NASAA Series 65 — All Questions

A researcher averages the 10-year returns of all funds in a category that exist today and concludes that the category's typical return was strong. What is the main problem?

• a.Funds that closed were mostly strong performers, so the average is understated
• b.The benchmark was chosen after the results were known, which makes the comparison unreliable
• c.Funds that closed or merged because of poor results were left out, so the average is overstated✓
• d.The study used information that was not available at the time, so it suffers from look-ahead bias

Survivorship bias arises when failed funds drop out of the data, leaving only the survivors and overstating performance. Poor performers, not strong ones, are the funds that typically close. Look-ahead bias and benchmark selection after the fact are different problems and do not describe analyzing only funds that still exist.Survivorship bias

For 2026, a single filer has $60,000 of taxable income. Assume the brackets are 10% up to $12,400, 12% from $12,400 to $50,400, and 22% from $50,400 to $105,700. Which figure is closest to the filer's effective federal income tax rate on this income?

• a.About 14.7%, the simple average of the three brackets reached
• b.22%, because the last dollars of income fall in the 22% bracket
• c.About 13.2%, because the roughly $7,912 of total tax is spread over the whole $60,000✓
• d.12%, because most of the taxable income sits in the 12% bracket

Tax is $1,240 on the first $12,400, $4,560 on the next $38,000, and $2,112 on the last $9,600, which totals $7,912. Dividing by $60,000 gives about 13.2%. The 22% figure is the marginal rate on the next dollar, not the effective rate. Averaging the bracket percentages ignores how much income falls in each bracket. The 12% figure picks the bracket holding the most income and ignores the 10% and 22% slices.IRC s.1 (rate schedules); Rev. Proc. 2025-32

An investor buys 500 shares of a U.S. common stock 10 days before the ex-dividend date and sells them 30 days after it, collecting a $600 dividend in between. How is the dividend taxed?

• a.As a qualified dividend, because the shares were held for more than 30 days
• b.As a qualified dividend, because any dividend from a U.S. corporation qualifies
• c.At ordinary rates, because the shares were not held more than 60 days in the 121-day window around the ex-dividend date✓
• d.As a qualified dividend, because the 61 days are counted from the payment date

Common stock must be held more than 60 days during the 121-day period that starts 60 days before the ex-dividend date. This investor held the shares only 40 days, so the dividend is taxed at ordinary rates. Thirty days is not the test for common stock. Being a U.S. corporation is necessary but not sufficient, since the holding period must also be met. Counting from the payment date would not help, because 40 days of ownership falls short of 61 either way.IRC s.1(h)(11)(B)(iii); IRS Pub. 550

A client in the 32% ordinary bracket, who would pay 15% on long-term gains, holds shares bought 11 months ago with a $10,000 unrealized gain. Ignoring other factors, how much federal tax does waiting until the shares have been held more than one year save?

• a.$3,200, because the entire short-term tax disappears
• b.$1,500, because that is the tax due at the long-term rate
• c.$1,200, because the long-term rate would be 20%
• d.$1,700, which is the 17-point difference between the two rates applied to the gain✓

A gain on shares held one year or less is taxed at ordinary rates, so the sale now costs $3,200. After the holding period the same gain costs $1,500 at 15%, so the saving is $1,700. The saving is not the whole $3,200, since the long-term tax is still owed. The $1,500 figure is the remaining tax, not the saving. A 20% long-term rate applies only at much higher income and is not the stated rate.IRC s.1(h); s.1222

A single filer has $50,000 of 2026 taxable income. Assume the 12% bracket ends at $50,400 and the next bracket is 22%. She earns $1,000 more in ordinary income. About how much additional federal income tax results?

• a.About $120, because she is in the 12% bracket
• b.About $115, which applies her average rate to the extra income
• c.About $180, because $400 is taxed at 12% and $600 at 22%✓
• d.About $220, because the entire $1,000 is taxed at 22%

Only $400 of the extra income fits under the $50,400 ceiling of the 12% bracket, which costs $48. The remaining $600 is taxed at 22%, which costs $132, for a total of $180. Taxing all $1,000 at 22% ignores the room left in the lower bracket. Taxing all of it at 12% ignores that the bracket fills up. Her average rate of about 11.5% is not the rate that applies to additional income.IRC s.1 (rate schedules)

An investor bought 100 shares of a mutual fund at $20 and later 100 shares at $30, for an average cost of $25 a share. She sells 50 shares at $35 and has elected the average cost method. What gain does she report?

• a.$500, because the gain is $10 a share on 50 shares✓
• b.$250, as if the latest $30 shares had been sold first
• c.$750, as if the earliest $20 shares had been sold first
• d.$1,000, as if 100 shares had been sold at the $10 difference

Under average cost the basis is $25 a share, so the gain is ($35 - $25) x 50 = $500. The first-in, first-out result would be $15 x 50 = $750. Selling the latest shares first would give $5 x 50 = $250. The $1,000 figure uses the right per-share gain but the wrong share count, since only 50 shares were sold.IRC s.1012; Treas. Reg. s.1.1012-1(e)

A client sells shares in a taxable account at a $5,000 loss, and two weeks later her IRA buys the same shares. What is the tax result?

