econ quiz 11/12

Roth IRA

An individual retirement account funded with after-tax dollars that offers tax-free investment growth and tax-free withdrawals in retirement.

tax treatment for a Roth IRA

• Contributions: After-tax (no upfront tax deduction).

• Growth: Tax-free.

• Withdrawals: Contributions can be withdrawn anytime tax- and penalty-free; earnings are tax- and penalty-free after age 59½ and a 5-year holding period.

Roth IRA required minimum distribution amounts

• Original owner: $0 (no RMDs during their lifetime).

• Beneficiaries: Most non-spouse heirs must empty the account within 10 years of inheriting it.

. What sort of investments are acceptable for a Roth IRA? What investments are prohibited?

• Acceptable: Stocks, bonds, ETFs, mutual funds, CDs, cash, and real estate/precious metals (via a Self-Directed IRA).

• Prohibited: Collectibles (art, gems, wine, most coins), life insurance, S-Corp stock, and personal-use real estate/self-dealing.

Do Roth IRAs have any sort of insurance associated with it?

• Banks/Credit Unions

• Brokerages

Who do Roths typically advantage more?

Younger/lower-income earners currently in a low tax bracket who expect to be in a higher tax bracket in retirement, long-term investors, and people wanting to leave tax-free money to heirs.

Traditional IRA

A tax-advantaged retirement account where anyone with earned income can contribute pre-tax or after-tax money, with no income cap to open or contribute.

tax treatment for a Traditional IRA

• Contributions: Typically tax-deductible upfront (lowers current taxable income).

• Growth: Tax-deferred.

• Withdrawals: Taxed as ordinary income in retirement (age 59½+); early withdrawals face ordinary income tax plus a 10% penalty.

What is an RMD in regards to a Traditional IRA

A Required Minimum Distribution—the minimum amount the IRS forces account owners to withdraw (and pay income tax on) every year starting at age 73.

Who is likely advantaged by using a Traditional IRA

High earners currently in a high tax bracket who expect to be in a lower tax bracket in retirement, because they get a larger tax break now and pay taxes at a lower rate later.

a 529

A state-sponsored, tax-advantaged savings account designed to pay for education expenses (available as an investment savings plan or a prepaid tuition plan)

Do 529s just apply to university associated costs anymore? If not, what else can they cover?

No. They also cover K–12 tuition and expenses (up to $20,000/year), registered apprenticeships, trade/career credentialing programs, student loan payments (up to $10,000 lifetime), and computers/internet used for school.

tax treatment of a 529

• Contributions: After-tax federally (over 30 states offer state tax deductions/credits).

• Growth: Tax-free.

• Withdrawals: Tax-free for qualified education expenses; non-qualified withdrawals incur ordinary income tax plus a 10% penalty on the earnings.

What can happen to unspent 529 funds?

• Roll over up to $35,000 into the beneficiary's Roth IRA (if open 15+ years).

• Change the beneficiary to another eligible family member.

• Leave it invested for future generations (no expiration date).

• Roll over into a 529A ABLE account for a disability.

• Withdraw up to the amount of a earned scholarship without the 10% penalty (only paying income tax on gains).