I. [2] Traditional IRA maximum contribution limit was raised in the most recent tax act.
A. $3,000 rather than $2,000 for anyone under 70 2 with earned income or if spouse is under 70 2 and worker is over 70 2 spouse can make contribution instead of worker.
B. Spousal IRA is up to $3,000 also
C. [3] Catch-up IRA is an additional $500 increase to the contribution limit for people over age 50. All of us are over 50 so we can each make $3,500 contributions to IRAs now.
II. [4] The Roth IRA was introduced in 1999. Its maximum contribution limits were recently increased also.
A. Same $3,000 and $3,500 limits as an IRA.
B. You can make a contribution to a Roth IRA after 70 2.
C. You can make a contribution to a Roth if you are a participant in a qualified plan.
D. [5] A Roth IRA should be used instead of a Traditional IRA:
1. Whenever you qualify, that is have adjusted gross income of less than $95,000 for single and $150,000 for joint filers and
2. You don't need the tax deduction to encourage you to make the retirement contribution and
3. You are not likely to have to withdraw the funds within five years.
4. There were elaborate calculations and formulas used in the past to help determine this but the bottom line is, the tax-free accumulation is like a 10% municipal bond, assuming you earn an average 10% return in the stock market over the rest of your life. You can't beat that so take advantage of the Roth IRA whenever you can.
5. [6] The downside is the income tax applies to funds withdrawn within five years of the when you opened the first Roth IRA even if you are over 59 2.
6. This leaves the Traditional IRA for the rich and the poor, those who don=t qualify because of too much income and those who can=t afford to make the IRA contribution without the deduction.
III. [7] Minimum Required Distributions
A. Required for Traditional IRAs beginning by the April 1 following the year that one attains age 70 2.
1. Most people make their first IRA distribution in their 70 2 year instead of waiting so that they do not have two distributions in the same year. This would be the case if you wait until April 1 because your second year distribution must be taken before December 31 of that year.
2. You become 70 2 six months after you become 70. Thus, if your birthday is before July 1, you become 70 2 in the same year you become 70. If your birthday is July 1 or later then your first distribution is not required until the year you become 71 because you attain 70 2 in that year.
3. I think Congress made a mistake in thinking that they would make it easier when they tried to accommodate people who were not quite sure how old they were or who had conflicting official records. Birth recording was not quite as sophisticated in the early 1900s and sometimes records were lost or destroyed. If it were up to me, we=d simply wait until everyone became 71.
4. [8] Your age on your birthday in your distribution year determines which line on the distribution chart you use. If you are 70 in your first distribution year then your denominator is 27.4. If you are 71 in your first distribution year then your denominator is 26.5.
5. Your minimum required distribution is the January 1 balance of your IRA divided by your life-expectancy factor.
6. [9] Example, if you had $100,000 in your IRA on January 1, 2002 and your birth date was January 1, 1932, when would your first distribution be required and how much would it be? You became 70 2 during 2002 on July 1, 2002 so your first distribution must be made by April 1, 2003. The amount is $100,000 divided by 27.4 or $3,650
7. Correspondingly, if you had $100,000 in your IRA on January 1, 2002 and your birth date was JULY 1, 1932, when would your first distribution be required and how much would it be? You became 70 2 during 2003 on January 1, 2003 so your first distribution must be made by April 1, 2004. You would be 71 in your first distribution year so the amount is $100,000 divided by 26.5 or $3,774
B. [10] Roth IRAs do not require distributions until after your death.
C. [11] Much has changed in this department with the release of the recent IRS regulations.
1. New tables were issued recently increasing life expectancies by about one year for everyone. Just think of how you would like to spend the extra year you now have.
2. The determination of life expectancy for survivor benefits is no longer done at the Required Beginning Date, pertaining to age 70 2, rather it is done on the September 30, in the year following the year of your death.
(1) [12] This means that everyone can use the table for a life 10 years younger regardless of the beneficiary you select.
(2) This means that you can change your beneficiary without changing your distribution amount.
(3) This means that you can select a charity to be your IRA beneficiary without increasing your required distribution.
(4) This means we don=t have to suffer the anguish of explaining, understanding, and selecting the recalculation or non-recalculation of life-expectancies.
(5) This was designed to simplify the process so that one need not engage an actuary to simply tell you the right amount to withdraw from your IRA.
(6) [13] Along with simplification comes the requirement that your IRA custodian tell you (and the IRS) your required distribution. IRS found the previous system unmanageable from their perspective in assuring that everyone took the right amount so this makes it possible for them to monitor.
(7) It is still wise to name your beneficiaries for your IRA by completing the form provided by your IRA custodian but please, keep a copy of this form in your file. Give it to your accountant and to your lawyer. Remember that your will does not control your IRA, if you change spouses you must update your beneficiary designation or your divorced spouse will get a windfall!
(8) [14] The requirement of make separate IRA accounts for separate beneficiaries is now eliminated as the division of the IRA account may be done after your death and each beneficiary will have their own account before the September 30 following your death and thus each will be able to use their own life expectancy for their distributions.
