Introduction to Retirement Plans
IRA, HSA, CESA & SEP
Legislative Change Highlights:
Legislative Change Highlights:
|2007 +||Qualified reservists called to active duty may make penalty-free distributions from an IRA and have additional rollover time. Also allows rollover of military death gratuity into an IRA (Roth or Traditional).|
|2007 +||Non-spouse beneficiaries allowed to roll money into an IRA from a Qualified Employer Plan.|
|2007-2009||IRA owners in RMD status may transfer up to $100K tax-free to eligible 501(3)c charities. See notes.|
|2007-2009||Participants in employer plans who declared bankruptcy (think Enron) may make additional IRA catch-up contributions.|
|2008 +||Direct rollover to a Roth IRA from a Qualified Employer Plan|
|2008-2009||FDIC insurance up to $250K in a Retirement plan is per decedent per institution regardless of various decedent/beneficiary combinations. IRA and HSA accounts are added together for insurance purposes.|
|2009 only||One-time IRA to HSA rollover permitted up to HSA limit. IRA code is either "normal" or "premature, no exception". See notes.|
|2009 only||RMD may be skipped unless IRA owner is taking Substantially Equal Periodic Payments or owner turning 70.5 in 2008 delayed his first RMD until tax filing deadline. No change is made tot he way the next distribution is calculated.|
|2010 +||Roth IRA income limit phase out for conversions to a Roth from a traditional IRA. Tax options are to report 2010 conversion amount as ordinary income (a) 100% in 2010, or (b) 50% 2011 and 50% 2012.|
|2010?||Charitable contribution exemption may be reinstated for 2010. See notes.|
|2010 +||Custodians are no longer required to place a "taxable amount" figure on 1099-R forms. Too many accountants relied upon that figure for tax purposes, resulting in an overpayment of taxes.|
The IRA distribution code for a charitable contribution or HSA rollover is whatever would normally apply - either a normal distribution or a pre-mature distribution with no exceptions. The taxable portion is taken care of on the tax return. Taxable amount of the distribution is shown as "$0" on 1040 line 15b due to QCD (Qual Char Dist) or HFD (HSA Funding Distribution). The $100K charitable distribution is for people 70.5 or older only.
IRA - Individual Retirement Account
The first type of retirement plan we'll cover is the IRA, which stands for Individual Retirement Arrangement. It is for an individual with earned income to save for retirement. IRAs first appeared in 1974 in an effort to encourage self-reliance and to reverse the prospect of poverty during the golden years.
Tax reduction or tax deferral are reasons why IRAs are so popular. Individuals may defer or substantially reduce taxes while building a retirement fund through regular contributions.
An IRA is for an individual and one individual at that. No other entity may own an IRA. Two people cannot co-own an IRA. A corporation cannot own an IRA. A trust cannot own an IRA.
IRA Investment Decisions
An IRA must be held by a custodian, such as a bank or brokerage firm. Individuals cannot buy savings bonds, put them in a safe place, and then claim them as an IRA deduction. A custodian, like a bank, must manage the IRA to ensure compliance with the rules.
Where the IRA is located - be it a bank or brokerage - determines the investment choices. For example, SBSU's IRA is similar to a Certificate of Deposit with no maturity date. The principal never loses value, the interest rate seldom changes, and the money is FDIC insured up to $250K per IRA owner. It is a safe investment and the ONLY type of IRA available at SBSU New Accounts.
State Bank of Southern Utah as an IRA Custodian
When you open an IRA at SBSU you are creating a FDIC-insured vehicle that conforms to IRA rules. It is one of the safest investments a person can make.
State Bank of Southern Utah is the custodian for the IRA. It is our responsibility to comply with regulations. For example, we are required to provide each IRA owner with the following upon account opening:
Tax Deferral - How IRA Plans Differ
An IRA is a type of tax shelter. That is, the IRS does not tax the interest (dividends or capital gains for those with stocks) so long as the funds stay within the protective walls of the IRA. Uncle Sam taxes money before it enters an IRA or when it leaves, but not while money is safely tucked inside. As a side note, IRAs are not protected against IRS confiscation for unpaid back taxes while some employer sponsored retirement plans are protected against this type of confiscation.
The major difference between the various IRA plans is when uncle Sam collects his taxes. With a traditional IRA taxes are typically collected after money is withdrawn. With a ROTH IRA, taxes are collected before money is placed into the plan. Once inside the IRA, and as long as it remains inside, the money is not taxed regardless of how large it grows.
If a person expects to be in a lower tax bracket upon retirement, the traditional IRA may be the best choice because contributions are usually tax deductible (distributions are taxed). To the contrary, a person who expects to be in a higher tax bracket upon retirement should opt for a Roth IRA because distributions may be tax free (contributions are made with after-tax money).
How the Plans Differ... continued
Traditional IRA: Individuals in a high tax bracket appreciate the tax-deductibility of traditional IRA contributions. Anyone with any amount of earned income may contribute to a traditional IRA. The millionaire next door may contribute to his traditional IRA and still get the tax deduction. The IRS allows the money inside of the IRA to grow tax free until it is withdrawn. There is one possible problem, however. A person who participates in an employer-sponsored retirement plan and earns too much money loses the tax deduction at some point (he may still contribute). We'll talk about this situation later.
Spousal Traditional IRA: This is basically a traditional IRA for the non-working spouse of a wage earner. The non-working spouse may contribute some of her husband's earnings to her very own Spousal IRA. They may also get a tax-deduction on their joint tax return even if one contributes to a qualified plan at work, such as a 401(k). Many non-working spouses qualify for the tax deduction on a joint tax return because the income limit is fairly high. However, as with many government programs the tax-deduction phases out if the working spouse earns too much.
How the Plans Differ... continued
Roth IRA: With this plan taxes are paid to Uncle Sam first. Contribution are with after-tax money. People who expect to be in a higher tax bracket when they retire should select this plan because withdrawals are tax free. However, individuals with large incomes cannot make contributions to a Roth IRA (there are no such income restrictions on a Traditional IRA).
Spousal Roth IRA: Same as with a Roth IRA for a non-working spouse of a wage earner. Contributions are with after-tax dollars. The account is separate from the wage-earner's account. Contribution limits apply and eligibility to make contributions depends upon whether the working spouse earns too much money. Many non-working spouses qualify for the plan because the income limit is high.
Contribution Limit Applies to all IRA Plans
IRAs are combined for contribution limit purposes. For example, the contribution limit for 2012 is $5K per individual under 50. He or she cannot contribute $5K to his Roth and another $5K to his traditional IRA for a total of $10K in contributions. The limit of $5K applies to all IRA plans combined.
The limit applies per individual. A person may contribute $5K to his Roth IRA and therefore use up his entire allowance. A spouse, however, still has a separate limit of her own.
The Coverdell Education Savings Account (CESA) is treated separately. People may contribute up to their IRA maximum and then contribute more to various CESA plans. More will be said about this later.
Qualified Employer Plans are also treated separately. That is, a person may contribute to an employer-sponsored plan, such as a 401(k), and still make full contributions to a separate IRA.
IRA Plans - The Final Word
|Contribution Rules and Restrictions|
Consult the following sources for specific rules and regulations relating to Individual Retirement Plans.
Notes: "Withdrawal" and "distribution" are words used interchangeably throughout this course. Both refer to the act of distributing money from an IRA to the owner or beneficiary.