Unit 23: Qualified Plans

Roth IRA: Rollover

The rules are the same for Traditional and Roth IRAs. Remember that only one is allowed per rolling year per person. You cannot do a rollover in a traditional and another in a Roth.

Here is a partial list of defined contribution plans: (5)

1. 401k plans 2. 403b plans 3. Profit-sharing plans 4. Money purchase plans 5. SIMPLE plans

Roth IRA: Exceptions to the age limit are as follows (3)

1. Death (no penalty for the beneficiary) 2. Disability of the account owner 3. A first-time home purchase (up to $10,000) There is no RMD rule for Roth IRAs. Account holders can leave the money in their accounts until they die.

There are exceptions to the penalty (but not the taxes) if the distribution is due to: (6)

1. Death of the owner 2. Disability of the owner 3. first-time homebuyer for the purchase of a principal residence (up to $10,000) 4. education expenses for the taxpayer, spouse, child, or grandchild 5. medical premiums for unemployed individuals 6. medical expenses in excess of defined adjust gross income (AGI) limits.

Certain investment practices are also considered inappropriate for IRAs or any other retirement plan: (4)

1. Short sale of stock 2. Speculative option strategies 3. Tax-exempt municipal securities 4. Margin account trading However, covered call writing is permissible because it is a conservative way to generate investment income.

The following is a partial list of investments generally considered appropriate for IRAs: (6)

1. Stocks 2. Bonds 3. Mutual funds 4. Unit investment trusts (UITs) 5. Government securities 6. US Government-issued gold and silver coins

There are a number of qualified retirement savings plans that require sponsorship by an employer, and so are only available to employees. They are broadly divided into two types: (2)

1. defined benefit plans 2. defined contribution plans

If an account holder fails to take the RMD by the required date, the difference between any amount that was withdrawn and the RMD requirement will be subject to a ________________________ penalty.

50%

If a customer contributes more to an IRA than legally allowed, the customer will incur a ______________________________ based on the amount of the excess contribution every year until the excess amount is withdrawn.

6% penalty

Rollovers have a time limit of ___________ calendar days , not __________ months.

60; 2

The first RMD may be delayed to _____________________________ of the year after the account holder turns _____________. If the RMD is delayed this way, there will need to be a second distribution in that year by ____________________________________.

April 1; 72; December 31.

Transfer

A customer may do this with IRA assets from one IRA account to another IRA account. This is sometimes called a custodian-to-custodian transfer. There is not limit to the number of times a customer may do a transfer. If a customer moves money from an employer plan- such as a 401k- to an IRA, this is sometimes called a direct rollover. Be careful; this activity is actually a transfer and not a rollover.

Traditional IRAs: Contributions

An eligible individual may make contributions up to a maximum dollar amount (this amount can change from year to year as determined by the tax code), provided that the contribution does not exceed earned income for the year. The dollar cap is increased by a catch-up amount for individuals age 50 and older. Currently the catch-up amount is $1,000.00. Contributions may be made for a tax year as late as the first filing deadline in the following year, normally April 15th.

Roth IRA: Withdrawals

Distributions is where the Roth shines. Distributions of the cost basis are always tax free. Qualified distribution of income or gains in the account are also tax free. Nonqualified distribution of income or gains from the account are taxed as ordinary income and subject to a 10% penalty.

Withdrawals

Distributions may begin without penalty after age 59 1/2 and are generally add to ordinary income for tax purposes. Distributions before age 59 1/2 are subject to a 10% penalty, as well as regular income tax.

Roth IRAs

Introduced in 1997 as part of the Taxpayer Relief Act, (names after its principal sponsor, Senator William Roth) is a variation on the traditional IRA.

Roth IRA: Suitability

Roth IRAs are considered a good way to save for retirement for those who are younger (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 IRA.

