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Individual Retirement Accounts (IRAs), including traditional IRAs, Roth IRAs, SIMPLEs, SEPs, are investments owned by many individual taxpayers and are an excellent way for workers to save for retirement. Although the basic IRA began as a fairly simple investment tool, the complications increased dramatically as the types of IRAs increased. Not only have the types of IRAs expanded, but options such as contributions, rollovers, and distributions, intended to add increased flexibility have also added increased complexity. This course is designed to provide practical insights into all tax aspects of IRAs and help CPAs successfully manage the complexities.
Prerequisite: Familiarity with federal tax issues for IRAs.
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Chapter 1 - Overview, Update, and Reference Guide
Learning Objectives
- Identify resources for forms and publications required for retirement plan administration.
- Identify online resources available to help with retirement plan administration.
- Understand the definitions used for retirement plan considerations.
Introduction
This course is written to provide information on the various retirement plans available to companies and individuals. It is not a legal reference and should be used solely for the purpose of continuing professional education. Each situation must be researched completely before making a determination. Many references and resources are quoted throughout the book for your use.
In this course, we will discuss contributions, rollovers, and distributions of Individual Retirement Arrangements including traditional IRAs, Roth IRAs, SIMPLES, and SEPS. We will also discuss methods for correcting plan mistakes. Throughout this reference, we will discuss
- The characteristics of the arrangements.
- When the arrangement can be set up.
- When and how much you can contribute to an arrangement.
- Transferring amounts among arrangements.
- Taxability of the arrangement.
- When and how to withdraw from arrangements.
This chapter contains updates, a guide to payroll forms and publications, due dates of various retirement plan items, and various websites that will be helpful in administering retirement plans. The forms and publications are discussed fully in other chapters.
Definitions
As we discuss the various retirement plans, it is important to have a good understanding of the definitions used by the IRS. Sometimes it is challenging because some publications or regulations use slightly different definitions.
401(k) - A qualified retirement plan to which contributions from salary are made from pre-tax dollars.
Annual Additions - A combination of all an individual's contributions, employer contributions and forfeitures, but not rollovers, allocated to an individual's account.
Annual Benefits - Benefits paid annually in a straight life annuity and no extra benefits from a plan the employees do not contribute into and no rollover contributions are made. Annuitant - Individual who is the beneficiary of an annuity.
Annuity - A series of fixed or variable payments provided by a contract and made at regular intervals for more than one full year. Individuals can purchase the contracts directly or with the assistance of their employer.
Annuity - Fixed-Period - An individual receives a fixed amount regularly for a specified length of time.
Annuities for a Single Life - An individual receives specific amounts regularly for life and the payments end at the individual's death.
Annuity - Joint and Survivor - The first annuitant receives a specific amount regularly for life. After their death, a second annuitant receives a specific amount regularly for life which is not necessarily the same amount paid to the first annuitant.
Annuity - Variable - The payments made to the annuitant may vary and the amounts may depend upon things such as profits earned by the pension or annuity funds, cost of living indexes, or earnings from a mutual fund.
Business - An activity with a profit motive and economic activity is involved. According to the IRS, service as a newspaper carrier under age 18 or as a public official is not a business; however, a service as a newspaper dealer is a business.
Common-Law Employee - A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. A leased employee can also be a common-law employee. Common-law employees are not considered self-employed and are not allowed to establish a retirement plan for income from their work, even if that income is self-employment income for social security tax purposes (i.e., ministers). However, an individual can be a common-law employee and a self-employed person.
Compensation - Compensation by common-law employees generally includes all the following payments for personal services:
- Wages and salaries
- Fees for professional services
- Cash of noncash amounts received including, but not limited to commissions, tips, fringe benefits, and bonuses
Compensation generally cannot include the following:
- Reimbursements or other expense allowances paid under an accountable plan
- Deferred compensation (either amounts going in or amounts coming out) other than certain elective deferrals unless the individual chooses not to include those elective deferrals in compensation
For a self-employed individual, compensation is earned income by that individual.
Compensation - Elective Deferrals - Includes amounts deferred in the following employee benefit plans:
- Qualified cash or deferred arrangement (Section 401(k) plan)
- Salary reduction agreement to contribute to a tax-sheltered annuity [Section 403(b) plan], a SIMPLE IRA plan, or a SARSEP
- Section 457 nonqualified deferred compensation plan
- Section 125 cafeteria plan
Contribution - Amount paid into a plan by the participant, including self-employed individuals.
