This action might not be possible to undo. Are you sure you want to continue?
Traditionally, retirement saving have been made on a pre-tax basis. Tax on contribution and future earning are delayed until distribution. In contrast, with a Roth Retirement account, the account owner pays tax on his contribution before it is made. At the time of the distribution, if certain requirements are met, the entire distribution is free of income tax. Moreover, an individual who have reached age 70 ½ is not eligible to set up a traditional IRA, but there is no age limit to set up a Roth IRA. With a traditional retirement plan, distribution are required to begin in the year the account owner reaches age 70 ½ or the year after death, if earlier. In a Roth retirement account, distributions are not required to begin at any ages if the owner is alive, so distributions may be deferred until the year after death.
Contribution to IRAs
A. Traditional IRA Contribution Deductions and Limits Assuming an individual has earned income and otherwise meets the requirements for an traditional IRA contribution, the most that can be contributed his/her IRA is the smaller of the following amounts: 1) $5,000 ($6,000 if age 50 or older) or 2) his/her taxable compensation of the year 1. This general limit may be increase to $8,000 if the individual participated in a 401(K) plan maintained by an employer, and the employer went into bankruptcy in an earlier year. Generally, an individual can deduct the lesser of the two amounts: his/her contributions to the traditional IRA for the year or the general limit. However, if an individual is an active participant in a retirement plan at work, the IRA deduction is reduced where the individual’s modified adjusted gross income exceeds the applicable dollar limit 2. The
Distribution from IRAs A. These amounts are indexed for inflation beginning in 2007. B.000 for single taxpayer and $169. Contribution to Roth IRA is not deductible 4 and there is no age limit for the contribution. but then reduced by all contributions for the year to all IRAs other than Roth IRAs 3.000 for married filling jointly.000 ($6. For 2009.deduction is also affected by the filing status of the individual.000 but les than $109. Roth IRA Contribution The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.000 if age 50 or older) minus all contributions for the year to all IRAs other than Roth IRA. Traditional IRA Taxation Section 408(d)(1) provides that any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee. as the case .000 for married filling jointly. IRC 408A(C).. the applicable dollar limit is more than $89. or 2) individual’s compensation minus all contributions for the year to all IRAs other than Roth IRAs. contributions are not allowed if adjusted gross income exceeds $110. the amount is $116. Moreover. This means that the contribution limit is the lesser of: 1) $5. In 2009. the contribution limit is same the as the limit for traditional IRAs. However. the contribution limit for Roth IRA generally is the same as the limit would be if contribution were made only to Roth IRAs. if contributions are made to both Roth IRAs and traditional IRAs.000 for single taxpayer and $160.000 for a married couple filing a joint return or qualifying widow. If the contribution are made only to Roth IRAs.
for example. This means that. in the manner provided under Section 72. Notice 87-16 provides the formula below: Total nondeductible contributions -------------------------------------------------------------------IRA account balance + amount distributed + outstanding in all IRA at year during year rollover X distributed amount . except for certain rollover situations. income on the contract. so distribution is fully includible in income except for nondeductible contributions. Section 408(d) (2) set forth three Special rules for applying Section 72: 1) all individual retirement plans shall be treated as 1 contract. Unfortunately.may be. With respect to any nondeductible contributions made to the IRA. distribution from an IRA are treated as ordinary income and includible in income for the year of distribution. 2) all distributions during any taxable year shall be treated as 1 distribution. to another IRA. and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins. the portion of nondeductible contribution constitutes a return of the owner’s basis and thus is returned tax free. and 3) the value of the contract. The owner of an IRA is deemed to have a zero basis in the IRA. except for amounts that are timely rolled into another eligible tax-deferred vehicle. To determine the nontaxable portion of a distribution form an IRA that includes contributions with tax basis. According each distribution has both a nontaxable and taxable component. a taxpayer cannot withdraw the nondeductible portion before withdrawing amount includible in taxable income.
the total fair market value of all traditional IRA the individual owns must be included in the computation. their fair market values at year end are as follows: Account 1 2 3 4 Total FMV $30.000 to account #4. but rolled into another IRA in the following year under the 60 rollover rule. Example 1. An individual may not designate a particular distribution as being from a segregated or particular nondeductible IRA.end “Outstanding rollover” means any amounts distributed before year end. Jane. has four traditional IRA accounts. All distributions during the tax year are to be aggregated and treated as one distribution both for purposes of reporting the distribution as well for purpose of determining the nondeductible portion of a distribution.000 10. He has made no other nondeductible contributions and would like to withdraw his $10.000 33. When calculating the nontaxable portion of distributions.000 16. Jane cannot withdraw the nondeductible .000 Jane has made nondeductible contributions totaling $10.000 nondeductible contribution from account #4.000 $89. age 60.
