Friday, April 30, 2010

Roth IRA question

Which of the following can a 72-year-old individual earning $20,000 annually not do in a Roth IRA?
A. continue to make non-tax-deductible contributions
B. make tax-deductible contributions to the account
C. elect to take no distributions
D. change the beneficiary

EXPLANATION: sometimes the wording of a test question can make an otherwise simple concept seem difficult. But, if you patiently read the answer choices and eliminate the ones you can eliminate, you usually end up with the advantage. What's tricky here is that true statements must be eliminated. Let's find three true statements, then. I like to start with the short statments like Choice D. Ask yourself, why couldn't somebody change a beneficiary? No reason, so D is eliminated. What about Choice C--can this person delay taking money out of the account? The government isn't going to tax the money coming out of a Roth, so there's no requirement to start taking distributions at age 70 1/2. C is true and, therefore, must be eliminated. Yes, it's tricky to have to eliminate true statements, which is why the exam likes to force you to do exactly that. What about Choice A, could a 72-year-old with earned income still contribute to a Roth? Yes. Not a Traditional IRA, but a Roth, yes. So, Choice A is eliminated.
Leaving us with the right answer . . .


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