General Rules Of Individual Retirement Plans

<div class="Section1">Prior to TRA &rsquo;84, the IRC provided for the issuance of retirement bonds.<a href="#_ftn1" name="_ftnref1">¹</a> These bonds were issued by the U.S. government, with interest to be paid on redemption. Sales of these bonds were suspended as of April&nbsp;30, 1982.<a href="#_ftn2" name="_ftnref2">²</a> Subsequently, the Treasury Department announced that existing bonds could be redeemed by their holders at any time without being subject to an early distribution penalty ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3677">3677</a>).<a href="#_ftn3" name="_ftnref3">³</a> Existing bonds also can be rolled over into other individual retirement plans under rules applicable to rollovers from individual retirement plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4004">4004</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;409, as in effect prior to repeal by TRA &rsquo;84.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treasury Release (4-27-82).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treasury Announcement (7-26-84).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;409(b)(3)(C), prior to repeal.<br /> <br /> </div></div><br />

<div class="Section1">An IRA offers tax-free build up on contributions. The earnings on a traditional IRA are tax deferred to the owner; that is, they are not taxed until the owner begins receiving distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a>). The earnings on a Roth IRA may or may not be taxed upon distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>). Like a trust that is part of a qualified plan, an individual retirement account is subject to taxes for its unrelated business income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3974">3974</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4098">4098</a>).<div class="Section1"><br /> <br /> Tax deferral is lost if an individual engages in a prohibited transaction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3980">3980</a>) or borrows under an individual retirement annuity. The loss occurs as of the first day of the tax year in which the prohibited transaction or borrowing occurred.<a href="#_ftn1" name="_ftnref1">¹</a> For an account established by an employer or association of employees, only the separate account of the individual loses its deferred status.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Prohibited transactions include: borrowing money from the IRA, selling property to it and using IRA assets for personal use or as security for a personal loan. Additionally an IRA is prohibited from investing in collectibles (e.g. artwork, antiques, stamps) and life insurance.<br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e); Treas. Reg. &sect;&nbsp;1.408-1.<br /> <br /> </div></div><br />

<div class="Section1">Sequence of returns risk is a market volatility issue surrounding the order in which returns on a taxpayer’s investments occur when the taxpayer is taking distributions or withdrawals from the portfolio.</div><br /> <div class="Section1"><br /> <br /> Essentially, if a greater proportion of low or negative returns occur during the early years of retirement, when taxpayer is taking withdrawals, the taxpayer’s overall returns are going to be lower than if those negative or low returns occurred at a later point in the taxpayer’s (and the investment’s) lifetime. Mathematically, this is because the withdrawal of a fixed dollar amount from a portfolio when the portfolio value is down requires the liquidation and distribution of a larger percentage of the portfolio than would be required when the portfolio value is high. These early low (or negative) returns and distributions have a larger impact on the compounded value of the portfolio if they occur in early years. Negative returns could even cause a portion of the principal investment to be lost.<br /> <br /> Even if the return is simply lower than average in the early years while distributions are being taken, the investment will generate an overall lower return because the investment will gain less value early on, meaning there will be a lower account value to generate growth even in later, higher return periods.<br /> <br /> When the taxpayer is making withdrawals from his or her investment accounts, the risk of outliving the retirement assets is magnified when negative returns occur in early years.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Financial planners modeling sequence of returns risk for their clients can illustrate the potential impact of (1) reducing market volatility of the overall portfolio, (2) reducing withdrawal amounts in early years or delaying withdrawals from the portfolio in down markets, and (3) maintaining a balanced portfolio so that withdrawal amounts can be paid from assets with a stable asset value rather than from selling volatile assets in a depressed market – as strategies to mitigate the potential impact of sequence of returns risk.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Distributions from traditional and Roth IRAs are not subject to the 3.8 percent net investment income tax (also known as the Medicare contribution tax) imposed under the Affordable Care Act. The tax equals 3.8 percent of the lesser of a taxpayer’s net investment income for the taxable year, or the excess (if any) of the taxpayer’s modified adjusted gross income for the year, over a threshold amount ($200,000 for a taxpayer filing an individual return and $250,000 for a taxpayer filing jointly).