IV. [15] Estate Planning with IRAs
A. While we still have an estate tax, you will save estate taxes by using the Roth IRA. As you have already paid the tax, the tax was removed from your estate and is therefore not subject to estate tax. You don=t pay estate tax on money that you no longer have. This reduces your estate tax liability.
B. [16 See slide] The best type of account to inherit is a Roth IRA. As the taxes have already been paid, you inherit 100% tax-free dollars. The same dollar value Roth account is worth about 30% more than a Traditional IRA account.
C. [17] Avoid having to consume an IRA account for the payment of estate taxes. Assure that you have adequate liquidity to pay estate taxes without withdrawal from the IRA. If you don=t have investment accounts, insurance is a good substitute. Estate taxes do not apply to inheritances received by spouses who are US citizens, but they would apply to children. Have the IRA beneficiary own the life insurance policy. The beneficiary will use the insurance proceeds to pay his share of the estate tax avoiding a withdrawal from the IRA.
1. If you have to withdraw from the IRA to pay estate tax, the account Amelts down.@ If $100 is need from the IRA for estate tax, then when you withdraw the $100 you will need to pay $30 of income tax. You must withdraw another $30 to pay for the income tax but you need $10 more to pay for the tax on the $30 withdrawal. After a few more cycles, you wind up paying about 60% of the IRA out in estate and income taxes.
2. [18] On the other hand, the tax-free deferral in the IRA makes it a good gift for grandchildren. If the grandchild is 18 when he receives the IRA, he is required take less than 3% per year from it until he attains age 70. All during this time, the growth accumulates tax-free, without capital gains taxes. The sting of the income tax may also encourage the youngster to leave the account intact, free from creditors and spouses for a longer period than a bequest of money. With the power of compounding, the benefits from a gift of a $100,000 IRA over the life of the grandchild total more than $ 4,028,994.39
3. [19] Traditional IRAs make good charitable gifts. The charity does not pay income tax on the distributions and the gift to charity is deducted from your taxable estate for estate tax purposes. This makes the gift to the charity more valuable that the same account given to an individual. Hence, if you wish to make a charitable gift in your estate plan, do not make that gift in your will, rather make it in your IRA beneficiary designation. For example, IRA beneficiary designation form asks for beneficiary. List $10,000 to the United Way, the balance to my Grandchildren in equal shares, per capita. If you had $100,000 and three grandchildren, the grandchildren would each get a $30,000 IRA. You may wish to leave the parents the rest of the estate.
D. [20] The best gift you can give to a child or grandchild upon college graduation is the commitment to add to their Roth IRA each year for the next 10 years.
1. $3,000 in cash to the child would total $30,000 in 10 years. They will probably spend it even before they get it.
2. The same $3,000 per year for only 10 years, a total of $30,000, invested in a Traditional IRA, using a 10% average annual return over the 40 years between age 25 when contributions start will provide an account of $917,725.16 when the child is 65. Over the following 22 years thereafter, they will receive $2,785.665.03 and the account will be worth $1,457,126.24 when the child dies at age 87. After taxes, at 27% the benefits would be $3,097,237.62.
3. Making the same contribution to a Roth IRA produces the same amounts until we consider the after-tax consequence. As there is no income tax, the after-tax benefits are $4,242,791.26 an increase of $1,137,453.64
V. [21] They surely didn't realize how they gave away the store when they made the Roth IRA.
Uniform Lifetime Table
Employee's Age Distribution Period
70 ................. 27.4
71 ................. 26.5
72 ................. 25.6
73 ................. 24.7
74 ................. 23.8
75 ................. 22.9
76 ................. 22.0
77 ................. 21.2
78 ................. 20.3
79 ................. 19.5
80 ................. 18.7
81 ................. 17.9
82 ................. 17.1
83 ................. 16.3
84 ................. 15.5
x 85 ................. 14.8
86 ................. 14.1
87 ................. 13.4
88 ................. 12.7
89 ................. 12.0
90 ................. 11.4
91 ................. 10.8
92 ................. 10.2
93 ................. 9.6
94 ................. 9.1
95 ................. 8.6
The above table is used for lifetime distributions of the account owner regardless of the identity of the beneficiary or age differential between account owner and designated beneficiary, unless the account owner's spouse is the sole beneficiary and is more than 10 years younger than the account owner, in which case the distribution period may be measured by the joint life and last survivor life expectancy of the employee and spouse, using the life expectancies in the joint and last survivor table of Reg ' 1.401(a)(9)-9, Q&A 3. (Reg ' 1.409(a)(9)-5, Q&A 6) FTC & H-8279; USTR & 4014.153
Determination of designated beneficiary. The account owner's designated beneficiary is determined based on the beneficiaries designated as of the account owner's date of death who remain beneficiaries on Sept. 30 of the year following the year of the account owner's death. (Reg ' 1.409(a)(9)-4, Q&A 4(a))
