traditional ira chapter 5 employee benefit & retirement planning copyright 2011, the national...

Traditional IRA Chapter 5Employee Benefit & Retirement Planning

Copyright 2011, The National Underwriter Company 1

Types of IRAs

Retirement accounts for individual savers:– Traditional IRA– Roth IRA

Employer-sponsored IRA accounts:– SEP IRA– SIMPLE IRA



What is it?

IRA meansIndividual Retirement Account

Individual Retirement Annuity

A type of retirement savings arrangement that allows contributions (up to certain limits) and investment earnings to grow tax-deferred.



What is it? (cont'd)

Traditional IRAs are primarily individual retirement plans.

However, employers can

– sponsor traditional IRAs as a limited alternative to an employer-sponsored qualified retirement plan

– sponsor a “deemed IRA” as part of a qualified plan



When is it indicated?

1. to shelter current compensation or earned income from taxation

2. to defer taxes on investment income

3. for long-term accumulation, especially for retirement

4. as a supplement or an alternative to a qualified plan



Advantages

• eligible individuals (and their spouses) may contribute up to the maximum annual contribution amount and, within limits, take a tax deduction for the contribution(s)

• tax deferred investment income

– but withdrawals taxed as ordinary income



Disadvantages

• deductions are limited and can be unavailable to active participants in a tax-favored employer retirement plan

• early withdrawals subject to 10% penalty

• generally, cannot establish IRA after age 70½; withdrawals must begin April 1 of year after year reach age 70½



Tax Implications: Contribution Rules

1. No required minimum contribution:

• can contribute in one year, skip another year

• but failure to contribute reduces tax-favored accumulation



Tax Implications: Contribution Rules (cont’d)

2. Deduction Limits

• maximum annual deductible IRA contribution for

an individual is the LESSER of

- the maximum annual contribution amount

or

- the individual’s earned income



Maximum Annual Contribution Amount (2011)

Type Dollar Limit

Regular $5,000

Catchup (attained age 50) $1,000




3. Earned Income:

• must be produced from personal services such as wages, salaries, commissions, and bonuses

• excludes unearned income such as dividends, interest, or rent



Tax Implications: Contribution Rules (cont'd)

4. Spousal IRAs:

• in some cases, an additional contribution can be made for a spouse

• earned income of one spouse can be used as income of other spouse, so, for example, contributions can be

made for spouse who does not work or who has little income

• must file a joint return to use earned income of other spouse



Tax Implications: Contribution Rules (cont'd)

5. Married couples with two incomes:

• should each establish separate IRA

• even if couple live in community property state




6. Active Participant Restriction:

• if an otherwise eligible person actively participates in an employer plan, the available traditional IRA deduction is reduced

• amount of reduction depends on adjusted gross income (AGI) level



AGI Phaseout Ranges for Deduction

of Active Participant (2011)

Single Return $56,000-$66,000

Joint Return (active participant spouse)

$90,000-$110,000

Joint Return (non active participant spouse)

$169,000-$179,000

Separate Return $0-$10,000




6. Active Participant Restriction (cont’d)

• if taxpayer is below the AGI cutoff level, at least $200 can be contributed to IRA and deducted

• If neither spouse is active participant, then no AGI phaseout




7. Nondeductible IRA

– nondeductible contributions can be made to traditional IRA

– limit is excess of maximum annual contribution amount over the amount deductible

– nondeductible contributions withdrawn tax free, investment earnings taxed




8. Time Limits

can establish IRA and claim tax deduction any timeprior to due date of tax return without extensions

9. Saver’s Credit

limited nonrefundable tax credit available to some low income taxpayers who contribute to IRA



Tax Implications: Investments

1. IRA contributions are not locked into any particular investment

• can have more than one IRA and invest with different sponsors

• can transfer (within limitations) from one IRA to another



Tax Implications: Investments (cont’d)

2. In general, can invest in any type of assets

but cannot invest in– collectibles (other than certain government coins)– life insurance contracts– a participant’s own note (since loans are not permitted)



Tax Implications: Loans

1. Cannot borrow from own IRA

2. Can use rollover provision to, in effect, make 60-day interest free loan



Tax Implications: Distribution and Rollover Rules

1. Can take out money at any time or leave it in indefinitely, but:

• penalty on early distributions before age 59½, unless exception applies

• penalty if required minimum distributions are not made starting at age 70½



Tax Implications: Distribution and Rollover Rules (cont'd)

2. Participant’s spouse does not need to consent to an IRA distribution under federal law:

• spousal consent may be required when a qualified plan is rolled over to an IRA

• property rights in an IRA are a matter of state law, varies by state



Tax Implications: Distribution and Rollover Rules (cont'd)

3. Generally, all amounts distributed from traditional IRA are ordinary income

if nondeductible contributions have been made to traditional IRA, a portion of a distribution can be received tax-free



Distribution and Rollover Rules (cont'd)

4. 10% early withdrawal penalty

EXCEPT distributions made– after age 59½– after death– as part of a series of substantially equal periodic

payments over the life or the life expectancy of the participant, or the participant and a beneficiary




4. 10% early withdrawal penalty (cont'd)

EXCEPT distributions made (cont'd)– for medical care (in excess of the 7.5% of itemized

deductions floor for such expenses)– to unemployed for health insurance premiums– to pay higher education costs for self, spouse, child, or

grandchild– to pay acquisition cost of first home for self or specific

relatives up to $10,000 lifetime maximum




5. Minimum distribution requirement

distribution must begin by April 1 of the year after the year in which age 70½ is reached

6. Can use IRA for direct rollover of certain distributions from employer sponsored retirement plans within 60 days after receipt

7. Complex tax rules apply at death of IRA owner



True or False?

1. Employers cannot sponsor an individual IRA.

2. Only interest and dividends are allowed within an IRA. Other investment income such as rent, cannot be sheltered in an IRA.

3. To contribute to a traditional spousal IRA, the couple must file a joint return.



True or False? (cont'd)

4. Ira D. Posit, age 59, withdrew money from his IRA to pay for a niece’s college expenses. Ira must pay income tax but no penalty tax on the amount withdrawn.

5. To avoid tax, a distribution of benefits from an employer-sponsored retirement plan must be directly transferred or rolled over to the “rollover” IRA within 30 days.



Discussion Question

How can an employer sponsor IRAs for employees?

traditional ira chapter 5 employee benefit & retirement planning copyright 2011, the national...

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deemed ira

qualified retirement

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