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Retirement Planning and
Employee Benefits for
Financial Planners
Chapter 9: IRAs and SEPs
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Introduction
 Traditional IRAs
 Tax Deductible/Nondeductible contributions
 Taxable/Nontaxable Distributions
 Roth IRAs
 Nondeductible Contributions
 Qualified distributions are income tax-free
 SEP IRAs
 IRAs provided by employers
 Greater funding limits than traditional IRAs
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IRAs – Contribution Limit
 Traditional and Roth
 Generally,
 Lesser of
 $5,500 ($6,500 for age 50 and over - 2014) or
 Individual’s earned income.
 Subject to limitations based on income
 Can divide contribution between a Roth/traditional IRA
 Attainment of age 70½
 can no longer make traditional IRA contributions.
 Can contribute to Roth IRA.
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Earned Income
 What is earned income?
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W-2 income
Schedule C net income
Income as a general partner
Alimony
 Exceptions:
 Spousal IRA: contribute up to:
 Spouse’s earned income – spouse’s IRA
contribution
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Timing of Contributions
 Contributions must be made by the
due date of the individual’s income
tax return (without extensions).
 Usually April 15th of the following tax
year.
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Deductibility of Traditional
IRA Contributions
 Deduction FOR AGI
Taxpayer
does not
have a
qualified
plan
No AGI Limit
Taxpayer is an
active participant in
a qualified plan
Single
AGI Phaseout AGI Phaseout
$60k - $70k
MFJ
Taxpayer is not an
active participant
in a qualified plan,
but taxpayer’s
spouse is an active
participant in a
qualified plan
$181k - $191k
AGI Phaseout
$96k - $116k
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Active Participant Status
 Limits Traditional IRA contributions.
 Individual is considered an active
participant:
 Defined Benefit Plan
 Participates or meets the eligibility
requirements of the plan.
 Defined Contribution Plan
 Receives a contribution to the qualified plan on
his behalf for the year (including forfeitures), or
 Defers compensation to a CODA plan.
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Nondeductible IRA
Contributions
 Tax-deferred growth
 Creates adjusted basis in IRA.
 Distributions will be partially return of
capital and partially earnings.
 Nondeductible IRA contributions are not limited
for active participants of qualified plans.
 File Form 8606 with Form 1040 to track the
adjusted taxable basis of an IRA.
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Distributions from Traditional
IRAs (1 of 2)
 Ordinary Income
 Except:
 Distributions of adjusted basis
AB before withdrawal
Ratio of AB =
FMV of account at
withdrawal
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Distributions from Traditional
IRAs (2 of 2)
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 Required Minimum Distributions
 Same as RMDs for Qualified Plans
 Year following turn 70 ½
 Subject to penalties if prior to age
59½
 Unless on account of an exception
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Exceptions to 10% Early Withdrawal
Penalty
 Distributions on account of:
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Death
Attainment of age 59½
Disability
Substantially Equal Periodic Payments
Medical Expenses in excess of 7.5% of AGI
QDRO
Higher Education Expenses
First Time Home Purchase – up to $10,000
Payment of health insurance premiums by
unemployed
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Roth IRAs
 Nondeductible Contributions
 Qualified Distributions are income tax-free
 Owner may continue to fund after attaining
age 70½
 Not subject to required minimum distribution
rules during the life of the account owner
 Share contribution limit with Traditional IRA
 Contributions may be limited based on AGI
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Roth IRA Contributions
(1of 2)
 Contributions
 Limited to lesser of earned income or
$5,500 ($6,500 if age 50 and over 2014)
 Combined Limit with Traditional IRA
 Availability phased-out based on AGI
Contribution AGI Phaseout Limit (2014)
Single
$114,000 - $129,000
Married Filing Jointly
$181,000 - $191,000
Married Filing Separate
$0 - $10,000
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Roth IRA Contributions
(2 of 2)
 Convert Traditional IRA to Roth IRA
 No limit in 2014
Conversion AGI Limit Prior to 2010
Single
$100,000
Married Filing Jointly
$100,000
Married Filing
Separately
Not Available
 Recharacterized Contributions
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Qualified Distributions from Roth
IRAs
 Qualified Distributions are income tax-free.
