1 Retirement Planning and Employee Benefits for Financial Planners Chapter 9: IRAs and SEPs

2 © 2007 ME™ - Your Money Education Resource™ Introduction  Traditional IRAs Tax Deductible/Nondeductible contributions Taxable/Nontaxable Distributions  Roth IRAs Nondeductible Contributions Qualified distributions are income tax-free  SEP IRAs IRAs provided by employers Greater funding limits than traditional IRAs

3 © 2007 ME™ - Your Money Education Resource™ IRAs – Contribution Limit  Traditional and Roth  Generally, Lesser of  $5,500 ($6,500 for age 50 and over ) or  Individual’s earned income.  Subject to limitations based on income  Can divide contribution between a Roth/traditional IRA  Attainment of age 70½ can no longer make traditional IRA contributions. Can contribute to Roth IRA.

4 © 2007 ME™ - Your Money Education Resource™ Earned Income  What is earned income? W-2 income Schedule C net income Income as a general partner Alimony  Exceptions: Spousal IRA: contribute up to:  Spouse’s earned income – spouse’s IRA contribution

5 © 2007 ME™ - Your Money Education Resource™ Timing of Contributions  Contributions must be made by the due date of the individual’s income tax return (without extensions). Usually April 15 th of the following tax year.

6 © 2007 ME™ - Your Money Education Resource™ Deductibility of Traditional IRA Contributions  Deduction FOR AGI Taxpayer does not have a qualified plan Taxpayer is an active participant in a qualified plan Taxpayer is not an active participant in a qualified plan, but taxpayer’s spouse is an active participant in a qualified plan No AGI LimitSingleAGI Phaseout $60k - $70k$181k - $191k MFJAGI Phaseout $96k - $116k

7 © 2007 ME™ - Your Money Education Resource™ Active Participant Status  Limits Traditional IRA contributions.  Individual is considered an active participant: Defined Benefit Plan  Participates or meets the eligibility requirements of the plan. Defined Contribution Plan  Receives a contribution to the qualified plan on his behalf for the year (including forfeitures), or  Defers compensation to a CODA plan.

8 © 2007 ME™ - Your Money Education Resource™ Nondeductible IRA Contributions  Tax-deferred growth  Creates adjusted basis in IRA. Distributions will be partially return of capital and partially earnings.  Nondeductible IRA contributions are not limited for active participants of qualified plans.  File Form 8606 with Form 1040 to track the adjusted taxable basis of an IRA.

9 © 2007 ME™ - Your Money Education Resource™ Distributions from Traditional IRAs (1 of 2)  Ordinary Income Except:  Distributions of adjusted basis Ratio of AB = AB before withdrawal FMV of account at withdrawal

10 © 2007 ME™ - Your Money Education Resource™ Distributions from Traditional IRAs (2 of 2)  Required Minimum Distributions Same as RMDs for Qualified Plans  Year following turn 70 ½  Subject to penalties if prior to age 59½ Unless on account of an exception

11 © 2007 ME™ - Your Money Education Resource™ Exceptions to 10% Early Withdrawal Penalty  Distributions on account of: Death Attainment of age 59½ Disability Substantially Equal Periodic Payments Medical Expenses in excess of 7.5% of AGI QDRO Higher Education Expenses First Time Home Purchase – up to $10,000 Payment of health insurance premiums by unemployed

12 © 2007 ME™ - Your Money Education Resource™ Roth IRAs  Nondeductible Contributions  Qualified Distributions are income tax-free  Owner may continue to fund after attaining age 70½  Not subject to required minimum distribution rules during the life of the account owner  Share contribution limit with Traditional IRA  Contributions may be limited based on AGI

13 © 2007 ME™ - Your Money Education Resource™ Roth IRA Contributions (1of 2)  Contributions Limited to lesser of earned income or $5,500 ($6,500 if age 50 and over )  Combined Limit with Traditional IRA Availability phased-out based on AGI Contribution AGI Phaseout Limit (2014) Single$114,000 - $129,000 Married Filing Jointly$181,000 - $191,000 Married Filing Separate$0 - $10,000

14 © 2007 ME™ - Your Money Education Resource™ Roth IRA Contributions (2 of 2)  Convert Traditional IRA to Roth IRA  No limit in 2014  Recharacterized Contributions Conversion AGI Limit Prior to 2010 Single$100,000 Married Filing Jointly$100,000 Married Filing Separately Not Available

15 © 2007 ME™ - Your Money Education Resource™ Qualified Distributions from Roth IRAs  Qualified Distributions are income tax-free.  Qualified Distributions are not subject to 10% early withdrawal penalty.  Qualified Distribution: The distribution is made after a five taxable year period, AND The distribution is on account of the owner attaining age 59½, the owner’s death, disability, or first-time home purchase (maximum $10,000).

