IRA Contributions

Self-directed IRA

Self-directed IRAs allow individuals to select, either alone or with the advice of a broker or investment advisor, those investments which they prefer for their IRA accounts. Permitted investments include not only bank certificates of deposit, stocks, bonds, and mutual funds, but also real estate, limited partnerships, private placements and deeds of trust, among others. Through such investments, individuals can plan their financial future and take advantage of the significant benefits that IRAs offer.

More and more individuals and their advisors are realizing that self-directed retirement accounts are compelling investment vehicles. IRAs can be the current investment vehicle of choice now as well as in the future.

PENSCO Trust is one of a limited number of companies which is authorized under the tax laws to provide retirement account custodial services.

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Transfers and Rollovers

If an individual desires to move an existing IRA from one institution to another, he or she can accomplish this by either a transfer or a rollover.

Transfers

A direct movement from one authorized IRA custodian or trustee to another, upon the request of the IRA owner, is called a transfer. This is a tax-free and penalty-free transfer of assets from one IRA to another.

Rollovers

A rollover is also a tax-free movement of funds or property. However, unlike a transfer, a rollover to an IRA may be from a qualified plan, another IRA, a tax-sheltered annuity (403(b)) plan or an eligible deferred compensation (457(b)) plan maintained by a governmental entity. Funds or assets distributed must be returned to the IRA custodian or trustee within 60 days from the day of receipt. (The IRS may extend this 60-day period in certain rare circumstances if the failure to complete the rollover in that time was beyond the control of the IRA owner.) If the rollover is not successfully completed within the required time period, the IRA owner will be subject to taxation and possible penalties.

Transfer Rules

Because the IRA owner does not actually receive the funds or property when a direct IRA to IRA transfer is executed, a transfer is not an IRS reportable event and no tax consequences will result. If funds are involved, the check is made payable to the new custodian or trustee. Stock or other non-cash property will be reregistered in the name of the new custodian or trustee. There is no limit on the number of transfers an IRA owner may conduct during a year. In addition, partial transfers are permitted. Once the current custodian or trustee is presented with a transfer from the successor custodian or trustee (authorized by the IRA owner), the transactions are handled by the respective institutions.

Rollover Rules

IRA to IRA

The IRA owner should complete a withdrawal form and send it to the IRA custodian or trustee. The check issued by the custodian or trustee should be made payable to (or assets re-titled in the name of) either the new IRA custodian or trustee, or the IRA owner for later re-titling in the name of the new IRA. The current custodian or trustee will report this transaction to the IRS as a distribution because the IRA owner is directly receiving the funds or assets.

If a rollover is made from an IRA, another rollover may not be made from that same IRA for at least twelve months after the rollover distribution is made.

Retirement Plan To IRA

Under the tax laws, lump sum and certain other types of distributions from qualified plans, 403(b) plans or 457(b) plans are eligible for rollover to an IRA. The plan administrator of any such plan will let you know if a distribution is an eligible rollover distribution.

For an eligible rollover distribution, an individual can then choose between a direct or indirect rollover. A direct rollover is much like a direct IRA transfer, in that funds or assets move directly from the plan to the IRA in the name of the IRA custodian or trustee. Amounts which are directly rolled over are not subject to federal income tax withholding.

Retirement Plan to IRA Indirect Rollovers

If the individual chooses to have the eligible rollover distribution paid personally (i.e., not go into an IRA), the plan administrator is required to withhold 20% from the distribution for federal income taxes before issuing the distribution. The IRA owner can still roll over an amount equal to the entire amount of the distribution, but must make up the 20% withheld with other funds to avoid being subject to tax (and possible penalties) on the amount not rolled over. Because of this, indirect rollovers generally are not desirable.

Contributions & Deductions

Each individual is limited to making a contribution to the lesser of $5,000 ($6,000 if the individual is at least age 50) or the amount of his or her "compensation." In general, "compensation" is income you receive from working, such as wages, salary, tips, commissions, and self-employment income. "Compensation" also includes alimony or separate maintenance payments received.