 Qualified Distributions are not subject to 10%
early withdrawal penalty.
 Qualified Distribution:
 The distribution is made after a five
taxable year period, AND
 The distribution is on account of the owner
attaining age 59½, the owner’s death,
disability, or first-time home purchase
(maximum $10,000).
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Nonqualified Distributions from
Roth IRAs
 Subject to income tax…maybe…
 First come from contributions (tax-free)
 Then from conversions (tax-free)
 Then from earnings – these are taxed
 Subject to 10% penalty
 Nonqualified distributions
 Contributions are not subject to penalty
 Conversions and earnings in the last five years are
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Tax-Free Distributions from IRAs to
Charity
 Can be made from a Traditional or
Roth IRA directly to charity
 Counts toward satisfying RMD for
year
 Owner must be 70 ½ or older
 Can distribute up to $100,000 per
year
 Advantage of contributions from IRA
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Nonqualified Distributions from Roth
IRAs
Subject to
Taxation?
Subject to
10% Penalty
No
No
Conversions
No
Yes, within
five years of
conversion*
Earnings
Yes
Yes*
Contributions
*Exceptions to the 10% early withdrawal penalty are the
same as the exceptions for Traditional IRA distributions.
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Comparing Roth IRAs to Traditional
IRAs
 Traditional IRAs do not allow
contributions after the owner is age
70½, unlike Roth IRAs.
 Roth IRAs are not subject to the
minimum distribution rules, unlike
Traditional IRAs.
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IRA Investment Options
 Permitted:
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Cash
Stocks
Bonds
Options (Often limited by custodians)
U.S. Gold, Silver, and Platinum Coins
Real estate
 Not Permitted:
 Life Insurance
 Collectibles: beer cans; art, etc.
 Other Coins
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Rollovers from Qualified Plans to
IRAs
 Lose Lump Sum Distribution Taxation
Options (NUA)
 Loans Not Permitted
 May be rolled back to Qualified Plan
that permits
 Lose ERISA Protection
 However, will have protection under
federal bankruptcy law.
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Simplified Employee Pensions
(SEPs)
 Small Business Retirement Plan
 Tax-deferred growth of Contributions
 Not a qualified plan, but has similar
characteristics with unique rules:
 More liberal coverage requirements.
 Can be established as late as the extended due
date of the income tax return.
 Unique contribution, vesting, and distribution
rules.
 Established utilizing Traditional IRA
Accounts
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Coverage Requirements
 Employers that sponsor SEPs must
provide benefits to all employees who
meet the following requirements:
 Attainment of age 21 or older, and
 Performance of services for three of the
last five years, and
 Received compensation of at least $550
(2014) during the year.
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Establishment of a SEP
Up to due date of return – including
extensions
Entity
Sole Proprietorship
(Schedule C)
Original Due
Date of Tax
Return
Extended Due
Date of Tax
Return
April 15th
October 15th
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Establishment of a SEP
 Employer must complete the
following three steps by the extended
due dates listed above.
 Complete a formal written agreement.
 Form 5305-SEP (no IRS approval required)
 Fill in blanks: page 449
 Give eligible employees notice.
 Copy of Form 5305-SEP
 Open a SEP-IRA account for each eligible
employee.
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Contributions to SEPs
 Employer Funded Only

No employee contributions
 Discretionary
 Must be made to all employees eligible during the
year – even if dead or no longer employed at time
of contribution
 Limited to the lesser of:
 25% of an employee’s covered compensation, or
 $52,000 for 2013.
 Self-employed: limit is 20%
 Can utilize cross-testing and Social Security Integration
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Vesting and Withdrawals
 Employees are 100% vested in their
account balance at all times.
 Withdrawals are treated just as
withdrawals from IRAs.
 Ordinary Income
 Potentially subject to 10% early withdrawal
penalty.
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