Chartered Retirement Planning Counselor SM Professional Designation Program

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Module 4Traditional, Roth & SIMPLE IRAs

Chartered Retirement Planning CounselorSM Professional Designation Program

Learning Objectives

4–1 Describe the basic characteristics and requirements of IRA accounts

4–2 Describe the basic characteristics of traditional IRAs, and analyze a situation to calculate the amount of an IRA contribution that is deductible.

4–3 Analyze a situation to determine the income tax or nontax requirements of a traditional IRA distribution..

4–4 Describe the basic characteristics of Roth IRAs, and analyze a situation to calculate the eligible contribution amount.

4–5 Explain the basics of Roth conversions.

4–6 Describe the basic characteristics of SIMPLE IRA plans.

4–7 Describe the basic characteristics of a Simplified Employee Pension (SEP).

4–8 Describe the employer/employee factors to be considered in determining if a SEP or SIMPLE IRA would be appropriate.

4-2

Questions to Get Us Warmed Up

4-3

Learning Objectives









4-4

IRA Statutory Requirements

• Eligibility: Compensation (earned income, alimony) and must be under age 70½ (no age limit on Roth IRAs)

• Contribution limit: 100% of earned income up $5,500 (spousal IRAs allowed), $1,000 age 50 catch-up

• Contribution deadline: April 15—no extensions

• Taxation: Earnings are tax-deferred

• Minimum: If an amount greater than $0, but less than $200 is deductible, then a $200 minimum deductible contribution is allowed.

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IRA Statutory Requirements

• Fully vested • No life insurance or collectibles• No loans• RMDs starting at age 70½

(not for Roth IRAs)• 6% penalty tax on excess

contributions

4-6

IRA Deductibility Active Participant Status

An employee is an active participant in a defined contribution plan if, during the taxable year, the employee received any annual additions to his/her account.

An employee is an active participant in a defined benefit plan if the employee is eligible to participate in the plan and has not opted out. (Note that investment earnings do not affect active participant status.)

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or orEmployerContribution

Employee Contribution(either voluntary or mandatory)

Forfeiture

To one of the following plans:• All qualified plans• Tax-sheltered annuity (TSA) under §403(b)• Simplified employee pension (SEP) & SIMPLE plans• Government pension plan

Traditional IRA Deduction Phaseout Amounts (2013)

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Single Taxpayer

Not an Active Participant

Active Participant

No Phaseout

$59,000-$69,000

Married Taxpayers Filing JointlyNeither is an

Active Participant

One Active Participant

Both Active Participants

No Phaseout

Active participant:

$95,000-$115,000

$95,000-$115,000

Other Spouse:

$178,000-$188,000

Calculation of Deductible IRA Contribution

1. Determine the deductible percentage.

2. Multiply by the maximum contribution amount.

3. The result is the maximum dollar amount that can be deducted (rounded up to the next $10).

Example: Single, Modified AGI $65,000

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200,2$500,5$4.000,10$

000,65$000,69$

Calculation of Deductible IRA Contribution (1)

1. Determine the deductible percentage.

2. Multiply by the maximum contribution amount.

3. The result is the maximum dollar amount that can be deducted (rounded up to the next $10).

Example: Married/Joint active participant, Modified AGI of $97,316

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$4,870.00$10nearesttouprounded$4,863.10

10.863,4$500,5$8842.000,20$

316,97$000,115$

Calculation of Deductible IRA Contribution (2)

• Same as previous scenario, except individual is age 50 or older

• .8842 x $6,500 = $5,747.30• Round up to nearest $10 = $5,750

deductible amount • Balance of $6,500 – $5,750 = $750

can be a nondeductible IRA contribution

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Required Minimum Distribution Beginning Dates

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Required Minimum Distribution Rates (Uniform Table)

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Participant Age

Distribution Period (Years)

