‘FAQ’
12/20/2011
Jack Kiley CPA, CISP
2012 IRA Contribution Limits
IRA Contribution limit remains at $ 5,000 for 2012
Recently the Internal Revenue Service announced the 2012 contribution and cost of living increases regarding IRAs and 401k plans. The following can be found on the IRS’s website at www.irs.gov.
If you are under 50 years of age at the end of 2012:
The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2012. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).
If you are 50 years of age or older before the end of 2012:
The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2012. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 to $183,000, up from $169,000 and $179,000.
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal governments Thrift Savings Plan is increased from $16,500 to $17,000.
For more information, please refer to IRS publication 590 or contact us.
MidAtlantic IRA, LLC
800.607.0145 x260
scott.blair@midatlanticira.com
DISCLAIMER: MidAtlantic IRA, LLC. does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.
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What is a Traditional IRA?
Source: www.irs.gov
A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.
Who Can Set Up a Traditional IRA?
You can set up and make contributions to a traditional IRA if:
- You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
- You were not age 70½ by the end of the year.
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct , later.
Both spouses have compensation.
If both you and your spouse have compensation and are under age 70½, each of you can set up an IRA. You cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation.
Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).
Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.
Commissions. An amount you receive that is a percentage of profits or sales price is compensation.
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
- The deduction for contributions made on your behalf to retirement plans, and
- The deduction allowed for one-half of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs.
Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.
Military differential pay. For IRA purposes, compensation includes military differential pay you receive. Military differential payments are those payments made by some employers to employees who have been called to active duty in the uniformed services for a period of more than 30 days. Beginning in 2009, these payments will be reported in box 1 (Wages, tips, other compensation) of Form W-2.
Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2009 Form W-2 with code Q. If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you could contribute more for those years than you already have, you could have made additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions are treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:
- 3 years from the date you filed your original return for the year for which you made the contribution,
- 2 years from the date you paid the tax due for the year for which you made the contribution, or
- 1 year from the date on which you made the contribution.
Table 1-1. Compensation for Purposes of an IRA
| Includes … |
Does not include … |
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earnings and profits from
property. |
| wages, salaries, etc. |
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interest and
dividend income. |
| commissions. |
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pension or annuity
income. |
| self-employment income. |
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deferred compensation. |
| alimony and separate maintenance. |
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income from certain
partnerships. |
| military differential pay. |
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any amounts you exclude
from income. |
| nontaxable combat pay. |
|
What Is Not Compensation?
Compensation does not include any of the following items.
- Earnings and profits from property, such as rental income, interest income, and dividend income.
- Pension or annuity income.
- Deferred compensation received (compensation payments postponed from a past year).
- Income from a partnership for which you do not provide services that are a material income-producing factor.
- Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.
When Can a Traditional IRA Be Set Up?
You can set up a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can Contributions Be Made , later.
How Can a Traditional IRA Be Set Up?
You can set up different kinds of IRAs with a variety of organizations. You can set up an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also set up an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements. The requirements for the various arrangements are discussed below.
Kinds of traditional IRAs.
Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.
Individual Retirement Account
An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
- The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
- The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
- Contributions, except for rollover contributions, must be in cash. See Rollovers , later.
- You must have a nonforfeitable right to the amount at all times.
- Money in your account cannot be used to buy a life insurance policy.
- Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
- You must start receiving distributions by April 1 of the year following the year in which you reach age 70½.
When Must You Withdraw Assets? (Required Minimum Distributions)
You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. See Excess Accumulations , later under What Acts Result in Penalties or Additional Taxes. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent’s IRA.
Required minimum distribution.
The amount that must be distributed each year is referred to as the required minimum distribution.
Distributions not eligible for rollover.
Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.
Waiver of required minimum distribution rules for 2009.
For 2009, you are not required to take a minimum distribution from your traditional IRA (as well as most defined contribution plans). This waiver applies to IRA participants as well as to beneficiaries. The waiver also applies to you if you turn 70½ in 2009 and delay your 2009 required minimum distribution until April 1, 2010. The waiver does not apply to minimum required distributions for 2008, even if you turned 70½ in 2008 and chose to take the 2008 required minimum distribution by April 1, 2009. If you are a beneficiary receiving distributions over a 5-year period, you generally can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period. If you received a distribution in 2009 that would otherwise be a required minimum distribution, you generally can roll over that amount into another IRA or eligible retirement plan within 60 days of the distribution. For 2009 RMDs, the 60-day rollover period was extended so that it ended no earlier than November 30, 2009, or 60 days after the distribution was received, whichever was later.
