Individual Retirement Accounts
Who Can Open a Traditional IRA?
You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 701 2 by the end of the year. What is compensation? Generally, compensation is what you earn from working. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2. Compensation also includes commissions and taxable alimony and separate maintenance payments.
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deductible part of your self-employment tax. Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. Nontaxable combat pay. For IRA purposes, if you were a member of the U.S. Armed Forces, your compensation includes any nontaxable combat pay you receive. Pub 17 Page 121
What is not included in income?
Compensation does not include any of the following items. Earnings and profits from property, such as rental income, interest income, and dividend income. Pension or annuity income. Deferred compensation received (compensation payments postponed from a past year). Income from a partnership for which you do not provide services that are a material income-producing factor. Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. Pub 17 Page 121
What are the exceptions to the 10% penalty to taxable distributions from an IRA?
Form 5329
Exceptions of 10% penalty.
Qualified retirement plan distributions (does not apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees).
Distributions made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from an employer plan, payments must begin after separation from service). The longer of 5 years or to age 59 ½. If you take out more you break the 5329 and have to pay 10% penalties on previous payments plus interest.
Distributions due to total and permanent disability. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of-your physical or mental condition. A medical determination that your condition can be expected to result in death or to be of long, continued, and indefinite duration must be made.
Distributions due to death (does not apply to modified endowment contracts).
Qualified retirement plan distributions up to the amount you paid for un-reimbursed medical expenses during the year minus 10% (or 7.5% if you or your spouse were born before January 2, 1950) of your adjusted gross income (AGI) for the year. 10% of AGI and anything above 10% is penalty free.
Qualified retirement plan distributions made to an alternate payee under a Qualified domestic relations order (does not apply to IRAs). QDRO cuts up investment plan for spouse. Not a taxable transfer. She/he will not have to pay 10% penalty if she withdraws. If money is rolled into a QDRO then it once again subject to 10% penalty.
IRA distributions made to certain unemployed individuals for health insurance premiums. - Must be collecting unemployment
Medical insurance. Even if you are under age 59 1/2, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply. You lost your job. You received unemployment compensation paid under any federal or state law for consecutive weeks because you lost your job. You receive the distributions during either the year you received the unemployment compensation or the following year.
IRA distributions made for qualified higher education expenses (commonly used exception).
Taxes still must be paid on it. Part of the federal student aid program. PUB 590-b page 25
Qualified retirement plan distributions made due to an IRS levy.
Qualified distributions to reservists while serving on active duty for at least 180 days.
IRA distributions made for the purchase of a first home, up to $10,000. First home. Even if you are under age 591/2, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time home buyer distribution, the distribution must meet all the following requirements.
1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the day you received it.
2. It must be used to pay qualified acquisition costs for the main home of a first-time home buyer (defined below)who is any of the following.
a. Yourself.
b. Your spouse.
c. Your or your spouse's child.
d. Your or your spouse's grandchild.
e. Your or your spouse's parent or other ancestor.
When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
Prohibited Transactions?
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are some examples of prohibited transactions with a traditional IRA. Borrowing money from it. Selling property to it. Using it as security for a loan. Buying property for personal use (present or future) with IRA funds. - PUB 590-b page 22
Effect on an IRA account. Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.
What information is required on form 5329?
When must you begin taking distributions from a traditional IRA?
If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 701 2. April 1 of the year following the year in which you reach age 701 2 is referred to as the required beginning date.
How do i calculate the RMDs?
Your RMD amount is determined by applying a life expectancy factor set by the IRS to your account balance at the end of the previous year. To calculate your RMD:
Find your age in the IRS Uniform Lifetime Table (below).
Locate the corresponding life expectancy factor.
Divide your retirement account balance as of December 31 of the prior year by your life expectancy factor.
See Pub. 590-b - page 42
Calculating RMDs for multiple retirement plans
If you have more than one retirement plan, you'll need to calculate the RMD of each plan separately. However, you may add the RMD amounts of all IRAs (including traditional, rollover, SIMPLE, and SEP-IRAs) and withdraw the total amount from any one or more of your IRAs. The same rules apply to 403(b) accounts.
