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| INVESTMENT INFO |
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Traditional IRA Accounts Age
1. Customer must sign the IRA adoption agreement. The Self Directed IRA adoption agreement serves two functions. It establishes the IRA custodial account, and it also serves as a brokerage account application. 2. Customer must receive a copy of the IRA Custodial Agreement and Disclosure Statement. The custodial agreement spells out the rules and requirements of the IRA account. The disclosure statement is a non-technical explanation of the IRA requirements. 3. Customer must receive a financial disclosure that discloses any fees associated with the account. 4. The firm establishing the IRA account on behalf of the individual should also require that the individual complete a contribution form that clearly identifies the type of contribution and the tax year for which the IRA contribution is being made. IRA CONTRIBUTIONS Regular IRA Contributions Deadline for contributions Contributions may be made (and account may be established) no later than the due date for filing income tax returns for the year for which the contribution is being made, not including extensions (Generally April 15). Stated another way, contributions for a prior year can be made up to April 15 of the current year. Contribution Limits There is no minimum contribution amount. The maximum contribution amount for an individual is the lesser of 100% of compensation or $3000 per year (for 2002) For a married couple with a non-working spouse, the maximum contribution for the couple is the lesser of 100% of compensation or $6,000, with no more than $3000 contributed for each individual (for 2002). Separate IRA's must be established for each spouse, and the couple must file a joint tax return. Increase in Annual IRA Contribution Limits IRA contribution limits have been raised, beginning in year 2002, as follows:
After 2008, the annual limit will be raised in $500 increments in accordance with Cost of Living Adjustments (COLA). Catch Up Contributions Effective for tax year 2002 and beyond, for participants who are eligible to make an IRA contribution and have attained the age of 50 before the end of the taxable year, the participant can make a "catch up" contribution in addition to the normal contribution amount as shown in the table below:
Form of IRA Contributions Regular contributions to an IRA account must be in cash or cash equivalent (i.e. check, money order). Deductibility of Traditional IRA Contributions If the IRA participant is not an "active participant" (that is, not eligible to participate in an employer sponsored plan), the IRA contribution is fully deductible, regardless of the participant's income. If the IRA participant is an "active participant", then the IRA deductibility is determined by the participant's adjusted gross income. The following tables show the deductibility limits for active participants for tax year 2002: The IRS will raise the deductibility phase out range until 2007, when the range for a single participant will be $50,000 - $60,000, and the range for married participants filing jointly will be $80,000 - $100,000 (active participant).
Non-deductible contributions Non-deductible contributions are contributions that exceed the deductibility limit but not the contribution limits. The deductibility limits only affect a participant's ability to take a deduction, not his ability to contribute. Any person under the age of 70 ½ with compensation can contribute to an IRA, regardless of compensation. Non-deductible contributions can earn tax-deferred income. Only the earnings will be taxable to the IRA participant when distributed. Upon distribution, the non-deductible contributions are recovered on a pro-rata basis. The participant must inform the IRS that he has made a non-deductible contribution by filing IRS Form 8606 with his tax return. An IRA participant may remove his non-deductible contributions (plus any applicable earnings) for a given tax year prior to the tax filing deadline (including extensions) for that year. Only the earnings will be taxable. Rollover Contributions Regular IRA Rollover A distribution from a qualified retirement account (qualified plan, SIMPLE, SEP, 457, 403(b) and IRA) that is re-deposited into the same IRA or another IRA within 60 days of the date of distribution is considered a rollover contribution. If the entire amount of the distribution is re-deposited, there will be no taxable distribution. If only part of the distribution is re-deposited, the amount that is not re-deposited will be subject to taxes and possibly penalties. For assets to be eligible for rollover they must have come from a retirement account that has had no rollover contributions nor distributions within the prior 12 months. An IRA participant may complete only one rollover of the same assets within a 12-month period. An IRA participant may rollover any assets, either cash or non-cash, but he must redeposit the same assets that were originally distributed. An IRA participant may not rollover a required minimum distribution. A rollover is a reportable transaction. The distribution is reported on IRS Form 1099R. The rollover contribution (re-deposit) is reported on IRS Form 5498. Direct Rollover The deposit of assets from a qualified plan directly into an IRA account (or the subsequent deposit of these assets into a successor qualified plan), without constructive receipt by the IRA participant, is considered a direct rollover. By completing a direct rollover of assets from a qualified plan, the IRA