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IRA accts
IRA
| Question | Answer |
|---|---|
| ERISA | Employee Retirement Income Security Act - created the IRA to give employees with not retirement plans to have some tax benefits for retirement |
| spousal IRA | designed to provide retirement assistance to uncompensated homemakers |
| traditional IRA | retire sav plan, funded by an annuity or a trust that meets certain requirements, & which may permit tax-deductible contributions and tax-deferral of earnings. It allows individuals to save and accumulate funds for retirement on a tax-favored basis. |
| 2 conditions indiv must meet to give to an IRA | •have earned income; and •not yet have attained age 70½. (earned income does not apply to Spousal IRA) |
| earned income | •salary •fees •tips •bonuses •commissions •alimony (The IRA rules do not include interest, dividends, or capital gains under the heading of earned income) |
| spousal IRA is available only if | the participant is married and filing federal income tax on a joint basis. A nonworking spouse who files a separate return may not contribute to a spousal IRAq |
| what happens if you over contribute to an IRA? | 6 percent is levied annually until the excess is withdrawn - Excess contributions to an IRA cannot be recharacterized and applied as contributions for the following year. These excess funds must be withdrawn to avoid the 6 percent penalty |
| Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) | increased the amount allowable to IRA annually |
| how much are you allowed to put in you IRA annually? | $5000 per year if over the age of 50 you are allowed an extra $1000 |
| Reduction of deduction | Maximum contribution x AGI-applicable dollar amount/$10,000 or for joint divide by $20,000 |
| if employee participates in com retire plan, how much can a you deduct from taxes if AGI is 61k and applica dollar amount is 58K | 5000*61000-58000/10000 = 1500.00 (THIS IS THE REDUCTION OF THE DEDUCTION) THEN SUBTRACT THIS FROM 5000.00 ANNUAL AMOUNT ALLOWED SO 5000-15000 = 3500.00 |
| even if all the funds are not deductable if an employee participates in employer plan, can they still contribute the full $5000 amount? | yes and even $6000 if 50 or over. Just all will not be deductable |
| Some married individuals may choose to file separate federal income tax returns how does this affect them if they already participate in an employer sponsored retirment program? | his or her applicable $$ amount is zero. What that means in terms of the tax deductibility of a traditional IRA contribution for an active participant is that the individual’s adjusted gross income must be less than $10,000 or all deductibility is lost. |
| tax credit | nonrefundable credit that is limited to the applicable percentage of traditional or Roth IRA contributions up to $2,000 for lower income qualifying families - this directly reduces the amount of tax owed |
| what does it mean that the tax credit is nonrefundable? | if no tax is owed, no tax credit is received. |
| rollover | The device used to maintain the favorable tax treatment of these retirement funds |
| eligible rollover distribution | any distribution made to an employee of the funds to his or her credit in a qualified trust |
| what types of distributions are not elig. for rollover? | rmd, hardship distrib, distrib for several yrs, |
| what are the 2 types of rollovers? | 1.trustee to participant to trustee 2.trustee to trustee |
| what is the penalty for distribution to a participant from a qualified plan, § 457 governmental plan, or § 403(b) tax-sheltered annuity | 20% withholding, the amount withheld is itself considered a distribution and subject to taxation and premature withdrawal penalties. this does not apply to Rollovers from traditional IRAs |
| how long do you have to roll funds once you receive them from a retirment acct to avoid paying taxes? | 60 days |
| how often can you do a rollover? | 1 X per year if the indiv recv's the fudns, if they do not recv funds there is not limit |
| certain rollovers of after-tax contributions are permitted - WHEN? | distributions after December 31, 2001 to a: •traditional IRA or •defined contribution plan (only if the plan separately accounts for after-tax contributions and the funds are transferred in a direct trustee-to-trustee transfer) |
| what are the exception to the 60-day rollover rule | these include hardships like: Examples of circumstances that could result in a waiver of the rule include disasters or other events beyond the individ control |
| how much is the premature distrb penalty? | 10% |
| amount of the traditional IRA distribution that would be includible in the individual’s gross income is the total amount of the distribution. However, there may be parts of a distribution that are not includible - why? | distribution of a nondeductible contribution |
| when does the 10% pentalty not apply | death, disability, medical care allowable expenses, pay health prem for unemployed, used for qual education expenses for self, spouse child or grandchild, up to 10k for 1st home, |
| how do you determmine how much is taxable for funds that are after tax funds | distrib amt X (uncovered nondectible contrib/total IRA bal at yr end+distrib amt)=tax free portion of contribution |