<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> IRC Section 1411 specifically excludes distributions from both traditional and Roth IRAs and other qualified plans from the definition of “net investment income.”<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> While taxable distributions from traditional IRAs are not subject to the net investment income tax, they do increase a taxpayer’s modified adjusted gross income (MAGI) for the year. A higher MAGI may expose taxpayer’s other investment income (or increase taxpayer’s exposure) to this 3.8 percent tax. Planners should consider the effect of an IRA distribution on a client’s MAGI and exposure to the net investment income tax.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRS Publication 550 (2018).<br /> <br /> </div>

<div class="Section1">Contributions to both a traditional IRA and Roth IRA must be made by the tax filing deadline for the tax year in question, not including extensions. For example, a taxpayer who wishes to contribute to an IRA must do so prior to the federal tax filing deadline of the following year. This rule applies whether the IRA is an existing or new plan.</div><br /> <div class="Section1"><br /> <br /> With respect to traditional IRAs, contributions may be deducted for that tax year if the contribution is made on account of that year. This applies both to contributions to individual plans and contributions to spousal plans.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A postmark is evidence of the timeliness of the contribution.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC §§ 219(f)(3), 408A(c)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Let. Ruls. 8633080, 8611090, 8536085.<br /> <br /> </div>

<div class="Section1">An individual retirement annuity is an annuity or an endowment contract issued by an insurance company that is structured similarly to an individual retirement account, but must meet certain additional requirements to qualify as a retirement plan.<a href="#_ftn1" name="_ftnref1">¹</a> An endowment contract issued after November&nbsp;6, 1978 will not qualify.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> To qualify as an individual retirement annuity, as provided by IRC Section&nbsp;408(b):<br /> <blockquote>(1)&nbsp;&nbsp; The contract must be nontransferable.<br /> <br /> (2)&nbsp;&nbsp; Contracts issued after November&nbsp;6, 1978 may not have fixed premiums.<br /> <br /> (3)&nbsp;&nbsp; The annual premium on behalf of any individual may not exceed the maximum annual contribution limit for the tax year except in the case of a SIMPLE IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>) or a simplified employee pension (SEP) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a>).<br /> <br /> (4)&nbsp;&nbsp; Any refund of premium must be applied to the payment of future premiums or the purchase of additional benefits before the close of the calendar year of the refund.<br /> <br /> (5)&nbsp;&nbsp; With respect to non-Roth individual retirement annuities, distribution must begin by April&nbsp;1 of the year after the year in which the owner reaches age 73 (72 for 2020 - 2022 and 70&frac12; prior to 2020) and the period over which distribution may be made is limited.<br /> <br /> (6)&nbsp;&nbsp; With respect to both traditional and Roth annuities, required minimum distribution requirements must be met on the owner&rsquo;s death ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> (7)&nbsp;&nbsp; Distributions must comply with the incidental death benefit requirements of IRC Section&nbsp;401(a)(9) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> (8)&nbsp;&nbsp; The interest of the owner must be nonforfeitable.</blockquote><br /> A contract will be considered transferable if it can be used as security for any loan other than a loan from the issuer in an amount not greater than the cash value of the contract. Even so, a policy loan would cause the contract to cease to be an individual retirement annuity or endowment contract as of the first day of the owner&rsquo;s tax year in which the loan was made ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The Eighth Circuit has held that a premium was not fixed when a lump sum was rolled from an IRA into an individual retirement annuity because funds taken from an IRA did not constitute a premium if used to pay for an individual retirement annuity.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Proposed regulations state that for a flexible premium annuity to qualify as an individual retirement annuity, the contract must provide that (1) at no time after the initial premium has been paid will a specified renewal premium be required, (2) the contract may be continued as a paid-up annuity under its nonforfeiture provision if premium payments cease altogether, and (3) if the contract is continued on a paid-up basis, it may be reinstated at any date prior to its maturity date by a payment of premium to the insurer.<br /> <br /> Two exceptions allow the insurer to set a minimum premium, not in excess of $50, and to terminate certain contracts where premiums have not been paid for an extended period and the paid-up benefit would be less than $20 a month.