individual retirement arrangements

269 Pages·2015·1.61 MB·English

by  Dan Barrett

INDIVIDUAL
RETIREMENT ARRANGEMENTS
(2015 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 try 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outdated.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 a source of authority on
legal and/or tax matters.

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

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

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© 2015 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 The 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 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 was a qualifying member of the Million Dollar Round Table, Qualifying
Member Court of the Table® and Top of the Table® producer. He holds the Certified
Financial Planner designation CFP®, Chartered Financial Consultant (ChFC), Chartered
Life Underwriter (CLU), Certified Employee Benefit Specialist (CEBS), Retirement
Planning Associate (RPA), Chartered Retirement Planning Counselor (CRPC) and the
Chartered Retirement Plans Specialist (CRPS) professional designations.

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.

About 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 our website at: www.Bestonlinecourses.com or call us at
800-345-5669.
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TABLE OF CONTENTS

ABOUT THE AUTHOR .................................................................................................. 3 
CHAPTER 1 HISTORY OF IRAs ............................................................................. 13 
Overview ....................................................................................................................... 13 
Learning Objective ........................................................................................................ 13 
Background of IRAs ..................................................................................................... 13 
Dual Purpose of IRAs ............................................................................................... 13 
Legislative Timeline of IRAs.................................................................................... 14 
Retirement Market Overview ....................................................................................... 16 
IRA Assets ................................................................................................................ 17 
Incidence of IRA Ownership Increases with Age and Income ................................. 19 
Rollovers to Traditional IRAs Fuel Growth ................................................................. 21 
IRA Contributions ......................................................................................................... 25 
GAO Report (15-16) ................................................................................................. 27 
Chapter 1 Review Questions ........................................................................................ 29 
CHAPTER 2 TRADITIONAL IRA ........................................................................... 31 
Overview ....................................................................................................................... 31 
Learning Objectives ...................................................................................................... 31 
Setting Up a Traditional IRA ........................................................................................ 31 
Individual Retirement Account ................................................................................. 32 
Individual Retirement Annuity ................................................................................. 33 
Traditional IRA Eligibility Requirements .................................................................... 34 
Compensation Defined .............................................................................................. 35 
Regular Annual IRA Contributions .............................................................................. 36 
Date of Regular Annual IRA Contributions ............................................................. 37 
Contributions Returned Before Due Date of Return ................................................. 37 
IRA Deductible Contributions ...................................................................................... 38 
Active Participant Defined ........................................................................................ 38 
Deduction Phase-out ................................................................................................. 39 
MAGI Defined .......................................................................................................... 40 
Non-Deductible Annual IRA Contributions ................................................................. 41 
Excess Contributions .................................................................................................... 42 
Penalty for Excess Contribution ............................................................................... 42 
Procedure .................................................................................................................. 43 
Tax Reporting ........................................................................................................... 44 
Spousal IRA .................................................................................................................. 44 
Contributions Limits to Spousal IRA ....................................................................... 45 
Deduction Limits for Spousal IRA ........................................................................... 45 
Setting up the Account .............................................................................................. 45 
Deduction of Fees ......................................................................................................... 45 
Chapter 2 Review Questions ........................................................................................ 46 
CHAPTER 3 SIMPLIFIED EMPLOYEE PENSION PLAN (SEP IRAs) ............. 47 
Overview ....................................................................................................................... 47 
Learning Objectives ...................................................................................................... 47 
5
SEP IRA Background ................................................................................................... 47 
SEP IRA Advantages .................................................................................................... 48 
Tax Advantages for the Employer ............................................................................ 48 
Tax Advantages for the Employee ............................................................................ 48 
Non-Tax Advantages for the Employer .................................................................... 48 
Disadvantages of a SEP IRA ........................................................................................ 49 
SEP IRA Participation Requirements ........................................................................... 49 
Self-Employed Individuals ....................................................................................... 50 
Establishing a SEP IRA Plan ........................................................................................ 50 
Depositing Employer Contributions ......................................................................... 50 
IRS Form 5305-SEP ................................................................................................. 51 
Notice To Interested Parties ...................................................................................... 52 
Annual Reporting ...................................................................................................... 53 
Investment Vehicles .................................................................................................. 53 
SEP IRA Nondiscrimination Rules ............................................................................... 53 
Non- Forfeitable and Non- Assignable ......................................................................... 54 
