Series 65 Retirement and Tax Practice Questions

Correct answer: C. The individual's maximum allowable Roth IRA contribution is reduced proportionally, rather than eliminated entirely

When a taxpayer's MAGI falls within the applicable Roth IRA phase-out range, the maximum allowable contribution is reduced on a pro-rata basis as income rises through the range, reaching zero only once MAGI exceeds the top of the range. Being 'within' the range does not mean the contribution is eliminated (A) or unaffected (B). Roth contributions are never tax-deductible in the first place, so B mischaracterizes the account entirely. There is also no requirement to redirect a disallowed Roth contribution into a traditional IRA (D); the taxpayer simply may contribute less, or nothing, to the Roth.

• AA. Being within the Roth phase-out range reduces the allowable contribution proportionally; it doesn't completely prohibit any contribution unless MAGI is above the top of the range.
• BB. Deductibility isn't the relevant concept for Roth IRAs (Roth contributions are always after-tax); being in the phase-out range reduces the contribution amount itself, not just its deductibility status.
• CC. Within the phase-out range, the maximum allowable Roth contribution is reduced proportionally based on where MAGI falls in the range, rather than being eliminated entirely.
• DD. There's no rule forcing a redirected contribution to a traditional IRA; the taxpayer can still make a reduced Roth contribution.

• Source: 26 U.S.C. § 408A, accessed October 2026

Correct answer: D. The 'prudent expert' standard, requiring the care, skill, and diligence of a knowledgeable investment professional

ERISA fiduciaries are held to the 'prudent expert' standard. A heightened version of the common-law prudent person rule. Requiring them to act with the skill of someone knowledgeable in investment matters, not merely with sincere intentions. Good faith alone is insufficient; process and expertise matter.

• AA. The business judgment rule is a corporate law concept affording deference to directors; it is not the standard ERISA applies to plan fiduciaries.
• BB. ERISA fiduciaries are not strictly liable for investment losses; liability turns on whether a prudent process was followed, not on outcomes alone.
• CC. A mere best-efforts/good-faith standard is insufficient under ERISA; fiduciaries must follow a prudent process, not just act in good faith.
• DD. Correct. ERISA holds plan fiduciaries to the 'prudent expert' standard, requiring the care, skill, prudence, and diligence that a knowledgeable investment professional would exercise.

• Source: 29 U.S.C. § 1104, accessed October 2026

Correct answer: C. a distribution used to pay off an outstanding personal credit card balance

The Internal Revenue Code provides a specific, limited list of exceptions to the 10% early-withdrawal penalty on IRA distributions taken before age 59½, including qualified higher-education expenses, up to $10,000 for a first-time home purchase, and unreimbursed medical expenses exceeding the AGI floor. Paying off general consumer debt such as a credit card balance is not on that list, so ordinary income tax plus the 10% penalty would still apply to such a distribution.

• AA. Under IRC section 72(t)(2)(E), IRA distributions used for qualified higher-education expenses of the owner, spouse, children, or grandchildren avoid the 10% penalty. This is a true exception, so it is not the answer to this EXCEPT question.
• BB. Under IRC section 72(t)(2)(F), up to $10,000 (a lifetime limit) of IRA distributions used toward a first-time home purchase avoids the 10% penalty. This is a true exception, so it is not the answer.
• CC. Paying off a personal credit card balance is ordinary consumer debt, and no provision of IRC section 72(t) exempts it from the 10% additional tax. The distribution is taxable and penalized, so this is the choice that is not an exception.
• DD. Under IRC section 72(t)(2)(B), the 10% penalty is waived on IRA distributions up to the amount of unreimbursed medical expenses that exceed the AGI floor (7.5% of AGI under current law). This is a true exception, so it is not the answer.

• Source: IRS: Retirement topics - Exceptions to tax on early distributions, accessed October 2026

Correct answer: C. She can still contribute to a traditional IRA, but the contribution will be nondeductible because of her active participation and income level

High income only affects the deductibility of a traditional IRA contribution for an active plan participant. It never bars the contribution itself. Maria can still contribute (subject to the annual limit); she just loses some or all of the deduction. Roth eligibility has its own separate income phase-out, but nothing here forces her into a Roth.

• AA. Income limits for active plan participants affect the deductibility of a traditional IRA contribution, not eligibility to contribute at all. She can still contribute.
• BB. Because she actively participates in an employer plan and her MAGI exceeds the phase-out range, her contribution loses its deductibility; it is not automatically deductible regardless of income.
• CC. Active participants whose income exceeds the phase-out range can still fund a traditional IRA, but the contribution becomes nondeductible (basis is tracked on Form 8606).
• DD. High income doesn't force a Roth in place of a traditional IRA; she may still use a traditional IRA (nondeductibly), separate from any Roth eligibility question.

