The Bank of Elk River serves the financial needs of individuals and businesses in Elk River, Otsego, and Zimmerman Minnesota.
Traditional IRA | Roth IRA | Education IRA | Simplified Employee Pension Plan
IRA stands for Individual Retirement Account. An IRA is a trust account that is designed for individuals to save for retirement. The Bank of Elk River is the custodian for these trust accounts and we are responsible for administering the account, which includes record keeping and required IRS tax reporting.
As the name implies, this account has only one owner. The account owner must fill out a special agreement with the bank called an IRA Adoption Agreement. The agreement will name the owner (with their personal information such as social security number, address, date of birth) and also any primary or secondary beneficiaries. The primary beneficiary will become the recipient of the IRA funds if the owner is deceased. The secondary beneficiary(ies) becomes the owner(s) if the primary beneficiary predeceases the IRA owner.
Traditional IRA Contributions
In order to contribute to an IRA the individual must:
- Have compensation or earned income (from their tax return):
- wages, salaries, tips, bonuses, or fees for services rendered
- sick pay and vacation pay
- alimony and separate maintenance
- Be under age 70 ½ at any time during the calendar year for which the contribution is being made.
Contributions cannot be made on behalf of deceased individuals even if they had earned income in that tax year.
Spousal IRA Contributions
Certain requirements must be met.
- One spouse must have earned income.
- One spouse does not have compensation or elects to be treated as having no earned income.
- Must file a joint tax return.
- At least one spouse must be under age 70 ½
The contribution limit per spouse is the same as Traditional IRAs.
Deadline For Making Contributions
Contributions made for a tax year must be made by the due date for filing that year's tax return (April 15 with no extensions).
Tax Deductions for IRA Contributions
Please contact your tax advisor for advice concerning deductibility of IRA contributions.
An excess contribution occurs when the customer contributes more than the contribution limit or 100% of their income for one tax year. The customer has the option of withdrawing the excess or carrying over the contribution to the next year.
The penalty when removing the excess depends on whether it is corrected before or after their tax filing due date.
Rollovers and Transfers
There are two ways to move IRA funds between retirement plans:
- Distribute the funds to the owner to subsequently be rolled over.
- Transfer the funds directly to a new successor trustee/custodian.
A customer wishing to do a rollover will need to complete a distribution form. The bank records the distribution as being either a premature (under age 59 ½) or normal (over age 59 ½) distribution. The customer has 60 days to roll over the funds to another IRA account or return it to the plan it was removed from. During that 60-day period the customer can use the funds for any reason they want. There is a limit of 1 rollover per 12-month period from a single institution. Once a rollover distribution has been taken, any further distributions from the same IRA plan cannot be rolled over. The distribution is reported on FORM 1099R. The contribution of rolled over funds must be reported on FORM 5498. If the customer decides not to roll over all or part of the distribution the difference is taxable and may be subject to penalty (if under 59 ½).
A transfer occurs when the funds are sent directly to a new successor trustee or custodian. The customer never has receipt of the funds. There is no limit to the number of transfers within a 12-month period. No tax reporting is done on transfers, as the customer does not have receipt of the funds.
Rollovers or transfers done when the customer is over 70 ½ during the tax year require special handling. If a customer is required to receive minimum distributions (RMD) the RMD cannot be transferred or rolled over. The first money out of an IRA for participants over 70 ½ must be for the current year's RMD.
Distributions from certain qualified plans are eligible to roll over to IRA accounts. The distribution is processed like a transfer, with the account holder never having receipt of the funds, yet it is reported as a rollover for tax purposes. The individual has the option of holding funds from a qualified plan distribution in a separate IRA called a Conduit IRA. By keeping the funds separate from other IRA contributions, the money may be rolled back into another qualified plan at a later date.
Premature distributions occur when the participant is under age 59 ½ for reasons other than death, disability or rollover. The distribution is taxed as ordinary income for the year it is received. The individual may be assessed an early withdrawal penalty from the bank if the certificate has not matured. They may also be subject to a 10% penalty from the IRS.
Normal distributions occur when the participant is over the age of 59 ½. Ordinary income tax is payable on the distribution amount for that tax year, but the 10% penalty does not apply.
Required Minimum Distributions (RMD) must begin in the year the participant reaches age 70 ½. The first distribution can be withdrawn up to April 1 (the required beginning date) of the year following the 70 ½ year. If the customer chooses to take the first distribution before April 1, they must take another distribution for the current year and both are reported as occurring in the same tax year. The RMD is calculated based on the life expectancy of the owner. The RMD is calculated on the IRA balance in all IRA plans as of the preceding year end. If the customer has more than one IRA plan they may choose to take the total RMD from only one account. There is an IRS penalty for failure to withdraw the required distribution. The RMD must be withdrawn prior to money being transferred or rolled over.
The designated primary beneficiary will receive the assets upon the participant's death. The secondary beneficiary(ies) will receive the assets only if the primary beneficiary predeceases the participant. The beneficiary must complete a death benefit form and a certified copy of the death certificate must be presented prior to a distribution being done. Special IRS reporting is required for both the deceased and the beneficiary in the year of death and as long as the funds stay in the participant's account.
Normal or Required Minimum Distributions (RMD's) may be deposited into an account at The Bank of Elk River or in another bank by direct deposit.
There is no annual maintenance fee to the participant for the IRA account.
Roth IRA Contributions
Roth IRA contributions are always nondeductible. For regular and spousal contributions, there are two eligibility requirements: earned income and modified adjusted gross income limitations.
