Question 1

An individual retirement account in which capital gains and earnings on your investments will not be taxed upon withdrawal at age 59 1/2 is a(n)________.

Accepted Answer

The answer of An individual retirement account in which capital...

Question 2

The tax characteristics of a Roth IRA and a traditional IRA differ in terms of initial contributions and withdrawals after retirement.

Accepted Answer

With a traditional IRA, contributions may be tax-deductible, but withdrawals in retirement are subject to income tax. With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.

Question 3

Contributions to a Roth IRA are not tax deductible initially and,therefore,very few people are interested in using a Roth IRA.

Accepted Answer

Contributions to a Roth IRA are not tax deductible initially, but many people are interested in using a Roth IRA because the earnings grow tax-free and qualified distributions are also tax-free.

Question 4

Dave and Tammy are both employed but are eligible to contribute to a traditional IRA.If they each contribute $5,500 to their respective accounts,how much federal income tax will they save if they are in the 30% marginal tax bracket?

Accepted Answer

Contributions to a traditional IRA are tax-deductible, meaning that they reduce the amount of taxable income. If Dave and Tammy each contribute $5,500 to their respective accounts, they will each save $5,500 x 30% = $1,650 in federal income tax.

Question 5

An annuity is similar to an IRA in that money accumulates tax-free during the build-up period.

Accepted Answer

An annuity and an IRA both offer tax-deferred growth, meaning that the money earned in the account is not taxed until withdrawals are made.

Question 6

Which of the following is not a characteristic of a traditional IRA?

Accepted Answer

Everyone is not eligible for deductible contributions regardless of income. The eligibility for deductible contributions depends on the individual's income and participation in an employer-sponsored retirement plan.

Question 7

Bob and Bonnie,husband and wife ages 56 and 58,have combined income of $80,000.What is the maximum combined IRA contribution that they can make in 2015?

Accepted Answer

The maximum contribution for people aged 50 or older is $6,500 per person in 2015. Therefore, Bob and Bonnie can each contribute $6,500 to their IRAs, for a total contribution of $13,000.

Question 8

Contributing to which of the following will give you an immediate tax benefit?

Accepted Answer

Contributing to a Traditional IRA will give you an immediate tax benefit. This is because contributions to a Traditional IRA are tax-deductible in the year they are made, meaning they reduce your taxable income. In contrast, contributions to a Roth IRA are made with after-tax dollars and do not provide an immediate tax benefit. A Rollover IRA is simply a Traditional IRA that holds assets transferred from a 401(k) or other retirement account, so the tax treatment is the same as a Traditional IRA. A regular brokerage account does not provide any tax benefits.

Question 9

The maximum amount that can be contributed to an IRA annually is adjusted periodically for inflation.

Accepted Answer

This is true. The maximum amount that can be contributed to an IRA annually is adjusted periodically for inflation by the IRS. As of 2021, the maximum contribution limit for traditional and Roth IRAs is $6,000, with an additional $1,000 catch-up contribution for individuals 50 years or older.

Question 10

What would be the difference in the tax consequences of an $18,000 withdrawal from a Roth IRA versus a traditional IRA if $15,000 represents long-term capital gains,$2,000 is short-term capital gains,and $1,000 is interest? Assume a tax rate of 30% and a capital gains tax rate of 10%.

Accepted Answer

With a Roth IRA, the withdrawal of $18,000 would not be subject to any taxes since the contributions were made after-tax. However, with a traditional IRA, the entire $18,000 would be subject to income tax at 30%, resulting in $5,400 in taxes. Additionally, the $15,000 of long-term capital gains and $2,000 of short-term capital gains would be subject to a separate 10% capital gains tax, resulting in an additional $1,700 in taxes. Therefore, the total tax liability with a traditional IRA would be $7,100, which is $5,400 more in taxes than with a Roth IRA.

Question 11

With which of the following retirement plans will your withdrawals not be subject to taxes if you are over 59 1/2 and have had the account for at least five years?

