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REG CPA Practice Questions: HSA and Retirement Contributions
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on adjusting gross income with HSA and retirement account contributions. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-adjusting-gross-income-with-hsa-and-retirement-account-contributions/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 01:12 Question 1: HSA Contributions 05:29 Question 2: Traditional IRA Contributions 09:33 Question 3: Tradional IRA Phase Out Range 13:28 Question 4: Roth IRA Contributions 17:00 Question 5: Nondeductible IRA Contributions 20:12 Pillar Topics
View Video Transcript
0:00
Welcome to another REG walkthrough video
0:02
My name is Logan and in today's video we're going to be going over adjusting gross income
0:06
with health saving accounts or HSA and retirement account contributions. And we're going to be doing that the Superfast CPA way, which is diving straight into questions
0:17
to learn the material. If you don't know much about our strategies, make sure you go to superfastcpa.com and watch
0:23
our free one-hour webinar training where we go over the six key ingredients to passing
0:27
the CPA exam. The link will be in the description, it will look like this
0:31
And again, it's only one hour long, it's free, and it will save you months and months of
0:35
struggling with your process. Also, if you like the idea of going through questions as your main learning material
0:41
be sure to check out our Superfast CPA app where we have five question mini quizzes that
0:45
you can access on the go so you can keep practicing throughout your day
0:49
With all that said, let's dive straight into the questions. One more thing I want to say as we're getting into the questions, only this first question
0:55
will be going over HSA contributions because they're very straightforward and there's not
1:01
much to it. So we figured that even just one question would be enough for you to learn what you
1:06
pretty much need to know. And the remaining four questions will go over retirement contributions and how those affect
1:11
gross income. Okay, so here's question one. Kevin, aged 38, is employed and covered by a high deductible health plan, or HDHP, that
1:19
insures only him. During the year, he contributes $3,000 to his health savings account, or HSA
1:25
Kevin's HDHP has a deductible of $1,500 and his total out-of-pocket medical expenses for
1:32
the year are $2,500. Throughout the year, Kevin has used $2,200 from his HSA to cover qualified medical expenses
1:40
If the maximum contribution limit for an individual HSA for the year is $3,500, which of the following
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statements is true regarding Kevin's HSA contributions and distributions for the year
1:50
Okay, so if you don't really know what an HSA is, you know, maybe you've dealt with it in real life, but basically we're going to be learning what an HSA is and how the
1:58
contributions affect an individual's gross income on their tax return. So take a second, read through the question one more time, read through the possible answers
2:06
to make sure you know what's going on and what the options are. And when you're ready, come back
2:10
We're going to go straight into the answer to start learning about HSAs. All right, here is the answer
2:15
So Kevin can deduct the full $3,000 contribution to his HSA from his gross income and the distributions
2:21
for qualified medical expenses are not taxable. So HSAs are pretty cool
2:25
Let's read about them here. Kevin is permitted to deduct the full amount of his HSA contribution from his gross income
2:31
up to the annual contribution limit, which in this scenario is $3,500
2:35
Small note about that, obviously that's not the actual number for the current year
2:40
We're trying to teach you more of the concept and how it works here rather than the actual
2:45
contribution limits and things like that. So just take that into account
2:49
You'll probably be given the actual contribution limit or you'll have actually gone over it
2:53
in your review course during your process of studying. But again, we're just trying to dive into the concept here and how it works
3:00
Because Kevin's contribution is $3,000, it is fully deductible because it's under that $3,500
3:05
Moreover, the distributions he made for qualified medical expenses are tax-free and not subject
3:09
to any penalties. Health savings accounts are tax-advantaged savings accounts for individuals with high
3:14
deductible health plans. They allow both individuals and employers to contribute pre-tax money
3:20
That's awesome. So you can take money before it's even been taxed and it can be used to pay for qualified
3:25
medical expenses. Contributions made by individuals can be deducted from their gross income, reducing taxable income
3:32
So not only is it not taxed when you put it in, when you take it out, as long as it was
3:36
used for qualifying medical expenses, it's still not taxed. So that's awesome
3:41
The IRS sets annual contribution limits and those change from year to year, with higher
3:45
limits for family coverage and additional catch-up contributions allowed for individuals aged 55 and older
3:51
Distributions from HSAs are tax-free when used for qualified medical expenses. This includes a wide range of medical, dental, and mental health services, so pretty broad
3:59
Funds in an HSA roll over year to year, so there's no pressure to spend the balance within
4:03
any given year, allowing the account to grow tax-free over time. HSAs for non-qualified expenses are subject to taxes and additional penalties unless the
4:11
account holder is over 65, disabled, or diseased. Note the relationship between HSAs and HDHPs
4:19
Only individuals covered by an HDHP can contribute to an HSA, so you have to have a high deductible
4:25
health plan to be able to have an HSA. They're kind of there to make up for the fact that you have a high deductible
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HDHPs have minimum deductibles and maximum out-of-pocket costs set by the IRS
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These plans require individuals to pay for all medical expenses up to the deductible
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encouraging the use of HSAs to cover these potential costs. The HSA is thus a financial cushion, offering tax advantages for healthcare savings and
4:56
expenses for individuals with these high deductible insurance plans. Okay, that was a lot for one question, but again, that's pretty much what you need to
5:04
know when it comes to HSAs and how they affect gross income
5:08
Contributions to an HSA reduce your gross income, and that's an adjustment to your gross
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income, not an itemized deduction, and we'll learn more about that in another video
