Retirement Planning and Employee Benefits for Financial Planners

1. Retirement Planning and Employee Benefits for Financial Planners Chapter 9: IRAs and SEPs

2. Introduction • Traditional IRAs • Tax Deductible/Nondeductible contributions • Taxable/Nontaxable Distributions • Roth IRAs • Nondeductible Contributions • Qualified distributions are income tax-free • SEP IRAs • IRAs provided by employers • Greater funding limits than traditional IRAs

3. IRAs – Contribution Limit • Traditional and Roth • Generally, • Lesser of • $5,500 ($6,500 for age 50 and over - 2014) or • Individual’s earned income. • Subject to limitations based on income • Can divide contribution between a Roth/traditional IRA • Attainment of age 70½ • can no longer make traditional IRA contributions. • Can contribute to Roth IRA.

4. Earned Income • What is earned income? • W-2 income • Schedule C net income • Income as a general partner • Alimony • Exceptions: • Spousal IRA: contribute up to: • Spouse’s earned income – spouse’s IRA contribution

5. Timing of Contributions • Contributions must be made by the due date of the individual’s income tax return (without extensions). • Usually April 15th of the following tax year.

6. Deductibility of Traditional IRA Contributions • Deduction FOR AGI

7. Active Participant Status • Limits Traditional IRA contributions. • Individual is considered an active participant: • Defined Benefit Plan • Participates or meets the eligibility requirements of the plan. • Defined Contribution Plan • Receives a contribution to the qualified plan on his behalf for the year (including forfeitures), or • Defers compensation to a CODA plan.

8. Nondeductible IRA Contributions • Tax-deferred growth • Creates adjusted basis in IRA. • Distributions will be partially return of capital and partially earnings. • Nondeductible IRA contributions are not limited for active participants of qualified plans. • File Form 8606 with Form 1040 to track the adjusted taxable basis of an IRA.

9. Distributions from Traditional IRAs (1 of 2) • Ordinary Income • Except: • Distributions of adjusted basis

10. Distributions from Traditional IRAs (2 of 2) • Required Minimum Distributions • Same as RMDs for Qualified Plans • Year following turn 70 ½ • Subject to penalties if prior to age 59½ • Unless on account of an exception

11. Exceptions to 10% Early Withdrawal Penalty • Distributions on account of: • Death • Attainment of age 59½ • Disability • Substantially Equal Periodic Payments • Medical Expenses in excess of 7.5% of AGI • QDRO • Higher Education Expenses • First Time Home Purchase – up to $10,000 • Payment of health insurance premiums by unemployed

12. Roth IRAs • Nondeductible Contributions • Qualified Distributions are income tax-free • Owner may continue to fund after attaining age 70½ • Not subject to required minimum distribution rules during the life of the account owner • Share contribution limit with Traditional IRA • Contributions may be limited based on AGI

13. Roth IRA Contributions (1of 2) • Contributions • Limited to lesser of earned income or $5,500 ($6,500 if age 50 and over - 2014) • Combined Limit with Traditional IRA • Availability phased-out based on AGI

14. Roth IRA Contributions (2 of 2) • Convert Traditional IRA to Roth IRA • No limit in 2014 • Recharacterized Contributions

15. Qualified Distributions from Roth IRAs • Qualified Distributions are income tax-free. • Qualified Distributions are not subject to 10% early withdrawal penalty. • Qualified Distribution: • The distribution is made after a five taxable year period, AND • The distribution is on account of the owner attaining age 59½, the owner’s death, disability, or first-time home purchase (maximum $10,000).

16. Nonqualified Distributions from Roth IRAs • Subject to income tax…maybe… • First come from contributions (tax-free) • Then from conversions (tax-free) • Then from earnings – these are taxed • Subject to 10% penalty • Nonqualified distributions • Contributions are not subject to penalty • Conversions and earnings in the last five years are

17. Tax-Free Distributions from IRAs to Charity • Can be made from a Traditional or Roth IRA directly to charity • Counts toward satisfying RMD for year • Owner must be 70 ½ or older • Can distribute up to $100,000 per year • Advantage of contributions from IRA

18. Nonqualified Distributions from Roth IRAs *Exceptions to the 10% early withdrawal penalty are the same as the exceptions for Traditional IRA distributions.

19. Comparing Roth IRAs to Traditional IRAs • Traditional IRAs do not allow contributions after the owner is age 70½, unlike Roth IRAs. • Roth IRAs are not subject to the minimum distribution rules, unlike Traditional IRAs.

20. IRA Investment Options • Permitted: • Cash • Stocks • Bonds • Options (Often limited by custodians) • U.S. Gold, Silver, and Platinum Coins • Real estate • Not Permitted: • Life Insurance • Collectibles: beer cans; art, etc. • Other Coins

21. Rollovers from Qualified Plans to IRAs • Lose Lump Sum Distribution Taxation Options (NUA) • Loans Not Permitted • May be rolled back to Qualified Plan that permits • Lose ERISA Protection • However, will have protection under federal bankruptcy law.

22. Simplified Employee Pensions (SEPs) • Small Business Retirement Plan • Tax-deferred growth of Contributions • Not a qualified plan, but has similar characteristics with unique rules: • More liberal coverage requirements. • Can be established as late as the extended due date of the income tax return. • Unique contribution, vesting, and distribution rules. • Established utilizing Traditional IRA Accounts

23. Coverage Requirements • Employers that sponsor SEPs must provide benefits to all employees who meet the following requirements: • Attainment of age 21 or older, and • Performance of services for three of the last five years, and • Received compensation of at least $550 (2014) during the year.

24. Establishment of a SEPUp to due date of return – including extensions

25. Establishment of a SEP • Employer must complete the following three steps by the extended due dates listed above. • Complete a formal written agreement. • Form 5305-SEP (no IRS approval required) • Fill in blanks: page 449 • Give eligible employees notice. • Copy of Form 5305-SEP • Open a SEP-IRA account for each eligible employee.

26. Contributions to SEPs • Employer Funded Only • No employee contributions • Discretionary • Must be made to all employees eligible during the year – even if dead or no longer employed at time of contribution • Limited to the lesser of: • 25% of an employee’s covered compensation, or • $52,000 for 2013. • Self-employed: limit is 20% • Can utilize cross-testing and Social Security Integration

27. Vesting and Withdrawals • Employees are 100% vested in their account balance at all times. • Withdrawals are treated just as withdrawals from IRAs. • Ordinary Income • Potentially subject to 10% early withdrawal penalty.