<br /> <br /> A flexible premium contract will not be considered to have fixed premiums merely because a maximum annual premium is set, an annual charge is placed against the policy value, or because the contract requires a level annual premium for supplementary benefits (such as a waiver of premium feature).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The IRS has privately ruled that a contract that includes a substantial element of life insurance will not qualify as an individual retirement annuity.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> A participation certificate in a group annuity contract meeting the above requirements will be considered an individual retirement annuity if there is a separate accounting for the benefit allocable to each participant-owner and the group contract is for the exclusive benefit of the participant-owners and their beneficiaries.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> A &ldquo;wraparound annuity&rdquo; contract entered into on or before September&nbsp;25, 1981 as an individual retirement annuity will continue to be treated for tax purposes as an individual retirement annuity provided no contributions are made on behalf of any individual who was not included under the contract on that date. &ldquo;Wraparound annuity&rdquo; refers to an insurance company contract containing typical deferred annuity provisions but that also promises to allocate net premiums to an account invested in shares of a specific mutual fund that is available to the general public without purchase of the annuity contract.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Effective November&nbsp;16, 1999, annuity contracts in which the premiums are invested at the direction of the IRA owners in &ldquo;publicly available securities&rdquo; (i.e., mutual funds that are available for public purchase) will be treated as an individual retirement annuity contract if no additional federal income tax liability would have been incurred if the owner had instead contributed such amount into an individual retirement account where the funds were commingled in a common investment fund.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(b), 408A(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-3(e)(1)(ix).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(6), 408A(c)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(b)(3), 408A(c)(6).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e)(3); Treas. Reg. &sect;&nbsp;1.408-3(c).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; <em>Running v. Miller</em>, 778 F.3d 711 (8th Cir. 2015).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.408-3(f).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Let. Rul. 8439026.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-3(a).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Rev. Rul. 81-225, 1981-2 CB 12, as clarified by Rev. Rul. 82-55, 1982-1 CB 12.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Rev. Proc. 99-44, 1999-2 CB 598, modifying Rev. Rul. 81-225, 1981-2 CB 12.<br /> <br /> </div></div><br />

<div class="Section1">The trustee or issuer (i.e. &ldquo;the sponsor&rdquo;) of an IRA must furnish the plan participant with a &ldquo;disclosure statement&rdquo; and a copy of the governing instrument at least seven days before the plan is purchased or established, whichever is earlier. Alternatively, the sponsor can wait to provide the disclosure statement to the participant until the time it is purchased or established, whichever is earlier, provided that the individual is permitted to revoke the plan within at least seven days from that date.<div class="Section1"><br /> <br /> The disclosure statement must include certain items in plain language such as provisions related to when and how the IRA can be revoked and the contact information for the person to receive the notice of cancellation. An individual revoking his or her plan is entitled to the return of the full amount he or she paid without adjustment for sales commission, administrative expenses, or fluctuation in market value. If the governing instrument is amended after the IRA is no longer subject to revocation, a copy of the amendment (and possibly a &ldquo;disclosure statement&rdquo;) must be furnished to the individual not later than the 30th day after the later of the date the amendment is adopted or becomes effective.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> IRS regulations also provide that, if values under an individual retirement arrangement are guaranteed or can be projected, the trustee or issuer must in certain instances disclose to an IRA purchaser the amounts guaranteed or projected to be withdrawable. Basically, these regulations provide that the trustee must show the owner the amount the owner could receive if he or she closed the account and paid any surrender charges or penalties at the end of each of the first five years after the initial contribution and at ages 60, 65, and 70.<a href="#_ftn2" name="_ftnref2">²</a> In making the disclosure, the trustee must show the amount guaranteed (or projected) to be withdrawable, after reduction for all charges or penalties that may be applied. The disclosures required for values at an owner&rsquo;s ages 60, 65, and 70 must be based on the actual age of the individual at the time of the disclosure. If a guaranteed rate is actually lower than the rate currently being paid on an account, the disclosure statement may use the higher rate, but must clearly indicate that the guaranteed rate is lower.