IRA Essentials PDF

IRA Essentials This manual is designed to be used in conjunction with educational offerings conducted by Ascensus. Some areas are not intended to be covered fully, but only highlighted for presentation purposes. The publisher is not engaged in rendering legal or accounting services. Every effort h...

IRA Essentials This manual is designed to be used in conjunction with educational offerings conducted by Ascensus. Some areas are not intended to be covered fully, but only highlighted for presentation purposes. The publisher is not engaged in rendering legal or accounting services. Every effort has been made to ensure the accuracy of the material presented during the seminar. But retirement plan forms and laws are often changed without prior notice from the government, so Ascensus cannot guarantee the accuracy of the material. The material in this manual reflects the law as of the publication date December 2024. Much of the information contained in this manual is based on the operation of the financial organizations to which Ascensus provides services. Some of your procedures may vary if your organization is not a member organization served by Ascensus. Ascensus makes no representations regarding compliance of the seminar or guidebook with any state laws or state regulations or federal securities law. Copyright ©2024 Ascensus, LLC. All Rights Reserved. No part of this manual or presentation may be reproduced in any form by audiotape, photocopy, or any other means without written permission of copyright owner. 910 (12/2024) Ascensus® and the Ascensus logo are registered trademarks of Ascensus, LLC. IRAdirect® is a registered trademark of Ascensus, LLC. Copyright ©2024 Ascensus, LLC. All Rights Reserved. All other trademarks, service marks or registered trademarks are the property of their respective owners.  Table of Contents Introduction and Establishing IRAs................................ 1 IRA Funding................................................... 25 IRA Distributions............................................... 39 IRA Portability................................................. 57 Job Aids Glossary Exercise Master Icon Legend Individual Exercise Group Exercise Group Discussion Example Job Aid Introduction and Establishing IRAs Learning Objectives After completing this section, you will be able to identify the tax advantages of Traditional and Roth IRAs, summarize the IRA opening document requirements, and explain the difference between primary and contingent beneficiaries. New terms in this section – Beneficiary – Disclosure Statement – Financial Disclosure – Individual Retirement Arrangement (IRA) – Plan Agreement 1 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Definition of an IRA I ___________________________________________________ R ___________________________________________________ A ___________________________________________________ An individual retirement arrangement (IRA) is a special domestic trust, custodial account, or annuity contract established to hold assets for an individual’s retirement. There can only be one owner per IRA. An IRA cannot be owned by an entity (such as a trust), but an entity can be named as an IRA beneficiary. An IRA is a tax-advantaged savings tool designed to provide retirement income in addition to Social Security income, employer-sponsored retirement plan benefits, personal savings, and wages. An IRA is an account or annuity, not an investment. – Individuals can establish either, or both, to save for retirement. Other than terminology and some potential payout differences, the two types of arrangements generally are subject to the same rules. – One set of opening documents establishes one IRA, but an IRA may contain several investments (e.g., a certificate of deposit or money market account). Account Versus Annuity Individual Retirement Accounts Individual Retirement Annuities Trustee or custodian – the financial Issuer – the insurance company offering organization maintaining the account the annuity Grantor or depositor – the individual Annuitant – the individual entitled to who establishes the account receive benefits from the annuity Trust instrument (plan agreement) – Endorsement – the governing the governing instrument for the instrument along with the annuity account contract for the annuity Contribution – the individual’s deposit Premium – the annuitant’s deposit to to the account the annuity Account value – the accumulated Cash surrender value – the assets in the account accumulated assets in the annuity after certain adjustments Distributions – withdrawals from the Annuity payments – payouts from the account annuity 2 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Legislative History of IRAs The current IRA rules are a result of numerous legislative changes passed by Congress over the years since IRAs were enacted. Traditional IRAs became available January 1, 1975, following the passage of the Employee Retirement Income Security Act of 1974 (ERISA). Roth IRAs became available January 1, 1998, following the passage of the Taxpayer Relief Act of 1997 (TRA-97). The following diagram provides a legislative history of IRAs. A complete legislative history can be found on Job Aids pages 3–6. 3 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs 1974 – ERISA 1976 – TRA-76 1978 – Revenue Act of 1978 1981 – ERTA 1982 – TEFRA-82 1984 – TRA-84 1986 – TRA-86 1992 – UCA-92 1996 – SBJPA-96, HIPPA-96 1997 – TRA-97 2001 – EGTRRA 2005 – KETRA, GO Zone, TIPRA 2006 – PPA, Tax Relief and Health Care Act of 2006 2008 – HEART, Emergency Economic Stabilization Act of 2008 2009 – WRERA 2012 – ATRA 2014 – Tax Increase Prevention Act of 2014 2015 – Consolidated Appropriations Act of 2016 2017 – Disaster Tax Relief and Airport and Airway Extension Act of 2017 2017 – Tax Cuts and Jobs Act of 2017 2018 – Bipartisan Budget Act of 2018 2019 – Further Consolidated Appropriations Act, 2020 (FCAA); includes Setting Every Community Up for Retirement Enhancement (SECURE) Act 2020 – Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020 – Taxpayer Certainty and Disaster Relief Act of 2020 2021 – Consolidated Appropriations Act, 2021 (CAA) 2022 – Consolidated Appropriations Act (CAA) of 2023; includes SECURE 2.0 Act of 2022 4 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Benefits to Financial Organizations IRAs offer a number of benefits to financial organizations. Provide a source of stable long-term assets Help build long-term relationships Keep financial organizations competitive 5 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Benefits to IRA Owners Both IRA types offer tax advantages Traditional IRA Tax Advantages Tax-deferred earnings (always) – Earnings generated on Traditional IRA contributions are tax-deferred. Financial organizations do not report IRA earnings to the IRS (e.g., no Form 1099-INT, Interest Income). IRA owners do not include earnings from Traditional IRAs in income until the year they take a distribution. Tax credit (possible) – Certain qualifying individuals may receive a nonrefundable tax credit (“saver’s credit”) for contributions made to Traditional IRAs. To determine if the IRA owner qualifies for a tax credit, the IRA owner should talk with a tax advisor, or refer to IRS Form 8880, Credit for Qualified Retirement Savings Contributions. Saver’s credit information can be found on Job Aids page 6. Tax deduction (possible) – Traditional IRA contributions may or may not be deductible. To determine if the IRA owner qualifies for a tax deduction, the IRA owner should talk with a tax advisor, read the IRA disclosure statement, consult the instructions to IRS Form 1040, U.S. Individual Income Tax Return, or refer to IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). Traditional IRA deductibility information can be found on Job Aids page 7. Roth IRA Tax Advantages Tax-deferred earnings (always) – Earnings generated on Roth IRA contributions are tax-deferred. Financial organizations do not report Roth IRA earnings to the IRS (e.g., no Form 1099-INT). Tax credit (possible) – Certain qualifying individuals may receive a nonrefundable tax credit (“saver’s credit”) for contributions made to Roth IRAs. To determine if the IRA owner qualifies for a tax credit, the IRA owner should talk with a tax advisor or refer to IRS Form 8880. Saver’s credit information can be found on Job Aids page 6. Tax-free earnings (possible) – Earnings are withdrawn from a Roth IRA tax- free if the IRA owner has a qualified distribution (i.e., the IRA owner has met the five-year period and has a qualified reason). NOTE: Effective in taxable years after December 31, 2026, the “saver’s credit” will be replaced by a “saver’s match”. If the individual qualifies, the saver’s match will be a refundable credit that is generally paid to a Traditional IRA or to the pre-tax deferral account of a 401(k), 403(b), or governmental 457(b) plan. 6 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs IRA Tax Advantages Circle the correct answer or answers. 