| There is a tax drawback to the use of a traditional IRA, what is it? | any capital gains treatment that the gain on the underlying investment might otherwise qualify for is lost. So, any earnings are subject to ordinary income tax, not capital gains treatment. |
| when must a person take distribution from their traditional IRA | April 1 of the year following the year in which he or she turns age 70½. This is known as the required beginning date, or RBD |
| what is the drawback to waiting until Apr 1 following the yr you turn 70 1/2 to take your first distributuion? | you must also take one that same year by Dec 31st. |
| The required beginning date for receiving the first RMD from an employer-sponsored retirement plan is when | April 1 of the year following the participant’s reaching age 70½ or retiring. |
| Uniform Lifetime Table | governs most required lifetime distributions by prescribing distribution periods depending on the age of the individual |
| How much is the tax if you fail to make the RMD? | 50% of the amount not taken. |
| how is RMD amount determined | IRA balance at yr end before the yr of the distrib, then use the Uniform life table to determine years left, divide IRA by yrs = amount of RMD |
| what happens if Death Before an Owner’s Required Beginning Date | distributions must normally be made pursuant to either the: •life expectancy rule •five-year rule |
| •life expectancy rule | the interest must be distributed over his life or life expectancy and must start no later than the end of the calendar year immed. following year of IRA owner’s death. life expect distrib. rules are changed somewhat when the benefici is surviving spouse |
| what options does the spouse have when the owner dies and has an IRA? | take deceased owner’s IRA as her own, or if not her own, must take distrib by cal yr end, or in yr spouse would have turned 70 1/2 |
| Five-Year Rule | In an IRA distribution taken under the five-year rule, a beneficiary's interest must be completely distributed within five years following the IRA owner's death. |
| Death On or After the Required Beginning Date | IF before the entire IRA interest has been distributed, the balance of the IRA must be distributed at least as quickly as under the method of distribution in effect at the time of the traditional IRA owner’s death. |
| Under the “catch-up” provision, who can make larger annual IRA contributions? | those who are age 50 or older |
| From which pla would a trustee NOT be required to withhold 20 percent of a distribution for tax purposes? | traditional IRA |
| For purposes of contributing to a traditional IRA, all of the following are considered earned income EXCEPT | A. salaries b. commissions c. alimony d. dividends DIVIDENDS |
| To be eligible to establish and contribute to a nonspousal traditional IRA, an individual must meet two conditions. What are they? | have earned income and be younger than 70½ |
| Which 3 THINGS are primary factors affecting an IRA’s value | contribution level, duration, ROR |
| what is one of the main things the Taxpayer Relief Act of 1997 accomplished | created additional classes of IRAs |
| Roth IRA | a personal retirement savings plan, funded by an annuity or trust/custodial account, which provides income tax deferral and may provide tax-free distribution of earnings |
| who is eligible for a Roth IRA | Eligibility for a Roth IRA is limited to individuals, regardless of age or qualified plan participation, whose income does not exceed certain adjusted gross income limits. |
| four significant differences between the traditional IRAs and Roth IRAs | contrib not deductible, potential for tax-free distribution of account earnings, elig. limited based on AGI, do not impose required distributions |
| Are Roth IRA's reduced or eliminated for active participants in employer-sponsored retirement plans | because Roth IRAs don’t offer tax deduction of contributions, they are not affected by an individual’s active participation in a qualified plan - the only thing that would limit contrib is high income. |
| what is the max amt to contrib to a Roth IRA? | Same as traditional, 5000 per year unless 50 yrs or over, then 6000 |
| what is the formula to determine what can be added annually to a Roth IRA? | max contrib X (AGI-applicable $ amt/15000(or 10k if joint or married filing sep)) = Contrib reduction |
| T or FA any contribution made by an individual to one type of IRA (Roth or Tradit) will reduce the amount of contribution that can be made to the other | TRUE!!! |
| ARE ROTH CONTRIB MADE WITH PRE TAX OR AFTER TAX DOLLARS? | AFTER TAX $$ |
| What is the attraction to Roth IRA since they are on tax deductible in the beginning? | The earnings are potentially tax deductible |
| Qualified Distributions | made no earlier than five years after opened, one of these is true: The indiv 59½, distrib. qualified first-time homebuyer distribution. •The individual is disabled. •The distribution is made to a beneficiary on or after the individual’s death. |
| how are taxes applied to a Roth IRA when it is not a qualified w/d (after 5 yrs or 59 1/2)? | FIFO tax treatment - owner can withdraw all of his or her contributions from the account at any time without incurring any income tax liability—while earnings left in the account continue to enjoy tax deferral |
