General Rules Of Individual Retirement Plans

<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">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">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 $XXX,000 or above in the case of a taxpayer filing a joint return, (b) or $XXX,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 />

<div class="Section1">Contributions to traditional IRAs are limited at two levels. First, there is a limit on the amount of contributions that may be deducted for income tax purposes. Second, there is a limit with respect to the amount of total contributions that can be made, including both deductible and nondeductible contributions.<div class="Section1"><br /> <br /> Contributions to an individual retirement plan are not subject to the general limits on contributions and benefits of IRC Section&nbsp;415 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>). (<em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a> for the effect of IRC Section&nbsp;415 on simplified employee pensions.) The source of the funds contributed to an IRA is not determinative as to eligibility or deductibility so long as the contributing individual has includable compensation at least equal to the amount of the contribution.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The IRA contribution limit does not apply to qualified rollovers into an IRA.<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="text-align: center;"><strong>Deductible Contributions</strong></p><br /> If an eligible individual contributes on his own behalf to a traditional IRA, he generally may deduct amounts contributed in cash up to the lesser of the &ldquo;deductible amount&rdquo; for the taxable year or 100 percent of <em>compensation</em> includable in his gross income for such year.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The &ldquo;deductible amount&rdquo; is $X,XXX in 2025 (projected), $7,000 in 2024, $6,500 in 2023, $6,000 for 2019-2022. It was $5,500 in 2014-2018.<a href="#_ftn4" name="_ftnref4">⁴</a> This amount is indexed for inflation.<br /> <blockquote><em>Example 1:</em> Danny, an unmarried college student working part-time, earns $4,500 in 2024. Danny can contribute up to $4,500, the amount of his compensation (rather than the deductible amount), to his IRA in 2024.<br /> <br /> <em>Example 2:</em> George, who is 34 years old and single, earns $24,000 in 2024. His IRA contributions for 2024 are limited to $7,000 (the deductible amount).</blockquote><br /> The &ldquo;deductible amount&rdquo; is increased by a $1,000 catch-up contribution for individuals who have attained age 50 before the close of the tax year.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote><em>Example: Samantha,</em> who is single, turned 50 in October of 2024. She earns $30,000 in 2024. Her IRA contributions for 2023 are limited to $8,000 ($7,000 plus a $1,000 catch-up).</blockquote><br /> Employer contributions to a simplified employee pension and any amounts contributed to a SIMPLE IRA are subject to different limitations.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Before 2020, contributions could not be made to a traditional IRA for the year in which the IRA participant reached age 70&frac12; or for any later year. The age cap was removed beginning in 2020 by the SECURE Act.<br /> <br /> <hr><br /> <br /> The overall maximum contribution limit is also equal to the &ldquo;deductible amount.&rdquo; <a href="#_ftn6" name="_ftnref6">⁶</a> Contributions made to Roth IRAs for the taxable year reduce both deductible and overall contribution limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3659">3659</a>). 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 /> In taxable years beginning in 2007 through 2009, the &ldquo;deductible amount&rdquo; was increased by $3,000 for former employees of bankrupt companies with indicted executives (e.g., Enron), if the employer matched 50 percent or more of employee 401(k) contributions in the form of employer stock. For taxpayers age 50 or older, the enhanced catch-up contribution was available instead of the usual $1,000 catch-up provision.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> If a married couple files a joint return, both spouses may contribute to an IRA even if only one spouse has taxable compensation. The maximum deduction allowed to an individual for a cash contribution to a traditional IRA <em>for a nonworking spouse</em> for a taxable year is the lesser of (1)&nbsp;the &ldquo;deductible amount&rdquo; or (2) 100 percent of the nonworking spouse&rsquo;s includable compensation, plus 100 percent of the working spouse&rsquo;s includable compensation minus (a) the amount of any IRA deduction taken by the working spouse for the year, and (b) the amount of any contribution made to a Roth IRA by the working spouse.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <blockquote><em>Example:</em> Sarah, age 52, is married with no taxable compensation for 2024. She and her spouse reported taxable compensation of $60,000 on their 2024 joint return. Sarah may contribute $8,000 to her IRA for 2024 ($7,000 plus an additional $1,000 contribution for age 50 and over).