1. Benjamin has a Traditional IRA and a Roth IRA. Will the interest earned on his IRAs be included on his Form 1099-INT? Yes No Maybe 2. Jacob has a Traditional IRA and a Roth IRA. Which IRA gives him the opportunity to possibly take advantage of the saver’s credit? Traditional IRA Roth IRA Neither 3. Vanessa has a Traditional IRA and a Roth IRA. Which IRA gives her the opportunity to possibly withdraw her earnings tax-free? Traditional IRA Roth IRA Neither 4. Can Evelyn take a tax deduction on the regular contribution made to her Traditional IRA? Yes No Maybe 7 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Establishing an IRA The first step in establishing an IRA with the prospective IRA owner is to provide information without giving tax advice. Identify the type of IRA the individual wishes to establish. Explain the rules, but do not apply the rules to the individual’s situation. Describe the IRA investment options available at your financial organization. Second, to establish an IRA, the financial organization must provide the following three documents. Plan agreement Disclosure statement Financial disclosure If required by the financial organization, complete an IRA application, and hand out any additional regulatory documents. Once each party has signed and received the required documentation, an IRA has been established. At this point, the IRA is ready to be funded. 8 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs IRA Application To gather information about the IRA owner, most financial organizations require an individual to complete an application when establishing an IRA. To accurately administer the IRA, the application often requests the following information about the IRA owner. Legal name Taxpayer identification number Address Date of birth 9 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Traditional IRA Simplifier INDIVIDUAL RETIREMENT ACCOUNT APPLICATION PART 1. IRA OWNER PART 2. IRA CUSTODIAN To be completed by the IRA custodian Name (First/MI/Last) Name Address Line 1 Address Line 1 Address Line 2 Address Line 2 City/State/ZIP City/State/ZIP Social Security Number Phone Organization Number Date of Birth Phone This is an amendment to an existing IRA. Email Address This IRA contains only simplified employee pension (SEP) plan assets. Account Number PART 3. CONTRIBUTION INFORMATION Contribution Amount Contribution Date CONTRIBUTION TYPE (Select one) Regular (Includes catch-up contributions) Contribution for Tax Year Rollover (Distribution from an IRA or eligible employer-sponsored retirement plan that is being deposited into this Traditional IRA) By selecting this transaction, I irrevocably designate this contribution as a rollover. Transfer (Direct movement of assets from a Traditional IRA or a SIMPLE IRA into this Traditional IRA) Recharacterization (A nontaxable movement of a Roth IRA contribution into this Traditional IRA) By selecting this transaction, I irrevocably designate this contribution as a recharacterization. SEP Contribution (Contribution made under a SEP plan; SEP contributions are reported for the year in which the contribution is made) IF YOU ARE REQUIRED TO TAKE A REQUIRED MINIMUM DISTRIBUTION THIS YEAR, COMPLETE THE FOLLOWING, IF APPLICABLE (Checking any of the following will require adjusting your required minimum distribution.) This is a rollover or transfer of assets removed last year. Date of Removal This is a transfer from my deceased spouse’s Traditional IRA and the assets were removed from the IRA in any year after death. The value of my portion of my deceased spouse’s IRA on December 31 of last year. PART 4. INVESTMENT AND DEPOSIT INFORMATION INVESTMENT INFORMATION (Complete this section as applicable.) Investment Description Quantity or Amount Investment Number Term or Maturity Date Interest Rate DEPOSIT METHOD Cash or Check (If the contribution type is transfer, the check must be from a financial organization made payable to the custodian for this IRA.) Internal Account Account Number Type (e.g., checking, savings, IRA) External Account (e.g., EFT, ACH, wire) (Additional documentation may be required and fees may apply.) Name of Organization Sending the Assets Routing Number (Optional) Account Number Type (e.g., checking, savings, IRA) Deposit Taken by Page 1 of 16 98 / 2300-C (Rev. 11/2024) ©2024 Ascensus, LLC 10 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Name of IRA Owner , Account Number PART 5. BENEFICIARY DESIGNATION I designate that upon my death, the assets in this account be paid to the beneficiaries named below. The interest of any beneficiary that predeceases me terminates completely, and the percentage share of any remaining beneficiaries will be increased on a pro rata basis. If no beneficiaries are named, my estate will be my beneficiary. I elect not to designate beneficiaries at this time and understand that I may designate beneficiaries at a later date. PRIMARY BENEFICIARIES (The total percentage designated must equal 100%. If more than one beneficiary is designated and no percentages are indicated, the beneficiaries will be deemed to own equal share percentages in the IRA.) Name Name Address Address City/State/ZIP City/State/ZIP Date of Birth Relationship Date of Birth Relationship Tax ID (SSN/TIN) Percent Designated Tax ID (SSN/TIN) Percent Designated Name Name Address Address City/State/ZIP City/State/ZIP Date of Birth Relationship Date of Birth Relationship Tax ID (SSN/TIN) Percent Designated Tax ID (SSN/TIN) Percent Designated CONTINGENT BENEFICIARIES (The total percentage designated must equal 100%. If more than one beneficiary is designated and no percentages are indicated, the beneficiaries will be deemed to own equal share percentages in the IRA. The balance in the account will be payable to these beneficiaries if all primary beneficiaries have predeceased the IRA owner.) Name Name Address Address City/State/ZIP City/State/ZIP Date of Birth Relationship Date of Birth Relationship Tax ID (SSN/TIN) Percent Designated Tax ID (SSN/TIN) Percent Designated Name Name Address Address City/State/ZIP City/State/ZIP Date of Birth Relationship Date of Birth Relationship Tax ID (SSN/TIN) Percent Designated Tax ID (SSN/TIN) Percent Designated Check here if additional beneficiaries are listed on an attached addendum. Total number of addendums attached to this IRA PART 6. SPOUSAL CONSENT PART 7. SIGNATURES Spousal consent should be considered if either the trust or the residence Important: Please read before signing. of the IRA owner is located in a community or marital property state. I understand the eligibility requirements for the type of IRA contribution I am making, and I state that I do qualify to make the contribution. I have received CURRENT MARITAL STATUS