• a.The loss is deferred and becomes deductible on her return in the year the IRA later sells the same shares
• b.The loss is allowed in full, because an IRA is a separate account with its own tax status and its own holding period
• c.The loss is disallowed and is not added to the IRA's basis, so the tax benefit is lost permanently✓
• d.The loss is disallowed but is added to the IRA's basis, just as it would be if she repurchased in a taxable account

A purchase by the investor's IRA within the 61-day window triggers the wash-sale rule, and the IRS has ruled that the disallowed loss does not increase the IRA's basis, so it is never recovered. Adding the loss to basis works only for replacement shares bought in a taxable account. The IRA is not a separate taxpayer for this purpose. Nothing is deferred to a later IRA sale, because IRA basis does not drive any later tax.Rev. Rul. 2008-5; IRC s.1091; IRS Pub. 550

An investor sells 300 shares at a loss of $10 a share, then buys 100 shares of the same stock 15 days later. How is the $3,000 loss treated?

• a.$2,000 is deductible now, and $1,000 is disallowed and added to the basis of the 100 new shares✓
• b.$1,000 is deductible now, and $2,000 is disallowed and added to basis
• c.The entire $3,000 is deductible, because only 100 of the 300 shares were replaced
• d.The entire $3,000 is disallowed and added to the basis of the 100 new shares

The wash-sale rule disallows the loss only on the number of shares replaced. The 100 replacement shares cover one third of the loss, or $1,000, which is added to their basis, and the other $2,000 is deductible now. Disallowing everything overstates the replacement. Allowing everything ignores the 100 replaced shares. Reversing the split gets the proportions backward.IRC s.1091(a); IRS Pub. 550

A donor whose basis is $40,000 gives shares worth $30,000 to her nephew. The nephew later sells them for $36,000. What gain or loss results?

• a.A $36,000 gain, because a gift carries no basis to the recipient
• b.A $4,000 loss, measured from the donor's $40,000 basis
• c.A $6,000 gain, measured from the $30,000 value on the day of the gift
• d.None, because a sale between the value at the gift and the donor's basis produces neither gain nor loss✓

When value at the gift is below the donor's basis, the recipient uses the donor's basis to measure a gain and the lower value to measure a loss. A sale price between the two results in neither. Using the $30,000 value alone would wrongly show a gain, and using the $40,000 basis alone would wrongly show a loss. A gift does carry basis to the recipient, so the full proceeds are not gain.IRC s.1015(a); Treas. Reg. s.1.1015-1

An investor buys 1,000 shares for $20,000. Over the years the company pays $1,500 of distributions classified as return of capital. She later sells the shares for $25,000. What gain does she report?

• a.$3,500, because the $1,500 of return of capital is subtracted from the $5,000 gain
• b.$5,000, because return of capital does not reduce her basis and the gain is simply proceeds minus cost
• c.$6,500, because the return of capital lowered her basis to $18,500✓
• d.$1,500, because only the return of capital is taxable when she finally sells the shares

Return-of-capital distributions are not taxed when received but reduce the basis, here from $20,000 to $18,500. The gain on a $25,000 sale is then $6,500. Ignoring the reduction understates the gain by $1,500. Subtracting the distribution from the gain makes the error run in the wrong direction. The return of capital was not taxed as income and does not by itself become the gain.IRC s.301(c)(2); s.1016(a)(4)

In one year an investor has short-term gains of $5,000, short-term losses of $8,000, long-term gains of $4,000, and long-term losses of $2,000. What is the net result?

• a.A net long-term gain of $2,000 taxed at long-term rates, with the $3,000 short-term loss carried forward
• b.A net capital loss of $1,000 that cannot be used until it offsets gains in a later year
• c.A net short-term loss of $3,000, because losses of a different term do not offset one another
• d.A net short-term loss of $1,000, deductible against ordinary income✓

Short-term items net to a $3,000 loss and long-term items net to a $2,000 gain. The two nets are then combined, leaving a $1,000 net short-term loss, which is deductible against ordinary income under the $3,000 annual limit. Carrying forward a loss that could be absorbed this year ignores the netting step. A net loss does not have to wait for future gains. Netting across the two terms is required, so the $3,000 figure is wrong.IRC s.1222; s.1211(b)

A single investor has a $20,000 net capital loss in year one and no other gains. In year two she realizes a $5,000 net gain on new trades. Assuming ample ordinary income, how much loss carryforward remains after year two?

• a.$9,000, after the $3,000 deducted in year one, then the $5,000 gain and another $3,000 deduction in year two✓
• b.$12,000, because the carryforward offsets only year two's $5,000 gain
• c.$14,000, because only one more $3,000 deduction is used
• d.$6,000, because the first year's $3,000 deduction is subtracted a second time

Year one uses $3,000 against ordinary income and carries forward $17,000. In year two the carryforward first offsets the $5,000 gain and then supports another $3,000 ordinary deduction, leaving $17,000 - $5,000 - $3,000 = $9,000. Offsetting only the gain skips the new $3,000 deduction. Using only the deduction ignores the gain. Subtracting the year-one deduction again double counts it.IRC s.1212(b); s.1211(b)

A single filer has modified AGI of $240,000, which includes $60,000 of net investment income. What is the 3.8% Net Investment Income Tax?