</blockquote><br /> While two spouses who file jointly are permitted a maximum deduction of up to $14,000 in 2024 (this amount is increased to $16,000 to include catch up contributions if they are both over 50), the deduction for each spouse is computed separately.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The deduction is taken from gross income so that an individual who does not itemize his deductions may take advantage of the retirement savings deduction.<a href="#_ftn10" name="_ftnref10">¹⁰</a> Prior to 2020, no deduction could be taken for a contribution <em>on behalf of</em> an individual who had attained age 70&frac12; before the end of the tax year.<a href="#_ftn11" name="_ftnref11">¹¹</a> An individual over age 70&frac12; could also take a deduction for a contribution made on behalf of a spouse who was under age 70&frac12;. An excess contribution made in one year can be deducted in a subsequent year to the extent the excess is absorbed in the later year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3669">3669</a>).<br /> <br /> The cost of a disability waiver of premium feature in an individual retirement annuity is deductible under IRC Section&nbsp;219, but where an individual contributes to an annuity for the benefit of himself and his non-employed spouse, the waiver of premium feature may only be allocated to the working spouse&rsquo;s interest.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> No deduction is allowed for contributions to an IRA if the individual for whose benefit the IRA is maintained acquired that IRA by reason of the death of another individual after 1983. But this does not apply where the acquiring individual is the surviving spouse of the deceased individual.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> For the limits on contributions to Roth IRAs, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3659">3659</a>. For limits on contributions to simplified employee pensions, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a>. For limits on contributions to a SIMPLE IRA, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>. For a discussion of the nondeductible contributions that may be made to an IRA, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3658">3658</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; Let. Rul. 8326163.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC. &sect;&nbsp;408(a)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(b)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(b)(5)(A)); Notice 2013-73, IR-2014-99, Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(b)(5)(B).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(a)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(b)(5)(C).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(c)(1).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Notice 2023-75.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;62(a)(7).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(d)(1), prior to repeal by the SECURE Act.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; Let. Rul. 7851087.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;219(d)(4), 408(d)(3)(C)(ii).<br /> <br /> </div></div><br />

<div class="Section1">An eligible individual may contribute cash to a Roth IRA on his own behalf up to the <em>lesser of</em> the maximum annual contribution limit (equal to the &ldquo;deductible amount&rdquo; under IRC Section 219(b)(5)(A)) or 100 percent of <em>compensation</em> includable in his gross income for the taxable year. The amount that can be contributed, however, is <em>reduced by</em> any contributions made to traditional IRAs for the taxable year on his own behalf.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The maximum annual contribution limit is $7,000 in 2025 (projected). This amount is indexed for inflation. The maximum annual contribution limit is increased by $1,000 for individuals who have attained age 50 before the close of the tax year (i.e. $8,000 in 2025 (projected)).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> SEPs and SIMPLE IRAs may not be designated as Roth IRAs, and contributions to a SEP or SIMPLE IRA will not affect the amount that an individual can contribute to a Roth IRA.<a href="#_ftn3" name="_ftnref3">³</a> Qualified rollover contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3662">3662</a>) do not count towards this limit.<a href="#_ftn4" name="_ftnref4">⁴</a> 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>. Roth IRA contributions are not deductible and can be made at any age.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> An individual may contribute cash to a Roth IRA <em>for a non-working spouse</em> for a taxable year up to the maximum deductible limit (disregarding active participant restrictions) permitted with respect to traditional IRAs for such non-working spouse ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3656">3656</a>), reduced by any such contributions made to traditional IRAs for the taxable year on behalf of the non-working spouse.