Establishing and Funding IRAs. Learning Objectives. After completing this session, you will be able to Ascensus, Inc.

Transcription

1 Establishing and Funding IRAs Learning Objectives After completing this session, you will be able to 1

2 Learning Objectives After completing this session, you will be able to define the purpose and tax advantages of Traditional and Roth IRAs, Learning Objectives After completing this session, you will be able to define the purpose and tax advantages of Traditional and Roth IRAs, identify the IRA contribution eligibility requirements, 2

3 Learning Objectives After completing this session, you will be able to define the purpose and tax advantages of Traditional and Roth IRAs, identify the IRA contribution eligibility requirements, outline the process for establishing an IRA application, Learning Objectives After completing this session, you will be able to define the purpose and tax advantages of Traditional and Roth IRAs, identify the IRA contribution eligibility requirements, outline the process for establishing an IRA application, state the IRA contribution limit and deadline, and 3

4 Learning Objectives After completing this session, you will be able to define the purpose and tax advantages of Traditional and Roth IRAs, identify the IRA contribution eligibility requirements, outline the process for establishing an IRA application, state the IRA contribution limit and deadline, and discuss the process for documenting a contribution. Introduction to IRAs I Individual account Cannot be owned by a nonperson entity Page 1 4

5 Introduction to IRAs I Individual account Cannot be owned by a nonperson entity R Studies show most members will need to rely on personal savings for 80 percent of their post-retirement income Page 1 Introduction to IRAs I Individual account Cannot be owned by a nonperson entity R Studies show most members will need to rely on personal savings for 80 percent of their post-retirement income A One application = One IRA Arrangement can contain several investments Page 1 5

6 Introduction to IRAs Benefits to Account Owners Traditional IRA Roth IRA Page 1 Introduction to IRAs Benefits to Account Owners Traditional IRA Roth IRA Tax-deferred earnings Page 1 6

7 Introduction to IRAs Benefits to Account Owners Traditional IRA Roth IRA Tax-deferred earnings Regular contributions may be tax-deductible Page 1 Introduction to IRAs Benefits to Account Owners Traditional IRA Roth IRA Tax-deferred earnings Regular contributions may be tax-deductible Earnings may be withdrawn income tax-free Page 1 7

8 Contribution Eligibility Page 2 Contribution Eligibility Anyone may establish an IRA. Eligibility requirements may limit how much an individual may contribute to an IRA. Page 2 8

9 Contribution Eligibility Anyone may establish an IRA. Eligibility requirements may limit how much an individual may contribute to an IRA. Earned income includes amounts derived from or received for personal services rendered. Page 2 Contribution Eligibility Anyone may establish an IRA. Eligibility requirements may limit how much an individual may contribute to an IRA. Earned income includes amounts derived from or received for personal services rendered. Traditional IRA & Roth IRA 1. Earned Income Page 2 9

10 Contribution Eligibility Earned Income Tips Combat pay Interest Not Earned Income Wages Rental Income Taxable alimony Bonuses Dividends Separation & early retirement Unemployment compensation Child support Professional fees Disability pay Commissions Salaries AFDC & TANF* Social Security Royalties* Page 2 Contribution Eligibility Earned Income Wages Salaries Tips Bonuses Taxable alimony Commissions Professional fees Combat pay Not Earned Income Interest Royalties* Dividends Rental Income Unemployment compensation Disability pay Child support Separation & early retirement AFDC & TANF* Social Security Page 2 10

11 Contribution Eligibility Traditional IRA 1. Earned Income Page 3 Contribution Eligibility Traditional IRA An account owner must not attain age 70½ or older any time during the year for which the contribution is made. 1. Earned Income 2. Age Page 3 11

12 Contribution Eligibility Roth IRA 1. Earned Income Page 3 Contribution Eligibility Roth IRA An account owner s modified adjusted gross income (MAGI) must not exceed the IRS limits. 1. Earned Income 2. Income Limit (MAGI) Page 3 12