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> For the reporting requirements imposed on IRA trustees with respect to required minimum distributions, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3698">3698</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-6(d)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-6(d)(4)(v).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Rev. Rul. 86-78, 1986-1 CB 208.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em> The 2017 Tax Act modified the rules governing ABLE accounts to permit a contributing beneficiary to claim the saver&rsquo;s credit for tax years beginning after 2017 and before 2026. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="386">386</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="389">389</a>. Under the SECURE Act 2.0, the existing saver&rsquo;s credit will be replaced by a 50 percent matching contribution from the federal government (the match will be deposited into existing 401(k)s and IRAs). That matching contribution will be limited to $2,000 and will also be subject to phase out based on income levels. This provision becomes effective in 2027.<div class="Section1"><br /> <br /> The saver&rsquo;s credit (formally known as the retirement savings contributions credit) permits certain lower-income taxpayers to claim a nonrefundable credit for qualified retirement savings contributions.<a href="#_ftn1" name="_ftnref1">¹</a> Qualified retirement savings contributions include contributions to Roth or traditional IRAs, as well as elective deferrals to a 401(k) plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3752">3752</a>), an IRC Section&nbsp;403(b) tax sheltered annuity ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4030">4030</a>), an eligible Section&nbsp;457 governmental plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3584">3584</a>), a SIMPLE IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>), and a salary reduction SEP ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3705">3705</a>). Voluntary after-tax contributions to a qualified plan or Section&nbsp;403(b) tax sheltered annuity are also eligible for the credit.<a href="#_ftn2" name="_ftnref2">²</a> The fact that contributions are made pursuant to a negative election (i.e., automatic enrollment) will not preclude a participant from claiming the saver&rsquo;s credit.<a href="#_ftn3" name="_ftnref3">³</a> Contributions made to an IRA that are withdrawn, together with the net income attributable to such contribution, on or before the due date (including extensions of time) for filing the federal income tax return of the contributing individual are not considered eligible contributions.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> To prevent churning (simply switching existing retirement funds from one account to another to qualify for the credit), the total of qualified retirement savings contributions is reduced by certain distributions received by the taxpayer during the prior two taxable years and the current taxable year for which the credit is claimed, including the period up to the due date (plus extensions) for filing the federal income tax return for the current taxable year. Distributions received by the taxpayer&rsquo;s spouse during the same time period are also counted if the taxpayer and spouse filed jointly both for the year during which a distribution was made and the year for which the credit is taken.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Corrective distributions of excess contributions and excess aggregate contributions<br /> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>), excess deferrals ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>), dividends paid on employer securities under Section&nbsp;404(k) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3824">3824</a>), and loans treated as distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3949">3949</a>) are not taken into account.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> To be eligible to claim the credit, the taxpayer must be at least 18 as of the end of the tax year, cannot be claimed as a dependent on someone else&rsquo;s tax return, and cannot be a full-time student. Full-time students include any individual who is enrolled in school during some part of each of five months during the year and is enrolled for the number of hours or courses the school considers to be full-time.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The amount of the credit is limited to an applicable percentage of IRA contributions and elective deferrals up to $2,000.