| when is the tax penalty waived for the Roth IRA Owner? | death, medical care to the extent allowable as a medical expense deduc, unemp'd indiv for pmt health ins, qualified educ, first-time homebuyer, |
| T or F When a traditional IRA owner converts to a Roth IRA, those previously-untaxed funds are subject to income taxation. | TRUE |
| can you convert a traditonal IRA to a Roth? Are there any income limitations? | yes you can convert, limitations were AGI less that $100k, however thiese limitations were removed. |
| Roth IRA owner’s death, distributions must normally be made how? | according to the life expectancy rule, or five-year rule the same rules as with the traditional IRA |
| what must be true for the surviving spouse to take the deceased spouses IRA as her own? | be the sole beneficiary and have unlimited rights to make w/d |
| t or f The annual $5,000 IRA contribution limit applies separately to traditional IRAs and Roth IRAs, meaning that any one individual could contribute $5,000 to a traditional IRA and another $5,000 to a Roth IRA in a single year | false |
| ch of the following tax benefits are characteristic of Roth IRAs? | I.deductibility of contributions II.tax deferral of earnings III.possible tax-free distributions ii - iii only |
| t or f There is no income limit that applies to eligibility to contribute to traditional IRAs; Roth IRAs do impose income limits. | true |
| t or f Both traditional IRAs and Roth IRAs provide for tax-deferred account accumulations. | true |
| t or f Both traditional IRAs and Roth IRAs provide for penalties for premature distributions. | true |
| t or f There is a mandatory distribution requirement imposed on both traditional and Roth IRAs. | false |
| For 2010 and later years, the ability to convert a traditional IRA to a Roth IRA is limited to those whose adjusted gross incomes are less than $100,000. | false |
| t of f •IRA funds may be invested in life insurance contracts or certain collectibles, such as antiques or art | false |
| two basic funding approaches for individual retirement accounts (both Roth and Traditional) | 1.trust or custodial account 2.annuity |
| Some of the non-annuity products that are normally used to fund individual retirement accounts through a custodial account include | •mutual funds, CD's, stocks, bonds, certain gold and silver coins |
| The savings and investment products which are specifically prohibited as IRA funding vehicles are: | •life insurance •collectibles, such as antiques, artwork, etc. |
| what tax benefits could be lost if certain products are used in an IRA? | growth in value of stocks and coins is normally associated with a gain in its value, rather than with dividends or interest. That gain could enjoy capital gains tax rates if the investment were not a part of an IRA |
| why can't an annuity contract used in an IRA must be nontransferable by the owner | The practical effect of this rule is that the annuity cannot be used as collateral for a loan |
| what would happen if an annuity contract was used for a loan? | become disqualified. The plan would simply cease to be an individual retirement annuity immediately subject to income taxation |
| dividend payable under the annuity contract must be used how? | reduce future premiums or purchase additional benefits |
| FINRA | Financial Industry Regulatory Authority |
| variable annuity should be recommended for use in an IRA or tax-qualified plan only when? | when the individual is seeking the nontax benefits of an annuity |
| non tax benefits | 1. death benefit 2. Lifetime Income 3. |
| before recommending a VA a reg rep must do what? | gather info for: age,income.financial situation and needs, investment experience and objectectives, intended use of the deferred VA, investment time horizon, existing assets, liquidity needs, liquid net worth, risk tolerance, tax status |
| what actual things must the customer know about the VA itself? | ◦surrender charge ◦potential tax penalty ◦various fees and costs ◦market risk |
| Investment gains eligible for capital gains treatment retain their identity as capital gains when used to fund a traditional IRA and will be subject to tax at capital gains rates when distributed from the IRA | false |
| t or f The annuity cannot be used as collateral for a loan. | true |
| The annuity must accept flexible premium payments. | true |
| The annuity must be fixed; it cannot be a variable annuity. | false |
| The owner’s interest in the annuity must be nonforfeitable. | true |
| What is the primary benefit of using an annuity to fund an IRA? | the availability of an income that cannot be outlived |
| All of the following are permissible funding options for IRAs EXCEPT: | a. mutual funds b. life insurance c. CDs d. Bonds life ins |
| What may be used to fund an IRA | custodial account, commercial annuity |
| ESA | Coverdell education savings account |
| An individual can put a maximum of how much into and education sav acct (ESA)? | $2000 per year |
| What is the maximum modified AGI that a joint or single tax filer can have and still take full advantage of ESA? | $190k Joint or $110 single |
| what is the modified AGI when it comes to ESA? | Modified adjusted gross income refers to the exclusions for income derived from certain foreign sources or United States possessions. |
