Retirement Accounts Practice Questions for the SIE

Answer: Contributions are made with after-tax dollars, and qualified withdrawals are tax-free.

A Roth IRA reverses the traditional IRA's tax pattern: contributions are made with after-tax dollars (they are never deductible), and qualified withdrawals come out completely tax-free. A withdrawal is qualified only when the account has satisfied the five-year holding period AND one of these is true: the owner is at least 59½, the owner has died, the owner is disabled, or the money is used for a first-home purchase. Note that the five-year clock applies to every one of those events — not just to the 59½ one. Choice B describes the traditional IRA: a possible deduction now (phased out at higher incomes for those covered by a workplace plan), then ordinary income tax later. No IRA gives you both a deduction going in and tax-free withdrawals coming out (choice C), and choice D would tax the same dollars twice. An easy way to keep the direction straight: a Roth is taxed now, a traditional is taxed later.

The Trap: Roth vs traditional taxation direction reversed

• Contributions are made with after-tax dollars, and all withdrawals are taxed as ordinary income.: The first half is right for a Roth, but the second half is not: taxing those same after-tax dollars again on the way out would be double taxation, which neither IRA imposes.
• Contributions are tax-deductible, and qualified withdrawals are also tax-free.: No IRA gives you both a deduction going in and tax-free withdrawals coming out; taking a deduction now means paying ordinary income tax later.
• Contributions are tax-deductible, and withdrawals are taxed as ordinary income.: This describes a traditional IRA, not a Roth — it reverses the direction of the tax benefit, which is the most common mix-up between the two accounts.

Verified against: Internal Revenue Code Section 408A — Roth IRA tax treatment (after-tax contributions, tax-free qualified withdrawals)

Answer: It is taxed as ordinary income, but the 10% early-withdrawal penalty is waived under the first-time-homebuyer exception.

Two separate taxes are in play, and they follow different rules. Money that went into a traditional IRA pre-tax — deductible contributions plus all the earnings on them — is taxed as ordinary income when it comes out, and none of the early-distribution exceptions change that. Separately, a distribution taken before age 59½ normally carries a 10% early-distribution penalty on top of that income tax under Internal Revenue Code Section 72(t). The first-time-homebuyer exception — capped at $10,000 over the owner's lifetime, and available for IRAs but not for 401(k)s — waives that 10% penalty only. So the full $10,000 is taxable as ordinary income but penalty-free (choice B). Choice A is the central trap: the Section 72(t) exceptions — death, disability, qualified higher education, certain medical costs, birth or adoption, and the first home — excuse the penalty, not the income tax. Choice C misses the exception entirely. Choice D confuses the IRA wrapper with a taxable brokerage account: distributions of pre-tax IRA money are ordinary income no matter how the growth arose, so long-term capital gains rates do not apply even to stock held for years inside the account.

The Trap: Penalty exception mistaken for an income-tax exemption

• It is free of both income tax and penalty because the money is used for a first-home purchase.: Exception-equals-tax-free trap; the Section 72(t) exceptions waive only the 10% penalty — they do not eliminate ordinary income tax on pre-tax money.
• It is subject to both ordinary income tax and the 10% early-withdrawal penalty.: Ignores the first-time-homebuyer exception, which waives the penalty on up to $10,000 (lifetime) of early distributions.
• It is taxed at the long-term capital gains rate because the account held appreciated stock.: Capital-gains misconception; traditional IRA distributions of pre-tax money are taxed as ordinary income regardless of how the gains arose.

Verified against: IRC §72(t)(2)(F); IRS Topic no. 557

Answer: A direct trustee-to-trustee transfer, which may be done an unlimited number of times.