participant can avoid the mandatory 20%withholding on distributions from a qualified plan. As long as qualified plan assets that are deposited via direct rollover into an IRA are not commingled with regular IRA assets, these direct rollover assets are eligible to be rolled into a successor qualified plan. The IRA account that holds direct rollover assets is often referred to as a "conduit IRA". IRA DISTRIBUTIONS Earnings in an IRA account can accumulate tax-free until they are distributed to the IRA participant. Once distributed, earnings and deductible contributions are taxed as ordinary income. Since the purpose of an IRA account is to provide a retirement income, the IRS imposes an additional tax of 10% of the amount of the distribution if the IRA participant takes a distribution before she reaches the age of 59 ½. The IRS does allow several exceptions to this 10% additional tax, including:
Withholding All distributions from an IRA account are subject to 10% Federal withholding tax unless the IRA participant elects to waive this withholding. The IRA withholding waiver election must be in writing, and will stay in effect until the IRA participant revokes the election. Basis of In-Kind Distributions The basis of in-kind distributions from an IRA account is the fair market value of the assets on the date of distribution. In-kind distributions made on the NFS system are valued at the assets' prior night closing price. Required Distributions at Age 70 ½ The IRA account is intended to provide a retirement income for the participant, not to provide a death benefit for the participant's beneficiaries. When the IRA participant attains the age of 70 ½, she is required to take a minimum distribution from her IRA account. The amount of the distribution is determined by dividing the prior end of year fair market value by a life expectancy factor. For tax purposes, required minimum distributions are includible in the participant's gross income, and the rules for the recovery of non-deductible contributions apply. The person who is in their first distribution calendar year (that is, the year in which they turn age 70 ½) has until April 1 of the following year to take their required minimum distribution (RMD) for the first year. For the second and subsequent years, the deadline for taking the required distribution is December 31. The IRS will impose a 50% penalty on the amount of the required minimum distribution that is not distributed to the IRA participant. Effective with tax year 2002, the IRS has greatly simplified the calculation of the RMD by applying a uniform life expectancy table for calculating the required distribution while the IRA participant is alive. The IRA participant will no longer have to elect single or joint life expectancy, or the recalculation or elapsed years methods. Instead, the life expectancy factor will be taken from a life expectancy table that assumes joint life expectancy with a beneficiary that is exactly 10 years younger than the participant; this table has been known for many years as the MDIB table. For most IRA participants, these new rules will result in a larger life expectancy factor, and hence a lower required minimum distribution than before these rules were implemented. The IRS has allowed an exception to these rules for IRA participants who have a spouse that is more than 10 years younger than the participant. In this case the IRS will allow the participant to use joint life expectancy and the actual attained ages of the participant and spouse beneficiary, and recalculate this factor each year. Also effective with the new rules for 2002, the IRA custodian will be required to report the amount of the required minimum distribution to the Internal Revenue Service, although the IRS has not announced when this reporting requirement will be implemented. IRS REPORTING REQUIREMENTS FOR IRA's Fair Market Value Statement The fair market value of an IRA is defined as the value of the IRA on December 31 of the preceding year. The account's fair market value is used in the calculation of the required minimum distribution and for calculating substantially equal payments so as to avoid the premature distribution penalty. A statement of the account's fair market value, in any written format, must be mailed to the IRA participant by January 31 of the year following the year for which the value is being reported. For purposes of this fair market value statement requirement, National Financial Services LLC uses the December statement, and includes a message on the statement that the value of the account is the value that will be reported to the IRS. IRS Form 1099R Form 1099R reports distributions from retirement plans. The 1099R must be mailed to IRA participants by January 31. If the participant has had federal taxes withheld from a distribution, a copy of the 1099R must be included with the individual's tax return. IRS Form 5498 Form 5498 reports regular and rollover contributions, employer contributions to SEP and SIMPLE plans, salary deferrals to a SIMPLE plan, and the account's fair market value. The 5498 is mailed to the IRA participant prior to May 31 and is an information return only; it does not have to be included with the participant's tax return. WHY PARTICIPATE IN A TRADITIONAL IRA? Any participant under the age of 70 ½ with compensation can participate in a traditional IRA. Contributions to a traditional IRA may be deductible. Earnings in an IRA accumulate tax free until distributed. IRA accounts can be used as a "conduit" for distributions from a qualified plan. |
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