*LEGEND: "MAGI"
= Modified Adjusted Gross Income
Generally equal to AGI (Adjusted
Gross Income) increased by the addition of earned income from abroad or
amounts effectively connected with the individuals conduct of a trade,
business, or derived from sources in Guam, American Samoa, or the Northern
Mariana Islands (if the individual is a resident of the possession where the
source of the income is located), and/or amounts derived from sources in
Puerto Rico (if the individual is a Puerto Rican resident).
| Year |
Traditional & ROTH IRA
Contribution Limits* |
With Catch-Up (Those Age 50+) |
| 2007 |
$4,000 |
$5,000 |
| 2008 |
$5,000 |
$6,000 |
| 2009-2010 |
Indexed to Inflation in $500 Increments |
Outcome of Indexed IRA + $1,000 |
*While you can contribute to
both a Traditional IRA
& a ROTH IRA in the same year, the total in all Plans can not exceed the
Contribution Limits noted in the above chart (in addition to any applicable
"Catch-Up" amount for those age 50+). There are no dollar limits
on IRA transfers and rollovers. "FULL" contribution limits for all IRA's decline
and phase out depending on AGI / MAGI if single and/or married filing jointly.
If one is also
a participant in an employer sponsored retirement plan (i.e. like a 401(k) or
Profit Sharing Plan) then one has to observe what are known as the 415
Limits on total aggregated contributions into all employer plans (not IRAs
or ROTH IRAs). For 2008 the maximum contributions from all sources
cannot exceed $46,000, plus $5,000 in catch up from one's own salary for those
over Age 50 (effectively an increase to your allowed salary deferral amount),
for a maximum of: $51,000.
Hyperlink
Disclaimer
Regarding Off-Site - Live Internet Linked Pages
The
information being provided is strictly as a courtesy.
When you link to any of the websites provided herewith, you are leaving
this site. Paul M. League, League
Financial & Insurance Services, LeagueFinancial.com and Royal Alliance Associates, Inc. make no
representation as to the completeness or accuracy of information that is
provided at these sites. Nor are
the companies liable for any direct or indirect technical or system issues or
any consequences arising out of your access to or your use of third-party
technologies, sites, information and programs made available through this site.
You
are now leaving the website of LeagueFinancial.com and you assume total
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General
Notes
Retirement
Plans are excellent places to build up assets; however, there are at least two
phases to retirement planning - the Accumulation phase and the
Distribution phase. The accumulation phase is more often dealt with as
a living matter, whereas the distribution one is often addressed as a
beneficiary matter involving the transferring of some or all of one's
Retirement Plan assets following one's death.
Distribution
considerations of such plans address how assets will be distributed,
either in life or as one retirement plan beneficiary spouse dies and those
assets transfer to either a surviving spouse and/or other named heirs
("beneficiaries"). Tax and estate laws deal rather specifically with different
types of "heirs" and how distributions to each are treated. For these and
other reasons, perhaps the most important planning step one can take on IRA or
Retirement Plan assets is keeping beneficiary designations up-to-date. This is
especially telling in cases of divorce where spouses often fail to update
beneficiary forms to reflect their changed circumstances, or on the death of a
beneficiary.
Extreme caution needs to be
taken on beneficiary designations, and updating them to reflect that listed
beneficiaries are still living and that they reflect most current changes in
one's life.
For examples, once
inherited, IRA assets that are distributed to a non-spousal beneficiary loose
their tax sheltered status and the distribution becomes taxable.
Also, if an IRA is inherited
from an estate that pays federal estate tax, the beneficiary is eligible,
under the "Income in Respect of a Decedent" (IRD) rules, to deduct
approximately 40% of the IRAs income tax, a deduction commonly overlooked by
beneficiaries, accountants, financial advisors and attorneys.
Though this overall subject
is far broader and more complex than this venue permits, certain desired
beneficiaries may not be old enough or responsible enough to control their
spending habits, which might necessitate the use of a Trust to manage and
control the distributions of such assets. Trusts, however, create separate
accounting and tax issues that one must carefully consider prior to employing
them.
RMD - Required Minimum
Distribution Exceptions:
ROTH IRA Owners
are not subject to RMD's (required minimum distributions); however, once THEY
DIE their non-spouse beneficiaries ARE SUBJECT TO RMDs (who do not roll
the account over into an IRA or who fail to treat the inherited ROTH IRA as
their own). The ONLY difference in the treatment of RMDs between
Traditional IRAs and ROTH IRAs are that the distributions from ROTH IRAs are
likely income tax free.