• a.$2,280, which is 3.8% of all $60,000 of net investment income, regardless of the threshold
• b.$9,120, which is 3.8% of the entire $240,000
• c.$1,520, which is 3.8% of the $40,000 by which modified AGI exceeds $200,000✓
• d.$0, because the tax starts only when modified AGI exceeds $250,000 for a single filer

The tax applies to the lesser of net investment income ($60,000) or the excess of modified AGI over the threshold ($240,000 - $200,000 = $40,000). Then 3.8% of $40,000 is $1,520. Taxing all the investment income ignores the cap. Taxing all of modified AGI treats wages as investment income. The $250,000 threshold is for joint filers, not a single filer.IRC s.1411

An executive exercises incentive stock options and keeps the shares through year-end. What is the tax effect for that year?

• a.There is no tax effect of any kind until the shares are sold
• b.No regular income arises from the spread, but the spread is an AMT adjustment that may trigger the alternative minimum tax✓
• c.The spread is a long-term capital gain taxed at the time of exercise
• d.The spread is wages subject to withholding, as with a nonqualified option

Exercising an incentive stock option creates no regular taxable income, but the bargain element is included in alternative minimum taxable income, so AMT may apply even though no shares were sold. Wage treatment at exercise describes nonqualified options. A capital gain does not arise until a sale. Saying there is no effect at all overlooks the AMT adjustment.IRC s.56(b)(3); s.422; s.421(a)

A client buys a 20-year zero-coupon corporate bond at original issue in a taxable account. Which describes the annual tax treatment?

• a.The discount is taxed as ordinary income only if the bond is sold before maturity
• b.Accrued original issue discount is reported as interest each year and added to the bond's basis✓
• c.The accrued discount is reported each year, but basis stays at cost, so the gain is taxed again at maturity
• d.Nothing is reported until maturity, when the whole discount is taxed as a long-term gain

A holder of original issue discount debt reports the yearly accrual as interest even though no cash arrives, and the basis rises by that amount. Waiting until maturity is the treatment many investors expect, but it is not allowed for a taxable corporate zero. A sale before maturity is not the trigger. Leaving basis unchanged would tax the same discount twice.IRC s.1272; Treas. Reg. s.1.1272-1; IRS Pub. 550

A trader in the 32% ordinary bracket, who pays 15% on long-term gains, closes a broad-based index option position after three weeks. It is a Section 1256 contract. What is the blended federal rate on the gain?

• a.About 23.5%, the simple average of 15% and 32%
• b.32%, because the position was held for less than one year
• c.About 25.2%, from 40% taxed at 15% and 60% taxed at 32%
• d.About 21.8%, from 60% taxed at 15% and 40% taxed at 32%✓

Section 1256 contracts are taxed 60% long term and 40% short term whatever the holding period. That is 0.6 x 15% + 0.4 x 32% = 21.8%. Applying the ordinary rate to everything ignores the 60/40 rule. Reversing the split gives 25.2%. A simple average of the two rates ignores the weights.IRC s.1256(a)(3); IRS Pub. 550

A single taxpayer sells a home she owned and lived in as her main residence for three of the past five years. Her gain is $320,000. How much is taxable?

• a.$320,000, because the exclusion applies only to married couples filing jointly
• b.$70,000, taxed as a long-term capital gain✓
• c.$70,000, taxed as ordinary income because the home was a personal asset
• d.$0, because the exclusion for a main residence is unlimited

A seller who meets the ownership and use tests excludes up to $250,000 of gain, or $500,000 on a joint return. The $70,000 excess over the $250,000 is taxed as a long-term capital gain because the home was held more than a year. The exclusion is capped, not unlimited. The excess is not ordinary income. The exclusion is available to single filers, so the whole gain is not taxed.IRC s.121

An employee was granted incentive stock options on March 1, 2023, and exercised them on September 1, 2024. The shares can be sold in a qualifying disposition only after:

• a.September 1, 2026, which is two years after the exercise date
• b.March 1, 2025, which is two years after the grant date
• c.March 1, 2024, which is one year after the grant date
• d.September 1, 2025, because one year after exercise is later than two years after grant✓

A qualifying disposition requires holding the shares more than two years from the grant and more than one year from the exercise, and both tests must be met. Here the grant test ends March 1, 2025 and the exercise test ends September 1, 2025, so the later date controls. Using only the grant date ignores the exercise test. Two years from exercise is not a requirement. One year from grant falls before the exercise date and is not a test.IRC s.422(a)(1)

A married donor gives her daughter $50,000 in cash in 2026, and her spouse consents to gift splitting. Using the $19,000 annual exclusion for each spouse, what is the couple's taxable gift and is a gift tax return required?

• a.$12,000, but no return is required because no tax is due
• b.$31,000, since only the donor's $19,000 exclusion applies
• c.$12,000 of taxable gifts, reported on Form 709 with both spouses consenting, with no tax due✓
• d.Nothing is taxable, so no return is needed, because the gift is below the $15 million lifetime exclusion

Splitting treats each spouse as giving $25,000, and each applies a $19,000 exclusion, so $12,000 is taxable in total. Gift splitting is elected only on a return, so Form 709 is required even though the lifetime exclusion means no tax is paid. Using one exclusion ignores the split. Filing is required because the gift exceeds the annual exclusions, so the lifetime exclusion does not remove the return.IRC s.2513; s.2503(b); Form 709

A 74-year-old client with a $30,000 RMD wants to support a charity from her IRA. Which approach qualifies as a qualified charitable distribution?

