SIE23

Roth IRAs

1997 Taxpayer Relief Act, Roth IRA is a variation on the traditional IRA. Contributions --- contribution rules for Roth IRAs are the same as Trad IRAs. 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 combine the maximum in both a traditional and roth IRA. As with trad IRAs, the contribution must come from earned income. ****Contributions to a roth IRA are NOT deductible from current income**** An investor's eligibility to contribute to a roth IRA is phased out at higher income limits eventually falling to zero. No age limit for contributions to a ROTH IRA, though the contributions MUST be from earned income.

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

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: 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?

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 In addition to the penalty, the ordinary income tax on the amount withdrawn must also be paid (20% × $30,000 = $6,000).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).

Traditional IRAs

Withdrawals --- Distributions may begin w/out penalty after age 59.5 and are generally added to ordinary income for tax purposes. Distributions before age 59.5 are subject to a 10% penalty as well as regular income tax. There are exceptions to the penalty (but not the taxes if the distribution is due to -death of the owner -disability of the owner -first-time home buyer purchase of a principal residence (up to $10,000) -education expenses for the taxpayer, spouse, child, or grandchild -medical premiums for unemployed individuals -medical expenses in excess of defined adjusted gross income (AGI) limits

Defined Benefit Plans (traditional pension plans)

A defined benefit plan defines within the plan document the benefit it will pay to retirees. These are often 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. Employers will use the services of an outside firm to determine how much the company needs to contribute to the plan to have sufficient assets to meet the defined benefit payments. Employers are required to make the payments as defined in the plan. This places the investment risk on the company, and many companies are moving away from these types of plans. ***Pension plans from private employers pay a fixed benefit. Once the employee begins to collect benefits, the amount will not change. The beneficiary takes on purchasing power risk. Pensions from government agencies often include a cost-of-living adjustment (COLA)

Q: Who benefits most from a defined benefit plan?

A) All benefit the same B) Employees with more years until retirement C) Younger employees D) Older employees Answer is D E: Because the older employee has fewer years left to work, the contribution made by the company will be higher.

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

A) All withdrawals are tax free B) The plan cannot discriminate C) The plan may discriminate D) All withdrawals are taxable E: With qualified plans, all withdrawals are taxable and the plan cannot discriminate; it has to be offered to all qualified employees. A nonqualified plan does not need to be offered to all qualified employees, and distributions above the cost basis are taxable.

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

A) The accounts grow tax deferred B) Contributions are not tax deductible C) Tax on interest and dividends are deferred, but not on capital gains D) Contributions are tax deductible Answer is A With qualified plans, deposits go in before taxes and grow tax deferred. All withdrawals are taxable. With nonqualified plans, deposits are made before tax, and distributions above the cost basis are taxable.

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

A: 2 and 4 E: IRAs have no provisions for either hardship withdrawals or loans. Both IRAs and 401(k) plans offer tax deferral on the earnings, and although the amount is larger with the 401(k), they both offer the catch-up provision for those who are age 50 or older.

Q: In a defined benefit plan the benefit amount is fixed. the benefit amount is variable. the contribution amount is fixed. the contribution amount can vary.

A: one and four E: In a defined benefit plan, the employee is promised a certain amount at retirement and the employer has to put in enough money to meet that promise. Changing rates of return can require changing deposits to meet the promised amounts at retirement.

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

A: one and four E: 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.

Q: In a defined contribution plan the benefit amount is fixed. the benefit amount is variable. the contribution amount is fixed. the contribution amount can vary.

Answer is 2 and 3 E: 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: Individual retirement accounts allow a catch-up contribution of $1,000 to be made into the account for those who are

Catch-up contributions are for those ages 50 and over (not over 50).

Traditional IRAs

Contributions --- an eligible individual may make contributions up to a maximum dollar amount, 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 No contributions are allowed starting with the year the account holder turns 70.5 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 are not acceptable IRA investments. Life insurance contracts may not be purchased in an IRA. ***Life insurance is not allowed within IRAs, but annuities are allowed. Though FINRA has expressed concer about the suitability of a tax-favored product (like annuity) within a tax-favored account***

Q: Who can contribute to an IRA?

E: Anyone with earned income can contribute even if covered by an employer sponsored plan. The contribution however may or may not be deductible depending on income level.

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

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

Roth IRAs continued.........

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 59.5 or older Exceptions to the age limit are as follows: Death (no penalty for the bene) Disability of the owner 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. ***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 trad IRA would be better off putting money in a ROTH IRA.

Individual Retirement Account (IRA)

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 an IRA. IRAs are considered qualified plans by the IRS. Qualified plans allow earnings in the account to grow tax-deferred. Additionally, 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 b/c the earnings on these amounts are still tax deferred. ***Contributions to IRAs are made out of earned income, not ordinary income. The concepts around contributions are tested but not the annual dollar limit.***

Roth IRAs continued...

Investments --- the investments limitations for a ROTH IRA are essentially the same as for a TRAD IRA Rollover --- the rollover rules are the same for trad and roth IRAs. Remember that only one is allowed per rolling year per person. You CAN'T do a rollover in a trad and another in a roth. Transfer --- The rules are the same as for a Traditional IRAs, but the transfer from a Roth account MUST be to a Roth account. 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. NQ distributions of income or gains from the account are taxed as ordinary income and subject to a 10% penalty.

Traditional IRAs continued...

List of investments generally considered appropriate for IRAs: Stocks Bonds MFs Unit Investment Trusts Government Securities US government issues gold and silver coins Investment practices considered inappropriate for IRAs or any other retirement plan: Short sales of stock Speculative option strategies Tax-exempt municipal securities Margin account trading Covered call writing is permissible because it is a conservative way to generate investment income.

Traditional IRAs

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 the RMD is based on the account values as the end of the previous year. 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 (or accounts) to take the distribution from. ***The first RMD may be delayed to April 1 of the year after the account holder turns 70.5. If the RMD is delayed this way, there will need to be a second distribution in that year by DEC. 31 If an account holder fails to take a RMD by the required date, any amount below the RMD amount will be subject to a 50% penalty (called an excise tax)

Traditional IRAs

Rollover --- A rollover is when a customer withdraws and takes possession of RIA assets and then returns the assets back to an IRA (or other qualified account) within 60 Calendar days. If these requirements are met, there are NO TAX implications for the withdrawal. One rollover per rolling year is allowed. Not one per IRA account or one per calendar year. **Rollovers have a time limit of 60 calendar days, not 2 months*** Transfer --- a customer may transfer IRA assets from one IRA account to another IRA account. A custodian-to-custodian transfer. There is no limit to the number of times a customer may do a transfer. If a customer moves money from an EMPLOYER plan, like a 401k, to an IRA, this is sometimes called a direct rollover. (This activity is actually a transfer and NOT a rollover

Qualified Accounts

These accounts allow for tax-deferred savings for retirement. Some require sponsorship by an employer and others do not, but all are designed to encourage people to save money for their retirement.

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. Here is a partial list of defined contribution plans: 401k plans 403b plans Profit-Sharing plans Money purchase plans Simple Plans These are more popular today because the investing risk is carried by the employee. The liability for the employer is much smaller. Also, the assets in these plans are transportable between employer plans, making them a better choice for a mobile work force that changes employers several times over an active career.