MODULE 4 BRIDGING THE INCOME GAP: IDENTIFYING OTHER SOURES OF RETIREMENT INCOME Flashcards
(44 cards)
SINGLE WAGE EARNER LIMIT FOR IRA CONTRIBUTIONS
the lesser of $6000 or 100% of compensation
A MARRIED COUPLE W/ BOTH SPOUSES WORKING LIMIT FOR IRA CONTRIBUTIONS
a total of $12K; each may contribute the max allowed for single wage earners
A MARRIED COUPLE W/ BOTH SPOUSES WORKING, BOTH AGE 50 OR OLDER
total of $14K; each may contribute the $6K allowed for single wage earners plus an additional age 50 catch-up amount of $1000 each
A MARRIED COUPLE W/ ONE SPOUSE WORKING
$6000 each; aggregate contributions to the two accounts cannot exceed the total compensation of the spouses; the nonworking spouse’s IRA is referred to as a “spousal IRA”
A DIVORCED COUPLE INDIVIDUAL, AGE 56, WHO IS NOT WORKING AND WHO IS RECEIVING ALIMONY FROM A DIVORCE SETTLEMENT PRIOR TO 2020
the lesser of $7000 or 100% of compensation (taxable alimony received is considered compensation. remember, under TCJA, alimony from divorce settlements in 2019 and beyond is no longer considered earned income)
DEDUCTIBILITY OF IRA CONTRIBUTIONS MAY BE LIMITED DUE TO AN INDIVIDUAL’S “ACTIVE PARTICIPANT” STATUS
WHAT RETIREMENT PLANS MUST BE CONSIDERED WHN DETERMINING WHETHER AN INDIVIDUAL HAS ACTIVE PARTICIPANT STATUS?
- qualified pension, profit sharing or stock bonus plans
- qualified annuity plans under Code Section 403(b) (TSA)
- simplified employee pension (SEP)
- SIMPLE IRA
- gov plans (not including SS, railroad retirement, or Section 457 plans)
WHAT CRITERIA ARE USED TO DETERMINE ACTIVE PARTICIPANT STATUS IN A DEFINED BENEFIT PLAN?
an individual is an active participant if:
- the individual is eligible under plan provisions
- even if the individual elected not to participate
- the employer failed to make mandatory contributions
- and/or failed to perform the minimum service required
WHAT CRITERIA ARE USED TO DETERMINE ACTIVE PARTICIPANT STATUS WITHIN: PSP, 401(K) OR STOCK BONUS PLANS?
an individual is an active participant if:
- the individual’s account received an employer contribution, an employee contribution, and/or a forfeiture allocation
HOW DO AN INDIVIDUAL’S RETIREMENT PLAN CONTRIBUTIONS AFFECT ACTIVE PARTICIPANT STATUS?
an individual who makes voluntary or mandatory retirement plan contributions is an active participant
HOW DO INVESTMENT EARNINGS AFFECT ACTIVE PARTICIPANT STATUS?
an individual is NOT an active participant if ONLY earnings (no contributions/forfeitures) are allocated to their account
TO CONTRIBUTE TO AN IRA AN INDIVIDUAL MUST HAVE EARNED INCOME. GIVE SOME EXAMPLES OF INCOME THAT IS NOT CONSIDERED “EARNED”
examples include unemployment compensation, passive income, deferred compensation, pension and annuity payments, SS, worker’s comp, and capital gains
KATHY DUGGINS IS A 37 YEAR OLD SINGLE FILER WHO CONTRIBUTED $6K TO AN IRA THIS TAX YEAR (2020. SHE WILL EARN $105K FROM EMPLOYMENT AT SANDSTONE PRODUCTS INC. DURING THE YEAR. THEY PROVIDE A 401(K) PLAN, BUT IN 3 YEARS SHE HAS BEEN W/ THE COMPANY, SHE HAS CHOSEN NOT TO PARTICIPATE.
IS SHE ELIGIBLE TO MAKE THE $6K IRA CONTRIBUTION FOR THIS YEAR?
yes - she has earned income in 2020
KATHY DUGGINS IS A 37 YEAR OLD SINGLE FILER WHO CONTRIBUTED $6K TO AN IRA THIS TAX YEAR (2020. SHE WILL EARN $105K FROM EMPLOYMENT AT SANDSTONE PRODUCTS INC. DURING THE YEAR. THEY PROVIDE A 401(K) PLAN, BUT IN 3 YEARS SHE HAS BEEN W/ THE COMPANY, SHE HAS CHOSEN NOT TO PARTICIPATE.
