individual retirement arrangements

267 Pages·2012·3.07 MB·English

by  Best 14

INDIVIDUAL
RETIREMENT ARRANGEMENTS
(2012 Edition)

Researched and Written by:
Edward J. Barrett
CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC
Disclaimer

This book is designed as an educational program for insurance and financial
professionals. EJB Financial Press is not engaged in rendering legal or other
professional advice and the reader should consult legal counsel as
appropriate.

We have tried to provide you with the most accurate and useful information
possible. However, one thing is certain and that is change. The content of
this publication may be affected by changes in law and in industry practice,
and as a result, information contained in this publication may become
outdated. This material should in no way be used as an original source of
authority on legal and/or tax matters.

Any laws and regulations cited in this publication have been edited and
summarized for the sake of clarity.

Any names used in this publication are fictional and have no relationship to
any person living or dead.

EJB Financial Press, Inc.
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This book is manufactured in the United States of America

© 2012 EJB Financial Press Inc., Printed in U.S.A. All rights reserved

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About the Author

Edward J. Barrett CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC, began his career in
the financial and insurance services back in 1978 with IDS Financial Services, becoming a
leading financial Advisor and top district sales manager in Boston, Massachusetts. In 1986,
Mr. Barrett joined Merrill Lynch in Boston as a Financial Advisor and then becoming the
Estate and Business Insurance Planning Specialist working with over 400 Financial Advisors
and their clients throughout the New England region assisting in the sale of insurance
products.

In 1992, after leaving Merrill Lynch and moving to Florida, Mr. Barrett founded The Barrett
Companies Inc. and Wealth Preservation Planning Associates, a financial and insurance
brokerage agency. During the same period, Mr. Barrett also formed Broker Educational
Sales & Training Inc., a premier provider of training and continuing education programs to
financial and insurance professionals in all 50 states and the District of Columbia.

Mr. Barrett is also a highly sought after speaker for financial advisors, insurance
professionals, attorneys, CPA’s and general audiences. He has written over 1,000 financial
articles for newspapers and magazines and has authored several books.

Mr. Barrett is a qualifying member of the Million Dollar Round Table, Qualifying
Member Court of the Table® and Top of the Table® producer. He has a number of
professional designations including: Certified Financial Planner (CFP), Chartered
Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Employee
Benefit Specialist (CEBS), Retirement Planning Associate (RPA), Chartered Retirement
Planning Consultant (CRPC), and Chartered Retirement Planning Specialist (CRPS).

About EJB Financial Press

EJB Financial Press, Inc. (www.ejbfinpress.com) was founded in 2004, by Mr. Barrett to
provide advanced educational and training manuals approved for correspondence continuing
education credits for insurance agents, financial advisors, accountants and attorneys
throughout the country.

Broker Educational Sales & Training Inc.

Broker Educational Sales & Training Inc. (BEST) is a nationally approved provider of
continuing education and advanced training programs to the mutual fund, insurance, financial
services industry and an approved sponsor of CPE courses with the National Association of
State Boards of Accountancy and Quality Assurance Service (QAS).

For more information visit their website at: www.brokered.net. Or call them at 800-345-
5669.
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TABLE OF CONTENTS

