Unit 16: Individual Retirement Accounts

10, exceed, 7.5, insurance, unemployed, disabled, first, levy, normal

10% EARLY WITHDRAWAL PENALTY A taxpayer may withdraw funds at any time from a traditional IRA account. However, distributions before age 59½ will generally be subject to an extra ___% excise tax, in addition to normal income tax on the amount distributed. EXCEPTIONS to the 10% penalty: • Unreimbursed medical expenses that ___ ___% of adjusted gross income •Distributions do not exceed the cost of the taxpayer's medical ___ while ___ •The taxpayer becomes ___ and dies •The distributions are used to buy, build, or rebuild a ___ home (up to $10,000) •The distributions are used to pay the IRS due to a ___ •Made as part of a series of substantially equal periodic payments •The distributions are made to a qualified reservist (an individual called up to active duty) •Qualified disaster distributions Even though distributions in these situations will not be subject to the additional 10% tax, they will be subject to income tax at the taxpayer's ___ rates.

beneficiary, own, fifth, 10

AFTER DEATH OF AN IRA OWNER Following the death of an IRA owner, the IRA usually passes to a ___. There are very different rules if the beneficiary is a surviving spouse, versus any other type of beneficiary (such as a child or a sibling). After the death of a traditional IRA's owner, a surviving spouse has two options: he or she can elect to treat the IRA as being his ___ by changing the ownership designation or roll over the IRA balance to his own IRA account or certain other types of retirement plans. For any beneficiary other than a surviving spouse, beneficiaries, the account balance must generally be fully distributed by the end of the ___ calendar year after the owner's death, or be paid as an annuity over the beneficiary's life expectancy beginning the year following the year of death (this is also called a "Stretch IRA" ). Note: The SECURE Act changes the rules for "Stretch IRAs" starting in 2020. Under the Secure Act, certain non-spousal beneficiaries must fully distribute inherited IRA within ___ years. However, this new rule does not take effect until January 1, 2020, which means current beneficiaries already taking RMDs from inherited accounts will not be affected.

due date, April 15, amended, wait, actually

CONTRIBUTION DEADLINES Contributions can be made to a traditional IRA at any time on or before the ___ ___ of the return (not including extensions). For the 2019 tax year, a taxpayer may make an IRA contribution up until ___ ___, 2020. However, if a contribution is reported on the taxpayer's return, but it is not made by the deadline, the taxpayer must file an ___ return. Example: Felton timely files his 2019 tax return on March 1, 2020, and claims a $4,000 deduction for an IRA contribution on the return. Felton may ___ as late as April 15, 2020, the due date of the return, to ___ make the IRA contribution.

income, employer, limited, traditional, 8606

DEDUCTIBILITY OF TRADITIONAL IRA CONTRIBUTIONS A taxpayer may not be able to deduct all of his traditional IRA contributions. Deductibility is based on ___, filing status, and whether the taxpayer or his spouse is covered by an ___ retirement plan at work. A taxpayer with qualifying compensation is permitted to contribute to a traditional IRA regardless of whether he or his spouse is covered by an employer, retirement plan; however, the deductibility of the contribution may be ___. This only applies to ___ IRA contributions, because Roth IRA contributions are never tax-deductible. If a taxpayer makes nondeductible contributions to a traditional IRA, he must attach Form ___, Nondeductible IRAs.

7000, 8606, nondeductible

DEDUCTIBILITY OF TRADITIONAL IRA CONTRIBUTIONS Example: Henrietta, age 61, works full-time as a restaurant manager. Her employer does not offer a retirement plan. Henrietta's husband, Kirk, 62, is a welder who is also not covered by a retirement plan at work. Both spouses have a traditional IRA. Their joint AGI in 2019 is $105,000. Since they are over 50 years of age, they can contribute and deduct a traditional IRA contribution up to $___ (each) for 2019, no matter how much they earn. Example: Julie is single and earned $109,000 in 2019. She is covered by a 401(k) retirement plan at work, but she also wants to contribute to a traditional IRA. She is phased out for the deduction because her MAGI exceeds the threshold for single filers covered by an employer plan. If she contributes to a traditional IRA in 2019, she must file Form ___ to report her ___ contribution. She is still allowed to contribute to a traditional IRA, but the amounts would not be deductible on her Form 1040.