If the basis in the account exceeds the total value of IRA distributions in the final year. even though the value of account #4 was made up entirely from nondeductible contributions. see Notice 89-25 . the ability to claim any such loss is subject to the 2% of adjusted gross income limit that applies to miscellaneous itemized deductions. a loss is recognized on the IRA distribution. In period of tough economic times and falling investment performances.124 of the distribution is h return of basis. $1. they should consider deferring the rollover into the following year. It is possible for an individual to recognize a loss in the year an IRA is liquidated. If possible. see Notice 87-16.000 --------------------$79. X $10. The nontaxable portion of his distribution is calculated as follows: $10.portion (basis) before withdrawing the amounts treated as taxable income.876 is taxable income. Moreover. the remaining $8. This will .000 + $10.000 Accordingly. He must include the value of all IRA accounts in calculating the nontaxable portion of the distribution.000 = $1.124 Planning strategy Individuals who have taken a distribution from nondeductible traditional IRA are contemplating rolling over a lump-sum distribution from a qualified plan into an IRA. and total distributions are less than unrecovered basis. one of the questions that invariably arises is whether losses in an IRA can be recognized by the owner.The taxpayer may recognize a loss only when all amounts in all IRAs have been distributed.
The potential for an IRA contributor to increase his or her retirement income can be significant. when available. the additional filing requirements and computations for nondeductible contributions and distributions should not deter a taxpayer from making nondeductible IRA contributions. If the individual failed to file Form 8606 to report nondeductible contributions. . However. if the individual satisfies the requirements. Copies of prior year showing no deductible IRA contribution would be suffice. All individuals who have made nondeductible contributions should have filed copies of Form 8606. this presumption can be rebutted with satisfactory evidence that the contributions were nondeductible. However. the contribution is presumed to have been deductible. Roth IRA Taxation 1. thus allowing a higher basis calculation for the distribution form the nondeductible IRA and lowering the taxable amount from that distribution. a nondeductible contribution to a Roth IRA will often be preferable B. an individual cannot deduct contributions to a Roth IRA. qualified distributions from Roth IRA are tax-free. However. A qualified distribution is any payment or distribution from an individual Roth IRA that meets the following requirements. Qualified distributions Unlike a traditional IRA. Thus.keep the IRA account balances lower during the distribution year. Nondeductible IRAs. as all income and realized gains in the account are accumulated tax-deferred. for each year such contribution were made.
this is limited to $10. made because the individual is disabled.5 b. the period held by the decedent is included in the period held by the beneficiary to determine whether the 5-year period is satisfied (408A(d)(2)(A) and Reg. made to a beneficiary or to the estate of the individual after the death of the individual d. If the distribution is made to a beneficiary of the estate of the owner. used to purchase or rebuild a first hom for the individual or a qualified family member. The period ends on the last day of the individual’s fifth consecutive tax year beginning with the tax year described previously. There is. the five year period with respect to the surviving spouse’s Roth IRA ends at the earlier of the five year period end of either the decedent or the spouse’s own Roth IRA. generally this tacking rule does not impact the holding period of other Roth IRA owned by the beneficiary. The 5 year period begins on the first day of the individual’s tax year for which the first regular contribution is made. the first day of the individual’s tax year in which the first conversion contributions is made to any Roth IRA of the individual. one exception.However. and 2. however. If the surviving spouse treat the Roth IRA as his or her own. It is made after the 5 year period beginning with the first taxable year for which a contribution was made to a Roth IRA. or if earlier.408A-6. made on or after the date the individual reach age 59.1. Q&A-1(b)). The payment or distribution is: a. So the five year period for an individual in his/her capacity as a beneficiary of a deceased Roth IRA owner is determined independently of the five-year period for the beneficiary’s own Roth IRA. c. §1.000 per lifetime. .