When calculating
LIFETIME RMDs, beneficiaries are not to use the IRS "Uniform
Lifetime Table".
Exception to
using the IRS "Uniform Lifetime Table" - if a client's sole
IRA BENEFICIARY for the entire year is a spouse who is more than 10 years
younger, the IRA Owner can use the actual ages of both spouses based
on the "Joint Life Table" (see: www.irs.gov/pub/irs-pdf/p590.pdf).
RBD - Required Beginning
Dates for IRA Distributions:
Typically this
date is April 1st following the year the IRA Owner attains age 70 1/2, and
thereafter by December 31st annually based upon IRS life expectancy
tables. 50% penalties apply for time violations.
"Still
Working Exception" - allows you to delay distributions from
employer retirement plans until the year after you retire, but only on those
plans of the present employer, not prior employer plans from other previous
jobs. N/A on IRA's but applicable on 401(k)s, 403(b) ("TSA"), etc.
"Grandfather
Rule on TSAs (403(b))" prior to 1987 "old money assets"
ONLY - allows you to delay distributions, on those assets only, until
you turn Age 75.
UBTI - Unrelated Business
Taxable Income in IRA Accounts
IRAs (Traditional, ROTH and
even SEP) that receive $1,000 or more of gross UBTI income (generally from
certain Limited Partnerships and Limited Liability Companies) in a single tax
year must file Form 990-T with the IRS on or before April 15th tax filing
deadline, with all applicable taxes paid from Trust assets. Accounts receiving
less than $1,000 are not required to file. Accounts that exceed $500 are
required to make estimated or pre-payments.
Traditional
IRA Notes
I.
Section 72(t) Exceptions to Avoid Pre-Age 59 1/2 Withdrawal Penalties
II. Traditional
IRA - Distribution Planning Strategies
I.
Section 72(t) Exceptions to Avoid Pre-Age 59 1/2 Withdrawal Penalties From
Traditional IRA's:
There
are several 72(t) exceptions available to avoid pre-age 59 1/2 withdrawal
penalties from the Traditional IRA, the most common being "SEPP" - or
Substantially Equal Periodic Payments.
Applicable SEPP Rules Include:
*
SEPPs must continue until the later of 5 years, or age 59 1/2.
*
Taking out more or less than the SEPP amount produces penalties and interest
on all prior withdrawals.
*
Requires the consistent use of one of the following three ways of
calculating the
SEPP amount:
·
Life Expectancy Method - results in lowest withdrawal amount,
and is annually recalculated at reduced life expectancy due to aging.
·
Amortization Method - results in increased withdrawal
amounts than under the Life Expectancy Method, and bases its calculations
on a set initial value that typically can not be changed.
·
Annuitization Method - results in increased withdrawal
amounts than under the Life Expectancy Method, and bases its calculations
on a set initial value that typically can not be changed.
The
latter two Methods, while resulting in greater withdrawal amounts (increased
income), also put one in danger of more rapidly depleting the IRA asset.
Great care must be taken when electing these latter two Methods.
Some
advisers suggest recoveries from the outcomes of these last two Methods
through personalized "Private Letter Rulings", that are costly to
obtain from the IRS (rulings that may allow for reducing withdrawal amounts
due to reduced asset values following significant market declines), or
"hybrid Methods" [valuing the IRA on the same day of each year, and
using the same type of monthly interest rate each year - typically the
Applicable Federal Rate ("AFR")], but neither of these indicated
solutions are simple or guaranteed.
One
must determine, for the period in question (i.e. the latter of 5 years or age
59 1/2), what is most important; namely, one's needed income amount, not only
during this period, but regarding any remaining IRA assets that are or will be
needed to support one's ongoing retirement income requirements.
II.
Traditional IRA Distribution Planning Strategies:
It
is one thing to set up, fund, and build a Traditional IRA retirement plan account, but
it is equally important to structure/design the plan in such a way as to
substantially avoid and/or reduce Estate & Income Taxes. Properly
structured the IRA can:
*
Maintain it's tax deferred status over the lives of the owner, spouse,
children and
even grandchildren.
*
Avoid a forced lump sum distribution & lump sum income taxes.
*
Reduce or eliminate estate taxes.
*
Control asset distributions, even after the owner's death.
