This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

We do not think you will get all these Roth IRA answers Correct!

So, the first 25 who answer all the questions correctly will win a prize from Dunham!

Potential Prizes

(We will invoke the honor system; no search engines allowed; a picture of the gifts is directly above where the quiz begins; this offer is valid until December 22, 2022!)

In the world of IRAs and qualified plans, nothing seems to create more debate and google searches than the Roth IRA.

On the surface, it seems simple. A Roth IRA is an individual retirement account (IRA) that offers a powerful way to save for retirement, but how much do you really know about Roth IRAs?

Read our article, Roth Conversions on Sale?

Can You Have a Potentially Happier Roth Conversion?

Click here to have us send you how” Bunching” and a Donor-Advised Fund might take some of the edge off taxes due with Roth Conversion.

How well did you do on your quiz? Let’s look at the answers and find out!

Answers and Explanations

1 – Where did the Roth IRA get its name?

Answer: (C) Named after the man known as the “taxpayer’s best friend, Sen. William V. Roth

The Roth IRA, named after its creator, Senator William V. Roth, Jr., was first made available in 1998. Senator Roth was also co-author of the Roth-Kemp tax cuts and was known as “the taxpayer’s best friend.”(1)

2 – A Roth option is available in which plans:

Answer: (B) Solo 401 (K) Plan(2)

529 and HSA (Health Savings Account) Plans are not retirement plans, although some consider HSA plans more tax efficient than a Roth IRA. This view is due to an HSA offering the Roth IRA’s advantage of tax-free growth and tax-free withdrawals in retirement for qualified expenses  but adds the benefit of tax-free contributions. In contrast, Roth IRA contributions are after-tax. (3)

Neither a SIMPLE IRA nor a SEP IRA comes in a Roth IRA structure, while 401(K) plans do, including the Solo 401(K) Plan.. (2) (4)

3 – Roth IRA Qualified Distributions are:

Answer: (C) Distributions from a Roth IRA made when you are 59 ½ years of age or older and the Roth IRA account is at least five years old(5)

A qualified distribution from your Roth IRA is not subject to taxes, and the 10% early withdrawal penalty, provided you meet the two criteria indicated in the answer.

In addition, a qualified distribution also occurs:

1 - If you have a disability;

2 – If you withdraw $10,000 from your Roth IRA as a first-time buyer of a home.

3 - You use the withdrawal to pay for qualified education expenses.

4 – Certain medical expenses;

5 – If you withdraw $5,000 to support the birth of a child or for adoption.

6 – If the Roth IRA makes a payment to your beneficiary after your death(5)

4 – Regarding the Five-Year Rule:

Answer (A) Applies for the first five years after your first-ever contribution to a Roth IRA. (6)

Remember, any potential earnings grow tax-free, and at age 59 ½, you can withdraw earnings on your Roth IRA with no penalty, provided your original Roth IRA has been open and funded for at least five years. (6)

5 – If you opened and funded your 2022 Roth IRA on April 18, 2023 (the final day in 2023 to file your 2022 tax return), the clock on the five-year rule expires on:

Answer: (D) January 1, 2027 (6)

The five-year rule operates under tax years. The use of tax years means that regardless of when in 2023 you opened and funded your 2023 Roth IRA retirement account, the five-year rule clock  started on January 1, 2023. (6)

If you are funding your 2022 Roth contribution on April 18, 2023, your five-year rule clock starts on January 1, 2022. Therefore, even though you funded the Roth IRA retirement account in 2023, your five-year rule clock ends on January 1, 2027, and you can start withdrawing funds without penalty at age 59 1/2. (6)

6 – IRS has income limitations for participation in Roth IRAs. However, in the past, you could consider what was known as a “Back-Door” IRA, where you contributed to a regular IRA and later converted it to a Roth IRA. Which statement below is true?