<a href="#_ftn6" name="_ftnref6">⁶</a> Thus, a married couple (both spouses under age 50) may be permitted a maximum contribution of up to $14,000 for 2025 (projected) ($7,000 for each spouse).<br /> <br /> The maximum contribution permitted to an individual Roth IRA or a spousal Roth IRA is reduced or eliminated for certain high-income taxpayers. The amount of the reduction is the amount that bears the same ratio to the overall limit as the taxpayer&rsquo;s <em>adjusted gross income</em> (AGI) in excess of an &ldquo;applicable dollar amount&rdquo; bears to $15,000 ($10,000 in the case of a joint return).<a href="#_ftn7" name="_ftnref7">⁷</a> Thus, the amount of the reduction is calculated as follows:<br /> <table style="height: 111px;" border="1" width="497" align="center"><br /> <tbody><br /> <tr><br /> <td rowspan="2" width="155">maximum contribution &times;</td><br /> <td style="text-align: center;" width="209">AGI &ndash; &ldquo;applicable dollar amount&rdquo;</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="209">$15,000 ($10,000 if a joint return)</td><br /> </tr><br /> </tbody><br /> </table><br /> The &ldquo;applicable dollar amount&rdquo; in 2025 (projected) is (1) $150,000 in the case of an individual ($146,000 in 2024, $138,000 in 2023, $129,000 in 2022, $125,000 for 2021, $124,000 for 2020), (2) $236,000 in the case of a married couple filing a joint return ($230,000 in 2024, $218,000 in 2023, $218,000 in 2023, $204,000 in 2022, $198,000 for 2021, $196,000 for 2020) and (3) $0 in the case of a married person filing separately.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Thus in 2025 (projected), the Roth IRA contribution limit is $0 for (1) individuals with AGI of $165,000 and above ($161,000 in 2024, $153,000 in 2023, $144,000 in 2022, $140,000 in 2021, $139,000 in 2020), (2) married couples filing a joint return with AGI of $246,000 and above ($240,000 in 2024, $228,000 in 2023, $214,000 in 2022, $208,000 in 2021, $206,000 in 2020), and (3) a married individual filing separately with AGI of $10,000 and above.<a href="#_ftn9" name="_ftnref9">⁹</a> Except for married individuals filing separately, the &ldquo;applicable dollar amount&rdquo; is indexed for inflation. The amount of the reduction is rounded to the next lowest multiple of $10. Unless the individual&rsquo;s contribution limit is reduced to zero, the IRC permits a minimum contribution of $200.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> For this purpose, AGI is calculated without regard to the exclusions for foreign earned income, qualified adoption expenses paid by the employer, and interest on qualified United States savings bonds used to pay higher education expenses. Social Security benefits includable in gross income under IRC Section&nbsp;86 and losses or gains on passive investments under IRC Section&nbsp;469 are taken into account. Also for this purpose, deductible contributions to a traditional IRA plan are not taken into account in determining AGI; amounts included in gross income as a result of a rollover or conversion from a traditional IRA to a Roth IRA are not taken into account for purposes of determining the maximum contribution limit for a Roth IRA.<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;408A(c)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;219(b)(5).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408A(f).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408A(c)(5).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408A(c)(1).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408A(c)(2), 219(b)(1), 219(c).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408A(c)(3).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408A(c)(3)(A).<br /> <br /> </div></div><br />

<div class="Section1">Yes. Despite the fact that a taxpayer whose income level exceeds the Roth IRA contribution limits cannot contribute directly to a Roth IRA, he or she is permitted to maintain a Roth account. In 2025 (projected), the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $236,000 ($150,000 for single taxpayers). In 2024, the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $230,000 ($146,000 for single taxpayers). <a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> In 2025 (projected), Roth contributions are completely disallowed for married taxpayers who earn over $246,000 and single taxpayers who earn over $165,000. In 2024, Roth contributions are completely disallowed for married taxpayers who earn over $240,000 and single taxpayers who earn over $161,000.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> While contributions cannot be made directly to the Roth IRA if the taxpayer&rsquo;s income exceeds the annual income threshold, for tax years beginning in 2010 and after, the income limits that applied to prevent high-income taxpayers from making rollovers from traditional IRAs were eliminated.