<br /> <br /> The applicable percentages for 2025 (projected) are as follows:<br /> <table border="1" width="0" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" colspan="7" width="710"><strong>ADJUSTED GROSS INCOME</strong></td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" colspan="2" width="187"><em>Joint return</em></td><br /> <td style="text-align: center;" colspan="2" width="187"><em>Head of a household</em></td><br /> <td style="text-align: center;" colspan="2" width="187"><em>All other cases</em></td><br /> <td style="text-align: center;" width="150"><em>Applicable</em></td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111"><em>Over</em></td><br /> <td style="text-align: right;" width="76"><em>Not over</em></td><br /> <td style="text-align: right;" width="111"><em>Over</em></td><br /> <td style="text-align: right;" width="76"><em>Not over</em></td><br /> <td style="text-align: right;" width="111"><em>Over</em></td><br /> <td style="text-align: right;" width="76"><em>Not over</em></td><br /> <td style="text-align: right;" width="150"><em>Percentage</em></td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">0</td><br /> <td style="text-align: right;" width="76">$47,500</td><br /> <td style="text-align: right;" width="111">0</td><br /> <td style="text-align: right;" width="76">$35,625</td><br /> <td style="text-align: right;" width="111">0</td><br /> <td style="text-align: right;" width="76">$23,750</td><br /> <td style="text-align: right;" width="150">50%</td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">47,500</td><br /> <td style="text-align: right;" width="76">51,000</td><br /> <td style="text-align: right;" width="111">35,625</td><br /> <td style="text-align: right;" width="76">38,250</td><br /> <td style="text-align: right;" width="111">23,750</td><br /> <td style="text-align: right;" width="76">25,500</td><br /> <td style="text-align: right;" width="150">20%</td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">51,000</td><br /> <td style="text-align: right;" width="76">79,000</td><br /> <td style="text-align: right;" width="111">38,250</td><br /> <td style="text-align: right;" width="76">59,250</td><br /> <td style="text-align: right;" width="111">25,500</td><br /> <td style="text-align: right;" width="76">39,500</td><br /> <td style="text-align: right;" width="150">10%</td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">79,000</td><br /> <td style="text-align: right;" width="76"></td><br /> <td style="text-align: right;" width="111">59,250</td><br /> <td style="text-align: right;" width="76"></td><br /> <td style="text-align: right;" width="111">39,500</td><br /> <td style="text-align: right;" width="76"></td><br /> <td style="text-align: right;" width="150">0%</td><br /> </tr><br /> </tbody><br /> </table><br /> The applicable percentages for 2024 are as follows:<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" colspan="7" width="710"><strong>ADJUSTED GROSS INCOME</strong></td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" colspan="2" width="187"><em>Joint return</em></td><br /> <td style="text-align: center;" colspan="2" width="187"><em>Head of a household</em></td><br /> <td style="text-align: center;" colspan="2" width="187"><em>All other cases</em></td><br /> <td style="text-align: center;" width="150"><em>Applicable</em></td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111"><em>Over</em></td><br /> <td style="text-align: right;" width="76"><em>Not over</em></td><br /> <td style="text-align: right;" width="111"><em>Over</em></td><br /> <td style="text-align: right;" width="76"><em>Not over</em></td><br /> <td style="text-align: right;" width="111"><em>Over</em></td><br /> <td style="text-align: right;" width="76"><em>Not over</em></td><br /> <td style="text-align: right;" width="150"><em>Percentage</em></td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">0</td><br /> <td style="text-align: right;" width="76">$46,000</td><br /> <td style="text-align: right;" width="111">0</td><br /> <td style="text-align: right;" width="76">$34,500</td><br /> <td style="text-align: right;" width="111">0</td><br /> <td style="text-align: right;" width="76">$23,000</td><br /> <td style="text-align: right;" width="150">50%</td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">46,000</td><br /> <td style="text-align: right;" width="76">50,000</td><br /> <td style="text-align: right;" width="111">34,500</td><br /> <td style="text-align: right;" width="76">37,500</td><br /> <td style="text-align: right;" width="111">23,000</td><br /> <td style="text-align: right;" width="76">25,000</td><br /> <td style="text-align: right;" width="150">20%</td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">50,000</td><br /> <td style="text-align: right;" width="76">76,500</td><br /> <td style="text-align: right;" width="111">37,500</td><br /> <td style="text-align: right;" width="76">57,375</td><br /> <td style="text-align: right;" width="111">25,000</td><br /> <td style="text-align: right;" width="76">38,250</td><br /> <td style="text-align: right;" width="150">10%</td><br /> </tr><br /> <tr><br /> <td style="text-align: right;" width="111">76,500</td><br /> <td style="text-align: right;" width="76"></td><br /> <td style="text-align: right;" width="111">57,375</td><br /> <td style="text-align: right;" width="76"></td><br /> <td style="text-align: right;" width="111">38,250</td><br /> <td style="text-align: right;" width="76"></td><br /> <td style="text-align: right;" width="150">0%</td><br /> </tr><br /> </tbody><br /> </table><br /> The income limits are indexed for inflation. For this purpose, adjusted gross income is calculated without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions.<a href="#_ftn9" name="_ftnref9">9</a><br /> <br /> Taxpayers have until their tax filing deadline to contribute to traditional and Roth IRAs and still claim the credit on the prior year&rsquo;s tax return.