Course 5 Module 5 Other Tax-Advantaged Retirement Plans

what are the conditions for an employer to deduct employer contributions?

-100 or less employees on any day of the year (only employees with more than 5k income are counted) -Employees who earned at least $5,000 from the employer in any two preceding years, and are reasonably expected to earn at least $5,000 in the current year, can contribute through salary deduction up to $13,500 (2021), annually. -Participants who have reached the age of 50 during the plan year may be permitted to make catch-up contributions of $3,000 additional to the limits listed above.

what are the advantages of a SEP IRA?

-A SEP can be adopted by completing IRS Form 5305-SEP rather than by the complex procedure required for qualified plans. -employees are always 100% vested in their benefits -The employer is even free not to make any contribution to the plan in a given year.

what are the SEP IRA coverage requirements?

-A SEP must cover all employees who are at least 21 years of age and who have worked for the employer during three out of the preceding five calendar years. -Contributions need not be made on behalf of employees whose compensation for the calendar year was less than $650 (2021). -The plan can exclude employees who are members of collective bargaining units if retirement benefits have been the subject of good faith bargaining.

what is the employer required to make as a contribution equal to in each account?

-A dollar for dollar matching contribution up to 3% of the employee's compensation (the employer can elect a lower percentage, not less than 1%, in no more than two out of the five years ending with the current year), or -2% of compensation for all eligible employees earning at least $5,000 (whether or not they elect salary reductions).

which employers qualify for the 403(b) salary reduction catch-up?

-An educational organization, A hospital, A home health care agency, A health and welfare service agency, or A church, synagogue or related organization, service catch up is 3000 (2021)

what are the tax implications of a SEP IRA?

-An employer can deduct contributions to a SEP up to 25% of the total payroll of all employees covered -Each individual can receive and exclude from income the lesser of 25% of the employee's income or $58,000 (2021). -elective deferrals in Salary Reductions SEPs are not included for purposes of the employer's deduction limit.

when are SIMPLE IRAs used?

-An employer has 100 or fewer employees and wants an easy-to-administer plan funded through employee salary reductions, or -An individual has a relatively small amount of self-employment income, and the SIMPLE IRA contribution limit is higher than that available for any other form of tax-favored plan, such as a Keogh plan or SEP.

what are the investment options in a 403(b)?

-Annuity contracts purchased by the employer from an insurance company, or -Mutual fund (regulated investment company) shares, held in custodial accounts.

Additional nondiscrimination requirements apply to plans of private nonprofit organizations, that is, these do not apply to government or church plans. what are those requirements?

-Contributions or benefits must not discriminate in favor of highly compensated employees. -The plan must meet the nondiscrimination rules for employer contributions and matching contributions. -The plan's coverage must meet certain percentage tests. -Integration with Social Security is governed by Code Section 401(a)(5), although Social Security integration is rarely used in 403(b) plans.

describe the tax consequences and contribution limits of a Coverdell ESA?

-Contributions that cannot exceed the annual cumulative limit of $2,000 (2021) must be made in cash -Contributions are not tax-deductible -withdrawals for education are penalty and tax free -contribution phase outs apply

what are the disadvantages of a SEP IRA?

-Employees cannot rely upon a SEP to provide an adequate retirement benefit. -Distributions from SEPs are not eligible for special averaging available for certain qualified plan distributions. -Employers often see the immediate vesting of their contributions as a disadvantage.

what are the disadvantages of a SIMPLE IRA?

-Employees cannot rely upon a SIMPLE IRA to provide an adequate retirement benefit. -Annual contributions are generally restricted to lesser amounts than would be available in a qualified plan. -Distributions from SIMPLE IRAs are not eligible for special 10-year averaging available for certain qualified plan distributions. -If an employer adopts a SIMPLE IRA plan, it cannot also maintain a qualified plan, SEP, 403(a) annuity, 403(b)

what are the tax implications of a SIMPLE IRA?

-If an organization maintains a SIMPLE IRA plan, it has restrictions in maintaining other plans. -Employer contributions are made directly to the employee IRA as salary contributions. -salary contributions of employees are subject to Social Security taxes.

what are the disadvantages of a Keogh plan?

-RMDs -if more-than-5% owner, payments must begin by April 1 of the year after attainment of age 72, regardless of whether the participant has retired.

who is considered an eligible beneficiary for the purpose of inheriting an IRA without the 10 year distribution requirement?

