RPA 2 - Assignment 2

Discuss the restrictions on investments in an IRA.

- The assets cannot be invested in life insurance contracts except for endowment contracts with incidental life insurance features issued before 1979. - Investments in collectibles such as antiques, works of art, stamps, coins, and the like also are prohibited. - Most IRAs are invested in assets such as bank-pooled funds, savings accounts, certificates of deposit, savings and loan association accounts, mutual fund shares, exchange-traded funds, face-amount certificates and insured credit union accounts. - A self-directed IRA arrangement also can be established. Under this approach, a corporate trustee is selected and generally charges fees for the service provided. The individual is free to make the investment decisions, within some constraints.

Provide two examples of prohibited transactions under ERISA for individual retirement savings plans.

1. An individual who owns an individual retirement annuity and borrows money under or by use of that annuity contract. 2. An individual who holds an IRA and uses all or any portion of the account as security for a loan. In example 1 - the annuity losses its tax-exempt status and its fair market value will have to be included in the individual's gross income, subject possibly to premature distribution excise taxes. In example 2 - the portion used to secure the loan will be treated and taxed as a distribution.

What are the requirements of a qualified distribution for a Roth IRA?

A qualified distribution that is made at least 5 years from the first of the year in which the Roth account was established and meets at least one of the following other requirements: (a) The taxpayer has attained the age of 59 1/2 (b) The taxpayer is disabled (c) The taxpayer has died and payment is made to a beneficiary or to the individual's estate (d) The distribution is made to pay first-time home buyer expenses and does not exceed $10,000

What are the conditions that must be met for a qualified fiduciary advisor, as defined by the PPA, to provide personally tailored investment advice to IRA owners?

A qualified fiduciary advisor may provide persinally tailored investment advice to IRA owners if the compensation for the advice provided does not vary with the investment option chosen or is provided through a computer model that is certified by an independent third party. The DOL believes computer models should, with few exceptions, be required to model all investment options under a plan or through an IRA.

A traditional IRA may be converted into a Roth IRA, subject to regular federal income taxation but not subject to the 10% penalty tax on premature distributions.

A traditional IRA may be converted into a Roth IRA, subject to regular federal income taxation but not subject to the 10% penalty tax on premature distributions.

Explain why an individual may want to make IRA contributions even though they are nondeductible.

Although these contributions will be made from after-tax income, they benefit from the compounding of tax-sheltered investment income during the time they remain in the IRA.

An individual will cease to be eligible to make regular annual contributions to either a traditional deductible or nondeductible IRA beginning with the taxable year in which the individual attains the age of 70 1/2. Regular IRA contributions to the IRA of the nonworking spouse can no longer be made beginning within the calendar year the nonworking spouse reaches the age of 70 1/2. If the employee-spouse is younger, he or she can continue to make annual IRA contributions to his or her own IRA until the year he or she reaches the age of 70 1/2.

An individual will cease to be eligible to make regular annual contributions to either a traditional deductible or nondeductible IRA beginning with the taxable year in which the individual attains the age of 70 1/2. Regular IRA contributions to the IRA of the nonworking spouse can no longer be made beginning within the calendar year the nonworking spouse reaches the age of 70 1/2. If the employee-spouse is younger, he or she can continue to make annual IRA contributions to his or her own IRA until the year he or she reaches the age of 70 1/2.

Explain the operation of spousal IRA.

An otherwise eligible individual also may set up and contribute to one or more IRAs for a nonworking spouse or a spouse who elects to be treated as having no compensation for the year. Under a spousal IRA plan of this type, the spouses must file a joint income tax return. The SBJPA created new spousal IRA rules effective for tax years beginning after December 31, 1996. Under the new rules, nonworking spouses were able to contribute up to $2,000. A combined maximum contribution of $4,000 was allowable - $2,000 for each spouse. Deductibility of this $4,000 was limited if the working spouse earned over $40,000 and participated in an employer-sponsored retirement program.

Any excess contribution to an IRA is subject to a nondeductible 6% excise tax in addition to current income taxation. The excise tax continues to be applied each year until the excess contribution is withdrawn from the IRA.

Any excess contribution to an IRA is subject to a nondeductible 6% excise tax in addition to current income taxation. The excise tax continues to be applied each year until the excess contribution is withdrawn from the IRA.

Explain when distributions from a traditional IRA must commence from an IRA.

Distributions from a traditional IRA must commence no later than April 1 of the calendar year in which the individual attains the age of 70 1/2. Although SBJPA no longer requires participants in qualified plans to begin receiving distributions after attaining the age of 70 1/2 if they are still employed, 5% owners and IRA holders are exempted from these modified distribution rules. Therefore, the holder of a traditional IRA must still commence distributions following attainment of the age of 70 1/2. Distributions may be in the form of a lump sum, a life annuity or joint life annuity, or in periodic payments not to exceed the life expectancy of the individual and a designated beneficiary. If the owner of the traditional IRA dies before the entire interest is distributed, the required distribution to the beneficiary depends upon whether distributions to the traditional IRA owner had already been required to start by the date he/she died.

An IRA rollover is a tax-free transfer of funds from a qualified plan, a 403(b) arrangement, or another IRA. Describe eligible rollover distributions from employer-sponsored plans.

Eligible rollover distributions may include any distribution except a required minimum distribution, or any distribution that is part of a series of substantially equal periodic payments over the IRA owner's life, life expectancy or a period of at least 10 years. If an individual rolls over to an IRA a distribution that is not eligible to be rolled over, a 6% excise tax may be imposed on the amount rolled over until it is removed.

