IRAs – Benefits and Contributions IRA University © 2013 Ascensus, Inc., Middleton, WI

IRAs – Benefits and Contributions This course introduces you to the benefits of and rules for contributing to individual retirement arrangements (IRAs). It is designed for students of IRA University, and should be completed before the IRA Fundamentals webinar. Navigating the Course To advance, click the bottom button with the arrow facing right. To go back or to see a slide again, click the bottom button with the arrow facing left. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Learn how to define an IRA, define eligibility requirements for Traditional and Roth IRAs, define contribution limits for Traditional and Roth IRAs, and IRAs – Benefits and Contributions compare the tax advantages of Traditional and Roth IRAs. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

What is an IRA? An individual retirement arrangement is an account or annuity. This special savings program was created by Congress to help taxpayers save for their retirement. According to the Social Security Administration, most people will need to rely on personal savings, such as IRAs, for up to 60 percent of their retirement income. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

This course covers two types of IRAs. 1) Traditional IRA 2) Roth IRA Both serve the same purpose— helping account owners save for retirement—but the rules and tax benefits are different for each. First, let’s discuss the eligibility rules for each IRA type. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Potential IRA owners need to meet certain requirements before making a regular contribution to an IRA. Anyone can open an IRA, but not everyone is eligible to contribute new money to an IRA. Eligibility requirements are slightly different for Traditional and Roth IRAs. Eligibility IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

If you are going to contribute money to a Traditional or Roth IRA, you must have compensation, or file jointly with a spouse who has compensation. Not all compensation is eligible for IRA contribution purposes. The common requirement for contributing to a Traditional or Roth IRA is compensation, also known as earned income. IRAs – Benefits and Contributions Compensation, or earned income, means money earned from personal services rendered. Basically, if you perform a service and get paid for it, you have compensation. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Wages Salaries Tips Commissions Taxable alimony Professional fees Bonuses Combat pay Royalties Interest Dividends Rental income Unemployment compensation Disability pay Child support Separation & early retirement AFDC & TANF Social Security Eligible Compensation Not Eligible Compensation IRAs – Benefits and Contributions Study the two columns. Advance the slide when you’re ready to apply what you’ve learned. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge IRAs – Benefits and Contributions YesNo Wages Correct!Sorry, try again. Determine whether the income source listed is eligible compensation by clicking on YES or NO. Click the right arrow when you are finished with each question. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Determine whether the income source listed is eligible compensation by clicking on YES or NO. Click the right arrow when you are finished with each question. Test Your Knowledge IRAs – Benefits and Contributions YesNo Taxable Alimony Correct!Sorry, try again. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge IRAs – Benefits and Contributions Determine whether the income source listed is eligible compensation by clicking on YES or NO. Click the right arrow when you are finished with each question. YesNo Social Security Correct! Sorry, try again. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Determine whether the income source listed is eligible compensation by clicking on YES or NO. Click the right arrow when you are finished with each question. Test Your Knowledge IRAs – Benefits and Contributions YesNo Interest Sorry, try again.Correct! Click to continue Click to go back

Determine whether the income source listed is eligible compensation by clicking on YES or NO. Click the right arrow when you are finished with each question. Test Your Knowledge IRAs – Benefits and Contributions YesNo Commissions Correct!Sorry, try again. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

To contribute to a Traditional IRA, an owner must have eligible compensation, or file jointly with a spouse who has eligible compensation. In addition, a Traditional IRA owner must be under age 70½ for the entire calendar year. A person turns 70½ six months after her 70 th birthday. Traditional IRA Eligibility IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Traditional IRA Eligibility Example Phyllis was born February 17, 1943, which means she turned 70 on February 17, 2013, and will turn 70½ on August 17, Even though she hasn’t turned 70½ quite yet, she may NOT make a regular contribution to her Traditional IRA for 2013, because she will not be under 70½ for the entire year. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge – Traditional IRA Eligibility John, born April 7, 1946, is currently unemployed. His wife, Molly, owns a flower shop and will earn $55,000 in Molly and John file a joint tax return. Is John eligible to make a contribution to his Traditional IRA? Click on the correct answer. Yes No IRAs – Benefits and Contributions Correct! John is under 70½ and has eligible compensation because he and Molly file a joint tax return. Oops! John is under 70½ and has eligible compensation because he and Molly file a joint tax return. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

To contribute to a Roth IRA, an owner must have eligible compensation, or file jointly with a spouse who has eligible compensation. In addition, a Roth IRA owner’s modified adjusted gross income (MAGI) must fall under certain limits. MAGI is determined according to IRS guidelines. Essentially, MAGI is adjusted gross income (AGI) with specific tax deductions added back in. Remember, d etermining MAGI is the IRA owner’s responsibility, NOT the financial organization’s! Roth IRA Eligibility IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge – Roth IRA Eligibility Using the MAGI chart from IRS Publication 590, can you determine if the following person is eligible to contribute to a Roth IRA? Emma, 37 and single, is a dentist with MAGI of $97,000. Is Emma eligible to contribute to a Roth IRA? Yes No IRAs – Benefits and Contributions Partial Correct! Emma has eligible compensation because she works as a dentist, and is below the MAGI limit. Oops! Emma has eligible compensation because she works as a dentist, and is below the MAGI limit. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge – Roth IRA Eligibility Using the MAGI chart from IRS Publication 590, can you determine if the following person is eligible to contribute to a Roth IRA? Jordan, 72, is a university professor and is married to Kristen, a doctor. They file a joint tax return, and their joint MAGI is $178,500. Is Jordan eligible to contribute to a Roth IRA? YesNo IRAs – Benefits and Contributions Correct! Jordan has eligible compensation as a professor, and falls within the phase- out range for making a partial contribution. Partial Oops! Jordan has eligible compensation as a professor, but he cannot make a full contribution. He falls within the phase-out range for making a partial contribution. Oops! Jordan has eligible compensation as a professor, and falls within the phase- out range for making a partial contribution. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Determining eligibility is the IRA owner’s responsibility! Remember IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Once eligibility has been met, the question becomes “How much can be contributed?” Contributions IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