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Therefore, many high-income taxpayers may make contributions indirectly to a Roth account, via a series of rollovers from traditional IRAs. The taxpayer must first open a traditional IRA if he or she does not already maintain such an account (in 2025 (projected), each taxpayer can contribute up to $7,000 to an IRA ($8,000 if the taxpayer is 50 or older)). Using the so-called &ldquo;backdoor&rdquo; Roth IRA technique, the taxpayer can then roll a portion of the traditional IRA into a Roth IRA account each year, though taxes must be paid on the amounts that are rolled over. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3662">3662</a> for rules regarding rollovers from an IRA to a Roth IRA.<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; Notice 2023-75.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Notice 2023-75.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408A(c)(3)(B), 408A(e).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor’s Note:</em> The 2017 tax reform legislation eliminated the ability of taxpayers to recharacterize Roth IRA conversions for tax years beginning after 2017. Taxpayers were entitled to recharacterize 2017 conversions through October 15, 2018.</div><br /> <div class="Section1"><br /> <br /> Prior to 2018, one important characteristic of a Roth IRA conversion was the taxpayer’s ability to undo the transaction through a recharacterization transaction that moves the funds back into the traditional account, eliminating the tax liability that the initial conversion created.<a href="#_ftn1" name="_ftnref1">¹</a> This option was unavailable if the individual chooses to convert to a Roth 401(k).<br /> <br /> If the taxpayer’s account performed poorly in the months after the conversion took place, or if the taxpayer otherwise found that he or she was unable to pay the tax bill that results from a Roth conversion, the taxpayer had until October 15 of the year following the conversion to recharacterize the funds. The tax reform changes to the recharacterization rules placed Roth IRAs on par with Roth 401(k)s, where once the conversion takes place, the taxpayer is required to pay the associated taxes regardless of any events that occur post-conversion.<br /> <br /> A taxpayer who converts to a Roth IRA is able to escape the IRS’s required minimum distribution (RMD) rules so that the funds in the account are permitted to grow tax-free over a longer period of time. Taxpayers who use Roth 401(k)s are often required to comply with the RMD rules when they turn 73 (72 for 2020-2022, 70½ prior to 2020), possibly reducing the account’s growth potential if the taxpayer does not need to access the funds.<a href="#_ftn2" name="_ftnref2">²</a> A taxpayer who plans to use a Roth account as a wealth transfer vehicle may also prefer the Roth IRA because the entire account value can be passed to heirs upon his or her death.<br /> <br /> Taxpayers who anticipate that they will need access to the funds before retirement should also consider how the application of the “five-year rule” could impact the tax-free availability of these funds. To access the funds, a qualifying event must have occurred <em>and</em> the Roth must be at least five years old before a qualified distribution is permitted. However, if the taxpayer has multiple Roth IRAs, only <em>one</em> of the taxpayer’s IRAs must be five years old before a tax-free withdrawal is permitted.<a href="#_ftn3" name="_ftnref3">³</a> With a Roth 401(k), the particular account must be five years old or a penalty tax will apply.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Importantly, for high-income taxpayers, post-conversion contributions may be limited or blocked entirely because of the income limits that apply to Roth IRA contributions (but not to Roth 401(k) contributions).<br /> <br /> In 2025 (projected), the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $236,000 ($150,000 for single filers). In 2025 (projected), Roth IRA contributions are completely blocked for married taxpayers who earn over $246,000 (married) or $165,000 (single)<br /> <br /> In 2024, the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $230,000 ($146,000 for single filers). In 2024, Roth IRA contributions are completely blocked for married taxpayers who earn over $240,000 (married) or $161,000 (single).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Stronger creditor protection rules also apply to Roth 401(k) accounts. While Roth IRAs are protected under state law, the rules that apply in some states offer much less in the way of creditor protection than can be found in others. Roth 401(k)s are always protected by ERISA-mandated federal creditor protection rules regardless of where the taxpayer lives.<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 § 408A(d)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.401(k)-1(f)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IRC §§ 408A(d).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   Treas. Reg. § 1.402A-1, A-4.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 408A(c)(3); IR-2014-99 (Oct. 23, 2014), Notice 2023-75.<br /> <br /> </div>

