Series 7 Quiz: Apply Retirement Account Rules
20 questions · exam conditions
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Apply Retirement Account RulesQuestion 1 of 20

An individual with a self-directed IRA is considering several investments. Which of the following would be a prohibited transaction?

Purchasing U.S. Treasury bonds.
Investing in an exchange-traded fund (ETF).
Buying a collectible antique coin.
Selling a cash-secured put.
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Series 7 Quiz

Series 7 Quiz: Apply Retirement Account Rules

Practice Apply Retirement Account Rules in Series 7 with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Apply Retirement Account Rules, giving you a quick way to practice the rules, question types, and explanations that matter most for Series 7.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

An individual with a self-directed IRA is considering several investments. Which of the following would be a prohibited transaction?

  1. Purchasing U.S. Treasury bonds.
  2. Investing in an exchange-traded fund (ETF).
  3. Buying a collectible antique coin. (correct answer)
  4. Selling a cash-secured put.
Explanation: The IRS prohibits IRA owners from investing their retirement funds in certain assets, including collectibles such as artwork, antiques, gems, stamps, and most coins. Investing in collectibles is considered a prohibited transaction and is treated as a taxable distribution from the IRA. Stocks, bonds, ETFs, and most options strategies are generally permissible.

Question 2

After changing jobs, a client wants a tax-free move from a former employer 401(k) to an IRA; which action ensures this?

  1. Request a lump-sum distribution payable to the client and redeposit within 90 days
  2. Complete an indirect rollover and replace any withholding only if audited
  3. Execute a direct rollover with the check payable to the IRA custodian for the client's benefit (correct answer)
  4. Transfer assets from the 401(k) to the IRA using a trustee-to-trustee transfer form
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is misunderstanding the rollover periods and withholding requirements, which is why distractor A fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.

Question 3

A 48-year-old completes an IRA-to-IRA rollover, then tries another rollover two months later; what is most accurate?

  1. Permitted because the 60-day rule resets monthly
  2. Generally prohibited due to the one-rollover-per-12-months rule (correct answer)
  3. Permitted if both IRAs are at the same custodian
  4. Permitted if the second rollover is to a Roth IRA
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is ignoring the one-per-12-months rule, which is why distractor A fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.

Question 4

A client turned 73 during the current calendar year and has a Traditional IRA. He has not yet taken his first Required Minimum Distribution (RMD). What is the latest date by which he must take his first RMD to avoid a penalty?

  1. December 31 of the current year.
  2. April 1 of the current year.
  3. April 1 of next year. (correct answer)
  4. December 31 of next year.
Explanation: Under the SECURE Act 2.0, an individual must take their first Required Minimum Distribution (RMD) from a Traditional IRA by April 1 of the year following the year they reach age 73. All subsequent RMDs must then be taken by December 31 of each year. Failure to take a timely RMD can result in a significant tax penalty on the amount that should have been withdrawn.

Question 5

An employee has a vested balance of $120,000 in her 401(k) plan. Her plan permits loans. What is the maximum loan amount she can take from her account?

  1. $12,000
  2. $50,000 (correct answer)
  3. $60,000
  4. $100,000
Explanation: The maximum amount an employee can borrow from their 401(k) is the lesser of $50,000 or 50% of their vested account balance. In this case, 50% of the vested balance is $60,000. Since $50,000 is less than $60,000, the maximum permitted loan is $50,000.

Question 6

A self-employed architect is the sole proprietor of his firm. He wants to establish a retirement plan that allows for large, discretionary contributions for himself. Which of the following plans would be most suitable for his goal?

  1. SIMPLE IRA
  2. Traditional IRA
  3. SEP IRA (correct answer)
  4. Roth 401(k)
Explanation: A SEP (Simplified Employee Pension) IRA is an ideal retirement plan for self-employed individuals. It allows for significant, tax-deductible contributions (up to 25% of compensation, not to exceed an indexed annual maximum). Contributions are flexible and can be made or skipped each year, making it perfect for a business owner with fluctuating income who wants the ability to contribute large amounts in profitable years.

Question 7

An employer with 50 employees wants to establish a retirement plan that is easy to administer and involves mandatory employer contributions. Which of the following plans requires the employer to make either a matching or a non-elective contribution for eligible employees?

  1. SEP IRA
  2. SIMPLE IRA (correct answer)
  3. Profit-Sharing Plan
  4. Traditional 401(k) plan
Explanation: A key characteristic of a SIMPLE (Savings Incentive Match Plan for Employees) IRA is the mandatory employer contribution. The employer must either make a dollar-for-dollar matching contribution (up to 3% of compensation) or a non-elective contribution of 2% of compensation for all eligible employees. While some 401(k) plans have a match, it is not always a required feature of the plan itself, unlike with a SIMPLE IRA.

