Transcript Chartered Retirement Planning CounselorSM Professional

CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Module 5
Traditional, Roth &
SIMPLE IRAs
©2013, College for Financial Planning, all rights reserved.
Learning Objectives
5–1 Describe the basic characteristics and requirements of IRA
accounts
5–2 Describe the basic characteristics of traditional IRAs, and analyze a
situation to calculate the amount of an IRA contribution that is
deductible.
5–3 Analyze a situation to determine the income tax or nontax
requirements of a traditional IRA distribution..
5–4 Describe the basic characteristics of Roth IRAs, and analyze a
situation to calculate the eligible contribution amount.
5–5 Explain the basics of Roth conversions.
5–6 Describe the basic characteristics of SIMPLE IRA plans.
5–7 Describe the basic characteristics of a Simplified Employee Pension
(SEP).
5–8 Describe the employer/employee factors to be considered in
determining if a SEP or SIMPLE IRA would be appropriate.
5-2
Questions to Get Us Warmed Up
5-3
Learning Objectives
5–1 Describe the basic characteristics and requirements of IRA
accounts
5–2 Describe the basic characteristics of traditional IRAs, and analyze a
situation to calculate the amount of an IRA contribution that is
deductible.
5–3 Analyze a situation to determine the income tax or nontax
requirements of a traditional IRA distribution.
5–4 Describe the basic characteristics of Roth IRAs, and analyze a
situation to calculate the eligible contribution amount.
5–5 Explain the basics of Roth conversions.
5–6 Describe the basic characteristics of SIMPLE IRA plans.
5–7 Describe the basic characteristics of a Simplified Employee Pension
(SEP).
5–8 Describe the employer/employee factors to be considered in
determining if a SEP or SIMPLE IRA would be appropriate.
5-4
IRA Statutory Requirements
• Eligibility: Compensation (earned income, alimony) and
•
•
•
•
must be under age 70½ (no age limit on Roth IRAs)
Contribution limit: 100% of earned income up $5,500
(spousal IRAs allowed), $1,000 age 50 catch-up
Contribution deadline: April 15—no extensions
Taxation: Earnings are tax-deferred
Minimum: If an amount greater
than $0, but less than $200 is
deductible, then a $200 minimum
deductible contribution is allowed.
5-5
IRA Statutory Requirements
•
•
•
•
•
Fully vested
No life insurance or collectibles
No loans
RMDs starting at age 70½
(not for Roth IRAs)
6% penalty tax on excess
contributions
5-6
IRA Deductibility Active Participant Status
An employee is an active participant in a defined contribution plan if,
during the taxable year, the employee received any annual additions to
his/her account.
Employer
Contribution
or
Employee Contribution
(either voluntary or mandatory)
or
Forfeiture
To one of the following plans:
•
•
•
•
All qualified plans
Tax-sheltered annuity (TSA) under §403(b)
Simplified employee pension (SEP) & SIMPLE plans
Government pension plan
An employee is an active participant in a defined benefit plan if the
employee is eligible to participate in the plan and has not opted out.
(Note that investment earnings do not affect active participant status.)
5-7
Traditional IRA Deduction Phaseout Amounts (2013)
Single Taxpayer
Not an Active
Participant
No Phaseout
Active
Participant
$59,000$69,000
Married Taxpayers Filing Jointly
Neither is an
Active Participant
One Active
Participant
Both Active
Participants
No Phaseout
Active
participant:
$95,000$115,000
$95,000$115,000
Other Spouse:
$178,000$188,000
5-8
Calculation of Deductible IRA Contribution
1. Determine the deductible percentage.
2. Multiply by the maximum contribution amount.
3. The result is the maximum dollar amount that
can be deducted (rounded up to the next $10).
Example: Single, Modified AGI $65,000
$69,000 $65,000
 .4  $5,500  $2,200
$10,000
5-9
Calculation of Deductible IRA Contribution (1)
1. Determine the deductible percentage.
2. Multiply by the maximum contribution amount.
3. The result is the maximum dollar amount that
can be deducted (rounded up to the next $10).
Example: Married/Joint active participant,
Modified AGI of $97,316
$115,000  $97,316
 .8842 $5,500  $4,863.10
$20,000
$4,863.10roundedup to nearest $10  $4,870.00
5-10
Calculation of Deductible IRA Contribution (2)
• Same as previous scenario, except individual is
•
•
•
age 50 or older
.8842 x $6,500 = $5,747.30
Round up to nearest $10 = $5,750 deductible
amount
Balance of $6,500 – $5,750 = $750
can be a nondeductible IRA contribution
5-11
Required Minimum Distribution Beginning Dates
IRA, SEP-IRA,
SIMPLE IRA
Age 70½
Roth IRA
Pension,
profit sharing,
401(k) plans
None if
owner is
alive
Later of
retirement
or age
70½
unless 5%
owner.
