 Hello, and welcome to the session in which we will discuss individual retirement accounts, also known as IRAs. What is the big idea of an IRA? Well, let's talk about if you are an employee first. If you are an employee and you work for a company, there's a good chance, not necessarily, but there's a good chance that you have some sort of a retirement plan, especially medium and large size companies, either a 401K or a 403B. 403B is mostly for educators. What is that for? Well, when you work, when you have your energy to work, you're still fairly young and you are contributing to your, you are contributing to the economy, you're going to be making money, you're going to be making wages. So what's going to happen? In addition to your current wages, you're going to put money away for later. Later is for your retirement. So your company might have what we called 401K. You put money, also your employer, your company that you work for will put some money for you for later and later is when you retire, you can sit on the beach and enjoy your retirement and you will have some sort of an income. Now to discuss more retirement plan, I have a whole session about retirement plan, the various retirement plans, but this is the idea is to put money away for later. Now let's assume you are not an employee or your company does not have a good 401K plan. So sometimes they could have various types of 401K plan. What can you do? Assume here you're not even an employee. You work for yourself or you work for several companies and you work part time. Regardless, the government gives you the option to do what? To save money for yourself for retirement. So that's why it's called individual retirement accounts. It means you as an individual can open this account and contribute money to it. Now how much can you contribute? Well you can contribute the lesser of 6500 or 100% of your earned income. As an individual, you can contribute every year if you make more than $6500 in earnings, you can contribute up to 6500. It's not only that, the 6500 is deductible and this is important. It's deductible for adjusted gross income and on the next slide I will show you where it goes specifically on the 1040 to show you, not on the 1040 on the tax form, to show you specifically the benefit of the IRA deduction. So it's going to give you a deduction today. So let's assume you contribute 6500 and your tax rate is 30% if we take 6500 times 0.3 you're already saved on your taxes this year, 1,950 in savings today plus this money is invested. Now if you are married and you have a spouse, you and your spouse can contribute 6500 times 2 which equal to 13,000. Now the numbers I'm using is for the year 2023. If you're viewing this recording in the year 25, 26, 27, the number will change. So don't assume that this is fixed, it will change. So if you are a person that's above the age of 50, the government allows you to make an additional $1,000 contribution. Again this number could change but usually this will stay the same, why? Because once you get closer to your retirement they want to encourage you just to catch up on savings. That's why they allow you to contribute an additional 1,000. So you can contribute up to 7500. So that's good. They'll give you an additional deduction. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. Now deductible IRA contribution might be reduced if the taxpayer is an active participant in another qualified plan. So notice what I said earlier. I said let's assume you work for small companies they don't have a 401k or you work for several employers where you're always part-time. That's your option. If you work for a company and the company offer a qualified plan, qualified plan let's just for simplicity say a retirement plan like a 401k plan. Under those circumstances your deduction for your regular IRA will be reduced and we're going to look at the reduction. Just know that there's always a limitation for everything. To extend individual is eligible to make a deductible contribution you could always make a non-deductible IRA contribution. So you could always make contribution to the IRA. It may not be deductible but you have the right to put money away for your retirement. You might be asking hold on a second why would I do that if I don't get the deduction? Well guess what? Income will accrue tax-free. It means and this is important let's assume you put today 6,500 in your IRA account and you put this money in good investment stocks. You invested in the latest technology and next year this 6,500 grew to $10,000 in one year. Well guess what? This growth of 3,500 notice it went from 6,500 to 10,000 it accrues tax-free. It means you don't have to pay taxes on it today. When do you have to pay taxes? We'll talk about that later when you start to take this money out. So that's why you might be also interested in contributing to a non-deductible IRA. So this is what we're going to be discussing in this session. Starting I want to show you where does the IRA contribution goes first then look a little bit more about the details. Okay so as I told you the IRA contribution is deductible and specifically once it's deductible it goes on schedule one which is it's going to go for four AGI and specifically individual retirement account for the purpose of this example it doesn't have to be in the same place every year IRA deduction is online 20. Notice it says IRA so let's assume you put here 6,500 then you add all your deductions adjustment to income and let's assume that's the only one 6,500 then this 6,500 will go on your 1040 above adjusted gross income above adjusted gross income so this is adjustment to income it's going to reduce your income by 6,500. If you remember what I mentioned earlier I said if you are covered by a qualified plan and I said let's assume you work for a company and you have a 401k well guess what your IRA deduction what you can deduct for your IRA contribution is reduced is reduced is reduced within an IRA in adjusted gross income rate ranges. So if you're a single and you work for a company and you are part of a 401k whether you contribute or not you are part of it you