Page 28 - Investment Advisor March 2022

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When are IRA funds transferred between Catch-up contributions are additional
2 spouses or incident to a divorce treated as elective deferrals for individuals 50 or
taxable distributions? older, which are not subject to the gen-
An individual may transfer, without tax, the individual’s IRA eral contribution ceiling of $14,000 in
to his or her spouse or former spouse under a divorce or sepa- 2022. All SIMPLE IRA contributions
rate maintenance decree or a written instrument incident to are excludable from the employee’s
the divorce. The IRA then is maintained for the benefit of the income, provided they meet certain
former spouse. Any other assignment of an IRA is a deemed design requirements set forth in the
distribution of the amount assigned. IRC. Moreover, certain lower-income
taxpayers may be eligible to claim the
Are IRA distributions subject to the 3.8% saver’s credit for salary reduction con-
3 net investment income tax? tributions to a SIMPLE IRA.
Distributions from traditional and Roth IRAs are not subject
to the 3.8% net investment income tax (also known as the How are amounts
Medicare contribution tax) imposed under the Affordable 6 distributed from a
Care Act. The tax equals 3.8% of the lesser of a taxpayer’s net traditional IRA taxed?
investment income for the taxable year, or the excess (if any) Distributions from a traditional IRA gen-
of the taxpayer’s modified adjusted gross income for the year, erally are taxed under IRC section 72
over a threshold amount ($200,000 for a taxpayer filing an (relating to the taxation of annuities). A
individual return and $250,000 for a taxpayer filing jointly). portion of the distribution may be exclud-
IRC Section 1411 specifically excludes distributions from both able from income — this amount in a given
traditional and Roth IRAs and other qualified plans from the year is that portion of the distribution
definition of “net investment income.” that bears the same ratio to the amount
received as the taxpayer’s investment in
Who is an “active participant” for purposes the contract (ie., nondeductible contribu-
4 of IRA eligibility rules and deduction limits? tions) bears to the expected return under
Suppose an individual is an “active participant” in: (1) a quali- the contract. In no case will the total amount excluded exceed
fied corporate or Keogh pension, profit sharing, stock bonus, the unrecovered investment in the contract.
or annuity plan; (2) a simplified employee pension or SIMPLE All traditional IRAs are treated as one contract, all distribu-
IRA; (3) a Section 403(b) tax sheltered annuity; or (4) a gov- tions during the year are treated as one distribution and the
ernment plan. In those instances, the individual’s deduction value of the contract, income on the contract, and the invest-
limit for contributions to a traditional IRA may be reduced ment are computed on the close of the calendar year or when
or eliminated. The limitation applies if the individual or their the taxable year begins.
spouse was an active participant for any part of the plan year Example: Bill King has made nondeductible contributions
that ended with or within the taxable year. to a traditional IRA totaling $2,000, giving him a basis at the
end of 2022 of $2,000. By the end of 2023, his IRA earns $400
How are SIMPLE IRA plan in interest income. In that year, Bill receives a distribution of
5 contributions taxed? $600. Of that amount, the nontaxable portion of the distribu-
A SIMPLE (savings incentive match plan for employees) tion is equal to $500.
IRA plan is a simplified, tax-favored retirement plan offered
by small employers that provides employees with a simpli- How are amounts distributed from a
fied method to contribute toward their retirement savings. 7 Roth IRA taxed?
Employees may choose to make salary reduction contributions “Qualified distributions” from a Roth IRA are not included in
(aka elective deferrals) and the employer is required to make gross income. Thus, earnings are tax-free, not tax deferred as
either matching or nonelective contributions. Contributions with traditional IRAs.
are made to an IRA set up for each employee that meets certain A “qualified distribution” made after the five-taxable year
vesting, participation and administrative requirements. period beginning with the first taxable year for which the
There are four permissible types of contributions to a individual (or their spouse) made a contribution to a Roth IRA
SIMPLE IRA plan: (1) salary reduction contributions, (2) catch- must meet these requirements:
up contributions, (3) matching contributions and (4) nonelec- 1. It is made on or after the date on which the individual
tive contributions. Salary reduction and catch-up contributions attains age 59 ½
are made by the employee, and the employer is responsible for 2. It is made to a beneficiary (or estate of individual) on or
making either a matching or nonelective contribution. after individual’s death

26 INVESTMENT ADVISOR MARCH 2022 | ThinkAdvisor.com