COMPLETE STRATEGIES FOR MAXIMIZING CONTRIBUTIONS, ROLLOVERS, DISTRIBUTIONS, AND ESTATE PLANNING OF IRAs, SIMPLEs, SEPs, AND ROTHs

Transcription

1 COMPLETE STRATEGIES FOR MAXIMIZING CONTRIBUTIONS, ROLLOVERS, DISTRIBUTIONS, AND ESTATE PLANNING OF IRAs, SIMPLEs, SEPs, AND ROTHs Written by Robert J. Doyle Jr., MBA, MA, CLU Chartered Financial Consultant CIRA/14/01

2 Table of Contents Regular IRA Basics... 1 Roth IRAs... 2 SEP Basics... 3 SIMPLE IRAs... 4 Rollovers... 5 Planning Under the Uniform Minimum-Distribution Rules... 6 Annuity Options and Distribution Planning... 7 Transfer Tax Planning... 8 This product is intended to serve solely as an aid in continuing professional education. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any tax and accounting opinion or return position, and must be supplemented for such purposes with other current authoritative materials. The information in this manual has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Surgent McCoy CPE, LLC, its authors, and instructors are not engaged in rendering legal, accounting, or other professional services and will not be held liable for any actions or suits based on this manual or comments made during any presentation. If legal advice or other expert assistance is required, seek the services of a competent professional. Revised April 2014

3 Regular IRA Basics Learning objectives 1 I. Introduction 1 A. Types of IRAs 1 1. Regular IRAs 1 2. Spousal IRAs 1 3. Conduit IRAs 2 4. Inherited IRAs 2 5. Other IRAs 2 B. Qualification requirements for IRAs 2 1. Full vesting at all times 2 2. Written trust or custodial agreement 3 3. Contribution limits 3 4. Where created 3 5. Firms qualified to serve as a trustee or custodian 3 6. Exclusive-benefit rule 3 7. No investment in life insurance 4 8. No commingling of investments 4 C. Investment restrictions on IRAs 4 1. Unrelated business taxable income 4 2. Collectibles 7 D. Prohibited-transactions rules 8 1. Persons and transactions covered 8 2. Tax consequences 9 E. Income-tax withholding rules 9 1. In general 9 2. Election out of withholding 9 3. The backup-withholding rules do not apply to payments made to an IRA 9 4. Designated distributions Periodic and nonperiodic distributions Federal payroll taxes Self-employed individuals 10 F. Reporting and disclosure requirements of IRA owners Deductible contributions Nondeductible contributions -- Form Form Form 1099-R for distributions involving federal income-tax withholding 11 II. Contributions to regular IRAs 11 A. In general Cash only Age limit Time period 11 B. Amount of contributions Deductible amount Reduced deduction for certain active participants in retirement plans Nondeductible contributions Spousal IRA contributions Contributions to inherited IRAs 17 C. Excess contributions Excise tax Corrective techniques 17 III. Distributions 18 A. Federal income tax In general Return of basis IRA distribution includable in gross income IRA owner acted as trustee agent so there was no taxable distribution 23 1-i

4 B. Early distribution tax In general Exceptions to the 10-percent additional tax Distributions after the death of the IRA owner Distributions on account of disability Distributions for medical expenses Distributions to unemployed individuals to pay health insurance premiums Distributions for qualified first-time homebuyers Distributions for qualified higher-education expenses Distributions under the substantially equal periodic payments exception 27 C. Required distributions 34 D. Withdrawal of excess contributions Withdrawals on or before the due date for filing the tax return Withdrawals after the due date of the tax return 35 IV. Income-tax-planning opportunities with IRAs 36 A. Current reduction of tax 36 B. Timing 36 C. Accumulation 36 D. Discretionary contributions 37 E. SEPs 37 F. Active participant 37 G. Surviving spouses 37 H. Nondeductible contributions 38 I. Conversions to Roth IRAs 38 1-ii