5-12
Required Minimum Distribution Rates (Uniform Table)
Participant
Age
Distribution Period
(Years)
Percent of
Balance
70
27.4
3.65
71
26.5
3.78
72
25.6
3.91
75
22.9
4.37
80
18.7
5.35
85
14.8
6.76
90
11.4
8.77
95
8.5
11.63
100
6.3
15.87
105
4.5
22.22
110
3.1
32.26
115
1.9
52.63
5-13
1st and 2nd Distribution Years
Jan. 1
Jan. 1
2nd distribution year
1st distribution year
Trigger year
70 1/2
Dec. 31
Balance on
Dec. 31 of prior year
Dec. 31
Apr. 1
Dec. 31
1st distribution due
by April 1
Required Beginning
Date
2nd distribution due
by Dec. 31 of 2nd year
5-14
Distributions Upon Death
Beneficiary
Death Occurs Before
RBD
Death Occurs After
RBD
None
5 year rule
Life expectancy of
deceased, fixed term
Not spouse
Life of beneficiary, fixed
term, or can roll to
inherited IRA (titled as a
beneficiary account)
Same
Spouse
Life of surviving spouse,
recalculated, or
rollover to spouse’s IRA
or retirement plan, or
delay distributions until
deceased would have
been age 70 ½
Life of surviving spouse,
recalculated, or
rollover to spouse’s IRA
or retirement plan
5-15
Learning Objectives
5–1 Describe the basic characteristics and requirements of IRA
accounts
5–2 Describe the basic characteristics of traditional IRAs, and analyze a
situation to calculate the amount of an IRA contribution that is
deductible.
5–3 Analyze a situation to determine the income tax or nontax
requirements of a traditional IRA distribution.
5–4 Describe the basic characteristics of Roth IRAs, and analyze a
situation to calculate the eligible contribution amount.
5–5 Explain the basics of Roth conversions.
5–6 Describe the basic characteristics of SIMPLE IRA plans.
5–7 Describe the basic characteristics of a Simplified Employee Pension
(SEP).
5–8 Describe the employer/employee factors to be considered in
determining if a SEP or SIMPLE IRA would be appropriate.
5-16
IRA Early Distribution Requirements
10% penalty for withdrawals prior to age 59½,
Exceptions include:
• Made to beneficiary after death of participant
• Made to a fully disabled participant
• Medical expenses above 7.5% of AGI
• Payment of medical insurance premiums
while receiving unemployment insurance
• To a first-time home buyer for the
purchase of a primary residence
($10,000 max)
• Used for qualified higher education
expenses
• Part of a series of substantially equal
periodic payments
5-17
Qualified Education Expense Exemption
•
•
•
This is defined as tuition, fees, books, supplies, and
equipment required for enrollment or attendance at
postsecondary education institutions, including graduate
schools.
This exception is applicable to the taxpayer, his or her
spouse, or the child or grandchild of either the taxpayer or
the spouse.
Qualified higher education expenses
are reduced by any amounts
excludible from gross income
received on account of scholarships,
veterans benefits, or the
redemption of qualified
U.S. savings bonds.
5-18
Substantially Equal Periodic Payments
Payments must continue for at least five years, or until
participant is age 59½, if later
Use one of three methods to calculate payments:
1. Life expectancy—Required minimum distribution method
2. Amortization—Life expectancy table
used in RMD method and reasonable
interest rate
3. Annuitization—Divide account balance
by a factor that reflects “reasonable”
interest and mortality rates
Distribution methods 2 and 3 may be
changed once to the RMD method.
5-19
Reg. 72(t) Withdrawal Example
Assumes male, age 56, $150,000 account,
8% annual return
Age
Life Expectancy
Amortization
Annuitization
56
$5,357
$13,573
$14,620
57
$5,802
$13,573
$14,620
58
$6,284
$13,573
$14,620
59
$6,806
$13,573
$14,620
60
$7,374
$13,573
$14,620
5-20
Learning Objectives
5–1 Describe the basic characteristics and requirements of IRA
accounts
5–2 Describe the basic characteristics of traditional IRAs, and analyze a
situation to calculate the amount of an IRA contribution that is
deductible.
