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1
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2
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3
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- IRC ' 412(i)
fully insured Defined Benefit Plan
- IRC '
419A(f)(6) Welfare Plans
- 419(e) Welfare Plan
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4
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- Life insurance exceeding 50% of Plan assets
- Benefits provided under annuity policy not equaling the benefits
provided under the Plan document.
- Cash value benefits for owners
- Failure to cover sufficient personnel to pass coverage tests.
- Failure to implement annuity insurance benefit coverage during the Plan
Year
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5
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- Contributions in excess of amounts deemed actuarially necessary to
provide the cost of the death benefit.
- Severance or disability benefit features that are in effect, intended to
operate as Anon-qualified
deferral compensation plans@.
- The Insurance Policies are almost always horrible economically.
- Funds are held by a third party trustee - out of client=s control.
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6
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7
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8
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9
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10
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11
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12
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13
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14
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15
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16
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17
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18
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19
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20
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21
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22
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23
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24
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25
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26
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27
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28
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29
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- Traditional IRA
ERISA - 1974
- SEPs
Revenue Act of 1978
- SIMPLE IRAs
Small Business Job Protection Act of 1996
- Roth IRAs
Taxpayer Relief Act of 1997
- Beneficiary IRAs
Pension Protection Act of 2006
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30
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31
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- Traditional IRA
- Roth IRA
- SEP
- SIMPLE IRA - “401(k) type”
- Beneficiary IRA (new in 2007)
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32
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33
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- Traditional IRA
An Adoption Agreement combined with trustee/custodian level form
- SIMPLE IRA
Form 5304 or 5305 SIMPLE combined with trustee/custodian level form
- Roth IRA
An Adoption Agreement combined with trustee/custodian level form
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34
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- U.S. Based
- No individual trustees – all assets titled in name of custodian
- No life insurance (includes viaticals)
- No discussion of rules for Individual Retirement Annuities or 408(c) IRA
sponsored by an employer or union
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35
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- Cash Only
Except for Rollovers or Direct Transfers
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36
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- No contributions if 701/2 by 12-31 of year
Except for SEPs, SIMPLE, Roth, or a Rollover contribution.
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37
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- April 15th
Deadline (219(f)(3)) During calendar year or by April 15th (or
deadline) without extensions (except for SEPs or SIMPLE matches)
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38
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- Maximum Per Person Contribution Amounts (Roth and Traditional)
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39
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- Compensation Limit
100% of IRA owner’s “taxable compensation” (special rule for
“spousal IRA”)
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40
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- Compensation Limit
100% of IRA owner’s “taxable compensation” (special rule for
“spousal IRA”)
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41
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- Saver’s Credit for Lower Income
Saver’s tax credit rates for up to $2,000 of contributions based
on AGI are as follows:
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42
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- Deductible?
Are you or your spouse an “active participant” in the qualified plan?
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43
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- Deductible?
Are you or your spouse an “active participant” in the qualified plan?
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44
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- Deductible?
- The active participant reduction for married individuals who file
jointly does not automatically apply to the spouse who is not an active
participant, unless the couples’ AGI exceeds $156,000.
- If a married active participant files separately, the reduction applies
if the individual’s AGI exceeds $10,000. The spouse of such an
individual who is not an active participant is not subject to any
deduction reduction, whether or not the spouses have lived apart at all
times during the taxable year.
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45
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- Who is an active participant?
- Profit Sharing Plan/401(k) Plan - was either allocated a forfeiture
during calendar year, deferred compensation to a 401(k) from amounts
earned during the calendar year, or was allocated a “PSP” contribution
that was made in the calendar year.
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46
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- Who is an active participant?
- Money Purchase Plan
If contribution required to be made for individual for Plan Year
ending in calendar year - ACTIVE (does not matter when contribution
made).
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47
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- Who is an active participant?
- Defined Benefit Plan
If benefit accrued during any part of calendar year - ACTIVE.
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48
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- Separately billed and paid trustee and/or management fees may be deducted
subject to 2% floor of miscellaneous itemized deductions.
- The management fees must be recurring - not sporadic “commissions” or
insurance commissions (see Rev. Rule 86-142).
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49
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- Ordinary Income. No capital gain. Nondeductible contributions give a
“basis” considered “investment in the contract.
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50
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51
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- Pre 59 ½
10% (plus 2 1/2% for California) under IRC § 72 unless one of the
following exemptions applies:
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52
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- RMDs
Required Minimum Distribution from Traditional IRAs
(§408(a)(6),§401(a)(9)).
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53
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- Death of IRA Owner Before 70 ½
Basic choices:
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54
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55
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56
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57
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58
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- No Age 70 ½ Limits for Roths
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59
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- Rollover to Roth allowed from “Roth 401(k) Account”.
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60
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- Conversions can be “undone” by due date of the tax return (even if no
extensions were obtained) for the calendar year of the conversion.
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61
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- Distributions - (Simplified Version) - TAX FREE if “qualified:
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62
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- No penalty on pre 59 ½ taxable conversions unless amounts are withdrawn
from the Roth within 5 years.
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63
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- When taking distributions, a Roth IRA owner treats all of his/her Roth
IRAs as one Roth IRA.
- Roth IRA contributions and earnings in the following order:
- 1. Regular/spousal contributions
- 2. Traditional IRA conversion contributions on a first-in, first out
basis with taxable amounts before nontaxable (basis) amounts
- 3. Earnings on all Roth IRA contributions
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64
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- Conversion amounts are subject to a 10 % penalty tax if distributed
within five years of the year of conversion.
