Retirement Planning - Other Tax Advantaged Plans Flashcards
Qualified plans vs other tax-exempt plans
What are the key features of Traditional IRA’s?
- contributions limited to the lesser of $6,000 or earned income, catch up of $1,000 over age 50
- Spousal IRA can be contributed to if a someone has no income but their spouse has earned income. Spouse would need to make at least $12,000 for both to be eligible to max out IRA’s for the year.
- contributions must be made to both Traditional and Roth IRA accounts by due date of tax return without extensions. and must be made in cash.
- Required Minimum Distributions must begin by April 1st of the year following age 72.
Earned income vs not earned income for IRA contributions.
What is the penalty for Excess Contributions to IRA’s?
-Excess Contributions are subject to an excise tax of 6%, this penalty is charged each year the excess contribution remains in the account.
This can be avoided by withdrawing the excess contribution and any related earnings from the account by April 15th of the next year.
Is your IRA contribution deductible?
The deduction limit will be reduced based on a proportion equal to the amount by which the individuals AGI exceeds the lower limit of the phaseout range divided by $10,000 or $20,000 in the case of a joint return
IRA Deduction examples
What is considered Active Participation?
-An active participant is someone who benefited under one of the following plans from contribution or an accrued benefit:
Qualified plan Annuity plan Tax sheltered annuity 403(b) plan Certain government plans Simplified employee pensions (SEPs)’ Simple retirement accounts (SIMPLEs)
How are Non-Deductible IRA contributions Treated?
- Non Deductible IRA contributions create an adjusted basis in the IRA.
- withdrawals from an IRA will consist partially of account earnings that have not been subject to income tax and partially adjusted basis for which income tax has been paid.
- Distributions from IRA’s with Non deductible contributions and Rollovers from qualified plans with After tax contributions (thrift plans) are a combination of return of basis and ordinary income.
- Ratio of Adjusted basis = AB Before Withdrawal/FMV of account at Withdrawal
What are the rules regarding 10% early withdrawals from IRAs?
- Traditional IRA and Roth IRA distributions taken before age 59 1/2 will be subject to the 10% penalty unless a specific exception applies.
- see the following chart for exceptions to the 10 percent withdrawal penalty for IRA’s and Qualified plans.
What are the key features of IRA annuities?
- Cannot be pledged as collateral or loans be taken from the contract.
- Annual premiums cannot exceed $6,000 for 2022
- Distributions are the same For IRA’s/
Roth IRAs vs IRA chart
What are the key features of IRA’s?
- Roth IRA’s can be funded at any age with Earned income,
- not subject to RMD’s
- Can only contribute if you fall within the limits, regardless if you are an active participant or not.
- Qualified Distributions are not subject to 10 percent penalty and not included in owners income.
What are Qualified Distributions from Roth IRA’s?
- Distribution must be made after a five year period which begins on January 1st of the taxable year for which the first regular contribution is made to any Roth IRA of the individual or when first conversion contribution is made.
- The distribution must satisfy one of the four following requirements:
- after age 59 1/2
- made to beneficiary as a result of death.
- for Disability.
- First time home purchase (cap of $10,000)
-If a beneficiary receives the account the five year clock does not reset.
How are Non Qualified Distributions from Roth IRA’s treated?
-Non Qualified Distributions treated on a FIFO Basis:
- Regular Contributions
- Conversion Contributions
- Earnings
Roth IRA Distribution Flow Chart