Accepted Answer

Withdrawals from a Roth IRA are tax-free if you are over 59 1/2 and have had the account for at least five years. This is because contributions to a Roth IRA are taxed upfront, so there are no taxes owed on the withdrawals in retirement.

Question 12

A(n)________ annuity provides a specific return on your investment so you know how much money you will receive at a future point.

Accepted Answer

A fixed annuity provides a set, guaranteed rate of return on your investment, which means you know exactly how much money you will receive at a future point. Guaranteed and insured annuities may also provide a specific return, but they could be variable or subject to change based on market conditions or other factors. Variable annuities do not offer a specific return as the return is based on the performance of the underlying investments.

Question 13

If you are about to invest in a stock that has excellent growth potential over the next few years and the investment is to be part of your retirement,the best place to do this would be in a

Accepted Answer

The best place to invest for retirement with a long-term growth potential stock would be within a Roth IRA. While a regular brokerage account or bank trust account is an option, a Roth IRA offers tax-free growth and tax-free withdrawals in retirement, making it the most advantageous choice for long-term retirement investing. A rollover IRA may be an option if you are transferring funds from a former employer's retirement plan, but a Roth IRA would still be the better choice for tax-free growth potential.

Question 14

The traditional IRA allows tax-deductible contributions of up to $5,500 ($6,500 for those age 50 or older)in 2015 for individuals who are not covered by employer-sponsored retirement plans or meet income qualifications if they have an employer plan.

Accepted Answer

This statement is true. The traditional IRA does allow tax-deductible contributions of up to $5,500 in 2015 (with an additional $1,000 catch-up contribution for those age 50 or older) for individuals who are not covered by employer-sponsored retirement plans or meet income qualifications if they have an employer plan.

Question 15

If your marginal tax rate while working is low,but you expect your marginal income tax rate to be high after you retire,you may be better off investing in a traditional IRA than in a Roth IRA.

Accepted Answer

A Roth IRA allows you to pay taxes on your contributions now, and then withdraw the money tax-free in retirement. If you expect your tax rate to be higher in retirement, paying taxes now (with a Roth IRA) rather than later (with a traditional IRA) would be more beneficial.

Question 16

When deciding whether to invest in a traditional IRA or a Roth IRA one would consider all of the following,except

Accepted Answer

The decision between a traditional IRA and a Roth IRA ultimately comes down to whether you want the money to accumulate tax-free or not. Traditional IRAs offer tax-deferred growth, meaning you won't pay taxes on the money until you withdraw it during retirement. Roth IRAs, on the other hand, offer tax-free growth, meaning you've already paid taxes on the money and won't owe anything when you withdraw it. Factors such as expected income during retirement, employer-sponsored retirement plans, and expected marginal income tax rates can all influence this decision, but the tax-free vs tax-deferred growth aspect is the most important one to consider.

Question 17

Individuals normally incur a tax penalty if funds are drawn from a traditional IRA before the age of 59 1/2.

Accepted Answer

This is true. Individuals who withdraw from a traditional IRA before the age of 59 1/2 typically incur a tax penalty of 10% on the amount withdrawn, in addition to any applicable income taxes. There are some exceptions to this penalty, such as for certain medical expenses or first-time home purchases.

Question 18

Generally,there are tax penalties for withdrawals from a traditional IRA before the age of

Accepted Answer

Generally, there are tax penalties for withdrawals from a traditional IRA before the age of 59 1/2.

Question 19

Which of the following statements about IRAs is not true?

Accepted Answer

Penalties for early withdrawal have not been phased out and still exist for IRA accounts.

Question 20

Which of the following statements is not true of annuities?

Accepted Answer

Annuities can provide annual payments for life (A), they may have high fees (C), and you can typically withdraw your investment as a lump sum (D). However, annuities do provide tax advantages, such as tax-deferred growth on the investment and the ability to receive payments tax-free if it is a qualified annuity, so statement B is not true.

Quiz 19: Retirement Planning