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1 Table of Contents Frequently Asked Questions... 2 Individual Retirement Arrangements (IRAs)... 2 IRA Basics... 2 Why should I name beneficiaries for my IRA?... 2 Traditional IRAs... 9 Roth IRAs SEP Plans Beneficiary Designations Transfers and Rollovers Between IRAs Divorce Situations Distributions Before Age 59½ Distribution Options for IRA Beneficiaries Required Minimum Distributions (RMDs) Contributions and Deductions Education Savings Account (ESAs) General Contributions Distributions Health Savings Account Eligibility Contributions Distributions Employer-Sponsored Retirement Plans Types of Plans Eligibility to Participate Vesting Requirements Salary Deferral Options Plan Loan Options Divorce or Legal Separation Distributions and Rollovers Social Security Retirement Benefits History of Social Security Projecting Social Security Retirement Benefits Choosing Your Social Security Retirement Date Applying for Social Security Retirement Benefits Working in Retirement Medicare and Medicaid History Eligibility Coverage and Costs Additional Resources Page 1

2 Frequently Asked Questions Individual Retirement Arrangements (IRAs) IRA Basics What is an IRA? An IRA is an individual retirement arrangement, which can be an individual retirement account or an individual retirement annuity. It is a personal savings plan that allows you to set aside money for retirement with tax advantages. There are two primary types of IRAs: Traditional and Roth. Depending on which one you choose, you may be able to deduct some or all of your contributions. You also may be eligible for a tax credit equal to a percentage of your contribution. How does a Traditional IRA differ from a Roth IRA? With a Traditional IRA, assuming you re eligible, your contributions are tax-deductible. Your earnings grow tax-deferred, so you will not pay income taxes on your investment earnings until you make withdrawals. Both deductible contributions and earnings are then taxed at your regular income tax rate when the money is withdrawn. Contributions you make to a Roth IRA are never tax-deductible, so they will always be tax-free upon distribution. Your earnings grow tax-deferred, so you will not pay income taxes on your investment earnings until you make withdrawals. And if you take a qualified distribution, your earnings are tax-free. Why should I name beneficiaries for my IRA? When you open an IRA, you may be asked to designate primary and contingent beneficiaries. These are the people (or entities) who will receive your IRA assets if you die before you ve withdrawn all your money. If you have significant assets or special concerns, you may want to consider consulting a tax advisor or estate planning professional to help ensure that your IRA is distributed according to your wishes and in the most tax-advantaged way allowed. What investments can I use for my IRA? Technically, an IRA is a tax-advantaged personal savings arrangement set up as a trust or custodial account that holds your investments. You can establish an IRA at any credit union, bank, other financial organization, brokerage firm, or mutual fund company. You also may establish an individual retirement annuity with an insurance company. Subject to what is allowed by the financial organization, you may invest your IRA money in most types of savings and investments, including CDs/share certificates, share savings, mutual funds, and individual stocks and bonds. You cannot invest in life insurance or collectibles, including artwork, stamps, Page 2

3 antiques, and some coins. Can anyone contribute to an IRA? You are eligible to contribute to a Traditional IRA if you are under age 70½ and you have eligible compensation. For IRA purposes, eligible compensation generally is defined as the money you earn from working and includes wages, salary, tips, bonuses, commissions, and selfemployment income, but not investment or pension income. If you are a non-earning spouse under the age of 70½ who files a joint tax return with a working spouse, you also are eligible to contribute to a Traditional IRA. You can contribute to a Roth IRA if you have eligible compensation below or within the modified adjusted gross income (MAGI)* limits. Unlike the Traditional IRA, there is no age restriction; you can contribute to a Roth IRA even after turning age 70½. If you are single, you can contribute to a Roth IRA for 2014 if your MAGI* is no greater than $129,000 ($127,000 for 2013). If you are married, filing jointly, you can contribute to a Roth IRA for 2014 if your joint MAGI* is not greater than $191,000 ($188,000 for 2013). * Modified adjusted gross income (MAGI) is your adjusted gross income from your IRS federal Form 1040 or 1040A tax return with the following added back: any Traditional IRA deduction, foreign earned income exclusion, student loan interest deduction, tuition and fees deduction, foreign housing deduction or exclusion, U.S. savings bond interest exclusion, domestic production activities deduction, or adoption expenses. For Roth IRA purposes, MAGI also excludes any income reported from the conversion of a Traditional IRA to a Roth IRA. When can I make my IRA contributions? You can contribute to your IRA anytime during the current year for that particular tax year. In fact, you can make contributions up until the due date for filing your tax return for that tax year, not including extensions. For most people, that date is April 15. For example, you can make your 2013 tax year contribution anytime between January 1, 2013, and April 15, And you can make your 2014 tax year contribution any time between January 1, 2014, and April 15, You can make your annual contribution to your IRA all at once or divide it into smaller amounts on your own schedule, subject to your IRA administrator s minimum requirements. You do not have to contribute to your IRA every year, nor do you need to make the maximum allowable annual contribution. If you do contribute less than the maximum in any given year, you cannot make up the shortfall in a later year. What are some issues to consider before contributing to a Roth IRA? You may want to consider contributing to a Roth IRA if you are not eligible to make taxdeductible contributions to a Traditional IRA, but you are eligible to contribute to a Roth IRA. Earnings in a Roth IRA accumulate tax-free and also can be distributed tax-free if qualified. Roth IRAs also have more flexible early distribution rules than Traditional IRAs. You can take taxfree and penalty-free distributions up to the total amount of your annual contributions at any Page 3