If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date.
Distributions by the required beginning date.
You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. If you reach age 70½ in 2009, you are not required to receive your first distribution by April 1, 2010 due to the special waiver for 2009. Your first required distribution however must be made for 2010 by December 31, 2010.
Caution
Even if you begin receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.
More than minimum received.
If, in any year, you receive more than the required minimum distribution for that year, you will not receive credit for the additional amount when determining the minimum required distributions for future years. This does not mean that you do not reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year.
Distributions after the required beginning date.
The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year.
Example.
You reach age 70½ on August 20, 2009. For 2009, you are not required to take a required minimum distribution. Your first required minimum distribution would be for 2010 which you must receive by December 31, 2010.
Distributions from individual retirement account.
If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year.
Distributions from individual retirement annuities.
If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries and IRS offices.
Change in marital status.
For purposes of figuring your required minimum distribution, your marital status is determined as of January 1 of each year. If your spouse is a beneficiary of your IRA on January 1, he or she remains a beneficiary for the entire year even if you get divorced or your spouse dies during the year. For purposes of determining your distribution period, a change in beneficiary is effective in the year following the year of death or divorce.
If your spouse is the sole beneficiary of your IRA, and he or she dies before you, your spouse will not fail to be your sole beneficiary for the year that he or she died solely because someone other than your spouse is named a beneficiary for the rest of that year. However, if you get divorced during the year and change the beneficiary designation on the IRA during that same year, your former spouse will not be treated as the sole beneficiary for that year.
Figuring the Owner’s Required Minimum Distribution
Figure your required minimum distribution for each year by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy.
The IRA account balance is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured.
Contributions increase the account balance in the year they are made. If a contribution for last year is not made until after December 31 of last year, it increases the account balance for this year, but not for last year. Disregard contributions made after December 31 of last year in determining your required minimum distribution for this year.
Outstanding rollovers and recharacterizations.
The IRA account balance is adjusted by outstanding rollovers and recharacterizations of Roth IRA conversions that are not in any account at the end of the preceding year. For a rollover from a qualified plan or another IRA that was not in any account at the end of the preceding year, increase the account balance of the receiving IRA by the rollover amount valued as of the date of receipt. If a conversion contribution or failed conversion contribution is contributed to a Roth IRA and that amount (plus net income allocable to it) is transferred to another IRA in a subsequent year as a recharacterized contribution, increase the account balance of the receiving IRA by the recharacterized contribution (plus allocable net income) for the year in which the conversion or failed conversion occurred.
Distributions reduce the account balance in the year they are made. A distribution for last year made after December 31 of last year reduces the account balance for this year, but not for last year. Disregard distributions made after December 31 of last year in determining your required minimum distribution for this year.
Example 1.
Laura was born on October 1, 1938. She reaches age 70½ in 2009. Her required beginning date would normally be April 1, 2010. However, for 2009, Laura does not have to take a required minimum distribution. Her first distribution would be for 2010 which she must receive by December 31, 2010. As of December 31, 2009, her account balance was $25,600. No rollover or recharacterization amounts were outstanding. Using Table III in Appendix C, the applicable distribution period for someone her age (72) is 25.6 years. Her required minimum distribution for 2010 is $1,000 ($25,600 ÷ 25.6). That amount is distributed to her in December 2010.
Example 2.
Joe, born October 1, 1938, reached 70½ in 2009. His wife (his beneficiary) turned 56 in September 2009. For 2009, Joe does not have to take a required minimum distribution. His first distribution would be for 2010, which he must receive before December 31, 2010. Joe’s IRA account balance as of December 31, 2009, is $29,200. Because Joe’s wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses Table II in Appendix C. Based on their ages at year end (December 31, 2010), the joint life expectancy for Joe (age 72) and his wife (age 57) is 29.2 years. The required minimum distribution for 2010, Joe’s first distribution year, is $1,000 ($29,200 ÷ 29.2). This amount is distributed to Joe in December, 2010.
This is the maximum number of years over which you are allowed to take distributions from the IRA. The period to use for 2009 is listed next to your age as of your birthday in 2009 in Table III in Appendix C.
Life expectancy.
If you must use Table I, your life expectancy for 2010 is listed in the table next to your age as of your birthday in 2010. If you use Table II, your life expectancy is listed where the row or column containing your age as of your birthday in 2010 intersects with the row or column containing your spouse’s age as of his or her birthday in 2010. Both Table I and Table II are in Appendix C.
