Unit 24 - Retirement Flashcards
Who is responsible for the catch up provision?
EGTRRA - Economic Growth and Tax Relief Reconciliation Act of 2001
Spousal IRA
If one spouse has little or no income, a spousal IRA can be opened for that spouse and contribution limits are the same as any other IRA
When can IRA contributions be made?
From Jan 1 of that current year, to the due date for filing your taxes (generally April 15th of the following year). Tax filing extensions do not extend this. It is due by April 15 no matter what.
Penalty for excess contributions?
6% penalty, unless excess is removed before filing taxes (but no later than April 15)
Roth IRA
After tax contributions
Not tax deductible
Earnings are tax free if taken after 5 years of the initial deposit, provided the:
-account holder was 59 1/2; or
- money withdrawn is used for first-time purchase of a principal residence (up to $10k); -account holder has died or become disabled
-Can continue to make contributions after 70 1/2 (unlike traditional IRA) if you still have income and not required to take distributions.
-income limits can reduce contribution limits based on AGI
-A minor can be named as beneficiary
Traditional IRA
Pre-tax dollars
Tax Deductible up to limit $6K/$12K or 100% of compensation.
Earnings are tax deferred until withdrawn.
Catch up provision $1000 for 50+
Cannot make additional contributions after 70 1/2 and must take distributions by April 1 of the year after he turns that age. Every year after, RMD must be made my Dec 31st.
Assume Question is about a traditional IRA unless otherwise specified
Qualified plan
Employer sponsored
Pre-tax contributions
Earnings grow tax deferred until withdrawn
Can postpone distributions until retirement (except for a SEP)
Qualified
Pretax contributions
Tax deferred
Can be a qualified plan or IRA
Non-Qualified
Employer sponsored After tax dollars Gains or income is taxed as ordinary income. Can discriminate No tax advantages Example: Deferred Compensation Plan
Deductible Contribution
Contribution made by an individual to a qualified plan or to an individual IRA. Means contributions are pre-tax or otherwise tax deductible.
Nondeductible Contribution
Contribution to a qualified plan or an IRA which is made with after tax dollars. Growth is tax deferred, but no tax benefit to contributions.
Max Contribution
Max combined for a traditional and Roth is $6000 ($7000 if 50 or older)
AGI
AGI = Earned income + Other Income (dividends, capital gains, alimony rec’d, profits from a business) - deductible items (4)
traditional IRA contribution,
alimony paid if divorce decree was prior to Jan 1 2019,
self-employment tax, and
penalties paid on early withdrawal from a savings account. (Does not include income from municipal securities)
Roth Conversions
Entire amount rolled over is added to investors ordinary income.
As long as transferred trustee to trustee, or 60 day rollover, no 10% penalty.
Conversions may be done from traditional IRA, qualified employer plan, Simple IRA and SEP IRA.
SEP IRA we
Simplified Employee Pension
Easy to administer (bc primarily used by small business)
Funded by employer
Employer contributions are tax deductible to employer
Qualified plan - non discrimination , all eligible must be able to participate. Taxed on withdrawal. Earnings tax deferred.
No catch up provisions
Fully vested immediately
Employer must be 21, service for 3 of the last 5 years and made at least $600 that year to be eligible
Employer can contribute up to 25% of an employees salary each year up to $56K. He must contribute same % to each employee.
Distributions must begin by April 1 after year they turn 70 1/2.
Every year after, RMD must be made my Dec 31st.