4 time and for any reason. In addition, you are not required to begin taking mandatory distributions at age 70½ from a Roth IRA like you are with a Traditional IRA, so your savings can potentially accumulate tax-free much longer and you can take your money out on your own time. How much can I contribute to my IRA? You can contribute up to $5,500 for 2013 and for 2014 to an IRA, provided you earn at least that amount in compensation. If you are age 50 and older before the end of the year, you can make an additional $1,000 catch-up contribution, for a total of $6,500 for 2013 and for Keep in mind that your annual contributions cannot exceed your annual compensation. In addition, any contributions you make to one IRA type (Traditional and Roth IRAs) will reduce contributions you can make to another type of IRA. In other words, for 2014, you can contribute a combined total of up to $5,500 ($6,500 with catch-up) to both Traditional and Roth IRAs. If you have little or no compensation, but are married and your spouse has eligible compensation, you are eligible to contribute up to the annual individual limit to your own IRA, as long as you file a joint tax return and there is enough income to support both you and your spouse s IRA contributions. It is important to note that you and your spouse cannot jointly own an IRA. Excess contributions If you contribute more than the allowable amount for a given tax year (excess contribution) to your IRA or make an improper rollover (which are deemed to be regular contributions), you must withdraw the excess along with any earnings by the due date of your tax return, including extensions. If you don t, you ll owe a six percent penalty tax that will be assessed each year on any excess amount that remains in your account. Which one is best if I qualify for both a Traditional and a Roth IRA? When you are eligible to contribute to a Roth IRA and make tax-deductible contributions to a Traditional IRA, the decision of which one to contribute to often comes down to whether you d rather receive a tax break up front (Traditional IRA tax deduction) or later (tax-free Roth IRA distribution). Assuming you contribute the same amount to each type of IRA, it may come down to what you do with the money you save in taxes by making tax-deductible contributions to a Traditional IRA. Would you save the annual tax savings each year and invest it for retirement? Or would you spend it? If you do not invest the tax savings, a Roth IRA may provide more money after taxes at retirement. If you spent or did not invest the tax savings, it s not available to add to your retirement fund. You may be giving up a tax break today when you make Roth IRA contributions, but the payoff may be a larger retirement fund down the road. Page 4

5 If you invest the tax savings, your decision may be based on whether you think your tax bracket in retirement will increase, stay the same, fall slightly, or significantly decrease. If you think your income tax bracket during retirement will significantly decrease, you generally may pay less taxes on the Traditional IRA savings distributed during retirement than you would pay now on the income used to make Roth IRA contributions. In this scenario, you would shelter your current income from a higher tax rate by making tax-deductible Traditional IRA contributions and take your IRA withdrawals during retirement when you're in a lower tax bracket. But if you are not retiring soon, a Roth IRA s advantage of tax-free earnings and more flexible withdrawal rules may outweigh the tax savings from deductible contributions today. If you think your income tax bracket will be the same or higher during retirement, paying taxes on the income for Roth IRA contributions now, with the potential for tax-free earnings, may be a good option. No one can predict the tax rates in the future, so make sure you seek competent tax or financial planning advice if you re unsure which route is best for you. What are some things to consider before making nondeductible contributions to a Traditional IRA? If you are not eligible to contribute to a Roth IRA or make tax-deductible contributions to a Traditional IRA, you can still make nondeductible contributions to a Traditional IRA (as long as you have eligible compensation). Making nondeductible contributions to a Traditional IRA may be right for you if retirement is still several years away and you want to defer taxes on investments that would be subject to ordinary income taxes, such as mutual funds and stocks, if not contributed to a tax-deferred savings vehicle. Do I need an IRA if I have an employer-sponsored retirement plan? If you are participating in an employer-sponsored retirement plan, such as a 401(k), tax-sheltered annuity 403(b), or a governmental 457(b) plan, ideally you should contribute the maximum to both your plan and an IRA. But saving that much may not be realistic for many people. Specifically for 2014, you generally can defer up to $17,500 of your wages into your employer s retirement plan, plus an extra $5,500 catch-up contribution if you are age 50 or older ($17,500 for 2013, plus $5,500 in catch-up contributions). Meanwhile, the IRA maximum annual contribution for 2014 and 2013 is $5,500, plus an extra $1,000 catch-up contribution if you are eligible. You can contribute to IRAs and a retirement plan for the same year, but your eligibility to deduct a Traditional IRA contribution may be affected by your participation in a retirement plan. If your employer matches a percentage of your retirement plan contributions, many advisors recommend that you contribute at least enough to earn the full amount of the match before Page 5