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And then when you take it out, it's not taxed either, as long as it's used for medical stuff
5:22
So again, they're pretty cool. That's pretty much what you need to know. So now let's dive into retirement account contributions for the rest of the video
5:29
And here is the next question. Martin and Grace are married and file a joint tax return
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Martin earned $30,000 this year and Grace earned $20,000. They are both under 50 years old
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They want to contribute to their traditional IRAs as much as they are legally allowed
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If the general contribution limit for individuals under 50 is set at $5,000 for the year, what
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is the maximum total amount they can contribute to their IRAs? So this is pretty easy
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You probably could even without knowing much about IRAs, guess how much they're able to
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contribute, but we're going to dive straight into the answer to start getting a good foundation
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for IRA contributions. So let's go ahead and go to the answer. Okay, so $10,000
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You probably could have even guessed that just based off of the numbers here, but let's
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go ahead and learn about how this works. So again, $10,000. The general rule for IRA contributions is that the maximum contribution is limited to
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the lesser of the set limit for the year or the individual's earned income
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If you don't make much money, then that might be your limit instead of the limit set for
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the year. And again, just like before, we're not going over the year specific limits in this video
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because again, they change from year to year. And when it comes to reg, the main focus is that you understand how it works
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There may be the occasional tax figure that you might need to know the actual number
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but for the most part, for the exam and when you're studying, you'll be given the actual
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current year number or you'll just need to know how the concept works
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So again, that's what we're doing in this video, just trying to teach you how it works
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Since both Martin and Grace have earned income well above the individual limit of $5,000
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for this example, and they are under 50, they can contribute the maximum limit
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Martin can contribute $5,000 and Grace can also contribute $5,000 making the total contribution $10,000
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This is the maximum amount they can contribute because it is the lesser of their individual
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earned incomes and the standard contribution limit. The IRA contribution limits and rules vary based on age and marital status and they are
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designed to encourage retirement savings. So let's first learn about the age rules
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So being under 50 versus over 50, the IRS allows individuals who are age 50 or over
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to make catch-up contributions to their IRAs. So basically they can put a little bit more into their IRA if they're over 50
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So basically like it says right here, this means that if you are under 50, you are subject
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to the standard contribution limit. So again, $5,000. If you are 50 or over, you can contribute additional money beyond the standard limit
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to the IRA. So maybe like another $1,000 or something like that
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This catch-up contribution is designed to allow older individuals who may be closer to retirement to save more money in their retirement accounts
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So as far as age goes, if you're under 50, you have the normal limit that changes from
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year to year. And if you're over 50, that might increase by something like $1,000 or something like that
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So you can contribute a little bit more. And then as far as being single versus being married, for single individuals, the contribution
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limit applies to their own earned income. So for this example, just the $5,000, that's just the limit
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However, married couples who file jointly have a higher combined contribution limit
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This higher limit acknowledges the pooled resources and potential for shared expenses
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in a marriage. For example, in the question we used, the contribution limit for an individual under
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50 was $5,000. If you are married and filing jointly, each spouse can contribute up to $5,000 for a combined
8:44
total of $10,000 provided they have at least that much in combined earned income
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So this is just a basic introduction to how it works. Basically money that you put into a normal IRA, like the contributions that you make
8:57
in the year generally can reduce your gross income or adjust your gross income so that
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you pay less taxes. And we'll get into a few other situations when it comes to retirement accounts that
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may change that. But right here, as long as they have a qualifying retirement account and they make contributions
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as long as the contributions are underneath the limit or up to the limit that is set for
