Series 65: Unit 24

IRA contribution limit

$6,000

Penalty for falling short of minimum required distribution

50% of amount falling short of the MRD

Direct Rollover

A direct rollover is a distribution from an employer sponsored retirement plan to an IRA, ROTH or traditional. The key here is that the employee never sees the money and it is directly transferred from the plan to an IRA

Business sponsored 60 day rollover

A participant in a business sponsored qualified plan can move their plan asset to a rollover IRA if they leave the company or elect to take lump sum distributions. If they elect the rollover, it must be done within 60 days of withdrawing the funds

60 day rollover IRA transfer

An individual can take possession of a retirement accounts funds to move them to another custodian. The account owner can only do this once every 12 months and it must be completed within 60 calendar days. 100% of the funds that were withdrawn must be transferred or else they will be subject to income tax

What are the typical investments in a 403(b)?

Annuities and more recently mutual funds

How does the IRS define a prohibited person?

Any member of the family expect a brother or sister

ROTH IRA eligibility rules

Anyone with earned income is eligible to open a ROTH IRA given that their income falls below a specific level. The max contribution amount gets smaller as adjusted gross income increases

What are unacceptable IRA investments?

Collectibles like antiques, gems, rare coins, works of art and stamps. Life insurance contracts also can not be purchased in an IRA

Guaranteed Investment Contracts (GICS)

Contracts issued by insurance companies that offer a guaranteed return of principal at a certain date and come with a higher fixed rate of return than CDs. Unlike CDs, GICS are not federally insured and have slightly more investment risk

What is the default option for IRA beneficiary payouts?

Five year withdrawal if the beneficiary does nothing by Dec 31 of the year following the year of death

When can someone withdraw accumulated earnings from their ROTH IRA

Five years from the initial deposits, they can withdrawal tax free if they are older than 59.5, money is used for the first time purchase of a principal residence (up to $10,000) or the account holder has died or become disabled

When can IRA contributions for taxable year be made?

From Jan 1st to April 15th of the next year even if they get a filing extension

Defined contribution plans

Included are money purchase pension plans as well as profit sharing plans and 401k plans. The max employer contribution is currently 56k. These plans accumulate until a future event when the funds may be withdrawn.

Taxation of traditional IRA

Income and capital gains are not taxed until the funds are withdrawn

Traditional and SEP IRA tax benefits

Participant in these plans can may deduct contributions to their IRA from their taxable income. Individuals who are ineligible to participate in qualified plans may deduct IRA contributions regardless of income level

Keogh plans

Qualified plans intended for self employed individuals and owner-employees of unincorporated business concerns or professional practices like independent contractors, consultants, and freelancers. This is meant only for sole proprietors, corps can not use this plan

SEP contribution limits

SEP allow the employer to contribute up to 25% of an employee's salary to the SEP each year. The employer determines the level of contributions each year and they must be the same for all employees

SEP IRA participation

SEP rules require that all eligible employees are allowed to participate

403(b) contributions rules

Subject to the same maximums that apply to all defined contribution plans, the lesser of 100% of the participants compensation or $56k per year

Adjust gross income (AGI)

Sum all earned income, income from interest/dividends, capital gains, alimonies received and profits from your business then subtract traditional IRA contributions, alimony paid, self employed taxes and penalties paid on early withdrawals from a savings account

403(b) Plans

Tax deferred retirement plans for employees of public school systems, and tax exempt, non profit organizations like churches and charitable institutions. Qualified employees can exclude contributions from their taxable incomes given that it doesnt exceed limits

Roth 401(k) plans

Technically there is not such thing as a Roth 401(k) plan, employers are allowed to add ROTH features to a 401(k). ROTH 401(k)s require after tax contributions and thus allow tax free withdrawals given that you are at least 59.5. The account also must be open for 5 or more years to make a tax free withdrawal

Contribution limits when putting money in a ROTH and traditional IRA?

The can contribution is $6,000 combined, $7,000 if $50 and older

SEP IRA eligibility

The employee must be at least 21 years old, have performed services for the employer for at least 3 to 5 years and received at least $600 in the current year

What happens when you convert a traditional IRA to a ROTH IRA?

The entire amount that is converted is added to the investor's ordinary income. There will be no 10% penalty given that funds are transferred trustee to trustree or if distributed to the owner are rolled over within 60 days for those under age 59.5

Income exclusion for 403(B)

The income that is contributed is not reported as income and thus can result in lower current income rates

Contributions to Keogh plans

The limit is much higher than IRAs. A person can contribute to a Keogh and IRA. The contribution percent for the employees must be the same as the owner if the business has employees

Rules on spousal rollover

The normal rules of your IRA applies like withdrawal ages and RMDs

Withholding tax during rollover

The payor of distribution must, by law, withhold 20% of the distribution as a withholding tax. The participant must still roll over 100% of the plan distribution including the withheld funds. This can be refunded on the next income tax return

Qualified

The term itself means that contributions are made with pretax dollars and earnings in the account at tax deferred until withdrawal

SEP IRA catch up provisions

There are no SEP IRA catch up provisions!

