Individual Retirement Accounts
Intro to Individual Retirement Accounts: Overview:
An Individual Retirement Account or "IRA" is a personal account for people who are employed [and their spouses] that provides either a tax-deferred or tax-free way of saving for retirement.
Roth IRA - Rollovers - A. Rollovers between Roth IRAs are permitted & can be done tax free.
B. Traditional IRAs can be rolled over to a Roth IRA with certain restrictions. ● Amounts transferred will be taxable as income to the owner. ● Traditional IRAs cannot be rolled over into a Roth IRA if: 1) The owner's adjusted gross income exceeds $100,000 2) The owner is "married filing separately." Married couples are not allowed to file separately just to utilize the convert option.
[Roth IRA] - Eligibility to Contribute -
Contributions to Roth IRAs are allowed up to certain limitations in Adjusted Gross Income.
Traditional IRA - Deductions - Individuals who ARE ACTIVE in a retirement plan at work.
May be able to deduct a contribution to an IRA depending upon income limitations based on your tax filing status [individual or joint] & your adjusted gross income.
Traditional IRA - Rollovers -
Rollovers to or from another IRA, Keogh or qualified plan are permitted. ● An individual has 60 days to invest benefits from a retirement plan into the new account before incurring a tax liability.
Traditional IRA - Earnings -
Taxes on all earnings in the IRA are deferred until withdrawals are made from the IRA.
Traditional IRA - Deductions - Individuals with an unemployed spouse may make the
maximum allowed contribution for themselves & their unemployed spouse may also make the same contribution based on the employed spouse's compensation amount.
A surviving spouse -
the transfer qualities for the federal estate tax marital deduction. ● The surviving spouse may elect to become the owner of the account & may treat the inherited IRA as their own. ● The spouse may make contributions and/or rollover the inherited IRA. The spouse pays taxes on any distributions.
The Roth Individual Retirement Account [Roth IRA]
● Introduction ● Plan Designed For ● Contribution Information ● Eligibility to Contribute
[Roth IRA] - Current & Historical Contributions & Catch-Up Limitations:
Year 2008 - 2012 Maximum Contribution $5,000 Catch-Up Contribution $1,000 After 2009, the maximum contributions limits will be indexed to inflation.
Current & Historical Contributions & Catch-Up Limitations:
Year 2008 - 2012 Maximum Contribution $5,000 Catch-Up Contributions $1,000 ● After 2009, the maximum contribution limits will be indexed to inflation.
Traditional IRA - Distributions:
● May begin at age 59 1/2. Funds withdrawn before age 59 1/2 are subject to a 10% penalty tax except for death, disability, medical expenses, first time home purchases, higher education costs & medical insurance premiums. ● Are mandatory by age 70 1/2. Required minimum distributions [RMDs] must begin no later than April 1st following the calendar year in which the owner reaches age 70 1/2. Late distributions are subject to a 50% penalty tax on the insufficient distributions. ● Withdrawals are taxed as ordinary income.
Traditional IRA - Distributions - Example:
If based on life expectancy, a person should be taking $10,000 a year and only takes $6,000, the insufficient distribution of $4,000 would be subject to a 50% penalty.
Deductions - Individuals who ARE NOT ACTIVE in a retirement plan at work:
May deduct all of their contributions up to the contribution limitations. ● There are no restrictions on deductions based upon the Adjusted Gross Income of an individual who is not active in another plan.
[Roth IRA] - Plan Designed for:
Roth IRAs are opened & used by individuals [and their spouses] who receive compensation. ● These plans are personal accounts controlled by individuals themselves.
[Roth IRA] - Introduction -
Roth IRAs were established by the Taxpayer Relief Act of 1997 are another way for individuals to save for retirement. ● Unlike a Traditional IRA, contributions to a Roth IRA are not tax deductible from the owner's gross income. ' ● However, since taxes have already been paid on contributions, contribution dollars can be withdrawn at anytime without penalties. ● The big difference with a Roth IRA is that upon retirement, qualified withdrawals of both contributions & earnings in the account can be made tax free. ● This benefits individuals who anticipate being in a higher tax bracket upon retirement.
A trust -
When a trust is designated as the beneficiary of an IRA, it becomes the owner of the account & the beneficiaries of the trust become the beneficiaries of the IRA. ● The maximum payout period is based on the oldest beneficiary's age.
Traditional IRA - Plan Designed for:
are opened & used by individuals [and their spouses] who receive compensation. ● These plans are personal accounts controlled by individuals themselves.