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the year, then those contributions can reduce the gross income for those individuals, whether
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it's one person or it's a married couple. Okay, so that's an intro into the retirement accounts
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Again, we're going to learn a little bit more about different situations in the next few questions
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So let's go ahead and go to the next question. Okay, question three. Henry and Julia, a married couple filing jointly, are determining the deductible amount for
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their traditional IRA contributions. Henry is a school administrator and participates in his employer's retirement plan with an
9:45
annual salary of $75,000. So he has the retirement plan. Julia is a self-employed graphic designer earning $50,000 and does not have a retirement plan
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Both are under 50 years old. Remember that rule. For this year, the IRS allows a maximum IRA contribution of $5,500 per individual with
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a phase out range for couples filing jointly starting at a combined income of $105,000
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So what is the maximum total deductible contribution they can make to their traditional IRAs
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Okay, so this is introducing something called the phase out limit. And again, we're going to learn about this from the answers
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But this is just one more thing that can affect how much of the contribution you can actually
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use to reduce your gross income. So take a second, pause the video, see if you understand the question, make sure you
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read through it. And when you're ready, come back. We'll look at the answer. All right, here is the answer
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So Julia can make a $5,500 contribution and Henry will have a smaller contribution because
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of the phase out rule. So let's go ahead and learn about that. The deductibility of IRA contributions depends on whether the taxpayer or their spouse is
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covered by a retirement plan at work and their modified adjusted gross income or modified AGI
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When one spouse, Henry, is covered by a retirement plan and their combined modified AGI is above
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the phase out start point, that spouse's ability to deduct their IRA contribution begins to decrease
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So one note, we're not going to dive super deep into how you calculate modified AGI
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There's a whole bunch of different calculations that go into it. We will talk a little bit more about it, but don't worry too much about it
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And then as far as the phase out limit, again, the calculation isn't super simple
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It's not like a dollar for dollar reduction or something like that
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It's some kind of percentage and it has some different factors. So just know that if you're over that phase out limit, then it starts reducing how much
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of the contributions can be deductible. With that said, let's read a little bit more
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Henry and Julia's combined modified AGI is $125,000, which puts them above the phase
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out start point of $105,000 for a married couple filing jointly, where one spouse is
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covered by a workplace retirement plan. Henry's allowable deduction for his IRA contribution will begin to phase out
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However, since Julia is not covered by a workforce retirement plan, her deduction is not subject
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to the same phase out. Instead, being subject to a much higher phase out limit, let's say for this example, $200,000
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to $230,000. So she can contribute and deduct the full $5,500. Henry's deduction would be subject to a face out, so he would not be able to deduct the
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full $5,500. The exact amount would be determined by the extent to which their combined income exceeds
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the phase out threshold. So again, we're not going to go into that calculation in this video, but just know that
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because he is the one that has the retirement plan and their total income is over that phase
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out limit, it starts reducing how much he can deduct on his tax return
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But for Julia, since she is not on the retirement plan specifically, her phase out limit is
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much higher, so she is able to deduct the full contribution. So this is a fairly common situation, you know, where one spouse is working and has
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a retirement plan and another spouse either isn't working or even if they are working
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they don't have a retirement plan. So this situation is common. So just know that if their combined income is over that phase out limit, that again
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you will probably be given in the exam or in your review course, and it changes from
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year to year, then it can start reducing the spouse who does have the retirement plans
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contributions that can be deducted from gross income. It's a little bit confusing probably, but hopefully that made sense
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So let's go ahead and learn about a couple more situations when it comes to retirement contributions
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Here's question four. Carlos is a single taxpayer with a modified adjusted gross income of $125,000 for the year
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He is considering making a contribution to a Roth IRA. The IRS has set the modified AGI phase out range for Roth IRA contributions at $120,000