• a.Directing the IRA custodian to send the money to a donor-advised fund at a public charity
• b.Withdrawing the money, then donating the same amount to the charity within 60 days
• c.Having her 401(k) plan administrator send the money directly to the charity
• d.Having the IRA custodian send the money directly to a public charity✓

A qualified charitable distribution must go straight from an IRA to an eligible charity, and the amount is excluded from income and can count toward the RMD. Taking the money first makes it taxable income, with a deduction possible only if she itemizes. Donor-advised funds are not eligible recipients. Employer plans such as a 401(k) cannot make this kind of distribution.IRC s.408(d)(8); IRS Pub. 590-B

Which holding is the least tax-efficient placement for a client who has both taxable and traditional IRA accounts?

• a.A REIT fund held in a 401(k) plan
• b.A municipal bond fund held inside the traditional IRA✓
• c.A broad-market index equity ETF in a taxable account
• d.Shares of a taxable bond fund inside an IRA

Municipal interest is already exempt from federal income tax, and withdrawals from a traditional IRA are taxed as ordinary income, so holding a municipal fund in the IRA gives up the exemption. An index ETF in a taxable account is tax-efficient because it pays small distributions and gains defer. Taxable bond funds and REIT funds throw off ordinary income, which is better sheltered inside the IRA.IRC s.408(d)(1) (IRA distributions taxed under s.72); IRC s.103(a) (municipal bond interest excluded)

A grandparent pays a grandchild's $40,000 college tuition directly to the university and also gives the grandchild $19,000 in cash the same year. What is the gift tax result for the year?

• a.The tuition is excluded but the cash is taxable, since only one gift tax exclusion may be used per grandchild each year
• b.The tuition is excluded only if the grandchild first receives the money and then pays the university from her own account
• c.The tuition counts against the annual exclusion, so the two gifts total $59,000 and $40,000 of it is a taxable gift
• d.Both are excluded: the tuition under the direct-payment exclusion and the cash under the annual exclusion✓

Tuition paid directly to an educational institution is excluded from gift tax without limit and does not use the annual exclusion, so the $19,000 cash gift is also fully excluded. Counting tuition against the annual exclusion misreads the rule. The two exclusions work independently. Paying through the grandchild would defeat the exclusion because it requires direct payment to the school.IRC s.2503(e)

In 2026 a single worker covered by an employer plan has MAGI of $84,000. Assume the deduction phase-out range is $81,000 to $91,000. How much of a $7,500 traditional IRA contribution is deductible?

• a.$2,250, which wrongly treats the 30% used as the share of the contribution that is deductible
• b.$0, because a worker covered by an employer plan loses the deduction at the bottom of the range
• c.$5,250, since 30% of the phase-out range has been used and 70% of the limit remains✓
• d.$7,500, because MAGI is under the $91,000 upper end of the range

MAGI is $3,000 into a $10,000 range, so the deduction is reduced by 30% and 70% of $7,500, or $5,250, remains. Using 30% as the deductible share gets the proportion backward. Full deductibility applies only below the bottom of the range, not just under the top. The deduction does not vanish at $81,000, because the phase-out is gradual.IRC s.219(g); Notice 2025-67

A married couple, both under 50, file jointly in 2026. One spouse earns $10,000 and the other has no earnings. With a $7,500 individual limit, what is the most they can contribute to IRAs for the year?

• a.$7,500, since only the spouse who earned income can fund an IRA
• b.$2,500, which is only what the non-earning spouse could add after the earner contributes the full $7,500
• c.$10,000, since combined contributions cannot exceed their joint taxable compensation✓
• d.$15,000, since each spouse may contribute the full limit regardless of earnings

A spousal IRA lets the non-earning spouse contribute based on the couple's joint compensation, so the total is capped at the lesser of both individual limits combined ($15,000) and joint compensation ($10,000), meaning $10,000. The earner alone is not the only person who can contribute. Joint compensation limits the total, so the full $15,000 is not available. The $2,500 figure is only the non-earner's share, not the couple's total.IRC s.219(c); IRS Pub. 590-A

A 40-year-old contributes $9,000 to her IRA in 2026, when her limit is $7,500, and leaves the excess in the account. What excise tax applies for that year?

• a.$0, because the penalty applies only to distributions, not contributions
• b.$150, which is a 10% penalty on the $1,500 excess
• c.$540, which is 6% of the entire $9,000 contribution
• d.$90, which is 6% of the $1,500 excess, and it repeats each year until the excess is corrected✓

Excess IRA contributions are subject to a 6% excise tax on the excess amount for each year it stays in the account, so 6% of $1,500 is $90. The tax applies to the excess only, not to the entire contribution. The 10% additional tax applies to early distributions, not to excess contributions. The excise tax is on contributions, so a rule limited to distributions is wrong.IRC s.4973; IRS Pub. 590-A

A client turns 75 in 2026, and her traditional IRA was worth $492,000 on December 31, 2025. The Uniform Lifetime Table divisor for age 75 is 24.6. What is her 2026 required minimum distribution?