<div class="Section1">Individual retirement plans are tax favored personal savings arrangements that allow an individual to set aside money for retirement.<div class="Section1"><br /> <br /> A traditional individual retirement plan generally allows an individual to contribute both deductible (where eligible) and nondeductible payments to receive the benefit of tax-deferred buildup on income.<br /> <br /> Alternatively, a Roth individual retirement plan allows eligible individuals to contribute only nondeductible payments with the benefit of tax-free buildup of income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>). A Roth individual retirement plan must clearly be designated as such at the time of establishment, and that designation cannot later be changed; the recharacterization of a Roth IRA will require the execution of new documents ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3662">3662</a>).<a href="#_ftn1" name="_ftnref1">¹</a> Note that tax reform eliminated the traditional ability to convert traditional IRA funds to a Roth account and later recharacterize the transaction for tax years beginning after 2017.<br /> <br /> With respect to both traditional and Roth individual retirement plans, some individuals also may contribute to such plans for their spouses.<br /> <br /> There are two kinds of traditional and Roth individual retirement plans: individual retirement accounts (discussed below) and individual retirement annuities ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3642">3642</a>).<br /> <br /> An individual retirement account (IRA) is a written trust or custodial account created for the purpose of saving money for retirement that allows individuals to make yearly contributions, up to specific annual limits, that will grow tax-free.<br /> <br /> A &ldquo;traditional&rdquo; IRA allows an individual to make both pre-tax (where eligible) and after-tax contributions to the account, which will grow free of income taxes, but are taxable when distributed to the participant (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a>). Alternatively, a Roth IRA only allows after-tax contributions, but such contributions also grow tax-free and usually can be distributed tax-free to the extent they are considered &ldquo;qualified distributions&rdquo; (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>).<br /> <br /> Contributions to such accounts must be in cash (except for rollovers) and may not exceed the maximum annual contribution limit for the tax year &ndash; $5,500 in 2018 and $6,000 (in 2019-2022), $6,500 in 2023, $7,000 in 2024 and $XX,000 in 2025 (projected) &ndash; except for rollover contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3992">3992</a>), for contributions to a SIMPLE IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>), and for employer contributions to simplified employee pensions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a>).<a href="#_ftn2" name="_ftnref2">²</a> A wire order from a broker to a custodian will constitute a &ldquo;cash contribution&rdquo; on the date payment and registration instructions are received by the broker, provided an agency arrangement recognized by and binding under state law exists between the broker and the custodian.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> With respect to traditional individual retirement accounts, distribution of an individual&rsquo;s interest must begin by April&nbsp;1 of the year after the year in which he or she reaches age 73 (72 in 2020-2022, 70&frac12; before 2020) and must be made over a limited period. In addition, 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> With respect to both traditional and Roth accounts, required minimum distribution (RMD) requirements must be met upon death of the owner ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3687">3687</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The trustee or custodian of an individual retirement account must be a bank, a federally insured credit union, a building and loan association, or an entity that satisfies IRS requirements.<a href="#_ftn6" name="_ftnref6">⁶</a> A trustee or custodian acceptable to the IRS cannot be an individual but can be a corporation or partnership that demonstrates that it has fiduciary ability (including continuity of life, established location, fiduciary experience, and fiduciary and financial responsibility), capacity to account for the interests of a large number of individuals, fitness to handle retirement funds, ability to administer fiduciary powers (including maintenance of a separate trust division), and adequate net worth (at least $250,000 initially).