<br /> <br /> The maximum credit that can be claimed is $1,000, or $2,000 for married taxpayers filing jointly. For married couples, contributions by or for either or both spouses may give rise to the credit.<a href="#_ftn10" name="_ftnref10">10</a><br /> <blockquote><em>Example:</em> Susan, who is married, earned $41,000 in 2022. Her husband did not have any earnings. During 2022, Susan contributed $1,200 to her IRA, which she deducted on her tax return, which reduced her adjusted gross income to $39,800. Susan is eligible to claim a 50 percent saver&rsquo;s credit, or $600.</blockquote><br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;25B.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;25B(d)(1); Ann. 2001-106, 2001-44 IRB 416, A-5.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Ann. 2001-106, 2001-44 IRB 416.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Ann. 2001-106, 2001-44 IRB 416, A-5.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Ann. 2001-106 Q-4.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;25B(d)(2); Ann. 2001-106, above, A-4.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;25B(c); Ann. 2001-106, 2001-44 IRB 416, A-2.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Notice 2023-75.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect; 25B(b)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">10</a>.&nbsp;&nbsp; Ann. 2001-106, 2001-44 IRB 416, A-9.<br /> <br /> </div></div><br />

<div class="Section1">An individual may transfer, without tax, the individual&rsquo;s IRA to his or her spouse or former spouse under a divorce or separate maintenance decree or a written instrument incident to the divorce. The IRA then is maintained for the benefit of the former spouse.<a href="#_ftn1" name="_ftnref1">¹</a> Any other assignment of an IRA is a deemed distribution of the amount assigned.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> It is especially important for clients to revisit IRA beneficiary designations upon divorce. The U.S. Supreme Court recently upheld a Minnesota law that operates to revoke a life insurance beneficiary designation in favor of an ex-spouse upon divorce. In that case, the policy owner&rsquo;s two children from a prior marriage claimed that they, not the owner&rsquo;s ex-spouse, were the rightful beneficiaries and the Supreme Court agreed. While this case involved life insurance policies, it is important to remember that it could also impact a client&rsquo;s IRA.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr><br /> <br /> Where an individual rolled over his interest in a tax sheltered annuity to an IRA, pursuant to a qualified domestic relations order (&ldquo;QDRO&rdquo;) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3909">3909</a>), the subsequent transfer of the IRA to the individual&rsquo;s spouse was considered a &ldquo;transfer incident to a divorce&rdquo; and, thus, nontaxable to either spouse.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> A taxpayer was liable for taxes on a distribution from his IRA that he subsequently turned over to his ex-wife in satisfaction of a family court order because it was not a &ldquo;transfer incident to divorce&rdquo; and the family court order was not a QDRO because it did not specifically require the transfer of assets to come from the IRA.<a href="#_ftn5" name="_ftnref5">⁵</a> A transfer of funds between the IRAs of two spouses that does not come within the divorce exception is a deemed distribution despite IRC provisions that provide that no gain is recognized on transfers between spouses.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The transfer of a portion of a husband&rsquo;s IRA to his wife to be placed in an IRA for her benefit that was the result of a private written agreement between the two that was not considered incident to a divorce was not eligible for nontaxable treatment under IRC Section&nbsp;408(d)(6).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Where a taxpayer received a full distribution from his IRA and endorsed the distribution check over to his soon-to-be-ex-wife, the husband was determined to have failed to satisfy the requirements for a nontaxable transfer incident to divorce and was liable for taxation on the entire proceeds of the IRA distribution.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> State community property laws, although generally disregarded under IRC Section&nbsp;408(g) with respect to IRAs, are not always preempted by Section&nbsp;408(g). Where two traditional IRAs were classified as community property, the distributions of the deceased spouse&rsquo;s community property interest in the IRAs to relatives other than her surviving husband were taxable only to those recipients and not to the husband.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Conversely, in a case of first impression, the Tax Court ruled that the recognition of community property interests in IRAs would conflict with existing federal tax rules under<br /> Section&nbsp;408(g) treating IRA accounts as separate property. In this case, the taxpayer transferred money from his IRA, which was considered community property under California law, to his former spouse pursuant to his divorce decree. By reason of IRC Section&nbsp;408(g), the Court held that the taxpayer, not the former spouse, was liable for the income taxes associated with the distribution because, despite the former spouse&rsquo;s community property interest in the IRA, taxable IRA distributions are separate property.