• Source: 26 U.S.C. § 219, accessed October 2026

Correct answer: C. No federal estate tax is due at David's death because of the unlimited marital deduction

Property passing outright to a surviving U.S. citizen spouse qualifies for the unlimited marital deduction, deferring estate tax entirely until the surviving spouse's later death (assuming it remains in her estate). No tax is due at David's death regardless of estate size.

• AA. Transfers to a surviving U.S. citizen spouse qualify for the unlimited marital deduction, so the estate is not immediately taxed on the full amount.
• BB. There is no $1 million threshold applicable here; the marital deduction shelters the entire outright transfer to the spouse regardless of amount.
• CC. The unlimited marital deduction allows an outright bequest to a surviving U.S. citizen spouse to pass free of federal estate tax at the first spouse's death. The correct answer.
• DD. There is no reduced 50% estate tax rate for spousal transfers; the unlimited marital deduction eliminates the tax at this death entirely, so nothing is due within nine months (the tax is deferred, not discounted).

• Source: 26 U.S.C. § 2056, accessed October 2026

Correct answer: B. Net unrealized appreciation (NUA) treatment, under which the appreciation is taxed at long-term capital gains rates when the stock is later sold, rather than as ordinary income

Net unrealized appreciation (NUA) is a special tax rule applicable to employer securities distributed in-kind from a qualified plan such as a 401(k). The employee pays ordinary income tax only on the plan's cost basis in the stock at the time of the lump-sum distribution; the built-in appreciation (the NUA) is taxed at favorable long-term capital gains rates only when the stock is later sold, rather than as ordinary income upon distribution as would occur if the stock were rolled into an IRA and later withdrawn. Step-up in basis (A) applies at death, not at a lifetime distribution, and does not eliminate all tax here. The wash sale rule (C) restricts loss deductions on repurchased securities and is irrelevant to a built-in gain. Section 1035 (D) applies to exchanges of insurance/annuity contracts, not employer stock.

• AA. Step-up in basis applies to inherited assets at death, not to a lifetime in-kind distribution of employer stock, so this is the wrong provision.
• BB. Net unrealized appreciation (NUA) treatment lets the built-in gain on employer stock be taxed at long-term capital gains rates upon a later sale, rather than as ordinary income at distribution. The correct answer.
• CC. The wash sale rule disallows losses on repurchased securities within a 30-day window; it doesn't offset or defer a built-in gain on distributed stock.
• DD. Section 1035 governs tax-free exchanges of annuity and life insurance contracts, not employer stock distributions from a qualified plan.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: D. 73

SECURE 2.0 raised the RMD beginning age to 73 for individuals who turn 72 after 2022 (with a further increase to 75 scheduled for 2033). Age 59½ (A) is the earliest age for penalty-free withdrawals, not the RMD trigger. Age 70½ (B) was the RMD age under pre-2020 law, before the original SECURE Act. Age 72 (C) was the RMD age created by the original 2019 SECURE Act but has since been superseded for most current retirees by SECURE 2.0.

• AA. 59½ is the age after which traditional IRA withdrawals avoid the early-withdrawal penalty, not the RMD starting age.
• BB. 70½ was the RMD age under pre-2020 law, since replaced first by the original SECURE Act and then by SECURE 2.0.
• CC. 72 was the RMD age set by the original SECURE Act (2019), but SECURE 2.0 subsequently raised it further for most current retirees.
• DD. SECURE 2.0 raised the required beginning age to 73 (for those turning 72 after 2022), making this the current general RMD age.

• Source: IRS: Retirement topics - Required minimum distributions (RMDs), accessed October 2026

Correct answer: D. Contributions are made after-tax, and qualified withdrawals, including earnings, are tax-free

Roth 401(k) contributions are made with after-tax dollars, and if the withdrawal is qualified (5-year rule met and age 59 1/2 or another qualifying event), both the contributions and the accumulated earnings come out completely tax-free.

• AA. This describes traditional 401(k) tax treatment (pre-tax contributions), not the Roth 401(k), where contributions are made after-tax.
• BB. This reverses the actual tax treatment. Roth 401(k) contributions are after-tax, not pre-tax, and qualified withdrawals aren't taxed as capital gains.
• CC. Taxing withdrawals again on the full amount would amount to double taxation and is not how Roth accounts work; qualified withdrawals, including earnings, are tax-free.
• DD. Correct. Roth 401(k) contributions are made with after-tax dollars, and qualified distributions. Including all accumulated earnings. Are received tax-free.

• Source: IRS: Retirement topics - Designated Roth account, accessed October 2026