5–3 Analyze a situation to determine the income tax or nontax
requirements of a traditional IRA distribution.
5–4 Describe the basic characteristics of Roth IRAs, and analyze a
situation to calculate the eligible contribution amount.
5–5 Explain the basics of Roth conversions.
5–6 Describe the basic characteristics of SIMPLE IRA plans.
5–7 Describe the basic characteristics of a Simplified Employee Pension
(SEP).
5–8 Describe the employer/employee factors to be considered in
determining if a SEP or SIMPLE IRA would be appropriate.
5-21
Roth IRA Contribution 2013 Phaseouts
Filing Status
Phaseout*
Single
$112,000–$127,000
Married, filing jointly
$178,000–$188,000
* Without regard to “active participant” status
5-22
Roth IRA “Qualified Distributions”
Must meet both of
the following:
• 5-year holding
•
period (5-year
“clock”) and
Attainment of age
59½, death, or
disability
5-23
Roth Conversions
•
•
•
•
•
Income limitation of $100,000
lifted in 2010
Assets may be converted from
traditional IRAs, SEPs, SIMPLEs
(after 2 years), and qualified
plans
If nondeductible IRAs are
involved, then a ratio of all
nondeductible contributions to
the total value of all IRAs must
be used
There is no 10% penalty tax
Recharacterizations are allowed
5-24
Roth Order of Distributions
• Return of contributions
• Return of conversion amount
• Return of earnings
5-25
When Establishing a Roth IRA Makes Sense
• For a young person in a low tax bracket who expects to
•
•
•
•
be in a much higher tax bracket at retirement
For anyone who suspects tax rates will be much higher
in the future
For anyone who wants to shelter income and earnings
from taxation after he or she reaches age 70½
For anyone who wants to avoid required minimum
distributions on IRA account balances
For anyone who wants tax-free income to be paid over
the lifetime of much younger
family members
5-26
Roth 401(k) or DRAC
• Annual contribution limit of $17,500, with
•
•
•
•
$5,500 age 50 catch-up
No income phaseouts
RMD rules do apply
Has own 5-year clock
ERISA protection
5-27
Learning Objectives
5–1 Describe the basic characteristics and requirements of IRA
accounts
5–2 Describe the basic characteristics of traditional IRAs, and analyze a
situation to calculate the amount of an IRA contribution that is
deductible.
5–3 Analyze a situation to determine the income tax or nontax
requirements of a traditional IRA distribution.
5–4 Describe the basic characteristics of Roth IRAs, and analyze a
situation to calculate the eligible contribution amount.
5–5 Explain the basics of Roth conversions.
5–6 Describe the basic characteristics of SIMPLE IRA plans.
5–7 Describe the basic characteristics of a Simplified Employee Pension
(SEP).
5–8 Describe the employer/employee factors to be considered in
determining if a SEP or SIMPLE IRA would be appropriate.
5-28
SIMPLE IRA
• 100 or fewer employees paid at least $5,000 in any two
•
•
•
preceding years and current year—must be only plan
Permits employee elective deferrals ($12,000 with
$2,500 age 50 catch-up)
100% immediate vesting
Nondiscrimination tests met if: 100% match on first 3%
(1% match in 2 of 5 years), or 2% non-elective contribution
to account of each employee earning more than $5,000
• IRA distribution rules apply, except
o
o
25% penalty on withdrawals
in initial two years
Rollovers limited during initial
two years
5-29
SIMPLE Plan Employer Contributions
Simple IRA
Simple 401(k)
• Match 100% first 3%
• Can reduce to 1% in
2 out of 5 years
• No limit on includible
compensation if
matching (can match
above $255,000)
• Nonelective 2%
contribution
($255,000
compensation limit)
• Match 100% first 3%
• $255,000 limit on
compensation
• Nonelective
2% contribution
($255,000
compensation
limit)
5-30
Simplified Employee Pensions: SEPs
• Employer-sponsored retirement
•
•
•
•
plan allowing flexible employer
contributions
Employee contributions not allowed
Eligibility
o Age 21
o Earned at least $550 during
current year
o Worked for employer at least 3
of the last 5 years
Vesting: 100% immediate
(since IRA accounts)
IRA rules generally apply to
distributions
5-31
Contributions
• 25% of compensation or $51,000, whichever is
•
•
less
Employer can integrate with Social Security
If employer is unincorporated then the Keogh
plan rules apply
5-32
Plan Establishment Deadlines
• Qualified plans: December 31st
• SIMPLE plans: October 1st for the current year
• SEP plans: tax filing deadline, including
extensions
5-33
Learning Objectives
5–1 Describe the basic characteristics and requirements of IRA
accounts
5–2 Describe the basic characteristics of traditional IRAs, and analyze a
situation to calculate the amount of an IRA contribution that is
deductible.
