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Personal Banking - Frequently Asked Questions

Retirement Plans

1. Traditional IRA Basics

2. Traditional IRA Withdrawals

3. Roth IRA Basics

4. Roth IRA Withdrawals

5. Traditional vs. Roth IRAs

6. IRA Basics

7. IRA Deadlines and Ownership

8. Direct Rollover IRAs

9. Education Savings Account Basics

10. Education Savings Account Tax Benefits

11. Education Savings Account Withdrawals

12. SIMPLE IRA Plan Basics

13. SIMPLE IRA Employer Deadlines

14. SIMPLE IRA Tax Benefits for Employees

15. SEP Plan Basics

16. SEP Employer Deadlines

17. SEP IRA Tax Benefits for Employees

1. Traditional IRA Basics

1.1 What is a Traditional IRA?

IRA stands for Individual Retirement Account. A Traditional IRA is a retirement plan that lets you set aside and invest a set amount of money per tax year. Investing in a Traditional IRA has tax advantages:
  • Your contributions may be tax-deductible, and you don't pay taxes on the account's earnings until you withdraw them. This is an advantage if you expect to be in a lower income bracket when you retire.
  • Depending on your modified adjusted gross income (MAGI, an income figure before certain deductions) and whether you are eligible for an employer-sponsored retirement plan, part or all of your contribution might be tax-deductible. Consult your tax advisor for complete details.

1.2 Who can contribute to a Traditional IRA?

You may be able to contribute to a Traditional IRA, if you:
  • Are under age 70 1/2
  • Have earned income or have a spouse with earned income
  • Meet other eligibility requirements.

1.3 How much can I contribute to a Traditional IRA?

If you meet the eligibility requirements:
  • For tax years 2013 and 2014, you can contribute up to $5,500: up to $6,500 if you are 50 or older;
  • OR 100 percent of your earned income, whichever is less. (Note: Earned income does not include investment earnings such as interest and dividends.)

1.4 Does the maximum amount I can contribute to a Traditional IRA change every year?

No. A law passed in 2001 defines increases in the contribution limits through 2008, with potential cost-of-living adjustments in $500 increments starting in 2009. Eligibility requirements apply. The law also allows you to make additional catch-up contributions if you are 50 or older. The maximum contribution limits for tax years 2013 and 2014 are:
  • $5,500 if younger than 50.
  • $6,500 if 50 or older.
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2. Traditional IRA Withdrawals

2.1 When can I withdraw my Traditional IRA funds for retirement?

You can begin withdrawing from a Traditional IRA without early-withdrawal IRS penalties at age 59 1/2.

2.2 Under what circumstances can I withdraw funds before retirement?

You can generally take distributions from a Traditional IRA for the following purposes, subject to certain restrictions, without IRS early-withdrawal penalties:
  • Health insurance premiums or medical expenses that exceed 10 percent of your adjusted gross income
  • A first-time home purchase ($10,000 maximum)
  • Qualified higher-education expenses for you, your spouse, your children, or your grandchildren
  • Substantially equal periodic payments taken over the course of your life expectancy
  • If you become disabled

2.3 What if I die before I withdraw all of my funds?

You can name a beneficiary or beneficiaries for a Traditional IRA to receive the funds in the event that you die before all the funds are withdrawn. Depending on your age at death, the beneficiary's relationship to you, and the terms of the IRA plan language, a beneficiary may be able to:
  • Take life expectancy payments
  • Take a complete distribution within five years
  • Treat the IRA as his/her own if the beneficiary is a spouse
  • Roll over the amounts to his/her own IRA or eligible plan if the beneficiary is a spouse
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3. Roth IRA Basics

3.1 What is a Roth IRA?

A Roth IRA is a type of retirement account for which you make contributions with after-tax dollars, but earnings on qualified withdrawals are tax-free.

3.2 Who is eligible to contribute to a Roth IRA?

There are no age limitations. Your MAGI (income before certain deductions) determines your eligibility to contribute to a Roth IRA.

If you're single and your MAGI for tax years 2013 and 2014 is:
  • Less than $114,000, you may contribute the maximum annual contribution limit to a Roth IRA (see question 3.3)
  • Between $114,000 and $129,000, you may make a partial contribution to a Roth IRA
  • More than $129,000, you may not contribute to a Roth IRA

If you're married and your joint MAGI for tax years 2013 and 2014 is:
  • Less than $181,000, you may contribute the maximum annual contribution limit to a Roth IRA (see question 3.3)
  • Between $181,000 and $191,000, you may make a partial contribution to a Roth IRA
  • More than $191,000, you may not contribute to a Roth IRA
  • For more information about your IRA eligibility, consult your tax advisor.