a copy of the IRA Application, the 5305-A Custodial Account Agreement, the I Am Not Married – I understand that if I become married in the Financial Disclosure, and the Disclosure Statement. I understand that the future, I should review the requirements for spousal consent. terms and conditions that apply to this IRA are contained in this Application I Am Married – I understand that if I choose to designate a primary and the Custodial Account Agreement. I agree to be bound by those terms beneficiary other than or in addition to my spouse, my spouse should and conditions. Within seven days from the date I open this IRA I may revoke sign below. it without penalty by mailing or delivering a written notice to the custodian. CONSENT OF SPOUSE I assume complete responsibility for I am the spouse of the above-named IRA owner. I acknowledge that I have determining that I am eligible for an IRA each year I make a received a fair and reasonable disclosure of my spouse’s property and contribution, financial obligations. Because of the important tax consequences of giving ensuring that all contributions I make are within the limits set forth up my interest in this IRA, I have been advised to see a tax professional. by the tax laws, and I hereby relinquish any interest that I may have in this IRA and consent to the tax consequences of any contributions (including rollover the beneficiary designation indicated above. I assume full responsibility contributions) and distributions. for any adverse consequences that may result. X Signature of IRA Owner Date (mm/dd/yyyy) X X Signature of Spouse Date (mm/dd/yyyy) Signature of Witness Date (mm/dd/yyyy) X X Signature of Witness Date (mm/dd/yyyy) Signature of Custodian Date (mm/dd/yyyy) Page 2 of 16 98 / 2300-C (Rev. 11/2024) ©2024 Ascensus, LLC 11 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Beneficiary Designation When establishing an IRA, the IRA owner may wish to designate beneficiaries. This may be included as part of the IRA application or a separate beneficiary designation form. A financial organization may allow an IRA owner to name multiple levels of beneficiaries, as described below. Primary Beneficiaries – Receive the IRA assets after the IRA owner’s death Contingent Beneficiaries – Receive the IRA assets after the IRA owner’s death if all the primary beneficiaries die before the IRA owner When an IRA owner designates multiple beneficiaries, each beneficiary receives a portion of the decedent’s IRA balance. The financial organization should verify that each beneficiary designation level totals 100 percent. If the IRA owner does not designate how the financial organization should divide the IRA assets, the beneficiaries generally will share equally in the assets. The named beneficiary must survive the IRA owner to be entitled to the assets. If the beneficiary dies before the IRA owner, the assets will not pass to the named beneficiary’s estate. 12 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Beneficiary Designation Mitch has opened an IRA at your financial organization. He has listed the following beneficiaries. Name Beneficiary Level Percentage Joelle Primary 75% Derek Primary 25% Abbie Contingent 60% Jackson Contingent 40% Answer the following questions. 1. If Mitch dies before any of his primary or contingent beneficiaries, what percentage of the IRA will each beneficiary receive? Joelle___________________________ Derek______________________________ Abbie__________________________ Jackson____________________________ 2. If Joelle dies before Mitch, but Derek, Abbie, and Jackson survive Mitch, what percentage of the IRA will each beneficiary receive? Joelle’s estate____________________ Derek______________________________ Abbie __________________________ Jackson____________________________ 3. If Joelle and Derek die before Mitch, but Abbie and Jackson survive Mitch, what percentage of the IRA will each beneficiary receive? Joelle’s estate____________________ Derek’s estate_______________________ Abbie __________________________ Jackson ___________________________ 13 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Spousal Consent Some states have community or marital property laws that govern the property rights of married individuals. A beneficiary designation form may allow the spouse to waive community or marital property rights to the IRA. This waiver is essential in community or marital property states when the IRA owner wishes to name a beneficiary other than or in addition to the spouse. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have community or marital property laws. Alaska, South Dakota, and Tennessee have elective community property laws. Signatures Many IRA applications contain a signature section that must be signed by both parties (i.e., IRA owner and financial organization) to establish the IRA. Language may be included as confirmation that the IRA owner has received the required documents. 14 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Satisfying the IRA Documentation Requirements Traditional IRAs Plan Agreement Disclosure Statement Financial Disclosure Form 5305-A IRS Pub. 590-A and Form 5305 IRS Pub. 590-B Forms Provider Forms Prototype Provider Roth IRAs Plan Agreement Disclosure Statement Financial Disclosure Form 5305-RA IRS Pub. 590-A Form 5305-R and IRS Pub. 590-B Forms Form 5305-RB Provider Forms Provider Prototype 15 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Plan Agreement When opening a Traditional or Roth IRA, the financial organization must provide an up-to-date plan agreement, which serves as the “contract” between the financial organization and the individual for whom the IRA is created. Both parties must enter into an agreement by signing either the plan agreement or application. After the document is signed, the financial organization must provide a copy to the IRA owner, retain a copy or a signed statement of receipt in the IRA owner’s file, and amend the document as required. If the IRA owner does not designate beneficiaries, the IRA plan agreement may identify a default beneficiary. What is the default beneficiary in your plan agreement? NOTE: IRS Notices 2022-33 and 2022-45 state that financial organizations must amend their IRA plan agreements for the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 by December 31, 2025 (or a later date as prescribed by the Treasury Secretary). The previous deadline for such amendments was December 31, 2022. IRS Notice 2024-02 states that financial organizations must amend their IRA plan agreements for the SECURE Act, the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, and the SECURE 2.0 Act of 2022, by December 31,2026 (or a later date as prescribed by the Treasury Secretary). 