5 Roth IRAs Learning objectives 1 I. Roth IRAs 1 A. Defined 1 1. In general 1 2. General definitions 1 3. Establishing a Roth IRA 2 B. Contributions 3 1. Permitted contributions to Roth IRAs 3 2. Maximum aggregate amount of regular contributions 3 3. Compensation 4 4. Modified AGI 4 5. Excess aggregate contributions 5 C. Rollover or conversion of regular IRA to Roth IRA 5 1. In general 5 2. Modified-AGI-limitation requirements for conversions 5 3. No age limitation on conversions 6 4. Recharacterization of failed conversions 6 5. Conversions from SEPs and SIMPLEs 6 6. Other qualified plans 7 7. Minimum distributions 7 8. Tax consequences of a conversion 8 9. Effect of taxable conversion amount Substantially equal periodic payments Ten-percent early withdrawal penalty 9 D. Distributions 9 1. In general 9 2. Five-year period Distributions to one treating as one s own Not qualified distributions Premature-distribution penalty Death of the Roth IRA owner Ordering rules Sourcing rules Multiple beneficiaries Withholding rules Minimum-distribution rules application to a Roth IRA Application of minimum-distribution rules to Roth and non-roth IRAs Basis of distributed property Contribution of distribution from a Roth IRA to another type of retirement plan Coverdell education savings account Gifts of a Roth IRA 15 E. Recharacterized contributions In general Net income attributable to the contribution Effect of recharacterizing Amounts contributed to an IRA in a tax-free transfer Amounts contributed by an employer under a SIMPLE IRA plan or a SEP Making the election to recharacterize a contribution Tax-free transfers Relation to rollovers Reconversions 19 F. Nondeductible contributions to regular IRAs still available 20 G. Reporting In general Notice II. Planning for the Roth 22 2-i

6 A. Contributions In general Plan limitations Investment alternatives 23 B. Conversions In general Who benefits from a conversion? Redesignation Factors affecting conversion The Roth Legacy Trust SM Design issues 27 C. Elimination of $100,000 MAGI limitation for conversions 28 D. Asset protection 28 E. Other IRAs In general The deemed IRA Inside Roth Conversion-rollovers into designated Roth accounts 34 2-ii

7 SEP Basics Learning objectives 1 I. Introduction 1 A. In general 1 1. Defined 1 2. IRA requirements 2 3. Employer established 2 4. Written instrument 2 5. Allocation of employer contributions formula 4 B. Statutory requirements 5 1. Participation 5 2. Nondiscriminatory contributions 6 3. Withdrawal of employer contributions by employees 6 4. Top-heavy provisions 7 5. IRA rules applicable to SEPs 8 C. Employer contributions 8 1. Maximum amount excludable from employee s income 8 2. Maximum deductible amount, in general 9 3. Maximum deductible amount for SEPs maintained by self-employed individuals (SEI) 9 4. Deductible amount for two defined-contribution plans FICA and FUTA taxes Taxable year of deduction for employer Maximum annual addition 16 II. Salary-reduction contributions (SARSEPs) 17 A. In general Provisions for SARSEPs repealed CODA-like Employer contribution Limits on elective deferrals (salary reductions) Excess deferrals Overall limits on SEP contributions FICA and FUTA tax Eligibility requirement Limitations on eligible employers 19 B. Deferral-percentage test In general Difference with 401(k) Practical considerations Top-heavy rules 21 III. Administration 22 A. Withholding In general Excess deferrals SARSEPs 22 B. Reporting requirements SEP arrangement using Form 5305-SEP General reporting requirements for other SEP arrangements Alternative method of compliance Reporting by IRA sponsor Reporting of employer contributions Reporting of unrelated business taxable income 24 C. Disclosure to employees Upon adoption of SEP arrangement Annual statements 24 IV. Tax- and fiscal-planning opportunities with SEPs 25 A. Start-up costs compared to qualified plans 25 B. Form 5305-SEP is limited in its options 25 3-i

8 C. Lower trustee and annuity issuer fees 25 D. Fiduciary liability 25 E. Administration Expense of form preparation SEP exemption from the survivor-annuity rules of ERISA Employee withdrawals 26 F. Flexibility Limited employer options No participant loans SEP arrangements and contributions to IRAs Contribution and establishment deadlines 27 V. Self-employed contribution worksheets 27 3-ii

