Assignment 2 - IRA's

Question 1

Indiv. decides…

Answer 1

1. if to make a contrib.
2. how much to contib.
3. how to invest
4. when to take a distrib.

Question 2

Tax-treatment

Answer 2

CONTRIBs = MAY be tax-ded.

EARNINGs = are tax-def’d

DISTRIBs = MAY be taxed

Question 3

Sources of Income

Answer 3

1. Earned income
2. Rollovers: another IRA, SEP, SIMPLE, qualif’d plan, 403(b)
3. Spousal
4. Beneficiary

Question 4

To be elig. to make an IRA contrib…

Answer 4

• earned income

          OR 

• alimony that is included in gross income
• must be under age 70 1/2

Question 5

contribution limits

Answer 5

• traditional IRA = $5,000 or 100% of earned income
• additional $1,000 = age over 50
• $3,000 catch-up if ER declares bankruptcy in 2007-2009

Question 6

bankruptcy catch-up

Answer 6

*3x normal catch-up

• ER declares in 2007-2009
• ER or other person is indicted due to some bus. transaction
• Indiv. must have been partic. in the ER’s 401(k) for at least 6 months
• ER made matching contribs. of at least 50%
• matching contribs. were made w/ ER stock

Question 7

Excess Contribs.

Answer 7

*indiv. misses the deadline for making the contrib. (April 15) for one year and then makes the contrib. for the next year.

• 6% excise tax on excess
• applied each yr until excess is w/drawn from IRA

Question 8

Contribs and Inv.

Answer 8

• only as contrib.
• must go into a nonforfeitable acct
• cannot inv. in = life ins.; collectibles; cannot commingle w/ other property
• can hold RE

Question 9

*Flexible premium annuity

• cannot require premium (discretionary)
• cannot accept over $4,000 per year
• contract is non-transferrable
• dividends used to purch. addit’l benef. or reduce future premium

Answer 9

Individual Retirement Annuity

Question 10

IRA - prohibited transactions

Answer 10

• selling, exchanging, or leasing property
• lending money or extending credit (LOANS)
• furnishing goods, services or facilities
• transferring to or using plan assets
• 10% penalty of amount involved
• increases to 100% if not corrected timely

Question 11

IRA LOANs

Answer 11

BAD

• from Indiv. Ret. Annuity = results in entire annuity losing tax-exempt status
• amt of loan subject to = premature distrib. penalty; income tax

Question 12

Distrib. Trad’l IRA

Answer 12

• req’d by age 70 1/2 = Apr. 1st year following attainment of age 70 1/2; and subsequent years

Question 13

Distrib. Methods of Trad’l IRA

Answer 13

• lump sum
• life “annuity” form of pmt
• periodic pmt of life expectancy
• term certain
• recalc. method

Question 14

Taxation of Distrib. = Tradi’l IRA

Answer 14

• income tax due, except for nonded. contrib.
• nonded. contrib.
• no cap gains treatment

Question 15

Premature distrib. from trad’l IRA

Answer 15

• prior to age 59 1/2
• 10% penalty
• Exceptions: death or disability; medical expenses; pmt of med. prem. if unempl’d; education; purchase of 1st home; substantially equal periodic pmts for at lease 5 yrs or age 59 1/2 (which is later)
• penalty assessed retroactively if done incorrectly

Question 16

Eligible Plans - ROLLOVERS

Answer 16

• qualified plans
• 403(b)s

Question 17

Direct Transfer Rollover

Answer 17

• instruction from the an indiv. for a plan trustee to transfer funds directly to the IRA
• check goes from plan to IRA
• never directly to indiv.
• check is always written out to IRA

Question 18

Regular Distrib. Rollover

Answer 18

• indiv. receives check from plan; made out to them
• 20% withholding mandatory
• indiv. may rollover total amt, but must make up the w/held amt out of pocket, and then get it as a tax refund

Question 19

• type of IRA
• holds only funds rolled-over from qualif’d plan
• entire amt (rollover plus earnings) can be rolled-over to a subsequent qualif’d plan
• cannot commingle assets w/ indiv. IRAs

Answer 19

Conduit IRA

Question 20

Rollover Time Limits

Answer 20

• must rollover w/in 60 days of regular distrib. (not direct rollover)
• can’t rollover from IRA to IRA more than once in 12 month period if assets are in taxpayer’s possession for a period of time. (N/A for direct transfers; N/A for rollovers from plan to an IRA)
• IRS can waive 60 day time limit if missed due to no fault of the indiv.