For example, assume that you have three IRAs. Your RMDs are $2,000 from the first IRA; $1,000 from the second IRA; and $1,000 from the third IRA. If you wish, you can take $4,000 from any one or more of your IRAs to satisfy your RMD for the year.
If you have accounts in several 401(k) or other employer-sponsored plans, the IRS generally requires you to calculate a separate RMD for each retirement plan in which you participate and withdraw the appropriate distribution from each plan.
What happens if you fail to take out your Required Minimum Distribution?
50 Percent Penalty Tax
Having allowed you to sidestep taxes as your traditional IRA grew via contributions and earnings during your working years, the IRS is serious about collecting taxes on the money once you have reached age 70 1/2 -- an age by which many workers have retired and after which you can no longer make contributions. Therefore, the penalty, or excise, tax for failing to take your RMD is 50 percent of the amount that should have been withdrawn. The tax applies to the entire RMD if you take no distribution at all. For example, if your RMD is $3,600 and you forget to withdraw it by December 31, you will owe the IRS $1,800 on top of the taxes on the $3,600 you failed to take out. If the RMD is $3,600 and you withdraw only $3,000, the IRS will demand an additional $300, or 50 percent of the $600 that should have been withdrawn.
RMD Calculation
You arrive at the RMD by dividing your IRA's end-of-year balance by an age-related distribution period estimate on the appropriate IRS life-expectancy table. For most traditional IRA owners, the Uniform Lifetime Table, available in IRS Publication 590, applies. If your spouse is more than 10 years younger and is the sole IRA beneficiary, use the Joint Life and Last Survivor Expectancy table. The Single Life Expectancy table is for named beneficiaries.
Form 5329
If you forget to withdraw your RMD, file Form 5329, available from the IRS website, along with RMD payment as soon as you discover the error. Speedy compliance, even after the fact, stands you in better stead should you decide to request a waiver of the penalty tax.
Letter of Explanation
If you forget to take the RMD, you may be able to avoid the penalty tax by writing a letter to the IRS. Explain the circumstances surrounding the omission and include proof that the distribution has since been taken. An account statement that displays the debited amount is sufficient.
5329 instructions page 7
Part VIII—Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs)
You owe this tax if you do not receive the required minimum distribution from your qualified retirement plan, including an IRA or an eligible section 457 deferred compensation plan. The additional tax is 50% of the excess accumulation, which is the difference between the amount that was required to be distributed and the amount that was actually distributed. The tax is due for the tax year that includes the last day by which the minimum required distribution must be taken.
Waiver of tax. The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.
Complete lines 50 and 51 as instructed.
Enter “RC” and the amount you want waived in parentheses on the TIP Instructions for Form 5329 (2017)
WE DO NOT DEFINE REASONABLE ERROR.
How is a conversion to a Roth IRA taxed?
Form 8606- see downloaded example. The total of all accounts is what matters for line 6.
What are the factors that a client should consider when doing a Roth IRA conversion?
What their income level is now vs in retirement. If your tax rate is higher now than in retirement than it may not be in the best benefit to convert, or vice versa. No one can predict future tax rates. Discuss the income now vs. later. Investment performance, if you have the $ to pay the taxes, what the tax rate of beneficiaries are.
What are the rules for Re-characterizing an IRA conversion?
PUB 590a page 29
You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called characterizing the contribution. To characterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you characterize your contribution, you must do all three of the following.
Include in the transfer any net income allocable to the contribution. If there was a loss, the net income you must transfer may be a negative amount.
Report the characterization on your tax return for the year during which the contribution was made.
Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.
No income tax consequences if done by filing deadline including extensions - its really creating a fiction as though you never contributed to the Roth. You can't re-characterize Roth conversions done 1/1/18 or later in the new tax lawyou may still re-characterize regular contributions so the last date someone can re-characterize a 2017 Roth conversion is by 10/17/18 (extension deadline).
How are non-deductible IRAs taxed upon distribution?
