Nadine, age 58, has participated in her employer's SIMPLE IRA plan for 14 months, and her account is funded entirely with pre-tax salary-reduction contributions and employer matching contributions. She withdraws $30,000 to purchase a vacation home. No exception to the early-distribution rules applies.
Which statement correctly describes the federal tax treatment of Nadine's withdrawal? Answer: The $30,000 is taxable as ordinary income and is subject to the 25% additional tax.
Governing authority: IRC §72(t) and the SIMPLE IRA early-distribution rules. A distribution from a SIMPLE IRA during the two-year period beginning with the participant's first participation is subject to a 25% additional tax rather than the usual 10%. Nadine has participated for only 14 months, so the 25% rate applies; because her contributions were pre-tax, the entire $30,000 is ordinary income. The 10% option applies the general early-distribution penalty but ignores the SIMPLE two-year rule. The no-penalty option improperly extends the age-55 separation exception, which applies to qualified employer plans, not IRAs. The return-of-contributions option treats pre-tax SIMPLE contributions as after-tax basis; no basis exists to exclude from income.
Grace, age 56, terminates employment with her employer in 2026 and receives a $60,000 lump-sum distribution from the employer's qualified 401(k) plan. In the same month, she withdraws $20,000 from a traditional IRA she has maintained since age 30. She does not roll over either amount and claims no other exception. Assume neither account contains any after-tax basis.
How does the 10% additional tax on early distributions apply to these amounts? Answer: The 10% additional tax applies to the IRA withdrawal, but not to the plan distribution, because the age-55 exception covers the 401(k) distribution.
Governing authority: IRC §72(t)(2)(A)(v), the separation-from-service exception to the 10% additional tax on early distributions. Because neither account contains after-tax basis, the full amounts are includible in gross income, and the issue is whether an exception applies. The exception applies to distributions from a qualified employer plan when the participant separates from service in or after the year she reaches age 55. Grace separated at age 56, so the 401(k) lump-sum distribution is not subject to the 10% additional tax. The exception does not apply to IRAs; because Grace is under age 59½ and no other exception applies, the traditional IRA withdrawal is subject to the 10% additional tax. The statement that the tax applies to both amounts because Grace is under 59½ and no exception applies ignores the age-55 plan exception. The statement that neither amount is taxed wrongly extends the age-55 exception to IRAs. The statement that the age-55 exception does not cover a lump-sum 401(k) distribution is wrong; the exception applies to distributions after separation, including lump sums, so the plan distribution is not subject to the additional tax.
Pilar, age 62, is a participant in her employer's 401(k) plan and had 2025 FICA wages of $176,000. For 2026, the elective deferral limit is $24,500, the age-50+ catch-up limit is $8,000, and the catch-up limit for participants ages 60 through 63 is $11,250. Catch-up contributions by employees whose prior-year FICA wages exceeded $150,000 must be made to a designated Roth account. Pilar wants to contribute the maximum amount permitted for 2026 while keeping the largest possible pre-tax portion.
Which statement correctly describes Pilar's maximum 2026 401(k) contribution? Answer: She may defer $35,750, but the $11,250 catch-up must be contributed to a designated Roth account.
Governing authority: IRC §402(g) elective deferral limits and the SECURE 2.0 Roth catch-up requirement. Because Pilar is 62, she is in the 60-63 age band, so her catch-up ceiling is $11,250 rather than $8,000; her maximum total deferral is $24,500 + $11,250 = $35,750. Her 2025 FICA wages exceeded $150,000, so the catch-up must be designated Roth, while the regular $24,500 deferral may be pre-tax or Roth at her election. The statement that the full $35,750 may be pre-tax ignores the Roth catch-up mandate. The $32,500 figure applies the $8,000 age-50 catch-up instead of the $11,250 limit for ages 60-63. The $24,500-only position misreads the high-FICA rule as eliminating catch-ups rather than requiring Roth treatment.
- Which of the following statements regarding a governmental 457(b) eligible deferred-compensation plan is true?
Answer: The plan is not a qualified plan under IRC Section 401(a), and a distribution before age 59 1/2 is not subject to the 10% additional tax.
A 457(b) plan is an eligible deferred-compensation plan under IRC Section 457, not a qualified plan under IRC Section 401(a), and distributions from a governmental 457(b) plan are generally not subject to the 10% additional tax under IRC Section 72(t). The statement that a 457(b) plan is a qualified plan with the same early-distribution penalties as a 401(k) plan is wrong on both points. The after-tax statement is wrong because traditional 457(b) deferrals are pre-tax and are taxable when distributed. The availability statement is wrong because governmental 457(b) plans cover state and local government employees generally, not only public-school and charity employees, and governmental 457(b) plans are subject to the required minimum distribution rules.
