General Taxability (Contributions)

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Tax Aspects of Individual Retirement

Accounts & Valuation of Retirement

Accounts in Divorces

Presented by:

Erin Spiwak, CPA, John VanDuzer, CPA, Kim Hardy, CPA/ABV/CFF, CVA, Mike Carignan May 28, 2015

Providing Tax, Auditing, Accounting & Controllership, Technology Solutions, Consulting, and Wealth Management Services Since 1964.

General Taxability (Contributions)

Traditional Roth

Taxability Pre-Tax After-Tax

Contribution Limit (2015) $5,500 $5,500 Catch up (50 +) $1,000 $1,000 Income Limitation (MFJ) Non-Deductible: None Deductible:

No retirement plan – None

(T) retirement plan - $98,000 + phase out) (S) retirement plan - $183,00 + phase out)

$183,000 (+ phase out)

Due Date April 15 (following year) April 15 (following year)

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General Taxability (Distributions)

• Roth IRAs

– Qualified distributions are non-taxable

• Must have had Roth IRA for > 5 Years • Owner must be older than 59.5 Years • Can take early distributions if owner is

disabled or purchasing first home.

– Non-qualified distributions are taxable to extent distribution exceeds basis. – No minimum required distributions (MRD)

General Taxability

(Distributions Continued)

• Traditional IRAs

– Distributions in Traditional IRAs non-taxable only to extent of allocable basis.

– Subject to early withdrawal penalties if distributions made under 59.5

(applicable to both Roth and Traditional IRAs) – Subject to Minimum Required Distribution

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General Taxability (Conversions)

• A Traditional IRA can be converted to

Roth IRA

– Income recognized on conversion to extent that the amount exceeds allocable basis. – No early withdrawal penalty on conversion.

However, subsequent Roth IRA distributions subject to penalty if made sooner than 5 years.

– Conversions can be made using 60 day distribution rule for rollovers.

Back Door Roth IRA Contribution

• Is the taxpayer’s income too high to contribute

yearly to a Roth IRA? Back door contribution is

available.

• Cannot have another traditional IRA account – If you do, roll it into a 401(k)

• Make nondeductible contribution to traditional and convert next day to Roth IRA

– Allowed because no income limitation on Roth IRA conversion

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Minimum Required Distributions (MRD)

• During owner’s life

– Must be made in the year after the taxpayer turns 70 ½. (You can double up in first year.) – Amount is calculated based on life expectancy

and balance at December 31 of the previous year.

– 50% excise penalty applies if distribution is not made.

• Can be waived with reasonable cause

MRDs After Owner’s Life

Beneficiary Decedent > 70.5 Decedent < 70.5

Spouse • Can roll IRA into own IRA. • Can elect either decedent’s or

spouse’s life expectancy for MRD calculation.

• Can roll IRA into own IRA. • Distributions can be

deferred until year in which Decedent would have turned 70.5 Non-Spouse

(e.g. child)

• IRA must be distributed based on oldest beneficiary’s expected life span. • Can use decedents life span

instead.

• Roll over must be trustee to trustee transfer.

• IRA must be distributed based on oldest beneficiary’s life span. • 5 year rule if elected or

distributions not made in the year following death. • Roll over must be trustee to

trustee transfer No beneficiary

or estate/trust as beneficiary

IRA must be distributed based on owner’s life expectancy at date of death.

Entire IRA must be distributed within 5 years of owner’s death.

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IRA Taxation in Divorce

• Transfer of IRA interest is non-taxable. Must be made pursuant to divorce decree or separate maintenance.

• Transfer is taxable if made pursuant to other agreement such as written separation agreement or temporary support order.

• No QDRO requirement

• If owner is subject to MRD and transferee would not be, transferred IRA would not be subject to MRD.

IRA Estate Planning Considerations

• No basis step-up for IRA assets

– Double tax potential

• Beneficiary challenges

– Would my spouse do with my assets as I intended?

– Trust limitations

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Mike Carignan

A financial advisor’s perspective

IRA Tax Fundamentals

and Strategies

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Today’s Objectives

Today I’ll demonstrate how clients can

improve their legacy

by describing what IRA investors typically do,

& comparing it to two simple but powerful ideas

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The dilemma

• Many people who have been successful in saving for

retirement have established a large enough nest-egg to be

able to create a legacy for their children, grandchildren and

favorite charities, leaving them to wonder how to best

leverage their qualified or tax advantaged retirement plans.