Rules for continuing the IRA as a beneficiary as a spouse

There is no 10% penalty for withdrawals before the age of 59.5 in this case. The bad part is the RMDs must be taken out beginning when the spouse would have had to take them out. RMDs will be calculated on the beneficiaries age

Simplified Employee Pension (SEP IRAs)

These IRAs are funded by an employer rather than an individual. It offers an easy way for a self employed person or small business to easily administer pension plans.

SEP IRA vesting

These account are fully vested meaning once the money is deposited into the SEP IRA, it belongs to the employee

Defined benefit plans

These plans are defined to return specific retirement benefits for participants like fixed monthly income or a specified sum at retirement. Regardless of investment performance, the promised benefit is paid under contract terms.

When are distributions of a ROTH IRA tax free?

They are tax free if the investor is after age 59.5 and the ROTH account has been open for more than 5 years

What happens when you withdraw from tax deductible contributions?

They are taxed as ordinary income

When can regular contributions be withdrawn from a ROTH IRA?

They can be withdrawn tax free any time as they are non deductible contributions

Profit sharing plans

This allows an employee to participate in a business's profits. The profits can be paid directly to the employee or deferred into an account for future payments. These plans must have substantial and recurring contributions in order to by a qualified profit sharing plan

How are 403(b) contributions made?

Through salary reductions so the employee will take a salary reduction and the money is withdrawn before taxation

How much all private sector plans be established?

Under a trust agreement. A trustee is appointed for each plan and has a fiduciary responsibility for the plan and plan owners.

Eligibility rules of Keogh plan

1) Full time employees only (must work at least 1,000 hours of work per year) 2) tenured employees that have worked one or more years continuously 3) Must be at least 21 and cant be older than 70.5 years

Options for nonspouse beneficiary of an IRA

1) Take the cash out now 2) cash out the IRA in five years 3) take out RMD on your life expectancy 4) Take RMDs based on the life expectancy of the oldest beneficiary

Not compensation for IRA purposes

1) capital gains 2) interest/dividends 3) pension or annuity income 4) child support 5) passive income from DPPS 6) alimony from post december 31, 2018

Tax advantages of 403(b)

1) contributions are excluded from gross income 2) participant's earnings accumulate tax free until distribution

Reason why someone wont incur a penalty for withdrawal before age 59.5

1) death 2) disability 3) first time purchase of a primary residence up to $10,000 lifetime 4) qualified higher education for immediate family members 5) certain medical expenses

Public state run education systems include

1) elementary schools 2) secondary schools 3) colleges/universities 4) medical schools

Tax exempt organizations include

1) private colleges or universities 2) trade schools 3) parochial schools 4) zoos and museums 5) research and scientific foundations 6) religious charitable institutions 7) private hospitals or medical schools

Similarities between IRAs and Keogh plans

1) tax deferral of contributions to plans 2) tax sheltered 3) contribution must be cash 4) distributions without penalty can begin at 59.5 5) penalties for early withdrawal 6) payout options 7) beneficiary

Employee in school systems who can enroll

1) teachers and other faculty members 2) administrators, managers and other members of the admin staff 3) counselors 4) clerical staff and maintenance workers 5) doctors or nurses at the school

403(b) plan requirements?

1) the plan must be in writing and must be made through a plan instrument, a trust agreement or both 2) the employer must contribute to an annuity contract, mutual fund or another approved investment

Spousal beneficiary of an IRA options

1) they can do a spousal rollover into their own IRA 2) continue to own the IRA as the beneficiary

Compensation for IRA purposes

1) wages, salaries and tips 2) commissions and bonuses 3) self employment income 4) alimony from pre-2019 decrees 5) non taxable combat pay

When can you withdraw money from a traditional and SEP IRA?

After age 59.5 you can begin without being taxed. After April 1 of the year following the year an individual turns 70.5 they must start taking distributions

Trustee to trustee transfer

Also called an IRA transfer, is when account asset are sent directly from one IRA to another without the investor ever having possession. The trustee to trustee transfer can be done as many times as wanted in a year.

Nondeductible contribution

An contribution to a qualified plan or IRA that is made with after tax dollars. Once the funds are in the account they grow tax deferred but there is not benefit from the contribution

Non-qualified

An employee sponsored plan where there is no tax advantage besides to possibility that the individual is in a lower tax bracket when withdrawing funds

GICS eligibility rules

An employer must be a 1) public educational institution 2) tax exempt organization or a church

Qualified plan

An employer sponsor plan where contributions are made pretax and earnings are tax deferred until withdrawal

Limits on ROTH IRA contributions?

An individual can contribute to their ROTH IRA after 70.5 if they have earned income

Contribution deduction limits of defined contribution plans

Deductions for a contribution to a defined contribution plan can not be more than 25% of the total payroll for the year

Difference between a direct and transfer rollover?