Traditional IRAs: Investments

Within an IRA, investments can be made in stocks, bonds, investment company securities, US minted gold and silver coins, and many other securities. There are, however, certain investments that are considered ineligible for use in an IRA. Collectibles (antiques, gems, rare coins, works of art, stamps) are not acceptable IRA investments. Life insurance contracts may not be purchased in an IRA. Although life insurance is not allowed within IRAs, annuities are allowed. However, FINRA has expressed concern about the suitability of a tax-favored product (like an annuity) within a tax-favored account.

Roth IRAs: Contributions

rules for Roth IRAs are the same as traditional IRAs. It might be better to say that the two types have a combined limit. The limit to IRA contributions is for all contributions to all IRAs in a year. A customer cannot contribute the maximum in both a traditional and a Roth IRA. As with traditional IRAs, the contribution must come from earned income.

Qualified Plans

allow the earnings in the account to grow tax deferred. Individuals making a contribution to an IRA can take a tax deduction for the amount of the contribution if certain criteria are met. If an individual is not actively participating in other qualified plans, such as an employer's 401k plan, the full amount of the contribution to the IRA is deductible. 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 (AGI) climbs. the exact income levels above which tax-deductible contributions are prohibited is not critical for testing purposes because these levels are, by law, raised each year. However, contributions may still be made because the earnings on these amounts are still tax deferred.

Contributions to a Roth IRA are not deductible from _________________________________________.

current income

Defined benefit plans (traditional pension plans)

defines within the plan document the benefit it will pay to retirees. Often called pension plans. They 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.

Pension plans from private employers pay a ______________________________. Once the employee begins to collect benefits, the amount will not change. The beneficiary takes on ______________________________. Pensions from government agencies often include a cost-of-living adjustment (COLA).

fixed benefit; purchasing power risk

An additional limitation is that an investor's eligibility to contribute to a Roth IRA is phased out at ____________________________________, eventually falling to zero. The __________________________________________is not tested, but the concept may be. There is ________________________________ for contributions to a Roth IRA, though remember that contributions must be from earned income.

higher income limits; no age limit

Rollover

is when a customer withdraws and takes possession of IRA assets and the returns the assets back to an IRA (or other qualified account) within 60 calendar days. 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 and not per calendar year.

Contributions to IRAs are made out of earned income, not _________________________________________________. Note that there is not age limit for making ____________________________________.

ordinary income; IRA contributions.

Employers will use the services of an outside firm to determine how much the company needs to contribute to the plan to have ________________________________ to meet the defined benefit payments. Employers are required to make the payments ________________________________. This places the investment risk on the company, and many companies _________________________________________________.

sufficient assets; as defined in the plan; are moving away from these types of plans.

For a Distribution to be Qualified :Roth IRA

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 1/2 or older.

Among other DC plans, are more popular today because the investing risk is carried by _____________________________. The liability for the employer is much ________________________. Also, the assets in these plans are ___________________________ between employer plans, making them a better choice for a mobile work force that changes employers several times over an active career.

the employee; smaller; transportable

Roth IRA: Investments

the limitations for Roth IRA are essentially the same as for a traditional IRA.

Roth IRA: Transfer

the rules are the same as for traditional IRAs, but the transfer from a Roth account must be to a Roth account.

Required Minimum Distributions (RMDs)

these distributions are required beginning in the year the account owner turns 72 and annually by December 31 thereafter. The amount of this is based on the account values as of the end of the previous year. If an investor has more than one account that requires this, the total of all the accounts is used to determine the amount. The account holder may choose which account (or accounts) to take the distribution from.

Defined Contribution Plans

these plans define the amount that may be contributed to the plan. Employees in these plans will normally have a balance that they may invest in a mix of securities as defined within the plan. At retirement, employees may take possession of the assets in their account, often transferring the assets to an IRA for distribution during retirement. Employers may be required to contribute to the plan depending on the type of plan and the specifics of a particular plan.

Individual Retirement Accounts (IRAs)

were created as a way of encouraging people to save for retirement. All employed individuals, regardless of whether they are covered by a qualified corporate retirement plan, may open and contribute to this. They are not considered qualified plans by the IRS. Qualified plans require and employer sponsor. It is easier to think of them as a self-sponsored qualified plan, but technically they are not "qualified".