• a.$19,294, which uses the 25.5 divisor for age 74
• b.$18,566, which uses the 26.5 divisor for age 73
• c.$20,760, which uses the 23.7 divisor for age 76
• d.$20,000, which is $492,000 divided by 24.6✓

The RMD equals the prior year-end balance divided by the divisor for the age the owner reaches in the distribution year, so $492,000 / 24.6 = $20,000. Using the age 73 or age 74 divisor gives a smaller figure because those divisors are larger. The age 76 divisor gives a higher figure. Each of those uses an age that is not the owner's age in 2026.IRC s.401(a)(9); IRS Pub. 590-B, Table III

For 2026, a single filer under 50 has MAGI of $159,000. Assume the Roth IRA phase-out range is $153,000 to $168,000 and the limit is $7,500. What is her maximum Roth contribution?

• a.$3,000, which treats the 40% as the share still allowed
• b.$7,500, because her MAGI is still below the top of the phase-out range
• c.$0, because any MAGI above $153,000 bars a Roth contribution
• d.$4,500, since 40% of the phase-out range has been used✓

MAGI is $6,000 into a $15,000 range, a 40% reduction, so 60% of $7,500, or $4,500, can be contributed. Treating 40% as the allowed share reverses the proportion. Contributions are reduced as soon as MAGI enters the range, not only above the top. The reduction is gradual, so the bottom of the range is not a cutoff.IRC s.408A(c)(3); Notice 2025-67

A 45-year-old's Roth IRA holds $30,000 of contributions, a $20,000 taxable conversion made two years ago, and $10,000 of earnings. She withdraws $35,000. What is the result?

• a.$10,000 of earnings is taxable and draws a $1,000 penalty, because earnings are withdrawn before conversions
• b.$5,000 is taxable income and draws a $500 penalty, since converted money is taxed a second time on withdrawal
• c.Nothing is taxable and no penalty applies, because Roth IRA withdrawals never carry an early-withdrawal penalty
• d.Nothing is taxable, but the $5,000 taken from the conversion layer draws a $500 early-withdrawal penalty✓

Roth withdrawals come out in order: contributions, then conversions, then earnings. The first $30,000 is contributions, which are tax free and penalty free. The next $5,000 comes from the conversion, which was already taxed, but because it is within five years of the conversion and she is under 59½, the 10% additional tax applies, which is $500. Converted money is not taxed twice. A penalty can apply to converted amounts. Earnings come last in the ordering and are untouched.IRC s.408A(d)(4); s.72(t)(6)

In January a client converted $100,000 from a traditional IRA to a Roth IRA. By October the Roth account has fallen 25%. Can she reverse the conversion and avoid tax on the $100,000?

• a.Yes, but only if the decline exceeds 20% of the converted amount
• b.Yes, by recharacterizing the conversion back to the traditional IRA by the tax filing deadline, including extensions
• c.No, a completed conversion cannot be recharacterized after 2017, so tax is owed on the amount converted✓
• d.Yes, but only if she returns the converted money to a traditional IRA within 60 days of the conversion date

The 2017 tax act ended recharacterization of conversions, so the conversion stands and she owes tax on the amount converted, even though the account has since fallen. A filing-deadline window was the pre-2018 rule. The 60-day period applies to rollovers, not to reversing conversions. No loss threshold exists, because recharacterization is not available at any loss level.IRC s.408A(d)(6); IRS Pub. 590-A

A client has $95,000 of pre-tax money and $5,000 of after-tax basis across her traditional IRAs, $100,000 in all, and converts $7,500 to a Roth IRA in 2026. How much of the conversion is taxable?

• a.$7,125, because 95% of every dollar converted is pre-tax✓
• b.$2,500, because the $5,000 of basis is used first against the conversion
• c.$375, which is 5% of the $7,500 she converted, since only the basis is taxed
• d.$7,500, because any conversion of IRA money is fully taxable

All traditional IRAs are treated as one pool, so the basis is spread proportionally: 5% of each dollar converted is basis and 95% is taxable, giving $7,125. Applying the basis first to the conversion ignores the pro-rata rule. Full taxation ignores the basis. The $375 figure is the tax-free portion, not the taxable one.IRC s.408(d)(2); Form 8606; IRS Pub. 590-B

A 55-year-old inherits a traditional IRA from her father, who died at 80 after he had begun taking required distributions. Under the current rules, what must she do?

• a.Take distributions over her own life expectancy, because adult children may stretch the account
• b.Take annual required distributions in years one through nine and empty the account by the end of year ten✓
• c.Empty the account within five years, since the owner had already passed his required beginning date
• d.Take nothing until the end of the tenth year, because the 10-year rule never requires earlier distributions

A beneficiary who is not an eligible designated beneficiary must empty the account by the end of the tenth year after death, and when the owner died on or after his required beginning date, annual distributions are also required in years one through nine. The life-expectancy stretch ended for most non-spouse beneficiaries. Skipping annual distributions applies only if the owner died before the required beginning date. The five-year rule is not the post-2019 rule.IRC s.401(a)(9)(H); Treas. Reg. s.1.401(a)(9)-5; IRS Pub. 590-B

A 15-year-old inherits an IRA from his parent. Which statement about his required distributions is correct?