13 Apply Your Knowledge: Contribution Eligibility 1. Meredith, age 35, is single and works as a doctor. She receives earned income of $80,000 per year. Can Meredith make a contribution to a Traditional IRA? (Yes or No) [Yes] Page 3 Apply Your Knowledge: Contribution Eligibility 2. Derek, age 38, is married and is a mechanic. He and his wife file a joint federal income tax return. Their combined earned income is $84,000 per year and they have a combined MAGI of $90,000 per year. Can Derek contribute to a Roth IRA? (Yes or No) [Yes] Page 3 13

14 Apply Your Knowledge: Contribution Eligibility 3. George, age 75, is single and is a maintenance worker. He has earned income of $35,000 per year. Can George contribute to a Traditional IRA? (Yes or No) [No] Page 3 Establishing an IRA First step: Provide information without giving tax advice. Page 4 Page 4 14

15 Establishing an IRA First step: Provide information without giving tax advice. Second step: The credit union must provide the following documents: Page 4 Page 4 Establishing an IRA Optional Document Application (required by most financial organizations) Required Documents Plan Agreement Disclosure Statement Financial Disclosure Regulatory Document Truth-in-Savings Disclosure Page 4 Page 4 15

16 Establishing an IRA Legal name Taxpayer identification number Address Date of birth. Page 4 Page 4 Establishing an IRA When establishing the IRA, the account owner may wish to designate beneficiaries. Page 5 Page 4 16

17 Establishing an IRA When establishing the IRA, the account owner may wish to designate beneficiaries. Account owners are not required to name beneficiaries while completing the application, but most will want to. Page 5 Page 4 Establishing an IRA There are two levels of beneficiaries Primary Beneficiary Page 5 Page 4 17

18 Establishing an IRA There are two levels of beneficiaries Primary Beneficiary Contingent Beneficiary Page 5 Page 4 Establishing an IRA Spousal Consent If the account owner names someone other than (or in addition to) their spouse as primary beneficiary x Sue Spouse 2/1/201 3 Page 6 Page 4 18

19 Establishing an IRA Spousal Consent If the account owner names someone other than (or in addition to) their spouse as primary beneficiary Community/Marital Property States: x Sue Spouse 2/1/201 3 *Alaska Arizona **California Idaho **Louisiana Nevada New Mexico Texas Washington Wisconsin * Alaska requires both spouses to opt in to community property law. ** While California and Louisiana have community property laws, they do not affect IRA death benefits if there are designated beneficiaries. Page 6 Page 4 Establishing an IRA The application must be signed by both parties IRA Owner Financial Organization 2/1/2013 2/1/2013 Page 6 Page 4 19

20 Required Documents Page 7 Required Documents The plan agreement serves as the contract between the credit union and the individual for whom the IRA is created. Page 7 20

21 Required Documents When establishing an IRA, the credit union must provide an upto-date disclosure statement, which explains the IRA rules in nontechnical language. Page 7 Required Documents The credit union must provide financial projections as part of the disclosure statement. helps account owners visualize their IRA investment growth, and allows account owner to compare investments Page 7 21

22 Apply Your Knowledge: Establishing an IRA 1. When completing the application the account owner is required to name beneficiaries (Yes or No). [No] Page 7 Apply Your Knowledge: Establishing an IRA 2. The account owner must sign the application to establish the IRA (Yes or No). [Yes] Page 7 22

23 Apply Your Knowledge: Establishing an IRA 3. What documents must the account owner receive upon the opening of an IRA? [Plan Agreement, Disclosure Statement, Financial Disclosure and TIS] [Optional document: Copy of signed application] Page 7 Apply Your Knowledge: Establishing an IRA 4. How often must the financial disclosure be given to the account owner? [Once, when the account is established] Page 7 23

24 IRA Contributions Page 8 IRA Contributions Annual Contribution Limit Tax Year Traditional and Roth IRA Aggregate Annual Regular Contribution Limits Annual Regular Contribution Limit Additional Catch-Up Contribution for Account owners Age 50 and Older 2013 $5,500 $1,000 ($6,500 total) Page 8 24

