Retire: Chapter 9: IRAs and SEPs
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Transcript Retire: Chapter 9: IRAs and SEPs
1
Retirement Planning and
Employee Benefits for
Financial Planners
Chapter 9: IRAs and SEPs
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Introduction
Traditional IRAs
Tax Deductible/Nondeductible contributions
Taxable/Nontaxable Distributions
Roth IRAs
Nondeductible Contributions
Qualified distributions are income tax-free
SEP IRAs
IRAs provided by employers
Greater funding limits than traditional IRAs
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IRAs – Contribution Limit
Traditional and Roth
Generally,
Lesser of
$5,500 ($6,500 for age 50 and over - 2014) or
Individual’s earned income.
Subject to limitations based on income
Can divide contribution between a Roth/traditional IRA
Attainment of age 70½
can no longer make traditional IRA contributions.
Can contribute to Roth IRA.
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Earned Income
What is earned income?
W-2 income
Schedule C net income
Income as a general partner
Alimony
Exceptions:
Spousal IRA: contribute up to:
Spouse’s earned income – spouse’s IRA
contribution
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Timing of Contributions
Contributions must be made by the
due date of the individual’s income
tax return (without extensions).
Usually April 15th of the following tax
year.
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Deductibility of Traditional
IRA Contributions
Deduction FOR AGI
Taxpayer
does not
have a
qualified
plan
No AGI Limit
Taxpayer is an
active participant in
a qualified plan
Single
AGI Phaseout AGI Phaseout
$60k - $70k
MFJ
Taxpayer is not an
active participant
in a qualified plan,
but taxpayer’s
spouse is an active
participant in a
qualified plan
$181k - $191k
AGI Phaseout
$96k - $116k
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Active Participant Status
Limits Traditional IRA contributions.
Individual is considered an active
participant:
Defined Benefit Plan
Participates or meets the eligibility
requirements of the plan.
Defined Contribution Plan
Receives a contribution to the qualified plan on
his behalf for the year (including forfeitures), or
Defers compensation to a CODA plan.
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Nondeductible IRA
Contributions
Tax-deferred growth
Creates adjusted basis in IRA.
Distributions will be partially return of
capital and partially earnings.
Nondeductible IRA contributions are not limited
for active participants of qualified plans.
File Form 8606 with Form 1040 to track the
adjusted taxable basis of an IRA.
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Distributions from Traditional
IRAs (1 of 2)
Ordinary Income
Except:
Distributions of adjusted basis
AB before withdrawal
Ratio of AB =
FMV of account at
withdrawal
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Distributions from Traditional
IRAs (2 of 2)
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Required Minimum Distributions
Same as RMDs for Qualified Plans
Year following turn 70 ½
Subject to penalties if prior to age
59½
Unless on account of an exception
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Exceptions to 10% Early Withdrawal
Penalty
Distributions on account of:
Death
Attainment of age 59½
Disability
Substantially Equal Periodic Payments
Medical Expenses in excess of 7.5% of AGI
QDRO
Higher Education Expenses
First Time Home Purchase – up to $10,000
Payment of health insurance premiums by
unemployed
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Roth IRAs
Nondeductible Contributions
Qualified Distributions are income tax-free
Owner may continue to fund after attaining
age 70½
Not subject to required minimum distribution
rules during the life of the account owner
Share contribution limit with Traditional IRA
Contributions may be limited based on AGI
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Roth IRA Contributions
(1of 2)
Contributions
Limited to lesser of earned income or
$5,500 ($6,500 if age 50 and over 2014)
Combined Limit with Traditional IRA
Availability phased-out based on AGI
Contribution AGI Phaseout Limit (2014)
Single
$114,000 - $129,000
Married Filing Jointly
$181,000 - $191,000
Married Filing Separate
$0 - $10,000
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Roth IRA Contributions
(2 of 2)
Convert Traditional IRA to Roth IRA
No limit in 2014
Conversion AGI Limit Prior to 2010
Single
$100,000
Married Filing Jointly
$100,000
Married Filing
Separately
Not Available
Recharacterized Contributions
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Qualified Distributions from Roth
IRAs
Qualified Distributions are income tax-free.
