1. Copyright © 2007, The American College. All rights reserved. Used with permission. Planning for Retirement Needs Individual Retirement Arrangements Chapter 17

2. Copyright © 2007, The American College. All rights reserved. Used with permission. Overview Contribution limits Traditional IRA rules Roth IRAs –Nondeductible contributions –Tax-free distributions

3. Copyright © 2007, The American College. All rights reserved. Used with permission. Overview of IRA Rules Maximum annual limit Traditional IRAs –Deductible –Nondeductible contributions Roth IRAs –Nondeductible contributions –Tax-free distributions

4. Copyright © 2007, The American College. All rights reserved. Used with permission. Maximum Annual Contributions Lesser of $4,000 (2007) or 100 percent of compensation $1,000 additional catch-up for those over 50 Aggregate all IRAs and Roth IRAs

5. Copyright © 2007, The American College. All rights reserved. Used with permission. Compensation Earnings from personal services Does not include investment earnings Alimony does count Liberal rules for self-employment

6. Copyright © 2007, The American College. All rights reserved. Used with permission. Spousal IRA Married nonworking person can still make a $4,000 contribution as long as: $8,000 of joint income Married filing jointly Spouse earns less than taxpayer

7. Copyright © 2007, The American College. All rights reserved. Used with permission. Contribution Requirements Must be in cash Due date of the tax return—no extensions

8. Copyright © 2007, The American College. All rights reserved. Used with permission. Excess Contributions More likely in a Roth IRA 6 percent penalty each tax year Can withdraw before tax-year due date without penalty (must withdraw interest) Can “use up” in following years

9. Copyright © 2007, The American College. All rights reserved. Used with permission. Traditional IRAs Anyone under age 70-1/2 $4,000 (2007) (plus catch-up) Deductible if neither participant nor spouse is an active participant Deduction phased out if person is an active participant and earnings exceed threshold Deduction phased out if person’s spouse is an active participant and earnings exceed higher threshold

10. Copyright © 2007, The American College. All rights reserved. Used with permission. What is Joe’s maximum deductible IRA contribution for 2007. He is single, age 35, is not an active participant in an employer plan, and has adjusted gross income of $200,000. Question:

11. Copyright © 2007, The American College. All rights reserved. Used with permission. Since he is not an active participant the income phaseout rules do not apply and he can make a $4,000 deductible contribution. Answer is more complex if he is married, you would have to ask if the spouse is active participant. With a Roth IRA the answer is different. He could not make a Roth contribution because he earns too much. Answer:

12. Copyright © 2007, The American College. All rights reserved. Used with permission. Active-Participant Status Includes all tax-advantaged plans Any portion of the plan year ending with or within the individual tax year Defined benefit—active unless excluded from plan’s eligibility provisions Defined contribution—must receive allocation of contribution or forfeiture Look at W-2 form to see how employer evaluated situation

13. Copyright © 2007, The American College. All rights reserved. Used with permission. Active Participant for 2007? Individual makes salary deferrals to a calendar-year 401(k) plan in the month of January 2007, then terminates employment? (YES) Individual first participates on July 1, 2007, in a plan with a July 1 to June 30 plan year? (NO) Individual participates in a calendar year profit-sharing plan and no contributions are made until June of 2008? (NO)

14. Copyright © 2007, The American College. All rights reserved. Used with permission. Calculating Deductible IRA Individual is an active participant Determine age Determine filing status Determine adjusted AGI Determine year in question Look at table Full, partial, or no deduction –Single $52,000 to $62,000 (2007) –Married filing joint $83,000 to $103,000 (2007)

15. Copyright © 2007, The American College. All rights reserved. Used with permission. What is Jim’s maximum deductible IRA contribution for 2007? He is single, age 54, an active participant in an employer plan, and has adjusted gross income of $57,000. Question:

16. Copyright © 2007, The American College. All rights reserved. Used with permission. His income falls right in the middle of the $10,000 phaseout range. The maximum deductible contribution is reduced by ½. Since he exceeds age 50 the deductible contribution is $2,500. Answer:

17. Copyright © 2007, The American College. All rights reserved. Used with permission. Married individual is not an active participant. Spouse is an active participant Deduction is phased out for AGI between $156,000 - $166,000 (2007) if filing jointly. Spousal Attribution Rule

18. Copyright © 2007, The American College. All rights reserved. Used with permission. Cindy, married to Brian, is an “active participant.” Brian is not in a retirement plan. They file jointly and their AGI for 2007 is $110,000. Neither have attained age 50. What can they each contribute to a traditional IRA for 2007 and are the contributions deductible? Question:

19. Copyright © 2007, The American College. All rights reserved. Used with permission. Cindy can contribute $4,000 on a nondeductible basis Brian can have a deductible IRA contribution of $4,000 Answer:

20. Copyright © 2007, The American College. All rights reserved. Used with permission. You are meeting with Ira the IRA client tomorrow. What facts do you need to ask him to determine his traditional IRA options? Question:

21. Copyright © 2007, The American College. All rights reserved. Used with permission. Age Marital status Tax filing status Income from personal services Adjusted gross income Active participant status Active participant status of a spouse No prior contributions to other IRAs for the year Answer:

22. Copyright © 2007, The American College. All rights reserved. Used with permission. Rollovers in Traditional IRAs Qualified plan to IRA IRA to IRA

23. Copyright © 2007, The American College. All rights reserved. Used with permission. Qualified Plan to IRA Exceptions Minimum distributions Annuities Hardship withdrawals Can now roll after-tax contributions In-kind rollovers–life insurance Direct rollovers

