IRAs Qualified Retirement Plans, Pensions, and Annuities Flashcards
What are the tax implications of distributions from retirement plans or annuities?
Distributions are taxable unless they represent the taxpayer’s cost basis (after-tax contributions)
Taxpayers receive Form 1099-R for these distributions, detailing the taxable portion and withheld federal income tax.
What are the two main types of qualified retirement plans?
- Defined Contribution Plans (e.g., 401(k), 403(b), profit-sharing plans)
- Defined Benefit Plans (e.g., traditional pension plans)
Qualified retirement plans are employer-sponsored and offer tax benefits.
What is the tax benefit of employee contributions to qualified retirement plans?
Employee contributions are pre-tax, lowering taxable income
Contributions and earnings grow tax-deferred.
What is an Individual Retirement Account (IRA)?
A personal retirement savings account with specific tax advantages
There are different types of IRAs, including Traditional and Roth IRAs.
What are the key features of a Traditional IRA?
- Contributions may be tax-deductible
- Earnings grow tax-deferred
- Distributions are taxable unless representing after-tax contributions
- Required Minimum Distributions (RMDs) begin at a specified age
What are the key features of a Roth IRA?
- Contributions are not tax-deductible
- Earnings grow tax-free
- Qualified distributions are tax-free
- No RMDs required during the owner’s lifetime
What is a Roth conversion?
A process where a taxpayer converts a Traditional IRA into a Roth IRA, with the converted amount being taxable
The converted amount is exempt from early withdrawal penalties.
What are recharacterizations in the context of IRAs?
The process of transferring contributions made to one type of IRA to the other by the tax return deadline
Post-2018, conversions to a Roth IRA cannot be recharacterized.
What is a Qualified Distribution?
Withdrawals from retirement plans that are generally taxable and may incur a 10% early withdrawal penalty if taken before age 59½
Exceptions include disability, qualified education expenses, first-time homebuyer costs, and certain medical expenses.
What is a Qualified Charitable Distribution (QCD)?
A distribution allowing taxpayers aged 70½ or older to donate up to $100,000 directly from an IRA to a qualified charity, which is non-taxable and counts toward RMDs
Available for traditional and Roth IRAs but not for employer-sponsored plans.
What are the rules for Inherited IRAs post-2019 under the Secure Act?
Most beneficiaries must withdraw the entire IRA balance within 10 years after the owner’s death
Exceptions apply to spouses, minor children, disabled or chronically ill individuals, and those within 10 years of the decedent’s age.
What constitutes a prohibited transaction in retirement plans?
Improper use of retirement plan assets, such as selling or leasing property between the plan and a disqualified person
Using plan assets for personal benefit is also considered a prohibited transaction.
What are the penalties for prohibited transactions?
The entire IRA balance may be treated as distributed and taxed, with additional penalties if the transaction is not corrected.
What is the difference in tax treatment between qualified and non-qualified annuities?
- Qualified Annuities: Taxed like retirement plans (taxable distributions unless representing basis)
- Non-Qualified Annuities: Distributions are taxed on earnings first, then as a return of basis