The earned income rules are the same for Roth IRAs as for Traditional IRAs. The same spousal rules also apply. If contributing to both Roth and Traditional IRAs this amount must be split between the accounts.
Individuals contributing to Roth IRAs have limits based on their Modified Adjusted Gross Income (MAGI). Roth IRA owners and their tax advisor need to determine their MAGI.
Qualified Plan participants can contribute to a Roth IRA as long as they meet the earned income and MAGI requirements.
Contribution Deadline and Tax Year Designation
The Roth IRA deadline is the same as for Traditional IRAs, the taxpayer's tax-filing due date excluding extensions (normally April 15).
Roth IRA Conversions
- TAX TREATMENT
IRA owners must pay taxes on the earnings and previously deducted contributions that are converted. The taxable portion of the conversion is included as ordinary income on their federal tax return for that year. The 10% premature distribution penalty does not apply to conversions.
- ASSETS ELIGIBLE FOR CONVERSION
Only Traditional IRAs are eligible for conversion to a Roth IRA. This includes regular Traditional IRAs, Conduit Traditional IRAs and Traditional IRAs that contain Simplified Employee Pension (SEP) contributions. SEP contributions cannot be made directly to a Roth IRA. The funds must first be deposited to the SEP IRA and then converted to a Roth. This will accomplish the necessary tax reporting. Simple IRAs are eligible for conversion after the two-year period of initial participation.
An individual's Required Minimum Distribution (RMD) is not eligible to be converted to a Roth. Individuals who have reached age 70 ½ must satisfy their RMD for the year prior to converting any assets to a Roth IRA.
- REASONS FOR CONVERTING TO A ROTH IRA
It may be an advantage to convert if:
- IRA owners predict they will be in the same or a higher tax bracket at retirement.
- Individuals prefer to pay tax on the conversion amount at a known rate rather than risk waiting to see what the tax rates may be in the future.
- There is a long period of time before RMDs will be required. The more years to accumulate tax free earnings, the better the advantage.
- IRA owners intend to pass their assets to their heirs. This can provide long-term, tax-free accumulations.
- REASONS NOT TO CONVERT TO A ROTH IRA
It may not be an advantage to convert if:
- You would be in a lower tax bracket at retirement.
- You need to use IRA funds to pay the taxes from the conversion.
- The conversion will impact the receipt of other tax benefits or social security benefits.
- Mandatory distributions will be required in the near future.
Roth IRA Distribution
Determining whether or not a Roth IRA distribution is tax-free depends on what type of assets are withdrawn-contributions, conversions, or earnings.
Please contact your tax advisor for advice concerning Roth IRA distributions.
There is no annual maintenance fee to the participant for the Roth IRA account.
Coverdell Education Savings Account
Features & Benefits:
- Contributions are non-deductible
- Tax-free withdrawals
- Penalty-free withdrawals
- Tax free to the extent distribution does not exceed expenses for the year
- Like regular IRA's with a cost basis, withdrawals consist of both contributions and earnings. If withdrawals are greater than eligible expenses, expenses are deemed as paid from a pro rata share of both principal and interest.
- Taxable at age 30 of beneficiary (child)
- Tax free rollover to a family member's Education IRA
Simplified Employee Pension Plan
A Simplified Employee's Pension Plan (SEP) is one form of retirement plan available to employers. Employers with few or no employees may prefer this plan because it is simple to establish and maintain. Each eligible employee establishes a SEP/IRA account and the employer makes the contribution to the account. Once the SEP/IRA account is established, the account follows the same rules as a traditional IRA.
Features & Benefits:
SEP contributions are tax deductible as a business expense for the business and the earnings are tax deferred for the employees.
The SEP plan agreement determines who is eligible to receive contributions. The employer sets up the following guidelines:
- Age Requirement (employer may require employees to attain age 21 before they are eligible to participate)
- Maximum Service Requirement (an employee may be required to work during 3 out of the immediately preceding 5 years)
- Compensation Requirement (employees earning less than $400-adjusted annually for cost of living)
- Contributions must be made for all eligible employees including those over 70 1/2, deceased, or terminated. The employer can decide each year whether to make a contribution. If contributions are made, they must be made for all eligible employees or the plan becomes disqualified.
The distribution of funds from a SEP is made directly to the employee. The funds need to be rolled over to another retirement account within 60 days. If the funds are not redeposited, the employee will have to pay income tax on the amount withdrawn and a 10% penalty if under age 59 1/2. Rollovers may only be done once per year per IRA plan.
The distribution of funds from a SEP is made directly to the new successor trustee or custodian. The customer does not have receipt of the funds and there is no limit to the number of times assets can be transferred.
NORMAL DISTRIBUTIONS - Distributions of any amount and frequency may be taken without IRS penalty when the participant reaches the age of 59 1/2. Ordinary income tax will be due on the amount withdrawn.
Distributions made to the participant prior to reaching age 59 1/2 are considered premature distributions unless for the reason of death, disability, or rollover. The distribution is taxed as normal income and a 10% penalty is assessed.
Required Minimum Distributions (RMDs)
The IRS requires that annual distributions begin for the year in which the participant attains age 70 1/2. The amount required each year is calculated based on the life expectancy of the participant and his or her designated beneficiary.
There is no maintenance fee to the participant for the SEP/IRA account.
Traditional IRA | Roth IRA | Educational IRA | Simplified Employee Pension Plan