permanent, cannot, recharacterization,

EXAMPLE: RECHARACTERIZATIONS Example: On June 1, 2019, Lawrence converts his traditional IRA to a Roth IRA. However, his investments perform poorly, and his account loses value after the conversion. He wants to go back and change his mind. However, since he converted his traditional IRA to a Roth in 2019, the conversion is ___. He ___ undo the conversion. Example: Example: Curtis is age 50 and unmarried. He does not have a retirement plan at work. On February 1, 2019, he made a $7,000 contribution to a Roth IRA for the 2019 tax year. He later sells a large block of stock at a large gain in his regular (non-IRA) brokerage account in 2019, and after the year discovers his 2019 MAGI is $160,000, which is in excess of the maximum permitted to be eligible to contribute to a Roth. By the time he discovers his error, it is March 5, 2020. He moves the entire contribution into a traditional IRA by making a trustee-to-trustee transfer. This is not a "rollover," it is a ___. Curtis has recharacterized the prohibited Roth IRA contribution. He will avoid the 6% excess contribution penalty that would otherwise apply to his earlier improper Roth contribution

MFS, 3600, jointly, 50

EXAMPLE: IRA CONTRIBUTIONS Example: Falco is 35, works full-time, and earned $55,000 in wages during the year. His wife, Danielle, is 34 and earned $3,600 in 2019. They choose to file ___. Therefore, Danielle is limited to a $___ IRA contribution, the amount of her qualifying compensation. Falco may contribute the full $6,000 (the 2019 limit for his age) to his own IRA account. Example: Derrick, 49, and Elaine, 51, are married and file ___. Derrick works as a paramedic and makes $76,000 per year. Elaine is a homemaker and has no taxable income. Even though Elaine has no qualifying compensation, they may contribute to her IRA account. Their combined maximum contribution for 2019 is $13,000. Derrick may contribute $6,000 to his IRA, and Elaine may contribute $7,000 to her IRA because she is over ___ years old. This special rule only applies if married taxpayers file jointly.

combined, wages, 7000

EXAMPLE: MFJ/QUALIFYING COMPENSATION For married taxpayers filing a joint return, the combined IRA contributions cannot exceed their ___ qualifying compensation. Example: Gilbert and Doreen are both age 49 and married. Gilbert has $23,000 of passive rental income for the year. Doreen has $18,000 of dividend income and $7,000 of wages. Only Doreen's ___ count as qualifying compensation for purposes of an IRA contribution. If they file jointly, they can contribute a maximum of $___ to their IRAs. One of them can contribute up to the maximum annual amount ($6,000), and the other can contribute up to $1,000 (equal to the remaining amount of Doreen's qualifying compensation), or they could split the $7,000 in another manner.

50, 3000, april 1

EXAMPLE: RMDS Example: Lorena reaches age 70½ in 2019 (she was born on January 2, 1949). Her first RMD must be distributed to her by April 1, 2020, to avoid the ___% excise tax. At the end of the year, her IRA account balance was $79,500. The applicable distribution period per the IRS tables for someone her age (71) on that date is 26.5 years. Her required minimum distribution for 2019 is $___ ($79,500 ÷ 26.5). She must withdraw this amount from her IRA no later than ___ __, 2020.

indirect, 20, nontaxable, rollover, 4b

EXAMPLE: ROLLOVER RULES Example: Sheldon quits his old job on September 1, 2019. On October 14, 2019, Sheldon begins a new job, which happens to be with a competitor of his old employer. He has an existing retirement account at his old employer. He decides to transfer the balance of his traditional IRA account to his new employer's retirement plan. Rather than disclose any information about his new workplace to his former boss, Sheldon decides to receive a direct distribution from his IRA of $60,000 in cash and $50,000 in stock. On October 30, 2019, Sheldon deposits the entire amount of $110,000 (cash and stock) into his new employer's retirement plan. Because this was an ___ rollover, Sheldon was forced to replace the ___% that was withheld with his own savings. Because the transaction is completed within 60 days, it is completely ___, and any withheld amounts will be returned as a tax credit in the year he reports the rollover. The rollover must be reported on Form 1040, Lines 4a and 4b and by including "___" next to Line ___.