Question 21

Primary distinction of ROTH IRA

Answer 21

• Roth IRA contribs. are subj. to income tax in the year of the contrib.
• distrib. is NEVER subj. to income tax (if rules are followed)

Question 22

ROTH IRA Contrib.

Answer 22

• max = $5,500 (same as tradit’l)
• phase out tied to AGI = Single $101,000-$116,000; Married $159,000-$169,000
• not deductible
• can make contrib. after age 70 1/2
• not taxed upon distrib. if worked 5 years AND = 59 1/2; death/disbil.; 1st home under $10,000
• 10% penalty otherwise (except for educ.)
• no requirement min. distrib.

Question 23

Conversion of Tradit’l IRA to ROTH IRA

Answer 23

• yes
• amt moved into the Roth IRA is taxed that year
• no early distrib. penalty

Question 24

ER sponsored IRA

Answer 24

• not SEP
• doesn’t need to be provided to all EE’s or be nondiscrim.
• treated as addit’l comp (FICA owed) OR P/R deduction
• subj. to $4,000 limitation and “active participant” rule
• EE is always 100% vested in their IRA

Question 25

* type of add-on IRA * created by EGTRRA * qualif'd retirement plan or a tax-sheltered acct that allows EEs to make vol. contribs. to an IRA that is a separate acct estab. under the plan * extra "money type" or sub-acct w/n a qualif'd plan * allows IRA to be held w/n the ER's retirement plan * no partic. testing requirement

Answer 25

Deemed IRA

Question 26

Pmts that must be made once a participant reaches age 70 1/2 or retires (whichever is later)

Answer 26

Required Minimum _Distributions_

Question 27

taxable income that arises from the conduct of business that is not substantially related to the exempt purpose of the plan

Answer 27

unrelated business income

Question 28

tax payable by the estate after the death of a person

Answer 28

estate tax

Question 29

allowable deductible IRA contribution

Answer 29

* $5,500 in 2009 and 2010 * catch-up contribution $1,000 (2008)

Question 30

IRA Contribution Deductibility Limit

Answer 30

Single - $52,000-$62,000 (2007) married - $83,000-$103,000 (2007)

Question 31

* same contrib. limits as regular IRA * contribs. are taxed in yr of contrib. * contribs. can be made after age 70 1/2 * distrib. (earnings and contrib.) are not taxed if "qualifed"

Answer 31

ROTH IRA

Question 32

Contrib. AGE limits

Answer 32

* can't make reg. annual contrib. starting w/ the taxable yr the indiv. attains age 70 1/2

Question 33

spousal IRA

Answer 33

* must file joint return * created by Small Business Job Protection Act * able to contrib. up to $2,000 (combined max of $4,000) * additional catch-up contrib. if age 50

Question 34

Deductibility of contrib. to IRA

Answer 34

* IF not actively partic. in qualified ER plan = may deduct full amt ($4,000) * IF active partic. in ER plan = deduction amt is decreased based on income levels

Question 35

Qualified Distrib. for ROTH IRA requirements

Answer 35

1. age 59 1/2 2. disabled 3. died and pmt is made to benef. or estate 4. used to pay for first-time home buyer expenses (max $10,000)

Question 36

advice requirements for qualified fiduciary advisor

Answer 36

* compensation for advice provided doesn't vary w/ the investment option chosen * provided through a computer model