Everett, age 52, requests a $100,000 lump-sum distribution from his former employer's 401(k) plan in 2026 and directs that it be paid directly to him rather than as a direct rollover to an IRA. Because it is paid directly to him, the plan withholds 20% for federal income tax and sends him a check for $80,000. A rollover must generally be completed within 60 days of his receipt of the distribution. Everett wants to avoid current income tax and the 10% early-distribution penalty on the entire amount.
What must Everett do to accomplish that goal? Answer: Roll over $100,000 within 60 days and replace the $20,000 withheld from other funds; the $20,000 withheld is credited against his income tax.
Governing authority: IRC §402(c)(3) (the 60-day rollover rule), IRC §3405(c) (mandatory 20% withholding on eligible rollover distributions), and IRC §72(t) (the 10% early-distribution penalty). The withheld $20,000 was never received, but it is still part of the distribution; to avoid income tax and the 10% penalty on the full $100,000, Everett must roll over $100,000 within 60 days, replacing the withheld $20,000 from other funds. The withheld amount is then credited against his income tax and refunded to the extent it exceeds his liability. Rolling over only $80,000 leaves $20,000 taxable and, at age 52, subject to the 10% early-distribution penalty. The federal income tax filing deadline is not the rollover deadline for a regular plan distribution; the 60-day rule governs.
In 2026, a 62-year-old participant in a 401(k) plan had prior-year FICA wages of $160,000. The 2026 elective deferral limit is $24,500, the catch-up limit for participants ages 60 through 63 is $11,250, and employees whose prior-year FICA wages exceeded $150,000 must make their catch-up contributions as designated Roth contributions.
Which of the following statements is true? Answer: He may defer up to $35,750, of which the $11,250 catch-up portion must be made as a designated Roth contribution because his prior-year FICA wages exceeded $150,000.
IRC Section 414(v) governs catch-up contributions. In 2026, a participant ages 60 through 63 has a catch-up limit of $11,250, so the total elective deferral is $24,500 + $11,250 = $35,750. Under the SECURE 2.0 amendments to Section 414(v), an employee whose prior-year FICA wages exceeded $150,000 must make catch-up contributions as designated Roth contributions; the regular $24,500 deferral may be pre-tax or designated Roth. The $32,500 option applies the general age-50 catch-up of $8,000 rather than the higher ages-60-through-63 limit. The all-pre-tax options are wrong because the Roth catch-up requirement applies once the FICA-wage threshold is crossed, and it is not limited to highly compensated employees; the all-Roth option wrongly extends the mandate to the entire deferral instead of only the catch-up.
- Which of the following statements regarding the additional tax on early distributions from a SIMPLE IRA is true?
Answer: An early distribution within the two-year period beginning on the date the employee first participated in any SIMPLE IRA is subject to a 25% additional tax instead of the 10% additional tax.
IRC Section 72(t)(6) imposes a 25% additional tax, in place of the usual 10% tax, on early distributions from a SIMPLE IRA within the two-year period beginning on the date the employee first participated in any SIMPLE IRA, assuming no exception applies. The statement that the 10% tax applies inside the two-year period and the 25% tax applies after it has the rates backwards. The statement that the 25% tax applies to any pre-59 1/2 distribution regardless of participation ignores the two-year limitation. The matching-contribution split is wrong because the 25% rate applies to amounts withdrawn within the two-year window without regard to whether they came from salary-reduction or employer-matching contributions.
Marcus, age 54, has $68,000 of compensation for purposes of the annual-additions limit from Halloran Manufacturing, which sponsors a 401(k) plan with a profit-sharing feature. For 2026, Marcus will make the maximum regular elective deferral of $24,500 and the age-50+ catch-up contribution of $8,000. His employer will make the largest profit-sharing contribution permitted by the annual-additions limit, without regard to the deduction rules. The annual-additions limit for 2026 is the lesser of $72,000 or 100% of compensation, and catch-up contributions are not counted in that limit.
What is the maximum total amount that may be added to Marcus's account for 2026? Answer: $76,000
Governing authority: IRC § 415(c), the annual-additions limit for defined contribution plans. Annual additions consist of employee deferrals and employer contributions, but not age-50+ catch-up contributions. For Marcus, the non-catch-up ceiling is the lesser of $72,000 or 100% of his $68,000 compensation, so it is $68,000. After the $24,500 regular deferral, the employer may contribute at most $43,500, and the $8,000 catch-up is added on top, giving $76,000. The $68,000 total treats the 100%-of-compensation cap as the ceiling for all additions and fails to add the catch-up on top of that ceiling. The $72,000 total applies the dollar limit without the 100%-of-compensation cap and omits the catch-up. The $80,000 total adds the catch-up to the $72,000 dollar limit but overlooks that 100% of compensation, not the dollar limit, is the binding cap here.