6 contributing to an IRA. But if you want investment options that are not available in your employer s retirement plan, saving in an IRA may give you different investment options. IRAs also offer more flexible withdrawal provisions, allowing you to access your money any time you need to, subject to potential taxes and penalties; retirement plan distributions only are allowed upon certain triggering events. When can I withdraw money from my IRA? You can withdraw money from your IRA at any time, but the IRS generally assesses a 10 percent early distribution penalty tax on the taxable portion of any withdrawals you make before turning age 59½. This penalty tax is in addition to the income tax you ll owe on your earnings and on any deductible contributions you made. Am I eligible to receive the Saver s Tax Credit for my IRA contribution? Low- to moderate-income workers may be eligible for an income tax credit when saving for retirement. This credit reduces the federal income tax you owe dollar-for-dollar and is over and above any deduction or exclusion you may be entitled to for your retirement contributions. You are eligible for this credit if you meet the income limits and if you contribute to a Traditional IRA or Roth IRA, or made salary deferrals under a 401(k) plan, 403(b) plan, governmental 457(b) plan, federal Thrift Savings Plan, SEP plan, SIMPLE IRA plan, or SIMPLE 401(k) plan. You also must be at least 18 years old and not a full-time student or claimed as a dependent on another taxpayer s return. You must file IRA Form 8880, Credit for Qualified Retirement Savings Contributions, with your income tax return to claim the credit. EXAMPLE: Let s say you qualify for the maximum 50% credit and you contribute $2,500 in 2014 to an eligible retirement plan or IRA. You will reduce your tax bill by $1,000 in 2014 (50% of the first $2,000). Saver's Tax Credit for 2014 Applicable percentage Joint Return Head of Household All Other Cases* 50% Up to $36,000 Up to $27,000 Up to $18,000 20% $36,000 $39,000 $27,000 $29,250 $18,000 $19,500 10% $39,000 $60,000 $29,250 $45,000 $19,500 $30,000 0% Over $60,000 Over $45,000 Over $30,000 Saver's Tax Credit for 2013 Applicable Percentage Joint Return Head of Household All Other Cases* 50% Up to $35,500 Up to $26,625 Up to $17,750 20% $35,500 $38,500 $26,625 $28,875 $17,750 $19,250 Page 6

7 10% $38,500 $59,000 $28,875 $44,250 $19,250 $29,500 0% Over $59,000 Over $44,250 Over $29,500 * Includes single filers, married filing separately, and qualifying widow or widower. What types of early distributions are not subject to the 10 percent penalty tax? You can make tax-free and penalty-free early distributions from a Roth IRA up to the total amount of your annual contributions at any time and for any reason. But the earnings will be subject to tax and a 10 percent penalty tax unless you qualify for a penalty tax exception. The pretax portion of Traditional IRA distributions are subject to income tax and the 10 percent penalty tax unless a penalty tax exception applies. There are several ways you can avoid the 10 percent early distribution penalty tax on IRA distributions. The penalty tax does not apply if your distribution is taken for any of the following reasons (subject to certain restrictions). Payments to beneficiaries after an IRA owner s death Disability (permanently disabled under the IRS definition) First-time homebuyer expenses Unreimbursed medical expenses that exceed a certain amount of income Health insurance premiums during unemployment Qualified higher education expenses IRS levy Substantially equal periodic payments Qualified reservist distributions Can I move money between IRAs? You can move money from one IRA to another IRA of the same type as a transfer or a rollover. The transaction is tax-free if it is properly done. Changing investments within your IRA does not constitute a transfer or rollover. Transfer To move the money between your IRAs using a transfer, instruct your financial organization to move the money directly to an IRA you ve established with another financial organization. The money in your account never actually passes through your hands. You can transfer all of the money in your IRA or only a portion, as many times as you want. Rollover To move the money in your IRA using a rollover, your financial organization distributes the amount of money you choose from your IRA to you. Even if you plan to roll over the assets, the distribution still is subject to federal withholding, unless you elect to waive withholding. Once you receive the money, you have 60 days to roll over the money to an IRA to avoid paying tax on it. Page 7

8 If you miss the 60-day deadline, you cannot put the money back into an IRA. If you took a distribution from a Traditional IRA, you will be subject to federal income taxes (excluding nondeductible contributions) and a 10 percent early distribution penalty tax if you are younger than age 59½ and you do not qualify for a penalty tax exception. If you miss the 60-day deadline on a Roth-to-Roth IRA rollover, you may be taxed and penalized on any amount that exceeds the contributions you ve made to your Roth IRA. What are my options if I inherit an IRA? The options available to you as a beneficiary will depend on what the IRA plan agreement dictates. Even then, a number of factors will affect your choices, such as the type of IRA, the number of beneficiaries, whether or not you are the spouse of the IRA owner, and sometimes, the IRA owner s age at death. If you ve inherited a Traditional IRA, what you can do with the IRA will first depend on the IRA owner s age at the time of death. More specifically, did the IRA owner die before or after his required beginning date (RBD) for required minimum distributions? The RBD is the date that Traditional IRA owners must start taking annual distributions from their IRAs. The RBD is April 1 of the year following the year the IRA owner turns 70½. For example, if the IRA owner reached age 70½ in November 2013 (he turned 70 in May 2013), his 70½ year is Thus, his RBD is April 1, Federal law allows the following beneficiary distribution options, but check with your financial organization to see if all these options are available to you. If the IRA owner died before his RBD, you generally may have the choice of taking a lump-sum distribution, meaning you will have immediate access to the money but lose the tax-deferred benefits; taking annual distributions of at least a required minimum amount based on life expectancy; or taking distributions according to the five-year rule, meaning you can take out as much or as little as you want over the course of five years, as long as the IRA is totally depleted by December 31 of the year containing the fifth anniversary of the IRA owner s death. If the IRA owner died on or after his RBD, you generally may have the same choices as above except for the five-year rule. In either case, if you are a spouse beneficiary, you have the added option to transfer or roll over the inherited assets to your own IRA. (For this option, separate accounting must be established if you are one of multiple beneficiaries.) Please take note that this is only available to spouse beneficiaries. If you ve inherited a Roth IRA, you may have the same options that are available for Traditional IRAs when the IRA owner dies before her RBD. Roth IRA owners do not have RBDs; they are never required to take annual distributions. So, Roth IRA beneficiaries may have all these Page 8