16 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT AGREEMENT Form 5305-A under section 408(a) of the Internal Revenue Code. FORM (Rev. April 2017) The depositor named on the application is establishing a Traditional determined in the year of the spouse’s death and reduced by individual retirement account under section 408(a) to provide for his or one for each subsequent year, or, if distributions are being her retirement and for the support of his or her beneficiaries after death. made over the period in paragraph (a)(iii) below, over such period. The custodian named on the application has given the depositor the disclosure statement required by Regulations section 1.408-6. (ii) the designated beneficiary is not the depositor’s surviving spouse, the remaining interest will be distributed over the The depositor has assigned the custodial account the sum indicated on beneficiary’s remaining life expectancy as determined in the the application. year following the death of the depositor and reduced by one The depositor and the custodian make the following agreement: for each subsequent year, or over the period in paragraph (a)(iii) below if longer. ARTICLE I Except in the case of a rollover contribution described in section 402(c), (iii) there is no designated beneficiary, the remaining interest will 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), an employer contribution to be distributed over the remaining life expectancy of the a simplified employee pension plan as described in section 408(k) or a depositor as determined in the year of the depositor’s death recharacterized contribution described in section 408A(d)(6), the and reduced by one for each subsequent year. custodian will accept only cash contributions up to $5,500 per year for tax (b) If the depositor dies before the required beginning date, the years 2013 through 2017. For individuals who have reached the age of 50 remaining interest will be distributed in accordance with paragraph by the end of the year, the contribution limit is increased to $6,500 per (i) below or, if elected or there is no designated beneficiary, in year for tax years 2013 through 2017. For years after 2017, these limits accordance with paragraph (ii) below. will be increased to reflect a cost-of-living adjustment, if any. (i) The remaining interest will be distributed in accordance with ARTICLE II paragraphs (a)(i) and (a)(ii) above (but not over the period in The depositor’s interest in the balance in the custodial account is paragraph (a)(iii), even if longer), starting by the end of the nonforfeitable. calendar year following the year of the depositor’s death. If, however, the designated beneficiary is the depositor’s surviving ARTICLE III spouse, then this distribution is not required to begin before 1. No part of the custodial account funds may be invested in life insurance the end of the calendar year in which the depositor would contracts, nor may the assets of the custodial account be commingled have reached age 70½. But, in such case, if the depositor’s with other property except in a common trust fund or common surviving spouse dies before distributions are required to investment fund (within the meaning of section 408(a)(5)). begin, then the remaining interest will be distributed in accordance with paragraph (a)(ii) above (but not over the 2. No part of the custodial account funds may be invested in collectibles period in paragraph (a)(iii), even if longer), over such spouse’s (within the meaning of section 408(m)) except as otherwise permitted designated beneficiary’s life expectancy, or in accordance with by section 408(m)(3), which provides an exception for certain gold, paragraph (ii) below if there is no such designated beneficiary. silver, and platinum coins, coins issued under the laws of any state, and certain bullion. (ii) The remaining interest will be distributed by the end of the calendar year containing the fifth anniversary of the depositor’s ARTICLE IV death. 1. Notwithstanding any provision of this agreement to the contrary, the 4. If the depositor dies before his or her entire interest has been distribution of the depositor’s interest in the custodial account shall be distributed and if the designated beneficiary is not the depositor’s made in accordance with the following requirements and shall surviving spouse, no additional contributions may be accepted in the otherwise comply with section 408(a)(6) and the regulations thereunder, account. the provisions of which are herein incorporated by reference. 5. The minimum amount that must be distributed each year, beginning 2. The depositor’s entire interest in the custodial account must be, or with the year containing the depositor’s required beginning date, is begin to be, distributed not later than the depositor’s required known as the “required minimum distribution” and is determined as beginning date, April 1 following the calendar year in which the follows. depositor reaches age 70½. By that date, the depositor may elect, in a manner acceptable to the custodian, to have the balance in the (a) The required minimum distribution under paragraph 2(b) for any custodial account distributed in: (a) A single sum or (b) Payments over year, beginning with the year the depositor reaches age 70½, is the a period not longer than the life of the depositor or the joint lives of depositor’s account value at the close of business on December 31 the depositor and his or her designated beneficiary. of the preceding year divided by the distribution period in the uniform lifetime table in Regulations section 1.401(a)(9)-9. 3. If the depositor dies before his or her entire interest is distributed to However, if the depositor’s designated beneficiary is his or her him or her, the remaining interest will be distributed as follows: surviving spouse, the required minimum distribution for a year (a) If the depositor dies on or after the required beginning date and: shall not be more than the depositor’s account value at the close of business on December 31 of the preceding year divided by the (i) the designated beneficiary is the depositor’s surviving spouse, number in the joint and last survivor table in Regulations section the remaining interest will be distributed over the surviving 1.401(a)(9)-9. The required minimum distribution for a year under spouse’s life expectancy as determined each year until such this paragraph (a) is determined using the depositor’s (or, if spouse’s death, or over the period in paragraph (a)(iii) below if applicable, the depositor and spouse’s) attained age (or ages) in longer. Any interest remaining after the spouse’s death will be the year. distributed over such spouse’s remaining life expectancy as Page 3 of 16 98 / 2300-C (Rev. 11/2024) ©2024 Ascensus, LLC 17 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Article Traditional IRA Roth IRA Number Plan Agreement Provisions Plan Agreement Provisions I Contributions – For a given year, financial Contributions – For a given year, financial organizations may not accept more than the organizations may not accept more than the applicable individual limit as an annual applicable individual limit as an annual contribution, and individuals must make contribution, and individuals must make contributions in cash. contributions in cash. II Nonforfeitability clause – The IRA owner’s MAGI restrictions – The annual contribution interest in the IRA is nonforfeitable. limit described in Article I, is gradually reduced for higher income limits. III IRA investment restrictions – IRA assets may Nonforfeitability clause – The IRA owner’s not be invested in life insurance contracts; may interest in the IRA is nonforfeitable. not be commingled with other property, except in a common trust fund or in a common investment fund; and may not be invested in collectibles, other than certain specially minted coins and bullion. IV Distribution rules – Traditional IRA IRA investment restrictions – IRA assets may distributions must follow certain rules. not be invested in life insurance contracts; may not be commingled with other property, except in a common trust fund or in a common investment fund; and may not be invested in collectibles, other than certain specially minted coins and bullion. V Reporting responsibilities – The IRA owner Distribution rules – Roth IRA distributions agrees to provide accurate information to the must follow certain rules. financial organization, and the financial organization agrees to submit required IRS reports. VI Controlling articles – Articles I through III of Reporting responsibilities – The IRA owner the plan agreement are controlling and cannot agrees to provide accurate information to the be modified by other articles that may be added. financial organization, and the financial organization agrees to submit required IRS reports. VII Amendments – Financial organizations must Controlling articles – Articles I through IV of periodically amend the IRA plan agreements to the plan agreement are controlling and cannot comply with law changes. be modified by other articles that may be added. VIII Additional provisions – Financial organizations Amendments – Financial organizations must may add other provisions in Article VIII of Form periodically amend the IRA plan agreements to 5305 or Form 5305-A, provided the articles are comply with law changes. consistent with existing regulations. IX Not applicable Additional provisions – Financial organizations may add other provisions in Article IX of Form 5305-R, Form 5305-RA, or Form 5305-RB, provided the articles are consistent with existing regulations. 