9 SIMPLE IRAs Learning objectives 1 I. SIMPLE plans 1 A. In general 1 1. Described 1 2. Contributions 1 3. Calendar year 1 B. Eligible employers 2 1. In general 2 2. Grace period 2 3. Other qualified plans 2 4. Exceptions to the other qualified plan rule 3 5. Tax-exempt employers and governmental entities 3 6. Employer-aggregation and leased-employee rules 3 C. Eligible employees 4 1. Mandatory employees 4 2. Less restrictive eligibility requirements 4 3. Participation in a plan of a different employer for the same year 5 4. Compensation defined for other than a self-employed individual 5 5. Compensation defined for a self-employed individual 5 D. SIMPLE plan contributions 5 1. Required contributions 5 2. Salary-reduction contribution 6 3. Annual limit on the amount of salary-reduction contributions 6 4. Required employer matching contributions 6 5. Self-employed persons 7 6. Reduction of the three-percent limit on matching contributions 8 7. Nonelective contributions 8 E. Employee elections 9 1. Additional or longer election periods 9 2. Termination of a salary-reduction agreement not within the plan s normal election period 9 3. Selection of the designated financial institution 9 F. Vesting requirements Nonforfeitable contributions Withdrawal rights 10 G. Employer administrative and notification requirements Employer notification requirements Notifications of a reduced matching contribution and a nonelective contribution Noncompliance penalties Eligible employees who do not establish a SIMPLE IRA Timing of employer salary-reduction contributions Timing of matching and nonelective contributions 11 H. Trustee administrative requirements Information required to be provided to an employer Information required to be provided to participants Information required to be provided to the IRS Reporting of distributions Reporting certain distributions to a participant 13 I. Tax treatment of SIMPLE plans Elective contributions to a SIMPLE plan Distributions from a SIMPLE IRA Special rollover rules Roll over from a SIMPLE IRA to another IRA in a trustee-to-trustee transfer Beginning of two-year period Qualification rules for SIMPLE plans Employer s deduction of contributions under a SIMPLE plan 14 J. Use of designated financial institution 15 4-i

10 1. In general Limiting the time and manner of transferring the balance without cost or penalty Frequency with which a participant s balance must be transferred without cost or penalty The DFI transfer of a participant s balance without cost or penalty DFI charges for a participant s transfer of the participant s balance 18 K. Establishing a SIMPLE plan In general Establishment for an employee Model forms 19 L. Planning considerations Choosing the SIMPLE Comparisons to 401(k) plans Tax-shelter potential Individuals with low earnings Minimizing the employer contribution Prime candidates for the SIMPLE From the employee s perspective Compliance problems SIMPLE 401(k) plans 21 4-ii

11 Rollovers Learning objectives 1 I. Introduction to rollovers 1 A. In general 1 1. Avoidance of tax 1 2. Rollovers versus transfers 1 3. Advantages of transfers over rollovers 1 4. Direct rollovers versus transfers 2 5. Withholding rules on IRA-to-IRA rollovers 2 6. Withholding rules on plan-to-ira rollovers 2 B. Rules applicable to all rollovers 3 1. Sixty-day time limit 3 2. No rollover of required minimum distributions 3 3. Partial rollovers from plans or IRAs 4 4. Rollovers to multiple recipients 5 II. Rollover of IRA distributions 5 A. To another IRA 5 1. One-year rule 5 2. One-year rule applied to each account separately 5 3. Direct transfers not subject to one-year rule 6 4. Rollback to same account is rollover 6 5. Amount not included in income 6 B. To a 401(a) qualified plan, 403(a) annuity plan, or 403(b) tax-sheltered annuity 6 1. Conduit IRA 6 2. Rollover of tainted conduit IRAs 7 3. An IRA may be used by surviving spouses 7 4. Rollover of property other than money 8 5. Amounts not included in gross income 8 C. Rollover or conversion of regular IRA to Roth IRA 8 1. General rule 8 2. Qualified rollover contributions 8 3. Eligibility for regular IRA to Roth IRA rollover 9 4. Taxation of conversion amounts 9 5. Ten-percent early withdrawal penalty on qualified rollover contributions 9 6. Income tax and 10-percent early withdrawal penalty on distributions 9 7. One-rollover-in-12-months rule 11 III. Advanced issues 11 A. Sale of property and rollover of proceeds For distributions from 401(a) qualified plans For distributions from an IRA 11 B. Rollovers to or from inherited IRAs When an IRA is inherited by someone other than the spouse Non-spousal rollovers When an IRA is inherited by a spouse New final regulations 14 IV. Rollover of 401(a) qualified plan distributions into IRAs 16 A. In general Property Eligible distributions 16 B. Exceptions 16 C. Trap for the unwary -- Multiple lump-sum distributions Special tax treatment eligibility Coordination of distributions Irrevocability of rollovers -- Effect on lump-sum tax treatment 17 D. Accumulated deductible employee contributions Background Continuing problems 17 5-i