9 distribution options available to them regardless of when the IRA owner died. And as with Traditional IRAs, the options depend on whether you are s spouse or nonspouse beneficiary. Inherited IRA assets that you withdraw are subject to income tax rules. Pretax assets distributed from Traditional IRAs and nonqualified assets from Roth IRAs (when the IRA owner did not reach a five-year holding period) generally are taxable, but the 10 percent early distribution penalty tax does not apply because death is a penalty tax exception. Depending on your specific financial situation and if the distribution is a significant amount, this could result in major tax consequences. Understanding your options and deadlines as a beneficiary is important because decisions you make now may be irrevocable down the road. FAQs are not intended to provide tax advice. Contact a tax professional. Traditional IRAs Am I eligible for a Traditional IRA? You are eligible to contribute to a Traditional IRA if you are under age 70½ and you (or your spouse if married, filing a joint tax return) have eligible compensation. For IRA purposes, eligible compensation generally is defined as what you earn from working and includes wages, salary, tips, commissions, bonuses, and self-employment income, but not investment or pension income. Traditional IRA eligibility is not affected by whether you are covered by an employersponsored retirement plan. How do tax-deductible contributions help me save for retirement? If you can deduct contributions to a Traditional IRA, you will receive a tax break up front, thereby reducing your taxable income in that year. Let s assume you re in the 25 percent federal marginal tax bracket for the 2014 tax year and you make the maximum annual IRA contribution of $5,500; you essentially might save $1,375 in current-year federal taxes. The bottom line is that after tax, your $5,500 contribution actually only costs you $3,625. In addition to the up-front tax break, money in a Traditional IRA accumulates tax-deferred, which means that until the year you withdraw the money, you won t have to pay taxes on it. At the time that you do withdraw the money, both your deductible contributions and earnings will be taxed at your regular income tax rate, which may be higher or lower at retirement. Why would I make nondeductible contributions to a Traditional IRA? Making a nondeductible contribution to a Traditional IRA may be your only IRA option if you make too much money to contribute to a Roth IRA and you are not eligible to make deductible contributions to a Traditional IRA. There still are benefits to making IRA contributions. Regardless of whether you were able to deduct your Traditional IRA contribution, the earnings Page 9

10 accumulate tax-deferred and therefore, will not be taxed until you take money out of your IRA. And because your contributions were not tax-deductible, when you withdraw the money later, you won t owe any tax on the nondeductible contribution portion of that withdrawal. For any year that you do not deduct your Traditional IRA contributions, you will need to file IRS Form 8606, Nondeductible IRAs, with your tax return to let the IRS know that your contribution was nondeductible. Failing to file this form may result in double taxation and possible penalties. How do I know if I am eligible to make tax-deductible contributions? Assuming you are under age 70½ and you have eligible compensation, your eligibility to take a tax deduction for a Traditional IRA contribution depends on your modified adjusted gross income (MAGI)*, tax filing status, and whether you or your spouse actively participate in an employer-sponsored retirement plan. If neither you nor your spouse is an active participant, you are eligible to deduct your full contribution. Otherwise, refer to the chart below to determine how much of a deduction you may take. Tax-Filing Status Active Participant Year Full Deduction if MAGI is Single Yes 2013 $59,000 or less 2014 $60,000 or less Married, Yes 2013 $95,000 or filing jointly less 2014 $96,000 or less Married, No, but 2013 $178,000 or filing jointly spouse is less 2014 $181,000 or less Partial Deduction if MAGI is No Deduction if MAGI is $59,000 $69,000 $69,000 or more $60,000 $70,000 $70,000 or more $95,000 $115,000 $115,000 or more $96,000 $116,000 $116,000 or more $178,000 $188,000 $188,000 or more $181,000 $191,000 $191,000 or more * Modified adjusted gross income (MAGI) is your adjusted gross income before certain deductions or adjustments to income. Can I withdraw money from my IRA before age 59½? Because Congress created Traditional IRAs as a tax-deferred way to save for retirement, most distributions from a Traditional IRA will be taxed as ordinary income and an additional 10 percent early distribution penalty tax may apply if the money is taken out before you reach age 59½ (six months after your 59th birthday). The early distribution penalty tax does not apply if your distribution is taken for any of the following reasons (subject to certain restrictions). Payments to beneficiaries after an IRA owner s death Disability (permanently disabled under the IRS definition) First-time homebuyer expenses Unreimbursed medical expenses that exceed a certain amount of income Page 10

