FIN 450 Module 3 & 4

recharacterization

taxpayer transfers the Roth IRA contribution into a traditional IRA, only if taxpayer is not an active participant. If already active, can re-characterize as a non deductible traditional IRA contribution.

active participant

taxpayers covered by a retirement savings plan with their employer. not include non-qualified plans.

self dealing

using self directed assets for personal gain and not for retirement account gain.

phase out scenario

when a taxpayer crosses lower bound of income threshold they begin to have a reduced deductible contribution. special formula for these people.

excess contribution

when taxpayer contributes to Roth IRA but then later receives substantial jump in compensation putting them over the limit to be eligible to contribute. Excess contributions will receive a 6% excise tax from the IRA. they can avoid excise tax by 1) withdrawing excess contributions plus growth or 2) recharacterization: vvvvv

Roth Conversion

Any portion of a Traditional IRA can be converted into a Roth IRA at any time. IRA owner realizing current ordinary (taxable) income in the amount of the conversion. convert tax-deferred assets into tax-free assets, but the cost is the current taxation

tax free growth

Roth IRA. After tax contributions. No taxes paid on growth as it accrues during accumulation yrs and no taxes due on ultimate distribution.

tax deferred growth

contributions of Traditional IRA. pre tax distributions with non taxed growth during accumulation yrs pre retirement.

self directed IRA

hold investments whose valuation not easy to ascertain. traditional IRA wants discernable. very few custodians for self directed IRAs. don't mix self directed IRA assets with non IRA assets, or end up with IRS problem. Investor run into regulatory problem under two circumstances 1-any expenses/investments are made in an asset held within a self directed IRA then problems with IRS. 2 - self dealing vvv

Roth 401(k)

hybrid between Roth IRA and traditional 401(k). employer can't make contributions directly into Roth 401(k), only traditional 401(k). Tax ayer can contribute to both their Roth 401(k) and regular 401(k).

stepped up basis

if an investor dies while holding an asset in a non qualified account, then their actual purchase price will no longer be applied for calculating capital gains taxes. person who inherits the asset will have a new basis equal to the value of the asset on date of death of the previous owner. exception exists for accounts that are jointly owned.

Individual retirement annuity

must meet all regular rules and limitations as straight IRA, primary difference being what it invests in (only annuity, no bonds, stocks, MF). can be fixed or a variable annuity contract, but either way premiums can't exceed annual contribution limit for straight IRA(5500). attractive - owner not required to select investment options - just make contributions and insurance company that holds individual retirement annuity will make all investment decisions. hands free. little flexibility. can handle life expectancy risk with lifetime payout feature.

spousal IRA

non working spouse of working taxpayer eligible to establish traditional IRA. spouse can contribute up to contribution limit if they file joint return.

Roth IRA

only non deductible contributions. can contribute after 70.5 y.o. no mandatory distribution amount. Can only have non deductible contributions. tax free distributions. Assets in Roth IRA not available for tax fee withdrawals until 5 calendar years have passed after first contribution.

rollover

retirement savings instrument is transferred into an IRA. roth 401k, roth 403b, and non deductible IRA contributions can be rolled into Roth IRA. All others (401k, profit sharing, money purchase plans) must be rolled into a traditional IRA. - direct rollover, no taxes. easy. - indirect rollover can result in taxes.

Traditional IRA

tax advantaged, pre tax contributions. offers retirement savers the ability to make both tax deductible and non deductible contributions. non deductible typically used by someone whose income above limit for traditional IRA contributions. no contribution limit unless covered by another retirement plan at work. For 2017, dollar limit is lesser of $5,500 or 100% of compensation. must be under 70.5 y.o. and have earned income. certain amt of distribution mandatory. constructed outside employer view. typically contain pre tax (deductible) contributions, but can have non-deductible (after tax) contributions. taxable distributions. no limit on non deductible contributions.