3.3 What is the maximum annual contribution limit for a Roth IRA?

  • For tax years 2013 and 2014, you can contribute up to $5,500 if you are younger than 50; up to $6,500 if you are 50 or older.
    or
  • 100 percent of your earned income, whichever is less.
    (Note: Earned income does not include investment earnings such as interest and dividends.)

3.4 Does the maximum amount I can contribute to a Roth IRA change every year?

No. A law passed in 2001 defines increases in the contribution limits through 2008, with potential cost-of-living adjustment in $500 increments starting in 2009. Eligibility requirements apply. The law also allows you to make additional catch-up contributions if you are 50 or older. The maximum contribution limits for tax years 2013 and 2014 are:
  • $5,500 if younger than 50.
  • $6,500 if 50 or older.
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4. Roth IRA Withdrawals

4.1 What are the tax consequences when I take money out of my Roth IRA?

Qualified distributions are tax-free.

4.2 What is a qualified distribution from a Roth IRA?

A qualified distribution requires:

Assets be held in a Roth IRA for at least five taxable years (beginning with the first taxable year for which you contributed to a Roth IRA of any kind) and

One of the following events:
  • Reaching age 59 1/2
  • Disability
  • Purchase of a first home
  • Death of the account holder

4.3 Do I have to take distributions from my Roth IRA?

No. With a Traditional IRA, you must begin taking minimum distributions by April 1 following the year in which you turn 70 1/2. With a Roth IRA, the required minimum distribution rules do not apply until you die.
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5. Traditional vs. Roth IRAs

5.1 What's the difference between a Traditional IRA and a Roth IRA?

With a Traditional IRA, you pay taxes on principal and earnings when you withdraw them. Depending on your income, you may be able to deduct the initial contribution to a Traditional IRA. With a Roth IRA, you pay income taxes on your contributions, but the earnings on qualified withdrawals are tax-free.

5.2 Can I convert my Traditional IRA to a Roth IRA?

In 2013, you may be able to convert your Traditional IRA to a Roth IRA. However, talk to your tax advisor about the eligibility requirements and how this type of conversion would affect your financial situation. 

5.3 Can I put the maximum annual contribution allowed into a Traditional IRA and also make the maximum annual contribution allowed into a Roth IRA?

No, your combined annual contributions to both Traditional and Roth IRA plans cannot exceed the maximum annual contribution limit.
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6. IRA Basics

6.1 What are my IRA investment options?

Union Bank offers a range of investment choices for your IRAs.

FDIC-insured options include fixed- and variable-rate time deposits, a money market savings account, and our Bonus Rate Rollover time deposit.

Additionally, UnionBanc Investment Services, the brokerage subsidiary of Union Bank, offers Brokerage IRAs, such as stocks and mutual funds. These investments are not FDIC insured or protected against market or investment loss.

6.2 What are the fees for a Union Bank Traditional or Roth IRA?

Union Bank assesses a $15 annual custodial fee on each Traditional and Roth IRA. This fee is waived if any one of the following applies:
  • You maintain a combined fair market value of at least $25,000 in your Union Bank IRAs (excluding Small Business Plans and Coverdell Education Savings Accounts)
  • You contribute $4,000 or more to one or more Union Bank IRAs (excluding Small Business Plans and Coverdell Education Savings Accounts) by December 31 of the prior year
  • You are 70 or older by June 30 of the prior year
You can prepay the custodial fee before January 15. Otherwise, we debit the fee from your IRA in late February.

6.3 Can I transfer my Traditional or Roth IRA from another financial institution?

Yes. You can also consolidate multiple retirement accounts into one or more accounts at Union Bank.
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7. IRA Deadlines and Ownership

7.1 What is the last day that I can make an IRA contribution?

You can make Traditional or Roth IRA contributions for the previous tax year until your tax return due date (not including extensions), generally April 15.

7.2 Can I claim an IRA contribution on my tax return even if I have not made the contribution when I file?

Yes, you can claim an IRA deduction on your tax return, provided that you make the Traditional or Roth IRA contribution before your tax return due date, generally April 15.

7.3 Can my living trust hold title to my IRA?

No, an IRA must be put in an individual's name. However, you can name your trust as a beneficiary. Consult your attorney for more information.