16 © 2007 ME™ - Your Money Education Resource™ Nonqualified Distributions from Roth IRAs  Subject to income tax…maybe… First come from contributions (tax-free) Then from conversions (tax-free) Then from earnings – these are taxed  Subject to 10% penalty Nonqualified distributions  Contributions are not subject to penalty  Conversions and earnings in the last five years are

17 © 2007 ME™ - Your Money Education Resource™ Tax-Free Distributions from IRAs to Charity  Can be made from a Traditional or Roth IRA directly to charity  Counts toward satisfying RMD for year  Owner must be 70 ½ or older  Can distribute up to $100,000 per year  Advantage of contributions from IRA

18 © 2007 ME™ - Your Money Education Resource™ Nonqualified Distributions from Roth IRAs Subject to Taxation? Subject to 10% Penalty Contributions No Conversions No Yes, within five years of conversion* Earnings YesYes* *Exceptions to the 10% early withdrawal penalty are the same as the exceptions for Traditional IRA distributions.

19 © 2007 ME™ - Your Money Education Resource™ Comparing Roth IRAs to Traditional IRAs  Traditional IRAs do not allow contributions after the owner is age 70½, unlike Roth IRAs.  Roth IRAs are not subject to the minimum distribution rules, unlike Traditional IRAs.

20 © 2007 ME™ - Your Money Education Resource™ IRA Investment Options  Permitted: Cash Stocks Bonds Options (Often limited by custodians) U.S. Gold, Silver, and Platinum Coins Real estate  Not Permitted: Life Insurance Collectibles: beer cans; art, etc. Other Coins

21 © 2007 ME™ - Your Money Education Resource™ Rollovers from Qualified Plans to IRAs  Lose Lump Sum Distribution Taxation Options (NUA)  Loans Not Permitted  May be rolled back to Qualified Plan that permits  Lose ERISA Protection However, will have protection under federal bankruptcy law.

22 © 2007 ME™ - Your Money Education Resource™ Simplified Employee Pensions (SEPs)  Small Business Retirement Plan  Tax-deferred growth of Contributions  Not a qualified plan, but has similar characteristics with unique rules: More liberal coverage requirements. Can be established as late as the extended due date of the income tax return. Unique contribution, vesting, and distribution rules.  Established utilizing Traditional IRA Accounts

23 © 2007 ME™ - Your Money Education Resource™ Coverage Requirements  Employers that sponsor SEPs must provide benefits to all employees who meet the following requirements: Attainment of age 21 or older, and Performance of services for three of the last five years, and Received compensation of at least $550 (2014) during the year.

24 © 2007 ME™ - Your Money Education Resource™ Establishment of a SEP Up to due date of return – including extensions Entity Original Due Date of Tax Return Extended Due Date of Tax Return Sole Proprietorship (Schedule C) April 15thOctober 15 th

25 © 2007 ME™ - Your Money Education Resource™ Establishment of a SEP  Employer must complete the following three steps by the extended due dates listed above. Complete a formal written agreement.  Form 5305-SEP (no IRS approval required) Fill in blanks: page 449 Give eligible employees notice.  Copy of Form 5305-SEP Open a SEP-IRA account for each eligible employee.

26 © 2007 ME™ - Your Money Education Resource™ Contributions to SEPs  Employer Funded Only No employee contributions  Discretionary Must be made to all employees eligible during the year – even if dead or no longer employed at time of contribution  Limited to the lesser of: 25% of an employee’s covered compensation, or $52,000 for  Self-employed: limit is 20%  Can utilize cross-testing and Social Security Integration

27 © 2007 ME™ - Your Money Education Resource™ Vesting and Withdrawals  Employees are 100% vested in their account balance at all times.  Withdrawals are treated just as withdrawals from IRAs. Ordinary Income  Potentially subject to 10% early withdrawal penalty.