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IRAs (Portfolio 367)

Tax Management Portfolio, IRAs, No. 367-2nd, contains a comprehensive examination of the tax and non-tax rules governing IRAs, and the use of their tax-favored status in retirement planning. This portfolio features practical advice along with a detailed discussion of the required provisions and federal income taxation of individual retirement annuities and traditional individual retirement accounts created under §408, and Roth IRAs created under §408A. Both individual retirement accounts and individual retirement annuities are referred to herein as IRAs.

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DESCRIPTION

Tax Management Portfolio, IRAs, No. 367-2nd, contains a comprehensive examination of the tax and non-tax rules governing IRAs, and the use of their tax-favored status in retirement planning.

This portfolio features practical advice along with a detailed discussion of the required provisions and federal income taxation of individual retirement annuities and traditional individual retirement accounts created under §408, and Roth IRAs created under §408A. Both individual retirement accounts and individual retirement annuities are referred to herein as IRAs.

The analysis covers the rules governing IRA contributions, fees, distributions, rollovers and prohibited transactions between IRAs and disqualified persons. Also discussed in detail are investment restrictions, and the withholding, reporting and disclosure rules. Finally, this portfolio explains state taxation, as well as ERISA, bankruptcy and other federal law considerations.


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AUTHORS

KATHRYN J. KENNEDY
Kathryn J. Kennedy; Drake University (B.S., with honors, 1974); Fellow of the Society of Actuaries (F.S.A., 1976); Northwestern University School of Law (summa cum laude, Order of the Coif, Article Editor for the Northwestern University Law Review, 1980); Member: Illinois Bar; Professor of Law and Director of the Center for Tax Law and Employee Benefits, John Marshall Law School; Member of the EP subcommittee of the IRS Advisory Council (ACT); Former Member of the Department of Labor's ERISA Advisory Council; Chair of the Distributions Subcommittee, Employee Benefits Committee of the ABA Section of Taxation; Former Chair of the ISBA Employee Benefits Section Council; Former Chair of the CBA Employee Benefits Committee.