24. Copyright © 2007, The American College. All rights reserved. Used with permission. IRA to IRA 60-day rule Once-a-year rule Trustee-to-trustee transfers Minimum distributions

25. Copyright © 2007, The American College. All rights reserved. Used with permission. Roth IRA Nondeductible contributions of the lesser of $4,000 or compensation (no age limit) Aggregate all IRAs and Roth IRAs Phaseout based only on income Spousal IRAs allowed Same catch-up as with traditional IRA

26. Copyright © 2007, The American College. All rights reserved. Used with permission. Phaseout Ranges Singles with AGI between $99,000 and $114,000 (2007) Married filing jointly between $156,000 and $166,000 (2007)

27. Copyright © 2007, The American College. All rights reserved. Used with permission. 5-year requirement : oMade after 5 tax years have passed oStart with first tax year for which contribution is made oStart with first Roth IRA established Roth IRA Qualifying Distributions Trigger event : oAge 59-1/2 oDeath oDisabled oFirst-time homebuyer

28. Copyright © 2007, The American College. All rights reserved. Used with permission. Nonqualifed Distributions Contributions withdrawn first Earnings taxed as with traditional IRA Income tax 10 percent early-withdrawal penalty 10 percent penalty within 5 years of conversion

29. Copyright © 2007, The American College. All rights reserved. Used with permission. Questions What are the tax ramifications if Alex withdraws $15,000 for his son’s college education? What are the tax ramifications if Alex withdraws $45,000 for his son’s college education? Case Study Facts Alex, age 55, has one Roth IRA that began in 1999. It currently has contributions of $40,000 and a balance of $75,000. He has not taken any distributions.

30. Copyright © 2007, The American College. All rights reserved. Used with permission. Responses If Alex withdraws $15,000 there are no income tax consequences. Basis ($40,000) can be withdrawn first without incurring income tax. At $45,000 Alex is withdrawing more than basis. Since this is not a qualified distribution (no triggering event) $5,000 will be subject to income tax as well as the Sec. 72(t) penalty tax. The penalty tax does not apply since the education exception is applicable in this case.

31. Copyright © 2007, The American College. All rights reserved. Used with permission. Questions Would a distribution now be a qualifying distribution? What are the other triggering events that could result in a qualified distribution? If Rita had started a second Roth IRA in 2004 would it be eligible for a qualifying distribution? Case Study Facts Rita, now age 60, has one Roth IRA, she first made a contribution for 1999. It currently has contributions of $40,000 and a balance of $75,000. He has not taken any distributions.

32. Copyright © 2007, The American College. All rights reserved. Used with permission. Responses It is qualifying because of 5-year rule (clarify). Other triggering events include –Death –Disability –$10,000 of first time homebuying expenses. Yes, distribution from second Roth IRA is qualifying distribution. 5 year period starts with first Roth IRA.

33. Copyright © 2007, The American College. All rights reserved. Used with permission. Required Roth IRA Distributions Age 70-1/2 distributions do not apply After death, payable over 5 years or over life expectancy Spousal rollover is allowed –Spouse steps into participant’s shoes –No distributions required to spouse

34. Copyright © 2007, The American College. All rights reserved. Used with permission. Molly, aged 74, is single, still employed, and participates in an employer-sponsored retirement plan. Her AGI is $80,000. Can she make a contribution to a Roth IRA for 2007? Question:

35. Copyright © 2007, The American College. All rights reserved. Used with permission. Sure, a single person can make Roth IRA contributions if he or she has personal-services income and has AGI less than $99,000. There is no maximum age limit. Answer:

36. Copyright © 2007, The American College. All rights reserved. Used with permission. In 2007 Joe, who is single, contributes $4,000 to a Roth IRA. However, at the end of the year his AGI turns out to be $104,000. What happens? Question:

37. Copyright © 2007, The American College. All rights reserved. Used with permission. Maximum contribution is reduced by one third Extra contribution plus earnings must be withdrawn by tax return due date to avoid excise tax Or can recharacterize as traditional IRA Answer:

38. Copyright © 2007, The American College. All rights reserved. Used with permission. Rollovers in Roth IRAs Roth IRA to Roth IRA IRA to Roth IRA conversion –Income tax paid but no 10-percent penalty –Can’t if adjusted AGI exceeds $100,000 or if married filing separately

39. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions The maximum annual contribution to an IRA or Roth IRA in 2006 is the lesser of $4,000 or 100 percent of compensation for a participant who has not yet attained age 50. A participant may borrow from his or her IRA. Although a contribution may be made to an IRA after age 70-1/2, the contribution is not deductible. A single individual with AGI of more than $150,000 will never be able to take an IRA deduction.

40. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions Compensation does not include pension and investment income in determining whether an individual has income that can be used to support an IRA contribution. An IRA contribution made on June 1, 2007, is deductible for 2006 as long as the individual filed for an extension of his or her tax return. The maximum amount that can be contributed to a spousal IRA for a nonworking spouse depends on how much is contributed for the working spouse.

41. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions If a spouse is not an active participant, the current year’s maximum dollar amount can be contributed on a deductible basis to a spousal IRA if the couple’s AGI on their joint tax return is $140,000. A participant who established a Roth IRA in 2003 may withdraw the entire account (which includes some investment earnings) tax-free in the year 2006, as long as he or she is over age 59-1/2. A single person who is an active participant and who has AGI of $80,000 can make a $4,000 Roth IRA contribution in 2007.