Retirement Planning Flashcards
Methods of rollover from IRA and ER Retirement Plans
Two methods:
Traditional (way of) Rollover
Direct Transfer Rollover
Traditional Rollover
Only one traditional rollover is allowed in a year.
- Plan administrator transfers vested account balance or portion to the participant.
- Within 60 days the participant deposits the funds into an IRA or different employer plan.
Traditional rollover from a qualified plan requires mandatory 20% federal income tax withholding by the employer (not required for IRA-to-IRA traditional rollover).
If withheld amount is not replaced and deposited with the rollover, the withholding amount is considered distributed and subject to income tax and possible 10% penalty.
Direct Transfer Rollover
No annual limit on the number of direct transfers in a year.
Plan trustee transfers rollover directly to IRA or another employer plan.
Participant does not take possession of the funds.
No mandatory tax withholding applies.
Distro Reqs For inherited traditional IRAs - Spouse Bene
Has choice of being treated as the IRA owner or as the beneficiary of an inherited IRA;
If spouse beneficiary chooses to be treated as the owner, they may defer RMDs until they attain age 73;
The spouse beneficiary may combine the inherited IRA with their own IRA.
Distro Reqs For inherited traditional IRAs - Non-Spouse Bene (10 year rule)
10-year rule - Non-eligible designated beneficiaries must take RMDs from inherited IRAs within 10 years
Note - if the account was in RMD status at the time of death the beneficiary must make annual RMDs in years 1-9 and have the account drained by the end of year 10
Inherited Roth IRA Distro Reqs
No RMD during life of owner.
Spouse beneficiary can become owner and forego RMDs for life.
Non-spouse beneficiary subject to RMDs.
Inherited IRA / ER Retirement Plans - Eligible designated beneficiary
These beneficiaries can take distributions from inherited IRAs over their lifetime, except for minors
Spouse,
chronically ill beneficiary, disabled beneficiary,
minor children of decedent under age 21, or
Other Benes/individuals NOT more than 10 years younger than the Decedent
Early Withdrawal Penalties - What does it apply to and how much
Applies to Traditional IRAs, IRA-Funded Employer Plans, & Qualified Plans
Withdrawals taken from an IRA or qualified plan prior to age 59 ½ are subject to a 10% penalty on the taxable portion of the distribution unless an exception applies.
Early Withdrawal Penalties - SIMPLE IRA
Withdrawals taken from an IRA or qualified plan prior to age 59 ½ are subject to a 10% penalty on the taxable portion of the distribution unless an exception applies.
Distributions from a SIMPLE IRA in the first two years are subject to a 25% penalty.
Roth IRA Distributions - Regular Contributions
Contributions can come out tax-free; No income tax; no penalty
but there are requirements for distribution of earnings to be tax-free
The 5-year holding is absolute; it must be satisfied for a qualified distribution, but death, disability, or first-time home purchase can occur at much younger ages.
Attainment of age 59 ½ is not an absolute requirement for a tax-free qualified distribution to occur.
Roth IRA Distributions - Qualified Distributions
Distribution must be made 5 yr after the first taxable year for which roth contributions was made
AND
distribution must occur in relation to one of the following events:
1. AC owner’s death
2. AC owner being disabled
3. First-time home purchase (life time limit of 10K max)
4. Made on or after the individual turns 59 1/2.
Roth IRA Distributions - Roth Conversion Contributions (non-qualified)
No regular income tax
distribution within 5 yr of conversion may be subject to 10% penalty
Roth IRA Distributions - 5 year holding period
5-yr holding period for regular contributions begins January 1 of the year FOR WHICH the contribution IS MADE/DESIGNATED
Roth IRA Distributions - Non-qualified - regular contributions
No regular income tax; no penalty
Early Withdrawal Penalty Exception for Separation from Services
No penalty for withdrawing form qualified plan for separation from service during or after the year the employee reaches age 55
(Penalty applicable for IRA withdrawals for this reason)
What types of withdrawals from qualified plans cause a penalty ?
Penalties apply, If you take withdrawals from qualified plans for
Higher education expenses
health insurance premiums paid while unemployed
1st time home buyer ($10K lifetime max),
What is 72t
72T - series of substantially equal payments
(Exceptions to penalty for early withdrawals)
Inherited IRA RMD - 10-year rule for non-eligible designated beneficiary
Rules for determining required minimum distributions for IRA Beneficiaries
Rules depend on the following:
The beneficiary is the surviving spouse.
The beneficiary is an individual (other than the surviving spouse).
The beneficiary isn’t an individual (for example, the beneficiary is the owner’s estate).
The IRA owner died before the required beginning date or died on or after the required beginning date.
Inherited IRA - Options for Spouses
Surviving spouse beneficiary can treat the inherited IRA as their own and not required to take RMDs in 10 year
Inherited IRA - Non-designated benes - 5yr rule
Non-designated beneficiaries such as estate, charities, trust not qualifying as designated beneficiary
will have to drain the IRA within 5 yr
Self-employment (SE)
a tax consisting of Social Security and Medicare taxes primarily for individuals who are classified as self-employed.
The SE tax is calculated on Schedule SE of Form 1040.
The self-employment tax rate is 15.3%. (12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance))
SE Tax When NE > 168,600 (SS Taxable Wages)
25795.80 (168600 x 0.153)
Adjusted NE = NE x 0.9253
Amount taxable at Medicare = Adjusted NE - 168,600
SE Tax = Add 25795.80 + Medicare Taxed Amount
15.3% applies up to the Social Security taxable wage base of $168,600. (2024)
Earnings above $168,600 (2024) are subject only to the Medicare tax of 2.90%.
SE Tax Adjustment for AGI
Half of the SE tax is an adjustment to income deduction on IRS Schedule 1 in calculating “for AGI”.
One-half of the SE is subtracted from net earnings from self-employment in the calculation of the maximum contribution to a retirement plan for a self-employed person.