-Surviving spouses -Chronically ill or disabled beneficiaries -Minor children, up to the age of majority (not grandchildren) -Individuals not more than 10 years younger than the IRA owner (such as a sibling)

what are the Roth 403(b) distribution rules that contrast with the Roth IRA rules?

-Withdrawals of less than the full amount of the account are made pro-rata with a portion of each withdrawal being taxable and tax-free. This is markedly different than the Roth-IRA distribution FIFO rules. -Direct Transfers from a Roth 403(b) to another Roth 403(b) plan are permitted. However, if a distribution (rather than a direct transfer) of Roth 403(b) money is taken, the proceeds can only be rolled over into a Roth-IRA (within sixty days). -If loans from a Roth 403(b) should default, the outstanding balance will be treated as fully taxable plus a 10% excise tax even the portion of the loan balance that represented after-tax Roth 403(b) contributions!

If an employer maintains a SIMPLE IRA, what other plans can it not have?

-a qualified plan, -SEP, -403(a) annuity, -403(b) tax-sheltered annuity or a governmental plan other than a Section 457 plan, for that year.

disadvantages of a 403(b) plan

-account balances at retirement age may not provide adequate retirement savings for employees -403(b) funds are in large part invested in low risk annuity contracts

what are the details of a profit sharing plan?

-annual contribution of any amount up to 25% of covered compensation of plan participants can be made -Plan contributions can even be omitted entirely in a bad year (although contributions must be substantial and recurring)

describe what the 403(b) Lifetime Catch-up provision is

-called the 15-year rule in IRS publication 571 and allows for an additional $3,000 (2021) to be contributed. This is in addition to the over 50 catch-up provision of $6,000 (2021). -salary reductions in a 403(b) plan are subject to catch-up provisions that allow certain employees with 15 or more years of service to contribute in excess of the elective deferral limit.

what is the order of withdrawals for a Roth IRA

-contributions -conversions (FIFO) -gain

what is the main disadvantage of a traditional to Roth IRA conversion?

-conversion amount is taxable in that year as ordinary income. -The 10% premature distribution penalty for withdrawals prior to age 59½ will apply to all nonqualified distributions that are attributable to taxable conversion amounts, and earnings thereon, which are distributed within the five-year period beginning with the year the contribution was made.

advantages of a traditional IRA

-deductible from current income -over 50 catch up provision

what are the advantages of a SIMPLE IRA?

-employees are always 100% vested in their benefits -SIMPLE IRAs can be funded in part through salary reductions by employees if certain conditions are met. -Individual IRA accounts allow participants to benefit from good investment results

assuming the employer organization is eligible, the positive indications for a 403(b) plan are:

-employer wants to provide a tax-deferred retirement plan for employees but can afford only minimal extra expense beyond existing salary and benefit costs -A 403(b) plan can be funded entirely from employee salary reductions except for installation and administration costs, which must be paid for by the employer. -When an employer wants an attractive, savings-type supplement to its existing defined benefit or other qualified plan. -In-service withdrawals by employees are permitted.

what are the active participants restrictions for an IRA if one spouse is an active participant and the other isn't?

-if they are MFJ and MAGI is above 208k (2021) then neither can make deductible contributions -if they are MFJ the active participant is subject to the 105k-125k threshold -

what is a SAR-SEP IRA?

-it is a salary reduction separate employee pension -discontinued in 97' but some plans are grandfathered in

when is a Keough plan used?

-long-term capital accumulation, particularly for retirement purposes, is an important objective of a self-employed business owner. -An owner of an unincorporated business wishes to adopt a plan providing retirement benefits for regular employees as an incentive and employee benefit, as well as retirement savings for him or herself. -A self-employed person wants to shelter current earnings from federal income tax. -An employee has self-employment income as well as income from employment and wishes to invest as much as possible of the self-employment income and defer taxes on it.

when is a traditional IRA used?

-need to shelter current compensation or income -when desirable to defer taxes on investment income -long-term accumulation is an objective -supplement or alt to a qualified pension or profit sharing plan

what is the tax consequence of a nondeductible contribution to a Traditional IRA?

