Retirement Planning: Investment of Retirement Funds in PA

IRA

What is it?

A Traditional IRA or Individual Retirement Account is a tax-deferred retirement account which an individual can contribute up to a certain dollar amount annually to save for retirement.

Contributions to the IRA might or might not be tax deductible and all distributions in excess of the after tax contributions are includible in the recipient’s gross income for taxes.

Eligibility

To establish an IRA, an individual must:

• be a United States taxpayer (with U.S. earned income)
• be under the age of 70 ½ years old
• have a valid Social Security #

Contributions

A traditional contribution for an IRA is $5,000 for an individual under age 50 and a $6,000 contribution for anyone between the ages of 50 and 70 ½.

For 2011 and beyond the contribution limit is indexed for inflation.

Contributions can be tax-deductible based on income limits and if you are covered by a qualified retirement plan at work.

Distributions

There will be a tax on earnings and deductible contributions once money is removed from the retirement account.

Because IRA contributions can be either qualified or non-qualified; the distributions also have to be either qualified or non-qualified.

With Qualified Distributions the non deductible contributions are not taxed. However the Earnings and Deductible contributions will be included in gross income as taxable.

Non Qualified Distributions are when a distribution is taken from the account before the individual has attained the age of 59 ½.

There is a 10% penalty tax on the account unless:

• Client is 59 ½
• Death or Disability
• Higher Education Expenses
• First time home purchase (up to 10k)
• Medical Expenses above 7.5 % of AGI

Required Distributions

Starting in the year you turn age 70 ½ there is a minimum required distribution. This is the minimum amount that the IRS expects you to remove from your account. If you do not take your minimum required distribution from your IRA, then the amounts not withdrawn are subject to an additional 50% tax penalty.

Deadlines

The funding deadline is April 15th excluding extension for the year in which contribution is made

FAQ’s:

• A 401K plan can be rolled into an IRA as a direct rollover
• A distribution can occur from an IRA and may be rolled back into the account to qualify as a rollover. However the money must be rolled back into the IRA within 60 calendar days from the date that the client received the check.
• You cannot take a loan against the IRA
• Any rollover deposit must be made in the same form as the withdrawal occurred (cash to cash, shares to shares)
• You can only deposit cash into an IRA.

Additional Issues:

Refer to IRS publication 590 (pages 6-43) if you have any further questions or concerns.

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ROTH IRA

What is it?

A Roth IRA is an individual retirement account that an individual can make non-deductible contributions to and grow the amount tax-deferred.

The Roth IRA allows post-tax contributions and may be withdrawn tax free, as long as the money is held within the retirement account for a minimum of five years, and is withdrawn on or after 59 ½.

Eligibility

In order to contribute to a Roth IRA, the individual must have some form of financial compensation.

Eligibility is affected by modified adjusted gross income (MAGI) limits. An individual can contribute to a Roth IRA if their MAGI is less than :

• $176K − Married Filing Jointly
• $10K − Married Filing Separately (living with spouse)
• $120K − Single, Head of Household, or Married filing separately (not living with spouse)

Contributions

Contributions to a Roth IRA must be the lesser of an individual’s taxable compensation or $5,000 for a person under the age of 50, or $6,000 for an individual over the age of 50.

In the year 2011, the contribution limits for Roth contributions will be indexed for inflation.

The maximum contribution is phased out if your MAGI is within the following limits:

• $166K − $176K Married Filing Jointly
• Zero − $10K Married Filing Separately (living with spouse)
• $105K − $120K Single, Head of Household, or Married filing separately (not living with spouse)

Distributions

There will be a tax on earnings and deductible contributions once money is removed from the retirement account.

Because IRA contributions can be either qualified or non-qualified; the distributions also have to be either qualified or non-qualified.

With Qualified Distributions the non deductible contributions are not taxed. However the Earnings and Deductible contributions will be included in gross income as taxable.

Non Qualified Distributions are when a distribution is taken from the account before the individual has attained the age of 59 ½.

Deadlines

The deadline for establishing is a Roth Ira is April 15th or the years tax filing deadline which excludes extensions for the year when the contribution was made.

FAQ’s

• A Roth IRA must have non deductible contributions made into it.
• A distribution can be taken from a Roth at any time with no penalty, as long as the money taken is purely the contribution amount, and not the earnings (see tax advisor for further detail)
• A Roth IRA may have any amount of money taken from it as a tax free event if the money is rolled back into the account within 60 days from the date the check is received by the client. This action is referred to as a 60 day rollover, and occurs once every 12 months.

Additional Issues:

Refer to IRS publication 590 (pages 56-66) if you have any further questions or concerns.

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