25 IRA Contributions Annual Contribution Limit Tax Year Traditional and Roth IRA Aggregate Annual Regular Contribution Limits Annual Regular Contribution Limit Additional Catch-Up Contribution for Account owners Age 50 and Older 2013 $5,500 $1,000 ($6,500 total) Example: Contribution Limit Kevin, age 54, has a Traditional and a Roth IRA at ABC Credit Union. Assuming he is eligible to contribute to both IRAs, he could contribute $3,250 to his Traditional IRA and $3,250 to his Roth IRA for tax year Page 8 IRA Contributions Annual Contribution Limit vs. Individual Contribution Limit If the IRA owner s earned income is lower than the annual contribution limit, the IRA owner may be eligible to contribute up to 100 percent of their earned income. Page 9 25

26 IRA Contributions Annual Contribution Limit vs. Individual Contribution Limit If the IRA owner s earned income is lower than the annual contribution limit, the IRA owner may be eligible to contribute up to 100 percent of their earned income. Example: Individual Limit Julie, age 19, is a single college student who earned $2,500 working in the university bookstore for tax year Even though the annual IRS contribution limit is $5,500, her individual limit is $2,500. Page 9 IRA Contributions Page 9 Page 11 26

27 IRA Contributions Spousal Contribution Limit A married account owner who does not earn any or earns minimal earned income and files a joint federal income tax return for a year can treat the couple s joint earned income as their own for purposes of determining the maximum contribution limit. Page 9 Page 11 IRA Contributions Spousal Contribution Limit A married account owner who does not earn any or earns minimal earned income and files a joint federal income tax return for a year can treat the couple s joint earned income as their own for purposes of determining the maximum contribution limit. Husband s Earned Income + Wife s Earned Income = Total Earned Income Husband s IRA Contribution Wife s IRA Contribution Page 9 27

28 IRA Contributions Example: Spousal Contribution Limit Kim and Matt, both 35, are married. Matt is in graduate school and has no earned income, and Kim is a dentist. As long as Kim and Matt file a joint federal tax return, Matt can use Kim s earned income to contribute to his Traditional IRA. If Kim earns at least $11,000 in 2013, then they can both contribute $5,500 to their own IRAs for Husband s Earned Income + Wife s Earned Income = Total Earned Income Husband s IRA Contribution Wife s IRA Contribution Page 9 Page 11 Apply Your Knowledge: Contribution Limit 1. Edward was born on December 30, What is his aggregate contribution limit for 2013? [$5,500] Page 10 28

29 Apply Your Knowledge: Contribution Limit 2. Elise was born on April 19, What is her aggregate contribution limit for 2013? [$6,500] Page 10 Contribution Deadline Page 10 29

30 Contribution Deadline January 1 December 31 A current-year regular contribution can be made beginning on January 1 of that year. Page 10 Contribution Deadline January 1 December 31 April 15 A current-year regular contribution can be made beginning on January 1 of that year. The deadline to make regular contributions for a year is the deadline for filing that year s federal income tax return, generally April 15. Page 10 30

31 Contribution Deadline Prior-Year Regular Contributions The instruction to attribute a contribution to the prior year must be in writing and is irrevocable. If there is no written instruction, assume the regular contribution is for the current year. A prior-year regular contribution cannot be changed to a current-year regular contribution. Page 11 Apply Your Knowledge: Contribution Deadline 1. What is the last date on which Henry can make a contribution for tax year 2013? [April 15, 2014] Page 11 31

32 Apply Your Knowledge: Contribution Deadline 2. If Henry makes his 2013 contribution on February 12, 2014, what methods can he use to provide the written direction for a prior-year contribution? [Any written instruction method accepted by the credit union] Page 11 Q&A and Contact Information Paul Kern CIS, CIP, CISP paul.kern@ascensus.com

33 Establishing and Funding IRAs Thank you for attending! 33