18 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Disclosure Statement When opening a Traditional or Roth IRA, the financial organization must provide an up-to-date disclosure statement, which explains the IRA rules in nontechnical language. Financial organizations must provide a copy to the IRA owner, retain a copy or a signed statement of receipt in the IRA owner’s file, and amend the document as required. Receipt of the disclosure statement begins the revocation period. The IRA owner has seven calendar days from receiving the disclosure statement to revoke the IRA without being assessed any fees or penalties from the financial organization. 19 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs DISCLOSURE STATEMENT RIGHT TO REVOKE YOUR IRA 1. Applicable Age for RMDs – You are required to take a minimum You have the right to revoke your IRA within seven days of the receipt of distribution from your IRA for the year in which you reach the the disclosure statement. If revoked, you are entitled to a full return of applicable age for RMDs and for each year thereafter. The the contribution you made to your IRA. The amount returned to you applicable age for RMDs is age 70½ if you were born before July 1, would not include an adjustment for such items as sales commissions, 1949; age 72 if you were born on or after July 1, 1949, but before administrative expenses, or fluctuation in market value. You may make January 1, 1951; age 73 if you were born on or after January 1, this revocation only by mailing or delivering a written notice to the 1951, but before January 1, 1960; and age 75 if you were born on custodian at the address listed on the application. or after January 1, 1960. You must take your first distribution by If you send your notice by first class mail, your revocation will be deemed your required beginning date, which is April 1 of the year following mailed as of the postmark date. the year you attain the applicable age. If you have any questions about the procedure for revoking your IRA, 2. Calculation – The minimum distribution for any taxable year is equal to please call the custodian at the telephone number listed on the application. the amount obtained by dividing the account balance at the end of the previous year by the applicable denominator. The applicable REQUIREMENTS OF AN IRA denominator generally is determined using the Uniform Lifetime Table A. Cash Contributions – Your contribution must be in cash, unless it is a provided by the IRS. If your spouse is your sole designated beneficiary rollover contribution. for the entire calendar year, and is more than 10 years younger than you, the RMD is determined each year using the actual joint life B. Maximum Contribution – The total amount you may contribute to an expectancy of you and your spouse obtained from the Joint Life IRA for any taxable year cannot exceed the lesser of 100 percent of Expectancy Table provided by the IRS, rather than the life expectancy your compensation or $7,000 (for 2024 and 2025), with possible cost- factor from the Uniform Lifetime Table. of-living adjustments each year thereafter. If you also maintain a Roth IRA (i.e., an IRA subject to the limits of Internal Revenue Code Section We reserve the right to do any one of the following by your (IRC Sec.) 408A), the maximum contribution to your Traditional IRAs is required beginning date. reduced by any contributions you make to your Roth IRAs. Your total (a) Make no distribution until you give us a proper withdrawal annual contribution to all Traditional IRAs and Roth IRAs cannot request exceed the lesser of the dollar amounts described above or (b) Distribute your entire IRA to you in a single sum payment 100 percent of your compensation. (c) Determine your RMD each year based on your life expectancy C. Contribution Eligibility – You are eligible to make a regular contribution calculated using the Uniform Lifetime Table, and pay those to your IRA for a tax year at any age if you have compensation for the distributions to you until you direct otherwise taxable year for which the contribution is made. K. Beneficiary Distributions – Upon your death, your beneficiaries are D. Catch-Up Contributions – If you are age 50 or older by the close of the required to take distributions according to IRC Sec. 401(a)(9) and taxable year, you may make an additional contribution to your IRA. Treasury Regulation 1.408-8. These requirements are described below. The maximum additional contribution is $1,000 per year. This amount is subject to possible cost-of-living adjustments each year beginning in 1. Death of IRA Owner Before January 1, 2020 – Your designated tax year 2025. beneficiary is determined based on the beneficiaries designated as of the date of your death, who remain your beneficiaries as of E. Nonforfeitability – Your interest in your IRA is nonforfeitable. September 30 of the year following the year of your death. F. Eligible Custodians – The custodian of your IRA must be a bank, If you die on or after your required beginning date, distributions savings and loan association, credit union, or a person or entity must be made to your beneficiaries over the longer of the single life approved by the Secretary of the Treasury. expectancy of your designated beneficiaries, or your remaining life G. Commingling Assets – The assets of your IRA cannot be commingled expectancy. If a beneficiary other than a person or qualified trust as with other property except in a common trust fund or common defined in the Treasury Regulations is named, you will be treated as investment fund. having no designated beneficiary of your IRA for purposes of H. Life Insurance – No portion of your IRA may be invested in life determining the distribution period. If there is no designated insurance contracts. beneficiary of your IRA, distributions will commence using your single life expectancy, reduced by one in each subsequent year. I. Collectibles – You may not invest the assets of your IRA in collectibles (within the meaning of IRC Sec. 408(m)). A collectible is defined as any If you die before your required beginning date, the entire amount work of art, rug or antique, metal or gem, stamp or coin, alcoholic remaining in your account will, at the election of your designated beverage, or other tangible personal property specified by the Internal beneficiaries, either Revenue Service (IRS). However, specially minted United States gold (a) be distributed by December 31 of the year containing the fifth and silver coins, and certain state-issued coins are permissible anniversary of your death, or investments. Platinum coins and certain gold, silver, platinum, or (b) be distributed over the remaining life expectancy of your palladium bullion (as described in IRC Sec. 408(m)(3)) are also designated beneficiaries. permitted as IRA investments. If your spouse is your sole designated beneficiary, he or she must J. Required Minimum Distributions – You are required to take minimum elect either option (a) or (b) by the earlier of December 31 of the distributions from your IRA at certain times in accordance with year containing the fifth anniversary of your death, or December 31 Treasury Regulation 1.408-8. Below is a summary of the IRA distribution of the year life expectancy payments would be required