Employer Contributions ................................................................................................ 55 
Contribution Formulas .............................................................................................. 55 
Contribution Limits ................................................................................................... 55 
Contribution Limits for Self-Employed .................................................................... 56 
To compute his plan compensation, Joe must subtract from his net profit of
$100,000: .................................................................................................................. 56 
Excess Contribution Rule ......................................................................................... 58 
More Than One Employer ........................................................................................ 59 
Multiple Plans ........................................................................................................... 59 
Deduction by the Employer ...................................................................................... 59 
SARSEP IRA Plans ...................................................................................................... 59 
Contributions to SARSEP IRA ................................................................................. 60 
Chapter 3 Review Questions ........................................................................................ 61 
CHAPTER 4 SIMPLE IRA ........................................................................................ 63 
Overview ....................................................................................................................... 63 
Learning Objectives ...................................................................................................... 63 
SIMPLE IRA Defined................................................................................................... 63 
Employer Eligibility ...................................................................................................... 64 
Two-Year Grace Period ............................................................................................ 64 
Deadline to Set-up a SIMPLE IRA ........................................................................... 64 
Employee Eligibility Requirements .............................................................................. 64 
Required Enrollment Periods .................................................................................... 65 
SIMPLE IRA Contributions ......................................................................................... 66 
Employee Salary Reduction Contributions ............................................................... 66 
Catch-Up Provision for Older Participants ............................................................... 67 
Employer Matching Contributions ........................................................................... 68 
Employer Non-elective Contributions ...................................................................... 68 
Tax Consequences of Contributions ......................................................................... 69 
Vesting Requirements ................................................................................................... 69 
Distribution Rules ......................................................................................................... 70 
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Saver’s Tax Credit ........................................................................................................ 70 
Chapter 4 Review Questions ........................................................................................ 72 
CHAPTER 5 ROTH IRA ............................................................................................ 73 
Overview ....................................................................................................................... 73 
Learning Objectives ...................................................................................................... 73 
Roth IRA Background .................................................................................................. 73 
Creating a Roth IRA ..................................................................................................... 74 
Funding a Roth IRA ...................................................................................................... 74 
Regular Annual Contributions .................................................................................. 75 
Applicable Dollar Limit Defined .............................................................................. 75 
MAGI Defined .......................................................................................................... 77 
Roth IRA Annual Contribution Phase-out Rules ...................................................... 77 
Spousal Roth IRA Contributions .................................................................................. 79 
Excess Contributions to Roth IRAs .............................................................................. 79 
Withdrawals of Excess Contributions ....................................................................... 80 
Corrective Action ...................................................................................................... 80 
Roth IRA Conversions .................................................................................................. 82 
Eligibility Requirements for Conversion .................................................................. 82 
Conversion Methods ................................................................................................. 83 
Eligible Assets to Be Converted ............................................................................... 84 
Prospects for Roth IRA Conversion ......................................................................... 87 
Conversion Advantages ............................................................................................ 88 
Conversion of an Annuity Contract .............................................................................. 88 
Background ............................................................................................................... 88 
Current Valuation Rules ........................................................................................... 89 
Guaranteed Benefit Riders ........................................................................................ 90 
Reporting and Recharacterization ............................................................................. 90 
Recharacterizations ....................................................................................................... 90 
Reasons to Do a Recharacterization ......................................................................... 90 
Recharacterization Requirements ............................................................................. 91 
Recharacterization Deadlines .................................................................................... 91 
Steps to Take for Recharacterizaton ......................................................................... 92 
Notifying the Custodians .......................................................................................... 92 
Assets That Cannot Be Converted ............................................................................ 93 
Reconversion................................................................................................................. 94 
Time Line for Conversion, Recharacterization and Reconversion ............................... 94 
DRAC-to Roth IRA Rollover ....................................................................................... 95 
DRAC Contributions ................................................................................................ 95 
DRAC Rollovers ....................................................................................................... 96 
The Five-Year Holding Period for Qualified Distributions ...................................... 97 