Percent of Balance

70 27.4 3.65

71 26.5 3.78

72 25.6 3.91

75 22.9 4.37

80 18.7 5.35

85 14.8 6.76

90 11.4 8.77

95 8.5 11.63

100 6.3 15.87

105 4.5 22.22

110 3.1 32.26

115 1.9 52.63

1st and 2nd Distribution Years

Balance onDec. 31 of prior year

70 1/2

Trigger year

1st distribution year

Dec. 31

Jan. 1

Jan. 1

Dec. 31

Dec. 31

Apr. 1

2nd distribution year

1st distribution dueby April 1 Required Beginning Date

2nd distribution dueby Dec. 31 of 2nd year

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Distributions Upon Death

BeneficiaryDeath Occurs Before RBD

Death Occurs After RBD

None 5 year rule Life expectancy of deceased, fixed term

Not spouse Life of beneficiary, fixed term, or can roll to inherited IRA (titled as a beneficiary account)

Same

Spouse Life of surviving spouse, recalculated, or rollover to spouse’s IRA or retirement plan, or delay distributions until deceased would have been age 70 ½

Life of surviving spouse, recalculated, or rollover to spouse’s IRA or retirement plan

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Learning Objectives



4–3 Analyze a situation to determine the income tax or nontax requirements of a traditional IRA distribution.






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IRA Early Distribution Requirements

10% penalty for withdrawals prior to age 59½,

Exceptions include:

•Made to beneficiary after death of participant

•Made to a fully disabled participant

•Medical expenses above 7.5% of AGI

•Payment of medical insurance premiums while receiving unemployment insurance

•To a first-time home buyer for the purchase of a primary residence ($10,000 max)

•Used for qualified higher education expenses

•Part of a series of substantially equal periodic payments

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Qualified Education Expense Exemption

• This is defined as tuition, fees, books, supplies, and equipment required for enrollment or attendance at postsecondary education institutions, including graduate schools.

• This exception is applicable to the taxpayer, his or her spouse, or the child or grandchild of either the taxpayer or the spouse.

• Qualified higher education expenses are reduced by any amounts excludible from gross income received on account of scholarships, veterans benefits, or the redemption of qualified U.S. savings bonds.

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Substantially Equal Periodic Payments

Payments must continue for at least five years, or until participant is age 59½, if laterUse one of three methods to calculate payments:1. Life expectancy—Required minimum distribution

method 2. Amortization—Life expectancy table

used in RMD method and reasonable interest rate

3. Annuitization—Divide account balance by a factor that reflects “reasonable” interest and mortality rates

Distribution methods 2 and 3 may be changed once to the RMD method.

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Reg. 72(t) Withdrawal Example

Assumes male, age 56, $150,000 account, 8% annual return

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AgeLife Expectancy Amortization

Annuitization

56 $5,357 $13,573 $14,620

57 $5,802 $13,573 $14,620

58 $6,284 $13,573 $14,620

59 $6,806 $13,573 $14,620

60 $7,374 $13,573 $14,620

Learning Objectives









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Roth IRA Contribution 2013 Phaseouts

4-22

Filing Status Phaseout*

Single $112,000–$127,000

Married, filing jointly $178,000–$188,000* Without regard to “active participant” status

Roth IRA “Qualified Distributions”

Must meet both of the following:• 5-year holding

period (5-year “clock”) and

• Attainment of age 59½, death, or disability

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Roth Conversions• Income limitation of

$100,000 lifted in 2010• Assets may be converted

from traditional IRAs, SEPs, SIMPLEs (after 2 years), and qualified plans

• If nondeductible IRAs are involved, then a ratio of all nondeductible contributions to the total value of all IRAs must be used

• There is no 10% penalty tax• Recharacterizations are

allowed

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Roth Order of Distributions

• Return of contributions• Return of conversion amount• Return of earnings

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When Establishing a Roth IRA Makes Sense

• For a young person in a low tax bracket who expects to be in a much higher tax bracket at retirement

• For anyone who suspects tax rates will be much higher in the future

• For anyone who wants to shelter income and earnings from taxation after he or she reaches age 70½

• For anyone who wants to avoid required minimum distributions on IRA account balances

• For anyone who wants tax-free income to be paid over the lifetime of much younger family members

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Roth 401(k) or DRAC

• Annual contribution limit of $17,500, with $5,500 age 50 catch-up

• No income phaseouts• RMD rules do apply• Has own 5-year clock• ERISA protection

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Learning Objectives









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SIMPLE IRA

• 100 or fewer employees paid at least $5,000 in any two preceding years and current year—must be only plan

• Permits employee elective deferrals ($12,000 with $2,500 age 50 catch-up)

