Planning for Retirement Needs. Individual Retirement Arrangements Chapter 17

Transcription

1 Planning for Retirement Needs Individual Retirement Arrangements Chapter 17

2 Overview Overview Contribution limits Traditional IRA rules Roth IRAs Nondeductible contributions Tax-free distributions

3 Overview of IRA Rules Maximum annual limit Traditional IRAs Deductible Nondeductible contributions Roth IRAs Nondeductible contributions Tax-free distributions

4 Maximum Annual Contributions (2013) Lesser of $5,500 (2013) or 100% of earnings from employment $1,000 additional catch-up for those over 50 Limit applies to all plans (IRA and Roth) in aggregate

5 Compensation Earnings from personal services Does not include investment earnings Alimony does count Liberal rules for self-employment

6 Spousal IRA Married nonworking person can still make maximum contribution as long as: joint income at least equals IRA contributions Married filing jointly Spouse earns less than taxpayer

7 Contribution Requirements Must be in cash Due date of the tax return no extensions

8 IRA Contributions Must be under age 70-1/2 Must have compensation from employment Meet these conditions can always make nondeductible contributions If single and not active participant (or married and neither spouse is active participant) can always make deductible contribution

9 IRA Deduction Phaseouts Deduction phased out if individual is active participant and earnings exceed Single $58,000 to $68,000 (2013) Married filing joint $92,000 to $112,000 (2013) Deduction phased out if individual is not active participant but spouse is and they file jointly and earnings exceed $173,000 - $183,000 (2013) See Tables 1.2 and 1.3 in IRS Publication 590

10 Active-Participant Status Any tax-advantaged plan (not nonqualified) Any portion of the plan year ending with or within the individual tax year Defined benefit active unless excluded from plan s eligibility provisions Defined contribution must receive allocation of contribution or forfeiture W-2 form has box for active participant status

11 Active Participant for 2012? 1. Individual makes salary deferrals to a calendar-year 401(k) plan in the month of January 2012, then terminates employment? 2. Individual first participates on July 1, 2012, in a plan with a July 1 to June 30 plan year? 3. Individual participates in a calendar year profit-sharing plan and no contributions are made until June of 2013?

12 Active Participant for 2013? 1. Yes, salary deferrals count as employer contributions and participating for any part of the year counts for active participant status. 2. No. Active participant for the calendar year in which the plan year ends. 3. No. Special rule for discretionary profit sharing plans. Not an active participant until the following year so that the participant can determine eligibility by April 15 th.

13 Required for Calculating Deductible IRA Active participant status for individual and spouse Age Filing status Determine adjusted AGI Determine indexed phaseouts for year in question Determined full, partial, or no deduction

14 Roth IRA Nondeductible contributions of the lesser of $5,000 or compensation (no age limit) Same catch-up as with traditional IRA Aggregate all IRAs and Roth IRAs Phaseout based only on income Spousal IRAs allowed

15 Roth IRA Contribution Phase out Ranges Roth Contributions are never deductible Singles with AGI between $112,000 and $127,000 (2013) Married filing jointly between $178,000 and $188,000 (2013)

16 Roth IRA Qualifying Distributions 5-year requirement : o Made after 5 tax years have passed o Start with first tax year for which contribution is made o Start with first Roth IRA established Trigger event : o Age 59-1/2 o Death o Disabled o First-time homebuyer

17 Nonqualifed Distributions Contributions withdrawn first Earnings taxed as with traditional IRA Income tax 10 percent early-withdrawal penalty 10 percent penalty within 5 years of conversion

18 Excess Contributions More likely in a Roth IRA 6 percent penalty each tax year Can withdraw before tax-year due date without penalty (must withdraw interest) Roth excess contributions may be eligible to be recharacterized into regular IRA contributions.

19 Required Roth IRA Distributions Age 70-1/2 distributions do not apply After death, payable over 5 years or over life expectancy Spousal rollover is allowed Spouse steps into participant s shoes No distributions required to spouse

20 Rollovers in Roth IRAs Roth IRA to Roth IRA IRA to Roth IRA conversion Income tax paid but no 10-percent penalty Starting 2008 convert from qualified plan to Roth Before 2010 can t if adjusted AGI exceeds $100,000 or if married filing separately Can someone who makes $1M a year in salary place $5K into a Roth?? Think about it...

21 IRA Roth IRA spousal IRA excess contribution active participant rollover trustee-to-trustee transfer direct rollover Vocabulary

22 True/False Questions 1. The maximum annual contribution to an IRA or Roth IRA in 2012 is the lesser of $5,000 or 100 percent of compensation for a participant who has not yet attained age Although a contribution may be made to an IRA after age 70-1/2, the contribution is not deductible. 3. A single individual with AGI of more than $150,000 will never be able to take an IRA deduction.