5–3 Analyze a situation to determine the income tax or nontax
requirements of a traditional IRA distribution.
5–4 Describe the basic characteristics of Roth IRAs, and analyze a
situation to calculate the eligible contribution amount.
5–5 Explain the basics of Roth conversions.
5–6 Describe the basic characteristics of SIMPLE IRA plans.
5–7 Describe the basic characteristics of a Simplified Employee Pension
(SEP).
5–8 Describe the employer/employee factors to be considered in
determining if a SEP or SIMPLE IRA would be appropriate.
5-34
SEP versus SIMPLE (1)
SEP
Maximum employee
deferral
SIMPLE
$0
$12,000 or 100% of
compensation ($2,500 age
50 catch-up)
Employer contributions
Entirely discretionary, lesser of
25% or $51,000 (20% limit if
unincorporated)
2% nondiscretionary or 3%
matching
Employer eligibility
No limit on number of
employees
Must have 100 or fewer
employees earning $5,000
or more
Employee eligibility
Age 21, earned at least $550,
and worked for employer 3 of
the last 5 years
No age requirement, income
of at least $5,000
Testing and annual filing
Simple filing requirements
Simple filing requirements
5-35
SEP vs. SIMPLE (2)
SEP
SIMPLE IRA
Setting up
Easy
Easy
Vesting
100% immediate
100% immediate
Individual accounts?
Yes, IRA
Yes, IRA
Investment choices and
responsibility
Employee
Employee
Deadline for establishing
Tax due date, including
extensions
October 1st for current year
in order to allow enough
time to for at least a 60-day
notification and election
period
Tax advantages
Tax deductibility for
employer contributions and
tax deferral
Tax deductibility for
employer and employee
contributions, and tax
deferral
5-36
Qualified & Nonqualified Plans
Qualified Plans
Nonqualified Plans
Pension Plans
Profit Sharing
Plans (DC)
Tax-Advantaged
Plans
Other Nonqualified
Plans
Defined Benefit (DB)
Profit Sharing
Traditional IRA
Section 457 Plans
Cash Balance (DB)
Thrift Plan
Roth IRA
Stock Bonus
SIMPLE IRA
ISO
Money Purchase (DC)
ESOP (LESOP)
SEP
ESPP
Target Benefit (DC)
Age-Weighted
(SARSEP)
NQSO
403(b) (TSA)
Deferred
Compensation Plans
Cross-Tested
(Comparability)
401(k) Plan
SIMPLE 401(k)
5-37
Multiple Choice Question 1
Allen Baker, a single 40-year-old taxpayer with an AGI
of $67,800, is covered by his employer’s profit
sharing/401(k) plan. During the plan year, no employer
contribution was made and Allen did not make any
salary reduction contributions to the 401(k) portion of
the plan. Allen’s account balance increased by $120;
this was attributable to investment earnings of $80 and
forfeitures of $40.
If he contributes $5,500 to his IRA, what is the amount
of his allowable IRA deduction?
a. $0
b. $200
c. $660
d. $5,500
5-38
Multiple Choice Question 2
Assume the facts above except that Allen is
married, his spouse is not an active participant,
they file jointly, and their AGI is $106,000.
What is the amount of their IRA deduction?
a. $0
b. $900
c. $5,500
d. $6,160
e. $11,000
5-39
Multiple Choice Question 3
Identify the six listed exemptions from the 10% penalty tax
on premature distributions from an IRA. (The remaining
three apply to qualified plans only.)
a. series of substantially equal periodic payments
b. distribution following owner’s death
c. distribution to an employee age 55 following separation
from service
d. distribution following disability
e. distribution to an alternate payee under a QDRO
f. distribution for medical expenses that exceed 7.5% of
AGI
g. distribution as a series of substantially equal periodic
payments after separation from service
h. distribution of up to $10,000 for a first-time homebuyer
i. distribution for qualified education expenses
5-40
Multiple Choice Question 4
Boulder Bolter, Inc. is a hardware chain that offers its
employees a 401(k) plan. The company wishes to make the
maximum contribution to the 401(k) plan. Assume the gross
covered payroll is $10 million for 400 employees; on average,
the employees defer 5% of their salaries. The first 3% is
matched dollar for dollar.
