Retirement Issues Chapter 9 pp. 289-326 2017 National Income Tax Workbook Retirement Issues p. 289 Taxation of Retirement Plan Distributions Impact of Income on Social Security Benefits & Medicare Premiums
Types of Retirement Plans Learning Objectives p. 289 Regular Distributions p. 290 Periodic Payments Paid at regular intervals for > 1 year TP cost recovered tax free TP cost = Premiums, contributions, taxed ER contributions minus
Refunds, unrepaid loans (not taxed), tax-free amounts already recovered Regular Distributions Simplified Method pp. 290-291 For annuity paid under qualified plan TP cost divided by # expected paymts Annuitants age on ASD - IRS Table in Pub 575 (1 life Table 1, > 1 Table 2) For annuity under contract
TP cost divided by # payments in contract Regular Distributions pp. 291-292 Simplified Method Ex 9.1 Bill & Kathy, both 65 Cost: $31,000 Joint & survivor annuity 2017 start Bill $1,200/mo Kathy $600/mo Total ages (130) Table 2 (Fig. 9.1) Tax free/payment: 31,000/310 = 100 Both die before #310? Misc Item. (no 2%) Simplified Worksheet Figure 9.1
p. 292 Regular Distributions Traditional IRA-Based Plans Deductible contributions? No basis Nondeductible contributions? Form 8606 Roth IRA? Qualified distributions: No tax, no 10% If 5 yrs after contribution (+rollover) & after age 59 , or death, disability, 1st-time home purchase Nonqualified: Earnings taxed + 10%
Regular Distributions Loans to Participants pp. 292-293 Loan = deemed distribution ( 72) unless 1. Loan to be repaid over 5 years 2. By its terms, level installments, P & I 3. Loan does not exceed lesser of: $50,000 less excess of highest loan $ last 12 mos over balance day of loan Or 50% of PV nonforfeitable benefit ($10,000 if greater)
Regular Distributions Loans to Participants p. 293 IRS memo: lack of clarity in 72(p)(2)(A) Feb Borrow $30,000 April repay May Borrow $20,000 July repay Dec Apply for $20,000 loan Possibilities (agents told either acceptable) 1. No loan as 1st 2 loans = $50,000 2. 12 mo high $30,000 allow $20,000
Regular Distributions Loans to Participants p. 293 Employment termination: Sponsor may require repayment of loan If no repayment, balance = distribution Early Distributions pp. 293-295
For qualified plans, including IRAs, 10% additional tax if distribution before 59 Section 457 plans not subject to 10% Exceptions Figure 9.2 (p. 294-295) Note: Over 55 & separation from service exception does not apply to IRAs (p. 295) Early Distributions p. 295 Substantially Equal Periodic Payments
SEPP exception to 10% penalty if made At least annually and For the life (or expectancy) of EE or joint lives of EE and beneficiary Qualified plan: Must separate from service IRA: Separation from service N/A 3 methods for payments Early Distributions pp. 295-296 Substantially Equal Periodic Payments
1. RMD Method: Account balance at end of prior year divided by Table factor 2. Fixed Amortization Method: Account balance over life expectancy + interest 3. Fixed Annuitization Method: Divide account balance by annuity factor based on age of TP (& beneficiary if joint) #1 payments vary, #2 & #3 payments level Early Distributions p. 296
Substantially Equal Periodic Payments Modifying method results in 10% penalty Exceptions Fixed methods to RMD no 10% After later of 5 years or age 59 Death, disability 10% applies to all prior distributions + interest for deferral p. 296 Early Distributions Medical Expense Exclusion
No 10% to extent distribution for deductible medical expenses Expense in excess of 10% AGI Applies even if not itemizing Expense must be incurred & not reimbursed Reminder: 65 and over 7.5% expired 12/31/16 all medical now subject to 10% AGI Required Minimum Distribution pp. 296-297 (RMD) By April 1 of year following attaining 70
If none in year turning 70 will have 2 distributions in following year Applies: Defined contribution plans, IRAs No RMD for Roth IRA while owner alive Still working & participating in plan: later of 70 or retirement (not if IRA or if 5% owner) Required Minimum Distribution p. 297 Excise tax if fail to take RMD - 4974 50% of amount required to be distributed
that was not distributed Form 5329 IRS can waive excise tax if: Reasonable error and TP takes reasonable steps to remedy Required Minimum Distribution Inherited IRAs p. 297 Timing of RMD depends on type of
beneficiary and whether owner died before or after required beginning date Roth IRA No RMD during life of owner RMD for heirs as if owners death occurred before required beginning date Required Minimum Distribution Inherited IRAs p. 297
Individual Beneficiaries Begin payments by 12/31 of year following death year and: Death prior to RMD beginning date Using beneficiarys life or 5-year rule Death on or after RMD beginning date Using longer of beneficiarys or owners life (using age just before death) Required Minimum Distribution Inherited IRAs pp. 297-298