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65
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66
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- Must be established at Employer level
- Can be on fiscal year basis
- Can be adopted and signed after employer’s fiscal year ends
- Contribution limit is same as PSP
- Eligibility - 3 calendar years prior to current year
- Allocations - prorata to pay (some exceptions with prototype)
- Top heavy Minimum Rules do apply
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67
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- Investments & Distributions
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68
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69
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- No 5500s needed
- Can allow - for those in low brackets - potentially getting more per
year into a Roth IRA
- Small Employer (under 100 employees) Credit.
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70
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- SIMPLE IRA is a “marriage” of a SIMPLE IRA Account for a participant
with a small (under 100 employees) Employer level “plan”
- Is not valid unless it’s the only plan of an Employer for the calendar
year
- Must time deductions on a calendar year basis
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71
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- No 5500s/no fiduciary responsibility
- Introduces “401(k)” type flexibility with limited options.
- Eligibility - age 21, $5,000+ in pay during current and each of prior 2
years.
- Match contributions can be made up to the employer’s tax return due date
but elective deferrals from employee’s pay must be made within 30 days after
the end of the month of deferral.
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72
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- Example
Business person A age 55 makes $300,000 W-2 and has 4 employees.
Properly established SIMPLE IRA with a 3% match 10-1-07 to defer
$13,000 of his/her December bonus.
No other qualified plan accounts or contributions.
Calendar year S corporation.
His/her maximum 2007 SIMPLE is…
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73
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- Example
His/her maximum 2007 SIMPLE is:
1. Deferral $10,500
2. Catch up Deferral $2,500
3. Employer Match $9,000
Total: $22,000
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74
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- SIMPLE IRA Account is same as a traditional IRA for all purposes except
a 25% penalty applies to any amounts withdrawn from it during the first
two years.
- After that, funds can be transferred/rolled-over to a traditional IRA.
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75
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- Two options - for employers for case of funding:
- Form 5304
Employees can open SIMPLE IRAs at any institution, and the
broker/advisor can charge a “load” or “advisory fee”.
- Form 5305
you designate a single financial institution for location of
all SIMPLE IRA accounts to receive the contribution - but the
investment must be “no-load” and “no surrender fee.”
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76
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- Rules are essentially same (except the penalty) as with qualified plans.
The following are the basic prohibitions:
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77
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- The following are the basic prohibitions:
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78
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- The following are the basic prohibitions:
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79
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- Note - The IRS has determined certain “factoring” or other transactions
with an IRA were “listed transactions”
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80
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- Note - I have been presented with several attempts by potential clients
asking me to issue an opinion letter to effect that IRA investment in an
LLC that does a “deal” with IRA owner is not a “PT”. There is a
misconception that use of an LLC obviates PT rules. NOT. A “loan” to an
owner - or taking “advantage” of your IRA in an LLC deal (preferred
splits) and many proposed co-ownership arrangements still constitutes a
PT. There are promoters touting the use of an LLC owned by your IRA
(with a cooperating custodian) that allows you as LLC Manager, to
transact business out of view of the custodian. Watch out!
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81
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- Note - There have been rulings or situations where an IRA and the IRA
owner can enter into a transaction as “co-owners”, with NO advantage to
one or the other, and there was no minimum threshold of $ for a deal of
that type that the IRA owner could not do individually.
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82
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- Note - An IRA’s purchase of leveraged real estate with the IRA owner
personally guaranteeing the loan is a PT.
Excise Tax on Entity Manager - A person who causes an IRA to be a
party to a “prohibited tax shelter transaction” (IRC § 4965(e)(1)) can
be liable for a $20,000 excise tax
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83
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- Unrelated Business Taxable Income
The rules related to UBTI relating to rents from real estate are
basically the same for IRAs as for qualified plans
One exception relates to “unrelated debt financed income”
An IRA is not sheltered from UBTI to extent income, rents, sale
proceeds, etc. relate to the portion of property acquired through use of
debt.
The exemption under IRC § 514(c) does not apply to IRAs. Thus,
normally purchase of leveraged real estate within an IRA (in which
appreciation above the interest rate is anticipated) is not advised
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84
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85
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86
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87
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88
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89
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- Deductible contributions - Report on Form 1040
- NonDeductible contributions - Form 8606 (needs to be filed to report nondeductible
contributions even if 1040 is not due).
- Form 5329 filed with 1040 when:
- Excise taxes due on contributions (6% per year excise tax on over
contributions to an IRA)
- Pre-age 59½ distributions
- Failure to receive RMD
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90
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- Form 1099-R - Distributions (comes from IRA custodian). Form 5498 also comes
from the IRA custodian.
- Income Tax Withholding. Federal income tax and California tax
withholding from an IRA is initially mandatory but the recipient may
elect out of withholding on all distributions for any reason. IRC §
3405.
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91
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- Note - Withholding from an IRA is considered to be paid over the full
year.
- Example - taxpayer realized in December she failed to pay sufficient
quarterly estimates.
Withhold 100% of an IRA distribution and send to IRS. If under
59½, or you want to avert taxation, rollover the amount to an IRA within
60 days from other sources.
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92
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93
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94
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95
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96
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97
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98
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99
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100
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101
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102
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103
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104
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105
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106
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107
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Notes