cannot, lump, five, waived,

EXAMPLES: AFTER DEATH OF AN IRA OWNER Example: Pauline, who was unmarried and had no children, died on April 30, 2019. At the time of her death, Pauline had a traditional IRA worth $102,000. The beneficiary of her IRA is her brother, Rudy, age 42. Although he ___ rollover her IRA into his own IRA, since he is not Pauline's spouse, Rudy can choose how he receives the IRA proceeds. Rudy can choose a ___ sum distribution, a ___-year distribution, or a "Stretch IRA" payout (an annuity paid over his lifetime). No matter what type of distribution Rudy selects, the amounts he withdraws from the IRA will be subject to income tax. However, the 10% early withdrawal penalty is ___ for a beneficiary of an IRA when the original IRA owner has died, (regardless of how old the beneficiary is).

directly, trustee-to-trustee, within, jobs, business, 20, credit

INDIRECT VS. DIRECT ROLLOVER RULES It is not uncommon for employees to roll funds from one retirement plan to another, especially after a job change. When employees leave a job that had an existing retirement plan, the employee will often roll over their existing plan (such as an employer's 401k) into a traditional IRA. With a direct rollover, the funds from the taxpayer's current retirement account are transferred ___ to a new retirement plan. This is also called a "___-___-___" transfer. With an indirect rollover, it is up to the employee to redeposit the funds into the new IRA or other qualifying retirement account ___ the mandatory 60-day period to avoid penalty. A "indirect" rollover of a retirement account may be requested when an employee changes ___ or leaves a job to start an independent ___, but does not want to share information with his former employer. With an indirect rollover, the employer generally withholds ___% of the amount that is pending transfer in order to pay the taxes due. This withholding is mandatory, even if the taxpayer intends to roll it over. If the taxpayer does roll it over and wants to defer tax on the entire taxable portion, he will be forced to add funds from other sources equal to the amount of tax withheld. This money is returned as a tax ___ for the year when the rollover process is completed.

traditional, roth, changes

INDIVIDUAL RETIREMENT ACCOUNTS In this unit, we primarily cover ___ individual retirement arrangements (traditional IRAs) and ___ IRAs, as they are tested heavily on Part 1 of the EA exam. We will cover other retirement plans for businesses in Part 2. Congress passed the SECURE Act on December 20, 2019, which made a significant number of ___ to retirement plans. However, most of the retirement plan provisions in the SECURE Act do not take effect until after January 1, 2020.

taxable, does not, rollover, disaster

IRA CONTRIBUTION LIMITS The limits for contributions to an IRA in 2019 are the lesser of qualifying ___ compensation (as described below) or the following amounts: $6,000 per taxpayer ($7,000 if age 50 or older) Taxpayers filing MFJ (even if only one had compensation): $12,000 (or $14,000 if both spouses are age 50 or older) This yearly IRA contribution limit ___ ___ apply to: ___ contributions (rolling over from one IRA account to another) Qualified reservist repayments Repayments of qualified ___ distributions

nontaxable, one, limited, not, 60, 60

IRA ROLLOVER RULES A rollover is a transfer from one retirement plan to another retirement plan or account. If executed properly, most rollovers are ___ events. A taxpayer can make only ___ rollover from an IRA to another IRA in any twelve-month period, regardless of the number of IRAs the taxpayer owns. There are two exceptions to this rule: • Trustee-to-trustee transfers between IRAs are not ___. • Rollovers from a traditional IRA to a Roth IRA are ___ limited. If a taxpayer receives an IRA distribution and wishes to make a nontaxable rollover, he must complete the transaction by the __th day following the day he receives the distribution. The "60-day rollover rule" applies to indirect rollovers of a qualified retirement account, such as an IRA or 401(k). Once a taxpayer takes a distribution from their account, they won't owe any interest or penalties as long as the money is redeposited into another qualified retirement account within ___ days.

jointly, own, qualifying, compensation

MFS/JOINT FILERS IRAs cannot be owned ___. Therefore, each spouse must have their ___ IRA account. However, a married couple filing jointly may contribute to each of their IRA accounts, even if only one taxpayer has ___ compensation. This is also called a "spousal IRA contribution." If married taxpayers choose to file separately, they must consider only their own qualifying ___ for IRA contribution purposes.