11 Health insurance premiums during unemployment Qualified higher education expenses IRS levy Substantially equal periodic payments Qualified reservist distributions Once you reach age 59½, you can withdraw money from your Traditional IRA for any reason without having to pay the 10 percent early distribution penalty tax. Why and when must I start taking money from my Traditional IRA? Congress created Traditional IRAs as a tax-favored way to save for retirement, not as a way to permanently shelter savings from income taxes. Consequently, the law requires you to start distributing your Traditional IRA assets once you reach a certain age. You must begin taking money out annually once you turn age 70½. You must take your first payment by April 1 of the year following the year in which you reach age 70½. This is called your required beginning date (RBD). These annual minimum payments are called required minimum distributions (RMDs). For years after your RBD, you are required to take RMDs by December 31 of each year. You can always withdraw more than the minimum amount, but if you do not take at least the RMD amount, you may be subject to a 50 percent excess accumulation penalty tax on the amount you did not take. What are the general rules and penalties for RMDs? Each year, beginning with your 70½ year, the financial organization administering your IRA must notify you that an RMD is due. If it does not provide the RMD amount within this notice, it must offer to calculate the amount for you. In addition, financial organizations are required to annually notify the IRS of all IRAs that are subject to RMDs. You are then responsible for ensuring that your RMD is satisfied each year. You can always withdraw more than the RMD amount, but if you do not take at least the RMD amount, you may be subject to a 50 percent excess accumulation penalty tax on the amount you did not take. How is my RMD calculated? Your RMD is calculated each year by dividing the prior year-end balance in your Traditional IRA by your life expectancy factor. You can refer to the IRS Uniform Lifetime Table in IRS Publication 590, Individual Retirement Arrangements (IRAs), to get the life expectancy factor that is based on your age in the distribution year. If your spouse happens to be more than 10 years younger than you and is the sole beneficiary of your IRA, you can use the joint life expectancy factor from the IRS Joint Life Expectancy Table (also found in Publication 590). What things should I think about if I am considering taking substantially equal periodic payments? Page 11

12 Consider the payment size Substantially equal periodic payments is a distribution method some taxpayers elect when they need to access their IRA money before they reach age 59½. Before you use the periodic payment exception, consider that the size of your payments may be relatively small, unless you have a substantial IRA balance. Payments are calculated based on your life expectancy, and your life expectancy is still quite long when you re under age 59½. Therefore, if you think you ll need more than small amounts of money doled out regularly, these payments might not be enough to meet your needs. Consider other alternatives Before using the periodic payment exception, consider your other alternatives. If you need the money because you re taking early retirement, consider the possibility you may return to work at a later date and no longer need the income. Or if you are still relatively young or you only need money for a one-time expense, consider postponing the expense until you reach age 59½, especially if that s not too far off. If that s not possible, consider making a single early withdrawal, paying the 10 percent tax, and leaving the rest of your IRA intact to grow tax-deferred. If you elect the periodic payment option, you will be required to distribute a specific annual amount from your IRA for several years. Consider other sources of money too. For example, if you plan to leave your job when you reach age 55 or later and you have a 401(k) plan, you can tap into your 401(k) plan without incurring an early distribution penalty tax. Decide on a distribution method The IRS provides different distribution methods by which you can receive payments, and pros and cons to each, so make sure you get the details. Also consider consulting with a financial representative or tax advisor experienced in IRA distributions, especially if your IRA balance is substantial. The payment method that s appropriate for you somewhat depends on whether you want to minimize or maximize the size of your payments. Although you may initially consider a method that calculates larger payments, you ll deplete your IRA faster and lose the benefit of future taxdeferred growth. And if it turns out that you don t need the larger payments after all, you cannot put your withdrawals back into your IRA or roll them over to an IRA or other retirement plan. Keep in mind that when you do begin to take payments, you not your IRA custodian are responsible for making sure you take the right amount each year. Keep good records and documentation for any follow-up questions. Consider income taxes When deciding to use the periodic payment exception, also consider the income taxes you will owe on the distributions. Although you ll avoid the 10 percent penalty tax, you still have to pay Page 12

13 ordinary income taxes on the taxable portion of each withdrawal; the larger your payments, the more tax you ll owe. You may have to pay estimated income taxes on the payments. Do I still have to take an RMD if I don t need the money? Even if you don t need the money from your Traditional IRA, you still must take your RMD. If I name a trust as the beneficiary of my IRA, does that change how my RMD is calculated? No. You still will use the Uniform Lifetime Table to calculate your RMD. If I name a charity as my beneficiary, does that change the calculation of my RMD? No. You still will use the Uniform Lifetime Table to calculate your RMD. FAQs are not intended to provide tax advice. Contact a tax professional Roth IRAs Am I eligible to contribute to a Roth IRA? You are eligible to contribute to a Roth IRA if you (or your spouse if married and filing a joint tax return) have eligible compensation. For IRA purposes, compensation generally is defined as what you earn from working and includes wages, salary, tips, commissions, bonuses, and selfemployment income, but not investment or pension income. You also must meet the modified adjusted gross income (MAGI)* limits (refer to the chart below). Tax-Filing Status Year Full Contribution if MAGI is Partial Contribution if MAGI is No contribution if MAGI is Single 2013 $112,000 or less $112,000 $127,000 $127,000 or more 2014 $114,000 or less $114,000 $129,000 $129,000 or more Married, 2013 $178,000 or less $178,000 $188,000 $188,000 or more filing jointly 2014 $181,000 or less $181,000 $191,000 $191,000 or more Married, filing 2013 N/A $0 $10,000 $10,000 or more separately 2014 N/A $0 $10,000 $10,000 or more * Modified adjusted gross income (MAGI) is your adjusted gross income before certain deductions or adjustments to income. If I have no income but my spouse does, can I contribute to a Roth IRA? Page 13

