Taxation of Retirement Plans

Question 1

Early withdrawals trigger a penalty before what age? How much? What are the exceptions? How can they be avoided?

Answer 1

• 59 1/2 yrs old
• 10% penalty tax
• Taxpayer disabled or expenses used to pay for death or medical expenses in excess of allowable % of AGI or for first time home buyer expenses up to $10,000
• If they deposit funds into another eligible retirement plan within 60 days

Question 2

What are the limits on IRA contributions?

Answer 2

• $5,500

- Additional $1,000 catch up for taxpayers over 50 yrs old

Question 3

Are IRA deductions for or from AGI?

Answer 3

-For AGI

Question 4

When must IRA contributions be made by to be deductible for the previous year?

Answer 4

-Original due date of return (April 15th)

Question 5

Are Roth IRA contributions deductible?

Answer 5

-No. Not deductible

Question 6

What happens when a traditional IRA (or 401 k) plan is converted into a Roth IRA?

Answer 6

• Taxable event

- Taxpayer must recognize gain at time of conversion to extent conversion amount exceeds tax basis in IRA

Question 7

What are the major features of Coverdell Education Savings Account (Education IRA)?

Answer 7

-Contributions not deductible but income may not be subject to tax if:
1) Established exclusively to pay higher education
costs
2) For a beneficiary under age 18 (unless special
needs)
3) Contributions limited to $2,000 per beneficiary per
year

Question 8

When is income taxed on traditional IRAs? What amount is taxed?

Answer 8

• In the year of withdrawal

- Taxpayer has basis for nondeductible contributions so excess above that is taxable

Question 9

When must withdrawals begin from traditional IRAs? What are the penalties if they don’t?

Answer 9

• Required minimum distributions must begin by April 1 of later of:
  1) Year taxpayer reaches age 70 1/2 or
  2) Year employee retires
• 50% penalty

Question 10

What are plans for self employed individuals called? What are the contribution limitations?

Answer 10

• Keogh or HR 10 plans
• Lesser of $53,000 or earned income (Net earnings from self employment less 50% of SE tax less allowable Keogh contribution)