About the Author .............................................................................................................. 3 
CHAPTER 1 HISTORY OF IRAs ............................................................................... 13 
Overview and Learning Objectives .............................................................................. 13 
Background of IRAs ..................................................................................................... 13 
Dual Purpose of IRAs ............................................................................................... 13 
Legislative Timeline of IRAs.................................................................................... 14 
The IRA Market ............................................................................................................ 16 
IRA Assets ................................................................................................................ 16 
IRA Contributions ..................................................................................................... 18 
IRA Account Balances and Investments ................................................................... 19 
Review Questions ......................................................................................................... 20 
CHAPTER 2 TRADITIONAL IRA ............................................................................. 21 
Overview and Learning Objectives .............................................................................. 21 
Traditional IRA Defined ............................................................................................... 21 
Setting Up a Traditional IRA ........................................................................................ 21 
Individual Retirement Account ................................................................................. 22 
Non-Bank Trustees ................................................................................................... 22 
Individual Retirement Annuity ................................................................................. 23 
Eligibility Requirements ............................................................................................... 25 
Regular Annual Contributions ...................................................................................... 26 
Date of Regular Annual Contributions ..................................................................... 27 
Contributions Returned Before Due Date of Return ................................................. 28 
Deductible Contributions .............................................................................................. 28 
Active Participant Defined ........................................................................................ 28 
Deduction Phase-out ................................................................................................. 29 
MAGI Defined .......................................................................................................... 31 
Non-Deductible Annual Contributions ......................................................................... 32 
Excess Contributions .................................................................................................... 33 
Spousal IRA .................................................................................................................. 34 
Contributions Limits to Spousal IRA ....................................................................... 35 
Deduction Limits for Spousal IRA ........................................................................... 35 
Setting up the Account .............................................................................................. 35 
Deduction of Fees ......................................................................................................... 35 
Review Questions ......................................................................................................... 36 
CHAPTER 3 SIMPLIFIED EMPLOYEE PENSION PLAN (SEP-IRAs) .............. 37 
Overview and Learning Objectives .............................................................................. 37 
SEP-IRA Background ................................................................................................... 37 
Advantages of a SEP-IRA ............................................................................................ 38 
Tax Advantages for the Employer ............................................................................ 38 
Tax Advantages for the Employee ............................................................................ 38 
Non-Tax Advantages for the Employer .................................................................... 38 
Disadvantages of a SEP-IRA ........................................................................................ 39 
SEP-IRA Participation Requirements ........................................................................... 39 
Self-Employed Individuals ....................................................................................... 40 
5
Establishing a SEP-IRA Plan ........................................................................................ 40 
Depositing Employer Contributions ......................................................................... 40 
IRS Form 5305-SEP ................................................................................................. 41 
Notice To Interested Parties ...................................................................................... 42 
Annual Reporting ...................................................................................................... 43 
Investment Vehicles .................................................................................................. 43 
SEP-IRA Nondiscrimination Rules .............................................................................. 43 
Non- Forfeitable and Non- Assignable ......................................................................... 44 
Employer Contributions ................................................................................................ 45 
Contribution Limits ................................................................................................... 45 
Excess Contribution Rule ......................................................................................... 45 
More Than One Employer ........................................................................................ 46 
More Than One Plan ................................................................................................. 46 
Deduction by the Employer ...................................................................................... 46 
SAR-SEP IRA Plans ..................................................................................................... 47 
Contributions to SAR-SEP IRA................................................................................ 47 
Review Questions ......................................................................................................... 49 
CHAPTER 4 SIMPLE IRA .......................................................................................... 51 
Overview and Learning Objectives .............................................................................. 51 
SIMPLE IRA Defined................................................................................................... 51 
Employer Eligibility ...................................................................................................... 52 
Two-Year Grace Period ............................................................................................ 52 
Deadline to Set-up a SIMPLE-IRA .......................................................................... 52 
