1. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company1 Types of IRAs Retirement accounts for individual savers: –Traditional IRA –Roth IRA Employer-sponsored IRA accounts: –SEP IRA –SIMPLE IRA

2. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company2 What is it? IRA means Individual Retirement Account Individual Retirement Annuity A type of retirement savings arrangement that allows contributions (up to certain limits) and investment earnings to grow tax-deferred.

3. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company3 What is it? (cont'd) Traditional IRAs are primarily individual retirement plans. However, employers can –sponsor traditional IRAs as a limited alternative to an employer-sponsored qualified retirement plan –sponsor a “deemed IRA” as part of a qualified plan

4. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company4 When is it indicated? 1.to shelter current compensation or earned income from taxation 2.to defer taxes on investment income 3.for long-term accumulation, especially for retirement 4.as a supplement or an alternative to a qualified plan

5. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company5 Advantages eligible individuals (and their spouses) may contribute up to the maximum annual contribution amount and, within limits, take a tax deduction for the contribution(s) tax deferred investment income –but withdrawals taxed as ordinary income

6. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company6 Disadvantages deductions are limited and can be unavailable to active participants in a tax-favored employer retirement plan early withdrawals subject to 10% penalty generally, cannot establish IRA after age 70½; withdrawals must begin April 1 of year after year reach age 70½

7. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company7 Tax Implications: Contribution Rules 1. No required minimum contribution: can contribute in one year, skip another year but failure to contribute reduces tax-favored accumulation

8. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company8 Tax Implications: Contribution Rules (cont’d) 2. Deduction Limit s maximum annual deductible IRA contribution for an individual is the LESSER of - the maximum annual contribution amount or - the individual’s earned income

9. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company9 Maximum Annual Contribution Amount (2011) TypeDollar Limit Regular$5,000 Catchup (attained age 50)$1,000

10. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company10 Tax Implications: Contribution Rules (cont’d) 3.Earned Income: must be produced from personal services such as wages, salaries, commissions, and bonuses excludes unearned income such as dividends, interest, or rent

11. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company11 Tax Implications: Contribution Rules (cont'd) 4.Spousal IRAs: in some cases, an additional contribution can be made for a spouse earned income of one spouse can be used as income of other spouse, so, for example, contributions can be made for spouse who does not work or who has little income must file a joint return to use earned income of other spouse

12. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company12 Tax Implications: Contribution Rules (cont'd) 5.Married couples with two incomes: should each establish separate IRA even if couple live in community property state

13. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company13 Tax Implications: Contribution Rules (cont’d) 6.Active Participant Restriction: if an otherwise eligible person actively participates in an employer plan, the available traditional IRA deduction is reduced amount of reduction depends on adjusted gross income (AGI) level

14. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company14 AGI Phaseout Ranges for Deduction of Active Participant (2011) Single Return$56,000-$66,000 Joint Return (active participant spouse) $90,000-$110,000 Joint Return (non active participant spouse) $169,000-$179,000 Separate Return$0-$10,000

15. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company15 Tax Implications: Contribution Rules (cont’d) 6.Active Participant Restriction (cont’d) if taxpayer is below the AGI cutoff level, at least $200 can be contributed to IRA and deducted If neither spouse is active participant, then no AGI phaseout

16. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company16 Tax Implications: Contribution Rules (cont’d) 7.Nondeductible IRA –nondeductible contributions can be made to traditional IRA –limit is excess of maximum annual contribution amount over the amount deductible –nondeductible contributions withdrawn tax free, investment earnings taxed

17. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company17 Tax Implications: Contribution Rules (cont’d) 8. Time Limits can establish IRA and claim tax deduction any time prior to due date of tax return without extensions 9.Saver’s Credit limited nonrefundable tax credit available to some low income taxpayers who contribute to IRA

18. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company18 Tax Implications: Investments 1.IRA contributions are not locked into any particular investment can have more than one IRA and invest with different sponsors can transfer (within limitations) from one IRA to another

19. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company19 Tax Implications: Investments (cont’d) 2.In general, can invest in any type of assets but cannot invest in –collectibles (other than certain government coins) –life insurance contracts –a participant’s own note (since loans are not permitted)

20. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company20 Tax Implications: Loans 1.Cannot borrow from own IRA 2. Can use rollover provision to, in effect, make 60- day interest free loan

21. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company21 Tax Implications: Distribution and Rollover Rules 1.Can take out money at any time or leave it in indefinitely, but: penalty on early distributions before age 59½, unless exception applies penalty if required minimum distributions are not made starting at age 70½

22. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company22 Tax Implications: Distribution and Rollover Rules (cont'd) 2.Participant’s spouse does not need to consent to an IRA distribution under federal law: spousal consent may be required when a qualified plan is rolled over to an IRA property rights in an IRA are a matter of state law, varies by state

23. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company23 Tax Implications: Distribution and Rollover Rules (cont'd) 3.Generally, all amounts distributed from traditional IRA are ordinary income if nondeductible contributions have been made to traditional IRA, a portion of a distribution can be received tax-free

24. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company24 Distribution and Rollover Rules (cont'd) 4.10% early withdrawal penalty EXCEPT distributions made –after age 59½ –after death –as part of a series of substantially equal periodic payments over the life or the life expectancy of the participant, or the participant and a beneficiary

25. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company25 Distribution and Rollover Rules (cont'd) 4.10% early withdrawal penalty (cont'd) EXCEPT distributions made (cont'd) –for medical care (in excess of the 7.5% of itemized deductions floor for such expenses) –to unemployed for health insurance premiums –to pay higher education costs for self, spouse, child, or grandchild –to pay acquisition cost of first home for self or specific relatives up to $10,000 lifetime maximum

26. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company26 Distribution and Rollover Rules (cont'd) 5.Minimum distribution requirement distribution must begin by April 1 of the year after the year in which age 70½ is reached 6.Can use IRA for direct rollover of certain distributions from employer sponsored retirement plans within 60 days after receipt 7.Complex tax rules apply at death of IRA owner

27. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company27 True or False? 1.Employers cannot sponsor an individual IRA. 2.Only interest and dividends are allowed within an IRA. Other investment income such as rent, cannot be sheltered in an IRA. 3.To contribute to a traditional spousal IRA, the couple must file a joint return.

28. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company28 True or False? (cont'd) 4.Ira D. Posit, age 59, withdrew money from his IRA to pay for a niece’s college expenses. Ira must pay income tax but no penalty tax on the amount withdrawn. 5.To avoid tax, a distribution of benefits from an employer-sponsored retirement plan must be directly transferred or rolled over to the “rollover” IRA within 30 days.

29. Traditional IRA Chapter 5 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company29 Discussion Question How can an employer sponsor IRAs for employees?