• a.He must empty the account within 10 years of the parent's death, with no exceptions
• b.He is treated the same way if the IRA came from a grandparent, since any minor beneficiary qualifies
• c.As the owner's minor child he is an eligible designated beneficiary, taking life-expectancy payments until the age of majority, when the 10-year rule begins✓
• d.He may stretch distributions over his life expectancy for his whole life, because minors are always eligible designated beneficiaries

Only the owner's own minor child is an eligible designated beneficiary. He takes life-expectancy payments until reaching majority, and then a 10-year period starts. The 10-year clock does not start at the parent's death for him. The life stretch does not last for life. A grandchild is not the owner's child, so a grandparent's IRA gets the ordinary 10-year rule.IRC s.401(a)(9)(E); IRS Pub. 590-B

A 58-year-old widow inherits her husband's IRA and expects to need cash before she is 59½. Which approach avoids the 10% additional tax on those withdrawals?

• a.Convert it to a Roth IRA first, since conversions are exempt from the penalty
• b.Treat it as her own, because a surviving spouse is exempt from the penalty at any age
• c.Roll it into her own IRA, since a death-related rollover removes the age limit
• d.Keep the account as an inherited IRA and take withdrawals as the beneficiary✓

Distributions from an inherited IRA to a beneficiary are not subject to the 10% additional tax, even if she is under 59½. Rolling it over or electing to treat it as her own makes it her IRA, so withdrawals before 59½ may be penalized. Spouses have no age exemption on their own IRAs. A conversion triggers tax, and withdrawals of converted amounts within five years of the conversion can still bear the penalty.IRC s.72(t)(2)(A)(ii); IRS Pub. 590-B

An employer's matching contributions follow a 2-to-6-year graded vesting schedule. A participant leaves after exactly three years of service with $15,000 of matching money in her account. How much is vested?

• a.$15,000, because three years of service is full vesting under a cliff schedule
• b.$3,000, because 20% is vested after three years of service
• c.$6,000, because 40% is vested after three years of service✓
• d.$9,000, because 60% is vested after three years of service

The 2-to-6 graded schedule vests 20% after two years and 20% more each year after, so 40% is vested at three years and $6,000 of $15,000 belongs to her. A three-year cliff would vest everything at once, but that is a different schedule. Sixty percent is the four-year figure. Twenty percent is the two-year figure.IRC s.411(a)(2)

A participant's 401(k) balance is $90,000, of which $70,000 is vested. If the plan permits loans, what is the most she may borrow?

• a.$35,000, which is 50% of the vested balance✓
• b.$50,000, the dollar cap, because her balance is large enough
• c.$45,000, which is 50% of the total balance
• d.$70,000, the full vested balance

A plan loan is limited to the greater of $10,000 or 50% of the vested balance, up to a $50,000 maximum. Half of $70,000 is $35,000. Using the total balance counts money she does not yet own. The $50,000 cap applies only when half the vested balance reaches it, and here it does not. The full vested balance far exceeds the limit.IRC s.72(p)(2)

For 2026, what is the most a 61-year-old may defer to her employer's 401(k) plan, if the plan allows catch-up contributions?

• a.$35,750, which is the $24,500 limit plus the $11,250 catch-up for ages 60 through 63✓
• b.$32,500, which adds the standard $8,000 catch-up for age 50 and older to the $24,500 limit
• c.$38,500, which adds both the $8,000 and $11,250 catch-ups
• d.$83,250, which adds the larger $11,250 catch-up to the $72,000 total-additions limit per participant

Participants age 60 through 63 can add a larger catch-up of $11,250 in place of the standard $8,000, so the deferral ceiling is $24,500 + $11,250 = $35,750. The standard catch-up applies at other ages. The two catch-ups do not stack. The $72,000 limit covers total additions, including employer money, and is not the employee's deferral ceiling.IRC s.414(v)(2)(E); Notice 2025-67

A participant withdraws $8,000 from his SIMPLE IRA in his second year of participation, at age 40. What additional tax applies to the early distribution?

• a.$0, because SIMPLE IRA distributions are penalty free after the first year
• b.$1,600, which is the 20% mandatory withholding rate
• c.$2,000, which is a 25% additional tax because of the first-two-years rule✓
• d.$800, which is the usual 10% additional tax

A distribution from a SIMPLE IRA within two years of first participation is hit with a 25% additional tax rather than 10%, so $8,000 x 25% = $2,000. The 10% rate applies after the two-year period. Twenty percent is a withholding rate, not an additional tax. There is no one-year exception.IRC s.72(t)(6)

A company's 401(k) uses the basic safe harbor match. An employee earning $80,000 defers 5% of pay, or $4,000. What is the required employer match?

• a.$2,400, because only the first 3% of pay is matched
• b.$4,000, because the safe harbor matches every dollar of deferral
• c.$3,200: 100% of the first 3% of pay plus 50% of the next 2%✓
• d.$2,000, because the match is 50% of the deferral

The basic safe harbor match is 100% of deferrals up to 3% of pay, which is $2,400, plus 50% of deferrals on the next 2% of pay, which is $800, for $3,200. A dollar-for-dollar match is more generous than required. The second tier adds $800 to the $2,400. A flat 50% is not the safe harbor formula.IRC s.401(k)(12)

A profit-sharing plan is top-heavy because key employees hold 70% of plan assets. The owner receives a contribution of 10% of her pay. What is the minimum employer contribution for a non-key employee earning $50,000?