Direct is from one account type to another, like 401k to IRA while a transfer is from one IRA to another IRA brokerage

What act is responsible for the catch up contribution rule?

Economic growth and tax relief reconciliation act of 2001 or EGTRRA

Taxation of SEP IRA

Employer contributions are tax deductible to the employer and contributions are not taxable to the employee until withdrawn. Earnings in the account are tax deferred

What does the term qualified plan refer to?

Employer sponsored plans, not IRAs

Cash out the IRA in five years

If the deceased was younger than 70.5 years, the non spouse ITA beneficiary can withdraw all the funds from an IRA on Dec 31 of the fifth year following the account owners death. All withdrawals will be included in taxable income during the year the funds were withdrawn assuming they were made with pretax dollars

Take RMDs based on the life expectancy of the older beneficiary

If there are multiple beneficiaries of an account, then the life expectancy of the older beneficiary is used. This means that you will receive larger payouts versus using the youngest beneficiaries life expectancy. You can avoid this by opening separate inherited IRA account for each beneficiary and RMDs will be based on each account.

Excess contribution penalty

If you exceed your IRA contribution, the excess is subject to a 6% penalty tax if you do not remove it by the time you file your tax returns, but no later than April 15

Substantially equal periodic payments (SEPP)

If you receive IRA payments at least annually based on your life expectancy you are not subject to the 10% penalty

Contributory v. noncontributory plans

In a contributory plan both the employer and employee make contributions to the account. In a noncontributory plan only the employer makes contributions

Disclaiming an IRA

In order for the disclaimer to be effective, it must be done within nine months of the death and in writing. If disclaimed the IRA would then be passed onto the contingent beneficiary. If there is no contingent beneficiary then it would follow the persons will

401(k) plans

In this plan an employee directs an employer to contribute a specific percent of the employee's salary into the account. The employer can also make matching contributions up to a set percentage of the employee directed contributions. Contributions are made with pretax dollars

Catch up contributions

Individuals age 50 or older can make contributions to their traditional or Roth IRA above their limits

When can contributions after age 70.5 be made to a ROTH IRA?

It can only be made if it is earned income

What does a filing extension do?

It gives you more time to file your return. It does not give you more time to pay your taxes!

What is an advantage of 401ks?

It takes advantage of dollar cost averaging

Investing in real estate in an IRA

It usually isnt an issue if it is a hands off investment but once you start deriving personal benefit from it issues start to arise

Traditional IRA max tax deductible annual contribution

Lesser of $6,000 per individual or $12,000 per couple, or 100% of taxable compensation for the taxable year

What are inappropriate IRA investments?

Muni bonds, muni bond funds and municipal bond UITs are eligible but considered inappropriate as their yields are typically lower than those of similar investment and their income is taxable on withdrawal from the IRA

Are distributions from a ROTH IRA required?

NO

Are contributions to a defined benefit plan affect by sex?

NO!

Does ROTH IRAs have minimum required distributions?

NO!

Does the nonspousal inheritance of an IRA ever incur 10% withdrawal penalty?

NO!

Does a 401(k) have to have employer or employee contributions?

No!

In a Keogh plan, can earnings from other jobs count towards determining the max that can be contributed?

No, only the earnings from self employment count in the computation

Are ROTH IRA tax contribution tax deductible?

No, they are are not tax deductible

Take out RMD over your life expectancy

Nonspouse IRA beneficiaries can take RMDs over their life expectancy leaving most of the asset in the account to grow in a tax deferred account. In this case, a separate inherited IRA account in the deceased owner's name for the benefit of the beneficiary must be established. The first year required minimum distribution must be taken by Dec 31 of the year following the year of the account owner's death

Is an IRA qualified under ERISA?

Not as employer's can not make contributions

Where is tax exempt income from muni securities shown?

On Form 1040. It is not included in AGI

Deductible contribution

When an amount contributed to a qualified plan is pretax or tax deductible on a tax return

When does a employer have to contribute to a plan?

When it is a defined benefit or defined contribution, pension plan! In profit sharing plans or 401ks it is not mandatory

When are profit sharing plans attractive?

When profits of a corporation are low or they have unpredictable cashflows. They are also easy to install, administer and communicate to employees

When can any employee can in a 403(b) plan?

When the 403(b) plan only offers employee deferrals then a new employee is eligible to start today

Can a minor be named a beneficiary for a ROTH IRA?

YES!

Are contributions to Roth IRA's taxable?

Yes! They are not tax deductible

When can you postpone distributions until April 1 of the calendar year following your retirement?

You can do it for qualified plans but not for IRAs

Ineligible investment practice for an IRA

You can not short stocks, use options or trade on margin. Covered call writing is allowed

Taking the cash out of an IRA now

You can take 100% of the cash out of the IRA immediately but it will be taxed at your ordinary income assuming it was funded completely with pretax contributions

Are you taxed on after tax dollar contributions to an IRA?

You will not be taxed when withdrawing those funds but your gains or income will be taxed at the income tax rate. If it is a qualified withdrawal they are not taxed at all.