Unit 23: Qualified Plans

Suitability for roth ira

good way to save for retirement for younger people (more years of growth that may be tax free) and those in lower income tax brackets (for whom the current deduction has little value). Anyone who may not deduct a contribution to a traditional IRA would be better off putting money in a roth.

It is important to know that contributions to both IRAs are

not deductible from current income

Distributions from IRAs are taxed at

ordinary income tax rates on the full amount of the distribution.

Contributions to IRAs are made out of earned income, not

ordinary income.

Investments for traditional/roth IRA-

same investment limitations

Qualified plans allow the earnings in the account to grow tax deferred.

(tax deferred refers to interest, dividends, or capital gains)

a partical list of defined contribution plans:

-401k -403b -Profit-sharing plans -money purchasing plans -SIMPLE plans

All of the following are true of Roth IRAs except

Contributions may be deductible depending on income limits

Which of the following are true of Roth IRAs but not Traditional IRAs? A)Anyone with income may contribute. B)Distributions are required after reaching 72. C)Contributions are typically deductible. D)Distributions are not required after reaching 72.

D. Because distributions are not taxable on Roth IRAs, there are no required distributions. Roth IRAs have income limits and contributions to Roth IRAs are not deductible. Contributions to IRAs must come from earned income.

Which of the following are true of both qualified plans and nonqualified plans?

The accounts grow tax deferred.

Q: A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to a traditional IRA this year?

The current maximum allowed by the IRS, which will all be deductible.

Contributions for both Roth and Traditional

The limit to IRA contributions is for all contributions to all IRAs in a year. A customer cannot contribute the max in both IRAs. W/Traditional, the contribution must come from earned income.

Which of the following are true of qualified plans but not true of nonqualified plans?

The plan cannot discriminate.

Transfer- traditional/roth ira

same. but the transfer from a Roth account must be to a Roth account.

Rollverover-traditional/roth ira

same. Only one is allowed per rolling year per person. You cannot rollover in a traditional to another in a roth.

There is no age limit for contributions to a Roth IRA,

but contributions must be from earned income.

Roth IRA

It's a variation on the traditional iRA.

What is the penalty for not taking the required minimum distribution (RMD) for the year?

There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 50% of the amount missed.

The dollar cap is increased by a catch up amount for individuals age

50 and up. Currently, the catch up amount is $1k

Traditional IRA-transfer

A customer may transfer IRA assets from one IRA account to another. aka custodian-to-custodian transfer. There is no limit to the # of times a customer may do a transfer.

What is a big advantage Roth IRAs have over traditional IRAs?

Distributions are normally tax free

Traditional IRAs- Withdrawals

Distributions may begin w/o penalty after age 59.5 and are generally added to ordinary income for tax purposes.

Withdrawals-traditional/roth ira

Distributions of the cost basis are always tax free. Qualified distribution of income/gains in the account are also tax free. Non-qualified distribution of income/gains from the account are taxed as ordinary income and subject to a 10% penalty.

Direct rollover

If a customer moves money from an employer plan, like a 401k to an IRA

An additional limitation is that an investor's eligibility to contribute to a Roth IRA is phased out at higher income limits,

eventually falling to zero.

Traditional IRAs-Contributions

An eligible individual may make contributions up to a max $$ amount (this amt changes every year depending on the tax code)

Is covered call writing permissible?

Yes, b/c it is a conservative way to generate investment income.

Exceptions to the age limit for roth ira

-death (no penalty for the beneficiary) -Disability of the account owner -A first-time home purchase (up to 10k)

Q: Which of the following are true of qualified plans: 1. Contributions are not tax deductible 2. Contributions are tax deductible 3. Plan needs IRS approval 4. Plan does not need IRS approval

2 and 3 Qualified plans require IRS approval, and the contributions are tax deductible. Because nonqualified plans' contributions are not deductible, they do not require IRS approval.

What is the penalty, if any, for overcontribution to an IRA?

6%

Traditional IRA- rollover

Is when a customer withdraws and takes possession of IRA assets and then returns the assets back into an IRA within 60 calendar days.

Who is responsible for meeting the desired returns on a defined benefit plan?

the sponsor

Required Minimum Distributions (RMDs) for IRAs must begin

the year following the year the participant turns 70½.

As long as the customer successfully completes the rollover,

there are no tax implications for the withdrawal. A person is allowed to perform one rollover per rolling year, not per IRA or calendar year.

Distributions before age 59.5 are subject to

10% penalty, as well as regular income tax.

A 72-year-old customer has a $30,000 required minimum distribution (RMD) calculated to be taken from an IRA. If the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much in taxes and penalties will be owed?

$8,500 Failure to meet the required minimum distribution (RMD) results in a 50% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 50% penalty tax. $5,000 × 50% equals $2,500. Note that the IRS will force the distribution of the RMD shortfall ($5,000). In addition to the penalty, the ordinary income tax on the amount withdrawn must also be paid (20% × $30,000 = $6,000). Total tax liability on this withdrawal equals $8,500 ($2,500 penalty tax plus $6,000 ordinary income tax).