Total deferrals
$500,000
Total match
$300,000
What is the maximum discretionary contribution the
company can make to the 401(k) plan? (Answer to the
nearest $25,000.)
a. $600,000
b. $1.7 million
c. $2.2 million
d. $2.5 million
5-41
Multiple Choice Question 5
Ken and Barbie file jointly. Both work, and their combined
AGI is $105,000. This year, Ken’s profit sharing account
earned over $5,000, but the company made no contributions
and there were no forfeitures. Barbie declined to participate
in her company’s
defined benefit plan in July because she wants to contribute
to and manage her own retirement money. (Her benefit at
age 65 under the plan was $240 per month.)
How much of their $11,000 contribution can they deduct?
a. $0
b. $5,500
c. $8,250
d. $11,000
5-42
Multiple Choice Question 6
Lucy received a $1,200 profit sharing
contribution this year. Lucy and George are
married, filing jointly. George is an artist who
had no earnings this year. Their combined AGI
for this year is $108,000.
How much of their $11,000 IRA contribution
can they deduct?
a. $0
b. $5,500
c. $7,430
d. $11,000
5-43
Multiple Choice Question 7
Sally and Joe are married, filing jointly. Their
combined AGI is $146,000. They are both
active participants in their employers’ plans.
After making the maximum qualified plan
contributions, they wish to make contributions
to their Roth IRAs.
How much can they contribute to their Roth
IRAs?
a. $0
b. $1,000
c. $5,500
d. $11,000
5-44
Multiple Choice Question 8
Jerry’s AGI totals $119,000 this year. He is
single. What is the maximum amount he can
contribute to his Roth IRA this year?
a. $0
b. $1,000
c. $2,940
d. $5,500
5-45
Multiple Choice Question 9
If a defined contribution plan provides for a graded vesting
schedule, which of the following statements can be correctly made
about the plan?
I. The plan will generally require one year of service for eligibility.
II. The plan will generally require two years of service for
eligibility.
III. At the end of his or her third year of service, a participant must
be entitled to at least 40% of his or her benefit under the plan.
IV. At the end of his or her fifth year of service, a participant must
be entitled to the full amount of his or her accrued retirement
benefit
a. I only
b. I and III only
c. II and IV only
d. I, III, and IV only
5-46
Multiple Choice Question 10
John Smith works for ABC Corp. and earns
$295,000. ABC Corp. provides a nonelective
contribution to its SIMPLE IRA plan.
Which one of the following is the maximum
amount that could go into John’s account?
(The Section 401(a)(17) limit on includible
compensation is $255,000 in 2013.)
a. $5,100
b. $12,000
c. $17,000
d. $17,100
e. $17,900
5-47
Multiple Choice Question 11
Which of the following could be disadvantages
of a SEP from the employer’s point of view?
I. mandatory annual contributions
II. statutory eligibility requirements
III. $12,000 (indexed) deferral limit in 2013
IV. lack of vesting schedules
a. III only
b. I and III only
c. II and IV only
d. II, III, and IV only
5-48
Multiple Choice Question 12
Which one of the following is not a basic
provision of a SEP?
a. individual ownership of accounts
b. 25% limit on employer contributions
c. forfeiture reallocations based on
compensation
d. plan must not discriminate in favor of highly
compensated employees
5-49
Multiple Choice Question 13
Trent Tyley, age 55, has contributed $11,500 to his Roth IRA over the past
six years. He also converted $20,000 just last year. Due to some very good
investment returns, his total account value is now $53,000. Trent has
decided to go on a dream vacation with his wife, and plans on withdrawing
$15,000 from his Roth to help pay for the vacation.
What are the tax ramifications, if any, of this withdrawal?
a. Since the Roth has been open for more than five years the entire
$15,000 would not be taxable.
b. The $11,500 in contributions would be considered withdrawn first and
not taxable, but the additional $3,500 would be subject to a 10%
penalty tax.
c. The $11,500 in contributions would be considered withdrawn first
and not taxable, but the additional $3,500 would be subject to
ordinary income taxes.
d. The $11,500 in contributions would be considered withdrawn first and
not taxable, and a prorated amount from the remaining balance of
$3,500 would be taxed as ordinary income and subject to the 10%
penalty tax.
5-50
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Module 5
End of Slides
©2013, College for Financial Planning, all rights reserved.