Spousal Beneficiary 1. Treat as spouses own IRA 2. Roll to traditional IRA or to extent taxable to qualified ER plan, 403(a) plan or 403(b) plan, 457(b) plan 3. Treat as beneficiary rather than spouse Required Minimum Distribution Inherited IRAs - Spouse p. 298
Treat as spouses own IRA All IRA rules apply 70 for RMD Considered own IRA if: Makes contributions to inherited IRA No RMD for year as beneficiary of IRA Must be sole beneficiary to treat as own Must have unlimited right to withdrawal Required Minimum Distribution Inherited IRAs - Spouse
p. 298 Rollover Must be sole beneficiary with unlimited right to withdraw from account Rollover election any time after death Spouse can roll a distribution from decd spouses IRA if general rollover rules met Required Minimum Distribution Inherited IRAs - Spouse
p. 298 Spouse treated as beneficiary Owner died before required begg date Apply 5-year rule or RMDs based on surviving spouses age Owner died before required begg date RMD based on owners age at death or spouses age Required Minimum Distribution p. 298 Inherited IRAs - Nonindividual Death on or after required begg date RMD based on owners age - Table I
Death before required begg date 5 year rule applies See-thru trust (4 requirements p. 298) Use oldest trust ben.s life expectancy Figure 9.3 - RMD Summary (p. 299) Impact of Income on Social Security pp. 299-300 Earnings before FRA reduce benefits
Figure 9.4 2017 earnings limit Before FRA: lose $1 for every $2 earned Year of FRA: lose $1 for every $3 earned up to month turns FRA Lost $$ will create higher benefit at FRA Earned income only considered Impact of Income on Medicare Premiums p. 300 Part A: Inpatient hospital care, nursing
facilities, hospice, home health Part B: Doctor and lab services, screenings, physical therapy, med equip Part C: Offered through private insurance Part D: Prescription drug plan Income related monthly adjustment amount (IRMAA) for higher incomes Impact of Income on Medicare Premiums pp. 301-302
Figure 9.5 Medicare Costs for 2017 IRMAA: MAGI for most recent return filed MAGI = AGI + tax exempt income Medicare Part B Hold Harmless Rule: No increase if no COLA or if COLA < B increase (N/A if subject to IRMAA) TP must have paid B premium out of SS in Nov and Dec of prior year Impact of Income on Medicare Premiums p. 302
Medicare Part B standard premium applies: 1. First enrollment is in 2017 2. TP does not receive Social Security 3. TP billed directly for Part B 4. Medicaid pays the premiums 5. MAGI > specified amount (+IRMAA) Figure 9.6 Part B Premium Amounts Impact of Income on Medicare Premiums pp. 302-303
Medicare Part D Late enrollment penalty Exceptions if have certain types of coverage before enrollment IRMAA if MAGI above certain amount Figure 9.7 Medicare D Premiums Retirement Plans Defined Benefit Plans pp. 303-304
Fixed preestablished retirement benefit Benefit based on # working years, age at retirement, compensation No salary deferrals Minimum funding standard - actuary Benefit cannot > $100% of highest 3 yrs average comp or $215,000 (62 in 2017) Retirement Plans Defined Benefit Plans pp. 304-306
Top-heavy rules apply if PV of benefits for key employees > 60% PV benefits for EEs Benefits may be increased for employees over the social security wage base Investment critical to meet promised $$ Multiple options on payouts Figure 9.8 and Figure 9.9 Summaries Retirement Plans p. 306 Defined Contribution Plans
Commitment to contribution, not benefit At retirement/termination EE gets value 1. 2. 3. 4. Profit-sharing plans 401(k) component of profit-sharing 403(b) plans 457 plans Retirement Plans
Profit Sharing Plans p. 307 Must establish plan by last day of plan yr. Can be retroactive to first day Can exclude EEs not age 21, not meeting certain # work years, under collective bargaining, certain nonresident aliens, EEs working < 1000 hours per year Set formula for ER contributions Retirement Plans
Profit Sharing Plans p. 307 Employer contributions 0% - 25% compensation (25% max ded.) Lesser: 100% of comp or $54,000 (2017) Max compensation of $270,000 Make up to extended due date of return Add 401(k) feature for EEs to make additional contribution Retirement Plans
Profit Sharing Plans p. 307 Money purchase plan similar but requires fixed annual contributions $ held in separate trust acct plan name Most provide investment choices ESOP defined contribution plan Invests primarily in employer stock No immediate cash outlay for ER Retirement Plans
p. 308 Profit Sharing Plans - Reporting 1. Summary Plan Description: To EEs when join, beneficiary when benefits paid 2. Individual Benefit Statement: Quarterly if EE directs acct, otherwise annually 3. Summary Annual Report: Narrative of the annual 5500 given to employees 4. Form 5500, SF or EZ Retirement Plans Profit Sharing Plans