to begin. rules. Your designated beneficiaries, other than a spouse who is the sole designated beneficiary, must elect either option (a) or (b) by December 31 of the year following the year of your death. If no Page 7 of 16 98 / 2300-C (Rev. 11/2024) ©2024 Ascensus, LLC 20 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Financial Disclosure When opening a Traditional or Roth IRA, the financial organization must provide a financial disclosure with the disclosure statement. The financial disclosure projects the future growth of the investment. The financial disclosure must be provided to the IRA owner at account opening and is not required to be amended even if the investment or rate changes. The financial disclosure is not required to be in an IRA owner’s file if other documents state that the IRA owner acknowledges receipt of a financial disclosure. Financial Disclosure Requirements – Growth Cannot Be Projected When an IRA owner chooses mutual funds, stocks, bonds, certain variable annuities, or similar investments as the initial investments within a self-directed IRA, an accurate earnings projection is not possible. The rules for a self-directed IRA financial disclosure are described below. Investment options – Give a general description of the investments offered through the self-directed IRA program. Fees – Give a general description of the fees that the financial organization may apply to a self-directed IRA. Earnings – Give a general description of how the financial organization computes the earnings on the available investments. Include a statement that the growth in value of the IRA is neither guaranteed nor projected. Other – Provide any other information that may aid the IRA owner. This information must include any relationship between the financial organization and an affiliated brokerage firm, and the procedures to request an investment transaction. 21 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Financial Disclosure Requirements – Growth Can Be Projected If financial organizations can reasonably project the growth of the IRA assets, the assumptions for the financial disclosure are as follows. First five years – Show the IRA value at the end of each of the first five years during which contributions are to be made. Account value at age 60, 65, and 70 – Show the IRA value at the end of the years in which the IRA owner will attain ages 60, 65, and 70. Contribution – When an individual establishes an IRA with a regular, spousal, or SEP contribution, a financial projection is based on an assumption that the IRA owner will make an annual $1,000 deposit on the first day of each year, regardless of the actual contribution made. When an individual establishes an IRA with a rollover or transfer contribution, the financial projection is based on an assumption that the IRA owner will make a one-time, $1,000 deposit on the first day of the year in which the contribution is actually made. Age used – Financial organizations must base the financial disclosure on the age the IRA owner will attain in the contribution year. Investment instrument – Use the type of investment instrument selected by the IRA owner. Term of certificate – If a time deposit is the selected investment, use the actual length of the time deposit in projecting any loss-of-earnings penalty. Earnings rate – Use an earnings rate no greater than that which is currently in effect. Compounding method – Use a compounding method no greater than that which is currently in effect. Loss of earnings penalty or fee – Show the account value for each of the projected years, taking into consideration any applicable loss-of-earnings penalty or other fee that the financial organization would assess if the IRA owner received a distribution at the end of the year for which the projection is being made. 22 Ascensus, LLC www.ascensus.com Introduction and Establishing IRAs Running Review Introduction & Establishing Funding Distributions Portability Traditional IRA Roth IRA Tax Advantages (List the common tax advantages) (List the tax advantage of a Traditional IRA) (List the tax advantage of a Roth IRA) IRS Required IRA Documents (List the IRS required documents) Additional Documentation (List the opening document) 23 Ascensus, LLC www.ascensus.com Notes 24 Ascensus, LLC www.ascensus.com IRA Funding Learning Objectives After completing this section, you will be able to compare and contrast Traditional and Roth IRA eligibility requirements, explain the regular contribution limit, distinguish the regular contribution deadline, state the rules for prior-year contributions, and discuss the regular contribution reporting deadlines. New terms in this section – Catch-Up Contribution – Eligible Compensation – Modified Adjusted Gross Income (MAGI) – Regular Contribution – Spousal Contribution 25 Ascensus, LLC www.ascensus.com IRA Funding IRA Regular Contribution Eligibility Anyone who is eligible to open an account at the financial organization may establish an IRA. Eligibility requirements may limit how much an individual may contribute to an IRA. The IRA owner must have eligible compensation during the year for which the regular contribution is made. Eligible compensation includes amounts derived from or received for personal services rendered (e.g., IRS Form W-2, Wage and Tax Statement, Schedule C, Profit or Loss From Business, if self-employed, or Schedule F, Profit or Loss From Farming). Sources of Compensation Eligible Compensation Not Eligible Compensation Wages Taxable alimony*** Salaries Interest Tips Royalties**** Bonuses Dividends Commissions Rental income Professional fees Unemployment compensation Combat pay Disability pay Certain payments to graduate students* Child support “Difficulty of care” payments** Separation & early retirement AFDC & TANF***** Social Security *Applies in 2020 and later years **Individuals may increase their nondeductible IRA contributions made after December 20, 2019, by the amount of nontaxable difficulty of care payments, a type of qualified foster care payment. ***Received under a divorce decree or separate maintenance agreement executed or modified on or after January 1, 2019. ****Whether royalties are considered eligible compensation depends on several factors. IRA owners should seek competent tax advice. *****Aid to Families with Dependent Children and Temporary Aid for Needy Families NOTE: IRA owners are responsible for determining if they are eligible to make regular Traditional IRA or Roth IRA contributions. 26 Ascensus, LLC www.ascensus.com IRA Funding Traditional IRA Contribution Eligibility Requirements Anyone who meets the following requirement is eligible to make regular contributions to a Traditional IRA. Eligible Compensation – The IRA owner must have eligible compensation during the year for which the regular contribution is made. NOTE: The eligibility rules to contribute to a Traditional IRA are different than the eligibility rules to deduct a Traditional IRA contribution. Traditional IRA deductibility information can be found on Job Aids page 7. 27 Ascensus, LLC www.ascensus.com IRA Funding Roth IRA Contribution Eligibility Requirements Anyone who meets both of the following requirements is eligible to make regular contributions to a Roth IRA. 1. Eligible Compensation – The IRA owner must have eligible compensation during the year for which the regular contribution is made. 2. Income limit – The IRA owner’s MAGI must not exceed the IRS limits. IRA owners with MAGI that falls within the phase-out range will calculate their maximum regular contribution by using the “Maximum Roth IRA Contribution Worksheet” in the instructions for IRS Form 8606, Nondeductible IRAs. IRA owners whose MAGI falls within the phase-out range should consult a tax advisor if they have questions about making regular contributions. 