Distributions during your lifetime. Required minimum distributions during your lifetime are based on a distribution period that generally is determined using Table III (Uniform Lifetime) in Appendix C. However, if the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you, see Sole beneficiary spouse who is more than 10 years younger , later. To figure the required minimum distribution for 2010, divide your account balance at the end of 2009 by the distribution period from the table. This is the distribution period listed next to your age (as of your birthday in 2010) in Table III in Appendix C, unless the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you.
Example.
You own a traditional IRA. Your account balance at the end of 2009 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 6 years younger than you. You turn 75 years old in 2010. You use Table III. Your distribution period is 22.9. Your required minimum distribution for 2010 would be $4,367 ($100,000 ÷ 22.9). For 2009, you do not have to take a required minimum distribution.
Sole beneficiary spouse who is more than 10 years younger. If the sole beneficiary of your IRA is your spouse and your spouse is more than 10 years younger than you, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy). The life expectancy to use is the joint life and last survivor expectancy listed where the row or column containing your age as of your birthday in 2010 intersects with the row or column containing your spouse’s age as of his or her birthday in 2010. You figure your required minimum distribution for 2010 by dividing your account balance at the end of 2009 by the life expectancy from Table II (Joint Life and Last Survivor Expectancy) in Appendix C.
Example.
You own a traditional IRA. Your account balance at the end of 2009 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2010 and your spouse turns 64. You use Table II. Your joint life and last survivor expectancy is 23.6. Your required minimum distribution for 2010 would be $4,237 ($100,000 ÷ 23.6).
Distributions in the year of the owner’s death. The required minimum distribution for the year of the owner’s death depends on whether the owner died before the required beginning date. If the owner died before the required beginning date, see Owner Died Before Required Beginning Date , later under IRA Beneficiaries. If the owner died on or after the required beginning date, the required minimum distribution for the year of death generally is based on Table III (Uniform Lifetime) in Appendix C. However, if the sole beneficiary of the IRA is the owner’s spouse who is more than 10 years younger than the owner, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy).
Note.
You figure the required minimum distribution for the year in which an IRA owner dies as if the owner lived for the entire year.
Source: www.irs.gov
A Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. It is an individual retirement arrangement. However, it differs from traditional IRAs in that contributions are not deductible. For information on contributions and the limitations please refer to Chapter 2 of the Publication 590, Individual Retirement Arrangements.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.
What’s New for 2010
Modified AGI limit for Roth IRA contributions increased. For 2010, your Roth IRA contribution limit is reduced (phased out) in the following situations.
- Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $167,000. You cannot make a Roth IRA contribution if your modified AGI is $177,000 or more.
- Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2010 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.
- Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
See Can You Contribute to a Roth IRA? in this chapter.
Conversions to Roth IRAs.
Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated.Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.
Catch-up contributions in certain employer bankruptcies.
The provision for additional catch-up contributions in certain employer bankruptcies does not apply for 2010 or later years.
Qualified charitable distributions (QCDs).
The provision for tax-free distributions from IRAs for charitable purposes is scheduled to expire and will not be available for 2010.
Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee’s account can be treated as a traditional IRA or a Roth IRA.For this purpose, a “qualified employer plan” includes:
- A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),
- A qualified employee annuity plan (section 403(a) plan),
- A tax-sheltered annuity plan (section 403(b) plan), and
- A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.
Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA.
Contributions not reported. You do not report Roth IRA contributions on your return.
| Question: Can a person make a contribution to a SEP-IRA and a Roth IRA, too? |
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Answer:
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You can make a contribution to a SEP-IRA and a Roth IRA.
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However, neither a SEP IRA or a SIMPLE IRA can be designated as a Roth IRA.
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Your SEP IRA contribution and Roth IRA contribution can not be made to the same IRA.
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If you have both a Roth IRA and a SEP IRA, it can affect the contribution limits.
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See Chapter 2 of Publication 590, Individual Retirement Arrangements (IRAs), for the requirements to contribute to a SEP and a Roth IRA.
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Additional Information: (on the IRS Site)
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Source: www.irs.gov
A SIMPLE IRA plan is a Savings Incentive Match PLan for Employees. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SIMPLE IRA plan, employees and employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self-employed individuals), subject to certain limits. It is ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a retirement plan.
Advantages:
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Easy to set up and run – usually just a phone call to a financial institution gets things started.
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Administrative costs are low.
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Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.
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You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.