2009. Thus. . the 10% early distributions tax of Section 72(t) applies to amounts includible in income. only the earnings in excess of that amount are taxed. he/she may have to pay the 10% additional tax on early distribution unless one of the exceptions is met. If. the taxpayer is not subjected to double taxation. where the distribution does not constitute a qualified the distribution. the taxpayer is generally allowed to recover his/her contributions before taxable earning are treated as distributed. and makes a regular contribution for 2008 on the dame date. The 5 year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion is separately determined for each conversion. while the 5-year period for the regular contribution begins on January 1. Example 2. he/she takes a distribution from a Roth IRA. and is not necessarily the same as the 5 year period used for determining whether a distribution is a qualified distribution. exceed the direct Roth contributions. The amount contributed is not subject to tax since taxpayers paid tax on contributions.2. 2008. Jane makes a conversion contribution on March 25. Nonqualified distributions are taxable to the extent the amount of the distributions. within the 5-year period starting with the first day of the tax year in which an individual first set up and contributed to a Roth or convert an amount from other qualified retirement plan to a Roth IRA. added to all prior distributions less prior amounts that were includible in income. Nonqualified distributions If the Roth IRA distribution fails to meet either one of the two requirements for qualified distributions. The 5 year period for the conversion begins January 1. Further. 2009.
Jane established his first Roth IRA in 2000 and made a participate contribution of $2. taxable Traditional IRA conversions. the IRS uses the 'ordering rules'. a nonqualified distribution of earnings may be subjected to income tax and the early-distribution penalty.000 $10.000 $50. the assets from the next source are distributed): 1. assets are distributed from a Roth IRA in the following order (once assets from one source run out. In 2005. Example 3.The tax implication of a nonqualified distribution depends on the source of the Roth IRA assets. Distributions of Roth IRA assets from regular participant contributions and from nontaxable conversions of Traditional IRA can be taken at anytime. In 2004. tax and penalty free if the distribution is in line with the rules that exempt assets from income tax and earlydistribution penalties.000 $5.000 a year. To determine the source of assets distributed from a Roth IRA.000 Source Roth IRA participant contributions 2000 through 2004 Taxable Traditional IRA conversions from 2004 Non-taxable Roth IRA conversions from 2004 Earnings . 4. nontaxable Traditional IRA conversions. and balance is John’s IRA at that time is represented as follows: Assets $10. 2. 3. john is 55 years old. regular Roth IRA contributions. A nonqualified distribution of taxable Traditional IRA conversion assets may be subjected to early-distribution penalties. he converted his traditional IRA to his Roth IRA. earnings on all Roth IRA assets. According to the ordering rules. And finally.
they are subjected to the 10% earlydistribution penalty since it hasn't been five years since John's conversion. Taxable conversion Nontaxable conversion Tax free and penalty free Tax free and penalty free Tax free but penalty may apply Tax free and penalty free Earnings Tax free and penalty free Taxes apply and Penalty is waived if any one of the penalty may exceptions apply.000. The additional $50. Finally.000. The additional $10. opening up a .000 is attributed to nontaxable conversion assets. The following chart summarizes the tax treatment of all possible Roth IRA distributions: Distributed Assets Regular participant contributions Qualified Nonqualified Distributions Distributions Tax free and penalty free Tax free and penalty free Comment Income tax and early-distribution penalty are never applied to distributed assets for which no deduction was allowed when the assets were contributed to the IRA. However. apply 3. the adjusted gross income limitation is scheduled to disappear altogether in 2010. These will not be subjected to taxes or the early-distribution penalty because no deduction was allowed when they were contributed to the Traditional IRA. Because these assets were taxed when converted. however. the first $10. However. the penalty may still be waived if John meets one of exceptions above.000 will be subjected to taxes and the 10% early-distribution penalty the distribution is nonqualified distribution and doesn’t meet one of the exceptions. Income tax and penalty is never applied to distributed assets for which no deduction was allowed when the assets were initially contributed to the IRA. Planning Strategy Currently. there will not be any income tax owed on the distribution.000 comes from his regular Roth IRA contributions and is therefore tax and penalty free. These are already taxed when converted. But. comes from his taxable conversion assets. the ability to convert a contribution from a traditional IRA to a Roth is dependent upon the individual’s modified adjusted gross income.$75. the earnings of $5.000 If John takes a distribution of $75. Penalty is waived if any one of the exceptions apply.