Custodian - The financial institution as defined in section 408(n) which has approval of the IRS to act as a custodian of individual retirement accounts.
Deduction - Plan contributions employers may subtract from gross income on their federal income tax return.
Defined Benefit Plan - Qualified retirement plan basing annual contributions on targeted benefit amounts.
Defined Contribution Plan - Qualified retirement plan with annual contributions based on a percentage of compensation.
Depositor - Person who establishes an IRA custodial account with a financial institution.
Designated Roth Account - Separate account created under a qualified Roth contribution program where participants may elect to have part or all of their elective deferrals to a 401(k) or 403(b) plan designated as Roth contributions. Elective deferrals designated as Roth contributions are included in taxable income, but qualified distributions are not included in taxable income.
Earned Income - Net earnings from self-employment from a business in which an individual's services materially produced the income. It also includes royalties, selling or disposing of the property (excluding capital gains), and licensing the use of property.
Economic Stimulus Payments - If economic stimulus payments were directly deposited in an individual's traditional IRA or a Roth IRA in 2008, they may be withdrawn tax-free and penaltyfree.
Employee Stock Ownership Plan (ESOP) - Defined contribution plan that is a stock bonus plan or a combined stock bonus and money purchase plan designed to invest primarily in qualifying employer securities.
Employer - Any person for whom an individual performs or did perform any service as an employee. For retirement plan purposes, a sole proprietor is treated as their own employer but, a partner is not an employer for retirement plan purposes. The partnership is treated as the employer of each partner.
Highly-Compensated Employee - Employee who (1) owned more than 5% of the business at any time during the year or the preceding year or (2) during the preceding year, received compensation of more than $200,000 for 2006 or 2007 and $205,000 in 2008 and, if chosen by the employer, the employee was in the top 20% of the employees' compensation.
Individual Retirement Account (IRA) - Tax-exempt trust created or organized in the U.S. for the exclusive benefit of an individual or the individual's beneficiaries.
Keogh Plan - A qualified retirement plan available to self-employed persons. Key Employee - Officers, employees, and officers defined by the Internal Revenue Code for purposes of determining whether a plan is "top heavy."
Leased employee - If a leased employee is considered a common-law employee, they will be your employee for all purposes, regardless of any pension plan of the leasing organization. A leased employee is not treated as your employee if
- All leased employees are not more than 20% of the non-highly compensated work force;
- The employee is covered under the leasing organization's qualified pension plan, and
- The leasing organization's plan is a money purchase pension plan that has immediate participation, full and immediate vesting, and a nonintegrated employer contribution rate of at least 10% of compensation for each participant.
Lump-Sum Distribution - Distribution of an individual's entire interest in a qualified retirement plan within one tax year.
Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments - When a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, is paid, it may be rolled over into the Roth IRA.
Minimum Distribution - A retirement plan distribution based on life expectancies, which an individual must take after 70~½~ in order to avoid penalties.
Minimum Funding Requirements - Associated with defined benefit plans and certain other plans, such as money purchase plans, assuring the plan has enough assets to satisfy its current and anticipated liabilities. Money Purchase Plan - Defined contribution plan in which the contributions by the employer are mandatory and established other than by reference to the employer's profits.
Net Earnings from Self-Employment - For SEP and qualified plans, net earnings from selfemployment is net income from an individual's trade or business if that individual provides significant personal services. Net income includes deductions for contributions to SEP and qualified plans for common-law employees and the deduction allowed for one-half of the selfemployment tax. For partnerships, net earnings include a partner's distributive share of partnership income or loss excluding separately stated items, such as capital gains and losses and income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership; however, distributions of other income or loss to limited partners are not net earnings from self-employment.
Participant - An eligible employee who is covered by an employer's retirement plan.
Partner - An individual who shares ownership of an unincorporated trade or business with one or more persons. Each partner is treated as an employee of the partnership for retirement plans considerations.
Pension - A series of definitely determinable payments made after an individual retires from work. Pension - Disability - An individual receiving determinable payments before they reached minimum retirement age due to a disability.
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