2024 MAGI Limits for Regular Roth IRA Contributions* MAGI for Full MAGI for Partial Ineligible for Filing Status Contribution Contribution Roth Contribution Single Up to $146,000 $146,000 up to $161,000 or more $161,000 Married, filing Up to $230,000 $230,000 up to $240,000 or more jointly $240,000 Married, filing N/A $0 up to $10,000 $10,000 or more separately** 2025 MAGI Limits for Regular Roth IRA Contributions* MAGI for Full MAGI for Partial Ineligible for Filing Status Contribution Contribution Roth Contribution Single Up to $150,000 $150,000 up to $165,000 or more $165,000 Married, filing Up to $236,000 $236,000 up to $246,000 or more jointly $246,000 Married, filing N/A $0 up to $10,000 $10,000 or more separately** *The MAGI limits are subject to annual cost-of-living adjustments (COLAs) and are usually released by the IRS in the fourth quarter for the following year. **IRA owners who do not live with a spouse at any time during the year are considered single filers for determining Roth IRA eligibility. 28 Ascensus, LLC www.ascensus.com IRA Funding Spousal Contributions If an IRA owner does not have eligible compensation, she may still be able to make an IRA contribution if the following requirements are met. The IRA owner is married and files a joint federal income tax return for the year. The IRA owner meets the other eligibility requirement for the type of IRA (Roth) to which the regular contribution is being made. NOTE: Each spouse who makes a regular contribution must contribute to his own IRA. A surviving spouse can make regular contributions to his IRA under the spousal contribution rules if the surviving spouse files a joint tax return for the year of his spouse’s death. Spousal Contributions Daphne, age 50, has eligible compensation of $140,000. Aaron, age 48, is currently unemployed with no source of eligible compensation. Daphne and Aaron are married, filing jointly. Their joint MAGI for this tax year is $150,000. Daphne is eligible to contribute to which IRA type(s)? Traditional IRA Roth IRA Neither Aaron is eligible to contribute to which IRA types(s)? Traditional IRA Roth IRA Neither 29 Ascensus, LLC www.ascensus.com IRA Funding Regular Contribution Limit The maximum amount individuals may contribute to their IRAs is referred to as the “regular contribution limit.” The regular contribution limit is determined by the IRS each year and may be adjusted for COLAs. IRA owners may contribute 100 percent of their eligible compensation up to the IRS regular contribution limit each year. IRA owners who attain age 50 by December 31 of the year may contribute an additional amount called a “catch-up contribution.” The catch‑­up contribution can be made any time during the year in which the IRA owner attains age 50 and for each subsequent year. Traditional and Roth IRA Aggregate Regular Contribution Limit Regular Contribution Catch-Up Contribution for IRA owners Tax Year Limit* Age 50 and Older** 2024 $7,000 $1,000 ($8,000 total) 2025 $7,000 $1,000 ($8,000 total) *The regular contribution limit is subject to COLAs and are usually released by the IRS in the fourth quarter for the following year. **Effective in taxable years after December 31, 2023, the catch-up contribution limit may be indexed in multiples of $100. NOTE: The amount of an IRA contribution exceeding the allowable limits is an excess contribution. The handling of excess contributions is beyond the scope of this seminar. 30 Ascensus, LLC www.ascensus.com IRA Funding Regular Contribution Limit Daphne, age 50, has eligible compensation of $140,000. Aaron, age 48, is currently unemployed with no source of eligible compensation. Daphne and Aaron are married, filing jointly. Their joint MAGI for this tax year is $150,000. How much may Daphne contribute for this tax year? ___________________________ How much may Aaron contribute for this tax year? _____________________________ 31 Ascensus, LLC www.ascensus.com IRA Funding Regular Contribution Deadline An IRA owner can make a current-year regular contribution beginning on January 1 of that year. The deadline to make regular contributions is the individual’s federal income tax return due date (generally April 15). If April 15 falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the next business day. The deadline is not extended if IRA owners receive an extension for filing their federal income tax returns. 4/15 Current-year Prior-year contributions contributions Current-year contributions 1/1 1/1 Prior-Year Contributions Federal regulations require written instruction to attribute a contribution to the prior year. This election is irrevocable and cannot be changed to a current-year regular contribution. The IRA owner may use any written means to make a prior-year election. To comply with these regulations, financial organizations should adhere to the following guidelines. If there is no written instruction, assume the contribution is for the current year. A prior-year contribution cannot be changed to a current-year contribution. A regular contribution made by mail is deemed timely if the envelope is postmarked by the IRA owner’s tax return deadline, not including extensions, and is accompanied by written direction. Direct deposit contributions are made for the current year unless the financial organization receives written instruction before the contribution is made to treat it as a prior-year contribution. 32 Ascensus, LLC www.ascensus.com IRA Funding Traditional IRA CONTRIBUTION AND INVESTMENT SELECTION PART 1. IRA OWNER PART 2. IRA TRUSTEE OR CUSTODIAN To be completed by the IRA trustee or custodian Name (First/MI/Last) Name Social Security Number Address Line 1 Date of Birth Phone Address Line 2 Email Address City/State/ZIP Account Number Suffix Phone Organization Number PART 3. CONTRIBUTION INFORMATION Contribution Amount Contribution Date CONTRIBUTION TYPE (Select one) Regular (Includes catch-up contributions) Contribution for Tax Year Rollover (Distribution from a Traditional IRA, SIMPLE IRA, or eligible employer-sponsored retirement plan that is being deposited into this Traditional IRA) By selecting this transaction, I irrevocably designate this contribution as a rollover. Transfer (Direct movement of assets from a Traditional IRA or SIMPLE IRA into this Traditional IRA) Recharacterization (A nontaxable movement of a Roth IRA contribution into this Traditional IRA) By selecting this transaction, I irrevocably designate this contribution as a recharacterization. SEP Contribution (Contribution made under a simplified employee pension (SEP) plan; SEP contributions are reported for the year in which the contribution is made) IF YOU ARE REQUIRED TO TAKE A REQUIRED MINIMUM DISTRIBUTION THIS YEAR, COMPLETE THE FOLLOWING IF APPLICABLE (Checking any of the following will require adjusting your required minimum distribution.) This is a rollover or transfer of assets removed last year. Date of Removal This is a transfer from my deceased spouse’s Traditional IRA and the assets were removed from the IRA in any year after death. The value of my portion of my deceased spouse’s IRA on December 31 of last year. PART 4. INVESTMENT AND DEPOSIT INFORMATION INVESTMENT INFORMATION (Complete this section as applicable.) Quantity Status Investment Term Interest Investment Description or Amount (new or existing) Number or Maturity Date Rate DEPOSIT METHOD Cash or Check (If the contribution type is transfer, the check must be from a financial organization made payable to the trustee for this IRA.) Internal Account Account Number Type (e.g., checking, savings, IRA) External Account (e.g., EFT, ACH, wire) (Additional documentation may be required and fees may apply.) Name of Organization Sending the Assets Routing Number (Optional) Account Number Type (e.g., checking, savings, IRA) Deposit Taken by PART 5. SIGNATURE I certify that all of the information provided by me is accurate and may be relied upon by the trustee or custodian. I certify that the contribution described above is eligible to be contributed to the IRA and I authorize the deposit to be invested in the manner described above. X Signature of IRA Owner Date (mm/dd/yyyy) Page 1 of 2 107 / 2314 (Rev. 11/2024) ©2024 Ascensus, LLC 33 Ascensus, LLC www.ascensus.com IRA Funding Regular Contribution Deadline Answer the following questions. Today is March 14, 2025, and Ryan, age 51, would like to make a contribution to his IRA. 1. For what year(s) can he make the contribution? Why? 2. Does Ryan need to give the financial organization written instruction for the contribution? 