Under IRS rollover rules, a customer may make only one indirect (60-day) IRA-to-IRA rollover in any 12-month period, and the limit applies across all of her IRAs combined. Two traps follow. First, the limit is not per account (choice A) — the IRS aggregates every IRA a customer owns and treats them as one. That per-IRA reading was the pre-2015 position, overturned by Bobrow v. Commissioner and IRS Announcement 2014-32, so older materials still teach it incorrectly. Second, the clock is not the calendar year (choice B) — it is a rolling 12 months measured from the date she received the earlier distribution. Because that distribution came in February, waiting until January would still fall inside the window, so choice B fails on the arithmetic as well as the concept. Since she used her one indirect rollover in February, taking a second distribution in July and redepositing it would make that distribution taxable and would create an excess contribution at the receiving firm, subject to a 6% annual excise tax until corrected. The clean solution is a direct trustee-to-trustee transfer: the money moves between custodians without the customer taking possession, so it is not a rollover at all. Transfers are unlimited in number and put no 60-day deadline at risk. Choice D compounds the error with a 90-day window that does not exist — the redeposit period for an indirect rollover is 60 days — and a second rollover would be barred in any case.

The Trap: Once-per-12-months rollover limit applied per account or per calendar year, instead of using unlimited trustee-to-trustee transfers

• Waiting until January, when the new calendar year restores her rollover privilege.: Calendar-year myth, and wrong on the math too. The 12-month clock runs from the date she received the February distribution — so January of the next year is still inside the window. A direct transfer also makes any wait unnecessary.
• Another 60-day rollover, because each IRA carries its own once-per-year rollover allowance.: Per-account myth. The once-per-12-months limit on indirect rollovers aggregates all of a customer's IRAs — traditional, Roth, SEP, and SIMPLE — treating them as a single IRA. She gets one indirect rollover total, not one per account.
• Taking the distribution from Firm C and redepositing it at Firm B within 90 days.: Wrong window — the indirect-rollover redeposit period is 60 days, not 90 — and a second indirect rollover would violate the 12-month limit regardless of the deadline used.

Verified against: verified against irs.gov 'Rollovers of retirement plan and IRA distributions' and Announcement 2014-32

Answer: She may contribute up to the annual IRS maximum, but because she participates in a workplace plan, her deduction may be reduced or eliminated at her income level

Eligibility and deductibility are separate questions for a traditional IRA. Anyone with earned income may contribute — up to the annual IRS maximum, or 100% of earned income if that is less — regardless of workplace-plan coverage, and (since the SECURE Act) regardless of age. IRS Publication 590-A puts it plainly: you can have a traditional IRA whether or not you are covered by any other retirement plan. What Priya's 401(k) participation affects is the tax deduction: for active participants in an employer plan, the deduction phases out as income rises, so a high earner like Priya may end up making a nondeductible contribution — still allowed, and the earnings still grow tax-deferred until withdrawal. Choice D fails on a different rule: the annual limit is one combined ceiling across all of a person's traditional and Roth IRAs together, not a separate limit for each type. These rules come from the Internal Revenue Code's IRA provisions.

The Trap: Traditional IRA contributions are NOT always deductible when covered by a workplace plan (deduction limited, contribution still allowed)

• She should contribute the annual maximum to both a traditional IRA and a Roth IRA, since each account type has its own separate limit: Misconception: separate limits for traditional and Roth. The annual contribution limit is a single combined ceiling shared across all of a person's traditional and Roth IRAs.
• She is not permitted to contribute to an IRA in any year she is covered by an employer retirement plan: Misconception: confusing deductibility with eligibility. Workplace-plan coverage can limit the deduction, but it does not bar making the contribution itself.
• Her contribution will be fully deductible, because traditional IRA contributions are always deductible: Misconception: 'traditional IRA contributions are always deductible.' The deduction phases out at higher incomes when the taxpayer is covered by a workplace retirement plan.