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The interest of the individual in the balance of his or her individual retirement account must be nonforfeitable, and the assets must not be commingled with other property except in a common trust fund or common investment fund. In such a trust, they may be pooled with trust funds of regular qualified plans.<a href="#_ftn8" name="_ftnref8">⁸</a> No part of the trust funds may be invested in life insurance.<a href="#_ftn9" name="_ftnref9">⁹</a> An account generally may not invest in collectibles without adverse tax consequences ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>). An account may invest in annuity contracts that, in the case of death prior to the time distributions commence, provide for a payment equal to the sum of the premiums paid or, if greater, the cash value of the contract.<a href="#_ftn10" name="_ftnref10">¹⁰</a> An account may not use any part of its assets to purchase an endowment contract issued after November&nbsp;6, 1978.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Effective for tax years beginning after December&nbsp;31, 2012, distributions from individual retirement arrangements (as well as from qualified plans, Section&nbsp;403(b) tax-sheltered annuities, and eligible 457 governmental plans) are exempted from the unearned income Medicare contribution tax imposed under the Affordable Care Act.<a href="#_ftn12" name="_ftnref12">¹²</a> The ACA imposes a tax of 3.8&nbsp;percent on individuals, estates, and trusts on the lesser of net investment income, or the excess of modified adjusted gross income (AGI + foreign earned income) over a threshold of $200,000 (individual) or $250,000 (joint). Investors may therefore find it beneficial to direct wages and investments into IRAs to reduce income and remain below these thresholds.<a href="#_ftn13" name="_ftnref13">¹³</a><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;408A(b); Treas. Reg. &sect;&nbsp;1.408A-2, A-2.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(a)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Let. Ruls. 9034068, 8837034.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(6), 408A(c)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(6), 408A(c)(4).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(2), 408(n).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.408-2(b)(2), 1.408-2(e).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;408(a)(4), 408(a)(5), 408(e)(6); Rev. Rul. 81-100, 1981-1 CB 326; <em><em>see also</em> Nichola v. Comm.</em>, TC Memo 1992-105.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(a)(3).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-2(b)(3).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.408-4(f), 1.408-3(e)(1)(ix).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; P.L. 111-148.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1411.<br /> <br /> </div></div><br />

<div class="Section1">The primary benefit of holding fixed income annuities within an IRA is the simplification of the required minimum distribution process. Fixed income annuities held inside a taxpayer’s IRA usually comply with the RMD rules automatically because their payments are determined in the same way that the RMD itself is calculated—using a formula based on the life expectancy of the individual and the amount invested.</div><br /> <div class="Section1"><br /> <br /> While a cash RMD is required each year after the taxpayer turns 73 (72 in 2020-2022, 70½ before 2020) regardless of general market conditions, it is important to remember that IRA assets may be invested in a variety of holdings, including securities and funds that will fluctuate with the equity markets. Unfortunately, the RMD requirements may, depending on market performance, cause taxpayers to miss market upswings by requiring that the taxpayer liquidate securities held within the IRA to satisfy his or her RMDs. Using a fixed income annuity can help reduce this risk because the payments are fixed in advance.<br /> <br /> In other words, there is no investment decision required each year because the taxpayer has already determined the value of the payout (whether it is made monthly, quarterly or annually). While the RMD for any non-annuitized portion of the IRA will still have to be calculated, the value of the annuity is excluded from this calculation, thereby reducing the risk that the taxpayer will be forced to make an unfavorable investment decision simply to comply with the RMD rules.<br /> <br /> Further, the fixed income annuity actually allows the taxpayer to set an income level in advance—RMDs will fluctuate with the IRA value in any given year, but the annuity payments will remain constant regardless of the performance of the remaining underlying IRA assets. Taxpayers also have the option of adding a cost-of-living increase to the annuity payouts to ensure sufficient income during retirement.