individual retirement arrangements

266 Pages·2017·1.3 MB·English

by  Best 14

INDIVIDUAL RETIREMENT ARRANGEMENTS
(2017 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outdated.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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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: selfstudyce.brokered.net or call us at
800-345-5669.

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TABLE OF CONTENTS

ABOUT THE AUTHOR .................................................................................................. 3
CHAPTER 1 HISTORY OF IRAs ............................................................................. 15
Overview ....................................................................................................................... 15
Learning Objectives ...................................................................................................... 15
Background of IRAs ..................................................................................................... 15
Dual Purpose of IRAs ............................................................................................... 15
Legislative Timeline of IRAs .................................................................................... 16
Retirement Market Overview ....................................................................................... 18
IRA Assets ................................................................................................................ 19
Incidence of IRA Ownership Increases with Age and Income Error! Bookmark not
defined.
Rollovers to Traditional IRAs Fuel Growth .................. Error! Bookmark not defined.
IRA Contributions .......................................................... Error! Bookmark not defined.
GAO Report (15-16) .................................................. Error! Bookmark not defined.
Chapter 1 Review Questions ......................................... Error! Bookmark not defined.
CHAPTER 2 TRADITIONAL IRA ........................................................................... 32
Overview ....................................................................................................................... 32
Learning Objectives ...................................................................................................... 32
Setting Up a Traditional IRA ........................................................................................ 32
Individual Retirement Account ................................................................................. 33
Individual Retirement Annuity ................................................................................. 34
Traditional IRA Eligibility Requirements .................................................................... 35
Compensation Defined .............................................................................................. 36
Regular Annual IRA Contributions .............................................................................. 37
Date of Regular Annual IRA Contributions ............................................................. 38
Contributions Returned Before Due Date of Return ................................................. 38
IRA Deductible Contributions ...................................................................................... 38
Active Participant Defined ........................................................................................ 39
Deduction Phase-out ................................................................................................. 40
MAGI Defined .......................................................................................................... 41
Non-Deductible Annual IRA Contributions ................................................................. 42
Excess Contributions .................................................................................................... 43
Penalty for Excess Contribution ............................................................................... 43
Procedure .................................................................................................................. 44
Tax Reporting ........................................................................................................... 45
Spousal IRA .................................................................................................................. 45
Contributions Limits to Spousal IRA ....................................................................... 45
Deduction Limits for Spousal IRA ........................................................................... 46
Setting up the Account .............................................................................................. 46
Deduction of Fees ......................................................................................................... 46
Chapter 2 Review Questions ........................................................................................ 47
CHAPTER 3 SIMPLIFIED EMPLOYEE PENSION PLAN (SEP IRAs) ............. 48
Overview ....................................................................................................................... 48
Learning Objectives ...................................................................................................... 48
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SEP IRA Background ................................................................................................... 48
SEP IRA Advantages .................................................................................................... 49
Tax Advantages for the Employer ............................................................................ 49
Tax Advantages for the Employee ............................................................................ 49
Non-Tax Advantages for the Employer .................................................................... 49
Disadvantages of a SEP IRA ........................................................................................ 50
SEP IRA Participation Requirements ........................................................................... 50
Self-Employed Individuals ....................................................................................... 51
Establishing a SEP IRA Plan ........................................................................................ 51
Depositing Employer Contributions ......................................................................... 51
IRS Form 5305-SEP ................................................................................................. 52
Notice To Interested Parties ...................................................................................... 53
Annual Reporting ...................................................................................................... 54
Investment Vehicles .................................................................................................. 54
SEP IRA Nondiscrimination Rules ............................................................................... 54
Non- Forfeitable and Non- Assignable ......................................................................... 55
Employer Contributions ................................................................................................ 56
Contribution Formulas .............................................................................................. 56
Contribution Limits ................................................................................................... 56
Contribution Limits for Self-Employed .................................................................... 57
Excess Contribution Rule ......................................................................................... 59
More Than One Employer ........................................................................................ 59