12 E. Rollover of property in kind or of its proceeds Rollover of property in kind Rollover of proceeds from sale of property Partial rollover of proceeds from sale of property Distribution of an annuity contract 19 F. Rollover of after-tax amounts 19 G. Direct trustee-to-trustee rollovers of after-tax employee contributions From one 401(a) plan to another 20 H. Direct rollover to Roth IRAs 20 I. Rollover of a distribution to an alternate payee To someone other than a spouse or former spouse To a spouse or former spouse As it affects the question of payment of the balance to the credit of the plan participant 21 J. Rollover of a distribution to a surviving spouse Deemed participant Prohibition of non-ira receptacle repealed 21 K. Special circumstances Rollover of 403(a) annuity plan distributions into IRAs Rollover of 403(b) TDA distributions into IRAs Rollover of 457 plan proceeds Failed rollovers -- Tax consequences Rollover of an ESOP diversification distribution Miscellaneous rollover rules 23 L. Roth contribution programs In general Final regulations Separate accounting Applicable elective deferral requirements Elections 24 M. Distributions from designated Roth accounts What is a designated Roth account? How is a distribution from a designated Roth account taxed? How is a nonqualified distribution from a designated Roth account taxed? Period of participation Distributions from a designated Roth account that are rolled over Investment in the contract of a rollover contribution to a designated Roth account Determining the remaining investment in the contract following a qualified distribution from a designated Roth account Tax treatment of employer securities distributed from a designated Roth account Amounts not eligible for rollover with respect to a designated Roth account Rollover from a designated Roth account to a Roth IRA Roth ordering rules When the five-taxable-year period for determining qualified distributions from a Roth IRA begins Rolling over a Roth IRA to a designated Roth account 30 5-ii

13 Planning Under the Uniform Minimum-Distribution Rules Learning objectives 1 I. Overview 1 A. In general 1 B. Major planning categories 2 II. The 50-percent excise (penalty) tax 2 A. Penalty applies to each plan shortfall 2 B. Aggregation rules 2 1. Regular IRAs and 403(b) plans 2 2. Roth IRAs 2 3. Qualified plans 3 C. Subsequent distributions applied to shortfalls 3 D. The effect of underpayments is cumulative 3 E. Excise tax imposed in calendar year of shortfall 3 F. Unvested benefits 3 G. Waivers of the excise tax 4 III. Minimum-distribution rules 4 A. Distributions commencing before an employee s death 4 1. In general 4 2. Required beginning date 4 3. Pre-required beginning date distributions 5 4. Computing the required minimum distributions from individual accounts 5 5. Rollovers and transfers 10 B. Distributions after the death of the participant/owner In general Methods Death of surviving spouse/designated beneficiary prior to commencement date Identifying the designated beneficiary Documentation Applicable distribution period 17 C. Miscellaneous rules Multiple plans Separate accounts Qualified domestic-relations order (QDRO) Nonretired participants Distribution of an annuity contract Post-mortem distributions to estates or trusts TEFRA 242(b) elections 26 D. Defined-benefit plans In general Minimum-distribution incidental benefit Period certain Additional benefits that accrue after the employee s required beginning date Vested-benefit limitation Actuarial increases Distributions before the required beginning date 32 6-i