14 In this situation, you can contribute to a Roth IRA if you and your spouse file a joint income tax return, and your spouse has enough income to cover both your and his IRA contributions. The modified adjusted gross income restrictions apply. What advantages do Roth IRAs have over Traditional IRAs? One of the greatest benefits you get from a Roth IRA is that you don t have to pay tax on the earnings that accumulate if you have a qualified distribution. Also you can allow your money to accumulate tax-free for as long as you want, and if you should need to dip into the money early, you can take your contribution amounts out tax- and penalty-free regardless of whether your distribution is qualified. As a Roth IRA owner, you can withdraw up to the total amount of your annual contributions (as opposed to any amounts you converted to a Roth IRA) at any time and for any reason tax-free and penalty-free. Plus, if you satisfy certain requirements for a qualified distribution, you can withdraw any earnings on the Roth IRA tax-free. Unlike Traditional IRAs, you also do not have to take required minimum distributions (RMDs) when you reach a certain age. Thus, you can let your savings accumulate tax-free longer and remove your money at your discretion. In addition, you can even leave your Roth IRA assets to your beneficiaries who also will receive tax-free distributions if qualified. Although RMDs are not mandatory during the IRA owner s lifetime, they are a requirement for Roth IRA beneficiaries. How can I withdraw money from my Roth IRA tax-free? Because regular contributions you make to a Roth IRA are never tax-deductible, you can withdraw those amounts at any time and for any reason without tax or penalty tax consequence. The earnings, however, grow tax-deferred and can only be withdrawn tax-free if you have a qualified distribution. To be qualified, you must have owned a Roth IRA for at least five years (beginning with January 1 of the tax year for which you made your first Roth IRA contribution/conversion to any Roth IRA) and you are a first-time homebuyer (subject to certain restrictions), age 59½, or disabled. For example, if you first made a Roth IRA contribution on April 1, 2010, for the 2009 tax year, your five-year clock started on January 1, Let s say that in 2014, you are age 63. You ve then met both the five-year requirement and age 59½ requirement, so you can take a qualified distribution. Your beneficiaries also may take tax- and penalty-free distributions after you die as long as the Roth IRA owner met the five-year requirement. What happens if I take an early or nonqualified distribution from my Roth IRA? Page 14

15 When you take money from your Roth IRA, it comes out in a certain order. The Roth IRA ordering rules dictate that the first dollars to leave your Roth IRA are any regular contributions you ve made. These always come out tax- and penalty-free, whether the distribution is qualified or nonqualified. The next dollars distributed are any conversion assets (amounts you converted from your Traditional IRA or rolled over from an employer-sponsored retirement plan), in the order you converted them (by year). These amounts may be subject to early distribution penalty taxes, depending on when the conversion or rollover took place, and whether you have a penalty tax exception. Each conversion and rollover has its own five-year period separate from the Roth IRA five-year period, and each must be met to avoid an early distribution penalty tax on a nonqualified distribution. Once your conversions are exhausted, distributions will dip into your earnings. When you remove earnings in a nonqualified distribution, the earnings will be taxed and are subject to the early distribution penalty tax, unless you meet a penalty tax exception. If you have more than one Roth IRA, the contribution dollars, conversion dollars, and earnings in all of your Roth IRAs are aggregated for purposes of these ordering rules. For example, John owns two Roth IRAs and each one contains $5,000 in contributions ($10,000 total), $2,000 in conversion amounts ($4,000 total), and $500 in earnings ($1,000 total). He wants to take a $13,000 distribution. That distribution is made up of $10,000 in contribution dollars and $3,000 of conversion dollars. The next time he takes a distribution, the first money to come out will be from the remaining conversion dollars, assuming that he does not make any more contributions to either of his Roth IRAs. You must track the assets in your Roth IRA for purposes of the ordering rules, and you must complete the appropriate IRS tax forms to file and pay any taxes due with your income tax return. Am I eligible to convert my Traditional IRA to a Roth IRA? As of January 1, 2010, anyone can convert a Traditional IRA to a Roth IRA, regardless of income and tax-filing status. Any pretax portion of your Traditional IRA (deductible contributions and earnings) that you convert is taxable in the year of the conversion. Special tax rules apply to 2010 conversions only. Unless you elected otherwise, a 2010 conversion will be divided equally and included in your income in 2011 and Why would I want to convert my Traditional IRA to a Roth IRA? Probably the most common reason for converting to a Roth IRA is the potential for tax-free distributions. Page 15