The annual amount that an individual may contribute to his IRA is called the annual contribution limit. Contributions The annual contribution limit depends on the following factors. 1) The tax year 2) The age of the IRA owner—if the IRA owner is 50 or older before the end of the tax year, he can make a catch-up contribution. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Contribution limits are an aggregate annual limit, which means that the total of ALL of an IRA owner’s contributions that are made to ALL Traditional and Roth IRAs cannot exceed the annual contribution limit. For example, if this year’s annual limit for an IRA owner under age 50 is $5,500, then she could NOT put $5,500 into a Traditional IRA and $5,500 into a Roth IRA. She would need to split the amount placed in each of her IRAs so that it does not exceed the limit (i.e. $3,000 in the Traditional IRA and $2,500 in the Roth IRA). IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge – IRS Annual Contribution Limit Using the IRS annual aggregate contribution limit chart below, identify the contribution limit for each person for the year listed. Michael, born July 17, 1964, tax year 2013? $5,500$6,500 Traditional and Roth IRA Aggregate Annual Contribution Limits Tax Year Annual Contribution Limit Additional Catch-Up Contribution for Owners Age 50 and Older 2013$5,500$1,000 ($6,500 total) *The annual contribution limit is subject to cost-of-living adjustments in future years in $500 increments. IRAs – Benefits and Contributions Correct! Michael is under age 50 for the entire tax year, so he may contribute $5,500. Oops! Michael is under age 50 for the entire tax year, so he may contribute $5,500. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Test Your Knowledge – IRS Annual Contribution Limit Using the IRS annual aggregate contribution limit chart below, identify the contribution limit for each person for the year listed. Margie, born September 17, 1963, tax year 2013? $5,500$6,500 Traditional and Roth IRA Aggregate Annual Contribution Limits Tax Year Annual Contribution Limit Additional Catch-Up Contribution for Owners Age 50 and Older 2013$5,500$1,000 ($6,500 total) *The annual contribution limit is subject to cost-of-living adjustments in future years in $500 increments. IRAs – Benefits and Contributions Oops! Margie turns 50 in 2013, so she may contribute $6,500. Correct! Margie turns 50 in 2013, so she may contribute $6,500. Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Contributions to IRAs have tax advantages, the details of which depend upon the type of IRA that receives the contribution. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Traditional IRA Traditional IRA contributions may be tax-deductible. Depending on their tax situation, IRA owners may be able to reduce their taxable income by the amount of the Traditional IRA contribution. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Example Eric, age 52, earns $48,000 a year as an airplane mechanic. After consulting with his tax advisor, he decides to make a $6,500 contribution to his Traditional IRA, which he will then deduct from his taxable income. Instead of paying income taxes on his entire $48,000 salary, he will pay taxes on only $41,500 ($48,000 - $6,500). IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Remember – determining whether or not an IRA owner can deduct his contribution to his Traditional IRA is NOT the financial organization’s responsibility! Direct the IRA owner’s questions to his tax advisor or the IRS website at IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

An IRA owner who cannot deduct his Traditional IRA contribution may still contribute to a Traditional IRA if he chooses. IRA owners making nondeductible contributions will need to report them to the IRS by filing IRS Form 8606 with their federal income tax returns. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Roth IRA Roth IRA contributions are never tax-deductible, but by following certain rules, Roth IRA owners may remove the earnings tax AND penalty free. Earnings from a Roth IRA generally may be distributed tax and penalty free if the following rules are met. Roth IRA has been open at least five years AND the reason for distribution is age 59½ or older, disability, death, or first- time homebuyer expenses IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Example Ellen, age 63, withdrew $50,000 today from her Roth IRA that she opened in 2001 with a $500 contribution. Because the Roth IRA has been open for more than five years, and Ellen is over age 59½, she will pay no tax or penalty tax on the earnings portion of her distribution. IRAs – Benefits and Contributions Click to continue Click to go back

Traditional IRA and Roth IRA When IRA owners contribute to their IRAs, the earnings on their contributions are always tax-deferred. As long as the earnings remain in the IRA, they will continue to grow tax-free. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

Example Ellen’s salary is $100,000 this year. She also earned $1,200 in dividends from her money market account and $500 in earnings from her Roth IRA. How should Ellen list this income on her tax return? Ellen will add the non-IRA earnings to her taxable income, and pay taxes on $101,200 for the year. The IRA earnings do not increase her taxable income, so she doesn’t pay taxes on them this year. IRAs – Benefits and Contributions Click to continue Click to go back © 2013 Ascensus, Inc., Middleton, WI

You should now be able to define an IRA, define eligibility requirements for Traditional and Roth IRAs, define contribution limits for Traditional and Roth IRAs, and IRAs – Benefits and Contributions compare the tax advantages of Traditional and Roth IRAs. Thank you for participating in IRAs – Benefits and Contributions! Click the End button on the bottom right to end the course. © 2013 Ascensus, Inc., Middleton, WI