Answer: (B) Back-door IRAs are permitted (7)

For 2023, the Roth IRA phase-out will begin at a modified Adjusted Gross Income (AGI) of $218,000 for happily married and filing jointly and $138,000 for those filing single. Contribution amounts go to $0 at $228,000 and $153,000 for married and single. (8)

7 – Mary opened her first Roth IRA seven years ago. Two years ago, she opened a different Roth IRA for $5,000. A month ago, Mary needed money and took it from the Roth IRA she opened two years ago. Mary took her $5,000 contribution plus $872 of earnings. Which statement is true under the five-year rule:

Answer: C Mary will pay no tax on either the contribution or earnings (6)

Under the five-year rule, the five-year clock starts with your first contribution to your first Roth IRA. If you subsequently open multiple Roth IRAs, once you satisfy the five-year requirement for your very first Roth IRA, any subsequent Roth IRA is considered held for five years. Since you don’t pay taxes on contributions , that means that as long as you are 59 ½ or older and your initial Roth IRA contribution is five years or older, you do not pay taxes on contributions or earnings. (6)

8 – Mary, who is over 60 years old, converted $50,000 of her regular IRA to a Roth IRA on December 4, 2015, another $50,000 on January 26, 2020, and another $50,000 on April 25, 2021. Under the Five-Year Rule, if Mary withdrew the entire $150,000 of converted Roth IRAs plus earnings:

Answer: B Mary owes income taxes only on her earnings for the January 26, 2020, and April 25, 2021, Roth IRA conversions. (6)

Unlike regular Roth IRA contributions, each Roth conversion has its own five-year period. So Mary’s Five Year Rule expired on her original Roth conversion in 2015. However, both the January 26, 2020, and the April 25, 2021 conversions would have earnings subject to taxation since each conversion has its own Five Year Rule.(6)

Remember, you don't pay taxes on contributions you withdraw from a Roth IRA. The reason is that you place after-tax contributions in a Roth or pay income tax on converting from a regular IRA to a Roth IRA. IRS does not tax you twice when you withdraw this money. (6)

On Roth conversions, the rule of thumb is within the first five years, don't withdraw more than the amount you converted. (6)

9 – Concerning a Roth IRA, IRS Ordering Rules specify:

Answer: D The order your money comes from your Roth IRA when non-qualified distributions are involved. (9)

The Ordering Rule specifies that when the money you are withdrawing from your Roth IRA is not a qualified distribution and part of the withdrawal may be taxable, the order that the money comes out of your Roth IRA is in this order:

1.        Regular contributions are first, and they are tax and penalty-free.

2.        Next are conversion contributions which are on a first-in, first-out basis. So in our question number 8 about Mary’s conversions to a Roth IRA, her December 4, 2015 Roth conversions would be first. Her January 26, 2020 Roth conversion would be next, followed by her April 25, 2021 Roth conversion.

3.        The final order would be any taxable earnings on the Roth IRAs. (9)

10 – Your income pushes you over the level to qualify for a Roth IRA. You have a $54,000 traditional IRA, which was all deductible, meaning you have not paid taxes on any of it. You took this quiz, read about the back-door IRA, and decided to make a $6,000 back-door contribution to a Roth IRA. You placed a $6,000 non-deductible contribution in your regular IRA and then, relatively quickly, converted it to a Roth IRA with no gain on the $6,000 contribution. The amount subject to taxes on the conversion is:

Answer: D The Pro-rata rule says 90% of your back door contribution is taxable, resulting in $5,4000 in taxable income. (10)

To calculate your tax on the pro rata rule:

1 – We total all of our IRA assets which in our example is $60,000.

2 – Total all after-tax IRA assets. In our case, this is the $6,000 we placed in the IRA for the back door Roth IRA conversion since all of the $54,000 were tax-deductible contributions.

3 – Now calculate the percentage of after-tax IRA ($6,000 / $60,000 = 10%).

4 – This means that 10% of the $6,000 is non-taxable, and 90% is subject to taxation.

5 – Total amount subject to taxation = 90% of $6,000 or $5,400 (10).

Don‘t forget to let us know if you got 10/10 on this quiz. The first 25 perfect scores get the prizes pictured above the start of this quiz..












Important Disclosures

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

All examples are hypothetical and are for illustrative purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family’s unique circumstances and objectives. No two markets are the same and past performance is not an indication of future results.

Dunham does not provide legal or tax advice. Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Dunham cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. All financial decisions and investments involve risk, including possible loss of principal.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC.