(d)     A deductible contribution of $5,000 will reduce taxable income by $5,000.  In the 28% tax bracket, there will be an immediate tax savings of $1,400 (28% x $5,000).


 The Internal Revenue Service will tax income in a traditional IRA when it is:

(b)     Earnings in an IRA are tax deferred.  The IRS taxes the earnings when they are withdrawn from the account.  There is no tax consequence to transfers between IRA custodians.  There is no tax liability when a distribution is rolled over between custodians provided the rollover is accomplished within 60 calendar days -- the IRS will impose withholding against the rollover, but this can be refunded upon proper completion of the rollover.

(c)     IRAs may be established for a given year at any time between January 1st of that year and the tax filing deadline of April 15th of the following year.

  (c)     Current regulations allow workers to contribute the lesser of 100% of earned income or $6,000 per year in 2019 ($7,000 for those age 50 or older).  In this case, 100% of earned income is less, so she may contribute $2,500.

    (b)     Excess contributions to an IRA are subject to a 6% penalty.  In this case, Mr. Brady is entitled to contribute $6,000.  The 6% penalty is applied to the excess $1,000 contribution.  He must pay a penalty of $60.  Current rules require the excess contribution of $1,000 to be withdrawn from the account no later than the tax filing date.

(b)     In this example, both spouses have earned income, so both may contribute $6,000 to their IRAs, on their own behalf (i.e., not as spousal IRAs).  John is an active participant in a qualified plan while Mary is not.  As an "active participant" in a pension plan and earning more than $123,000 jointly (the income threshold in 2019), John's contribution is not tax deductible.  Mary, on the other hand, is not an "active participant"; her contribution may be tax-deductible.  Deductions for such contributions phase out when joint income is between $193,000 and $203,000 (in 2019).  Her contribution is tax deductible since the couple earned less than $193,000.

    (a)     In this example, both spouses have earned income, so both may contribute $6,000 to their IRAs, on their own behalf (i.e., not as spousal IRAs).  John is an active participant in a qualified plan while Mary is not.  As an "active participant" in a pension plan and earning more than $123,000 jointly (the income threshold in 2019), John's contribution is not tax deductible.  Mary, on the other hand, is not an "active participant"; her contribution may be tax-deductible.  Deductions for such contributions phase out when joint income reaches $203,000 (in 2019).  Her contribution is not tax deductible since the couple earned more than $203,000 -- the income cutoff for such deductions.

  (a)     Whether the employee's pension benefits are vested or not is immaterial.  This employee is "eligible" for a pension plan -- so he is an "active participant". Since his income exceeds the income threshold  any contributions are non-deductible.   He may make a contribution of $6,000 to a non-deductible IRA or Roth IRA.  

  (b)     For individual taxpayers covered by a qualified pension plan, the deductibility of IRA contributions is "phased out" at the rate of $.60 for every $1 of earnings above the income threshold ($64,000 in 2019).  Jim earned $8,000 more than the $59,000 limit.  The non-deductible portion of his contribution is $4,800 ($8,000 x .60).  The remaining $1,200 of the contribution is deductible.

 (d)     This is an example of a rollover - and is a prime example of why the IRS limits the number of rollovers an IRA holder is entitled to.  Because the IRA funds were redeposited in an IRA within 60 days of the withdrawal, there is no tax consequence assuming Mr. Hunt has not rolled over the funds in the past year.  If they had not been redeposited, Mr. Hunt would have to pay taxes on the withdrawal, plus a penalty for early withdrawal.  [Needless to say, this type of activity should not be recommended to clients.]

(c)     Movement of IRA or pension plan assets directly between custodians is an example of a transfer, not a rollover.

(b)     Rolling lump sum distributions into an IRA is a way of delaying the tax bite on the pension distribution.  Taxes will be owed when money is withdrawn, which must begin no later than age 70½.  Rollovers do not "eliminate" taxes.  By placing the pension plan assets in the IRA, they will not generate current income for the IRA holder.  There is no law which requires rollovers of pension plan assets.

(c)     To avoid taxes on the pension plan distribution, Mr. Franklin should roll the distribution into an IRA.  Since he is seeking another job with retirement benefits, he may wish to eventually move the "old pension" money to the new employer's plan.  If the lump sum is commingled with other IRA assets (such as the account established with deductible  contributions), the pension money can not be subsequently moved into the new pension plan.  The best course of action is to hold that money in a separate IRA account -- a Conduit IRA.

(d)     IRS rules prohibit the investment of IRA assets in life insurance policies.

(c)     Collectibles and precious metals are prohibited investments in an IRA with the exception of US Gold Eagle coins and certain types of precious metals.

(c)     Mutual funds provide the most convenient investment in an self-directed IRA.  Almost 40% of IRA investors own at least one stock fund, 12% are invested in bond funds, and 27% hold money market funds in their IRAs.  Certificates of deposit are typically held in bank IRAs.

(d)     All of the choices presented are suitable for conservative investors.  However, municipal bond funds would be poor choice as an IRA investment.  In an IRA, the earnings are tax deferred.  The lower, tax free yields of municipal bonds is a disadvantage for an IRA investor.  Tax-advantaged investments, such as municipal bonds are best held in the individual's "regular" accounts -- not an IRA.

(d)     Fixed income securities, such as bonds (both interest paying and zero coupon), are subject to inflation risk.  Stocks, with their potential for appreciation, provide a better inflation hedge than bonds.   Growth stocks have greater appreciation potential than utility stocks.

(d)     Taxes on any earnings in the account, whether from dividends, interest or capital gains, are deferred until withdrawal from the account.  There is no requirement thatwithdrawal begin at age 59½ , or at retirement. All earnings in the account - dividends, interest or capital gains - will be taxed at the ordinary tax rate (i.e., the capital gains tax rate does not apply in an IRA)

(c)     Withdrawals prior to age 59½  are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn.  The penalty can be avoided in the event of death or disability.  There is no exemption for "financial hardship".  Mr., Johnson owes taxes of $1,400 (28% of $5,000) plus a penalty of $500 (10% of $5,000).

(d)     Once an IRA has been established, the holder may withdraw funds at any time.  However, premature withdrawals subject the IRA owner to a 10% penalty.

(c)     Withdrawals prior to age 59½  are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn.  The penalty can be avoided in the event of death or disability.

(c)     Mandatory withdrawals are required once an IRA holder reaches age 70½ . Failure to take the required amount results in a 50% penalty. The amount of the required annual distribution is found by dividing the value of the account (as of January 1st of the year) by the life expectancy of the holder (based on age as of December 31st).  In this case the woman must withdraw $4,000 ($88,000 divided by 22.0 years) to avoid the 50% penalty.  She will, of course, pay taxes on any amounts withdrawn.

(d)     The IRS requires the first mandatory withdrawal from an IRA to be taken no later than April 1st of the year following the year in which the account holder reaches age 70½ .  In this case, Mrs. Thompson reaches age 70½  in 2020 (her 70th birthday was August 1, 2019).  She must begin withdrawals no later than April 1st of the following year - 2021.

(b)     The man is required to withdraw $5,000 from the account ($60,000 value divided by 12.0 year life expectancy).  Since he withdrew only $3,000, he is subject to the 50% penalty on the $2,000 undistributed amount - the "excess accumulation".  His penalty is $1,000 (50% of $2,000).