Verified against: misconceptions 'always deductible' and 'separate limits'); never-hard-code-dollar-limits warning; verified against IRS Publication 590-A and IRS IRA deduction/contribution limits pages

Answer: She must take annual RMDs from the traditional IRA, but the Roth IRA has no lifetime RMDs for the owner

Required minimum distributions apply to traditional IRAs: contributions were typically deducted and the growth has been tax-deferred, so the IRS eventually forces the money out to be taxed. Owners must begin RMDs at age 73 under the SECURE 2.0 Act (the age moved up from 72 starting in 2023 and is scheduled to rise to 75 in 2033 — study materials showing 70 1/2 or 72 are out of date). The very first RMD may be deferred to April 1 of the year after the owner turns 73, but every RMD after that is due by December 31. A Roth IRA is funded with after-tax dollars, and its owner is not required to take any distribution during her lifetime — one reason Roth accounts are attractive for passing assets to heirs. RMD-type rules can apply to Roth assets after the owner dies, once the account passes to a beneficiary. At 74, this retiree is past her required beginning date for the traditional IRA only, so she must take RMDs from that account but not from the Roth. Watch for the two traps: assuming every IRA has RMDs, and swapping which account type carries them.

The Trap: Which IRA has lifetime RMDs — traditional (age 73) yes, Roth no

• Neither account requires distributions during her lifetime: Misconception: believing traditional IRAs have no RMDs. Traditional IRA owners must begin RMDs at age 73.
• She must take annual RMDs from the Roth IRA but not from the traditional IRA: Misconception: swapping the two account types. It is the traditional IRA that carries lifetime RMDs; the Roth does not.
• She must take annual RMDs from both accounts: Misconception: assuming RMDs apply to every IRA. Roth IRAs impose no lifetime RMDs on the account owner.

Verified against: first RMD may defer to Apr 1 of following year)

Answer: Each spouse may fund his or her own IRA up to the annual IRS maximum plus the age-50 catch-up, supported by Marcus's earned income

The general rule is that IRA contributions require earned income, but the spousal IRA provision (the Kay Bailey Hutchison Spousal IRA in the Internal Revenue Code) creates the key exception: for a married couple filing jointly, one spouse's earned income can support contributions to both spouses' IRAs. The ceiling is that the couple's combined contributions cannot exceed the taxable compensation reported on their joint return — here Marcus's salary clears that bar, so each spouse can be funded to the full amount. Each spouse owns his or her own separate account: 'individual' is built into the name, and no joint IRA exists. Catch-up contributions are available to anyone age 50 or older, regardless of employment, so both Marcus (53) and Dana (51) may add the catch-up amount on top of the annual maximum. Note that this is about who may CONTRIBUTE — whether a traditional IRA contribution is also DEDUCTIBLE is a separate test, phased out at higher incomes when a spouse is covered by a workplace retirement plan. Watch the two traps together: the earned-income requirement bends for a spouse, and the catch-up turns on age, not on having a job.

The Trap: Earned-income requirement has a spousal exception; catch-up depends on age, not employment

• Dana may contribute, but she is not eligible for the catch-up contribution because she is not employed: Misconception: tying the catch-up to employment. Catch-up eligibility is based solely on being age 50 or older, not on working status.
• Dana cannot contribute to an IRA because she has no earned income of her own: Misconception: applying the earned-income requirement without the spousal exception. A spousal IRA lets a non-working spouse contribute based on the working spouse's earned income.
• They must combine their savings into a single joint IRA to use the spousal contribution rules: Misconception: believing spouses can share one IRA. An IRA is by definition an individual account — there is no joint IRA; each spouse owns a separate account.

Verified against: verified against irs.gov 'Retirement topics — IRA contribution limits' and IRS Pub 590-A (Kay Bailey Hutchison Spousal IRA; joint-return requirement; combined contributions limited to joint taxable compensation; catch-up at age 50+)

Answer: Her contributions are returned tax- and penalty-free, but the earnings are taxable as ordinary income because the account has not met the five-year test; no 10% penalty applies at her age

A qualified Roth IRA distribution — one that is entirely tax-free — requires two things at once: the five-year holding period must be satisfied, AND a qualifying trigger must apply (age 59½, death, disability, or a first-home purchase up to a lifetime limit). Carmen satisfies the age test but fails the five-year test, so her distribution is not qualified. IRS ordering rules then take over: regular annual contributions are deemed to come out first, and because they were made with after-tax dollars they come back tax- and penalty-free. The earnings come out last and, in a non-qualified distribution, are taxed as ordinary income — though Carmen owes no 10% early-withdrawal penalty on them, because that penalty applies only to distributions taken before 59½ and she is 61. One nuance worth knowing: the five-year clock starts on January 1 of the tax year FOR WHICH the first contribution was made, which can be earlier than the day the account was actually opened. Even with that head start, three years falls short. The trap is assuming age alone makes a Roth withdrawal tax-free; the five-year clock is an independent requirement, and both must be met.

