General Taxability (Contributions)

Transcription

1 Tax Aspects of Individual Retirement Accounts & Valuation of Retirement Accounts in Divorces Presented by: Erin Spiwak, CPA, John VanDuzer, CPA, Kim Hardy, CPA/ABV/CFF, CVA, Mike Carignan May 28, 2015 General Taxability (Contributions) Traditional Taxability Pre-Tax After-Tax Contribution Limit (2015) $5,500 $5,500 Catch up (50 +) $1,000 $1,000 Income Limitation (MFJ) Non-Deductible: None Deductible: No retirement plan None (T) retirement plan - $98,000 + phase out) (S) retirement plan - $183,00 + phase out) Roth $183,000 (+ phase out) Due Date April 15 (following year) April 15 (following year) 1

2 General Taxability (Distributions) Roth IRAs Qualified distributions are non-taxable Must have had Roth IRA for > 5 Years Owner must be older than 59.5 Years Can take early distributions if owner is disabled or purchasing first home. Non-qualified distributions are taxable to extent distribution exceeds basis. No minimum required distributions (MRD) General Taxability (Distributions Continued) Traditional IRAs Distributions in Traditional IRAs non-taxable only to extent of allocable basis. Subject to early withdrawal penalties if distributions made under 59.5 (applicable to both Roth and Traditional IRAs) Subject to Minimum Required Distribution (MRD) 2

3 General Taxability (Conversions) A Traditional IRA can be converted to Roth IRA Income recognized on conversion to extent that the amount exceeds allocable basis. No early withdrawal penalty on conversion. However, subsequent Roth IRA distributions subject to penalty if made sooner than 5 years. Conversions can be made using 60 day distribution rule for rollovers. Back Door Roth IRA Contribution Is the taxpayer s income too high to contribute yearly to a Roth IRA? Back door contribution is available. Cannot have another traditional IRA account If you do, roll it into a 401(k) Make nondeductible contribution to traditional and convert next day to Roth IRA Allowed because no income limitation on Roth IRA conversion 3

4 Minimum Required Distributions (MRD) During owner s life Must be made in the year after the taxpayer turns 70 ½. (You can double up in first year.) Amount is calculated based on life expectancy and balance at December 31 of the previous year. 50% excise penalty applies if distribution is not made. Can be waived with reasonable cause MRDs After Owner s Life Beneficiary Decedent > 70.5 Decedent < 70.5 Spouse Can roll IRA into own IRA. Can elect either decedent s or spouse s life expectancy for MRD calculation. Non-Spouse (e.g. child) No beneficiary or estate/trust as beneficiary IRA must be distributed based on oldest beneficiary s expected life span. Can use decedents life span instead. Roll over must be trustee to trustee transfer. IRA must be distributed based on owner s life expectancy at date of death. Can roll IRA into own IRA. Distributions can be deferred until year in which Decedent would have turned 70.5 IRA must be distributed based on oldest beneficiary s life span. 5 year rule if elected or distributions not made in the year following death. Roll over must be trustee to trustee transfer Entire IRA must be distributed within 5 years of owner s death. 4

5 IRA Taxation in Divorce Transfer of IRA interest is non-taxable. Must be made pursuant to divorce decree or separate maintenance. Transfer is taxable if made pursuant to other agreement such as written separation agreement or temporary support order. No QDRO requirement If owner is subject to MRD and transferee would not be, transferred IRA would not be subject to MRD. IRA Estate Planning Considerations No basis step-up for IRA assets Double tax potential Beneficiary challenges Would my spouse do with my assets as I intended? Trust limitations Estate liquidity and use of life insurance 5

6 Mike Carignan A financial advisor s perspective IRA Tax Fundamentals and Strategies 6

7 Today s Objectives Today I ll demonstrate how clients can improve their legacy by describing what IRA investors typically do, & comparing it to two simple but powerful ideas 13 The dilemma Many people who have been successful in saving for retirement have established a large enough nest-egg to be able to create a legacy for their children, grandchildren and favorite charities, leaving them to wonder how to best leverage their qualified or tax advantaged retirement plans. A common question is whether IRA owners should take larger withdrawals and pay income taxes now, or whether they should take out as little as possible during their lifetime, leaving a likely income tax burden for their heirs and beneficiaries. 14 7

8 Income in Respect of a Decedent IRD: The Bad News Is No step-up in basis at death 2. Beneficiary pays income tax at owner s death Taxes are calculated at Beneficiary s tax rate 3. Deceased IRA owner must include the entire IRA value in his / her estate for estate taxes Even though the $$ pass directly to the designated beneficiary! This is what s known as the Double-Tax 16 IRD: The Good News Is... You can overcome these problems, and... The IRS gives you tools to do it! 1. Stretch the inheritance to spread the taxes over many years and continue tax deferral 2. Consider charitable beneficiaries 3. Offset or eliminate IRD tax for beneficiaries 17 8

9 Estate Tax Exclusion: Then and Now 1997: $600,000 Per Person 2015: $5,430,000 Per Person 18 Stretching The IRD Deduction IRA Value = $500,000 Estate Tax (40%) = $200,000 Creates IRD deduction of 40% of the asset Children inherit $500,000 Stretch = $40,000 per year for 30 years (over-simplified) Estate Tax Deduction = 40% So 40% of each stretch payment is excused from income tax until the deduction is used up Each stretch payment is 40% income-tax-free for 12.5 years! Unlimited deduction carry-forward Can amend prior 3-years tax-returns 19 9

10 2 IRA Wealth Transfer Strategies Typical IRA Transfer IRA Owner(s) $500,000 Children $300,000 Grandchildren 21 10

11 1. IRA Income Tax Offset RMD s IRA $500,000 Life Insurance $200,000 Beneficiaries $500,000 Taxes IRA Income Tax Elimination IRA $500,000 RMD s Life Insurance $500,000 Charity $500,000 Beneficiaries Tax-Free Total: $1,000,

12 Comparison of Strategies Total Net After-Tax Legacy 24 Defined Benefit Plans in Divorce A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age. 2 Options: Spouse gets 1/2 of future payments through a QDRO if allowed by the Plan. Spouse gets 1/2 of the estimated present value of those future payments. 12

13 Information Needed Demographic Info Date of Valuation Date of Birth of Plan Participant Plan Specifics Life Expectancy at Expected Retirement Date (based on gender and race) Date of Marriage Years of Service Eligible Retirement Date Information Needed (Continued) Present Value Info Monthly Benefit Earned Interest Rate (LT US Treasury Rates, PBGC rates, Consumer Price Index) Cost of Living Adjustment (COLA) Assumed Income Tax Rate See Sample Letter from Retirement Plan Administrator 13

14 Partial Martial Asset Coverture Fraction / DeLoach Formula Developed by the Florida First District Court of Appeals in The formula states that the portion of the employee spouse s retirement plan benefits which is a marital asset equals the employee s period of participation in the pension plan during the marriage over the employee s total period of participation in the plan times the present value of the plan benefits Case Study 14

15 Other Considerations Interest Rates Tax Rates Penalties (FERS) Defined Contribution Plans Questions? Erin Spiwak, CPA Partner James Moore, CPAs Office: EXT erinspiwakgainesvillecpa John VanDuzer, CPA Senior Manager James Moore, CPAs Office: EXT johnvanduzercpa Kim Hardy, CPA/ABV/CFF, CVA Director of Business Valuation Services James Moore, CPAs Office: EXT kim-hardy-cpa/14/53a/69a Mike Carignan Financial Advisor HK Financial Services Office: michael-carignan-cfp-crpc/4/b79/758 15