Multiple Choice
Preparing a budget is an example of which of the following types of management skills?
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1. Introduction to Accounting
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Which of the following statements about the rules of a Roth IRA is true?
A
Required minimum distributions (RMDs) must begin at age 73 for Roth IRAs.
B
Contributions to a Roth IRA are tax-deductible in the year they are made.
C
Qualified withdrawals from a Roth IRA are tax-free if certain conditions are met.
D
Earnings can be withdrawn at any time without penalty, regardless of age or holding period.
Verified step by step guidance1
Step 1: Begin by understanding the concept of a Roth IRA. A Roth IRA is a type of individual retirement account that allows for tax-free growth and tax-free withdrawals under certain conditions.
Step 2: Review the rules regarding Required Minimum Distributions (RMDs). Roth IRAs do not require RMDs during the account holder's lifetime, unlike traditional IRAs. This makes the statement about RMDs at age 73 incorrect.
Step 3: Examine the tax treatment of contributions to a Roth IRA. Contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible in the year they are made. This makes the second statement incorrect.
Step 4: Analyze the conditions for qualified withdrawals. Qualified withdrawals from a Roth IRA are tax-free if the account has been held for at least five years and the account holder is at least 59½ years old, or if the withdrawal meets certain exceptions (e.g., for a first-time home purchase). This makes the third statement correct.
Step 5: Evaluate the rules for withdrawing earnings. Earnings in a Roth IRA cannot be withdrawn at any time without penalty. Early withdrawals of earnings may be subject to taxes and penalties unless they meet specific exceptions. This makes the fourth statement incorrect.
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