Multiple Plans ........................................................................................................... 59
Deduction by the Employer ...................................................................................... 60
SARSEP IRA Plans ...................................................................................................... 60
Contributions to SARSEP IRA ................................................................................. 60
Chapter 3 Review Questions ........................................................................................ 62
CHAPTER 4 SIMPLE IRA ........................................................................................ 64
Overview ....................................................................................................................... 64
Learning Objectives ...................................................................................................... 64
SIMPLE IRA Defined .................................................................................................. 64
Employer Eligibility ..................................................................................................... 65
Employee Eligibility ..................................................................................................... 65
Establishing a SIMPLE IRA Plan ................................................................................. 66
Deadline to Set-up a SIMPLE IRA ........................................................................... 66
Two-Year Grace Period ............................................................................................ 66
Required Enrollment Periods .................................................................................... 67
SIMPLE IRA Contributions ......................................................................................... 68
Employee Salary Reduction Contributions ............................................................... 68
Catch-Up Provision for Older Participants ............................................................... 69
Employer Matching Contributions ........................................................................... 69
Employer Non-elective Contributions ...................................................................... 70
Tax Consequences of Contributions ......................................................................... 70
Vesting Requirements ................................................................................................... 71
Distribution Rules ......................................................................................................... 71
New SIMPLE IRA Rollover Rules ............................................................................... 71
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Saver’s Tax Credit ........................................................................................................ 72
Chapter 4 Review Questions ........................................................................................ 73
CHAPTER 5 IRA ROLLOVERS............................................................................... 74
Overview ....................................................................................................................... 74
Learning Objectives ...................................................................................................... 74
Purpose of IRA Rollovers ............................................................................................. 74
In Direct Rollovers ........................................................................................................ 75
60 Day Eligibility Rule ............................................................................................. 75
Tax Consequences for Not Meeting the 60-day Rule ............................................... 76
Waiver of 60 Day Rule ............................................................................................. 76
Exceptions to the 60-day Rule .................................................................................. 77
IRS Rev. Proc. 2016-47: Self Certification for Late Rollovers ................................ 78
The 12-Month Rule ................................................................................................... 79
IRS Announcement 2014-15 and 2014-32 .................................................................. 80
Background of the One-Per-Year Rule ..................................................................... 80
Tax Consequences of the One-Rollover-Per-Year Limit .......................................... 80
Direct Rollovers ............................................................................................................ 80
IRA Rollover Rules after EGTRRA ............................................................................. 81
IRA Rollovers after PPA of 2006 ................................................................................. 82
IRS Notice 2007-7 ........................................................................................................ 83
IRS Notice 2008-30 .................................................................................................. 84
Worker, Retiree, and Employer Recovery Act of 2008 ................................................ 84
IRS Notice 2009-75 ...................................................................................................... 85
Eligible Rollover Distributions ..................................................................................... 86
Withholding Requirements from Qualified Retirement Plans ...................................... 86
IRA Rollover Withholding Rules ................................................................................. 87
Reporting IRA Rollovers to the IRS ............................................................................. 87
Variety of IRA Rollovers .............................................................................................. 87
Advisory Opinion 2005-23A ........................................................................................ 89
FINRA Regulatory Notice 13-45 .................................................................................. 91
Background ............................................................................................................... 91
FINRA and SEC Examinations ................................................................................ 91
Rollovers to IRAs: FINRA Regulatory Notice 13-45 ............................................... 92
Additional Factors to Consider ................................................................................. 94
IRA Rollovers and the DOL Conflict of Interest Rule ................................................. 95
Chapter 5 Review Questions ........................................................................................ 97
CHAPTER 6 IRA DISTRIBUTIONS DURING PARTICIPANTS LIFETIME .. 98
Overview ....................................................................................................................... 98
Learning Objectives ...................................................................................................... 98
IRA Distribution Timelines .......................................................................................... 98
Distributions Prior to Age 59½ ..................................................................................... 99
The Exceptions .......................................................................................................... 99
Series of Substantial Equal Periodic Payments .......................................................... 102
Calculating the SOSEPP Payment .......................................................................... 102
Modification of SOSEPP ........................................................................................ 102