-nondeductible contributions will be free of tax when distributed -income earned on such contributions will be taxed -if an IRA has deductible and nondeductible contributions the amount withdrawn will be treated partly tax free and partly taxable

in what instances does premature distribution penalty not apply

-over 59 1/2 -to bene after death -to pay for participant's disability -72(t) payments -distributions for medical expenses exceeding 7.5% AGI -distributions to pay health insurance if participant is unemployed -distributions for higher education costs for taxpayer, spouse, child, or grandchild -distributions to pay acquisition costs of a first home up to 10k

explain the features of the first time home buyer exception for Roth IRAs.

-purchase principal residence -can be used if a principal residence was not owned within the preceding two years -exception can be used more than once -$10k lifetime limit.

upon death of the owner of a Roth IRA, who are the individuals that are not subject to the 10 year distribution rules?

-surviving spouse -disable or chronically ill individuals -individuals not more than 10 yrs younger than owner -child who has not reached age of majority

disadvantages of a traditional IRA

-taxes as ordinary income when withdrawn -phase outs if they are an active participant in an employer sponsored plan -withdrawals have 10% penalty if premature -RMDs are required by April 1st of the year after reaching 72

what is the SIMPLE IRA early withdrawal penalty?

-the 10% penalty on premature distributions is increased to 25% during the first two years of participation. -a SIMPLE IRA to a traditional IRA during the first two years of participation is permitted only in the case of distributions to which the 25% early distribution penalty does not apply.

explain the difference between the Roth IRA contribution 5-year rule and the conversion 5-year rule

-the 5 year contribution rule is that the clock starts after any contribution is made to any Roth account -the 5 year conversion rule is that the clock starts with every conversion and each hold their own clock before they can be accessed penalty free

when contributions are made as nondeductible into a traditional IRA, who's responsibility is it to prove the contributions were nondeductible when it is time for withdrawal?

-the IRS will assume all money withdrawn from traditional IRA account is fully taxable unless proven otherwise by the taxpayer.

when are SEP IRAs used?

-when the employer is looking for an alternative to a qualified profit sharing plan that is easier and less expensive to install and administer -Qualified plans must be adopted before the end of the year in which they are to be effective. But, on the other hand, SEPs can be adopted as late as the tax return filing date for the year (including extensions) in which they are to be effective. So, when an employer wants to install a tax-deferred plan, and it is too late to adopt a qualified plan for the year in question, SEP is the best bet.

Generally, contributions to an Coverdell ESA must be made on or before the beneficiary attains what age?

18

what is a short summary of a HR10 (Keogh) Plan?

A Keogh plan, sometimes referred to as an HR10 plan, is a qualified retirement plan that covers one or more self-employed individuals. A self-employed individual is a sole proprietor or partner who works in his or her unincorporated business.

In general, any type of qualified plan can be designed to cover self-employed persons. However, the typical Keogh plan covering one self-employed person, and possibly the spouse of the self-employed person, as well as a few employees, is usually designed as one of these plans.

A profit sharing plan, A money purchase plan, A target benefit plan, or A defined benefit plan.

are employer and employee contributions to a SIMPLE IRA subject to the Social Security Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes.

Employer, no employee, yes

if a 58 year old person opens and contributes to a Roth IRA on 1/1/2020, when can they take the withdrawal of the gain in the account without penalty?

I believe the answer is 1/1/2025 even through they are going to be over the age of 59 1/2. The distribution must be made after the five-year period beginning with the first taxable year in which the individual made a Roth IRA contribution.

with an employer-sponsored IRA, Contributions to the IRA can be made either as additional compensation from the employer or as a salary reduction elected by the employee. If they are extra compensation then who gets the tax deduction?

If the employer contributes extra compensation, it is taxable to the employee, but the employee may be eligible for the IRA deduction.

The maximum annual additions limit to a defined contribution plan on behalf of a participant in 2021 is:

Lesser of 100% of compensation or $58,000

Mabel earns $75,000 annually. Her husband, Al, has no earned income, although he has investment income in excess of $100,000 annually. Neither spouse has attained age 50 and neither is an active participant in an employer-sponsored retirement plan. How much can Mabel contribute and deduct?

Mabel can contribute and deduct up to $6,000 to an IRA for her and up to $6,000 to an IRA for Al, for a total of $12,000, provided they file a joint return. -To qualify, the couple's AGI needs to be under the current $198,000 - $208,000 (2021) threshold.

What does the acronym SIMPLE IRA stand for?

Savings Incentive Match Plans for Employees

who uses a 403(b) plan?

The 403(b) plan (TSA) is most commonly used by: tax-exempt entities such as -public schools, -colleges, -universities, -churches -hospitals.

