More on retirement, 2021 Contributions and Deductions, Eligibility, Employer Contributions ( Part 13)

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Retirement Topics by IRA Contribution Limits

Eligibility

Individuals can set up and make contributions to a traditional IRA if:

(1) They (or, if they file a joint return, their spouse) received taxable compensation during the year, and

(2) They were not aged 701⁄2 by the end of the year.

An individual can have a traditional IRA whether another type of retirement program covers them. However, a taxpayer possibly will not be able to deduct all of their contributions if an employer retirement plan includes the taxpayer or their spouse.

2021 IRS Retirement Plan Limits

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Contributions & Deductions

Any employer, including a corporation, may establish an IRA plan for the benefit of some or all of its employees. The employer may make contributions on an additional compensation basis or a salary reduction plan. There is no nondiscrimination requirement concerning the establishment, availability or funding of an IRA plan. However, employee participation in an IRA plan cannot be used as a basis for determining nondiscrimination in any other employer-provided plan. Installation and trustee fees paid by the employer concerning such plans should be deductible as ordinary and necessary business expenses. Separate accounting is required for each employee’s interest in the trust, but the commingling of assets is permissible for investment purposes.

Employer Contributions

SIMPLE IRA Plan FAQ  about Contributions

Amounts contributed by an employer will be tax-deductible as additional compensation and includable in the employee’s income. However, the employee will be entitled to an offsetting deduction for the contributed amounts. Employer contributions will be subject to FICA and FUTA but not to federal income tax withholding if the employer reasonably believes that the employee will be entitled to a deduction for the contributed amounts.

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Retirement Vehicles

Any individual may establish one or more of the types of IRA funding vehicles as long as the annual contributions limit is not exceeded in the aggregate. The types of funding vehicles available are as follows:

(a) A fixed or variable individual retirement annuity may be purchased. The contract must be nontransferable, non-forfeit-able, and may not be pledged as security for a loan except to the issuing insurance company. An endowment contract must have level premiums, and the cash value at maturity must not be less than the death benefit. Also, the death benefit at some time during the contract must exceed the greatest of the cash value or the premiums paid. Whole life insurance may not be used and, the annuity contract may provide for a waiver of premium, but no other collateral benefits.

(b) A written trust or custodial account may be used to fund an individual retirement account. The rules concerning the trustee are the same as those for a Keogh plan. The only prohibited investment for the account is life insurance. Trust assets must not be commingled with other assets except in a common trust or investment fund.

(c) Retirement bonds were available for purchase before April 30, 1982, and may still be retained by some IRA participants. Since these vehicles are no longer available there is little point in discussing them. Although the Code does not explicitly prohibit an IRA from investing in certain types of property, investment in collectibles will be regarded as a currently taxable distribution to the participant.

Retirement Plans for Self-Employed People

Note: Since 1987, United States minted gold and silver coins after December 31, 1986, are not considered to be collectibles.

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Distribution & Settlement Options

To encourage participants to set aside funds for their retirement, tax

the law imposes a 10% penalty tax on “premature distributions.” That is distributions that are received by the participant before the attainment of age 591⁄2. This penalty tax is imposed in addition to the participant’s ordinary income tax liability. However, this penalty does not occur where the distribution is the result of the death, disability or the timely repayment of excess contributions.

Life Annuity Exemption

Distributions made before age 591⁄2 are exempted from the penalty tax if they are made over a time of years based on the participant’s life expectancy. Payments may also be made in the form of a joint and survivor annuity based on the participant’s and the spouse’s life expectancy and must be substantially equal. The plan must provide for a lump-sum distribution of the participant’s entire interest no later than the required beginning date or for distribution under one of the following periods:

(a) The participant’s life;

(b) The lives of the participant and the appointed beneficiary;

(c) A period of years not more than the participant’s life expectancy; or

(d) A period of years not more than the life expectancy of the participant and a designated beneficiary.

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Minimum Distributions

Funds cannot be kept indefinitely in a traditional IRA. Eventually, they must be distributed. However, the requirements for distributing IRA funds differ, depending on whether the taxpayer is the IRA  beneficiary of a decedent’s IRA. Owners of traditional IRAs must start receiving distributions by April first of the year following the year in which they attained age 701⁄2. April 1 st of the year following the year in which a taxpayer reaches age 701⁄2 is referred to as the required starting date (RBD).

Note: The minimum distribution amount for the year the taxpayer attained age 701⁄2 must be received no later than April 1 st of the next year. After that, the required minimum distribution for any year must be made by December 31 st of that later year.

If the minimum required distribution is not made, then an excise tax equal to 50% of the excess of the required distribution over the amount distributed will be imposed on the payee.

Required Minimum Distribution

The required minimum distribution for each year is determined by dividing the IRA account balance as of the end of the business year on December 31 st of the preceding year by the applicable distribution period or life expectancy.

Roth IRA Required Minimum Distribution (RMD)

2009 Waiver of Required Minimum Distribution Rules

For 2009, under the Worker, Retiree, and Employer Recovery Act, no minimum distribution was required for the calendar year 2009 from individual retirement plans and employer-provided qualified retirement plans that were defined contribution plans (within the meaning of §414(i)). 7-49

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