Tax Treatment of Roth IRA Distributions Trivia

This trivia will quiz you on the concepts explained in the article Tax Treatment of Roth IRA Distributions If there is any question you do not understand, it is advised to refer to that page for explanation. After selecting your answers, choose the "Grade Me!" button at the bottom to know your result & the right answers.

1) The Roth IRA was created by the Taxpayer Relief Act of 1997 and came into effect on _______________

a) January 1st, 1998
b) January 1st, 1999
c) January 1st, 2000
d) January 1st, 2001

2) Before 1998, investors who wanted to contribute towards an IRA would either make a deductible or non-deductible contribution to a ______________

a) Roth IRA
b) Simple 401k
c) Traditional IRA
d) Roth 401k

3) Distributions taken from a traditional IRA are taxed as normal income, and early withdrawals before the age of 59 and a 1/2 are subject to a ____% early withdrawal penalty

a) 5%
b) 10%
c) 15%
d) 20%

4) Which of these is a possible source of Roth IRA asset?

a) Normal contributions by the investor
b) Earnings received on all contributions made by the Roth IRA investor
c) Roth conversion of taxable traditional IRA assets
d) Roth conversion of nontaxable traditional IRA assets
e) All of the above

Use the following information to answer the next 5 questions:

Simon established his first Roth IRA in 2002 and made annual participant contributions of $2000. In 2006, he converted his Traditional IRA assets to his Roth IRA for $40,000 (which was established in 2002). In 2007, Simon turns 55 years of age and wants to make some distributions of his assets. Here is his Roth IRA asset account at this time.
Here is his Roth IRA asset account at this time.

Assets Source
$10,000 Annual Roth IRA Contributions from 2002 - 2006
$40,000 Taxable traditional IRA conversion in 2006
$10,000 Non taxable Roth IRA conversion from 2006
$5000 Earnings & Capital gains made on participant contributions

5) A distribution of $10,000 is tax and penalty free because it comes from normal participant contributions made by John

a) True
b) False

6) The first $10,000 out of the $25,000 is tax and penalty free because it comes from normal participant contributions made by John (in Case i).

a) True
b) False

7) The other $15,000 comes from taxable traditional IRA conversions made in 2006. Because these conversion assets were taxed when converted, they are not subject to tax now. However, they will be subject to the 10% early withdrawal penalty fee unless 5 years have passed since the conversion was made.

a) True
b) False

8) Out of a distribution of $60,000, how much is tax exempt?

a) $10,000
b) $25,000
c) $50,000
d) All of it (The first $10,000 withdrawn is penalty and tax free as in Cases i and ii. The other $40,000 is not subject to tax because the conversion assets were already taxed when the conversion occured, as in Case ii. The remaining $10,000 is attributed to non-taxable conversion assets and is not taxable because no deductions were allowed when assets were contributed to the Traditional IRA.)

9) If excess contributions are made to a Roth IRA and later withdrawn, these contributions cannot be included as part of 'normal participant contributions' for qualified distributions.

a) True
b) False

10) In order for a Roth IRA distribution to be qualified, it must be taken under all of the following circumstances except:

a) the Roth IRA investor must be 59 and 1/2 years or older at the time of the distribution
b) the Roth IRA investor becomes disabled at the time of taking the distributions
c) the Roth IRA investor is moving to a new city and needs the funds to help move.
d) the distributions taken from the Roth IRA will be used in the purchase or building of a new home for the Roth IRA holder or qualified family member. This is limited to $10,000 per person per lifetime.


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