Revenue Ruling 2002-62 ........................................................................................ 103
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Calculating the Three Methods ............................................................................... 105
Distributions from Ages 59½ and 70 .......................................................................... 107
Deductible Contributions ........................................................................................ 107
Non-deductible Contributions ................................................................................. 107
Distributions from Age 70½ ....................................................................................... 108
Required Minimum Distributions ........................................................................... 108
Required Beginning Date (RBD) ............................................................................ 109
Calculating Required Minimum Distribution ......................................................... 110
Penalties for Failure to Make RMDs ...................................................................... 111
IRS Life Expectancy Tables ....................................................................................... 111
Uniform Lifetime Table .......................................................................................... 112
Calculating RMDs Using the Uniform Lifetime Table .......................................... 113
Using the Joint Life Table ....................................................................................... 114
Determination of Marital Status ................................................................................. 116
Qualified Charitable Distributions from IRAs ............................................................ 116
Background ............................................................................................................. 116
Requirements for a QCD......................................................................................... 116
Qualified Longevity Annuity Contracts ..................................................................... 119
QLAC Concept ....................................................................................................... 120
QLAC Rules ............................................................................................................ 120
Additional Considerations ...................................................................................... 122
Chapter 6 Review Questions ...................................................................................... 123
CHAPTER 7 IRA BENEFICIARY PLANNING ................................................... 124
Overview ..................................................................................................................... 124
Learning Objectives .................................................................................................... 124
IRA Beneficiary Planning ........................................................................................... 124
Changing Beneficiaries ........................................................................................... 125
Types of Beneficiaries ................................................................................................ 125
Primary Beneficiary ................................................................................................ 125
Contingent Beneficiary ........................................................................................... 125
Per Stirpes vs. Per Capita ............................................................................................ 126
Per Stirpes ............................................................................................................... 126
Per Capita ................................................................................................................ 126
Designated Beneficiary Rules ..................................................................................... 127
Date to Determine the Designated Beneficiary....................................................... 128
Liberalized Rules Regarding Beneficiary Designations ......................................... 128
Beneficiary Determined after IRA Participant’s Death .......................................... 129
Postmortem Planning .............................................................................................. 129
Trust as a Designated Beneficiary .............................................................................. 129
Conduit Trust .......................................................................................................... 131
Accumulation Trust ................................................................................................ 131
No Named Beneficiary after IRA Participant’s Death ............................................... 132
5-Year Rule ............................................................................................................. 133
5-Year Rule under WRERA ................................................................................... 133
Death of Beneficiary Prior To Beneficiary Finalization Date .................................... 133
Applying Distribution Rules: Death Prior to the RBD .............................................. 134
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Surviving Spouse as Beneficiary ............................................................................ 134
Non-Spouse Individual Designated Beneficiary ..................................................... 136
Multiple Individual Beneficiaries (Designated Beneficiary) .................................. 136
Trust as Beneficiary (Designated Beneficiary) ....................................................... 137
Non-Designated Beneficiary ................................................................................... 137
Applying Distribution Rules: Death On or After the RBD ....................................... 138
Spouse as Designated Beneficiary .......................................................................... 138
Non-Spouse Individual Designated Beneficiary ..................................................... 139
Multiple Individual Beneficiaries (Designated Beneficiary) .................................. 139
Trust as Beneficiary (Designated Beneficiary) ....................................................... 140
Non-Designated Beneficiary ................................................................................... 140
IRA Distributions Due to a Divorce ........................................................................... 140
Importance of Updating Beneficiary Designation Forms ........................................... 141
Lesson to be Learned .............................................................................................. 142
Chapter 7 Review Questions ...................................................................................... 143
CHAPTER 8 ROTH IRA .......................................................................................... 144
Overview ..................................................................................................................... 144
Learning Objectives .................................................................................................... 144
Roth IRA Background ................................................................................................ 144
Creating a Roth IRA ................................................................................................... 145
Funding a Roth IRA .................................................................................................... 145
Regular Annual Contributions ................................................................................ 146
Applicable Dollar Limit Defined ............................................................................ 146