should contribute once your income start to exceed 73,000 up to 83,000 so the range is 10,000 once you enter this range the 73,000 you're adjusted gross income your IRA deduction start to be reduced and once you reach 83 and above once you have 83,000 and more that's it you can no longer deduct now merit filing jointly you have a different range again those ranges are for the year 2023 obviously they will change but usually the range are the same 10,000 for single 20,000 for merit filing jointly for merit filing separately as always as always you do what they penalize you so as soon as you make $10,000 you can no longer contribute. Otherwise if you don't qualify if you're not under a qualified 401k plan there's no limitation so if you let's assume you don't work for any company let's assume that's the case you work or you are a freelancer you make money here and there and you want to contribute your 401k as long as you have earnings you can contribute up to 6,500 of deductible IRA now bear in mind once you qualify and we're gonna see an example once you qualify then the minimum the minimum is $200 so you have to contribute at least there's a floor of $200 we'll look at an example don't worry about this let's take a look at this example Adam is single 27 years old earns a compensation of 80,000 in 2023 he actively participate in his employer qualified retirement plan so he worked for a company and they do have a 401k Adam decides to contribute 6,500 to a traditional IRA Adam wants to even contribute as much as possible 6,500 calculate the deductible amount for Adam's traditional IRA after factoring in the phase out reduction well let's see Adam makes 80,000 so 80,000 minus 73 the beginning of the range he's 7,000 into the range remember the range is 10,000 this is the range it's why I like to show you the picture and he is 7,000 into this range like 7,000 means 70% into the range so that 7,000 divided by 10 he's 70% into the range well if his if he can if he contributed 6,500 he's gonna be losing and a deduction contribution 70% of that 70% of 6,500 is 4550 he can contribute the 6,500 however 4550 will will not be deductible will not be deductible the remaining so let's say 6,500 minus 4550 so he can oh my god what a coincidence 1950 is deductible and this has nothing to do with the 1950 that I showed you earlier the tax savings okay they're just coincident so he can contribute the 6,500 however let me go back here show you so he can contribute but here he can only deduct 1,900 of it is deductible okay 1,000 950 not 1,500 what if Adam's earning were 82,900 well if that's the case he is in the phase out up to 99% if that's the case up to 99% the reduction of the 6,500 he will have to reduce it by 6,435 and he will be eligible mathematically for 65 dollars well he can contribute 200 dollars there's a minimum floor of 200 dollars also mathematically if we use the formula at 65 this is what I meant by the floor the minimum is 65 let's talk about something called spousal IRA if both spouses have earned income and I mentioned this earlier ceiling on the deductible contribution is 13,000 or the combined income if only one spouse has earned income ceiling is 13,000 or the earned income of that spouse okay obviously you must find jointly to get that espousal IRA now alimony is considered earned income for the purpose of IRA contribution so if a person is receiving alimony it's considered income a person whose only income is alimony can still contribute an IRA I'll tell you this when I was in when I was working back in 2011 2012 my wife was in college and guess what I have earnings and I had earnings more than 13,000 my wife can I have I open an IRA for my wife because she was in college spousal IRA and she was able to contribute the maximum for that year whatever that year was I believe it was 5,000 and I still remember what we invested in actually in Microsoft and what's a good investment to really really good investment we make a good choice we made a good choice we don't always make a good choice in investments but that was a good choice so therefore what you need to know is you can contribute you can basically double it if you are married so George a married individual is eligible to establish an IRA account in the year 2023 his compensation was 125 while his spouse breed does not work outside the home so she doesn't work he works well George has the option to contribute 13,000 to two IRAs which can be divided between the two spouse remember IRA is as it says individual so George will have to have an account and Brie will have to have an account as well two separate account okay however no more than 6,500 can be allocated to either spouse let's assume Brie earned income is only 2,500 it's fine she can use his income to contribute 6,500 now when can you contribute to your IRA well guess what the government is very generous let's assume we're looking at year x7 then you have up till year x8 April 4th April 15th to contribute so although although you are preparing your taxes for 20x7 they'll give you three and a half month of the following year to contribute they just want to make it as easy as possible for you if you extend they don't they don't use the extension April 15th which is the original due date and this this applies both to deductible and non-deductible IRA it means when we talk about Roth IRA which will be next it applies the same thing they just want you to encourage you so in case you forgot in 20x7 to contribute they're gonna give you three and a half month in the following year the chance to contribute now let's talk about the taxation of IRA benefits which is covered in when we talk about when we talk about taxable income but let's talk about this now when a participant makes deductible contribution what does it mean deductible it means when they contributed this money they got a tax break tax break means they got a deduction when they contribute this money to a traditional IRA and deduct them their basis in the IRA is zero if you're contributing money and that and your that money is you haven't paid taxes on it it means your basis is zero therefore any withdrawals