Other considerations will go into the decision whether to convert. He would consider doing so if his adjusted gross income is modest enough to allow it. One of the greatest benefits of the Roth is the ability to avoid the lifetime required minimum distribution. there is a one-time sale of Roth conversions implemented in 2010: the IRA owner will have the option to spread the income realized from a 2010 Roth conversion over the following two years. Such year present an opportunity to convert a portion of an existing to convert a portion of an existing traditional IRA to Roth IRA at low tax cost. rather than . A teenager with modest earnings would be well advised to contribute up to the maximum to a Roth IRA when the tax cost of doing so is low on non-existent. Those individuals who do not need the IRA assets for living and who would prefer to leave IRA assets to another generation will likely wish to consider the conversion option. Many taxpayers experience years with low taxable income. One of the important questions is whether the individual needs the IRA funds for living expenses. Required Minimum Distribution from IRA and Retirement plans The required minimum distribution rules are designed to ensure that funds in taxqualified retirement plan or a traditional IRA are actually used for retirement.significant planning opportunity for anyone with an IRA. but not for a Roth IRA contributions. half in 2011 and half in 2012. might make a corresponding gift to the child. perhaps as a result of retirement. who wants to encourage good saving and investment habits. A parent.5 is prohibited from making a traditional IRA contributions. While this opportunity continues beyond 2010. Some with earned income who has already reached age 70.
Once distribution has begun for a 5% owner. The required beginning date depends on whether the plan is a qualified plan or an IRA and. The penalty for failing to do so is 50% of the difference between what was distributed and what ought to have distributed according to IRS rule.for estate planning purposed. individuals who have reached the age of 70 ½ must take a certain amount of money out of their qualified plans every year. whether the individual is or is not a 5% owner. A. the required beginning date means April 1 of the calendar year following the calendar year in which the employee attains age 70 ½ . If an individual doesn’t need the funds for currently living. the required beginning date means April 1 of the calendar year following the later of: 1) the calendar year in which the employee attains age 70 ½. or 2) the calendar year in which the employee retires. In the case of a 5% owner in a qualified plan. distribution must continue in subsequent years even if the individual ceases to be 5% owner. in the case of a qualified plan. Whether the individual has terminated employment is disregarded here. . the scenario is that the individual would defer distribution as long as possible to take advantage of the tax-free build up available in an IRA or a qualified plan. An individual is treated as a 5% owner if the employee is a more than 5% owner of the employer with respect to the plan year within the calendar year in which the individual attains age 70 ½ . If the individual in a qualified plan is not a 5% owner. Ordinarily. Required Payout During Owner’s Life Distributions from a qualified plan or a traditional IRA are generally required no later than the participant’s required beginning date. The Roth IRA is not subject to the pre-death required minimum distribution.
The participant may use another table that takes into account the actual joint life expectancy of the owner and designated beneficiary.For traditional IRA. The only exception for the use of Uniform Lifetime Table is where the participant’s spouse is the sole designated beneficiary and the spouse is more than 10 years younger than the participant. all subsequent distributions must be made by December 31 of the distribution year. Even though the first distribution must be made by April 1 of the year the participant is 70 ½ . the individual will be forced to take two distributions that year: one by April and other by December 31. the required beginning date starts April 1 of the calendar year for the calendar year in which the individual attains age 70 ½. Next. While the distribution process is fairly standardized. If an individual chose to start the requirement minimum distribution in the year following the year in which he/she attains age 70 ½. thought should be given when the first required minimum distribution should be taken. . The applicable distribution period is determined using the Uniform Lifetime table set forth in the regulations. So if an individual defer the first distribution into the second year. a participant with a younger spouse can consider whether to designate the spouse as the sole beneficiary. he/ she will have 2 year of distribution in that second year. thus use the more advantageous joint table to defer the distribution. the minimum amount is determined by dividing the account balance by the participant’s anticipated life expectancy determined by the Uniform Lifetime Table. it still lend to some planning opportunities. First. The minimum amount distributed is determined by taking the value of the account as of the last valuation date immediately preceding calendar year and dividing it by applicable distribution period. Essentially.
The exact distribution requirements depend on whether the owner died before or after the owner’s required beginning date. If that is the case. a designated beneficiary other the owner’s spouse. The distribution must begin by December 31 of the year the owner would have attained age 70 ½. If the owner dies before required beginning date and the spouse chose to leave the fund in owner’s account. Once the first distribution is satisfied.This might push the individual to a higher tax bracket. 2. the individual might consider taking the first distribution in the calendar year in which the individual reaches age 70 ½. The distributions should be made using the Table V Divisor for the owner’s (may use surviving spouse’s age if younger) each year. the taxpayer can decide when to take each subsequent year’s required minimum distribution. recalculated annually. Generally. Required Payout on Owner’s Death The required Minimum distribution after the owner’s death depends on whether the beneficiary is the owner’s spouse. or if there is no designated beneficiary. individual can take only one distribution at the end of the year in order to better allow the earning to grow and accumulate throughout the year. Required Minimum distribution after an owner’s death are determined based on Table V of the 72 regulations and beneficiary’s age is used. If the surviving spouse dies before distribution to the surviving spouse have . The spouse may leave the assets in the owner’s account or rollover the assets in to the spouse’s own account. For the most par. Spouse as Designated Beneficiary If the spouse is the sole designated beneficiary. A. there are tow options available to the spouse.