• a.$1,500, but only if the non-key employee also makes elective deferrals
• b.$1,500, which is 3% of pay, regardless of whether the employee defers✓
• c.$5,000, which is 10% of pay to match the owner's rate
• d.$0, because a top-heavy plan requires nothing for non-key employees

When a plan is top-heavy, each non-key employee must receive a minimum contribution of the lesser of 3% of pay or the highest rate given to a key employee, so 3% of $50,000 is $1,500. The owner's higher rate does not raise the minimum, because the 3% cap applies. The minimum is owed whether or not the employee defers. Top-heavy status triggers a minimum, so requiring nothing is wrong.IRC s.416(c)

In a 401(k) plan test year, the non-highly compensated employees' average deferral percentage is 4%. Under the basic ADP test, what is the highest average deferral percentage the highly compensated group may have?

• a.5%, which is 1.25 times the non-highly compensated employees' average deferral percentage
• b.8%, which is twice the non-highly compensated employees' average deferral percentage
• c.6%, which is the non-highly compensated average plus two percentage points✓
• d.4%, which equals the non-highly compensated average

The test allows the greater of 1.25 times the non-highly compensated average (5%) or the lesser of that average plus 2 points or twice the average (6% versus 8%, so 6%). The larger result, 6%, controls. The 5% figure is only the first alternative. Eight percent ignores that the plus-2 alternative caps the second. The group's rate need not equal the others.IRC s.401(k)(3)(A)(ii)

At 56, a client retired from her employer. She takes a $30,000 withdrawal from that employer's 401(k) and a $40,000 withdrawal from an IRA she funded years ago. What 10% additional tax applies?

• a.$4,000, because the separation-at-55 exception covers the 401(k) but not the IRA✓
• b.$0, because separation from service at 55 or older covers every retirement account
• c.$7,000, because both withdrawals are before age 59½
• d.$3,000, because the exception covers the IRA but not the 401(k)

A distribution from an employer plan after separation from service in or after the year the participant turns 55 is exempt from the 10% additional tax, so the $30,000 is penalty free. The IRA has no such exception, so the $40,000 is penalized at 10%, which is $4,000. Both withdrawals are not penalized, since one qualifies. The exception does not cover the IRA, so the $3,000 figure reverses the accounts. It also does not reach every account.IRC s.72(t)(2)(A)(v)

A 62-year-old retiree takes a lump-sum distribution of employer stock from her 401(k). The shares cost the plan $20,000 and are worth $120,000. How is the $100,000 of net unrealized appreciation treated when she later sells the shares for $120,000?

• a.All $120,000 is ordinary income at distribution
• b.The $20,000 cost is ordinary income at distribution, and the $100,000 of appreciation is long-term gain at the sale✓
• c.The $100,000 is ordinary income at distribution, and the $20,000 is long-term gain
• d.Nothing is taxed at distribution, and the whole $120,000 is ordinary income at the sale

With a qualifying lump-sum distribution of employer stock, only the plan's cost basis is taxed as ordinary income when distributed, and the net unrealized appreciation is taxed as long-term capital gain when she sells, whatever the holding period. Taxing everything as ordinary income gives up the special treatment. Reversing the two pieces taxes the large piece at ordinary rates. Deferring all tax to the sale and using ordinary rates ignores the NUA rule.IRC s.402(e)(4); Treas. Reg. s.1.402(a)-1(b)

A 52-year-old begins substantially equal periodic payments from her IRA to avoid the 10% additional tax. At age 55 she changes the payment amount. What is the consequence?

• a.The 10% additional tax applies only to payments taken after the change
• b.The additional tax applies only to the excess of the new payments over the original payment schedule amounts
• c.No additional tax applies, since she is over 55 when she changes the amount and the payments were already substantially equal
• d.The 10% additional tax is applied retroactively to all payments taken before 59½, plus interest✓

The payments must continue unchanged until the later of five years or age 59½. Here that is 59½. A modification before then triggers recapture of the 10% tax on all payments taken so far, with interest. The tax does not apply only going forward. The age 55 exception applies to employer plans after separation from service, not to an IRA. The recapture is not limited to the excess.IRC s.72(t)(4)

In March a client took a check from IRA one and redeposited it in IRA two within 60 days. In September she takes a check from IRA three and deposits it in IRA two within 60 days. How is the September distribution treated?

• a.It is taxable, because only one indirect IRA rollover is allowed in any 12 months across all of her IRAs✓
• b.It is tax free, because the one-per-year limit applies only to Roth IRAs
• c.It is tax free, because the 60-day deposit rule is the only requirement
• d.It is tax free, because the limit applies separately to each IRA she owns

The one-rollover-per-year limit applies to the owner's IRAs in total, so a second indirect rollover within 12 months is a taxable distribution, and it may also be an excess contribution to IRA two. Direct trustee-to-trustee transfers are not limited. Meeting the 60-day deadline does not cure it. The limit is not confined to Roth IRAs.IRC s.408(d)(3)(B); IRS Pub. 590-A

A 45-year-old in the 24% bracket withdraws $5,000 from her HSA for a non-medical purchase. What is the combined federal tax cost?