Qualified Distributions are not subject to 10%
early withdrawal penalty.
Qualified Distribution:
The distribution is made after a five
taxable year period, AND
The distribution is on account of the owner
attaining age 59½, the owner’s death,
disability, or first-time home purchase
(maximum $10,000).
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Nonqualified Distributions from
Roth IRAs
Subject to income tax…maybe…
First come from contributions (tax-free)
Then from conversions (tax-free)
Then from earnings – these are taxed
Subject to 10% penalty
Nonqualified distributions
Contributions are not subject to penalty
Conversions and earnings in the last five years are
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Tax-Free Distributions from IRAs to
Charity
Can be made from a Traditional or
Roth IRA directly to charity
Counts toward satisfying RMD for
year
Owner must be 70 ½ or older
Can distribute up to $100,000 per
year
Advantage of contributions from IRA
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Nonqualified Distributions from Roth
IRAs
Subject to
Taxation?
Subject to
10% Penalty
No
No
Conversions
No
Yes, within
five years of
conversion*
Earnings
Yes
Yes*
Contributions
*Exceptions to the 10% early withdrawal penalty are the
same as the exceptions for Traditional IRA distributions.
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Comparing Roth IRAs to Traditional
IRAs
Traditional IRAs do not allow
contributions after the owner is age
70½, unlike Roth IRAs.
Roth IRAs are not subject to the
minimum distribution rules, unlike
Traditional IRAs.
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IRA Investment Options
Permitted:
Cash
Stocks
Bonds
Options (Often limited by custodians)
U.S. Gold, Silver, and Platinum Coins
Real estate
Not Permitted:
Life Insurance
Collectibles: beer cans; art, etc.
Other Coins
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Rollovers from Qualified Plans to
IRAs
Lose Lump Sum Distribution Taxation
Options (NUA)
Loans Not Permitted
May be rolled back to Qualified Plan
that permits
Lose ERISA Protection
However, will have protection under
federal bankruptcy law.
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Simplified Employee Pensions
(SEPs)
Small Business Retirement Plan
Tax-deferred growth of Contributions
Not a qualified plan, but has similar
characteristics with unique rules:
More liberal coverage requirements.
Can be established as late as the extended due
date of the income tax return.
Unique contribution, vesting, and distribution
rules.
Established utilizing Traditional IRA
Accounts
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Coverage Requirements
Employers that sponsor SEPs must
provide benefits to all employees who
meet the following requirements:
Attainment of age 21 or older, and
Performance of services for three of the
last five years, and
Received compensation of at least $550
(2014) during the year.
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Establishment of a SEP
Up to due date of return – including
extensions
Entity
Sole Proprietorship
(Schedule C)
Original Due
Date of Tax
Return
Extended Due
Date of Tax
Return
April 15th
October 15th
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Establishment of a SEP
Employer must complete the
following three steps by the extended
due dates listed above.
Complete a formal written agreement.
Form 5305-SEP (no IRS approval required)
Fill in blanks: page 449
Give eligible employees notice.
Copy of Form 5305-SEP
Open a SEP-IRA account for each eligible
employee.
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Contributions to SEPs
Employer Funded Only
No employee contributions
Discretionary
Must be made to all employees eligible during the
year – even if dead or no longer employed at time
of contribution
Limited to the lesser of:
25% of an employee’s covered compensation, or
$52,000 for 2013.
Self-employed: limit is 20%
Can utilize cross-testing and Social Security Integration
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Vesting and Withdrawals
Employees are 100% vested in their
account balance at all times.
Withdrawals are treated just as
withdrawals from IRAs.
Ordinary Income
Potentially subject to 10% early withdrawal
penalty.
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