Individual Retirement Plans Flashcards
IRAs were established in 1974 with the passage of the ___________ ________ _________ ______ ______ (ERISA).
At first, IRAs were reserved for __________ _________ who were not covered by a qualified _________ plan but in 1981, IRA eligibility was extended to all _______ ________.
- The principal and earnings grow ______ _________ and is taxed when withdrawn.
- The annual contribution limit was raised to $________, with an additional $______ for non-working spouses.
In 1986, the _______ ________ _____ (TRA ‘86) phased out the ___________ of IRA contributions for ______ wage earners who are covered by a qualified employer plan.
IRAs were established in 1974 with the passage of the Employee Retirement Income Security Act (ERISA).
At first, IRAs were reserved for working people who were not covered by a qualified employer plan but in 1981, IRA eligibility was extended to all wage earners.
- The principal and earnings grow tax-deferred, taxed only when withdrawn.
- The annual contribution limit was raised to $2,000, with an additional $250 for non-working spouses.
In 1986, the Tax Reform Act (TRA ‘86) phased out the deductibility of IRA contributions for higher wage earners who are covered by a qualified employer plan.
Today, anyone who is younger than ______ and _____________ can set up and contribute to an IRA through just about any financial institution.
In 2018, the IRA contribution limit is $________ per spouse.
Those 50 or older can make additional “catch-up” contributions of up to $________.
Today, anyone who is younger than 70½ and earns income can set up and contribute to an IRA through just about any financial institution.
- Certificates of deposit, securities, annuities, and some forms of real estate are allowed to fund IRAs.
- Life insurance and collectibles (such as artwork, stamps, rare books, or antiques) are not permitted as IRA funding vehicles.
In 2018, the IRA contribution limit is $5,500 per spouse.
Those 50 or older can make additional “catch-up” contributions of up to $1,000.
Traditional IRA Deductions
If a person is not covered by an __________ plan, he or she can ______ the amount contributed to an IRA.
Whether an IRA contribution can be deducted from the worker’s taxes depends on
- whether the IRA owner is covered by an employer-sponsored retirement plan and
- what the IRA owner’s income level is if covered under an employer-sponsored retirement plan.
If a person is not covered by an employer plan, he or she can deduct the amount contributed to an IRA.
When distributed, traditional IRA funds are _______ .
Withdrawals from a traditional IRA before the age of ______ are subject not only to regular income taxation but also to a ___ percent tax penalty.
Distributions taken from a traditional IRA for any of the following reasons, though taxable, are exempt from the 10 percent penalty:
- The IRA owner _____ or becomes ________.
- The IRA owner has _________ expenses that exceed ____ percent of adjusted gross income (_____ percent of AGI if the owner is 65 or older.
- The distributions are used to buy a ______ .
- The distributions are used to pay for qualifying _______ _________ expenses.
- The distributions are used to pay for ________ _________ while unemployed.
- The IRA owner takes them as substantially _______ ________ over his or her life.
Beginning no later than ______ of the year following the year they turn age ______ , owners of traditional IRAs must begin taking required minimum distributions (RMDs) from their IRAs.
The IRS imposes penalties for early withdrawals from a traditional IRA.
But at a certain point, traditional IRA owners must begin taking distributions from their plans.
When distributed, traditional IRA funds are taxed.
Withdrawals from a traditional IRA before the age of 59½ are subject not only to regular income taxation but also to a 10 percent tax penalty.
Distributions taken from a traditional IRA for any of the following reasons, though taxable, are exempt from the 10 percent penalty:
- The IRA owner dies or becomes disabled.
- The IRA owner has medical expenses that exceed 10 percent of adjusted gross income (7.5 percent of AGI if the owner is 65 or older.
- The distributions are used to buy a first-time home.
- The distributions are used to pay for qualifying higher education expenses.
- The distributions are used to pay for health insurance premiums while unemployed.
- The IRA owner takes them as substantially equal payments over his or her life.
Beginning no later than April 1 of the year following the year they turn age 70½, owners of traditional IRAs must begin taking required minimum distributions (RMDs) from their IRAs.
Failure to take an RMD results in one of the stiffest penalties the IRS imposes. This penalty is 50 percent of the difference between the amount that was taken and the amount that should have been taken.
- Funds withdrawn from a traditional IRA are subject to _____________ if they were not taxed before.
- If an IRA owner dies before the funds fully paid out, they will be ____________ to the beneficiary.
- Any funds remaining in a deceased’s IRA account is included in deceased’s estate and ________ .
- Funds withdrawn from a traditional IRA are subject to ordinary income tax if they were not taxed before.
- If an IRA owner dies before the funds fully paid out, they will be paid (and taxed) to the beneficiary.
- Any funds remaining in a deceased’s IRA account is included in deceased’s estate and taxed.
Roth IRAs are limited to people with what income caps?
Introduced in 1997, Roth IRAs provide for “____________” tax benefits.
Traditional IRAs are available to anyone under ______ with _________ ____________ .
Roth IRAs are limited to those whose adjusted gross incomes (AGIs) are
- below $133,000 for single filers (2017)
- below $196,000 for joint filers (2017)
Introduced in 1997, Roth IRAs provide for “back-end” tax benefits.