• a.$1,000: the additional tax only, since the contributions were already deducted
• b.$1,200: income tax only, since HSA withdrawals never carry any additional tax
• c.$1,700: income tax plus the 10% additional tax that applies to IRAs
• d.$2,200: $1,200 of income tax plus a 20% additional tax of $1,000✓

A non-medical HSA withdrawal before age 65 is taxed as ordinary income, 24% of $5,000 or $1,200, plus a 20% additional tax of $1,000. The 10% figure belongs to IRA early withdrawals. HSAs do carry a penalty. Because the contributions were deductible, the withdrawal is also taxable income, so the additional tax alone is not the cost.IRC s.223(f)(4)

For 2026, which coverage qualifies as an HSA-eligible high-deductible health plan? The minimum deductibles are $1,700 for self-only and $3,400 for family, and the maximum out-of-pocket limits are $8,500 and $17,000.

• a.Self-only coverage with a $2,500 deductible and a $9,500 annual out-of-pocket maximum
• b.Self-only coverage with a $1,500 deductible and a $6,000 annual out-of-pocket maximum
• c.Family coverage with a $3,000 deductible and a $15,000 annual out-of-pocket maximum
• d.Self-only coverage with a $2,000 deductible and an $8,000 out-of-pocket maximum✓

A qualifying plan must have a deductible at or above the minimum and an out-of-pocket maximum at or below the cap for its coverage tier. The $2,000 self-only plan meets both. A $1,500 self-only deductible is below $1,700. A $3,000 family deductible is below $3,400. A $9,500 out-of-pocket maximum for self-only exceeds $8,500.IRC s.223(c)(2); Rev. Proc. 2025-19

A health FSA permits the maximum carryover. An employee elected $3,400 for 2026, spent $2,500, and has $900 unused at year-end. Assume the carryover limit is $680. What happens to the $900?

• a.All $900 carries over, because the carryover is limited only by the amount unspent
• b.The $900 is refunded to the employee as taxable wages in the next paycheck
• c.All $900 is forfeited, since health FSAs have no carryover
• d.$680 carries over and the remaining $220 is forfeited✓

A plan can allow up to $680 of unused health FSA money to carry over, so $680 moves forward and the $220 excess is lost under the use-it-or-lose-it rule. The carryover is capped by the dollar limit, not just the unspent balance. A carryover option exists, so full forfeiture ignores it. Unused FSA money is not refunded to the employee.IRC s.125; Notice 2013-71; Rev. Proc. 2025-19

A plan committee member approves a fund with unusually high fees when an identical lower-cost share class is available, and participants lose money as a result. What is her exposure under ERISA?

• a.She is personally liable to restore the plan's losses and any profits made through the breach✓
• b.Only the plan sponsor's corporation is liable, since individual fiduciaries are protected by the corporate form
• c.She is liable only if she personally profited from the decision, since ERISA liability requires a gain to the fiduciary
• d.She is protected if the plan document names no specific funds

ERISA makes a fiduciary who breaches the prudence duty personally liable to make good the plan's losses and restore profits obtained through the breach. Liability is not limited to the corporation. A personal profit is not required. Silence in the plan document does not excuse imprudent selection.ERISA s.409(a), 29 U.S.C. s.1109

A plan sponsor wants to hand selection and replacement of the plan's investment menu to an adviser, who will act without needing the sponsor's approval. Which role does this describe?

• a.A non-fiduciary service provider, since the sponsor remains responsible for the plan
• b.A section 3(21) investment adviser fiduciary, who makes the final decision on the menu
• c.A QDIA provider, since it chooses the default investment for participants
• d.A section 3(38) investment manager, who has discretion over plan assets and acknowledges fiduciary status in writing✓

A 3(38) investment manager has the power to manage, acquire, or dispose of plan assets and acknowledges its fiduciary status in writing. A 3(21) adviser only recommends, and the sponsor decides. Someone with discretionary authority is a fiduciary, so non-fiduciary status is wrong. A QDIA is a default investment, not a type of service provider.ERISA s.3(21)(A) and s.3(38), 29 U.S.C. s.1002

A plan trustee sells a building he owns to the plan at a fair appraised price. The amount involved is $400,000. What is the first-tier excise tax, and what happens if the transaction is not corrected?

• a.$400,000 immediately, which is 100% of the amount involved
• b.$60,000, which is 15% of the amount involved, and a 100% tax if it is not corrected✓
• c.$40,000, which is 10% of the amount involved, and a 50% tax if it is not corrected in time
• d.$0, because the plan paid a fair market price and the plan was not harmed by the sale

A sale between a plan and a disqualified person is prohibited whether or not the price is fair. The first-tier tax is 15% of the amount involved, $60,000, and a second-tier tax of 100% applies if the transaction is not corrected in time. Fairness of price is not a defense. The percentages 10% and 50% are not the statutory rates. The 100% tax is a second-tier tax, not the first.IRC s.4975(a)-(b)