Income Tax Planning for IRAs & Qualified Plans

Transcription

1 Income Tax Planning for IRAs & Qualified Plans Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates, LLP

2 Foundation Concepts Tax Brackets 2

3 Foundation Concepts General Income Tax Treatment Tax Deduction for Contribution Tax-free Distributions Tax-free Compounding Required Minimum Distributions Traditional IRA Roth IRA Non- Deductible IRA Contribution returned tax-free 3

4 Foundation Concepts Legacy The trustee s or custodian s beneficiary designation controls to whom an IRA transfers at the owner s death. Income tax consequences will vary substantially depending how the form is completed. 4

5 Importance Foundation Concepts Contributions Management Rollovers Roth conversions Prohibited transactions Unrelated Business Income Asset protection Distributions Time 5

6 Contributions Contributions cannot exceed lesser of: The deductible amount OR The taxpayer s compensation included in gross income *Note there are additional special catch-up contributions for 403(b) & 457(b) plans. 6

7 Contributions SPECIAL NOTE: If the taxpayer fails to make a contribution up to the deductible amount for a particular tax year, the shortfall may not be carried over to future tax years. However, the taxpayer is allowed to make a contribution to his IRA, for the previous tax year, up to the normal filing date of the income tax return without extensions (i.e. April 15th). 7

8 Contributions 6% Excess Contributions Tax To the extent that a taxpayer makes an excess contribution (i.e. a contribution greater than the deductible amount without regard to the active participant limitations) to an IRA during the tax year, she will be assessed a 6% excise tax on the excess over the maximum permissible amount. IRC

9 Contributions 6% Excess Contributions Tax Provided the taxpayer withdraws the excess contribution before April 15th of the year following the year of contribution (including any gains/losses and earnings attributed to it), none of the contribution will be subject to the 6% excise tax. To the extent that the excess contribution is not withdrawn, it will be used to offset the maximum deductible amount in future tax years. 9 IRC 4973

10 Rollover Strategies A rollover is a distribution from a qualified retirement plan or IRA to the participant that the participant re-deposits in another IRA or plan. A trustee-to-trustee transfer or direct transfer passes directly from the old plan to the new plan, and is never directly held by the participant. 10

11 Rollover Strategies Limit of one rollover each 12 months Not a calendar year test Distribution date is the benchmark, not the rollover date Aggregate limit as opposed to an account by account limit Trustee-to-Trustee transfers are unlimited Bobrow v. Commissioner, TC Memo

12 Rollover Strategies Exception to 60-Day Rollover Rule IRC 408(d)(3)(I) provides that the Secretary may waive the 60-day requirement where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual. 12

13 Rollover Strategies Exception to 60-Day Rollover Rule Relief available under Rev. Proc IRS will consider all relevant facts and circumstances, including: Errors committed by a financial institution; Inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; The use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and The time elapsed since the distribution occurred. 13

14 Rollover Strategies 60-Day Rollover Waivers Self Certification Rev. Proc taxpayers may use a sample letter provided to self-certify that early distribution taxes shouldn't apply because 60-day rollover window was missed due to at least one of the following reasons: error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates; distribution, having been made in the form of a check, was misplaced and never cashed; distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; taxpayer's principal residence was severely damaged; a member of the taxpayer's family died; taxpayer or a member of the taxpayer's family was seriously ill; taxpayer was incarcerated; restrictions were imposed by a foreign country; postal error occurred; distribution was made on account of a levy under 6331 and the proceeds of the levy have been returned to the taxpayer; or party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer's reasonable efforts to obtain the information. 14

15 Rollover Strategies 60-Day Rollover Waivers Self Certification Rev. Proc Contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed in prior slide no longer prevent the taxpayer from making the contribution. Deemed satisfied if contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution. IRS must not have previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates. 15

16 Rollover Strategies 60-Day Rollover Waivers Self Certification Rev. Proc Not a waiver by the IRS of the 60-day rollover requirement. Taxpayer may report the contribution as a valid rollover unless later informed otherwise by the IRS. IRS may consider whether a taxpayer's contribution meets the requirements for a waiver. Plan administrator/ira trustee may rely on a taxpayer's self-certification in determining whether the taxpayer has satisfied the conditions for a waiver of the 60-day rollover requirement. Plan administrator/ira trustee may not rely on the self-certification if they have actual knowledge that is contrary to the self-certification. 16

17 Roth IRAs Taxation of Distributions 17

18 Roth IRAs Taxation of Distributions 18

19 Roth IRAs Taxation of Distributions 19

20 Roth IRAs Taxation of Distributions Distribution within 5 years Distribution beyond 5 years Age < 59½ Income Tax: Yes (earnings only) 10% Penalty : Yes (earnings & taxable portion of prior conversion amounts) Income Tax: Yes (earnings only) 10% Penalty: Yes (earnings only) Age 59½ Income Tax: Yes (earnings only) 10% Penalty: No Income Tax: No 10% Penalty: No 20

21 Prohibited Transactions Prohibited transactions include most business transactions between an IRA and a disqualified person. The consequence of a prohibited transaction is that the IRA is disqualified. That is, the IRA s assets are treated as distributed as of the first day of the year in which the prohibited transaction occurs. The IRA owner must recognize the amount distributed as income and pay income tax. IRC 408(e)(2); Treas. Reg (d)(1); 21

22 Prohibited Transactions Prohibited transactions include most business transactions between an IRA and a disqualified person. The consequence of a prohibited transaction is that the IRA is disqualified. That is, the IRA s assets are treated as distributed as of the first day of the year in which the prohibited transaction occurs. The IRA owner must recognize the amount distributed as income and pay income tax. IRC 408(e)(2); Treas. Reg (d)(1); 22

23 Unrelated Business Income Overview IRAs are subject to tax on Unrelated Business Income that most typically apply to tax-exempt charitable organizations under Section 512. IRC 408(e)(2). The rational is that the tax exemption granted to the IRA should only be available for activities that further the reason the exemption was granted. Treas. Reg (b). Three elements for UBTI: The income is from a trade or business; The trade or business is regularly carried on; and The activity is not substantially related to the tax-exempt function of the organization. 23

24 IRA Distribution Planning Why Distribution Planning is Important Potential after-death tax exposure Net to Family 36% Federal Estate Tax, 40% Federal Income Tax, 24% 24

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26 AICPA PFP Section Member Resources PFP Section members, inclusive of CPA/PFS credential holders, have access to resources on the latest planning strategies and trends in personal financial planning services so that they can practice competently and profitably. Visit aicpa.org/pfp/resources. Estate Tax Retirement Investment Insurance & Risk Management Practice Management Legislative/ Regulatory Professional Responsibilities Consumer Content 26

27 About the PFP Section & PFS Credential The AICPA Personal Financial Planning (PFP) Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners. (Learn more at aicpa.org/pfp.) The Personal Financial Specialist (PFS) program allows CPAs to gain and demonstrate competence and confidence in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners through experience, education, examination and the resulting PFS credential. (Learn more at aicpa.org/pfs.) 27

28 Disclaimer This podcast is designed to provide illustrative information with respect to the subject matter covered, and does not represent an official opinion or position of the AICPA or AICPA.Org. It is provided with the understanding that the AICPA and AICPA.Org are not engaged in offering legal, accounting or other professional service. If such advice or expert assistance is required, the services of a competent, professional person should be sought. The AICPA and AICPA.Org make no representations, warranties or guarantees as to, and assume no responsibility for, the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of, reference to, or reliance on such material. 28

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