3. If Ryan mails a contribution postmarked April 14, 2025, and you receive it on April 21, 2025, can you still apply it to tax year 2024? 4. If Ryan receives an extension to file his 2024 federal income tax return, does this extend his contribution deadline for tax year 2024? 34 Ascensus, LLC www.ascensus.com IRA Funding Reporting Regular IRA Contributions Financial organizations generally must send IRS Form 5498, IRA Contribution Information, to the IRS for IRA owners who made a reportable contribution for the preceding year and for each IRA that had a balance at the end of the preceding year. Financial organizations must send Form 5498 to the IRS by May 31* of the following year. Financial organizations must include the following information on Form 5498 for a Traditional IRA or Roth IRA contribution. * If the deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the next business day. Enter total amount of regular Traditional IRA contributions made in current year or as a prior-year contribution, including catch-up and spousal contributions. Enter the December 31 balance. Mark the Enter total amount of regular Roth IRA appropriate box. contributions made in current year or as a prior-year contribution, including catch-up and spousal contributions. 35 Ascensus, LLC www.ascensus.com IRA Funding Account Statement Financial organizations must send an account statement to each IRA owner who made a reportable contribution for the previous tax year. The account statement may be in any written format; however, the statement must indicate that this information is being sent to the IRS. Financial organizations must send the account statement to the IRA owner by May 31*. NOTE: IRA owners do not need to submit the account statement to the IRS to report contributions to their IRAs. Fair Market Value (FMV) Statement Financial organizations must annually notify IRA owners of their FMV, which is the prior year’s December 31 IRA balance. The FMV statement may be in any written format and is due to the IRA owner or beneficiary by January 31*. Financial organizations are not required to send an FMV statement to the IRS. * If the deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the next business day. 36 Ascensus, LLC www.ascensus.com IRA Funding Running Review Introduction & Establishing Funding Distributions Portability Traditional IRA Roth IRA Tax Advantages Tax-deferred earnings (always) Tax credit (possible) Tax deduction (possible) Tax-free earnings (possible) IRS Required IRA Documents IRA plan agreement IRA disclosure statement Financial disclosure Additional Documentation IRA application (if required) Regular Contributions (List the contribution eligibility requirements) N/A (List the 2025 limits) Annual limit = Catch-up limit = (List the contribution deadline) (List the tax reporting deadlines) FMV statement to the IRA owner = Form 5498 to the IRS = Account statement to the IRA owner = 37 Ascensus, LLC www.ascensus.com Notes 38 Ascensus, LLC www.ascensus.com IRA Distributions Learning Objectives After completing this section, you will be able to identify federal income tax withholding requirements, recognize the exceptions to the early distribution penalty tax, summarize the tax consequences of Traditional and Roth IRA distributions, define a required minimum distribution (RMD) and the required beginning date (RBD), and discuss the distribution reporting deadlines. New terms in this section – Basis – Distribution Period – Early Distribution Penalty Tax – Qualified Distribution – Required Beginning Date (RBD) – Required Minimum Distribution (RMD) – Withholding 39 Ascensus, LLC www.ascensus.com IRA Distributions IRA Distribution Taxation An IRA owner may take a distribution (also called a withdrawal) at any time. The IRA owner may be subject to one or both of the following tax consequences on an IRA distribution. Income tax (federal and state) Early distribution penalty tax The financial organization is responsible for reporting the distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to the IRA owner and the IRS. The IRA owner is responsible for determining the taxable portion of each distribution and paying any taxes due—including the early distribution penalty tax. Steps to Complete an IRA Distribution IRA owner contacts the financial organization to take a distribution. Financial organization documents the distribution on a withdrawal form and processes the distribution. IRA owner receives the money. Financial organization reports the distribution information to the IRS and IRA owner. IRA owner documents the distribution on his tax return (if applicable). 40 Ascensus, LLC www.ascensus.com IRA Distributions Federal Income Tax Withholding Financial organizations must notify IRA owners and beneficiaries of their right to withhold or waive withholding on IRA distributions that, in aggregate, total $200 or more per year. This provides the IRA owner or beneficiary the opportunity to prepay some of the federal income taxes that may be due on the distribution. The withholding rate depends on whether the IRA distributions are payable on demand—or nonperiodic—meaning that the IRA owner can vary or stop payouts at any time. Most IRA distributions are nonperiodic. If the payouts are not payable on demand, meaning that the IRA owner or beneficiary will receive a steady stream of payouts that will not change, such as annuitized distributions from an IR annuity, then the distributions are deemed periodic. Financial organizations are required to withhold 10 percent from most nonperiodic distributions unless the individual receiving the distribution elects a different amount or to waive withholding. Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, is used to capture withholding elections for periodic distributions. Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, is used to capture withholding elections for nonperiodic distributions (i.e., on-demand distributions) and eligible rollover distributions. Individuals using Form W-4R may elect a withholding rate of less than 10 percent on nonperiodic distributions. Beginning in 2023, the withholding notice and election for periodic payments continues to be met by having the IRA owner complete IRS Form W-4P or a substitute form. For nonperiodic payments, IRA owners may use the withholding election on file. IRA owners making a new election must complete the new IRS Form W-4R or a substitute. Once an IRA owner makes a withholding election, it is valid until revoked. The IRA owner may revoke an election at any time by signing a new form. NOTE: Do not confuse the 10 percent withholding amount with the 10 percent early distribution penalty tax, which is discussed later in this seminar. Withholding is the financial organization’s responsibility, whereas the early distribution penalty tax is the IRA owner’s responsibility. 41 Ascensus, LLC www.ascensus.com IRA Distributions State Income Tax Withholding State withholding regulations apply if both of the following are true. Your financial organization has a branch or an office in the state. The IRA owner or beneficiary is required to file an income tax return in that state or is a state resident, depending on the state. NOTE: Financial organizations that conduct business in a state in which they do not have a