Question 8

An employee, age 50, leaves his job and requests a distribution of his entire 401(k) balance of $200,000, payable to him directly. He intends to complete a 60-day rollover to an IRA. The check he receives from the plan administrator will be for:

  1. $200,000
  2. $180,000
  3. $160,000 (correct answer)
  4. $100,000
Explanation: Distributions from a qualified plan that are paid directly to the participant (an indirect rollover) are subject to mandatory 20% federal income tax withholding. Therefore, the plan administrator will withhold 20% of the $200,000 balance, which is $40,000. The employee will receive a check for 160,000(160,000 (200,000 - $40,000). To avoid taxes and penalties, the employee must deposit the full $200,000 into a new IRA within 60 days, meaning they must use $40,000 of their own funds to make up for the amount withheld.

Question 9

An investor, age 45, is leaving her job and wants to move her 401(k) balance to a Traditional IRA at her brokerage firm. To avoid mandatory tax withholding and potential tax consequences, her registered representative should recommend she instruct the 401(k) plan administrator to:

  1. send a check payable to her, which she must deposit into the IRA within 60 days.
  2. liquidate the assets and send her the cash to fund the new IRA.
  3. send the funds directly to the new IRA custodian for her benefit. (correct answer)
  4. send a check payable to her and withhold 10% for federal taxes.
Explanation: The most efficient and safest way to move retirement assets is through a direct rollover, also known as a trustee-to-trustee transfer. In this process, the funds are sent directly from the old custodian (the 401(k) plan) to the new custodian (the IRA provider). This avoids the mandatory 20% withholding that applies to indirect rollovers, where the participant receives the check first.

Question 10

A married couple files a joint tax return. One spouse earns $200,000 annually, while the other spouse has no earned income. Under the spousal IRA rules, what is the maximum IRA contribution the non-working spouse can make?

  1. Zero, because they have no earned income.
  2. Half of the working spouse's contribution.
  3. The maximum annual contribution limit for an individual. (correct answer)
  4. An amount equal to the working spouse's contribution.
Explanation: The spousal IRA rule allows a spouse with little or no compensation to contribute to an IRA, as long as the couple files a joint tax return and the working spouse has enough earned income to cover both contributions. The non-working spouse can contribute up to the full annual individual limit to their own IRA, provided the couple's combined compensation is at least equal to the total contributions.

Question 11

A married couple, both age 53, file their taxes jointly. Their modified adjusted gross income (MAGI) for the year is significantly above the threshold for direct contributions. They both want to contribute the maximum amount, including catch-up contributions, to a Roth IRA. Which of the following is a permissible strategy?

  1. Making non-deductible contributions to a Traditional IRA and immediately converting it to a Roth IRA. (correct answer)
  2. Making deductible contributions to a Traditional IRA and immediately converting it to a Roth IRA.
  3. Making direct contributions to a Roth IRA, as the income limits do not apply to catch-up contributions.
  4. Making contributions to a SEP IRA and rolling it over to a Roth IRA within the same year.
Explanation: When an individual's MAGI is too high for a direct Roth IRA contribution, they may be able to use the 'backdoor' Roth IRA strategy. This involves making a non-deductible contribution to a Traditional IRA (for which there are no income limits) and then converting that Traditional IRA to a Roth IRA. Because the initial contribution was non-deductible, only the earnings, if any, would be taxable upon conversion. Direct contributions are prohibited, and SEP IRAs are generally for self-employment income.

Question 12

An investor, age 62, has a Traditional IRA with a total value of $400,000. The account's basis consists of $80,000 in non-deductible contributions. If the investor takes a $40,000 distribution, what portion of the withdrawal is taxable as ordinary income?

  1. $40,000
  2. $32,000 (correct answer)
  3. $8,000
  4. $0
Explanation: Distributions from an IRA with a mix of pre-tax and after-tax (non-deductible) funds are taxed on a pro-rata basis. First, calculate the percentage of the IRA that is from non-deductible contributions: $80,000 (basis) / $400,000 (total value) = 20%. This 20% of any distribution is a tax-free return of basis. The remaining 80% is taxable. Therefore, 80% of the $40,000 distribution, or $32,000, is subject to ordinary income tax. The other $8,000 (20%) is a tax-free return of principal.

Question 13

A 40-year-old individual inherits a Roth IRA from her mother, who passed away during the year. The daughter is the sole, designated non-spouse beneficiary. Which action is required for this inherited account?