The IRS essentially treats each distribution you make as being partially from the nondeductible contribution you initially made and partially from the income and gains it generated. To figure how much comes from which part, you have to track how much of your total IRA balance came from nondeductible contributions and how much came from income, and then take the correct proportion from each.
A simple example should make it clearer. Say you contribute $5,000 to a nondeductible IRA. Over the course of five years, it grows to $8,000. You retire and take a distribution of $2,000. To figure out how much is taxable, you can see that $5,000 out of $8,000 in the account came from the original contribution, which works out to five-eighths of its total value. So five-eighths of $2,000, or $1,250, will be free of tax. The remaining $750 represents the three-eighths of the account that came from income and gains, and it gets included in your taxable income.
Track on form 8606
When do I need to file form 8606?
Use Form 8606 to report:
Nondeductible contributions you made to traditional IRAs;
Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs;
Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs; and
Distributions from Roth IRAs.
Who Must File File Form 8606 if any of the following apply -
You made nondeductible contributions to a traditional IRA for 2017, including a repayment of a qualified reservist distribution.
You received distributions from a traditional, SEP, or SIMPLE IRA in 2017 and your basis in traditional IRAs is more than zero. For this purpose, a distribution does not include a rollover, qualified charitable distribution, one-time distribution to fund an HSA, conversion, re-characterization, or return of certain contributions.
You converted an amount from a traditional, SEP, or SIMPLE IRA to a Roth IRA in 2017 (unless you re-characterized the entire conversion—see Re-characterizations, later).
You received distributions from a Roth IRA in 2017 (other than a rollover, recharacterization, or return of certain contributions—see the instructions for Part III, later).
You received a distribution from an inherited traditional IRA that has basis, you rolled over an inherited plan account to a Roth IRA, or you received a distribution from an inherited Roth IRA that was not a qualified distribution.
You may need to file more than one Form 8606. See Pub. 590-A and Pub. 590-B for more information.
A calculation of earnings or loss is required only if a partial recharacterization is being done. In other words, if the full IRA balance is being recharacterized, then no calculation is required. For instance, assume you established a new Roth IRA and funded it with $3,000 in December 2016. By October 2017, the IRA earned $500, making the balance $3,500. In order to claim a deduction for the $3,000, you decide that you want to treat the amount as a Traditional IRA contribution. Because the Roth IRA received no other contributions or made no distributions and because the IRA had no balance before the $3,000 contribution, you can simply recharacterize the full balance to the traditional IRA. The same rule applies if a full recharacterization of a Roth conversion is being done and no other distributions or transfers were made from or to the account.
Conversion https://www.investopedia.com/articles/retirement/03/092403.asp#ixzz57DYv9qnp
How do I report a rollover?
http://www.irs.gov/pub/irs-tege/rollover_chart.pdf
Amount on 15a say (rollover on 15b)
Also, enter “Rollover” next to line 15b. If the total distribution was rolled over in a qualified rollover,
enter -0- on line 15b.
RMD pub 590b – page 58 recalculated
RMD pub 590b –page 44 non recalculated.
Inheriting an IRA CHART
What are the distribution requirements for beneficiaries of an IRA?
PUB 590b Page 5
Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own.Strategies on leaving it in a beneficiary account and rolling it over into their own account (closer to 59 ½ would be beneficial) May have an inherited IRA and my own IRA. May have an unlimited amount of inherited IRAs.
What are the phase-outs for being able to contribute to a Traditional deductible IRA or Roth IRA?
How much can I contribute to an IRA?
What is considered eligible compensation for purposes of contributing to an IRA?
Compensation for Purposes of an IRA Includes ...
To contribute to a traditional IRA, you must be under age 70½ at the end of the tax year. You, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes. If you made nondeductible contributions to a traditional IRA, you must attach Form 8606.pdf, Nondeductible IRAs.
Compensation for Purposes of an IRA does not Include...
Earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation.
https://www.irs.gov/taxtopics/tc451
PUB 590a page 6-7
W2 page 20
Generally, an employee is an active participant if covered by (a) a defined benefit plan for any tax year that he or she is eligible to participate in or (b) a defined contribution plan (for example, a section 401(k) plan) for any tax year that employer or employee contributions (or forfeitures) are added to his or her account. One spouse being covered by a retirement plan at work causes the other spouse (non-working) to be subject to an income phase out. Working spouse can make a contribution but NO deduction. File 8606 to report non deductible contributions.
Active participants of employer sponsor plans that you participate in will effect the phase outs of Ira deductions for Traditional IRAs (NOT CONTRIBUTIONS).Spousal IRA combined earned income minus the contribution max to an IRA. Contributing based on the spouses earned income.
Back door Roth contribution taxable?
Conversion from non-deductible Traditional contribution to Roth… depends upon the total of all other SEPS, SIMPLES and accounts (form 8606) may be not paying tax on a portion. You aggregate and use for 8606 to determine the percentage that is taxable.
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.
You cannot deduct contributions to a Roth IRA.
If you satisfy the requirements, qualified distributions are tax-free.
You can make contributions to your Roth IRA after you reach age 70 ½.
You can leave amounts in your Roth IRA as long as you live.
The account or annuity must be designated as a Roth IRA when it is set up.
Who can establish a SEP or SIMPLE IRA?
Pub 590 page 6
Line 28 on 1040 SEP contribution
How much can I contribute to my SEP?
The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:
1. 25% of compensation, or
2. $55,000 (for 2018; $54,000 for 2017 and subject to annual cost-of-living adjustments for later years).
If they are a S-Corp with W-2 wages you will use the W-2 to determine the amount of contribution.
If they are a sole proprietorship or partnership then it will be based on net adjusted earnings.
How much can be contributed to or SIMPLE IRA?
An employee may defer up to $12,500 in 2016 - 2018 (subject to cost-of-living adjustments for later years). Employees age 50 or over can make a catch-up contribution of up to $3,000 in 2016 - 2018 (subject to cost-of-living adjustments for later years).
Employer contributions
How much must I contribute for my employees participating in our SIMPLE IRA plan?
You're generally required to either:
match each employee's salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee's compensation (not limited by the annual compensation limit), or
make nonelective contributions of 2% of the employee's compensation up to the annual limit of $275,000 for 2018 ($270,000 for 2017), subject to cost-of-living adjustments in later years. If you choose to make nonelective contributions, you must make them for all eligible employees whether or not they make salary reduction contributions.
590a Page 3
How is the maximum contribution determined?
Can you review the valuation of a IRA for RMD purposes when it includes a variable annuity?
How do you request a waiver for failing to take a RMD?
Can a NOL offset income froma Roth IRA conversion?
How is UBTI taxable to an IRA?
PUB 598 page 3
Unrelated business income. Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Certain trade or business activities are not treated as an unrelated trade or business. See Excluded Trade or Business Activities, later.
Must file 990t and pay taxes on amount over $1000
Trustees for the following trusts that have $1,000 or more of unrelated trade or business gross income: 1. Individual retirement accounts (IRAs), including traditional IRAs described under section 408(a), 990t page 2
Possibly a master limited partnership… flow through business type entities.
K-1 box 20 code v. Paid tax on income over $1000. Taxable at Trust rates.
Can I make a QCD from an IRA?
590b page 13
Qualified charitable distributions - A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions. You must be at least age 70 1 2 when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for charitable contribution. The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.
If you are the beneficiary to an inherited IRA you (the bene) must be 70 1/2 in order to do a QCD from the inherited IRA. It is NOT based on the decedents age.
https://www.irs.gov/pub/irs-drop/n-07-07.pdf (Page 14 Q/A 37)
1040 – Gross amount on line 4a - taxable amount on line 4b
After tax distributions from an IRA?
Can you review the treatment of having a trust as the beneficiary of an IRA?
What is the cost basis of property distributed from a trust?
http://www.irs.gov/pub/irs-pdf/p551.pdf
Can you use an IRA for a start up business?
http://www.irs.gov/pub/irs-tege/robs_guidelines.pdf