life, artwork, coins, S, real,

PROHIBITED IRA INVESTMENTS Almost any type of investment is permissible inside an IRA, including stocks, bonds, and real estate. However, there are some investments that are prohibited. For example, the law does not permit IRA funds to be invested in ___ insurance or collectibles. If the taxpayer invests in any of these using IRA funds, it is treated as a prohibited transaction. The following investments are prohibited: Collectibles and jewelry, such as: ___, antiques, baseball cards, uncut gemstones, or comics Precious metals, ___, and gemstones (exceptions exist for U.S. coins and bullion) ___ corporation stock Life insurance contracts ___ Estate for personal use There is a narrow exception for investments in gold and silver coins minted by the U.S. Treasury Department. Investments in certain gold, silver, palladium, and platinum bullion are also allowable.

prohibited transaction, taxable income, 10

PROHIBITED TRANSACTION Although occurrences of prohibited transactions are rare, the consequences can be catastrophic. If a prohibited transaction occurs at any time during the year, normally the account ceases to be treated as an IRA, and its assets are treated as if having been wholly distributed on the first day of the year. Example: Zamir, age 40, has a self-directed IRA account. The fair market value of Zamir's traditional IRA was $300,000 as of January 1, 2019. He had previously made $200,000 of nondeductible contributions to his IRA, so that was his basis in the account. On January 10, 2019, Zamir borrowed $150,000 from his IRA to purchase a vacation home for himself. This is a ___ ___, and Zamir's entire IRA account will no longer be treated as an IRA from the date of the withdrawal. Since the FMV of the IRA on the first day of the year, $300,000, is greater than Zamir's basis, $200,000, the excess amount of $100,000 is reported as ___ ___. Zamir would also be subject to the additional ___% penalty for withdrawing funds before the age of 59½.

improper use, IRA loan, security, personal, leasing, compensation, disqualified

PROHIBITED TRANSACTIONS Generally, a prohibited transaction is the "___ ___" of an IRA by the owner, a beneficiary, or a disqualified person (typically a fiduciary or family member). Prohibited transactions related to an IRA include: Personally borrowing money from the IRA (i.e., there is no such thing as an "___ ___," although some types of retirement plans do allow limited borrowing, traditional IRAs do not) Using it as ___ for a loan Buying property for ___ use with IRA funds Selling, ___, or exchanging property to the IRA account Accepting unreasonable ___ for managing property or assets held by the IRA Granting account fiduciaries to obtain, use, or borrow against account assets for their own gain Transferring plan assets, lending money, or providing goods and services to "___ persons," usually a close family member, or a business that a close family member owns and controls. Note: Prohibited transactions are rare occurrences, and they generally only occur when a taxpayer has a "self-directed" IRA. A self-directed IRA is a type of account that offers a taxpayer the ability to use his retirement funds to make almost any type of investment without requiring a financial institution or another custodian. For the purposes of the prohibited transaction rules, "family members" includes the taxpayer's spouse, parents, grandparents, children; and grandchildren and spouses of the taxpayer's children and grandchildren. Family members do not include in-laws, cousins, friends, aunts, uncles, siblings, and stepsiblings.

alimony, combat, child, rental, interest, gambling, compensation,

QUALIFYING COMPENSATION For purposes of making an IRA contribution, taxable alimony (but not child support payments) counts as qualifying compensation. This allows taxpayers to build retirement savings in IRAs even if they rely on ___ income for support. Nontaxable ___ pay also qualifies as compensation for this purpose. "Compensation" for purposes of contributing to an IRA does NOT include: • ___ support or nontaxable alimony • ___ income (except when earned by a real estate professional) • Dividend and ___ income • Pension or annuity income • Deferred compensation • Prize winnings or ___ income • Items that are excluded from income, such as certain foreign earned income and excludable foreign housing costs (except for nontaxable combat pay) Note: Starting after December 31, 2019, the SECURE Act allows certain taxable stipends and non-tuition fellowship payments received by graduate students to be treated as "___" for IRA purposes. However, this provision will not become effective until the 2020 tax year. For the 2019 tax year, taxable fellowships and scholarships are not considered "qualifying income" for IRA contribution purposes

never, reversed, error

RECHARACTERIZATIONS In the past, a taxpayer was able to "undo" or reverse a rollover or conversion of one type of IRA to a different type of IRA through a recharacterization. Essentially, by recharacterizing an IRA, it is as if the conversion or rollover ___ occurred. The Tax Cuts and Jobs Act eliminates the option to recharacterize, or "unwind" an earlier Roth conversion. This means that a Roth IRA conversion made in 2019 or later year, cannot be ___. Some types of recharacterizations are still permitted under the TCJA. For example, a recharacterization is allowed for fixing certain mistakes, or to correct an ___ in their IRA contributions. A client can use the recharacterization rules to fix an invalid contribution or an invalid rollover, for example.

