Traditional and Roth IRAs Flashcards
Who must IRAs be established with?
an approved custodian or trustee
You can make your full contribution up to and including the date of ___ of the following year and it will still count as the past year’s contribution
4/15
2 types of traditional IRAs
- tax-deductible
2. non tax-deductible
Tax sheltered retirement plans
These are retirement savings vehicles that qualify forfavorable tax treatment
Two favorable tax treatments are available for tax-sheltered retirement plans
- Contributions into the plan can be deducted from taxable income in the year they are contributed
- Sheltering of taxes on the investment income (dividends, interest, capital gains) from the funds in the plan until the funds are withdrawn
Unless certain requirements are met, what three bad things will happen when money is withdrawn from tax-sheltered retirement accounts?
- Taxes are due to the government
(The TOTAL amount of withdrawals are taxed as ordinary income at your marginal tax rate) - A 10% penalty is assessed
- Investment growth is severely reduced
Maximum defined contribution benefit plan has ___ dollar limit to the amount of benefits that are paid
no
Contributions to personal IRAs are limited to what?
earned income
What is considered earned income?
Wages and Salaries Commissions Self-employment income Alimony payments Parents or grandparents can supply the contributions if the child has earned income
Is unearned income disqualified?
yes
What is considered unearned income?
Dividends
Interest
Rental payments, etc.
Capital Gains
Who makes the decisions as to how to invest the funds?
the account owner
What does the benefit at retirement depend upon?
the value of your investments at retirement
Allowable IRA Investments
CDs and savings accounts Mutual funds Annuities Real estate Individual securities Legal tender, such as U.S. gold and silver coins, purchased after 1/1/87 Precious metals are now allowed
Not Allowed IRA Investments
Life Insurance
Collectables (art, stamps, gems, antiques, etc)
A participant’s own note
You must begin taking Minimum Required Withdrawals (MRDs) by ____ of the calendar year following the year in which you reach age ____ and by December 31st of each year thereafter
April 1st ; 70 1/2
What happens if your MRDs do NOT completely deplete your funds during your life expectancy?
will face 50% penalty on the amount you should have withdrawn per year
What taxes will you pay on the amount of your withdrawals
ordinary income taxes
No 10% penalty on withdrawals if you are ____ years or older
59 1/2
Any withdrawals before the age of 59 ½ are subject to a 10% penalty with what exceptions? (7)
- Due to death or disability of the participant
- Withdrawals are made in the form of substantially equal periodic payments over the life of the participant or joint lives of the participant and beneficiary
- Payment of qualified, unreimbursed medical expenses in excess of 7.5 % of AGI
- Used to purchase medical insurance of an unemployed individual
- Used to pay up to $10,000 lifetime limit of expenses incurred by first-time (must not have owned a home during the last two years) homebuyers
- Used to pay qualified, higher education expensesof the taxpayer, the taxpayer’s spouse, or any child or grandchild of the taxpayer or taxpayer’s spouse
- Used to pay back taxes because of an IRS levy
What kind of contributions are made to a non-deductible IRA?
After- tax
Who would non-deductible IRAs be appropriate for?
individuals who have maxed out their tax-deductible contributions to tax-sheltered and tax-exempt retirement plans
In a non-deductible IRA, investment earning grow ____
tax-deferred
Non-deductible IRAs can be a bookkeeping and income tax reporting nightmare
yes
Upon any distribution, Rollover IRA distributed funds are subject to ___ IRS income tax withholding
20%
You can avoid IRS income tax withholding by doing what?
a trustee-to-trustee transfer
Trustee-to-Trustee IRA Rollover (3)
- You must complete a transfer form
- The funds are transferred directly from one trustee to another–no 20% IRS withholding
- There are no limits as to the number of transfers as long as you meet the one transfer per account per year
In a Roth IRA, are contributions tax-deductible?
no
Do earnings in a Roth IRA grow tax-free?
yes
As long as you have earned income, you can continue making contributions to a Roth IRA past the age of _____
70 1/2
You can take losses in a Roth IRA Account but you must…..
close ALL of your Roth IRAs at the same time
In a Roth IRA. do you have to begin taking Minimum Required Withdrawals (MRDs) by April 1st of the calendar year following the year in which you reach age 70½ ?
No
You can withdraw your ________ from a Roth IRA at any time tax-free and penalty-free
CONTRIBUTIONS
In a Roth IRA, Per the IRS, withdrawals are first made from _____ and then ______
contributions; earnings
Qualified Roth IRA Distribution
are distributions where the earnings are not taxed as ordinary income and there is not a 10% penalty
Qualified distributions must be made from Roth IRAs that have a ___ year holding period
5
Non Qualfied Roth IRA Distributions
distributions that do not meet the previous qualified distribution requirements
The earnings portion of a non-qualified distribution is taxable as ordinary income (but penalty free) if the funds are used for what? (7)
- Due to death or disability of the participant
- Withdrawals are made in the form of substantially equal periodic payments over the life of the participant or joint lives of the participant and beneficiary
- Payment of qualified, unreimbursed medical expenses in excess of 7.5 % of AGI
- Used to purchase medical insurance of an unemployed individual
- Used to pay up to $10,000 (lifetime limit) of expenses incurred by first-time (must not have owned a home during the last two years) homebuyers
- Used to pay qualified higher education expensesof the taxpayer, the taxpayer’s spouse, or any child or grandchild of the taxpayer or taxpayer’s spouse
- Used to pay back taxes because of an IRS levy