from the IRA are subject to ordinary income tax in the year you received again this is what we're talking about traditional and I keep mentioning traditional why because we're gonna have another IRA for a separate recording called Roth IRA in a traditional IRA if your contribution are deductible remember they could be deductible they may not be deductible remember if you can still contribute in an undeductible way they're assuming it's deductible your basis is zero it means everything you take out the principal plus the earnings is taxable you remember I contributed 6500 it growth at 10,000 when I take the 10,000 out I have to pay taxes on the 6,500 assuming I contributed this in a pre-tax money and I have to pay taxes on the 3,500 all as ordinary income which is the highest rate payment made to participant before the age of 59 and a half which is you have to wait until you're 59 and a half are not included in the gross income but are all that are not only included in gross income so if you take any money before 59 and a half they are subject to a 10% penalty so remember there's a penalty in case you take the money earlier also withdrawal must be made before the age of 72 you might be saying why does this rule exist why am I waiting to take my money until 72 if I can take it as early as 59 and a half well because I have other sources of income and if I have other sources of income I don't have to take money out of my IRA maybe you know the stock market is not doing well therefore I wait until the stock market is higher than I cash out my IRA but why you must that's the that's the that's the question why you must take them by the age of 72 here's why because the government gave you the option to put to put money away tax-free so when you took when you put this money you did not pay taxes on it and now the government can't wait until you take it out because once you take it out this is when they take their share so they give you from 59 and a half until 72 okay you want to keep it you want to keep it that's fine that's fine but at 72 they want you to take it out and there's a formula you have to use the minimum distribution why because they want the tax you want it it's as simple as that now is there an exception for the 10% penalty in case you take the money earlier there are exceptions exceptions exceptions apply exceptions apply to 10 year to the 10% penalty one if you take this money for medical expenses if you want to use this money for qualify higher education expenses and for each for each exception there are specific rules that you have to follow qualify first-time home buyer expense you can take up to 10,000 now I did take 10,000 out of my retirement account not my IRA that's also available for for the 401k when I first bought my first home also if an individual received unemployment compensation what does that mean means the individual lost their job at least for 12 consecutive weeks they can use IRA withdrawals they can take money out for their health insurance and the insurance for their spouse dependent without the incurring the 10% penalty so let's assume you lost your job and you are on you receive an unemployment compensation the government says look if you need that money to pay for your health insurance because you're not employed you have to pay for your health insurance and if you know anything about health insurance in the US it's expensive or for your spouse or your dependent you can take it out we will not charge you a penalty let's talk about to roll over IRA sometimes what happened is this you have an IRA account somewhere which is your individual account then you then at some point you work for a company and this company have a 401k and you might work for many companies and each company you work for they open a 401k for you as an employee so you have two 401ks and you left this company what you can do sometime if it's allowed you can take the money from your 401k and roll it over into your IRA so this way you have all your money in one place and you can you know from the other 401k roll it over to your IRA so if an individual retirement account receive a roll over from another qualified plan here 401k such in such another or another it could be another IRA the distribution from the qualified plan will not be considered part of the recipient gross income so when you do a roll over but you have to do it properly when you move money from a 401k to an IRA or from one IRA to another IRA that's fine as long as you roll it over what does it mean roll it over you can cash it out this applies as long as the distribution is transferred to another IRA or to another qualified plan within 60 days of receipts so you get the money immediately and we have 60 days but put that money in the other account let's take a look at this example no one makes a withdrawal of 18,000 from his traditional IRA on May 15 20 x3 effectively closing his account however he promptly deposits these funds into a different traditional IRA on June 10 this is what a roll over is this transaction qualify as a roll over and does not generate any gross income for no and the year 20 extra and you have to be very careful when dealing with those better keep it for the professional don't see the money just call both companies says I need to roll the money from this account to another account one of them will handle it either the usually it's the receiving company because they want your money they will they will handle everything let them handle it in this way the event is not taxable you don't have to include that money in your gross income and you have your money all in one place my advice to you is this personal advice start to invest as early as possible no one told me this I started investing late okay whatever you can invest early and that money will accumulate believe me what should you do now go to far hat lectures and work MCQs multiple choice questions to understand these topics better whether you are a CPA candidate accounting student or an enrolled agent you need to understand this topic or as an individual as a citizen for your own benefit good luck study hard and of course stay safe