| What if the joint tax payer has AGI above $190k, can they still contribute to ESA? | The maximum contribution amount is phased out for joint tax filers with modified adjusted gross incomes between $190,000 and $220,000. No ESA contribution may be made by a joint tax filer with a modified AGI of $220,000 or more. |
| what formula is used for joint tax payers who earn over $190k and want to contribute to ESA | Maximum permitted contribution x (Mod AGI – $190,000/$30,000)= Reduction in contribution |
| what formula is used for single tax payers who earn over $190k and want to contribute to ESA | Maximum permitted contribution x (Mod AGI – $95,000/$15,000)= Reduction in contribution |
| who can be the beneficiary of a Coverdale Education Savings account? | A beneficiary may be any individual who is age 18 or less, However, if the beneficiary is a special needs beneficiary, the “age 18 or less” requirement does not apply |
| t or f an individual may make a $2,000 contribution for his or her child, grandchild, or someone who is not related at all. | true. legislation that authorized ESAs and Roth IRAs does not require any relationship between the ESA donor and the beneficiary |
| does legislation allow the purchase of life insurance with the assets of the ESA? | contribution to a Coverdell ESA must be made to a trust or custodial account which may allocate the funds to a wide range of investments, but not to life ins |
| are contrib to ESA tax deductible? | no, they are made with after tax dollars. |
| ESA excise tax | tax on educ savings acct that is excess of $2000 per year or the allowable amount according to their income |
| 2 limitations to ESA distributions | 1. must be soley for education expenses 2. distribution must be used for the designated beneficiary |
| what determines if an ESA distribution is allowable for room and board? | as long as the student is enrolled at least half-time |
| eligible educational institution | remarkably broad and covers virtually all accredited public, nonprofit, and proprietary educational institutions |
| how do you determine the taxes and fees for a ESA distrib that is not totally used for college expenses? | 1. dist amt-amt contrib to plan 2. amt qual/amt not qual of total distrib= % of qual exp 3. that % X amount of earnings on acct (this will give tax free amt 4. subt tx free amount from total earnings, there is also a 10% penalty on this amt |
| by what age do ESA need to be used? | generally by the age of 30 within 30 days of 30th bday, except in the case of a special needs indiv |
| can funds be rolled over? | yes, provided the designated beneficiary of the recipient ESA is a member of the family of the original designated beneficiary and has not yet reached age 30 |
| 2 rollover requirements for both ESA's and IRA's | made no later than 60 days after the date of distribution from the original ESA or IRA. And, only one rollover is allowed during any 12-month period. |
| What is the purpose of an ESA? | to fund education expenses on a tax-favored basis |
| The eligibility to make ESA contributions is phased out for joint tax filers with modified adjusted gross incomes between amount _____ and _____. | $190k - $220k |
| According to the ESA rules, an eligible educational institution is limited to only public, state-supported schools. ESAs cannot be used to fund the costs of education at private schools. | false |
| Contributions to a Coverdell ESA are not tax deductible. | true |
| t of f An eligible educational institution is any college, university, vocational school, or elementary, secondary or post-secondary institution. | true |
| why dont employers have qual retirement plans? | •high levels of paperwork and bookkeeping needed; •high costs of various consultants, such as lawyers, accountants, and actuaries; •assumption of a fiduciary responsibility; and •contribution inflexibility. |
| SEP | simplified employee pension plan as an alternative to a qualified retirement plan |
| what does a SEP do? | employer’s agreement to contribute to traditional IRAs that are established for and maintained by its employees, in their names |
| what is an attraction to a SEP as opposed to a qual plan for the employer? | mcuh easier & less expensive to install & administer than a qualified retirement plan. As a result, the need for the various consultants normally associated with the establishment of a qualified retirement is minimized, further reducing employer’s cost |
| SIMPLE | savings incentive match plans for employees |
| T OR F A SEP allows for higher contribution levels than traditional or Roth IRAs, has fewer restrictions than qualified retirement plans | true, although employees not able to contribute to these SEP plans after 1996 |
| Upon becoming participants of a sep when are employees vested? | 100% immediately |
| what are the tax benefits to the employer for SEP contributions? | •SEP contributions are deductible by the employer. •SEP contributions are excluded from the employee’s current income. |
| what limitations of contributions do employers have with the SEP plan? | no more than the lesser of 25 percent of compensation and $50,000 |
| if SEP contributions are made, they must be made to who? | •is at least 21 years old; •has performed services for the employer during the year for which contribution is made; and •has earned at least $550 in at least three of the preceding five years. |