The Trap: Roth qualified distribution requires BOTH the five-year holding period AND a qualifying event such as age 59½ — age alone is not enough

• The earnings are tax-free, but her contributions are taxable as ordinary income: Misconception: reversing the Roth taxation direction. Regular contributions were made with after-tax dollars and are not taxed again on withdrawal; it is the earnings that lose tax-free treatment when the distribution is not qualified.
• The entire withdrawal is taxable as ordinary income: Misconception: applying traditional-IRA taxation to a Roth. Roth contributions were made with after-tax dollars and come back tax-free; only the earnings portion can be taxable here.
• The entire withdrawal is tax-free because she is over age 59½: Misconception: treating 59½ alone as sufficient. A qualified Roth distribution requires BOTH the age/qualifying-event test AND the account satisfying the five-year holding period — her account is only three years old.

Verified against: contributions withdrawable anytime tax-free). Verified against IRS Pub 590-B (ordering rules; 5-year period runs from Jan 1 of first contribution year) and IRS Topic no. 557 (10% additional tax applies only before age 59½; applies to Roth IRAs).

Answer: Use a direct trustee-to-trustee transfer, which can be done an unlimited number of times and avoids the rollover restriction

IRS rules distinguish two ways of moving IRA money. An indirect (60-day) rollover — where the owner receives a check payable to himself and redeposits it within 60 days — is limited to one per 12-month period, measured across all of the taxpayer's IRAs in aggregate rather than per account. Two details decide this question. First, the limit aggregates every IRA the taxpayer owns, treating them as a single IRA, so a rollover involving two IRAs still uses up the one allowance for the third. Second, the 12-month period is a rolling one that starts on the date the distribution is received — not on January 1, and not on the date the money is redeposited. Theo received his distribution in February and used his one rollover there, so a second check payable to himself in September falls squarely inside that window: it would be a taxable distribution, potentially carrying the 10% early-withdrawal penalty if he is under 59½, plus a 6% excise tax for each year the money remains in the receiving IRA as an excess contribution. A direct trustee-to-trustee transfer, in which the funds move between custodians without the owner ever taking possession, is not a rollover at all. Transfers between IRAs are not limited in number, which makes this the correct recommendation here and the safer default for consolidating retirement accounts generally.

The Trap: Once-per-12-month limit is aggregate across all IRAs and runs from the distribution date, not the calendar year — trustee-to-trustee transfers are unlimited

• Tell Theo the funds cannot be moved by any method until 12 months have passed since the February rollover: Misconception: extending the rollover limit to all movement methods. Direct trustee-to-trustee transfers are not rollovers and face no frequency limit, so the funds can be moved right away using the correct method.
• Proceed with another 60-day rollover, because the once-per-year limit applies separately to each IRA: Misconception: reading the limit as per-account. The IRS applies the once-per-12-month indirect rollover limit by aggregating ALL of the taxpayer's IRAs — traditional, Roth, and SIMPLE — and effectively treating them as one IRA for this purpose.
• Wait until January, when the new calendar year resets his rollover allowance: Misconception: treating the limit as a calendar-year rule. Nothing resets on January 1. The 12-month clock is a rolling one that begins on the date the distribution was received — February — so it does not close until the following February, and a January distribution would still fall inside the window.