<br /> <br /> As with any planning strategy, however, there are potential objections. Most commonly, advisors may feel that it makes little sense for some taxpayers (especially younger individuals) to hold an annuity within the IRA because both types of investments are tax-deferred, so the annuity could be held separately from IRA assets with similar consequences. As a result, some might feel that the strategy is simply redundant.<br /> <br /> Additionally, amounts held in an annuity are more difficult to access than other IRA funds without incurring significant penalty charges—if the taxpayer has a financial emergency after age 73 (72 in 2020-2022, 70½ before 2020), he or she could access non-annuitized IRA funds without penalty. Taxpayers should, therefore, only consider purchasing the annuity with IRA funds if they have sufficient assets held outside of the annuity to cover any unforeseen expenses.<br /> <br /> Further, while holding an annuity within an IRA can allow the taxpayer to avoid selling IRA assets during unfavorable market swings, it can also mean that the taxpayer has no reason to liquidate those holdings when their value is high, potentially avoiding a loss if the value eventually falls.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Advisors considering recommending that a client purchase an annuity inside of an IRA should carefully consider the costs and the benefits of the arrangement, and should carefully review and comply with any applicable fiduciary rules.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Funds accumulated in a traditional IRA generally are not taxable until they are distributed ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a>). Funds accumulated in a Roth IRA may or may not be taxable on distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>). Special rules may treat funds accumulated in an IRA as a &ldquo;deemed distribution&rdquo; and, thus, includable in income under the rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3671">3671</a> for traditional IRAs and in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a> for Roth IRAs.<div class="Section1"><br /> <br /> A distribution of a nontransferable, nonforfeitable annuity contract that provides for payments to begin by age 73 (72 for 2020-2022, 70&frac12; prior to 2020) and not to extend beyond certain limits is not taxable, but payments made under such an annuity would be includable in income under the appropriate rules.<br /> <br /> Contributions to an IRA may be returned to the participant in a tax-free manner if certain conditions are met as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3670">3670</a> (provided, in the case of a traditional IRA that no deduction was allowed for the contribution). If net income allocable to the contribution is distributed before the due date for filing the tax return for the year in which the contribution was made, it must be included in income for the tax year for which the contribution was made even if the distribution actually was made after the end of that year.<a href="#_ftn1" name="_ftnref1">¹</a> With respect to distributions of excess contributions after this deadline, the net income amount is included in income in the year distributed. Any net income amount also may be subject to penalty tax as an early distribution.<br /> <br /> Where a taxpayer transferred funds from a single IRA into two newly-created IRAs, the direct trustee-to-trustee transfers were not considered distributions under IRC Section&nbsp;408(d)(1).<a href="#_ftn2" name="_ftnref2">²</a> The division of a decedent&rsquo;s IRA into separate subaccounts does not result in current taxation of the IRA beneficiaries.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A distribution of any amount may be received free of federal income tax to the extent the amount is then contributed within 60 days to another plan under qualified rollover rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4004">4004</a>).<br /> <br /> For the penalty tax imposed on accumulated amounts not distributed in accordance with the required minimum distribution rules, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3682">3682</a>.<br /> <br /> If any assets of an individual retirement account are used to purchase collectibles (works of art, gems, antiques, metals, etc.), the amount so used will be treated as distributed from the account (and also may be subject to penalty as an early distribution). A plan may invest in certain gold or silver coins issued by the United States, any coins issued under the laws of a state, and certain platinum coins. A plan may buy gold, silver, platinum, and palladium bullion of a fineness sufficient for the commodities market if the bullion remains in the physical possession of the IRA trustee.<a href="#_ftn4" name="_ftnref4">⁴</a> A plan may purchase shares in a grantor trust holding such bullion.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If any part of an individual retirement account is used by the individual as security for a loan, that portion is deemed distributed on the first day of the tax year in which the loan was made.