Employee Eligibility Requirements .............................................................................. 52 
Required Enrollment Periods .................................................................................... 53 
SIMPLE IRA Contributions ......................................................................................... 54 
Employee Salary Reduction Contributions ............................................................... 54 
Catch-Up Provision for Older Participants ............................................................... 55 
Employer Matching Contributions ........................................................................... 56 
Employer Non-elective Contributions ...................................................................... 56 
Tax Consequences of Contributions ......................................................................... 57 
Vesting Requirements ................................................................................................... 58 
Distribution Rules ......................................................................................................... 58 
Savers Tax Credit .......................................................................................................... 58 
Review Questions ......................................................................................................... 60 
CHAPTER 5 IRA ROLLOVERS ................................................................................ 61 
Overview and Learning Objectives .............................................................................. 61 
Purpose of IRA Rollovers ............................................................................................. 61 
In-Direct Rollovers ....................................................................................................... 62 
60 Day Eligibility Rule ............................................................................................. 62 
Waiver of 60-day Rule .............................................................................................. 63 
Direct Rollovers ............................................................................................................ 64 
IRS Notice 2007-7 .................................................................................................... 67 
IRS Notice 2008-30 .................................................................................................. 68 
Worker, Retiree, and Employer Recovery Act of 2008 ................................................ 68 
IRS Notice 2009-75 .................................................................................................. 68 
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Eligible Rollover Distributions ..................................................................................... 69 
Withholding Requirements from Qualified Plans ......................................................... 70 
IRA Rollover Withholding Rules ................................................................................. 70 
Reporting IRA Rollovers to the IRS ............................................................................. 71 
Variety of IRA Rollovers .............................................................................................. 71 
IRA Rollover Market Opportunity ................................................................................ 72 
In-Service Distributions ................................................................................................ 74 
In-Service Distribution of Employer Contributions ................................................. 75 
In-Service Distribution of Employer Contributions Restricted to Hardship ............ 75 
Hardship Distributions of Employee Salary Deferrals ............................................. 76 
Definition of Hardship .............................................................................................. 76 
Section 826 of Pension Protection Act of 2006 ........................................................ 77 
In-Service Distributions of Rollover Contributions .................................................. 77 
Steps to Take ............................................................................................................. 77 
Review Questions ......................................................................................................... 79 
CHAPTER 6 IRA DISTRIBUTIONS DURING PARTICIPANTS LIFETIME ..... 81 
Overview and Learning Objectives .............................................................................. 81 
IRA Distribution Timelines .......................................................................................... 81 
Distributions Prior to Age 59½ ..................................................................................... 82 
The Exceptions.......................................................................................................... 82 
Series of Substantial Equal Periodic Payments ............................................................ 85 
Modification of SOSEPP .......................................................................................... 85 
Revenue Ruling 2002-62 .......................................................................................... 86 
Calculating the Three Methods ................................................................................. 89 
Distributions from Ages 59½ and 70 ............................................................................ 91 
Deductible Contributions .......................................................................................... 91 
Nondeductible Contributions .................................................................................... 92 
Distributions from Age 70½ ......................................................................................... 93 
Required Minimum Distributions ............................................................................. 93 
Required Beginning Date (RBD) .............................................................................. 93 
Calculating Required Minimum Distribution ........................................................... 94 
Penalties for Failure to Make Required Minimum Distributions ............................. 96 
IRS Life Expectancy Tables ......................................................................................... 97 
Uniform Lifetime Table ............................................................................................ 97 
Calculating RMDs Using the Uniform Lifetime Table ............................................ 97 
Using the Joint Life Table......................................................................................... 99 
Determination of Marital Status.................................................................................. 100 
Qualified Charitable Distributions from IRAs Revived ............................................. 100 
Background ............................................................................................................. 101 
Review Questions ....................................................................................................... 102 
CHAPTER 7 RMDs AFTER IRA PARTICIPANT’S DEATH .............................. 103 
Overview and Learning Objectives ............................................................................ 103 
Background ................................................................................................................. 103 
Beneficiary Planning ................................................................................................... 104 
Changing Beneficiaries ........................................................................................... 104 
Types of Beneficiaries ............................................................................................ 104 