What is the deadline for making IRA contributions?

IRA contributions must be made before the due date for the individual's filing of the federal income tax return for the taxable year for which the deduction is claimed.

Describe the characteristics of a Roth IRA.

If a taxpayer makes regular annual contributions to any other IRAs, for instance, to either a traditional deductible or nondeductible IRA, the maximum annual contribution limit to the Roth IRA is reduced by those contributions. The rules permitting a regular annual contribution to a Roth IRA are unique to this particular retirement savings vehicle. Unlike a traditional IRA, regular annual contributions can be made to a Roth IRA at any age, provided they do not exceed earned income for that particular year. The income phase out on the ability to make regular annual contributions to a Roth IRA applies even if an individual is not an active participant in an employer-sponsored retirement plan.

What tax penalty is assessed if timely distributions do not occur?

If traditional IRA assets are not distributed at least as rapidly as described, an excise tax will be levied. This excise tax will be 50% of the excess accumulation. The excess accumulation is the difference between the amount that was distributed during the year and the amount that should have been distributed.

In an effort to encourage lower and middle income workers to save for their retirement, a graded nonrefundable tax credit applicable to the first $2,000 retirement contributions is available to eligible taxpayers. Retirement plan contributions eligible for the credit include contributions to traditional and Roth IRAs as well as elective contributions made to simplified employee pensions, savings incentive match plan for employees, 401(k)s, 403(b)s and eligible governmental 457(b) plans.

In an effort to encourage lower and middle income workers to save for their retirement, a graded nonrefundable tax credit applicable to the first $2,000 retirement contributions is available to eligible taxpayers. Retirement plan contributions eligible for the credit include contributions to traditional and Roth IRAs as well as elective contributions made to simplified employee pensions, savings incentive match plan for employees, 401(k)s, 403(b)s and eligible governmental 457(b) plans.

Describe the procedure involved in determining the amount of deductible contributions an individual may make to an IRA.

Individuals may deduct the full amount ($5,500 - 2013 excluding catch-up contributions) of their regular annual contributions to IRAs if they do not actively participate in a qualified plan. However, if either the taxpayer or his/her spouse is an active participant in an employer-maintained plan for any part of a plan year ending with or within the taxable year, the maximum IRA contribution deduction is reduced based on adjusted gross income, calculated without any regard to any IRA contributions.

What are the characteristics of employer-sponsored IRAs?

One distinguishing characteristic of an employer-sponsored IRA is the fact that no requirement exists that this type of account must be made available to all employees or be nondiscriminatory in benefits. The contributions to the IRA may be made as additional compensation or by payroll deduction. Any amount contributed by an employer to an IRA is taxable to the employee as additional compensation income. The employee is then eligible for the IRA tax deduction up to the allowable annual dollar limitation for a given year, unless the "active participation in a qualified plan" rules apply, in which case the contributions may be nondeductible in whole or in part.

List conditions under which IRA premature distributions (distributions taken prior to the age of 59 1/2) are exempt from the 10% penalty rate.

The penalty does not apply to distributions made on account of the IRA owner's death or disability. Subject to certain payment patterns, an exception exists for substantially equal periodic payments made at least annually over the life or life expectancy period of the individual or joint lives of life expectancies of the individual and a beneficiary. Also, the 10% penalty does not apply of a withdrawal is made because of an IRS levy on the account to collect taxes and if a withdrawal is made to an alternate payee pursuant to a qualified domestic relations order. The penalty does not apply to distributions taken to pay medical expenses, health insurance premiums after separation of employment, qualifying education expenses and first-time home buyer expenses.

An IRA rollover is a tax-free transfer of funds from a qualified plan, a 403(b) arrangement, or another IRA. Describe the two methods of making these distributions.

The two methods of making rollover contributions to an IRA - a direct rollover and a regular or indirect rollover. In a direct rollover, the individual instructs the plan trustee or contract issuer to transfer funds directly to the IRA. In a regular rollover, the individual receives a check for the eligible rollover distribution from the plan trustee or the contract issuer and within 60 days of receipt contributes up to the amount of te eligible rollover distribution as a rollover contribution to an IRA.

On what type of income may individual retirement account contributions be based? Explain

To be eligible to establish and IRA, an individual must have earned income from personal services - investment income does not qualify for such a plan. If an individual and spouse both have compensation or self-employment income during a taxable year, each spouse may establish an individual retirement savings plan. Community property laws do not apply to such plans. If an individual is married and otherwise eligible to make IRA contributions an has a nonworking spouse, two IRAs may be established, but subject to certain limitations.

An individual may establish an individual retirement savings plan by making contributions to an IRA or an individual retirement annuity. Describe the annuity type of plan.

Under this type of plan, the individual's contribution is invested through the purchase of a flexible premium annuity IRA from a legally licensed life insurance company. The annuity contract must involve flexible premiums and may be participating or nonparticipating. Also, the annuity may be fixed or variable. Key requirements of a flexible premium annuity IRA include nontransferability, nonforfeitability and restrictions on the treatment of dividends.

What are deemed IRAs?

When an employer sponsoring a qualified plan, 403(b) arrangement or governmental 457(b) plan adds an IRA feature to its plan, these ad-on accounts or annuities are deemed to be either a traditional or a Roth IRA. They are not subject to the normal rules applicable to the particular retirement plan to which they are attached. They are, however, subject to the reporting and other requirements generally applicable to IRAs under the IRC.