The following are among the types of income which are not "compensation":

rental income
interest and dividend income
pension annuity payments
deferred compensation
income from a partnership or limited liability company in which you do not provide material income-producing services

The deductibility of IRA contributions for any year can be affected by whether or not the individual is a participant in a tax-favored retirement plan, the individual's tax return filing status, as well as the amount of the individual's "adjusted gross income" for that year. However, to the extent an individual is not eligible to make a full deductible contribution for any year, he or she can still make a nondeductible contribution to an IRA and have the earnings on those contributions grow on the same tax-favored basis as earnings on deductible contributions.

Spousal IRA

A spousal IRA enables an earning spouse to fund an IRA for the other spouse, with certain limitations on deductions.

For 2008, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts:

$5,000 ($6,000 if you are age 50 or older), or
The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.
1. Your spouse's IRA contribution for the year to a traditional IRA.
2. Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is age 50 or older or $12,000 if both of you are age 50 or older).

Among the important spousal IRA conditions are the following:

the couple must be married
at least one spouse must have compensation
a joint federal tax return must be filed
an IRA must be established for the non-compensated spouse
the non-compensated spouse must be under the age of 70½

A working spouse over age 70½ can contribute up to maximum allowed ($5,000 or $6,000 depending on age) on behalf of the non-compensated spouse, if the non-compensated spouse is under age 70½ and the above requirements are met, even if the working spouse cannot on account of age contribute to his or her own IRA.

Each spouse must have his or her separate IRA; both spouses cannot contribute to the same IRA. If the non-compensated spouse later receives compensation, he or she does not have to open another IRA for future contributions. Those future contributions can be deposited in the spousal IRA which has already been established.

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRA may be established by employers with fewer than 100 employees, provided certain requirements in the tax laws are met. A SIMPLE IRA is essentially a more limited version of a 401(k) and an expanded version of a SEP IRA.

The structure of a SIMPLE IRA allows for a mandatory employer contribution and optional employee deferrals. All contributions must be made to a SIMPLE IRA, not a regular IRA. Conversely, regular contributions must not be made to a SIMPLE IRA.

SEP IRA

A SEP (Simplified Employee Pension) IRA is an employee benefit plan with compliance and reporting requirements simpler than those for qualified plans. For that reason, SEP IRAs are attractive for sole proprietors and small companies. Contributions (tax deductible to employers) must be made to IRAs because IRAs are the funding vehicle for SEPs.

Contributions are limited to 25% of adjusted gross income or $46,000 for 2009, whichever is less.

SEP participants can still contribute up to $5,000 (or $6,000 if over 50) to an IRA. However, because a SEP is an employee benefit retirement plan, an active participant in a SEP may not be able to deduct non-SEP contributions.

The employer has until its tax filing date for its business, including any extensions, to make SEP contributions.

Conduit IRA

A conduit IRA is an IRA which is funded solely from amounts attributable to a rollover from a qualified retirement plan, tax-sheltered annuity (403(b)) plan or governmental eligible deferred compensation (457(b)) plan and earnings on those amounts.

Recent changes to the tax laws permit plans to accept rollovers from IRAs funded with any type of before-tax contributions. However, many plans choose to accept rollovers from an IRA only if the IRA is funded exclusively with amounts rolled in from one of the plans mentioned above. For that reason, conduit IRAs are useful because they preserve an IRA owner's option to roll back funds into a plan that so limits rollovers from IRAs.

IRA to Plan Rollover

When the IRA owner desires to roll an IRA back to a plan, a distribution may be made from the IRA custodian or trustee to the IRA owner. The IRA owner then has 60 days to deposit the amount in a plan to avoid taxation and possible penalties. (The IRS may extend this 60-day period if the failure to complete the rollover in that time was beyond the control of the IRA owner.) The IRA custodian or trustee will treat this rollover as a distribution by reporting it on Form 1099-R. The receiving plan will report this to the IRS as an incoming rollover contribution.

The rollover can also be made directly from the IRA to the recipient plan. Either way, there is no mandatory federal income tax withholding, as there may be with distributions from retirement plans.