A non-spouse -
A non-spouse may not elect to become the owner of the account & may not rollover the IRA to another IRA. ● Distributions will be taxed as ordinary income to the beneficiary in the year in which the distribution is received.
Traditional IRA - Deductions -
Deductions for IRA contributions are permitted depending on the taxpayer's filing status & adjusted gross income.
Limitations: Not everyone can take advantage of IRA accounts.
Each type of IRA has eligibility restrictions, contribution limits & penalties for early withdrawal of assets.
Earning & Distributions: "Non-Qualified Distributions" -
For distributions from a Roth account that do not satisfy the above requirements, a portion of the distribution may be included in the account owner's gross income. ● The amount included as gross income will generally be subject to the 10% penalty tax on early withdrawals.
Investments: Individuals may hold almost any investment in their IRA.
However, there are some explicitly named prohibited items.
Traditional IRA - Deductions - A person is considered to be an "active" participant in another plan if they are
eligible to participate in an employer-sponsored retirement plan [qualified plan, SEP, SIMPLE or gov't plan] within the tax year even if they elect not to participate.
Traditional IRA - Contribution Conditions: ● Excess Contributions - Contributions above the limits which are not removed from the account are subject to a cumulative 6% excise tax. ● Compensation that qualifies for an IRA contribution includes earned income & alimony but does not include pensions, annuities & other deferred compensation.
● Contributions must be made in cash & may be made up to April 15th of the year following the year that a deduction is claimed. ● If an extension is granted for the filing of a tax return, the IRA contribution must still be made not later than April 15th. ● Contributions may not be made after age 70 1/2.
IRA Contributions MAY NOT be invested in:
● collectible items such as antiques, paintings, rugs, diamonds & stamps ● life insurance
IRA Contributions MAY BE invested in:
● stocks, bonds, mutual funds & other securities ● Certain U.S. Gov't or state issued gold, silver, platinum & palladium coins & bullion ● Real Estate
Earning & Distributions: C
A Roth IRA owner is not required to begin distribution by a specific age.
Traditional IRA - Contributions:
● Contributions may be made annually up to 100% of earned income not to exceed specified limits. ● All contributions to Traditional & Roth IRAs are aggregated & cannot exceed the limits. ● Individuals who will be at least 50 years of age during the tax year may contribute an additional "catch-up" amount to an IRA. ● Current & Historical Contributions & Catch-Up Limitations
[Roth IRA] - Contribution Information:
● Contributions may be made annually up to specified limits. All contributions to Traditional & Roth IRAs are aggregated & cannot exceed the limits. ● Individuals who will be at least 50 years of age during the tax year may contribute an additional "catch-up" amount to an IRA. ● Current & Historical Contributions & Catch-Up Limitations ● Contributions to Roth IRAs are not tax deductible ● Unlike Traditional IRAs, contributions may continue to be made after the owner reaches age 70 1/2.
Earning & Distributions: A. In a Roth IRA, "Qualified Distributions" which include contributions & earnings are tax free when withdrawn. To be "qualified," the distribution must satisfy the following 2 requirements: 1. 5 Year Holding Period - The distribution may not be made before the end of the 5th year after which the individual made their initial contribution to the Roth IRA.
2. Must meet one of the following criteria: ● Is made after the IRA owner has reached age 59 1/2 ● Is made as a result of the death or disability of the IRA owner ● Is used for "qualified first time home buyer expenses ● Is used for educational expenses ● Is used for medical insurance premiums
Many people mistakenly think an IRA itself is an investment. ● However, an IRA is really only a container in which an individual can keep stocks, bonds, mutual funds & a wide variety of other investments.
● IRA accounts can be opened & held at almost any custodian institution such as a bank, brokerage or insurance company. ● Today, there are a number of different types of IRAs, each designed for different individual situations & financial goals.
Handling of Inherited IRAs -
if the owner of an IRA dies & the designated beneficiary is: ● A surviving spouse ● A non-spouse ● A trust
Traditional IRA - Deductions - An individual as well as their unemployed spouse are permitted to
make non-deductible IRA contributions [up to contribution limits] to the extent that they are ineligible to make deductible IRA contributions due to restrictions [active in employer's plan, AGI limitations.
Traditional Individual Retirement Account [Traditional IRA] - Intro. - is the original IRA designed to encourage employed individuals to save for retirement by providing them with tax incentives.
● Advantages include the fact that contributions to the account are generally tax deductible [without limitations] and that the taxes on contributions & earnings in the account are deferred, generally until the owner retires & begins taking withdrawals when they may be in a lower tax bracket. ● The only condition for being eligible to contribute to a Traditional IRA is to have sufficient earned income.