14 Annuity Options and Distribution Planning Learning objectives 1 I. Overview 1 II. Required spousal benefits (REA requirements) 2 A. Overview 2 B. Required (default) spousal benefits 2 1. A qualified pre-retirement survivor annuity (QPSA) 2 2. A qualified joint-and-survivor annuity (QJSA) 2 3. Annuity starting date 2 C. Affected plans 3 1. REA requirements apply generally to all qualified pension plans 3 2. Exception for profit-sharing and stock-bonus plans and ESOPs 3 3. Exception for certain benefits 4 4. Application to IRAs 4 D. Qualified pre-retirement survivor annuity (QPSA) 4 1. The survivor benefit 4 2. Alternative election 5 3. Election age requirement 5 E. Qualified joint-and-survivor annuity (QJSA) 5 1. Survivor-benefit ratio limits 5 2. Alternative election requires spousal consent 6 3. Time period for making alternative election 6 4. Notice of election 6 F. Spousal consent 6 III. Annuity basics 6 A. Periodic payment of income for life or specified period of years 6 B. Factors affecting the payable benefit 6 IV. Types of annuities 7 A. Straight single-life annuity 7 B. Life annuity with guaranteed payments 8 C. Modified cash refund (MCR) annuity 8 D. Conventional joint-and-survivor (J&S) annuity 8 1. Normal form 8 2. Spouse is normal beneficiary 8 3. Survivor-benefit ratios 8 E. J&S (first-death reduction) annuity 9 1. Benefit reduction upon first death 9 2. Generally a better choice than conventional J&S annuity 9 F. J&S annuity with pop-up feature 9 G. Other specialized annuities Full-cash-refund annuity Temporary annuity Annuity certain 10 H. Variable annuities Fluctuating benefit payments How they operate Selecting the AIR 11 I. Equity-indexed annuities (EIA) What are they? How are they different from variable annuities? So what is the attraction? What are the drawbacks? 11 V. Taxation of annuity benefits 11 A. Amounts received as an annuity 11 B. Distributions taxed as ordinary income 12 C. Participant s cost basis (investment in contract) 12 D. Cost-basis recovery rules for IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs 12 7-i

15 1. Exclusion ratio Investment (cost basis) Expected benefit Adjustments Fixed ratio Term Deduction for premature death Application 14 E. Cost-basis recovery rules for annuities from qualified employer retirement plans Qualified employer retirement plans Exception In general Investment in contract No adjustments for refund features or guarantees Level-amount basis recovery 15 7-ii

16 Transfer Tax Planning Learning objectives 1 I. Recent income, estate, and gift tax rules changes 1 A. Summary of the changes 1 B and 2010 tax laws made permanent 1 C. Reintroduction of the 39.6% bracket at the top 1 D. Pease and PEP reductions 2 E. The estate and gift tax 2 F. Unification on maximum rates on long-term capital gains and qualified dividends 3 G. Extensions of some credits 3 H. AMT exemptions 3 I. Offset of credits against the AMT is made permanent 4 II. Qualified plans and IRAs 4 A. Income tax 4 1. In general 4 2. Income in respect of a decedent 4 3. Net value of IRD 6 4. Acceleration of income 6 5. Principal and income considerations 8 B. Charitable remainder trusts 9 1. In general 9 2. Charitable trusts 9 3. Structuring the charitable disposition 11 III. Beneficiary designations 13 A. In general Gift tax Marital-deduction planning 13 B. General effect of final regulations Designating a beneficiary Establishing a beneficiary list Disclaimers 14 C. Trust as designated beneficiary In general Special rule Nontax considerations Required distributions from qualified plans and individual retirement plans Marital-deduction qualification 17 D. Beneficiaries Spouse directly Marital-deduction trust Credit-shelter trust Estate Charitable bequests Practical problems 24 E. Using a much younger designated beneficiary General principle Planning trap 25 F. Spousal IRA rollover versus inherited (nonrollover) IRA Situation Advantages of inherited IRA Advantages of a rollover IRA Basis of election Special circumstances 26 G. Special features of a Roth IRA IRD Minimum-distribution rules application to a Roth IRA Application of minimum-distribution rules to Roth and non-roth IRAs 30 8-i

17 4. Gifts of a Roth IRA 30 H. Hypothetical situations 30 8-ii