<a href="#_ftn6" name="_ftnref6">⁶</a> Amounts rolled over into an IRA from a qualified plan by one of the 25 highest paid employees, however, may be pledged as security for repayments that may have to be made to the plan in the event of an early plan termination.<a href="#_ftn7" name="_ftnref7">⁷</a> A less-than-60-day interest-free loan from IRA accumulations is possible under the rollover rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4012">4012</a>).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> If the owner of an individual retirement annuity borrows money under or by use of the contract in any tax year, including a policy loan, the annuity ceases to qualify as an individual retirement annuity as of the first day of the tax year and the fair market value of the contract would be deemed distributed on that day.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> If an individual engages in a prohibited transaction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3976">3976</a>) with his or her IRA, such IRA ceases to qualify as such as of the first day of that tax year when the prohibited transaction occurred; the individual, however, is not liable for a prohibited transaction tax.<a href="#_ftn10" name="_ftnref10">¹⁰</a> The fair market value of all the assets in the account is deemed distributed on that day.<a href="#_ftn11" name="_ftnref11">¹¹</a> If the account is maintained by an employer, only the separate account of the individual involved is disqualified and deemed distributed.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> The transfer to an individual retirement account of a personal note received in a terminating distribution from a qualified plan and the holding of that note is a prohibited transaction.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> The use of IRA funds to invest in a personal retirement residence of the taxpayer is considered a prohibited transaction under IRC Section&nbsp;4975(c)(1)(D) and, thus, is treated as a distribution.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> Whether a purchase of life insurance in conjunction with an individual retirement plan but with non-plan funds constitutes a prohibited transaction apparently depends on the circumstances. The IRS has held that the purchase of insurance on the depositor&rsquo;s life by the trustee of the account with non-plan funds amounted to an indirect prohibited transaction by the depositor.<a href="#_ftn15" name="_ftnref15">¹⁵</a> The IRS also has ruled that the solicitation by an association of individuals who maintain individual retirement plans with the association for enrollment in a group life plan did not result in a prohibited transaction where premiums would be paid by the individuals and not out of plan funds.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> Institutions may offer limited financial incentives to IRA and Keogh holders without running afoul of the prohibited transaction rules provided certain conditions are met. Generally speaking, the value of the incentive must not exceed $10 for deposits of less than $5,000 and $20 for deposits of $5,000 or more. These requirements also are applicable to SEPs that allow participants to transfer their SEP balances to IRAs sponsored by other financial institutions and to SIMPLE IRAs.<a href="#_ftn17" name="_ftnref17">¹⁷</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;408(d)(4); Treas. Reg. &sect;&nbsp;1.408-4(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Let. Rul. 9438019. <em><em>See also</em></em> Rev. Rul. 78-406, 1978-2 CB 157; Let. Rul. 9433032.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Let. Rul. 200008044.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(m); Let. Rul. 200217059.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Let. Ruls. 200732026, 200732027.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e)(4); Treas. Reg. &sect;&nbsp;1.408-4(d)(2); Let. Ruls. 8335117, 8019103, 8011116.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; <em><em>See, e.g</em></em>., Let. Ruls. 8845060, 8803087, 8751049. <em><em>See also</em></em> Treas. Reg. &sect;&nbsp;1.401-4(c).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Let. Rul. 9010007.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e)(3). <em><em>See also</em> Griswold v. Comm.</em>, 85 TC 869 (1985).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;4975(c)(3).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.408-1(c)(2).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; IRC &sect;&nbsp;408(e)(2).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; TAM 8849001.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; <em>Harris v. Comm.</em>, TC Memo 1994-22.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp; Let. Rul. 8245075.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp; Let. Rul. 8338141.<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp; PTE 93-1, 58 Fed. Reg. 3567, 1-11-93; PTE 93-33, 58 Fed. Reg. 31053, 5-28-93, as amended at&nbsp;64 Fed. Reg. 11044 (Mar.&nbsp;8, 1999).<br /> <br /> </div></div><br />