• A common question is whether IRA owners should take larger

withdrawals and pay income taxes now, or whether they

should take out as little as possible during their lifetime,

leaving a likely income tax burden for their heirs and

beneficiaries.

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Income in Respect of a Decedent

IRD: The Bad News Is. . .

1. No step-up in basis at death

2. Beneficiary pays income tax at owner’s death

• Taxes are calculated at Beneficiary’s tax rate

3. Deceased IRA owner must include the entire IRA

value in his / her estate for estate taxes

• Even though the $$ pass directly to the designated

beneficiary!

This is what’s known as the “Double-Tax”

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IRD: The Good News Is. . .

You can overcome these problems, and. . .

The IRS gives you tools to do it!

1. Stretch the inheritance to spread the taxes over

many years and continue tax deferral

2. Consider charitable beneficiaries

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Estate Tax Exclusion:

Then and Now

1997:

$600,000

Per Person

2015:

$5,430,000

Per Person

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Stretching The IRD Deduction

• IRA Value = $500,000 • Estate Tax (40%) = $200,000

• Creates IRD deduction of 40% of the asset

Children inherit $500,000

• Stretch = $40,000 per year for 30 years (over-simplified) • Estate Tax Deduction = 40%

• So 40% of each stretch payment is excused from income tax until the deduction is used up

Each stretch payment is 40% income-tax-free for 12.5 years!

• Unlimited deduction carry-forward • Can amend prior 3-years’ tax-returns

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2 IRA

Wealth Transfer Strategies

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Typical IRA Transfer

IRA Owner(s)

$500,000

Children

$300,000

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1. IRA Income Tax Offset

IRA

$500,000

RMD’s

Life Insurance

$200,000

Taxes

Beneficiaries

$500,000

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2. IRA Income Tax Elimination

IRA

$500,000

RMD’s

Life Insurance

$500,000

Charity

$500,000

Tax-Free Total:

$1,000,000

Beneficiaries

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Comparison of Strategies

Total Net After-Tax Legacy

Defined Benefit Plans in Divorce

• A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age.

• 2 Options:

– Spouse gets 1/2 of future payments through a QDRO if allowed by the Plan. – Spouse gets 1/2 of the estimated present

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Information Needed

• Demographic Info

– Date of Valuation

– Date of Birth of Plan Participant – Plan Specifics

– Life Expectancy at Expected Retirement Date (based on gender and race)

– Date of Marriage – Years of Service

– Eligible Retirement Date

Information Needed (Continued)

• Present Value Info

– Monthly Benefit Earned

– Interest Rate (LT US Treasury Rates, PBGC rates, Consumer Price Index) – Cost of Living Adjustment (COLA) – Assumed Income Tax Rate

• See Sample Letter from Retirement

Plan Administrator

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Partial Martial Asset

• Coverture Fraction / DeLoach Formula

– Developed by the Florida First District Court of Appeals in 1991- The formula states that the portion of the employee spouse’s retirement plan benefits which is a marital asset equals the employee’s period of participation in the pension plan during the marriage over the employee’s total period of participation in the plan times the present value of the plan benefits

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Other Considerations

• Interest Rates

• Tax Rates

• Penalties (FERS)

• Defined Contribution Plans

Questions?

John VanDuzer, CPA Senior Manager James Moore, CPAs www.jmco.com

Office: 352.378.1331 EXT. 2221 [email protected]

https://www.linkedin.com/in/ johnvanduzercpa

Erin Spiwak, CPA Partner

James Moore, CPAs www.jmco.com

Office: 352.378.1331 EXT. 2200 [email protected]

https://www.linkedin.com/in/ erinspiwakgainesvillecpa

Kim Hardy, CPA/ABV/CFF, CVA Director of Business Valuation Services James Moore, CPAs www.jmco.com Office: 352.378.1331 EXT. 2225 [email protected] https://www.linkedin.com/pub/ kim-hardy-cpa/14/53a/69a Mike Carignan Financial Advisor HK Financial Services Office: 904.673.4638 [email protected] https://www.linkedin.com/pub/ michael-carignan-cfp-crpc/4/b79/758