distributed, delayed, December 31, tables, old, 2019, 5329

REQUIRED MINIMUM DISTRIBUTIONS (RMDS) A person cannot keep funds in a traditional IRA account indefinitely. When the account owner reaches 70½ years of age, the funds must be ___ in annual required minimum distributions (RMDs). The first RMD payment can be ___ until April 1 of the year following the year the taxpayer turns 70½. The distribution for each subsequent year must be made by ___ ___. The amount of each RMD is based on IRS ___. Note: The SECURE Act changes the rules for RMDs starting in 2020. If a taxpayer was born between January 1, 1949 and June 30, 1949, that taxpayer is subject to the ___ rules, because they reached 70½ in 2019 and therefore are subject to a 2019 RMD. For their first (2019) RMD, the taxpayer has the option of taking the withdrawal either before the end of ___ or delay the first RMD until April 1, 2020. Failure to take an RMD can result in a penalty tax equal to 50% of the amount the taxpayer should have withdrawn but did not. He must file Form ___, Additional Taxes on Qualified Plans, to report the excise tax that applies as a result of the failure to take the RMD.

would not, subtracted, 10000

SELF-EMPLOYMENT LOSSES If a person's only qualifying compensation for the year is from self-employment and the self-employment activity generates a loss for that year, he ___ ___ be able to contribute to an IRA. However, if the taxpayer has wages in addition to self-employment income, a loss from self-employment would not be ___ from the wages when figuring total "qualifying" compensation income for purposes of determining his IRA contribution. Example: Florence is 45 and earns $10,000 of wages working part-time for a library. She also works as a self-employed photographer, but her photography business has a net loss of ($5,400) for the year. Even though Florence's net income for the year is only $4,600 ($10,000 wages - $5,400 loss from self-employment), her "qualifying compensation" for purposes of an IRA contribution is still $____, the amount of her wages. This means that Florence can make a full IRA contribution, assuming she has enough available funds to do so.

traditional, received, basis, penalty, 10, five, after

TAXABILITY OF IRA DISTRIBUTIONS Distributions from a ___ IRA are generally taxable in the year they are ___. The rules are different for Roth IRA distributions. A taxpayer can withdraw their regular Roth IRA contributions (their ___, but not the earnings) at any time and at any age with no ___ or tax. However, withdrawing earnings before age 59½ may result in a ___% early withdrawal penalty. In order to qualify for completely tax-free and penalty-free withdrawal, Roth IRA distributions generally must meet a ___-year holding requirement and occur ___ age 59½, although there are exceptions for disability or death of the IRA owner.

under, wages, phased, deduct, deductible, limit

TRADITIONAL IRA RULES To make contributions to a traditional IRA: •The taxpayer must be ___ age 70½ at the end of 2019. •The taxpayer must have qualifying taxable compensation, such as ___, salaries, commissions, tips, bonuses, or self-employment income. If either the taxpayer or his spouse is covered by an employer plan and his income is too high, his deductible IRA contribution will be ___ out. However, as long as a taxpayer has qualifying compensation and is below 70½ years of age, he may contribute to a traditional IRA (although he may not be able to ___ the contribution). Note: If the taxpayer (or their spouse) does not participate in a retirement plan at work, their traditional IRA contribution is fully ___ up to their allowable contribution ___.

not taxed, adjustment, gross income, higher, after-tax, not, taxed

TRADITIONAL VS ROTH Traditional IRA: Amounts in a traditional IRA, including contributions and earnings, are generally ___ ___ until they are distributed. Typically, a taxpayer can deduct his traditional IRA contributions as an ___ to ___ ___. However, the deduction is phased out at ___ income levels, when the taxpayer (or the taxpayer's spouse) is also covered by a workplace retirement plan. Roth IRA: Contributions to a Roth IRA are paid with ___-___ income and are ___ deductible. In contrast to a traditional IRA, withdrawals from a Roth IRA are generally not ___. Income limits apply in determining who is eligible to participate in a Roth IRA. However, there is no income limit for taxpayers who wish to convert their traditional IRA to a Roth.