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to $135,000 for single filers based on his modified AGI. What is the impact on Carlos's current year's gross income if he makes a maximum contribution
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to his Roth IRA? So Roth IRAs, if you don't know much about them, they are quite different from normal
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IRAs in the fact that you put in money that has already been taxed into the IRA
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So with that knowledge, and if you know anything about Roth IRAs, go ahead and pause the video
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make sure you understand what the question is asking, and then we will dive into how contributions to a Roth IRA might affect somebody's gross income
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Okay, here's the answer. So his gross income will remain the same as Roth IRA contributions do not adjust gross income
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Okay, so this is something important to know that traditional IRA contributions, taking
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into account the phase out limit and things like that, those contributions can reduce
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your gross income, but contributions to a Roth IRA do not reduce your gross income
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So let's go ahead and read about it. Roth IRA contributions are made with after-tax dollars, meaning the contributions are not
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tax deductible and therefore do not reduce your gross income in the year you make the contribution
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Carlos's MAGI or modified AGI is within the phase out range for Roth IRA contributions
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for single filers, which means he can still contribute, but the amount he can contribute
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is less than the standard limit. And again, we're not going to dive super deep into modified AGI
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We're going to learn a little bit about it here, but just know that it can affect certain
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parts of IRAs. It is important to know that it exists and that it affects them, but we're not going
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to do a super deep dive into modified AGI in this video. However, this does not affect his gross income
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Roth IRAs provide tax benefits at retirement when qualified distributions are tax free
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by the way, that's awesome. Rather than providing an immediate tax deduction, just a small plug for Roth IRAs, taxes will
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always go up. So that's awesome that you can take distributions tax free when you, when you're able, but there
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are rules to it. Obviously modified adjusted gross income is a metric used by the IRS to determine eligibility
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for certain tax deductions and credits. It starts with your adjusted gross income and adds back certain deductions
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The specifics of what gets added back can differ depending on the tax related benefit
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being considered. So again, that's why we're not really diving super deep into it
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There's a lot of things that can go into it and it's based off of your AGI. And right now in this video, we're mainly just trying to figure out how to get to AGI
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which these contributions from HSAs and retirement accounts can affect your AGI
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So when it comes to individual retirement accounts for traditional IRAs, modified AGI
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affects your ability to deduct contributions if you or your spouse are covered by a workplace
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retirement plan. So again, modified AGI does affect that. If neither is covered, modified AGI doesn't typically impact the deduction eligibility
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for your contributions. For Roth IRAs, modified AGI is used to determine the eligibility to contribute and the maximum
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amount you can contribute, with phase-out ranges applied at higher income levels that
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gradually reduce allowable contributions. So essentially, don't get tricked by Roth IRAs
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Contributions to a Roth IRA will not reduce your gross income, but they're tax-free when
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you take the money out later in your life. All right, we've learned a ton about HSAs and IRAs
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So we're going to go to the last question to learn one last thing. All right, here's the last question
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Ava is a single high-earning professional with a modified adjusted gross income well
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above the phase-out range for deductible traditional IRA contributions. For the current year, she contributes $6,000, the maximum allowed, to her traditional IRA
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Given that her modified AGI exceeds the limits for deductible contributions, which statement
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best describes the impact of her non-deductible traditional IRA contribution on her current
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year's gross income? So this last question, we haven't really dealt with anybody who is a super high-earning
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And when it says high-earning, that means that they are above the typical limits for
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people contributing to IRAs. So how does this work? How does this affect their gross income
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Take a second, pause the video, read through the question and the possible answers, and
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when you're ready, we'll come back and learn about this. Okay, here's the answer
