105-5 Traditional & ROTH IRA's Flashcards
Traditional IRA
- Refers to either a personal IRA or SEP IRA
- compensation is from earned income from employment
- for IRA purposes, compensation includes any taxable alimony & separate maintenance payments received under a decree of divorce or separate maintenance
- no contributions can be made once an individual attains age 70.5
- IRA owner cannot contribution more than his earned income for the year, except in the case of a spousal IRA
2 Types of Traditional IRAs
- Individual retirement accounts
- Individual retirement annuities
Spousal IRA
up to $6,500 (or $7,500 if spouse is age 50 or older) is permitted if the compensation limit is met by only 1 spouse
the spouse without earned income borrows compensation from the spouse w/ earned income to fully fund a traditional IRA
Traditional IRA withdrawal requirement
Withdrawals from the account are required by April 1 of the year following the year the individual attains age 70.5
3 Basic Rules Associated w/ the deductibility of contributions made to a traditional IRA
- if neither MFJ spouse is an active participant in an employer-sponsored retirement plan or if a single person is not an active participant, then contributions to a traditional IRA are deductible without regard to the participant’s MAGI
- If both MFJ are active participants in an employer-sponsored retirement plan, then deductibility of contributions is phased out based on the following MAGI ranges for 2019:
- Single: $64k - $74k
- MFJ: $103k-$123k
- MFS: $0-$10,000 - When 1 spouse is an active participant and 1 spouse is not an active participant, 2 separate phaseout thresholds are applicable
Prohibited Transaction
the improper use of an IRA account or annuity by the individual or any disqualified person
If an individual or the individual's beneficiary engages in a prohibited transaction w/ the individual's IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year The individual (or beneficiary) must include the FMV of all (or part, in certain cases) of the IRA assets in gross income for that year
Allowable investments in a traditional IRA
Any type of investment with the exception of:
- collectibles (though certain types of U.S.-issued coins such as the American Eagle gold coin, are permissible)
- life insurance policies
- any form of participant note or obligation
Stretch IRA
an IRA that extends the tax deferral of earnings within the IRA beyond the lifetime of the person who originally established the IRA through the use of multi-generational beneficiary designations
-Extends or stretches the period of tax-deferred earnings within an IRA beyond the lifetime of the owner who originally established it, typically over several generations
Inherited IRA
Other contributions may not be made to an inherited IRA
-A spouse beneficiary of an IRA has the additional options of either rolling over the decedent’s IRA balance to a personally owned IRA, treating the decedent’s IRA as a personal IRA, or electing to be treated as a beneficiary rather than the owner
Premature distribution penalty and exceptions for a traditional IRA
-Generally, distributions taken from a traditional IRA before the owner attains age 59.5 are subject to an early distribution penalty of 10% of the taxable amount taken (in addition to income tax on the same)
Exceptions:
- age 59.5
- total and permanent disability
- death
- for unreimbursed medical expenses > 10% of AGI
- to pay higher education costs for the taxpayer, spouse, child, or grandchild
- to pay acquisition costs of a first home for participant, spouse, child, grandchild, up to a $10k lifetime max
- to pay health insurance premiums
- Substantially equal periodic payments
Substantially Equal Periodic Payments
These payments, once begun, must continue for the greater of 5 years or until the owner attains age 59.5
3 methods for calculating substantially equal periodic payments:
1) Life expectancy method: distributions are made over remaining life expectancy
2) Amortization method: the participant’s account balance amortizes over a period equal to the life expectancy of the participant (or joint life expectancy w/ beneficiary). The IR must be a reasonable rate of interest on the date the payments begin.
3) Annuity method: the participant’s account can be divided by an annuity factor to determine a payment. A reasonable IR and a reasonable mortality table must be used in the calculation of the payment
The payments must last until the greater of 5 years or 59.5, so 5 years is really only applicable to those age 54.5 or older
ROTH IRA Contributions
Only taxpayers w/ a MAGI below certain levels are permitted to make contributions to a ROTH IRA
2019 phase out numbers:
- Single: $122k-$137k
- MFJ: $193k-$203k
- MFS: $0-$10k
Contributions may be made for years beyond when the owner has attained age 70.5
ROTH IRA Distributions
Made from a ROTH IRA when both of the following are met:
- Distribution is made after a 5 yr holding period
- Distribution is made because of 1 of the following:
- Owner attains age 59.5
- Owner dies, payment is made to a beneficiary or estate of the owner on or after his death
- Owner becomes disabled
- Payment is made to buy, build, or rebuild a 1st-time home for the owner, spouse, child, parent, direct ancestor, or grandchild (lifetime cap of $10k in amount)
5 yr holding period is an absolute requirement
5 yr holding period is not re-determined when the ROTH IRA owner dies. Thus, the beneficiary of the ROTH IRA only needs to wait until the end of the original 5-yr period for the distribution to be treated as a qualified distribution
Order of how ROTH distributions are counted
Think of each category separately - contributions, conversions, and earnings
- ROTH distributions counted against contributions 1st. Never subject to any income tax or the 10% EWP (early withdrawal penalty).
- ROTH distributions are counted against conversions second.
ROTH earnings that are withdrawn will always be subject to income taxes unless they are part of a qualified distribution
Employer plan exceptions for withdrawals
Employer plans allow for an exception from the 10% EWP for separation from service in the year someone will be age 55 or older