TABLE OF CONTENTS

Portfolio Description

 Authors

 Technical Advisors

 Description

 Detailed Analysis

 I. Types of IRAs

 A. Historical Perspective on IRAs

 B. Introduction to IRAs

 II. Required Provisions

 Introductory Material

 A. Full Vesting at All Times

 B. Required Provisions for IndividualRetirement Accounts

 1. Written Trust or Custodial Agreement

 2. Contribution Limits

 3. U.S. Situs

 4. Firms Qualified to Serve as Trustee orCustodian

 5. Exclusive Benefit Rule

 6. No Investment in Life Insurance

 7. No Commingling of Investments

 C. Required Provisions for IndividualRetirement Annuities

 1. Issued by an Insurance Company

 2. No Life Insurance

 3. Nontransferable

 4. No Fixed Premiums

 5. Maximum Annual Premiums; Other PremiumIssues

 D. Required Provisions for a § 408(c) IRASponsored by an Employer or Union

 E. Requirements for Retirement Bonds

 III. Federal Income Tax Aspects of IRAs

 A. Contributions Other than Rollovers

 1. Cash Only

 2. No Contributions After Age 701/2  (Except Rollovers and Roth IRAs)

 3. Deadline for Contributions

 4. Limits on Contribution Amounts

 a. Maximum Dollar Amount

 b. Compensation Amount

 c. Reduced Deduction Limit for Certain ActiveParticipants

 d. Active Participant

 (1) Defined Benefit Plans

 (2) Defined Contribution Plans

 (3) Purely Discretionary Profit-Sharing andStock Bonus Plans

 (4) Employee Contributions

 (5) Exceptions to the Above Rules

 e. Additional Contributions for Participantsin Plan with Bankrupt Sponsors

 f. Reductions Due to Other IRA Contributions

 g. Nondeductible Contributions

 (1) General

 (2) Designation

 (3) Timing

 (4) Recordkeeping Requirements

 (5) Reporting Requirements; Penalties

 h. Spousal IRA Contributions

 5. Excess Contributions

 a. To an IRA Other than a Roth IRA

 b. Excess Contribution to a Roth IRA

 c. Arising from Contributions by Other Persons

 d. Excise Tax

 e. Corrective Techniques

 (1) Carryforward to Later Years

 (2) Withdrawals

 6. No Contributions to an Inherited IRA

 7. Contributions by Persons Other than the IRAOwner

 a. Contributions by Employers

 b. Contributions by Estates

 8. Premium Payments for Individual RetirementAnnuities

 B. Fees of IRA Trustee, Custodian or AnnuityIssuer

 C. Broker's and Insurance Agent's Commissions

 D. Distributions

 1. Constructive Receipt

 2. Distributions to the IRA Owner

 a. Federal Income Tax

 b. Early Distribution Tax

 (1) Amount Subject to Tax

 (2) Exceptions in General

 (3) Exception for Substantially Equal PeriodicPayments

 (4) Exception for Qualified First-TimeHomebuyer Distributions

 (5) Exception for Amounts Allowable as aMedical Expense Deduction

 (6) Exception for Health Insurance PremiumsAfter Becoming Unemployed

 (7) Exception for Qualified Higher EducationExpenses

 (8) Exception for Qualified ReservistDistributions

 c. Minimum Required Distributions

 (1) Required Beginning Date

 (2) IRA Owner Dies Before the RequiredBeginning Date

 (a) Five-Year Rule

 (b) Exceptions

 (c) Determining Whether the 5 Year Rule or anException Applies

 (3) IRA Owner Survives to Required BeginningDate

 (a) How Is the Minimum Amount Calculated?

 (b) What Is the Applicable Divisor?

 (c) How Does the Divisor Change Once the IRAOwner Dies after the Required Beginning Date?

 (d) What Account Balance Is Used?

 (4) Beneficiary Designations

 (a) Who Can Be a Beneficiary?

 (b) Timing of the Designated Beneficiary

 (c) Multiple Beneficiaries

 (d) Rollovers or Transfers to an IRA thatNames a Different Beneficiary

 (e) Disclaimer by Beneficiary

 (f) Named Beneficiary's Rights Voidable Underan IRA Custodial Agreement?

 (5) Calculating the Required MinimumDistribution from an Annuity

 (6) Minimum Distribution Incidental Benefit(MDIB) Rules

 (7) No Credit for a Distribution in Excess ofa Year's Required Minimum Distribution

 (8) Deadline for Required MinimumDistributions

 (9) Excise Tax for Failure to Receive RequiredMinimum Distributions

 (10) Effect of Required Minimum Distributionson Rollovers and Transfers

 (11) Required Minimum Distributions forMultiple IRAs Are Computed on an Aggregate Basis

 (12) Miscellaneous Rules

 (13) IRA Reporting of Minimum RequiredDistributions

 3. Divorce Distributions

 4. Constructive Distributions

 a. Prohibited Transactions

 b. Pledging and Borrowing

 c. Collectibles as Investments

 d. Purchase of an Endowment Contract

 5. Foreign Tax Issues

 6. Alternative Minimum Tax

 7. Tax-Free Charitable Distributions

 8. HSA Funding Distributions

 9. Required Minimum Distributions for 2009

 E. Rollovers

 1. Transfers Distinguished

 2. Rules Applicable to All Rollovers

 a. 60-Day Time Limit and Waiver by IRS

 b. No Rollover of a Required MinimumDistribution

 c. Partial Rollovers from Plan or IRA

 d. Rollovers to Multiple Recipients

 e. Rollovers of Mandatory Distributions

 f. Rollover Notice

 3. Rollover of IRA Distributions

 a. IRA Distributions Rolled Over to AnotherIRA

 b. IRA Distributions Rolled Over to anEligible Retirement Plan

 (1) After 2001

 (2) Before 2002

 c. Rollover of Property Other than Money

 d. Rollovers After Death of the IRA Owner

 4. Rollover of § 401(a) Qualified PlanDistributions into IRAs

 a. Rollover of Property in Kind from a §401(a) Qualified Plan, or Its Proceeds

 b. Rollover of After-Tax Employee Contributions

 c. Rollover of a Distribution from a § 401(a)Qualified Plan to an “Alternate Payee”

 d. Rollover of a Distribution from a § 401(a)Qualified Plan to a Surviving Spouse

 e. Rollover of a Distribution from a § 401(a)Qualified Plan to a Nonspouse Beneficiary

 f. Miscellaneous Rollover Rules

 5. Rollover of § 403(a) Annuity PlanDistributions into IRAs

 6. Rollover of § 403(b) Tax-Sheltered AnnuityDistributions into IRAs

 7. Capital Gain and Averaging Treatment

 8. Rollover of State or Local GovernmentDeferred Compensation Plan Proceeds into IRAs

 9. Direct Rollovers from Eligible Plans toRoth IRAs

 10. Rollover of Former § 405 Qualified BondPurchase Plan Proceeds into IRAs

 11. Rollovers from Federal Plans to IRAs

 a. Rollover of Lump-Sum Credit Under CivilService Retirement System into an IRA (Not Allowed)