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Per Stirpes vs. Per Capita ............................................................................................ 105 
Per Stirpes ............................................................................................................... 105 
Per Capita ................................................................................................................ 106 
Designated Beneficiary Rules ..................................................................................... 106 
Trust as a Designated Beneficiary .............................................................................. 107 
Trusteed vs. Custodial IRA ..................................................................................... 108 
Conduit Trust .......................................................................................................... 108 
Date to Determine the Designated Beneficiary ...................................................... 109 
Liberalized Rules Regarding Beneficiary Designations ......................................... 109 
Beneficiary Determined After IRA Participant’s Death ......................................... 110 
Postmortem Planning .............................................................................................. 110 
No Named Beneficiary after IRA Participant’s Death ............................................... 110 
5-Year Rule ............................................................................................................. 111 
5-Year Rule under WRERA ................................................................................... 111 
Death of Beneficiary Prior To Beneficiary Finalization Date ................................ 111 
Applying Distribution Rules: Death Prior to the RBD .............................................. 112 
Surviving Spouse as Beneficiary ............................................................................ 112 
Non-Spouse Individual Designated Beneficiary ..................................................... 114 
Multiple Individual Beneficiaries (Designated Beneficiary) .................................. 115 
Trust as Beneficiary (Designated Beneficiary) ....................................................... 115 
Non-Designated Beneficiary ................................................................................... 115 
Applying Distribution Rules: Death On or After the RBD........................................ 116 
Spouse as Designated Beneficiary .......................................................................... 116 
Non-Spouse Individual Designated Beneficiary ..................................................... 117 
Multiple Individual Beneficiaries (Designated Beneficiary) .................................. 117 
Trust as Beneficiary (Designated Beneficiary) ....................................................... 118 
Non-Designated Beneficiary ................................................................................... 118 
IRA Distributions Due to a Divorce ........................................................................... 118 
Importance of Updating Beneficiary Designation Forms ........................................... 119 
Lesson to be Learned: ............................................................................................. 120 
Review Questions ....................................................................................................... 121 
CHAPTER 8 ROTH IRA ............................................................................................ 123 
Overview and Learning Objectives ............................................................................ 123 
Roth IRA Background ................................................................................................ 123 
Creating a Roth IRA ................................................................................................... 123 
Funding a Roth IRA .................................................................................................... 124 
Applicable Dollar Limit Defined ............................................................................ 127 
MAGI Defined ........................................................................................................ 128 
Roth IRA Annual Contribution Phase-out Rules .................................................... 129 
Spousal Roth IRA Contributions ............................................................................ 131 
Excess Contributions .............................................................................................. 131 
Withdrawals of Excess Contributions ..................................................................... 132 
Applying Excess Contributions .............................................................................. 132 
Roth IRA Conversions ................................................................................................ 132 
Eligibility Requirements for Conversion ................................................................ 132 
Conversion Methods ............................................................................................... 133 
8
Eligible Assets to Be Converted ............................................................................. 134 
Prospects for Roth IRA Conversion ....................................................................... 137 
Conversion Advantages .......................................................................................... 138 
Conversion of an Annuity Contract ............................................................................ 139 
Recharacterizations ..................................................................................................... 139 
Reasons to Do a Recharacterization ....................................................................... 139 
Recharacterization Requirements ........................................................................... 139 
Recharacterization Deadlines .................................................................................. 140 
Steps to Take For Recharacterizaton ...................................................................... 140 
Notifying the Custodians ........................................................................................ 140 
Assets That Cannot Be Converted .......................................................................... 142 
DRAC-to Roth IRA Rollover ..................................................................................... 144 
DRAC Contributions .............................................................................................. 144 
DRAC Rollovers ..................................................................................................... 144 
The Five-Year Holding Period for Qualified Distributions .................................... 145 
Roth IRA Documents must be Amended................................................................ 146 
DRAC-To-Roth-IRA Rollovers Allowed For High-Income Employees ............... 146 
Small Business Job Protection Act of 2010 ................................................................ 146 
Review Questions ....................................................................................................... 148 
CHAPTER 9 ROTH IRA DISTRIBUTIONS ........................................................... 149 
Overview and Learning Objectives ............................................................................ 149 
Participant’s Lifetime Distributions ............................................................................ 149 
Qualified Distributions ............................................................................................ 150 