Under a SIMPLE IRA plan, you, the employer, make contributions to traditional IRAs (SIMPLE IRAs) set up for each of your eligible employees. In addition, this type of plan allows your employees to defer a part of their salaries into the plan for retirement. A SIMPLE IRA Plan is funded both by employer and employee contributions. Each employee is always 100% vested in (or, has ownership of) all money in his or her SIMPLE IRA.
How does a SIMPLE IRA plan work?
Example 1:
Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s salary. Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution from Rockland.
Elizabeth has a yearly salary of $50,000 and decides to contribute 5% of her salary to her SIMPLE IRA. Elizabeth’s yearly contribution is $2,500 (5% of $50,000). The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus the $1,500 contribution from Rockland). The financial institution partnering with Rockland on the SIMPLE IRA plan has several investment choices and Elizabeth is free to pick and choose which ones suit her best.
Example 2:
Austin works for the Skidmore Tire Company, a small business with 75 employees. Skidmore has decided to establish a SIMPLE IRA plan for all its employees and will make a 2% nonelective contribution for each of its employees. Under this option, even if a Skidmore employee does not contribute to his or her SIMPLE IRA, that employee would still receive an employer contribution to his or her SIMPLE IRA equal to 2% of salary.
Austin has a yearly salary of $40,000 and has decided that this year, he simply cannot make a contribution to his SIMPLE IRA. Even though Austin does not make a contribution this year, Skidmore must make a contribution of $800 (2% of $40,000). The financial institution partnering with Skidmore on the SIMPLE IRA plan has several investment choices and Austin has the same investment options as the other plan participants.
Source: IRS.gov
A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA). See Publication 560 for detailed SEP information for employers and employees.
Note: The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.
How is a SEP established?
A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.
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A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individually designed SEP may be adopted.
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Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided.
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A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.
Source: www.IRS.gov
IRS TAX TIP 2008-59
A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses.
The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
Here are some things to remember about Distributions from Coverdell Accounts:
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Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
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There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible.
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The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
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If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.
There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.
If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member. For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM begin_of_the_skype_highlighting 800-TAX-FORM end_of_the_skype_highlighting (800-829-3676).
Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.
Links:
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Publication 970, Tax Benefits for Higher Education ( PDF 368K)
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Source: IRS.gov www.irs.gov
Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).
Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.
Commissions. An amount you receive that is a percentage of profits or sales price is compensation.
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
- The deduction for contributions made on your behalf to retirement plans, and
- The deduction allowed for one-half of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs.
Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.
Military differential pay. For IRA purposes, compensation includes military differential pay you receive. Military differential payments are those payments made by some employers to employees who have been called to active duty in the uniformed services for a period of more than 30 days. Beginning in 2009, these payments will be reported in box 1 (Wages, tips, other compensation) of Form W-2.
Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2009 Form W-2 with code Q. If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you could contribute more for those years than you already have, you could have made additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions are treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:
- 3 years from the date you filed your original return for the year for which you made the contribution,
- 2 years from the date you paid the tax due for the year for which you made the contribution, or
- 1 year from the date on which you made the contribution.
Table 1-1. Compensation for Purposes of an IRA
| Includes … |
Does not include … |
|
earnings and profits from
property. |
| wages, salaries, etc. |
|
|
interest and
dividend income. |
| commissions. |
|
|
pension or annuity
income. |
| self-employment income. |
|
|
deferred compensation. |
| alimony and separate maintenance. |
|
|
income from certain
partnerships. |
| military differential pay. |
|
|
any amounts you exclude
from income. |
| nontaxable combat pay. |
|
|
|
What Is Not Compensation?
Compensation does not include any of the following items.
- Earnings and profits from property, such as rental income, interest income, and dividend income.
- Pension or annuity income.
- Deferred compensation received (compensation payments postponed from a past year).
- Income from a partnership for which you do not provide services that are a material income-producing factor.
- Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.
This information is available on the IRS Site: Page Last Reviewed or Updated: January 26, 2010
2010 Combined Traditional and Roth IRA Contribution Limits
If you are under 50 years of age at the end of 2010: The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).
If you are 50 years of age or older before 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.
See Publication 590, Individual Retirement Arrangements (IRAs), for additional information.
2010 Traditional IRA Deductible Contribution Limits
2010 Roth IRA Contribution Limits
sources: www.IRS.gov
A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.
No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.
- Your Social Security number and driver’s license number to help verify your identity.
- Names and dates of birth for anyone to be designated as beneficiaries.
- Tax ID number or Date of Trusts for any trusts to be designated as beneficiaries.
To open an account by downloading the forms you will also need:
- Acrobat reader to fill in the forms
- A Printer, as all documents documents will require your signature.
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