If I decide to convert my traditional IRA to a Roth IRA, can I move the money back to a traditional IRA within the same year?

The Tax Cuts and Jobs Act tax reform bill has removed the ability to recharacterize any Roth IRA conversions done in 2018 and onward.

the secure act did away with the stretch IRA, when must the assets be distributed now?

Unless the beneficiary is an "eligible designated beneficiary," the entire inherited account balance must be distributed within 10 years after the date of death.

are the first distributions from a Roth IRA from the gain in the account or from the principal?

Unlike a traditional IRA, distribution from a Roth IRA are first considered return of principal and thus nontaxable, even before age 59½.

if you file an extension on your taxes does that extend your window to contribute to an IRA for that tax year?

hell no

if a client makes a Roth IRA contribution on 4/1/2020 for the 2019 tax year, when does the 5 year period begin and end?

it begins 1/1/2019 it ends 1/1/2024

does MAGI include taxable income from a conversion of a traditional to a Roth IRA?

no

are employers required to contribute to a SEP?

no, -The recurring and substantial contributions requirement applicable to qualified profit sharing plans has no effect on SEPs, so SEP contributions are more flexible than those to a qualified plan.

are direct employer contributions to a SEP IRA subject to Social Security taxes and federal unemployment taxes?

no, -The impact of state payroll taxes depends on the particular state's laws. Both salary reductions and employer contributions may be exempt from state payroll taxes in some states.

will participation in a 457 Plan affect the deductibility of an IRA contribution?

no, -participant in a Section 457 plan is not considered an active participant for IRA contribution deduction purposes.

are there restrictions on contributions to a Roth IRA based on whether or not that person is an active participant in an employer sponsored plan?

no, Income phase outs apply but not based on active/not

if you convert a traditional IRA to a Roth IRA, does that affect the amount you can contribute to a Roth IRA for that tax year?

no, Rollovers and conversions do not affect

can an employer discriminate when it comes to employer contributions to a SEP IRA?

no, The employer contribution, if made, must be allocated to plan participants under a written formula that does not discriminate in favor of highly compensated employees. -In the allocation formula, only the first $290,000 (2021) of each employee's compensation can be taken into account. -SEP allocation formulas can be integrated with Social Security under the integration rules applicable to qualified defined contribution plans.

does investment income count as income toward being able to contribute to a Traditional IRA?

no, investment income is not included.

are distributions from a Roth IRA open for less than 5 years taxable upon the owner's death?

partially yes, -the gain would be taxable at the owner's death.

Participation in which retirement plans may affect the deductibility of an IRA?

qualified retirement plans -simplified employee pensions (SEPs), -Section 403(bs) -tax - deferred annuity plans -SIMPLE IRAs.

what are the IRA active participant AGI phase-out ranges for 2021? what if you are inside the range?

single: 66k-76k MFJ: 105k-125k MFS: 0-10k -The reduction in the maximum annual deductible contribution amount in the phase-out AGI region is proportional to the amount by which the AGI exceeds the lower limit.

what is the age limit to Roth IRA contributions?

there is no age limit to Roth IRA contributions

Minnie (age 35) and Bill (age 40), a married couple, each earn $75,000 annually. Neither is an active participant in any qualified plan, SEP, Section 403(b) plan, or SIMPLE IRA. For 2021, how much can Minnie and Bill can each contribute and deduct to their own IRA?

up to $6,000 to their own IRA plan (a total of $12,000 combined). -To qualify, the couple's AGI needs to be under the current $198,000 - $208,000 (2021) threshold.

are taxable alimony payments considered earned income?

yes

is alimony received pursuant a divorce finalized prior to January 1, 2019, considered compensation for IRA contribution purposes?

yes

is there A limited, nonrefundable tax credit is available to certain lower-income taxpayers who make salary deferrals to a SIMPLE IRA.

yes

do Roth 403(b) plans have RMDs starting at age 72?

yes!

can a taxpayer file his tax return and claim an IRA deduction even before the actual contribution is made?

yes, -The taxpayer must contribute the amount reported by the tax filing due date.

can distributions from a Roth IRA be taxable?

yes, if all contributions have been taken out and the distribution is not a qualified distribution then it can be subject to federal income tax.

if you are a single filer with no employer-sponsored retirement plan can you deduct the full amount of a traditional IRA contribution?

yes, there are no phase outs for people who are not participants in an employer-sponsored retirement plan.