MAGI Defined ........................................................................................................ 147
Roth IRA Annual Contribution Phase-out Rules .................................................... 148
Spousal Roth IRA Contributions ................................................................................ 149
Excess Contributions to Roth IRAs ............................................................................ 150
Withdrawals of Excess Contributions ..................................................................... 150
Corrective Action .................................................................................................... 150
Roth IRA Conversions ................................................................................................ 152
Eligibility Requirements for Conversion ................................................................ 152
Conversion Methods ............................................................................................... 153
“Backdoor” Roth IRA Conversion Strategy ............................................................... 154
IRA Aggregation Rule ............................................................................................ 155
The Step Transaction Rule ...................................................................................... 155
Eligible Assets to Be Converted ................................................................................. 156
Prospects for Roth IRA Conversion ....................................................................... 159
Conversion Advantages .......................................................................................... 159
Conversion of an Annuity Contract ............................................................................ 160
Background ............................................................................................................. 160
Current Valuation Rules ......................................................................................... 161
Guaranteed Benefit Riders ...................................................................................... 162
Reporting to IRS ..................................................................................................... 162
Recharacterizations ..................................................................................................... 162
Reasons to Do a Re-characterization ...................................................................... 162
Recharacterization Requirements ........................................................................... 163
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Recharacterization Deadlines .................................................................................. 163
Steps to Take for Recharacterization ...................................................................... 164
Notifying the Custodians ........................................................................................ 164
Assets That Cannot Be Converted .......................................................................... 165
Reconversion .............................................................................................................. 166
Time Line for Conversion, Recharacterization and Reconversion ............................. 166
DRAC to Roth IRA Rollover ...................................................................................... 167
DRAC Contributions .............................................................................................. 167
DRAC Rollovers ..................................................................................................... 168
The Five-Year Holding Period for Qualified Distributions .................................... 169
Roth IRA Documents Must Be Amended .............................................................. 169
DRAC to Roth IRA Rollovers Allowed For High-Income Employees .................. 169
Small Business Job Protection Act of 2010 ................................................................ 170
ATRA of 2102 Expands “In-Plan” Roth 401(k) Conversions .................................... 170
Background ............................................................................................................. 170
Expansion of In-Plan Roth Conversions ................................................................. 171
Benefits to Participants ........................................................................................... 171
IRS Notice 2014-54 After-Tax Rollover Rules .......................................................... 172
Chapter 8 Review Questions ...................................................................................... 173
CHAPTER 9 ROTH IRA DISTRIBUTIONS ........................................................ 174
Overview ..................................................................................................................... 174
Learning Objectives .................................................................................................... 174
Participant’s Lifetime Distributions ............................................................................ 174
Qualified Distributions ............................................................................................ 175
Nonqualified Distributions ...................................................................................... 175
Ordering Rules ............................................................................................................ 176
5-Year Holding Period for Conversions ................................................................. 178
Roth IRA Distributions after Participant’s Death ....................................................... 178
Spouse as Sole Designated Beneficiary .................................................................. 179
Tax Reporting of Roth IRA Distributions .................................................................. 179
Chapter 9 Review Questions ...................................................................................... 180
CHAPTER 10 IRA INVESTMENTS....................................................................... 182
Overview ..................................................................................................................... 182
Learning Objectives .................................................................................................... 182
Investment Providers and Investment Types .............................................................. 182
Banks ....................................................................................................................... 183
Time Deposit Open Account .................................................................................. 183
Special Certificates Of Deposit (CDs) .................................................................... 184
Passbook Accounts ................................................................................................. 184
Pooled Fund ............................................................................................................ 184
Insured Credit Unions ............................................................................................. 184
Brokerage Houses ................................................................................................... 185
Mutual Fund Companies ......................................................................................... 185
Self-Directed IRAs ..................................................................................................... 186
REITs in IRAs ............................................................................................................ 187
Annuities inside IRAs ................................................................................................. 188
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