16 Flexibility is another attraction of the Roth IRA. If you find that you really need the money for an emergency or unforeseen expense, you can withdraw regular contributions from a Roth IRA tax- and penalty-free at any time and for any reason because you paid the taxes at the time of the conversion. Another reason converting to a Roth IRA may be appealing is that you do not have to take required minimum distributions (RMDs) when you reach a certain age, as is the case with Traditional IRAs. Thus, you can let your savings accumulate tax-free longer and remove your money at your own discretion. You may want to seek professional tax advice to determine if converting to a Roth IRA is right for you. What should I consider before converting my Traditional IRA to a Roth IRA? When converting assets from a Traditional IRA to a Roth IRA, you must pay tax on any portion that has not already been taxed. In other words, the taxable amount that you convert will be included in your taxable income in the year of the conversion. As a result, a conversion may bump you into a higher tax bracket. The extra income from the conversion may also affect your eligibility for some tax breaks or financial aid. One alternative for lowering your annual taxable income from the conversion is to do partial conversions over several years. Can I roll over assets from my employer-sponsored retirement plan to a Roth IRA? Yes. You may roll over your employer-sponsored retirement plan savings to a Roth IRA. Like with IRA conversions, any pretax amounts rolled over to a Roth IRA must be included in your taxable income in the year they are distributed from your employer s plan. If you have made designated Roth contributions to your employer-sponsored retirement plan, you also may roll over those assets to a Roth IRA (but not to a Traditional IRA). The five-year period of your Roth IRA applies to those assets once they re rolled over in the case of a nonqualified distribution from your employer s plan. If you take a qualified distribution from your designated Roth account, the assets are rolled into your Roth IRA as contributions, so you will not be taxed on them again even if you take a nonqualified distribution from your Roth IRA. SEP Plans What is a SEP Plan? A simplified employee pension (SEP) plan is an employer-funded retirement plan that allows employers or self-employed individuals the option to make contributions into their own and each eligible employee s Traditional IRA. What type of business is eligible to set up a SEP plan? Page 16

17 SEP plans are available to all types of businesses, including sole proprietorships, partnerships, and corporations, as well as individuals with self-employment income. The employer establishes the SEP plan and determines how to apply the IRS-allowed eligibility requirements to its employees. Your employer can even establish a Traditional IRA to receive SEP contributions on behalf of an employee who is unable or unwilling to establish an IRA. Who is eligible to participate in a SEP plan? Your employer may require employees to meet the following criteria to be eligible. Be at least age 21 Have worked for the employer during at least three of the preceding five years (for any period of time, however short) Have earned at least $550 in compensation from the employer for the year. Not be covered under a collective bargaining agreement In addition, your employer can exclude employees who are nonresident aliens with no U.S. earned income. Your employer can use less restrictive requirements or have no eligibility requirements at all. But employers cannot make these requirements any more restrictive. For example, your employer cannot require that employees be at least age 25, but could set the minimum age at 18. What is the SEP contribution deadline? Your employer must notify all eligible employees of the contribution amount by January 31 of the year following the year for which the contribution was made, or within 30 days of the contribution, whichever is later. Your employer has until its federal tax return due date, including extensions, to make contributions. What is the SEP contribution limit? For 2014, the maximum annual SEP contribution that your employer can make to your Traditional IRA is 25 percent of your annual compensation up to a maximum contribution of $52,000 ($51,000 for 2013). For employees, compensation generally is defined as the income reported on the employee s Form W-2 statement. For self-employed individuals, compensation generally is defined as net business income from the business sponsoring the SEP plan. The maximum amount of compensation that can be considered in computing SEP contributions in 2014 is $260,000 ($255,000 for 2013). Can I still make a regular Traditional IRA contribution if I m participating in a SEP plan? Yes. If you are under age 70½ and have eligible compensation, you may contribute to a Traditional IRA in addition to receiving SEP plan contributions (or other employer-sponsored Page 17

18 retirement plan contributions). But your ability to take a tax deduction for your Traditional IRA contribution may be affected because you will be considered an active participant in an employer-sponsored retirement plan. How do SEP plans benefit employers? Employers offering a SEP plan can chose whether to make SEP plan contributions every year. This flexibility allows them to still offer a retirement plan benefit to employees, but does not lock them in to making contributions in a year that they cannot afford to. And because they have until their federal income tax return deadline for the year to make contributions, they can determine profits each year before deciding whether to contribute. Employers have less reporting, fiduciary liability, and administrative costs with SEP plans than they do with other employer-sponsored retirement plans. In addition, they may receive a tax credit for establishing the plan and a tax deduction for making contributions. How do SEP plans benefit employees? As an employee, a SEP plan offers you immediate vesting and access to your contributions. Any SEP contribution your employer makes to your Traditional IRA belongs to you, even after you leave employment. IRAs that receive SEP contributions are portable, meaning that you can move your IRA assets to any other financial organization that offers IRAs. Also, you choose the investments for your SEP plan assets from those offered by the financial organization that administers your IRA. And your employer can continue to make SEP plan contributions until you retire or leave employment, regardless of how old you are. What are the rules for withdrawing money from a SEP plan? Because SEP contributions go into your Traditional IRA, the Traditional IRA distribution rules apply, including the early distribution penalty tax and required minimum distribution (RMD) rules. Any amounts distributed generally are taxable to you. Early Distribution Penalty Tax IRAs and retirement plans were created to encourage individuals to save for retirement. For this reason, the law generally imposes a 10 percent penalty tax on the taxable portion of any distributions you take from your IRA before turning age 59½. This penalty tax is in addition to the income tax you ll owe on your distribution. Required Minimum Distributions Like all Traditional IRAs, Traditional IRAs containing SEP plan contributions are subject to the RMD rules. The rules state that by April 1 of the year following the year in which you attain age 70½, you must start taking an RMD. Each year after that, you must take your RMD by December 31. You can always withdraw more than the RMD amount, but if you do not take out at least the RMD amount, you will be subject to a 50 percent excess accumulation penalty tax on the amount you did not distribute. Page 18