Rollovers have a time limit of

60 calendar days, NOT 2 MONTHS.

Traditional IRAs- Required min. distributions

Are required beginning in the year the account owner turns 72 and annually by Dec. 31st thereafter. The amount of the RMD is based on the account values as of the end of the previous year.

Who benefits more from a defined contribution plan?

Young employees

If an account holder fails to take an RMD by the required date,

any amount below the RMD amount will be subject to a 50% penality

For a distribution to be qualified,

the account holder must have held a roth IRA for at least 5 years before the distribution and the account holder must be age 59.5 or older.

If an individual is not actively participating in other qualified plans like a 401(K) plan,

the full amount of the contribution to the IRA is deductible.

If an investor has more than one account that requires RMDs,

the total of all the accounts is used to determine the amount. The account holder may choose which account(s) to take distributions from.

Exceptions to traditional IRA penalty before age 59.5:

-death of the owner -disability of the owner -first time homebuyer for purchase of a principal residence, up to 10k -education expenses for the taxpayer, spouse, child, grandchild -medical premiums for unemployed individuals -medical expenses in excess of adjusted gross income limits

Roth IRAs: 1. have no minimum required distributions at any age. 2. have higher contribution limits than those allowed for a traditional IRA. 3. allow the withdrawal of earnings tax free as long as the account has been opened for two years. 4. can be contributed to in the same year as a traditional IRA.

1 and 4 Roth IRAs have no minimum required distributions at any age. All earnings grow and may be withdrawn tax free as long as there has been an open Roth IRA for at least five years and the participant is at least age 59½. One may contribute to both a Roth and a traditional IRA in the same year, but the combined contribution may not exceed the annual maximum for any plan.

Certain investment practices are also considered inappropriate for IRAs or any other retirement plan

1. short sales of stock 2. speculative option strategies 3. tax-exempt municipal securities 4. margin account trading

Which of the following are available to participants in a 401(k) plan that are not available to IRA holders? 1. Tax deferral on the earnings 2. Hardship withdrawals 3. The catch-up provision for those who are age 50 and older 4. Loans against the vested balance

2 and 4.

No contributions are allowed starting with the year the account holder turns

70 and a half

Contributions to an IRA can be made up to which of the following dates?

April 15 of the year following the year the contribution is for. A contribution for tax year 2019 could be made until the tax filing dead line for the year which would be April 15, 2020. No extensions are available for contributions even if an extension is granted for filing the taxes.

Q: Which of the following is an acceptable investment for an IRA? A)Gold coins minted in Switzerland but sold in the U.S. B)A mutual fund specializing in speculative bonds C)A collection of medieval manuscripts and art D)A universal variable life insurance contract

B

Defined benefit plans (traditional pension plans)

defines within the plan document the benefit it will pay to retirees. Called pension plans. The plan will determine a benefit that retirees receive based on years of service, age, and salary at the time of retirement. The plan will replace a portion of the preretirement income.

For an individual covered by another qualified plan,

the portion deductible is determined by that person's income level. The tax deduction gradually phases out as the taxpayer's adjusted gross income climbs.

Traditional IRAs-investments

Within an IRA, investments can be made in stocks, bonds, investment company securities, U.S.-minted gold and silver coins and other securities

IRAs

All employed individuals, NOT qualified corporate retirement plan, may open and contribute to an IRA.

Although life insurance isn't allowed within IRAs,

annuities are. However, FINRA has expressed concern about the suitability of a tax-favored product (aka annuity) within a tax favored account.

In a defined benefit plan: 1. the benefit amount is fixed. 2. the benefit amount is variable. 3. the contribution amount is fixed. 4. the contribution amount can vary.

1 and 4

Investments that are ineligible for use in an IRA

1. collectibles (gems, rare coins, works of art, stamps, antiques) are NOT acceptable investments. Life insurance contracts may not be purchased in an IRA.

The following is a partial list of investments generally considered appropriate for IRAs:

1. stocks 2. bonds 3. mutual funds 4. Unit Investment trusts 5. Government securities 6. U.S. govt issued gold and silver coins

What is the penalty if any for over contribution to an IRA?

10% penalty is for early withdrawal 50% is for failure to make the minimum required distribution (MRD) for the year. Contribution of more the maximum amount in a year is 6%.

In a defined contribution plan the: 1. the benefit amount is fixed. 2. the benefit amount is variable. 3. the contribution amount is fixed. 4. the contribution amount can vary.

2 and 3 In a defined contribution plan the amount that the employer is depositing is fixed by the employer, but the employee chooses the investments so the benefit varies.

Q: All of the following are true of Roth IRAs except: A)Contributions may be deductible depending on income limits. B)Withdrawals are not required at age 70½. C)Contributions may be able to be made after 70½. D)Contributions are made after tax

A