fund investing in utility stocks
     d.     mutual fund investing in growth stocks


     Mrs. Lincoln purchased a blue chip growth fund in her IRA a couple of years ago.  Mrs. Lincoln is approaching retirement and is looking for a more conservative investment.  She sells the growth fund shares for a $25,000 gain and invests the proceeds in a bond fund.  The tax on the capital gains is:

     a.     payable in the year of the sale
     b.     deferred until Mrs. Lincoln reaches age 59½
     c.     deferred until Mrs. Lincoln retires     
     d.     deferred until proceeds are withdrawn from the IRA


     Due to financial hardship, Mr. Johnson, age 46, withdraws $5,000 from his IRA.  He is in the 28% tax bracket.  On the withdrawal, he must pay:

     a.     $500 penalty
     b.     $1,400 in taxes
     c.     $1,400 in taxes and a $500 penalty
     d.     $2,500 penalty


     Which of the following may withdraw funds from an IRA?

     I.     a 47-year old woman
     II.     a 53-year old permanently disabled man
     III.     a beneficiary upon the death of an IRA account holder
     IV.     a 74-year old man

     a.     II and III only
     b.     III and IV only
     c.     I, II and IV only
     d     I, II, III and IV


  Which of the following may withdraw funds from a traditional IRA without penalty?

     I.     a 47-year old woman
     II.     a 53-year old permanently disabled man
     III.     a beneficiary upon the death an IRA account holder
     IV.     a 74-year old man

     a.     I and II only
     b.     III and IV only
     c.     II, III and IV only
     d     I, II, III and IV



     Withdrawals may be taken, penalty-free, from a traditional IRA prior to age 59½ under all of the following circumstances EXCEPT:

     a.     the account holder is disabled
     b.     the account holder is deceased
     c.     substantially equal payments are scheduled for a lifetime
     d.     due to financial hardship





    A 79-old widow has an IRA account valued at $88,000 as of January 1, 2011.  Her life expectancy, according to IRS tables, is 22.0 years.  To avoid paying a penalty, she must withdraw:

     a.     $500
     b.     $2,000
     c.     $4,000
     d.     $6,000



 Mrs. Thompson celebrated her 70th birthday August 1, 2011.   She is required to begin withdrawals from her IRA no later than:

     a.     December 31, 2011
     b.     April 1, 2012
     c.     December 31, 2012
     d.     April 1, 2013


An 89-year old man has an IRA valued at $60,000 as of January 1, 2011.  According to IRS tables, his life expectancy is 12.0 years.   He withdrew $3,000 from the IRA during 2011.  In addition to the taxes owed on the withdrawal,  he is subject to a penalty of:

     a.     0
     b.     $1,000
     c.     $1,500
     d.     $2,000