pp. 308-310 Loans Lesser of $50,000 or account balance Repay 60 mos & pay at least quarterly Payout options Lump sum, rollover to IRA (or other ER plan) or periodic distributions Figure 9.10 and Figure 9.11 Summaries Retirement Plans 401(k) Plans
p. 310 Employees contribute, ER may match Contribution annual limitation for 2017: ER: Lesser of 100% of comp or $54,000 EE: $18,000, $6,000 catch-up if 50 Employer deduction 25% total comp + all salary reductions Roth feature: EE contributions in wages Retirement Plans 401(k) Plans
pp. 310-311 Vesting Salary deferrals immediately 100% vested ER contributions can vest over time Nondiscrimination Annual testing to ensure HCE $ proportional to those of non HCEs HCE = 5% owner or comp > $120,000 (can provide that >120,000 is HCE if in top 20% ) Retirement Plans p. 311
401(k) Plans - Nondiscrimination Limitation by HCEs contributions Subject to $18,000 limit + limited based on deferrals by NHCEs Figure 9.12 Safe Harbor 401(k) no testing 100% vested 3% for all NHCEs or 100% vested match for 3%, 50% of next 2% or 100% vested match of 1st 4% Retirement Plans p. 311 401(k) Plans - Nondiscrimination Alternative testing method
1. Employees divided into groups and tested within each group 2. Each group is then tested against other groups Retirement Plans Solo 401(k) Plans pp. 311-312 One participant Normally profit-sharing with 401(k) Covers business owner w/no employees
EE deferral: 100% comp up to $18,000+ $6,000 catch-up if age 50 or over ER nonelective contribution up to 25% Overall max without catch-up: $54,000 Retirement Plans Solo 401(k) Plans p. 312
Ex 9.2 Age 51, $50,000 in wages Deferred $18,000 + $6,000 catch-up Corporation contributed $12,500 (25%) $36,500 max that could be contributed Form 5500-SF if $250,000 in assets Salary deferrals: Deposit month-end + 15 ER contributions: Return due date (w/ext.) Retirement Plans pp. 312-314 401(k) Hardship Distributions Immediate & heavy financial need
1. 2. 3. 4. 5. 6. Medical Care Purchase of Principal Residence Educational Payments Foreclosure/Eviction from Principal Res. Funeral and Burial Expenses Repairs for Damage to Principal Res.
Figure 9.13 and Figure 9.14 Summaries Retirement Plans p. 315 403(b) Plans: Tax Sheltered Annuities Plan for nonprofit entities - 501(c)(3), educational, churches, certain govt ent. May exclude certain employees (list p. 315) Can have a Roth contribution feature Total contribution limit: Lesser of 100% of
comp ($270,000 max) or $54,000 EE: $18,000 + $6,000 catch-up ( age 50) Retirement Plans p. 315 403(b) Plans: Tax Sheltered Annuities If 15 years of service can increase deferral by smallest of 1. $3,000 2. $15,000 less prior year additions 3. $5,000 x # service years less total
elective deferrals (excluding catch-up) Yields max of $21,000 for 2017 Retirement Plans p. 315 403(b) Plans: Tax Sheltered Annuities 15-year: use test, lifetime & annual limits Deferrals > standard from 15-year first Ex 9.3 Age 50, 15 years, $70,000 comp Max for 2017 is $60,000 EE: $21,000 ($18,000 std + $3,000)
ER: $33,000 (to max $54,000) EE: $6,000 age 50 catch-up Retirement Plans p. 316 403(b) Plans: Tax Sheltered Annuities Ex 9.4: Ex 9.3 deferred only $22,000 (2017) $22,000 deferral is considered: 1. $18,000 maximum standard 2. $3,000 of 15-year catch-up
3. $1,000 of 50 catch-up (22-18-3) Eligible for 15-year $3,000 Retirement Plans pp. 316-317 403(b) Plans: Tax Sheltered Annuities Investment of assets Annuity contract with insurance company Custodial account in mutual funds Retirement account set up for church EEs Reporting
Written plan + 401(k) admin reporting Figure 9.15 and Figure 9.16 Summaries Retirement Plans p. 318 457 Plans State, political subdivisions, agencies, other organizations exempt under 501(c) For employees or independent contractors Nongovernment top-hat plans limit
participation to HCE-type groups Not subject to nondiscrimination rules Retirement Plans p. 318 457 Plans Participant Contribution Lesser of 100% of comp or $18,000 (2017) Catch-up of $6,000 if age 50 or older No catch-up if tax-exempt org plan 3 years < retirement, lesser of: 2 x the annual limit ($36,000) or
Basic annual limit + amount of basic limit not used in prior years (only allowed if not using $6,000 catch-up) Retirement Plans p. 318 457 Plans Plan Assets Set up in separate accounts/trusts but remain to ER creditors Plan Payouts
Not until earlier of separation or age 70 May permit in-service distrib. < $5,000 Retirement Plans 457 Plans p. 318 May distribute for unforeseeable emergency 1. An illness or accident participant/family 2. Property loss by casualty not reimbursed 3. Funeral expense spouse/dependent 4. Similar events beyond control of partic.