- This means that contributions to a Roth account are paid with after-tax dollars and cannot be deducted.
- But the earnings on those contributions, when withdrawn, are entirely tax free, provided the withdrawal meets the requirements for a qualified distribution.
Traditional IRAs are available to anyone under 70½ with earned income.
The following chart shows how this applies:
Roth IRA Contribution Limits
The contribution limits to a Roth IRA are the same as those for a traditional IRA.
A person can maintain both a Roth IRA and a traditional IRA the maximum amount that a person can contribute to both combined is limited to the overall contribution limit of $ _______ .
The main benefit to a Roth IRA is that ____________ is due when withdrawals are taken from the account in a qualified distribution.
Interest and earnings grow _________ and are _________ when withdrawn.
However, to receive this tax-free treatment, the distribution must be a qualified distribution and two requirements must be met:
- The account must be held for a minimum of 5 years.
- The distribution must occur
- after the owner has reached age _____ or
- when the account owner _____ , or
- when the account owner becomes _______ , or
- when the distribution is used to buy _________ (limited to a lifetime maximum of $________ ).
Unlike a traditional IRA that requires distributions to begin by an owner’s age 70½, a Roth IRA _______ require mandatory distributions.
The main benefit to a Roth IRA is that no income tax is due when withdrawals are taken from the account in a qualified distribution.
Interest and earnings grow tax free and are tax free when withdrawn.
However, to receive this tax-free treatment, the distribution must be a qualified distribution and two requirements must be met:
- The account must be held for a minimum of five years.
- The distribution must occur
- after the owner has reached age 59½, or
- when the account owner dies, or
- when the account owner becomes disabled, or
- when the distribution is used to buy a first-time home (limited to a lifetime maximum of $10,000).
Unlike a traditional IRA that requires distributions to begin by an owner’s age 70½, a Roth IRA does not require mandatory distributions.
Rollover IRAs are common today as people ________
____________________.
People can roll over funds in one of two ways:
- The participant can choose to receive the funds __________ and then ___________ them into the rollover account.
- The participant can specify that the funds be transferred ________________________ of the existing plan to the trustee of the rollover IRA.
A participant has ____ days to complete a rollover IRA transaction after receiving funds for transfer or they are subject to tax and a potential tax penalty.
Rollover IRAs are common today as people move from job to job.
When a distribution is received from a qualified plan, it is normally taxed.
- However, in a rollover IRA, those distributions avoid current taxation and can continue to build tax-deferred for later access.
- There are no limits on amounts that can be transferred.
People can roll over funds in one of two ways:
- The participant can choose to receive the funds personally and then deposit them into the rollover account.
- The participant can specify that the funds be transferred directly from the trustee of the existing plan to the trustee of the rollover IRA.
A participant has 60 days to complete a rollover IRA transaction after receiving funds for transfer or they are subject to tax and a potential tax penalty.
Tax laws permit converting traditional IRAs into Roth IRAs (called a ______ ___________ ) if ________ ________ are paid on the traditional IRA when the account is converted.
Tax laws permit converting traditional IRAs into Roth IRAs (called a Roth conversion) if certain conditions are met.
income taxes must be paid on the traditional IRA when the account is converted.
Whether a person can contribute to a Roth IRA depends on the person’s adjusted gross income.
Key Points
- Earnings on a traditional IRA enjoy tax-deferred accumulation until withdrawn. At that point, withdrawals are fully taxed.
- Life insurance and collectibles (such as artwork, stamps, rare books, or antiques) are not permitted as IRA funding vehicles.
- Those who are eligible to set up IRAs for themselves can also set up separate IRAs for a non-working spouse. Eligible people can contribute up to the annual amount allowed to both accounts.
- If a person is not covered by an employer plan, he or she can fully deduct the amount he/she contributes to his or her IRA.
- Beginning no later than April 1 of the year following the year they turn age 70½, owners of traditional IRAs must begin taking required minimum distributions (RMDs) from their IRAs.
- Contributions to a Roth account are paid with after-tax dollars and cannot be deducted. But the earnings on those contributions, when withdrawn, are entirely tax free.
- A person can maintain both a Roth IRA and a traditional IRA and can make contributions to both in any given year.
- The main benefit to a Roth IRA is that no income tax is due when withdrawals are taken from the account in a qualified distribution.
- A participant has 60 days to complete a rollover IRA transaction after receiving funds for transfer.
- Anyone can convert a traditional IRA to a Roth IRA. However, income taxes must be paid on the traditional IRA when the account is converted.
Paul reached age 70 1/2 this year and has a Roth IRA worth $100,000. Which of the following statements best describes his distribution options?
- If Paul waits to take a distribution until next year, he must take two distributions.
- Paul must take his first required minimum distribution by April 1 of the year following the year he turns 70 1/2.
- Paul will have to pay a 50 percent penalty tax if he does not take the full amount of the required minimum distribution.
- Paul is not required to take any distributions from his Roth IRA.
Paul is not required to take any distributions from his Roth IRA.