Verified against: trustee-to-trustee unlimited); IRS Publication 590-A, 'Application of one-rollover-per-year limitation' (aggregation across all IRAs; trustee-to-trustee transfers not limited) and 'Waiting period between rollovers' (1-year period begins on the date the distribution is received)

Answer: May contribute up to the current IRS annual limit, but her deduction may be reduced or eliminated because of her income and workplace-plan coverage

Keep two questions separate: 'Can I contribute?' and 'Can I deduct it?' Anyone with earned income may contribute to a traditional IRA up to the current IRS annual limit regardless of how much they earn — but when the contributor (or spouse) actively participates in a workplace plan such as a 401(k), the tax DEDUCTION is phased out above certain income levels. Dana can fund the IRA; her deduction may be partly or fully lost, leaving a nondeductible contribution that still grows tax-deferred. Choice A blocks the contribution itself — wrong variable. Choice C ignores the phase-out entirely. Choice D reverses the two IRAs' rules: income phase-outs limit direct Roth contributions, while traditional IRAs limit only the deduction. These deduction and phase-out rules come from the Internal Revenue Code as administered by the IRS.

The Trap: Traditional IRA contributions are always deductible (or plan coverage bars contributing at all)

• May not contribute to a traditional IRA because she is covered by a workplace retirement plan: Confuses contribution eligibility with deductibility — plan coverage never bars contributing to a traditional IRA; it only affects whether the contribution is deductible.
• May contribute and deduct the full amount, because traditional IRA contributions are deductible for everyone: The 'always deductible' misconception — deductibility is phased out at higher incomes when the contributor is an active participant in an employer plan.
• Must use a Roth IRA instead, because high earners are barred from contributing to traditional IRAs: Swaps the two phase-outs — it is direct ROTH contributions that are subject to income phase-outs; traditional IRA contributions have no income cap (only the deduction does). At her income Dana might actually be shut out of direct Roth contributions.

Verified against: never hard-code dollar limits)

Answer: It is taxed as ordinary income, but the 10% early-withdrawal penalty is waived

Traditional IRA withdrawals of deductible (pre-tax) money come out as ordinary income, and none of the early-withdrawal exceptions change that. What those exceptions change is the 10% additional tax on withdrawals taken before age 59½: under the Internal Revenue Code, the penalty is waived for events including death, disability, qualified higher-education expenses, certain unreimbursed medical costs, and up to $10,000 (a lifetime cap, per taxpayer) used for a first-time home purchase. So this customer owes ordinary income tax on the $10,000 but no penalty. Two details worth filing away: a 'first-time' homebuyer just means someone with no ownership interest in a principal residence during the prior two years, and the first-home and higher-education exceptions are IRA-only — they do not extend to 401(k)-type plans. Choice B confuses the penalty waiver with total tax forgiveness — only a qualified Roth IRA withdrawal can be fully tax-free. Choice C forgets the exceptions exist. Choice D imports capital-gains treatment, which does not apply to IRA distributions: whatever the account earned inside the IRA, it leaves the IRA as ordinary income.

The Trap: Penalty exceptions also eliminate the ordinary income tax on the withdrawal

• It is taxed at long-term capital gains rates because the IRA held the investments for more than one year: Capital-gains misconception — gains inside a traditional IRA lose their capital-gains character, so taxable distributions of pre-tax IRA money are ordinary income no matter how long the investments were held inside the account.
• It is entirely free of both income tax and penalty because it qualifies for the first-home exception: The 'exception waives everything' misconception — a penalty exception waives the 10% additional tax only; it never removes deductible traditional IRA money from gross income (tax-free first-home treatment belongs to qualified Roth withdrawals).
• It is taxed as ordinary income plus the 10% penalty because the customer is under age 59½: Ignores the penalty exceptions — the under-59½ penalty is waived for death, disability, first home (up to $10,000), higher education, certain medical costs, and other listed events.

Verified against: withdrawals taxed as ordinary income). Verified 2026-07-17 against IRS Topic No. 557 (irs.gov/taxtopics/tc557), IRS 'Retirement topics — Exceptions to tax on early distributions' (first-home exception is IRA-only), and Pub 590-B.