Roth IRA Documents Must Be Amended ................................................................ 97 
DRAC-To-Roth-IRA Rollovers Allowed For High-Income Employees ................. 97 
Small Business Job Protection Act of 2010 .................................................................. 98 
ATRA of 2102 Expands “In-Plan” Roth 401(k) Conversions ...................................... 98 
Background ............................................................................................................... 98 
Expansion of In-Plan Roth Conversions ................................................................... 99 
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Benefits to Participants ............................................................................................. 99 
Chapter 5 Review Questions ...................................................................................... 101 
CHAPTER 6 IRA ROLLOVERS............................................................................. 103 
Overview ..................................................................................................................... 103 
Learning Objectives .................................................................................................... 103 
Purpose of IRA Rollovers ........................................................................................... 103 
In-Direct Rollovers ..................................................................................................... 104 
60 Day Eligibility Rule ........................................................................................... 104 
Waiver of 60-day Rule ............................................................................................ 105 
12-Month Rule ........................................................................................................ 106 
IRS Announcement 2014-15 and 2014-32 ................................................................. 106 
Transition Rule Ignores Some 2014 Distributions.................................................. 106 
Background of the One-Per-Year Rule ................................................................... 107 
Tax Consequences of the One-Rollover-Per-Year Limit ........................................ 107 
Direct Rollovers .......................................................................................................... 107 
IRA Rollover Rules after EGTRRA ........................................................................... 108 
IRA Rollovers after PPA of 2006 ............................................................................... 109 
IRS Notice 2007-7 .................................................................................................. 110 
IRS Notice 2008-30 ................................................................................................ 111 
Worker, Retiree, and Employer Recovery Act of 2008 .............................................. 111 
IRS Notice 2009-75 ................................................................................................ 112 
Eligible Rollover Distributions ................................................................................... 113 
Withholding Requirements from Qualified Plans ....................................................... 113 
IRA Rollover Withholding Rules ............................................................................... 114 
FINRA Regulatory Notice 13-45 ................................................................................ 114 
Background ............................................................................................................. 114 
FINRA and SEC Examinations .............................................................................. 115 
Rollovers to IRAs: FINRA Regulatory Notice 13-45............................................. 115 
Reporting IRA Rollovers to the IRS ........................................................................... 118 
Variety of IRA Rollovers ............................................................................................ 118 
IRS Notice 2014-54 After-Tax Rollover Rules .......................................................... 120 
In-Service Distributions .............................................................................................. 120 
Types of In-Service Distributions ........................................................................... 121 
In-Service Distribution of Employer Contributions ............................................... 121 
In-Service Distribution of Employer Contributions Restricted to Hardship .......... 122 
Hardship Distributions of Employee Salary Deferrals ........................................... 122 
Definition of Hardship ............................................................................................ 123 
Section 826 of Pension Protection Act of 2006 ...................................................... 123 
In-Service Distributions of Rollover Contributions ................................................ 124 
Steps to Take ........................................................................................................... 124 
Chapter 6 Review Questions ...................................................................................... 129 
CHAPTER 7 IRA DISTRIBUTIONS DURING PARTICIPANTS LIFETIME . 131 
Overview ..................................................................................................................... 131 
Learning Objectives .................................................................................................... 131 
IRA Distribution Timelines ........................................................................................ 131 
Distributions Prior to Age 59½ ................................................................................... 132 
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The Exceptions........................................................................................................ 132 
Series of Substantial Equal Periodic Payments .......................................................... 134 
Calculating the SOSEPP Payment .......................................................................... 135 
Modification of SOSEPP ........................................................................................ 135 
Revenue Ruling 2002-62 ........................................................................................ 136 
Calculating the Three Methods ............................................................................... 138 
Distributions from Ages 59½ and 70 .......................................................................... 140 
Deductible Contributions ........................................................................................ 140 
Nondeductible Contributions .................................................................................. 140 
Distributions from Age 70½ ....................................................................................... 141 
Required Minimum Distributions ........................................................................... 141 
Required Beginning Date (RBD) ............................................................................ 142 
Calculating Required Minimum Distribution ......................................................... 143 
Penalties for Failure to Make Required Minimum Distributions ........................... 144 
IRS Life Expectancy Tables ....................................................................................... 145 
Uniform Lifetime Table .......................................................................................... 146 
Calculating RMDs Using the Uniform Lifetime Table .......................................... 146 
Using the Joint Life Table....................................................................................... 147 
Determination of Marital Status.................................................................................. 149 
Qualified Charitable Distributions from IRAs ............................................................ 149 