IS SHE AN ACTIVE PARTICIPANT?
no. although her employer provides a 401(k) plan, she is not participating and has not participated in the plan; therefore, she has no account and no “annual additions.”
KATHY DUGGINS IS A 37 YEAR OLD SINGLE FILER WHO CONTRIBUTED $6K TO AN IRA THIS TAX YEAR (2020. SHE WILL EARN $105K FROM EMPLOYMENT AT SANDSTONE PRODUCTS INC. DURING THE YEAR. THEY PROVIDE A 401(K) PLAN, BUT IN 3 YEARS SHE HAS BEEN W/ THE COMPANY, SHE HAS CHOSEN NOT TO PARTICIPATE.
IS SHE ELIGIBLE TO DEDUCT THE FULL CONTRIBUTION?
yes. since she is not an active participant, she is not subject to the deduction phaseouts, and the $6K contribution will be fully deductible
ELMO HOFFMAN IS A 49-Y/O SINGLE FILER. HIS AGI FOR THE YEAR IS $85K. HE HAS WORKED AT WWQS FOR 20 YEARS. WWQS PROVIDES A DEFINED BENEFIT PLAN FOR ALL EMPLOYEES WHO HAVE AT LEAST ONE YEAR OF SERVICE, BUT ELMO HAS WAIVED PARTICIPATION IN THE PLAN. HE CONTRIBUTED $6K TO HIS IRA FOR THIS TAX (2020).
IS ELMO ELIGIBLE TO MAKE THE $6K CONTRIBUTION TO HIS IRA?
yes - he has earned income.
ELMO HOFFMAN IS A 49-Y/O SINGLE FILER. HIS AGI FOR THE YEAR IS $85K. HE HAS WORKED AT WWQS FOR 20 YEARS. WWQS PROVIDES A DEFINED BENEFIT PLAN FOR ALL EMPLOYEES WHO HAVE AT LEAST ONE YEAR OF SERVICE, BUT ELMO HAS WAIVED PARTICIPATION IN THE PLAN. HE CONTRIBUTED $6K TO HIS IRA FOR THIS TAX (2020).
IS HE AN ACTIVE PARTICIPANT?
yes - he is considered an active participant in the defined benefit plan because he is eligible under the plan provisions, even though he has not chosen to participate
ELMO HOFFMAN IS A 49-Y/O SINGLE FILER. HIS AGI FOR THE YEAR IS $85K. HE HAS WORKED AT WWQS FOR 20 YEARS. WWQS PROVIDES A DEFINED BENEFIT PLAN FOR ALL EMPLOYEES WHO HAVE AT LEAST ONE YEAR OF SERVICE, BUT ELMO HAS WAIVED PARTICIPATION IN THE PLAN. HE CONTRIBUTED $6K TO HIS IRA FOR THIS TAX (2020).
IS HE ELIGIBLE TO DEDUCT THE FULL CONTRIBUTION?
no. none of the contribution is deductible bc he is an active participant and has an AGI above the phaseout range. he would be able to contribute to a Roth IRA bc his income is below the start of the Roth IRA phaseout range for single people.
SUSAN JONES, 39, IS SINGLE AND AN ACTIVE PARTICIPANT IN HER EMPLOYER’S QUALIFIED PLAN. HER AGI FOR THIS YEAR IS $66K AND SHE WILL CONTRIBUTE $6K TO HER IRA THIS TAX YEAR. WHAT AMOUNT IS DEDUCTIBLE?
$75K - $66K = $9K
$9K / $10K = .9
$6K x .9 = $5400
$5400 is deductible.
SUSAN JONES, 39, IS SINGLE AND AN ACTIVE PARTICIPANT IN HER EMPLOYER’S QUALIFIED PLAN. HER AGI FOR THIS YEAR IS $66K AND SHE WILL CONTRIBUTE $6K TO HER IRA THIS TAX YEAR. WHAT AMOUNT IS DEDUCTIBLE?
IF SUSAN’S AGI FOR THIS YEAR (2020) IS $71K INSTEAD, WHAT AMT OF HER $6K IRA CONTRIBUTION IS THEN DEDUCTIBLE?
