Planning for Retirement Needs

1. Planning for Retirement Needs Individual Retirement Arrangements Chapter 18

2. Funding Vehicle Trust or Custodial Account • Document limits contributions to maximum • Custodian must be financial institution • Domestic trust • Exclusive benefit of participant • Prohibit life insurance • No commingling of assets

3. Funding Vehicles—Annuities • Nontransferable • May not have fixed premiums

4. Investment Prohibitions • Life insurance • Collectibles • Exception for certain federal government coins • Exception for gold, silver, palladium, and platinum bullion • Prohibited transactions include • Borrowing money from the IRA • Selling property to it • Receiving unreasonable compensation for managing it • Using it as security for a loan • Buying property for personal use (present or future) with IRA funds

5. Planning with IRAs and Roth IRAs • Maximum contributions have risen • Nonworking spouse • Penalty-free withdrawals • Roth available to many taxpayers

6. Planning with IRAs and Roth IRAs • Comparing IRA and Roth • Tax rates go down choose traditional IRA • Tax rates go up choose Roth • Tax rates the same, same accumulation • Conversions • Income cap gone in 2010 • Useful for estate planning • Affluent • Gift to children

7. Employer Sponsored IRA • Qualified plan/403(b)/457 can allow employees option to make IRA contribution • Called deemed IRA • Still subject to regular IRA limits

8. Vocabulary • Self-directed IRA • Deemed IRA

9. Total IRA Assets Roth can be powerful and it is hip, but not used very much • IRAs had a head start • Time value of money • Retirement Plan Assets roll into IRA w/o tax • Roth • Generally only highly successful investors appreciate the Roth • But – highly successful investors can not make contributions directly to a Roth SEP-SAR and Simple Employer plans – to be discussed later

10. True/False Questions • An IRA that purchases the IRA owner’s vacation home has engaged in a prohibited transaction. • An IRA can invest in a valuable painting, but not an antique automobile. • Sam, age 35, is single is an active participant in an employer sponsored retirement plan. His AGI in 2009 is $85,000. He may make either a $5,000 contribution to a Roth IRA or a $5,000 nondeductible contribution to a traditional IRA in 2009. • A Roth IRA contribution is typically a better choice than a deductible IRA contribution if tax rates are lower at the time of the contribution than at the time of distribution.

11. True/False Questions • If the tax rates are the same at the time of the contribution and the time of the withdrawal the pre-tax deductible IRA and the after-tax Roth IRA will yield the same result. • Gold bullion is no longer an allowable investment in an IRA. • A Roth IRA conversion can be a useful estate planning tool. • An IRA can only make loans to the owner.

12. IRA vehicles Trust or custodial agreement with corporate custodian Annuity contract Prohibited investments Life insurance Collectibles Exception certain coins Exception certain precious metals Prohibited transactions Loans to owner Use of assets Sale from/to IRA and owner IRA Contribution determination Based on 2009 indexed limits be ready to determine Roth IRA/traditional IRA eligibility IRA vs Roth IRA Same tax rates comparable accumulation Increasing tax rate Roth Decreasing tax rate traditional IRA Roth Conversions 2009 must have less than $100,000 AGI to qualify Can convert directly from qualified plan to Roth 2010 cap comes off Conversion can have estate planning value Chapter 18 Review