• 100% immediate vesting

• Nondiscrimination tests met if: 100% match on first 3% (1% match in 2 of 5 years), or 2% non-elective contribution to account of each employee earning more than $5,000

• IRA distribution rules apply, excepto 25% penalty on withdrawals

in initial two yearso Rollovers limited during initial

two years4-29

SIMPLE Plan Employer Contributions

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Simplified Employee Pensions: SEPs

• Employer-sponsored retirement plan allowing flexible employer contributions

• Employee contributions not allowed

• Eligibilityo Age 21o Earned at least $550 during

current yearo Worked for employer at least 3

of the last 5 years• Vesting: 100% immediate

(since IRA accounts)

• IRA rules generally apply to distributions

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Contributions

• 25% of compensation or $51,000, whichever is less

• Employer can integrate with Social Security

• If employer is unincorporated then the Keogh plan rules apply

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Plan Establishment Deadlines

• Qualified plans: December 31st • SIMPLE plans: October 1st for the current

year• SEP plans: tax filing deadline, including

extensions

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Learning Objectives









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SEP versus SIMPLE (1)

SEP SIMPLE

Maximum employee deferral

$0 $12,000 or 100% of compensation ($2,500 age 50 catch-up)

Employer contributions

Entirely discretionary, lesser of 25% or $51,000 (20% limit if unincorporated)

2% nondiscretionary or 3% matching

Employer eligibility No limit on number of employees

Must have 100 or fewer employees earning $5,000 or more

Employee eligibility Age 21, earned at least $550, and worked for employer 3 of the last 5 years

No age requirement, income of at least $5,000

Testing and annual filing

Simple filing requirements Simple filing requirements

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SEP vs. SIMPLE (2)SEP SIMPLE IRA

Setting up Easy Easy

Vesting 100% immediate 100% immediate

Individual accounts? Yes, IRA Yes, IRA

Investment choices and responsibility

Employee Employee

Deadline for establishing Tax due date, including extensions

October 1st for current year in order to allow enough time to for at least a 60-day notification and election period

Tax advantages Tax deductibility for employer contributions and tax deferral

Tax deductibility for employer and employee contributions, and tax deferral

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Qualified & Nonqualified Plans

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Qualified Plans Nonqualified Plans

Pension Plans Profit Sharing Plans (DC)

Tax-Advantaged Plans

Other Nonqualified Plans

Defined Benefit (DB)

Profit Sharing Traditional IRA Section 457 Plans

Cash Balance (DB) Thrift Plan Roth IRA

Stock Bonus SIMPLE IRA ISO

Money Purchase (DC)

ESOP (LESOP) SEP ESPP

Target Benefit (DC) Age-Weighted (SARSEP) NQSO

Cross-Tested (Comparability)

401(k) Plan 403(b) (TSA) Deferred Compensation Plans

SIMPLE 401(k)

Question 1For this question, assume that all IRA contributions are made for

the current year.

Allen Baker, a single 40-year-old taxpayer with an AGI of $67,800, is covered by his employer’s profit sharing/401(k) plan. During the plan year, no employer contribution was made and Allen did not make any salary reduction contributions to the 401(k) portion of the plan. Allen’s account balance increased by $120; this was attributable to investment earnings of $80 and forfeitures of $40.

If he contributes $5,500 to his IRA, what is the amount of his allowable IRA deduction?

a. $0

b. $100

c. $660

d. $5,500

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Question 2

For this question, assume that all IRA contributions are made for the current year.

Assume the same facts as question 1, except that Allen is married, his spouse is not an active participant, they file jointly, and their AGI is $106,000.

What is the amount of their IRA deduction?a. $0

b. $900

c. $5,500

d. $6,160

e. $11,000

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Question 3

Identify the six listed exemptions from the 10% penalty tax on premature distributions from an IRA. (The remaining three apply to qualified plans only.)

a. series of substantially equal periodic payments

b. distribution following owner’s death

c. distribution to an employee age 55 following separation from service

d. distribution following disability

e. distribution to an alternate payee under a QDRO

f. distribution for medical expenses that exceed 7.5% of AGI

g. distribution as a series of substantially equal periodic payments after separation from service

h. distribution of up to $10,000 for a first-time homebuyer

i. distribution for qualified education expenses

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Question 4

Boulder Bolter, Inc. is a hardware chain that offers its employees a 401(k) plan. Bolts are big, and profits are high. The company wishes to make the maximum contribution to the 401(k) plan. Assume the gross covered payroll is $10 million for 400 employees; on average, the employees defer 5% of their salaries. The first 3% is matched dollar for dollar.