23 True/False Questions 4. Compensation does not include pension and investment income in determining whether an individual has income that can be used to support an IRA contribution. 5. An IRA contribution made on June 1, 2013, is deductible for 2012 as long as the individual filed for an extension of his or her tax return. 6. The maximum contribution to a spousal IRA for a nonworking spouse depends on the amount of the contribution for the working spouse.

24 True/False Questions 7. If a worker is an active participant but his nonworking spouse is not a $5,000 deductible contribution can be made to a spousal IRA if the couple s AGI is $140, A participant who established a Roth IRA in 2006 may withdraw the entire account (which includes some investment earnings) tax-free in the year 2009, as long as he or she is over age 59-1/2. 9. A single person who is an active participant and who has AGI of $85,000 can make a $5,000 Roth IRA contribution in 2009.

25 Chapter 17 Review IRA Contributions Employment earnings Self employment ok Exception for spousal IRA Investment/pension not ok Contribution requirements Cash By following April 15 Excess contribution subject to 6% excise tax Recharacterization Aggregate IRA/Roth limits Lesser of $5,000 or compensation $1,000 catch-up age 50 IRA nondeductible Compensation Under age 70 1/2

26 Chapter 17 Review IRA deductible Always deductible if not active participant (and spouse) If active participant must know tax filing status and income If spouse active participant higher income phaseout Active participant Tax advantaged plan DC must get allocation DB simply eligible Roth IRA Eligibility based on income and tax filing status only Conversion Results in income tax Withdrawals in first 5 years subject to 72(t) penalty In 2009 must have $100,000 AGI 2010 no cap

27 Case Study Facts Alex, currently age 55, has one Roth IRA that began in It currently has contributions of $22,000 and a balance of $40,000. He has not taken any distributions. Questions What are the tax ramifications if Alex withdraws $15,000 for his son s college education? What are the tax ramifications if Alex withdraws $40,000 for his son s college education?

28 Responses If Alex withdraws $15,000 there are no income tax consequences. Basis ($22,000) can be withdrawn first without incurring income tax. At $40,000 Alex is withdrawing more than basis. Since this is not a qualified distribution (no triggering event) $18,000 will be subject to income tax as well as the Sec. 72(t) penalty tax. The penalty tax does not apply since the education exception is applicable in this case.

29 Case Study Facts Rita, now age 60, has one Roth IRA, she first made a contribution for It currently has contributions of $32,000 and a balance of $57,000. She has not taken any distributions. Questions Would a distribution now be a qualifying distribution? What are the other triggering events that could result in a qualified distribution? If Rita had started a second Roth IRA in 2004 would it be eligible for a qualifying distribution?

30 Responses Any withdrawals would be qualifying tax-free distributions satisfies the 5 year requirement and age 59 ½ triggering event Other triggering events include Death Disability $10,000 of first time homebuying expenses. Yes, distribution from second Roth IRA is qualifying distribution. 5 year period starts with first Roth IRA.

31 Question: In 2013 Joe, who is single, contributes $5,000 to a Roth IRA. However, at the end of the year his AGI turns out to be $130,000. What happens?

32 Answer: Maximum contribution is reduced by one third Contribution that exceeds limit (excess contribution) plus earnings must be withdrawn by tax return due date to avoid 6% excise tax Or can recharacterize as traditional IRA

33 Question: What is Joe s maximum deductible IRA contribution for He is single, age 35, is not an active participant in an employer plan, and has adjusted gross income of $250,000.

34 Answer: Since he is not an active participant the income phaseout rules do not apply and he can make a $5,000 deductible contribution. Answer is more complex if he is married, you would have to ask if the spouse is active participant. With a Roth IRA the answer is different. He could not make a Roth contribution because he earns too much.

35 Question: What is Jim s maximum deductible IRA contribution for 2012? He is single, age 54, an active participant in an employer plan, and has adjusted gross income of $60,000.

36 Answer: His income falls right in the middle of the $10,000 phaseout range. The maximum deductible contribution is reduced by ½. Since he exceeds age 50 the deductible contribution is $3,000 for 2009.

37 Question: Cindy, married to Brian, is an active participant. Brian is not in a retirement plan. They file jointly and their AGI for 2009 is $140,000. Neither have attained age 50. What can they each contribute to a traditional IRA for 2009 and are the contributions deductible?

38 Answer: Cindy can contribute $5,000 on a nondeductible basis Brian can have a deductible IRA contribution of $5,000