Background ............................................................................................................. 149 
Requirements for a QCD ........................................................................................ 150 
Chapter 7 Review Questions ...................................................................................... 154 
CHAPTER 8 IRA BENEFICIARY PLANNING ................................................... 155 
Overview ..................................................................................................................... 155 
Learning Objectives .................................................................................................... 155 
IRA Beneficiary Planning ........................................................................................... 155 
Changing Beneficiaries ........................................................................................... 156 
Types of Beneficiaries ................................................................................................ 156 
Per Stirpes vs. Per Capita ............................................................................................ 157 
Per Stirpes ............................................................................................................... 157 
Per Capita ................................................................................................................ 157 
Designated Beneficiary Rules ..................................................................................... 158 
Date to Determine the Designated Beneficiary ...................................................... 159 
Liberalized Rules Regarding Beneficiary Designations ......................................... 159 
Beneficiary Determined after IRA Participant’s Death .......................................... 160 
Postmortem Planning .............................................................................................. 160 
Trust as a Designated Beneficiary .............................................................................. 160 
Conduit Trust .......................................................................................................... 162 
Accumulation Trust ................................................................................................ 162 
No Named Beneficiary after IRA Participant’s Death ............................................... 163 
5-Year Rule ............................................................................................................. 163 
5-Year Rule under WRERA ................................................................................... 164 
Death of Beneficiary Prior To Beneficiary Finalization Date .................................... 164 
Applying Distribution Rules: Death Prior to the RBD .............................................. 164 
Surviving Spouse as Beneficiary ............................................................................ 165 
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Non-Spouse Individual Designated Beneficiary ..................................................... 167 
Multiple Individual Beneficiaries (Designated Beneficiary) .................................. 167 
Trust as Beneficiary (Designated Beneficiary) ....................................................... 167 
Non-Designated Beneficiary ................................................................................... 168 
Applying Distribution Rules: Death On or After the RBD........................................ 168 
Spouse as Designated Beneficiary .......................................................................... 169 
Non-Spouse Individual Designated Beneficiary ..................................................... 170 
Multiple Individual Beneficiaries (Designated Beneficiary) .................................. 170 
Trust as Beneficiary (Designated Beneficiary) ....................................................... 170 
Non-Designated Beneficiary ................................................................................... 171 
IRA Distributions Due to a Divorce ........................................................................... 171 
Importance of Updating Beneficiary Designation Forms ........................................... 171 
Lesson to be Learned .............................................................................................. 172 
Chapter 8 Review Questions ...................................................................................... 174 
CHAPTER 9 ROTH IRA DISTRIBUTIONS ......................................................... 175 
Overview ..................................................................................................................... 175 
Learning Objectives .................................................................................................... 175 
Participant’s Lifetime Distributions ............................................................................ 175 
Qualified Distributions ............................................................................................ 176 
Nonqualified Distributions...................................................................................... 176 
Ordering Rules ............................................................................................................ 177 
5-Year Holding Period for Conversions ................................................................. 179 
Roth IRA Distributions after Participant’s Death ....................................................... 179 
Spouse as Sole Designated Beneficiary .................................................................. 180 
Tax Reporting of Roth IRA Distributions .................................................................. 180 
Chapter 9 Review Questions ...................................................................................... 181 
CHAPTER 10 IRA INVESTMENTS....................................................................... 183 
Overview ..................................................................................................................... 183 
Learning Objectives .................................................................................................... 183 
Investment Providers and Investment Types .............................................................. 183 
Banks....................................................................................................................... 183 
Time Deposit Open Account .................................................................................. 184 
Special Certificates Of Deposit (CDs) .................................................................... 185 
Passbook Accounts ................................................................................................. 185 
Pooled Fund ............................................................................................................ 185 
Insured Credit Unions ............................................................................................. 185 
Brokerage Houses ................................................................................................... 186 
Mutual Fund Companies ......................................................................................... 186 
Self-Directed IRAs ...................................................................................................... 188 
Annuities inside IRAs ................................................................................................. 188 
The Double-Tax Deferred Question ....................................................................... 189 
Advantages of Annuities inside an IRA ...................................................................... 191 
Suitability Recommendations ................................................................................. 193 
New RMD Rules on Variable Annuity Contracts ................................................... 193 
Deduction of Fees inside an IRA ................................................................................ 194 
Fixed Fee in Lieu of Brokerage Commissions ....................................................... 195 
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