| Few employees may be excluded from an employer’s SEP who are they? | •covered by a collective bargaining agreement if retirement benefits have been the subject of good faith bargaining; and •nonresident aliens, if they received no income from the employer from U.S. sources. |
| integrated SEP | must provide for a uniform contribution disparity among all employees |
| what does uniform mean when referring to an integrated SEP? | it must use the same •base contribution percentage, and •excess contribution percentage for all employees in the plan |
| dis·par·i·ty | lack of similarity or equality; inequality; difference: a disparity in age; disparity in rank |
| integration level | Amount of pay level and employer can set an amount of pay for a SEP acct. The % of contrib may be 5% up to the integration level and the more for over $20k |
| EXCESS ALLOWANCE | the difference between the allocation above the integration level and the allocation at or below the integration level |
| t or f excess sep contrib is in addition to the base % paid on the amount paid on the integration level | true, 5% on base amount and then 10.7 on anything over the base salary amount. |
| what amount are employees allowed to put in the SEP accts? | $5000 unless they are catching up, age 50 or older |
| how much can an employee contrib during the year if their employ and they are both active in the plan? Formula? | Maximum contribution X (AGI – applicable dollar amount/$10,000 ($20,000 for joint filers) = Reduction of deduction |
| how do you determine the tax free portion of a SEP distribution | Distribution amount x (Unrecovered nondeductible contributions/Total SEP balance + distribution amount) |
| t or f As is the case with traditional IRAs, the Internal Revenue Code requires that minimum distributions from a SEP begin no later than the employee’s age 70½. | true |
| how is RMD amount for a SEP acc determined? | equal to the value of the employee’s SEP account divided by his or her remaining life expectancy. The Uniform Lifetime Table governs lifetime required distributions by prescribing distribution periods depending on the age of the individual |
| what is the benefit of doing a rollover? | By rolling over alue of accounts to which before-tax contributions have been made, the account owner avoids inclusion of distribution in his or her annual income. Furthermore, the rolled over funds will continue to enjoy tax deferral of growth. |
| what is the time frame and the amount of rollover difference between going from trustee to trustee and trustee to indiv? | trustee to trustee can be done as often as owner wished, if to employee then only 1 X per yr and has 60 days to roll money into new fund |
| Once an employer has established a SEP plan for its employees and begins making contributions to employee accounts, contributions must be made every year thereafter | false |
| What is the earliest age that regular distributions can be taken from a SEP plan without penalty? | 59 1/2 |
| What is the annual limit on employee contributions to a SEP plan? (Search Chapter 5) | It is the same as the annual limit that applies to traditional and Roth IRAs. |
| t or f Trustee-to-trustee rollovers are generally considered transfers | true |
| t or f Rollovers of SEP funds distributed to the employee must be completed within 90 days of distribution. | false |
| Trustee-to-trustee rollovers may be done no more frequently than once every 24 months | false |
| 2 basic types of simple plans authorized by congress? | •SIMPLE IRAs •SIMPLE 401(k)s |
| what kind of company can use the SIMPLE plan? | eligibility to establish a SIMPLE is restricted to small employers - 100 or fewer employees earning at least $5,000 annually |
| what happens if an employer has fewer than 100 employees and then grows and then has more? | his plan is allowed to stay in place for 2 years |
| t of f SIMPLE IRA is not subject to nondiscrimination or top-heavy rules. | true |
| what is the $ amount an employee must earn in order for the employer to include them in SIMPLE Plan? or for the SEP plan? | $5000/yr for the SIMPLE & $550 per yr for the SEP |
| Exceptions to the 10 percent premature distribution penalty for SIMPLE IRAs are the same as those that apply to all IRAs. | true |
| Under a SIMPLE plan, when does an employee become fully vested in any employer contributions made on his or her behalf? | immediately |
| If an employer elects matching contributions as its funding approach for its SIMPLE plan, for which employees is it required to make contributions? | only for those employees who make elective deferrals to the plan |
| Who may contribute to a SIMPLE IRA | employee and employer |
| How long must an individual participate in a SIMPLE plan before funds in the plan can be rolled over to a traditional IRA? | 2 yrs |
| t or f | true |
| t or f Unlike required distributions from other qualified employer plans, RMDs from a SIMPLE IRA cannot be delayed past the employee’s age 70½ to a later retirement date | true |
| what is the procedure for a rollover for a simple plan if made in the first 2 yres of the the plan? | it can only go to another SIMPLE plan. If after the 2 yrs, it can go to a simple plan or a traditional IRA |
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