Taxation of Retirement Plans

Question 1

When is income for contributions of salary to qualified pension plans recognized? What about earnings in the plan (growth)?

Answer 1

When distributions are made from the pension, taxed as ordinary income.
When distributed.

Question 2

What are criteria for the plan to be qualified?

Answer 2

Non-discriminatory, funding, vesting, and certain participation/coverage requirements.

Question 3

What is the tax implication when there is an early withdrawal (before age 59 1/2)?

Answer 3

A penalty of 10% plus the taxation (marginal tax rate) on the withdrawal.

Question 4

What is IRA?

Answer 4

Individual retirement account.

Question 5

Traditional IRA: what is the limit on contributions? For married couple?

Answer 5

I: Lower of 2017: $5,500. or compensation. If he is older than 50, additional 1,000 allowed or compensation amount.

M: $11,000 as long as one person has the compensation above the amount.

Question 6

Traditional IRA: how much can TP deduct the contribution? Is this amount impacted by the amount of income?

Answer 6

All as long as TP is not a participant in another qualified pension plan.
No.

Question 7

Traditional IRA: What happens re: deduction if TP participates in another qualified plan? What about for a spouse who is not an active participant in another plan?

Answer 7

IRA contribution can be deducted but it is phased out proportionately above a certain level of modified AGI.

Spouse: can deduct but also subject to phase out limit (higher amount than for the active spouse).

Question 8

Traditional IRA: What’s the benefit does TP have who can’t deduct contributions?

Answer 8

Defer the income (including growth) until distribution.

Question 9

Traditional IRA: what is the due date for contribution to be deductible for the previous tax year?

Answer 9

April 15 (the original due date of the return).

Question 10

Traditional IRA: On which form must nondeductible contribution be reported? Benefit for this report?

Answer 10

Form 8606.

This basis will reduce the tax at distribution.

Question 11

Traditional IRA: when must distribution be started? If not?

Answer 11

April 1 of the later of when TP reaches age 70 1/2 or TP retires.
Penalty.

Question 12

Roth IRA: Difference?

Answer 12

Contributions are never deductible and TP may not be eligible to make contributions if modified AGI exceeds certain levels.
Distributions are not taxable.

Question 13

Roth IRA: When are distributions non taxable?

Answer 13

• Distributions occurred 5 yrs or more from the date of the initial contribution.
• Distributions are made on or after the TP attains age 59 1/2.

Question 14

Roth IRA: What’s the penalty when TP does not start withdrawing at age of 70 1/2?

Answer 14

No penalty. Withdrawal not required.

Question 15

Roth IRA: What are exceptions to 10% early withdrawal penalty?

Answer 15

If TP is disabled, age 59 1/2, separated from service after age 55, or has died.

• Made in the form of certain periodic pmts over TP’s expected life.
• For first-time homebuyers (up to $10,000).
• Used to pay qualified higher education expenses.
• Pay health insurance premiums if unemployed.
• Used to pay medical expenses in excess of AGI floor.

Question 16

Roth IRA: Tax implication when converting traditional IRA to Roth IRA? When converting 401(k) plans?

Answer 16

Must count conversion as income and taxed (minus any basis).

Same rule.

Question 17

Roth IRA: On which form must the conversion be reported?

Answer 17

Form 8606.

Question 18

Distribution: what is the “basis” in the plan? Tax implication of this basis?

Answer 18

Nondeductible contribution. Reduces taxable income.

Question 19

Distributions: What are 3 things that never create basis?

Answer 19

1. Contribution made by employers.
2. Tax deductible employee contributions.
3. Tax-free earnings inside the plan.

Question 20

Distributions: When required distribution is not made, what is the tax implication?

Answer 20

Tax of 50% of amount not distributed must be paid.

Question 21

What is Keough plans?

Answer 21

For self-employed TPs.

Question 22

Keough plans: Contribution limitations?

Answer 22

Lesser of the annual limitation or 100% of earned income.

Question 23

Keough plans: Formula to compute “earned income”?

Answer 23

Earned income = Net income from self-employment - 50% of the self-employment tax - the allowable Keough contribution.

Question 24

What is Section 401(k) plans?

Answer 24

Plan which allows voluntary employee contributions to reduce taxable salary up to an annual limit, plus a catch-up amount for those age 50 and over.
Many employers match a certain % of employee contributions.

Question 25

What is SEP?

Answer 25

Simplified Employee Pension Plan.

An individual retirement plan established by an employer.

Question 26

SEP: when must an employer make contributions for a year?

Answer 26

When an employee who has;

• reached age 21.
• performed service for the employer during at least three of the immediately preceding 5 yrs.
• has received a certain level of compensation.

Question 27

SEP: what is the maximum contribution limit for employer?

Answer 27

Can’t exceed lower of;

25% of compensation or The dollar limitation for defined contribution plans.

Question 28

SEP: whats the due date of making contributions if want to deduct?

Answer 28

Extended due date of the return (Oct 15) or must be made before filing tax return.

Question 29

Section 529 plans: what is it? Criteria?

Answer 29

Used to save for college expenses and earnings can be excluded from gross income.
Beneficiary must be specified.

Question 30

Section 529 plans: Tax treatment for contributions?

Answer 30

Not deductible.

Question 31

Section 529 plans: Tax treatment for distributions?

Answer 31

Not taxable as long as used for qualifying higher education expenses - tuitions, fees, book, room and board etc.

Question 32

Section 529 plans: Maximum limit for contribution?

Answer 32

Up to $250,000.

Question 33

Section 529 plans: Tax implication for distribution for non qualified purposes?

Answer 33

10% penalty.

Question 34

Education IRA: maximum contribution limit? Age limit of beneficiary?

Answer 34

$2,000 (2016).

No contribution allowed for a beneficial 18 or older.

Question 35

IRA: what is the base amount for contribution phase out for TP (married and jointly filed)? What does this mean?
For spouse? For contribution amount limit for single?

Answer 35

$99,000 - 119,000.
TP can participate in another qualifying plan as long as his income does not exceed this amount and deduction of $5,500 can be claimed.

Spouse: $186,000 - 196,000.

Single: $72,000.