Expenses not otherwise covered: insurance, liquidation of assets, cessation of deferrals Retirement Plans 457 Plans pp. 318-320 Rev. Ruling 2010-27 - Examples of unforeseeable emergency expenses 457 plans not subject to 10% penalty Can choose Roth feature
No 5500 filing but nongovernmental must file notification of plan to DOL Public employers also 415(m) plan Figure 9.17 and Figure 9.18 Summaries Retirement Plans Multiple Plans pp. 320-321 Individual must monitor total contributions In the aggregate cannot > $18,000 (2017) Total 50 catch-up cannot be > $6,000
Ex 9.5 Deferred $2,500 in first job New job in Nov., max deferral $15,500 Total $18,000 Retirement Plans Multiple Plans p. 321 Ex 9.6 50 years old, 2 unrelated employers Participates in 401(k) and 403(b) plans
Each allow $18,000, 403(b) no catch-up Total limit for the year still $24,000 Retirement Plans Multiple Plans p. 321 Max participant contribution is lesser of: 1. Allowed amount for that plan type or 2. 100% of eligible compensation Ex 9.7 #1: 401(k), $10,000 comp
#2: SIMPLE IRA $10,000 comp Max to either plan is $10,000 Retirement Plans Multiple Plans p. 321 457(b) plan is not aggregated with other qualified plans If had 457(b) and 401(k) - could contribute $18,000 to 457(b) (more if w/in 3 years of retirement age)
And $18,000 to a 401(k) (assuming sufficient compensation for each) pp. 321-322 Retirement Plans IRA-Based: SIMPLE IRA Plan With 100 employees earning $5,000 No SIMPLE if offers any other qualified plan to EEs (unless collective bargaining) Set up through any financial provider Establish by Oct 1 of prior year Must give EEs 60-day notice of match
Also 60-day notice every year p. 322 Retirement Plans IRA-Based: SIMPLE IRA Plan Participation Eligible if $5,000 comp in any 2 prior years and to earn $5,000 in current year Can use minimum less than $5,000 Cannot require > 2 years prior service Cannot have minimum age Can exclude collective bargaining EEs &
nonresident aliens w/no US source inc. p. 322 Retirement Plans IRA-Based: SIMPLE IRA Plan EEs cannot opt-out but can choose not to make a salary-reduction contribution Contributions EE: Lesser of $12,500 or 100% of comp EE: Catch-up of $3,000 if age 50 ER: Match mandated immediately 100% vested
p. 322 Retirement Plans IRA-Based: SIMPLE IRA Plan ER contribution methods 1. 2% nonelective: 2% of comp (2017 max $270,000) regardless of EE deferral or 2. 100% match up to 3% of comp Can be as low as 1% Cannot be < 3% for > 2 of 5 years pp. 322-323
Retirement Plans IRA-Based: SIMPLE IRA Plan Investment in Plan Assets EE has complete control of EE account Reporting Annual summary & election notice to EEs Form 5498 from financial institution No 5500 filing pp. 323-324 Retirement Plans IRA-Based: SIMPLE IRA Plan
Early Withdrawals 25% penalty on distributions w/in 2 years of contribution prior to age 59 Penalty exceptions may apply Figure 9.19 and Figure 9.20 Summaries Retirement Plans IRA-Based: SEP p. 324
ER can contribute to IRAs owned by EEs 5305-SEP by extended due date of ER Participation: Age 21, working 3 of 5 years All eligible must participate including parttime, seasonal, part-year employees Exclude: collective bargaining, nonres. aliens w/no US source inc., < $600 comp Retirement Plans IRA-Based: SEP p. 324
Contributions ER pays directly to SEP IRA for each EE Only ER contributions allowed Determined annually, may be zero Must be the same for each EE Max 25% of comp up to $54,000 Can include social security integration Retirement Plans IRA-Based: SEP pp. 324-325
Ex 9.8 Figure 9.21 25% Due to $54,000 limit, same contribution despite level of compensation Figure 9.22 20% Maximizes contributions for owner Still $54,000 for owner, less for others Retirement Plans IRA-Based: SEP pp. 325-326
SEP accounts are IRAs under complete control of the employee owner No annual 5500 filing Form 5498 from financial institution Figures 9.23 and 9.24 - Summaries Questions?
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