It is usually advisable for surviving spouse to leave the fund in owner’s account if the owner is actually younger than the surviving spouse. it is advantage to roll over the owner’s account into the spouse’s account. So the distribution should begin by the spouse’s required beginning date and be calculated based on the spouse’s life expectancy using the divisor form the uniform distribution table. Similarly. distributions of the balance should be made using the Table V divisor for the owner’s age each year (may use surviving spouse’s age if younger). the surviving spouse must also take the own’s . However. if the surviving spouse is younger the owner. If the owner dies after required the beginning date and the surviving spouse chose to leave the fund in owner’s account. Then the distribution should begin by the surviving spouse’s required beginning dated and be calculated based on the surviving spouse’s life expectancy using the divisor form the Uniform Distribution table. the distribution should be made as follows: the owner’s required minimum distribution for the year of death should be distributed.begun. as if the surviving spouse were the account owner. use the Table V divisor for ht e designated beneficiary named by the surviving spouse. as if the surviving spouse were the owner. it is better to roll the owner’s account into the surviving spouse’s account if the spouse is younger than the owner. use the Table V divisor for designated beneficiary named by the surving spouse. If the owner dies after the owner’s required beginning date. Distributions are recalculated annually and must begin by December 31 of the year following the owner’s death. If the surviving spouse dies before distributions to the surviving spouse have begun.
reduced by one for each year thereafter. Early Distribution Tax While the required minimum distribution rules are there to prevent individuals from using tax-deferred amount for estate planning purpose rather than for actual retirement. C. There is generally a 10% penalty tax on retirement income includible in income which is paid before an . Reg. The calculation should use Table V divisor based on oldest designate beneficiary’s age in the calendar year after participant’s death. In addition. Designated Beneficiary Other Than Spouse Distribution must be made by December 31 of the year following the owner’s death to the designated beneficiary over the designated beneficiary’s life expectancy. If the owner has reached the RBD.required distribution for the year of the owners’ death. 1. and if the owner has not reached the required beginning date. then the account must be distributed over the owner’s nonrecalculated life expectancy based on the owner’s age in calendar year of the owner’s death. A-12 (2001) B. the account must be distributed by December 31st of the fifth year following the account owner’s death. No designated beneficiary If there is no designated beneficiary. Prop.402(c)-2. the owner’s required minimum distribution must be made for the year of death. reduced by one for each year after the year of the owner’s death. if the account owner dies after his required beginning date. the early distributions tax of Section 72(t) is to prevent individuals form receiving taxpreferred retirement income too early and for non-retirement purposed.
Distributions for higher education expenses.individual attains age 59 ½. the 10% penalty tax will still apply to the 20% withheld and not received if the individual is under age 59 ½. Despite the general rule. Distribution for certain qualified first time home purchase. If the individual subsequently rolls over the distribution actually received within 60-day rollover period. The 10% is in addition to any other tax otherwise due and applies unless taxation is avoided by rolling the amount into another eligible tax-deferred vehicle such as an IRA. • Distribution paid with respect tot stock of a corporation that are described in Section 404(k) • Distribution made to the employee to the extent such distribution do not exceed the amount allowable as a deduction under Section 213 to the employee for amounts paid during the tax year for medical care. If an individual in a qualified plan does not elect direct rollover. The following exceptions are only available to IRAs: • • • Distributions to unemployed individuals for health insurance premiums. the early distribution tax is subject to a number of exceptions: • • Distribution made to a beneficiary on or after the death of the employee Distribution attributable to the employee’s being disabled as defined in Section 72(m) • Distributions that are part of a series of substantially equal periodic payments made for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and the employee’s designated beneficiary. he/she would be subject to the 20% federal income tax withhold. .
408A(c)(1) .1 2 3 4 Code Sec. 219(a) Code Sec. 408A(c)(2) Code Sec. 219 (g) Code Sec.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.