Properly
structuring beneficiary designations, use of Trust beneficiaries, use of
disclaimers, etc., all contribute to effectively "stretching out" a
Traditional IRA. In the process, all parties benefit with the ultimate beneficiaries
(typically grandchildren), reaping typically 10x-20x what the primary
beneficiaries would have received by simply getting capable advice &
distribution planning guidance.
At
death, IRAs are included in the IRA owner's estate and they create an income
tax liability for the beneficiaries when they take the assets. IRAs are
considered "Income with Respect to a Decedent (IRD)" according to
IRC Section 691(c). Therefore, beneficiaries are entitled to take an
income tax proportional deduction for any estate taxes they paid on the IRA. In
order to calculate this tax deduction you first have to calculate the estate
taxes due on the entire estate of the IRA owner and then you subtract the item
of IRD and re-calculate the estate tax again. A solution for IRA
beneficiaries is for estate owners to establish irrevocable life insurance
trusts funded with life insurance to pay the estate taxes and preserve more of
the overall estate assets for the intended heirs, as well as IRA beneficiaries
subject to IRD taxes, and for such estate owners to spend down more of their
assets that are subject to IRD, while living, rather then consuming non-IRD
assets.
ROTH IRA
Notes
I.
ROTH IRA
Distributions
& Rollovers from Traditional IRA's
II.
ROTH IRA
Conversions
I. ROTH IRA Distributions:
The 2 forms of
withdrawals from ROTH IRA's include either distributions of earnings or
of principal. Earnings on contributions of principle grow federally
tax-free provided certain DISTRIBUTION REQUIREMENTS are met (see IRS Publication
590 for full details).
ROTH IRA -
DISTRIBUTION REQUIREMENTS:
Withdrawal of Contributions - since principal contributions are made on
an after-tax basis, withdrawals of such contributions are generally
federally tax-free.
Withdrawal
of Earnings (on Contributions)
- may be federally tax-free and penalty free IF the owner has
had the ROTH IRA for at least 5 years AND one of the following
applies:
1) the owner is age 59 1/2 or older
2) the owner is disabled or deceased
3) the proceeds are used for a first time home purchase
($10,000 lifetime limit)
Withdrawal Exceptions
(not subject to the IRS 10% premature
withdrawal penalty): withdrawals that do not exceed the contribution amount;
the owner is age 59 1/2 or older; the owner becomes disabled or dies; the proceeds are used for a
first time home purchase ($10,000 lifetime limit); certain medical
expenses; distributions of certain substantially equal periodic payment
plans (SEPP); payment of health insurance premiums by certain unemployed
persons; rollovers; qualified education expenses; divorce and IRS levy.
Non-Spousal ROTH IRA Beneficiaries must begin distributions under either the 5
year rule, or can opt out of this rule in favor of life expectancy. If you
are the beneficiary of more than one ROTH IRA, from different decedents,
you cannot take the required distributions from just any account, but must take
them from an account that was inherited from the same person. NOTE:
you cannot aggregate ROTH and Traditional IRA's for computing RMD's (required minimum distributions).
Rollovers to a
ROTH IRA from a Traditional IRA
(both pre-1998
and after): these are allowed but are fully taxable; however, they do not invoke the 10% pre-mature distribution
penalty.
II.
ROTH IRA Conversions ~ Estimated Tax Penalties & Other Thoughts:
Some risk attaches to the long-range tax-saving move of converting your regular
Traditional IRA to a ROTH IRA. In a Traditional IRA, funds grow tax-free but are taxable when withdrawn.
ROTH IRA funds get tax-free
growth and are tax-free when withdrawn, but with a tax cost up front: ROTH IRA contributions are never
tax-deductible (as Traditional IRA contributions are) and conversions of
Traditional IRAs to
ROTH IRAs are
always taxable. Conversions, at a tax cost today, are done so that today’s funds when withdrawn, and all
future appreciation when withdrawn, will be tax-free.
IRS is finding that some taxpayers making the conversion have failed to take the resulting conversion income
into account in their estimated tax calculations. This has led to unexpected tax penalties.
Example: Jane has a salary of $70,000 a year. Her tax on this, after allowable deductions,
is covered by wage withholding. But last year she converted her $150,000
Traditional IRA to
a ROTH IRA. She knew this would increase her income tax bill, which she intended to pay
out of savings. But she may be surprised to learn she’s subject to a tax penalty for
underpayment of estimated tax, a tax she may not have known about or considered
inapplicable to wage earners.
IRS has encountered many in Jane’s situation, who come to IRS asking that their penalties be abated
(waived). IRS says it has no legal authority to abate the penalty.