$75K - $71K = $4K
$4K / $10K = .4
$6000 x .4 = $2400
$2400 is deductible
MARK SMITH AND HIS WIFE BETTY BOTH WORK, AND THEY FILE A JOINT RETURN. HE IS AN ACTIVE PARTICIPANT IN HIS EMPLOYER’S QUALIFIED PLAN. THEIR AGI FOR THIS YEAR IS $105K & THEY WILL MAKE A $12K IRA CONTRIBUTION FOR 2020. WHAT AMT IS DEDUCTIBLE? THEY ARE BOTH 39.
$124K - $105K = $19K
$19K / $20K = .95
$6K x .95 = $5700
$5700 is deductible for Mark. the full amount, $6K is deductible for Betty. their total deduction is $11.7K
BOBBY BRINSON & HIS UNEMPLOYED WIFE LAURA FILE A JOINT RETURN. HE IS AN ACTIVE PARTICIPANT IN HIS EMPLOYER’S QUALIFIED PLAN. LAURA IS NOT. BOTH ARE UNDER AGE 50. THEIR AGI IS $140K AND THEY WILL CONTRIBUTE $12K TO THEIR IRAS THIS YEAR. WHAT AMT IS DEDUCTIBLE?
$140K > $124K; therefore, Bobby has no deduction but he could contribute to a Roth IRA bc their AGI is less than the start of the phaseout range for Roth IRAs
Laura can deduct $6K as a spousal IRA contribution. their total deduction is $6K
notice it is best to figure their AGI, then deal w/ each spouse separately. combine the results as the total.
WHAT NEEDS TO TAKE PLACE IN ORDER FOR A DISTRIBUTION FROM A ROTH IRA TO BE CONSIDERED “QUALIFIED”?
(1) the account must have been opened for at least 5 Roth years, AND
(2) the distribution is made after age 59 & 1/2, death, or disability, or if it is made to a first-time homebuyer in an amount up to $10K
note there can never be a qualified Roth distribution until the owner is a “5-year Roth veteran” (started the Roth IRA clock for 5 years)
second, the time frame is 5 Roth years (not 5 calendar years). ex. Carlos contributed $100 to a Roth IRA on 3/15/2021. however, it was contributed for 2020. the first time he meets the 5-year Roth clock on Jan 1, 2025.
third, many ppl think there cannot be a qualified distribution from a Roth IRA until the owner is 59 & 1/2. not true. age 59 & 1/2 is only 1 of 4 reasons a w/d can be qualified. if the $ is w/d due to death, disability, or $10K of earnings for qualified first-time homebuyer expenses, then a w/d prior to age 59 & 1/2 could be a qualified distribution. still, 59 & 1/2 is the major milestone for retirement purposes.
IF A DISTRIBUTION FROM A ROTH IRA IS NOT QUALIFIED, WOULD THAT MEAN THE DISTRIBUTION WOULD ALSO BE SUBJECT TO THE 10% EARLY W/D PENALTY IF THE ACCOUNT OWNER IS UNDER AGE 59 & 1/2?
not necessarily. the same exceptions to the 10% penalty that apply to traditional IRAs also applies to Roth IRAs. this includes:
(1) qualified higher education expenses
(2) medical expenses in excess of 10%
(3) substantially equal periodic payments
SHIRLEY AND JIM SMITTEN ARE MARRIED & FILE JOINTLY. THEIR MODIFIED AGI IS $215K (2020). JIM CONTRIBUTES TO HIS 401(K) BUT SHIRLEY HAS NO PLAN. SHE PLANS TO CONTRIBUTE TO HER ROTH IRA & JIM TOLD YOU THAT HE WILL CONTRIBUTE TO HIS TRAD IRA. THEY’VE ASKED FOR YOUR HELP IN ANALYZING THEIR SITUATION - CAN THEY MAKE A CONTRIBUTION TO THE ROTH IRA FOR SHIRLEY AS THEY PLANNED, & MAKE A DEDUCTIBLE CONTRIBUTION INTO JIM’S IRA?
their AGI is $215K. shirley cannot contribute bc their AGI is too high (phaseout is from $196K to $206K. jim cannot deduct his contribution to a traditional IRA bc their AGI is greater than the phaseout range for TIRA ($104K to $124K) and he is an active participant.
shirley can contribute (but not deduct) $6K to a trad IRA bc their AGI is above the phaseout for a spousal IRA and jim is an active participant. in fact, both can contribute to a nondeductible IRA.