  1. She must roll the assets into her own existing Roth IRA and begin taking distributions.
  2. She must retitle the account as an inherited IRA and liquidate it by the end of the 10th year following her mother's death. (correct answer)
  3. She can leave the funds in the inherited IRA indefinitely since distributions from Roth IRAs are tax-free.
  4. She must begin taking annual required minimum distributions based on her own life expectancy.
Explanation: Under the SECURE Act, most designated non-spouse beneficiaries who inherit an IRA (both Traditional and Roth) must withdraw all assets from the account by the end of the 10th year following the year of the original owner's death. The account must be properly retitled as an inherited IRA. Rolling into one's own IRA is not permitted for non-spouses, and the 'stretch' provision based on the beneficiary's life expectancy has been eliminated for most.

Question 14

A 45-year-old single individual is an active participant in their employer's 401(k) plan and has a modified adjusted gross income (MAGI) of $90,000. For the current tax year, what is the tax treatment of their maximum allowable contribution to a Traditional IRA?

  1. The contribution is fully deductible.
  2. The contribution is partially deductible.
  3. The contribution is not deductible. (correct answer)
  4. The contribution is prohibited because the individual is an active participant in a 401(k).
Explanation: The deductibility of Traditional IRA contributions for an individual covered by a workplace retirement plan is phased out based on their MAGI. For a single filer with a MAGI of $90,000, their income is above the annual phase-out range, making their contribution entirely non-deductible. The contribution itself is still permitted, but it must be made with after-tax dollars.

Question 15

When comparing a traditional defined benefit pension plan to a defined contribution plan like a 401(k), the key distinction regarding investment risk is that in a defined benefit plan, the risk is borne by the:

  1. employee.
  2. employer. (correct answer)
  3. Pension Benefit Guaranty Corporation (PBGC).
  4. plan's trustee.
Explanation: In a defined benefit plan, the employer promises a specific retirement benefit to the employee, calculated by a formula. The employer is responsible for funding the plan sufficiently to meet these future obligations, regardless of investment performance. Therefore, the employer bears all of the investment risk. In a defined contribution plan, the employee's retirement income depends on the performance of the investments in their individual account, so the employee bears the investment risk.

Question 16

A 49-year-old wants to move assets from one 401(k) to another employer plan; which method is typically used?

  1. Distribution and redeposit within 180 days with no withholding
  2. One-per-year IRA transfer into the new 401(k)
  3. Tax-free conversion to a Roth 401(k) without reporting income
  4. Trustee-to-trustee direct rollover to the new plan, if accepted (correct answer)
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is confusing IRA and 401(k) rollover rules, which is why distractor B fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.

Question 17

A 30-year-old opens a Roth IRA; which statement correctly describes the tax treatment of contributions and qualified withdrawals?

  1. Contributions are tax-deductible; qualified withdrawals are taxable
  2. Contributions are after-tax; earnings are always taxed at distribution
  3. Contributions are pre-tax; withdrawals are always penalty-free
  4. Contributions are after-tax; qualified withdrawals can be tax-free (correct answer)
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is confusing Roth with traditional IRA tax treatments, which is why distractor A fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.

Question 18

A 50-year-old receives a $100,000 401(k) distribution with $20,000 withheld; to rollover fully, what must he deposit?

  1. $80,000 within 60 days
  2. $120,000 within 60 days
  3. $80,000 within 90 days
  4. $100,000 within 60 days (correct answer)
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is failing to account for replacing withheld amounts, which is why distractor A fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.

Question 19

A mid-career client wants to consolidate an old 401(k) into a traditional IRA; what is a key tax advantage of the IRA?

  1. IRA earnings are taxed annually at capital gains rates
  2. IRA contributions are always deductible regardless of income
  3. IRA withdrawals are tax-free after age 59 1/2
  4. IRA growth is tax-deferred until distribution (correct answer)
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is confusing tax-deferred with tax-free growth, which is why distractor C fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.

Question 20

A 40-year-old withdraws earnings from a Roth IRA opened 3 years ago; what is the likely tax result?

  1. Earnings are tax-free and penalty-free at any age
  2. Earnings are tax-free but subject to 20% mandatory withholding
  3. Earnings are generally taxable and may be subject to a 10% penalty (correct answer)
  4. Earnings are excluded if used for any home purchase
Explanation: This question tests the application of rules governing retirement plans, including rollovers, transfers, distributions, and tax-advantaged accounts. Understanding these rules involves knowing the differences in tax treatments, contribution limits, and penalties for various account types like IRAs and 401(k)s. In this scenario, the specific account types and actions taken (e.g., rollovers, early withdrawals) directly affect tax outcomes and penalties. The correct answer illustrates the proper application of these rules, ensuring compliance and maximization of tax advantages. A common error is assuming all Roth withdrawals are tax-free regardless of holding period, which is why distractor A fails. To help students: Emphasize the importance of understanding IRS regulations for retirement accounts and practice scenario-based questions that apply these rules in real-world contexts. Encourage familiarization with contribution limits and tax implications.