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Where taxpayers requested that an IRA be reclassified under state marital property law from individual property to marital property, no distribution under IRC Section&nbsp;408(d)(1) was deemed to have occurred.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> The involuntary garnishment of a husband&rsquo;s IRA and resulting transfer of such funds to the former spouse to satisfy arrearages in child support payments was a deemed distribution to the husband because it discharged a legal obligation owed by the husband.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> An IRA being transferred to an ex-spouse pursuant to a divorce or separation agreement should made through a direct trustee-to-trustee transfer to avoid possible tax consequences.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(d)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-4(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; <em>Sveen v. Melin</em>, 138 S. Ct. 939 (2018).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Let. Rul. 8916083.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; <em>Czepiel v. Comm.</em>, TC Memo 1999-289.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Ruls. 9422060, 8820086.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Let. Rul. 9344027.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; <em>Jones v. Comm.</em>, TC Memo 2000-219.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Let. Rul. 8040101.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; <em>Bunney v. Comm.</em>, 114 TC 259 (2000). <em><em>See also</em> Morris v. Comm.,</em> TC Memo 2002-17.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Let. Ruls. 199937055, 9419036.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; <em>Vorwald v. Comm.</em>, TC Memo 1997-15.<br /> <br /> </div></div><br />

<div class="Section1">Virtually any individual who wishes to do so may establish a traditional individual retirement plan. To deduct contributions to such a plan once it is established and avoid tax penalties for excess contributions, an individual must have compensation (either earned income of an employee or self-employed person, or alimony prior to 2019), and before 2020, must not have attained age 70&frac12; during the taxable year for which the contribution is made.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Note that the SECURE Act eliminated the age cap on IRA contributions. Further, the 2017 tax reform legislation eliminated the deduction for alimony payments and provides that alimony is no longer includable in the recipient&rsquo;s income for tax years beginning after 2018. Because only &ldquo;taxable&rdquo; alimony constitutes &ldquo;compensation,&rdquo; alimony is no longer included after 2018.<br /> <br /> If an individual is an &ldquo;active participant&rdquo; ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3666">3666</a>), the deduction may be limited ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3656">3656</a>). Any individual who can make a rollover contribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3992">3992</a>) may establish an individual retirement plan (or more than one plan) to receive it ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3996">3996</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4012">4012</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> To establish and contribute directly to a Roth individual retirement plan, an individual (1) must have compensation (either earned income of an employee or self-employed person, or alimony (<em><em>but see</em></em> above)), and (2) must not have adjusted gross income (in 2025 (projected)) (a) of $246,000 or above in the case of a taxpayer filing a joint return, (b) or $165,000 or above in the case of a taxpayer filing a single or head-of-household return,<a href="#_ftn3" name="_ftnref3">³</a> or (c) $10,000 or above in the case of a married individual filing separately.<a href="#_ftn4" name="_ftnref4">⁴</a> In 2024 these amounts were $240,000 for joint returns and $161,000 for single or head-of-household, or $10,000 or above for married filing separately. An individual who satisfies these requirements may establish and contribute to a Roth IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3659">3659</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> For taxpayers who exceed the income limits and are thus prohibited from contributing directly to a Roth IRA, a Roth IRA may still be established to receive rollover distributions from other IRAs or qualified plans (this strategy is commonly referred to as the backdoor Roth IRA).<br /> <br /> <hr><br /> <br /> As to what constitutes &ldquo;compensation,&rdquo; <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3665">3665</a>.<br /> <br /> An estate may not make a contribution on behalf of the decedent.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Special Ruling 9-28-76.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Notice 2023-75.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRS Pub. 590.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;219, 408A; IR-2011-103.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Rul. 8439066.<br /> <br /> </div></div><br />