Total deferrals $500,000

Total match $300,000

What is the maximum discretionary contribution the company can make to the 401(k) plan? (Answer to the nearest $25,000.)

a. $600,000

b. $1.7 million

c. $2.2 million

d. $2.5 million5-41

Question 5

Ken and Barbie file jointly. Both work, and their combined AGI is $105,000. This year, Ken’s profit sharing account earned over $5,000, but the company made no contributions and there were no forfeitures. Barbie declined to participate in her company’s defined benefit plan in June because she wants to contribute to and manage her own retirement money. (Her benefit at age 65 under the plan was $240 per month.) How much of their $11,000 contribution can they deduct?

a. $0

b. $5,500

c. $8,250

d. $11,000

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Question 6

Lucy received a $1,200 profit sharing contribution this year. Lucy and George are married, filing jointly. George is an artist who had no earnings this year. Their combined AGI for this year is $108,000.

How much of their $11,000 IRA contribution can they deduct?

a. $0b. $5,500c. $7,430d. $11,000

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Question 7

Sally and Joe are married, filing jointly. Their combined AGI is $146,000. They are both active participants in their employers’ plans. After making the maximum qualified plan contributions, they wish to make contributions to their Roth IRAs.

How much can they contribute to their Roth IRAs?

a. $0b. $1,000c. $5,500d. $11,000

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Question 8

Jerry’s AGI totals $119,000 this year. He is single. What is the maximum amount he can contribute to his Roth IRA this year?

a. $0b. $1,000c. $2,940d. $5,500

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Question 9

If a defined contribution plan provides a graded vesting schedule, which of the following statements can be correctly made about the plan?

I. The plan will generally require one year of service for eligibility.

II. The plan will generally require two years of service for eligibility.

III. At the end of his or her third year of service, a participant must be entitled to at least 40% of his or her benefit under the plan.

IV. At the end of his or her fifth year of service, a participant must be entitled to the full amount of his or her accrued retirement benefit.

a. I onlyb. I and III onlyc. II and IV onlyd. I, III, and IV only

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Question 10

John Smith works for ABC Corp. and earns $295,000. ABC Corp. provides a nonelective contribution to its SIMPLE IRA plan.

Which one of the following is the maximum amount that could go into John’s account? (The Section 401(a)(17) limit on includible compensation is $255,000 in 2013.)

a. $5,100

b. $12,000

c. $17,000

d. $17,100

e. $17,900

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Question 11

Which of the following could be disadvantages of a SEP from the employer’s point of view?

I. mandatory annual contributionsII. statutory eligibility requirementsIII.$12,000 (indexed) deferral limit in 2013IV.lack of vesting schedules

a. III onlyb. I and III onlyc. II and IV onlyd. II, III, and IV only

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Question 12

Which one of the following is not a basic provision of a SEP?

a. individual ownership of accountsb. 25% limit on employer contributionsc. forfeiture reallocations based on

compensationd. plan must not discriminate in favor of highly

compensated employees

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Question 13

Trent Tyley, age 55, has contributed $11,500 to his Roth IRA over the past six years. He also converted $20,000 just last year. Due to some very good investment returns, his total account value is now $53,000. Trent has decided to go on a dream vacation with his wife, and plans on withdrawing $15,000 from his Roth to help pay for the vacation. What are the tax ramifications, if any, of this withdrawal?

a. Since the Roth has been open for more than five years, the entire $15,000 would not be taxable.

b. The $11,500 in contributions would be considered withdrawn first and not taxable, but the additional $3,500 would be subject to a 10% penalty tax.

c. The $11,500 in contributions would be considered withdrawn first and not taxable, but the additional $3,500 would be subject to ordinary income taxes.

d. The $11,500 in contributions would be considered withdrawn first and not taxable, and a prorated amount from the remaining balance of $3,500 would be taxed as ordinary income and subject to the 10% penalty tax.

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Chartered Retirement Planning Counselor SM Professional Designation Program

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