A client earns $450,000 in 2026. Her employer sponsors a defined contribution profit-sharing plan and contributes 10% of each participant's compensation to the plan. She also makes the maximum 2026 elective deferral of $24,500. The compensation limit used in calculating plan contributions is $360,000, and the annual additions limit for defined contribution plans is $72,000.
What are her total annual additions for 2026? Answer: $60,500
IRC Section 415(c) caps annual additions, which include employer contributions and employee elective deferrals, at $72,000. Under IRC Section 401(a)(17), plan contributions are computed on compensation no greater than $360,000, so the employer contribution is 10% of $360,000 = $36,000, not 10% of the full $450,000 salary. Adding the $24,500 deferral gives total annual additions of $60,500, which is below the $72,000 cap. $69,500 results from ignoring the compensation cap; $45,000 uses the uncapped salary and omits the deferral; and $36,000 captures only the employer contribution, omitting the deferral.
An employee owns 6% of the corporation that sponsors her qualified retirement plan and continues working after reaching age 73.
Which of the following statements regarding required minimum distributions from a qualified retirement plan is true for an employee who reaches age 73 in 2026? Answer: An employee who is a 5% owner and continues working after reaching age 73 must take the first required minimum distribution by April 1 of the year after reaching age 73.
Under IRC § 401(a)(9), the required beginning date for a 5% owner who continues working is April 1 of the year after the year she reaches age 73, the RMD age in 2026. The still-working exception, which lets a non-5% owner delay the first RMD until April 1 of the year after retirement, does not apply to a 5% owner. The December 31 deadline is wrong because the first RMD carries an April 1 extension. The statement that any employee who continues working may delay the first RMD until retirement is wrong because it ignores the 5% owner exception. The statement that a 5% owner may delay until age 75 is wrong because a 5% owner cannot use the still-working exception, and the age-75 phase-in does not apply to an employee who reaches age 73 in 2026.
Naomi, age 74, receives several amounts from her employer's 401(k) plan in 2026 after terminating employment: a hardship withdrawal of elective deferrals, her required minimum distribution for the year, a deemed distribution resulting from a defaulted plan loan, and a lump-sum distribution of her entire remaining vested account balance, which she rolls over to a traditional IRA.
Which of the amounts Naomi received are eligible for a tax-free rollover to a traditional IRA? Answer: The lump-sum distribution is eligible; the hardship withdrawal, the RMD, and the deemed loan distribution are not.
Governing authority: IRC §402(c), which defines eligible rollover distributions. A lump-sum distribution of the vested account balance after separation from service is an eligible rollover distribution. Required minimum distributions and hardship withdrawals are statutorily excluded from eligible rollover distributions, and a deemed distribution of a defaulted plan loan is not an actual distribution and cannot be rolled over. The answer that says all four amounts are eligible is wrong because the RMD, hardship withdrawal, and deemed loan distribution are not eligible. The answer that says the deemed loan distribution and the lump-sum distribution are eligible is wrong because a deemed loan distribution is not an eligible rollover distribution. The answer that says only the RMD is ineligible is wrong because the hardship withdrawal and the deemed loan distribution are also ineligible.
- Which of the following statements regarding the exception to the 10% additional tax for separation from service is true?
Answer: An employee who separates from service in the year she turns 55 may take penalty-free distributions from the plan, but the exception does not apply to a traditional IRA.
IRC Section 72(t)(2)(A)(v) waives the 10% additional tax on distributions from a qualified retirement plan made after an employee separates from service during or after the calendar year in which she attains age 55. The exact-date statement is wrong because the test is the calendar year of separation, not the employee's age on the separation date. The statement that the exception may apply to distributions from a traditional IRA is wrong: the age-55 separation exception is available only from qualified plans, and it does not follow plan proceeds into an IRA. The defined-benefit-only statement is wrong because the exception applies to qualified plans generally, including 401(k) plans, and a 401(k) distribution before age 59 1/2 is not always penalized since other statutory exceptions may apply.
Delia turns 73 on October 1, 2026, and continues working for the company whose 401(k) plan holds her account. She owns 6% of the company's stock, making her a 5% owner under the tax rules. Required minimum distributions from the plan generally begin at age 73; the first RMD is due by April 1 of the year after the participant reaches age 73. A participant who is still employed and does not own more than 5% of the employer may delay the first RMD until April 1 of the year after retirement.
By what date must Delia receive her first RMD from the plan? Answer: April 1, 2027
Governing authority: IRC §401(a)(9), required minimum distribution rules for employer plans. Delia reached RMD age (73) in 2026, so her first distribution, for 2026, must be made by April 1, 2027. Because she is a 5% owner, she cannot use the still-working exception, so the April 1-of-the-year-after-retirement date is unavailable. December 31, 2026, is earlier than required; December 31, 2027, is the deadline for her second RMD (for 2027), not her first. The retirement-delay date applies only to participants who are not 5% owners.
