ira fundamentals

IRA Fundamentals

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IRA Fundamentals

Learning Objectives

• Describe and list the tax benefits of an IRA

• Recognize types of annual contributions

• Explain contribution eligibility and thedeadline to make an annual contribution

• Identify the methods of moving assetsbetween IRAs and between employer-sponsored retirement plans and IRAs

• State the early distribution penalty taxexceptions

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IRA Fundamentals


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IndividualRetirementArrangement

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Types of IRAs

TraditionalIRA Roth IRA SIMPLE IRA

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Traditional IRA Tax Advantages

Tax credit(possible)

Tax deduction(possible)

Tax-deferred earnings(always)

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Roth IRA Tax Advantages

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Tax credit(possible)

Tax-free earnings(possible)

Tax-deferred earnings(always)

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Traditional IRA Contribution Eligibility

Regular Contribution• Has eligible

compensation

Spousal Contribution• Couple has eligible

compensation• Married, filing joint

federal tax return

Catch-Up Contribution• Eligible for regular or

spousal contribution• Has eligible

compensation to support additional contribution

• Attain age 50 before end of tax year

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Roth IRA Contribution Eligibility

Regular Contribution• Has eligible

compensation• MAGI within limits

Spousal Contribution• Couple has eligible

compensation• Married, filing joint

federal tax return• MAGI within limits

Catch-Up Contribution• Eligible for regular or

spousal contribution• Has eligible

compensation to support additional contribution

• Attain age 50 before end of tax year

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2021 MAGI Limits for Regular Roth IRA Contributions

Filing StatusMAGI for Full Contribution

MAGI for Partial Contribution

Ineligible for Roth Contribution

Single Up to $125,000 $125,000 up to $140,000 Over $140,000

Married, filing jointly Up to $198,000 $198,000 up to $208,000 Over $208,000

Married, filing separately N/A $0 up to $10,000 Over $10,000

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Limits for Regular Roth IRA Contributions

Traditional and Roth IRA Aggregate Annual RegularContribution Limits

Tax YearAnnual Regular

Contribution LimitCatch-Up Contribution for IRA

Owners Age 50 and Older

2021 $6,000 $1,000 ($7,000 total)

2022

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Annual and Regular Contribution Limits

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Current-year contributions

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Current-year contributions

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Regular Contribution Deadline

Prior-year contributions

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IRA Distribution Taxation Overview

Income tax

Early distribution penalty tax

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Traditional IRA Distribution Stages

10% penalty tax(unless exception applies)

RMD

No penalty tax

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Early Distribution Penalty Tax

Penalty Tax

Financial organization

cannot collect

Applies to taxable portion

Under age 59½

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Early Distribution Penalty Tax Exceptions

IRS levy

Higher education expenses

Disability

First-time homebuyer expenses

Death

Health insurance premiums following

unemployment

Substantially equal periodic

payments

Qualified reservist

distributions

Medical expenses

Age 59½

Qualified birth or

adoption**

*For distributions taken on or after December 28, 2019, and before December 27, 2020.**For distributions taken in 2020 or later.

Qualified disaster

distributions*

Coronavirus-Related Distributions (CRDs)

CARES Provision • Distributions up to $100,000 in aggregate to a qualified individual.

• CRDs – are exempt from early distribution penalties,– are taxed ratably over 3-year period (unless

opt out), and– may be repaid to retirement plan or IRA

over 3-year period.

Effective Date Distributions taken on or after January 1, 2020, and before December 31, 2020.

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IRA Fundamentals


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Qualified Disaster Distributions

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Individual sufferedeconomic loss

andPrinciple residence is in presidentially declared

disaster area

Individual sufferedeconomic loss

andPrinciple residence is in presidentially declared

disaster area

May repay amounts to an eligible retirement plan or IRA over a 3-year period

For disasters that began on or after December 28, 2019, and ended on or before December 27, 2020

Could distribute up to $100,000

Distribution had to be taken within 180 days of December 27, 2020

Taxed ratably overa 3-year period, unless an individual elects otherwise

Roth IRA Distribution Stages

10% penalty tax(unless exception applies)

No penalty tax

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IRA Fundamentals


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5-Year Period

January 1 of the earlier year for which the first Roth IRA contribution or conversion was made

5One 5-year period per IRA owner

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Qualified Reason

Disability Death 1st-time homebuyer expenses

Age 59½

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IRA Fundamentals


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Nonqualified Distribution

5-year period Nonqualified distribution (subject to tax and penalty)

No qualified reason

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Contributory Basis

Conversions and Retirement Plan

Rollovers (by year)

Earnings

Roth IRA owners determine taxable portion of distribution using IRS Form 8606

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Ordering Rules

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IRA-to-IRA Portability

SIMPLE IRA

Traditional IRA

Roth IRA

SIMPLE IRA

Traditional IRA

Roth IRA

Transfer

Rollover

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Occurs between like IRAs(and Traditional and SIMPLE)No constructive receipt of assetsUnlimited number of transfersWithholding rules do not apply

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Basic Transfer

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Basic Rollover

Occurs between like IRAs(and Traditional and SIMPLE)Constructive receipt of assets60-day ruleOne-per-12-month ruleWithholding rules applyIrrevocable rollover designation

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One-Per-12-Month Rule

Cannot roll over more than one distribution per 12-month period

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One-Per-12-Month Rule Example

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1/1/20223/10/2021Distribution from IRA #1

3/31/2021Rollover

from IRA #1 to

IRA #2

9/9/2021Distribution from IRA #3 cannot be rolled over

3/10/2022IRA owner eligible for

rollover

1/1/2021

Employer-Sponsored

Retirement Plan

Rolling Over Employer-Sponsored Retirement Plan Assets to an IRA

SIMPLE IRA

Traditional IRA

Roth IRA

Direct Rollover

Indirect Rollover

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Rolling Over Designated Roth Account Assets to a Roth IRA

Roth IRADirect Rollover

Indirect Rollover

DesignatedRoth IRA

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Rolling Over IRA Assets to an Employer-Sponsored Retirement Plan

Traditional IRA (pretax assets

only)

SIMPLE IRA

Direct Rollover

Indirect Rollover

Employer-Sponsored

Retirement Plan

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Between retirement plan and IRAPlan administrator determines eligibilityNo constructive receiptNo 60-day ruleNo one-per-12-month ruleIrrevocable rollover designation

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Basic Direct Rollover

Between retirement plan and IRAIRA owner determines eligibilityConstructive receipt of assets60-day ruleNo one-per-12-month ruleIrrevocable rollover designation

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Basic Indirect Rollover

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Current Rollover Rules

Roth account assets

Allother

assets

No Roth assets

Roth IRATraditional IRA(including SEP plan

contributions)

SIMPLE IRA (after 2-year waiting

period)

EligibleRetirement Plans

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Questions?

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IRA Fundamentals

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