19 FAQs are not intended to provide tax advice. Contact a tax professional. Beneficiary Designations Must I name a beneficiary for my IRA? You are not required by law to name beneficiaries for your IRA. But if you do not name beneficiaries for your IRA, you risk having your IRA assets paid to unintended recipients. In most cases, and depending on the IRA plan agreement, without a named beneficiary, your IRA assets will pass to your estate upon your death and may need to go through probate. You should refer to the terms of your IRA plan agreement to verify how your IRA assets will be distributed upon your death. May I name more than one beneficiary for my IRA? Yes. You may name multiple beneficiaries for your IRA. Under many beneficiary designation forms, if you name multiple primary beneficiaries on your IRA, each primary beneficiary who is alive at the time of your death will receive a portion of your IRA. If a beneficiary predeceases you, the portion that you assigned to that beneficiary will be split among your remaining primary beneficiaries the assigned portion will not pass to the deceased beneficiary s heirs. Can I name another beneficiary as back-up in case my designated beneficiary dies? Although the specific terms governing contingent beneficiaries designations can vary, many financial organizations allow the naming of contingent beneficiaries. A contingent beneficiary generally is a beneficiary who will receive your IRA assets upon your death only if all of your primary beneficiaries die before you. Naming one or more contingent beneficiary for your IRA may be a good back-up plan in the event you forget to update your beneficiary designation upon the death of your primary beneficiary. Before naming contingent beneficiaries, however, be sure to read the terms of the beneficiary designation form carefully so you understand the circumstances under which the contingent beneficiary will be eligible to receive your IRA assets. Is spousal consent required for a beneficiary designation? Some states have adopted community property or marital property laws that will give ownership of some of your IRA assets to your living spouse if he has not provided written consent that waives inheritance of the IRA assets. If you live in a state that has such laws or if your IRA is maintained in such a state, you should familiarize yourself with the spousal consent requirements before naming someone other than your spouse as the primary beneficiary of your IRA. States that have community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Alaska (upon election). Wisconsin also has laws based on key community property principles. May I name a charitable organization as my IRA beneficiary? Page 19

20 Yes. Under most IRA plans, you are permitted to name any individual or entity you desire as the beneficiary of your IRA. Can my overall estate planning strategy be significantly affected by my IRA beneficiary designation(s)? Yes. Your selection of whom you will name as your primary and contingent IRA beneficiaries can significantly affect your overall estate planning strategy. A comprehensive estate planning strategy will take into account your IRA assets and their unique impact on your overall estate. Are there potential drawbacks to naming my estate as the beneficiary of my IRA? Yes. Even if the beneficiaries of your estate are the same as the beneficiaries you would name for your IRA, there is a difference in how and when they can access the assets, and potentially on the taxes they will pay. While it is permissible to name your estate as the beneficiary of your IRA, doing so generally may subject your IRA assets to probate, a process that could significantly delay your beneficiaries access to your assets. Also, if an estate is the beneficiary of an IRA, the assets may be required to be distributed more quickly than if the estate s beneficiaries were named directly under the IRA. This is because an estate does not have a life expectancy under which single life expectancy payments may be calculated, potentially resulting in less time to benefit from tax-deferred or potential tax-free gains. Transfers and Rollovers Between IRAs How can I move my IRA assets from one financial organization to another? Moving your IRA assets from one financial organization to another can be done as a transfer or a rollover. In a transfer, your IRA assets are sent directly from your current financial organization to your new financial organization (i.e., the IRA assets are not distributed to you). In a rollover, your IRA assets are distributed to you and you must subsequently redeposit them into an IRA within 60 days to avoid taxation. There are restrictions on how frequently you may roll over your IRA assets, but there are no restrictions on how often you can transfer your IRA assets. What is the primary difference between a transfer and a rollover? In the case of a transfer, an individual s IRA assets generally are transferred directly from one financial organization to another. Because IRA assets are not paid to you, transfers are not reported to the IRS. With a rollover, on the other hand, IRA assets generally are paid to you and then you must redeposit the assets into an IRA within 60 days to avoid taxation. Because assets are distributed to you, financial organizations must report rollovers to the IRS and you must report the rollover to the IRS on your federal income tax return, even though a completed rollover is a nontaxable event. Are nontaxable transfers between IRAs reported to the IRS? Page 20

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