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So her gross income will remain the same, and she will have a basis in her traditional
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IRA contribution. So basically, because she's making so much money, even though she's contributing to an
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IRA, because she's making so much money, she's over that typical limit
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So the contributions do not affect her gross income. Non-deductible traditional IRAs offer a tax-advantaged saving strategy for individuals whose income
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exceeds the limits for deductible contributions. So even if you make a ton of money, you can still have an IRA
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Non-deductible traditional IRA contributions do not reduce your gross income in the year that they are made
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These contributions are made with after-tax dollars, which means Ava won't get a tax
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deduction for the amount contributed to the IRA in the current tax year
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However, since the contributions are made with after-tax dollars, Ava will not be taxed
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again on the amount of the contributions when she withdraws them in retirement, meaning
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that she will have a basis in the IRA. Only the earnings on the non-deductible contributions will be taxable upon withdrawal
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Individuals keep track of their after-tax contributions to establish a basis in the IRA, ensuring that they aren't taxed twice on the same money
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While these accounts don't offer the upfront tax benefit of deductible IRAs, they do provide
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a way to save and invest for retirement with deferred taxation on potential investment gains
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Additionally, non-deductible IRAs can be converted to Roth IRAs, potentially offering tax-free
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growth and withdrawals under certain conditions. So the difference between non-deductible and Roth, so with both of them, you're putting
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in dollars that have already been taxed, but with non-deductible traditional IRAs, when
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you take the money out, the part that you put in isn't taxed, but the part that was
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earned on top of it will be taxed. Whereas with Roth IRAs, they grow tax-free
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So again, this is just another situation where contributions to an IRA actually aren't going
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to affect your gross income. So there's two situations where they won't actually affect your gross income
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If you have a non-deductible traditional IRA, which is when you just make so much money
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that you're over the typical limit for a normal IRA, and there's Roth IRAs where those also
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do not affect your gross income. And then there's traditional IRAs that as long as you're within the right limits and
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you're underneath the phase-out limits, you can use those contributions as deductions
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to your gross income. All right, again, we learned a ton in this video
20:06
We're going to finish off with doing one last part of the Superfast CPA strategy, which
20:10
is something called pillar topics. So pillar topics is essentially as you're going through your material or even after
20:16
you've gone through your material for the day, you take a second and put the things
20:20
down that you learned from doing the questions. These are the things that are obviously important, the concepts that you were supposed to learn
20:26
according to your review course and according to the questions that you saw when you were studying
20:32
So let's write down a few important pillar topics to finish the video. Okay, so HSAs are a part of high deductible plans
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They let you put in pre-tax dollars and the contributions can reduce your gross income
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Distributions from an HSA are tax-free as long as they are used for qualifying medical expenses. Okay
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And then as far as IRAs, traditional IRAs have yearly limits to how much you can contribute
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And those contributions typically are able to reduce your gross income
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However, if income is high enough, then those contributions start phasing out
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Roth IRA contributions do not reduce gross income. And non-deductible traditional IRAs are for people who make too much money for a normal
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traditional IRA. And these contributions are also not able to reduce gross income
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Okay, those are some basic pillar topics that you could learn from this video
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Again, when you're making your own pillar topics, maybe you learned something a little bit different that you want to write down
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You could make it more detailed, you could make it more simple, however you want to do it
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But that's an example of pillar topics. Alright, to close out this video, I just want to remind everybody about the free one-hour
22:27
training webinar we have on superfastcpa.com. Again, the link will be in the description
22:32
Make sure you go check that out. It will save you months of struggling with your studying
22:35
Also, if you liked going through questions as your main learning material and you feel like you learned a lot, make sure you check out our Superfast CPA app where we have five
22:43
question mini-quizzes that you can take on the go all throughout your day to continue
22:47
to learn. If you found this helpful, make sure to like the video, leave a comment, and with that
22:51
said, I'll see you in the next video
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