 b. Rollover of Thrift Savings PlanDistributions from Federal Plans

 12. Failed Rollovers: Tax Consequences

 F. Deducting Losses from IRA Investments

 G. Income Tax Planning Opportunities

 H. Hurricane Withdrawals

 I. Rollovers by Nonspouse Beneficiaries ofCertain Retirement Plan Distributions

 IV. Prohibited Transactions

 Introductory Material

 A. Persons and Transactions Covered

 1. Disqualified Persons

 2. Prohibited Transactions

 3. Prohibited Transaction Exemptions

 a. Statutory Exemptions

 (1) Sale of Bank Stock

 (2) Investment Advice

 (3) Service Providers

 (4) Correction of Prohibited Transaction

 (5) Block Trades

 (6) Electronic Communication Network

 (7) Foreign Exchange Transactions

 (8) Cross Trading

 b. Individual Exemptions

 c. Administrative Exemptions

 d. Class Exemptions

 4. Fiduciary Prohibited Transactions andSelf-Directed IRAs

 B. Tax Consequences

 C. Excise Tax on Prohibited Tax Shelter Transactions

 V. Investment Restrictions on IRAs

 A. Plan Asset Regulations

 1. DOL Plan Asset Regulations

 2. Exceptions to the DOL Plan AssetRegulations

 3. Pension Protection Act of 2006 Amendments

 B. Unrelated Business Taxable Income

 C. Collectibles

 VI. Obtaining IRS Approval of IRAs

 Introductory Material

 A. Automatic Reliance by Individuals

 B. IRS Opinion Letters Concerning IRAs

 VII. Withholding, Reporting and DisclosureRules for IRAs

 A. Reporting and Disclosure Requirements ofIRA Owners

 1. Deductible Contributions

 2. Form 8606

 3. Form 5329

 4. Form 1099-R for Distribution Subject toWithholding

 B. Reporting and Disclosure Requirements ofTrustees, Custodians and Annuity Issuers

 1. Form 5498 to IRS

 2. Fair Market Value Statement and ContributionInformation to IRA Owner

 3. Distribution Reporting to IRS andDisclosure to Payees

 4. Disclosure Statement

 C. Additional Reporting Rules for IRAsSponsored by Employers or Employee Associations

 D. Income Tax Withholding Rules

 1. Designated Distributions

 2. Persons Liable for Withholding

 3. Periodic and Nonperiodic Distributions

 4. Election of No Withholding; NoticeRequirements

 a. Periodic Payments

 b. Nonperiodic Payments

 5. Reporting and Recordkeeping Requirements

 6. Miscellaneous Withholding Rules

 VIII. Other Tax Aspects of IRAs

 A. Federal Payroll Taxes

 B. State Taxes

 C. Assignment of Income

 IX. Non-Tax Rules for IRAs

 A. Creditors' Rights to IRA Assets

 1. State Law and Federal Laws Other ThanBankruptcy

 2. Bankruptcy Law

 a. Exclusions from Bankruptcy Estate Under §541

 b. Exemptions from Bankruptcy Estate Under §522

 3. IRS's Right to Levy

 B. Exculpatory Provisions in IRA Agreement (InFavor of IRA Trustee or Issuer)

 C. ERISA Considerations

 1. Individually Established IRAs

 2. Employer or Labor Union-Sponsored IRAs

 D. Federal Securities Laws

 E. State Law Issues for IRAs

 X. Roth IRAs

 A. In General

 B. Creation of a Roth IRA

 C. Contribution Limits

 D. Qualified Rollover Contributions

 1. In General

 2. Special Income Inclusion Rule

 3. Contribution Recharacterization

 a. Recharacterization Election

 b. Deadlines for Recharacterization

 c. Earnings (or Losses) Recharacterized

 4. Reconversions

 E. Qualified Distributions

 F. Excess Roth IRA Contributions

 G. Roth IRA Forms and Reporting Requirements

 1. IRS Forms

 2. IRS Opinion Letters Concerning Roth IRAs

 3. Reporting Requirements for Roth IRAs

 H. Creditor Protection

 I. Tax-Free Charitable Distributions

 J. Roth IRA Conversions in 2010 and Thereafter

 1. Restrictions on Roth IRA Conversions Priorto 2010

 2. Tax Consequences of Roth IRA Conversions

 3. Reversing a Roth IRA Conversion


WORKING PAPERS

 Working Papers

 Table of Worksheets

 Other Sources

 Worksheet 1 Publication 590, IndividualRetirement Arrangements (IRAs)

 Worksheet 2 IRS Listing of RequiredModifications for Traditional IRAs (language for use by drafters of traditionalindividual retirement accounts)

 Worksheet 3 IRS Listing of RequiredModifications and Information Package for Roth Individual Retirement Accounts

 Worksheet 4 Traditional and Roth IRADistribution Flowcharts, reprinted from 32 Tax Mgmt. Compensation Plan. J. 233(7/2/04)

 Worksheet 5 Comparison Chart of IRAs forIndividuals

 Worksheet 6 IRA and SEP Checklist for thePension Protection Act of 2006

 Bibliography

 OFFICIAL

 Statutes:

 Regulations:

 IRS Announcements:

 IRS Notices:

 Treasury Rulings:

 Cases:

 UNOFFICIAL

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