1. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 A “Traditional IRA” is a tax-deferred savings vehicle A limited tax-deductible contribution may be made up to $5,000 (2009-2011) Additional catch-up contributions of $1,000 (2006 forward) are permitted for individuals over age 50 What Is A Traditional IRA?

2. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 An individual or spouse actively participating in a qualified plan or tax-sheltered annuity: –May make an IRA contribution up to the lesser of the $5,000 dollar limit (in 2009-2011, including the total of all IRA contributions combined) or 100% of compensation –The amount a taxpayer can deduct is determined based on AGI and filing status Mandatory distributions are required beginning at age 70½ Penalties, in addition to income taxes, are imposed for early nonqualified withdrawals What Is A Traditional IRA?

3. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 AGI Threshold Tax YearSingleJointSeparate 2010$56,000$89,000$0 2011 $56,000$90,000$0 Note: For non-active participants with an active spouse, the deduction begins to phase out when AGI is > $90,000 (2011) For a taxpayer who exceeds the threshold, the maximum deduction is reduced by the following formula: Maximum annual contribution x AGI – AGI Threshold $10,000 What Are The AGI Threshold Contribution Phase-Out Limits?

4. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 Jill participates in a qualified plan and her husband, Jack does not participate in his employer’s plan They file a joint return in 2011 showing AGI of $125,000 –Jack can make a deductible contribution to his IRA of $5,000 (Couple’s AGI is under $169,000) Same facts, but Jill and Jack’s AGI is $200,000 –Neither Jack nor Jill can make a deductible contribution, since their AGI exceeds $179,000 Example Traditional IRA

5. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 Note: An individual may make a deductible contribution to a spousal IRA for a spouse with less taxable compensation than the individual –In 2011, $5,000 could be contributed to one IRA and another $5,000 to a spousal IRA Example Traditional IRA (cont’d)

6. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 Individuals receiving certain distributions from a qualified plan (pension, profit-sharing, stock bonus or annuity plan) or a tax-deferred annuity are allowed to “roll over” the distribution within 60 days to an IRA without incurring income tax on the distribution No rollover is permitted for benefits attributable to nondeductible employee contributions made by the employee to the qualified plan prior to 2002 What Is A Rollover?

7. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 Taxable distributions from a qualified retirement plan, TSA, or Section 457 governmental plan can be rolled over, without incurring income tax, to an IRA or any of the above listed plans A mandatory withholding of 20% applies if the participant receives a distribution instead of electing a direct (trustee-to-trustee) transfer A spouse of a deceased IRA holder may roll over a distribution (received after the spouse’s death) to an IRA What Is A Rollover?

8. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 Annual contributions may be made up to the lesser of $5,000 (2009-2011) or 100% of compensation –indexed for inflation in $500 increments for years after 2010 Catch-up contributions of $1,000 (2011) are permitted for individuals over age 50 Contributions are not deductible, but withdrawals may be entirely income tax free Contributions may be made after age 70½ What Is A Roth IRA?

9. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 If AGI exceeds certain limits, a contribution to a Roth IRA cannot be made for that year –Single phase-out limit $107,000 - $122,000 –Married filing joint limit $169,000 - $179,000 –Married filing separate limit $0 - $10,000 Rules on allowable Roth IRA contributions apply regardless of taxpayer’s active participation in a qualified plan Distributions are not required to begin until after death For certain clients a rollover (“conversion”) of a Traditional IRA to a Roth IRA may be desirable What Is A Roth IRA?

10. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 The Coverdell Education Savings Account or Education IRA permits a non-deductible contribution of up to $2,000 (2011) to pay qualified education expenses Qualified education expenses now include both elementary and secondary school expenses ESA contributions must be designated as such and made in cash, on or before the beneficiary reaches age 18 Contributions can be made up until April 15 of the following year, by the due date for the filing of the contributor’s income tax return What Is An ESA?

11. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 There is an excise tax for excess contributions Income tax will be imposed on that portion of distributions exceeding qualified education expenses There is a 10% premature distribution penalty AGI phase-out limits on contributions –Single contributor $95,000 - $110,000 –Married Filing Joint $190,000 - $220,000 What Is An ESA?

12. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 Max annual IRA contribution (under age 50)$5,000 Max annual IRA contribution (age 50+)$6,000 Max annual 401(k), 403(b) or 457 deferral limit (under age 50)$16,500 Max annual 401(k), 403(b) or 457 deferral limit (age 50+)$22,000 Max annual additions limit for defined contribution plan$49,000 Max includible compensation for computing contributions$245,000 Max SIMPLE salary-deferral limit (under age 50)$11,500 Max SIMPLE salary-deferral limit (age 50+)$14,000 Minimum annual compensation for determining a highly compensated employee for 401(k) nondiscrimination tests $110,000 Summary Of Contribution Limits For Retirement Accounts 2011

13. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 Situation 1: When a married client or their spouse –is covered by a qualified plan, and –does not make in excess of the AGI phase-out limits, and –makes income in excess of what is needed to maintain their current standard of living It is preferable to make non-tax deductible contributions to a Roth rather than a Traditional IRA When Is Use Of A Traditional IRA Appropriate?

14. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 Situation 2: Where neither the client nor spouse is covered under a qualified plan, but both work Situation 3: Where the client –Is not covered under a plan –Has earned income –Is married, and –Spouse has no income from employment When Is Use Of A Traditional IRA Appropriate?

15. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 Situation 4: Client is an employer without a qualified plan and would like to establish a plan covering only him or herself When Is Use Of A Traditional IRA Appropriate?

16. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 An individual has received a distribution from a –Qualified plan –TSA, or –Section 457 government plan, and Seeks to avoid current taxation on all or a part of the distribution When Is Use Of A Rollover IRA Appropriate?

17. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company17 Where the client would not otherwise qualify for a deduction for contributing to a Traditional IRA Where a client anticipates a reduced need to access IRA funds during retirement and wants funds to continue to grow tax-free Client anticipates being in a high marginal tax bracket following retirement When Is Use Of A Roth IRA Appropriate?

18. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company18 An individual is permitted to set aside retirement savings in a –Variable premium annuity contract –Fixed rate annuity contract, or –A trusteed or custodial account with a bank, credit union, savings and loan, brokerage firm, or other financial institution An individual may split total contributions into more than one IRA 3 parties can make contributions to a Traditional IRA –Employee –Employee’s employer –Employee’s union What Are The Requirements?

19. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company19 Anyone can contribute to an ESA Annual contributions must be made in cash –Contributions of other property are only permissible in the case of rollovers Plan must be established and contributions made –Within the taxable year for which a deduction is allowed, or –Before the due date for filing the individual’s tax returns for that taxable year (by April 15 th of the following year for most taxpayers) What Are The Requirements?

20. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company20 Traditional IRAs must begin to pay a participant’s benefit by April 1 st of the year following the year in which the participant turns 70½ –RBD – required beginning date ESA’s must be distributed within 30 days after the date on which the designated beneficiary attains age 30 –Earnings on such distributed balances may be includable in income and subject to the 10% penalty tax –Any amount remaining in the ESA at the end of the 30-day period will be deemed to be distributed What Are The Requirements?

21. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company21 Alternatives for a Traditional IRA if the owner dies before beginning distributions: –Payments are made over the life expectancy of the designated beneficiary, or –If there is no designated beneficiary, payments must be paid out within five years of the IRA owner’s death –If the designated beneficiary is the IRA owner’s spouse, the spouse may roll over the balance to the spouse’s own IRA, or elect to treat the decedent’s IRA as the spouse’s own, or take distributions over the spouse’s life expectancy beginning the later of –The end of the calendar year immediately following the calendar year in which the owner died, or –The end of the calendar year in which the owner would have attained age 70½ What Are The Requirements?

22. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company22 Alternatives for a Traditional IRA if the owner dies on or after the required beginning date: –Payments are made over the life expectancy of the designated beneficiary, or –If there is no designated beneficiary, payments are made over the remaining life expectancy of the IRA owner immediately before death –If the sole designated beneficiary is the IRA owner’s spouse, the spouse may roll over the balance to the spouse’s own IRA, or elect to treat the decedent’s IRA as the spouse’s own, or take distributions over the spouse’s remaining life expectancy beginning with the calendar year immediately following the calendar year in which the owner died What Are The Requirements?

23. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company23 Roth IRAs generally follow the same rules as Traditional IRAs for owners dying before the required beginning date –Roth IRAs do not have a lifetime required beginning date ESAs must be distributed within 30 days of the death of the beneficiary –If the ESA is distributed to the designated beneficiary’s surviving spouse or a family member, it will be treated as if the spouse or family member is the designated beneficiary as long as they are under the age of 30 –Any balance remaining in the ESA at the end of the 30-day period following the designated beneficiary’s death will be deemed distributed What Are The Requirements?

24. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company24 Banks and insurance companies provide prototype plans IRS provides prototype trusteed and custodial plans Once an IRA is established, contributions need to be made How Is It Done?

25. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company25 Examples of tax savings: –Individual in a 15% tax bracket would save $750 per year with a $5,000 annual deductible contribution –A partner in a partnership who did not wish to include other employees in a plan could save $1,250 per year in taxes by making a $5,000 annual deductible IRA contribution, assuming a 25% tax bracket How Is It Done?

26. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company26 Money contributed to a Traditional IRA is currently deductible from gross income up to the specified limits Earnings accumulate on a tax-deferred basis Generally, individual needs to be 59½ to receive distributions without a 10% premature distribution penalty (unless an exception to the penalty applies) Tax Implications

27. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company27 Exceptions to the 10% penalty include: –Withdrawals due to death or disability –Withdrawals in the form of a series of substantially equal periodic payments –Distributions up to $10,000 for a “qualified first-time homebuyer distribution” –Withdrawals used to pay qualified higher education expenses Tax Implications

28. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company28 Distributions from a Traditional IRA are taxed to the client at ordinary income tax rates A “qualified distribution” from a Roth IRA is not taxable if distribution is made: –after the five year waiting period –in the event of death or disability –for first-time homebuyer expenses –at or after age 59½ Tax Implications

29. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company29 Non-qualified distributions from a Roth are includable in income only to the extent that the withdrawal (plus earlier withdrawals) exceeds the total of contributions made to the Roth IRA There is no required beginning distribution date at age 70½ for a Roth IRA –However, traditional IRA minimum distribution rules apply to the beneficiary of a Roth following the death of the IRA owner Tax Implications

30. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company30 Division of an interest in an IRA should be less difficult than division of a qualified plan, since all benefits in an IRA are vested and nonforfeitable ERISA provides that the transfer of the spouse’s entire interest in an IRA to a former spouse under a divorce decree is not a taxable distribution Caution: Transfers of partial interests may cause the “premature distribution” tax and ordinary income tax to be imposed Issues In Community Property States

31. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company31 Active Participant defined Individual is an active participant if covered by a(n): –qualified pension, profit sharing or stock bonus plan, –qualified annuity plan –SEP –government sponsored plan, or –employee only contributory plan exempt from tax under IRC Section 501(c)(18)

32. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company32 Simplified Employee Pensions IRA-based plan established by an employer that receives contributions by employer based on predetermined formula Contribution limit is lesser of 25% of compensation or $49,000 (in 2011) Compensation limit is $245,000 (2011) Elective deferrals to preexisting plans (SARSEPs) still allowed

33. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company33 Simplified Employee Pensions Employer must contribute for every employee 21 or older who earned $550 or more (2011) in 3 of the last 5 years May not discriminate in favor of HCEs Limited integration is permitted 100% vesting for all employees required Plan must be in writing, must spell out how contributions will be allocated SEP participants are active participants for IRA deduction purposes

34. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company34 SIMPLE IRAs Available to employers with 100 or fewer employees earning $5,000 or less May not sponsor another plan Salary deferrals up to $11,500 permitted in 2011 Catch-up contributions permitted up to $2,500 in 2011

35. Individual Retirement Plans and SEPs Chapter 51 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company35 SIMPLE IRAs Contribution formula requirement: must be one of following: –Match contribution: dollar for dollar up to 3% of compensation, or –Nonelective contribution: 2% of compensation for all eligible employees earning at least $5,000