Nonqualified Distributions...................................................................................... 150 
Ordering Rules ............................................................................................................ 151 
5-Year Holding Period for Conversions ................................................................. 153 
Distributions after Participant’s Death........................................................................ 153 
Spouse as Sole Designated Beneficiary .................................................................. 154 
Tax Reporting of Roth IRA Distributions .................................................................. 154 
Review Questions ....................................................................................................... 155 
CHAPTER 10 IRA INVESTMENTS ......................................................................... 157 
Overview and Learning Objectives ............................................................................ 157 
Investment Providers and Investment Types .............................................................. 157 
Banks....................................................................................................................... 157 
Time Deposit Open Account .................................................................................. 158 
Special Certificates Of Deposit (CDs) .................................................................... 159 
Passbook Accounts ................................................................................................. 159 
Pooled Fund ............................................................................................................ 159 
Insured Credit Unions ............................................................................................. 159 
Brokerage Houses ................................................................................................... 160 
Mutual Fund Companies ......................................................................................... 160 
Self-Directed IRAs ...................................................................................................... 162 
Annuities inside IRAs ................................................................................................. 162 
The Double-Tax Deferred Question ....................................................................... 163 
Advantages of Annuities inside an IRA ...................................................................... 165 
Suitability Recommendations ................................................................................. 169 
9
New RMD Rules on Variable Annuity Contracts ................................................... 169 
Deduction of Fees inside an IRA ................................................................................ 170 
Fixed Fee in Lieu of Brokerage Commissions ....................................................... 171 
Prohibited Investments in an IRA ............................................................................... 171 
Investment in Collectibles....................................................................................... 172 
Life Insurance inside an IRA .................................................................................. 172 
Prohibited Transaction Rule ....................................................................................... 172 
The Tax: General Rule ........................................................................................... 173 
Prohibited Transaction Defined .............................................................................. 173 
Application of IRC § 4975 ...................................................................................... 173 
Disqualified Person Defined ................................................................................... 174 
The Willis Case ........................................................................................................... 175 
Review Questions ....................................................................................................... 177 
CHAPTER 11 IRA CREDITOR PROTECTION ..................................................... 179 
Overview and Learning Objectives ............................................................................ 179 
Federal Bankruptcy ..................................................................................................... 179 
Bankruptcy Estate Defined ......................................................................................... 180 
Solo Business Owners............................................................................................. 180 
Qualify Assets for an Exemption ............................................................................ 181 
IRAs in Bankruptcy Proceedings ................................................................................ 182 
ERISA Protection Not Applicable to IRAs ............................................................ 182 
Rousey v. Jacoway .................................................................................................. 183 
Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BAPCPA) .... 184 
IRA Exemptions Following BAPCPA.................................................................... 185 
Post-BAPCPA Results ............................................................................................ 186 
BAPCPA Miscellany .............................................................................................. 187 
States Most Impacted .............................................................................................. 188 
Creditor Protection of Inherited IRAs ......................................................................... 188 
Florida Update ........................................................................................................ 189 
Medicaid Planning and IRAs ...................................................................................... 190 
Review Questions ....................................................................................................... 191 
CHAPTER 12 ESTATE PLANNING WITH RETIREMENT ASSETS ................ 193 
Overview and Learning Objectives ............................................................................ 193 
The Federal Estate Tax ............................................................................................... 193 
The Economic Growth and Tax Relief Reconciliation Act of 2001 ....................... 194 
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010......................................................................................................................... 194 
Deductions from the FET ........................................................................................ 195 
Calculating the Federal Estate Tax Liability in 2011 ................................................. 196 
Gross Estate ............................................................................................................ 196 
Taxable Estate ......................................................................................................... 199 
Tentative Estate Tax ............................................................................................... 200 
Gift Tax Payable ..................................................................................................... 200 
Credits Against the Tax .......................................................................................... 201 
Net Federal Estate Tax Payable .............................................................................. 201 
Estate Tax Applicable To IRA Owned At Death ........................................................ 202 
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