TIP: You can undo the conversion to ROTH IRA, restoring the funds to a
Traditional IRA. That
would undo the income tax liability on the conversion, and with it the estimated tax liability
thereon. For a conversion in 2000, you have until the due date of the 2000 return, including
extensions.
TIP: Tax law allows several options for calculating estimated tax. One method reduces the
payment due—and hence the underpayment penalty—where income balloons in the last 4
months of the year, the period when many choose to make their
ROTH IRA conversions.
TIP: Speaking of undoing conversions, some undo where the funds’ value drops after
conversion, as for example in the 2000 stock market decline. Undoing the conversion won’t
get their money back, but will save them from tax on wealth they no longer have.
TIP: Some with an eye on President Bush’s 2001
approved tax cut may want to undo a conversion last year at last year’s rates, and convert anew this year or later, at promised lower rates.
ROTH IRA conversions are risky and involve big bucks. Making and undoing conversions, and estimated tax
calculations, should be done with a professional advisor.
"Education
IRA" Notes
Coverdell
Education Savings Account ("ESA") -- A College Savings Plan
A
Coverdell Education Savings Account ("ESA") , formerly and still
more widely known as an "Education IRA", is a trust or custodial account created exclusively for the
purpose of paying the "qualified education expenses" of a specified
living beneficiary; hence, a College Savings Plan. These Plans began
accepting contributions as of January 1, 1998, and from then through 2001 only
allowed for a maximum contribution of up to $500. As of 2002 that
contribution is increased as shown in the above chart. Education
IRA's can also accept contributions by corporations,
tax-exempt organizations, and other entities.
Covered, "eligible expenses",
were
expanded in 2002 to include costs for grades K1-K12, public, private,
religious, and college, and include such "qualified higher education, elementary & secondary education expenses" as:
tuition, fees, books, supplies, equipment required for enrollment or
attendance, computer and software used during attendance (non game, hobby or
sports), tutoring, extended day programs (as required or provided by the
institution), computer equipment, special needs services, room & board if
at least a half-time student (at the schools posted room rate, otherwise
limited to $2,500 for students living off campus, and not at home), uniforms & extended day
program costs, and also contributions made to a qualified state tuition
program.
Taxation
Issues Regarding - Contributions, Earnings & Distributions:
*
Contributions are not tax deductible and are instead treated as
"completed present interest gifts" for gift tax purposes.
Contributions may be made up until April 15th of the following year, not including any extensions.
Contributions may be made to both Education IRA & Section 529 College
Savings Plans without triggering a 6% excise tax as prior to 2002.
*
Earnings on contributions are not taxed until distribution.
*
Taxation on distributions for "Eligible Education Expenses" - contributed principal or generated earnings are not
taxable.
*
Taxation on distributions for "Ineligible
Education Expenses" - contributed principal or generated earnings are
taxable. Such distributions are taxed under IRC Section 72 annuity rules
in the following manner:
*
Contribution Portion Distributions -subject to income tax.
*
Earnings Portion Distributions -subject to income tax PLUS a 10%
penalty tax.
Termination
of an Education IRA after 30 days of a beneficiary turning age 30 will
result in taxation on the earnings portion of any assets not used or
distributed for their intended education purpose, PLUS a 10% penalty
tax. The penalty will not apply on distributions made on account of
either death or disability, or individuals with "special needs" as
so defined.
*
The Hope Scholarship Credit and Lifetime Learning Credit: As of
2002 there is no longer a restriction on using this Credit during the same
year you make a withdrawal from an "Education IRA", as long as they
are used for separate expenses.
Account
Beneficiary Flexibility:
The
question often arises "may the designated beneficiary of the account be
changed from one child to another, or to some other party without triggering a
tax?" The answer is YES!
The
restrictions on this are that it may be done but only with or for
"Account Beneficiaries" that are defined as - "qualified
family members"; namely, spouse, child, stepchild, daughter-in-law,
son-in-law, mother, stepmother, mother-in-law, father, stepfather,
father-in-law, sister, half sister, stepsister, sister-in-law, brother, half
brother, stepbrother, brother-in-law, aunt, uncle, niece, nephew,
first-cousin, or the spouse of any of the foregoing.
NOTE:
While this information is believed to be accurate it is not to be relied
upon.
Consult your own tax/legal advisor for this and other
tax issues.
Contact
Us to Plan Your IRA's, Education Savings Accounts,
& Distribution Strategies Today!
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