CTA Tax Planning and Strategy 2 — Questions and Answers
Question 1: Which retirement plan allows the highest annual contribution limit for self-employed individuals in 2024?
- Traditional IRA
- SIMPLE IRA
- SEP-IRA
- Solo 401(k) (Correct answer)
Correct answer: Solo 401(k)
A Solo 401(k) allows self-employed individuals to make both employee deferrals ($23,000 in 2024) and employer contributions, for a combined limit of up to $69,000.
Question 2: What is the purpose of a like-kind exchange under IRC Section 1031?
- To avoid paying any capital gains tax permanently
- To defer capital gains recognition when exchanging business or investment real property (Correct answer)
- To convert ordinary income to capital gains
- To accelerate depreciation deductions
Correct answer: To defer capital gains recognition when exchanging business or investment real property
A Section 1031 like-kind exchange allows taxpayers to defer capital gains taxes by reinvesting proceeds from the sale of real property into similar real property.
Question 3: Which strategy allows high-income taxpayers to contribute to a Roth IRA indirectly by first contributing to a non-deductible traditional IRA?
- Roth rollover
- Backdoor Roth IRA (Correct answer)
- Mega Roth conversion
- IRA recharacterization
Correct answer: Backdoor Roth IRA
The backdoor Roth IRA strategy involves making a non-deductible traditional IRA contribution and then immediately converting it to a Roth IRA.
Question 4: Qualified Opportunity Zone (QOZ) investments offer which tax benefit?
- Immediate deduction of investment amount
- Deferral and potential reduction of capital gains taxes, plus exclusion of gains from QOZ investment appreciation (Correct answer)
- 100% exclusion of all investment income
- Unlimited charitable deduction
Correct answer: Deferral and potential reduction of capital gains taxes, plus exclusion of gains from QOZ investment appreciation
QOZ investments allow deferral of existing capital gains, a step-up in basis for long-held investments, and exclusion of gains on QOZ fund appreciation held over 10 years.
Question 5: Which of the following is a valid strategy to avoid the 10% early withdrawal penalty from a retirement account?
- Withdrawing before age 55
- Taking substantially equal periodic payments (SEPP) under Rule 72(t) (Correct answer)
- Using funds for a vacation home purchase
- Withdrawing for general living expenses
Correct answer: Taking substantially equal periodic payments (SEPP) under Rule 72(t)
Rule 72(t) allows penalty-free distributions from IRAs if payments are taken as substantially equal periodic payments based on life expectancy.
Question 6: A donor-advised fund (DAF) provides which tax planning benefit?
- Allows the donor to receive income from donated assets
- Enables an immediate charitable deduction while granting investment control with grants made over time (Correct answer)
- Provides a tax deduction only when grants are distributed to charities
- Avoids all capital gains on contributed assets
Correct answer: Enables an immediate charitable deduction while granting investment control with grants made over time
A DAF allows donors to take an immediate charitable deduction in the year of contribution while recommending grants to charities over future years.
CTA Tax Planning and Strategy 2
Which retirement plan allows the highest annual contribution limit for self-employed individuals in 2024?