Tag: Retirement Planning

Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

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Kinds of IRAs and Prohibited Transactions

You can open different kinds of IRAs with a variety of organizations. You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also open an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements, which are listed below for various arrangements.

Traditional IRAs

Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.

Read  2016 Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

SIMPLE IRAs

A savings incentive match plan for employees (SIMPLE) plan is a tax-favored written agreement (salary reduction) between you and your employer that allows you to
choose to reduce your compensation (salary) by a certain percentage each pay period, and have your employer contribute the salary reductions to a SIMPLE IRA on your behalf.

All contributions under a SIMPLE IRA plan must be made to a SIMPLE IRA, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described above.

If your employer maintains a SIMPLE IRA plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution.

Roth IRAs

A Roth IRA can be either an individual retirement account or individual retirement annuity, described above. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. A SEP IRA or SIMPLE IRA cannot be designated as a Roth IRA.

Designated Roth accounts. Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. Designated
Roth accounts are not IRAs and should not be confused with Roth IRAs. Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. A contribution to one does not impact your eligibility to contribute to the other.

Read  2016 Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are some examples of prohibited transactions with an IRA.
• Borrowing money from it.
• Selling property to it.
• Using it as security for a loan.
• Buying property for personal use (present or future) with IRA funds.

Read  2016 Individual Retirement Accounts Kinds of IRAs and Prohibited Transactions

Any accounting, business or tax advice contained in the Tax E Man Blog or  www.PatTax.net, including attachments, links and enclosures, are not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax related penalties.

If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

“Empowering clients through education, a stress free transaction and an excellent service experience.”

Individual Retirement Accounts-Traditional IRAs

Tax E Man
Tax Consultation, Preparation, Representation

 

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Traditional IRAs

IRA Contribution Limits—2016
Lesser of: Taxable compensation for the year, or:
Under age 50………………………………………………………………………. $ 5,500
Age 50 or older……………………………………………………………………. $ 6,500

What is an IRA?
An IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An IRA is referred to as a traditional IRA if it is not a Roth IRA or a SIMPLE IRA. Traditional IRAs include SEP IRAs.
Traditional IRA tax advantages and rules:

  • Contributions to an IRA may be fully or partially deductible.
  • Amounts in your IRA (including earnings and gains) are not taxed until distributed.
  • There is no limit on how much you can earn and still contribute (however, contributions are not deductible above certain amounts).
  • Contributions are not allowed past age 70½ and required minimum distributions begin after age 70½.
  • Early distributions (before you are age 59½) are subject to a 10% additional tax. Exceptions apply.
  • Distributions are taxed as ordinary income.

Who Can Contribute to an IRA?
Any individual can set up a traditional IRA if he or she receives taxable compensation during the year and is not age 70½ by the end of the year. An individual can have a traditional IRA even if covered by an employer-sponsored retirement plan. However, the deductible amount of contributions to a traditional IRA may be phased out. See Reduced IRA Deduction, later.

Contribution limit. Contributions to IRAs are limited to the lesser of the individual’s compensation (or spouse’s compensation under a spousal IRA), or $5,500 ($6,500 for age 50 or older).

 Click and Read 2016 Individual Retirement Accounts Traditional IRAs Here

Total contributions are combined with Roth IRA contributions to determine limits. For example, a $1,000 contribution to a Roth IRA will reduce total contributions allowable to a traditional IRA by $1,000.

Spousal IRA. If both spouses have compensation, each can set up a separate IRA. Spouses cannot participate in the same IRA. If filing status is Married Filing Jointly and one spouse’s compensation is less than the contribution limit, the lower-income spouse can use the compensation of the other spouse to qualify. However, the spousal IRA is limited to total compensation reduced by any IRA contributions.

This means that the total combined contributions that can be made for the year to your IRA and your spouse’s IRA can be as much as $11,000 ($12,000 if only one of you is age
50 or older or $13,000 if both of you are age 50 or older).70½ rule. Contributions cannot be made in a year the participant has reached age 70½ or for any later year.

 Click and Read 2016 Individual Retirement Accounts Traditional IRAs Here

Any accounting, business or tax advice contained in the Tax E Man Blog or  www.PatTax.net, including attachments, links and enclosures, are not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax related penalties.

If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

“Empowering clients through education, a stress free transaction and an excellent service experience.”

Pension Income Planning

Tax E Man
Tax Consultation, Preparation, Representation

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Baldwin NY Tax Preparation service Pat Tax Inc. and Patrick White, Enrolled Agent .  Please feel free to contact us with any questions or  concerns.

 

Pension Income Planning

An employee nearing retirement may face a dilemma when it comes to choosing his or her pension. Pension options from a defined benefit retirement plan generally include a lifetime payment with no survivor benefit, a joint and 50% survivor payment, or a joint and 100% survivor payment. The joint and survivor benefits are reduced amounts from the lifetime payment option.

 Read 2016 Pension Income Planning Here

Predicament
If the employee selects the lifetime payment and then dies before the surviving spouse, no monthly pension will be left for the spouse. If the employee selects one of the survivor options, and the spouse dies before the employee dies, the employee will be locked into the lower payout for the rest of his or her life. The amount of potential loss of income can be devastating to the retired employee or spouse. Emotionally, an employee may be inclined to choose one of the pension options that give an ongoing benefit to his or her surviving spouse. However, this may not be the best financial decision.

Example:

Henry, age 65, will be retiring soon. He and his wife, Louise, also age 65, are reviewing his pension options.

 Option  Monthly Pension  Survivor’s Monthly Pension
 Life  $2,000  $0
 50% Survivor Benefit  $1,600  $800
 100% Survivor Benefit  $1,200  $1,200

If Henry chooses the life option and subsequently dies, Louise will be left without any portion of his pension. With the 50% survivor benefit, Henry would have $400 less per month than the life option, and Louise would receive a pension of half of Henry’s if Henry were to die. With the 100% survivor benefit, Henry would receive $1,200 per month and if he were to die, Louise would receive $1,200 per month.

  Read 2016 Pension Income Planning Here

Any accounting, business or tax advice contained in the Tax E Man Blog or  www.PatTax.net, including attachments, links and enclosures, are not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax related penalties.

If desired, Pat Tax, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired.

The Tax E Man Blog, along with our website www.PatTax.net, are designed to be year round resources for tax consultation, preparation and representation services provided by Pat Tax, Inc. . Please feel free to contact us with any questions or concerns.

“Empowering clients through education, a stress free transaction and an excellent service experience.”