7.4 Can I have a joint IRA with my spouse?

No, you cannot both participate in the same IRA. Each spouse must have a separate IRA.
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8. Direct Rollover IRAs

8.1 I am leaving my job or retiring. What can I do with my money from the company's retirement plan?

When you leave a job or retire, if you receive a distribution from your employer-sponsored retirement plan, it can trigger adverse tax consequences (see question 8.3). Instead, ask your employer to make an eligible rollover distribution directly to another qualified retirement account, such as a Union Bank Rollover IRA. This way you can avoid incurring taxes and penalties as a result of a distribution. This strategy also helps keep your money earning tax-deferred income.

8.2 What assets from a qualified retirement plan may I roll over to an IRA?

Generally,  you can directly roll over a distribution from a qualified retirement plan (see question 8.3) into a Traditional IRA. Distributions you cannot roll over include:
  • Death distributions to a non-spouse beneficiary
  • A series of substantially equal periodic payments over your life expectancy
  • RMDs
  • Any hardship distributions, regardless of contribution source
  • Certain defaulted loan amounts treated as taxable distributions
For more details, consult your tax advisor.

8.3 What is a qualified retirement plan?

A plan that meets the requirements of IRS Section 401(a) is a qualified retirement plan and is eligible for special tax consideration.
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9. Education Savings Account Basics

9.1 What is a Coverdell Education Savings Account?

A Coverdell Education Savings Account allows you to save up to $2,000 per child, per year until the child turns 18 for elementary, secondary-education, and higher-education expenses, subject to eligibility requirements. While contributions are not tax-deductible, earnings grow tax-deferred, and qualified distributions are tax-free.

9.2 Who is eligible to contribute to an education savings account?

Any qualifying individual can contribute to an education savings account, making this an ideal savings option for parents, grandparents, other relatives, and friends.

You are eligible for a full contribution to an education savings account ($2,000 in total contributions per child, per year) if your adjusted gross income is:

  • Less than $95,000 (single taxpayer)
  • Less than $190,000 (married taxpayer filing joint return)
You are eligible for a partial contribution to an education savings account (less than $2,000 per child, per year) if your adjusted gross income is:
  • Between $95,000 and $110,000 (single taxpayer)
  • Between $190,000 and $220,000 (married taxpayer filing joint return)

9.3 Can different people contribute to my child's education savings account?

More than one person can contribute for the same child, and more than one education savings account can be established for the same child. However, the total combined contributions cannot exceed $2,000 per child, per year, across all accounts. Contributions must stop when the child reaches age 18, except in the case of children that meet certain special-needs requirements.

9.4 Who is responsible for the funds?

Although the account is in the child's name, the account's responsible individual (the child's parent or guardian) controls the education savings account until all of the funds are distributed. The responsible individual is the individual who has the power to direct the investment of contributions; redirect the initial investments; and direct the financial organization regarding administration, management, and distribution of the funds (generally, until the child reaches the age of majority).

9.5 Why should I open an education savings account when $2,000 per year won't cover my child's education expenses?

The education savings account is designed to be part of an overall savings plan. It offers the advantage of tax-free earnings when you withdraw the funds for qualified education expenses. Also, since 2002, you can contribute to an education savings account and to a qualified state tuition program for the same child in the same year.
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10. Education Savings Account Tax Benefits

10.1 What are the tax advantages of an education savings account?

Although the contributions are not tax-deductible, you can withdraw earnings tax-free for qualified education expenses.

10.2 What is the deadline for making education savings account contributions?

You have until your tax return due date (not including extensions), typically April 15, to contribute to an education savings account for the tax year for which you are filing.

10.3 Can I contribute to an education savings account as well as Traditional or Roth IRA?

Yes. The $2,000 maximum contribution per child, per year does not affect your ability to contribute to a Traditional or Roth IRA.
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11. Education Savings Account Withdrawals

11.1 Are there restrictions on using the funds?

You must use withdrawals from an education savings account for qualifying education expenses or the earnings may be subject to income tax and possible penalties.

11.2 What is considered a qualified education expense?

You can withdraw earnings tax-free and without penalty for qualified education expenses. These include tuition, fees, books, supplies, and equipment required for the education of the designated beneficiary at an eligible educational institution. If the student is half-time or greater, room and board is considered a qualified education expense. Note: Depending on the investment option chosen, Union Bank early-withdrawal penalties or compensating fees may apply if funds are withdrawn prior to the maturity date.

11.3 Are there mandatory distribution requirements for an education savings account?

Although contributions must stop when the child reaches age 18, the account can remain open until the child turns 30. If the funds have not been distributed by that time, the account balance must be withdrawn within 30 days or transferred to another child within the same family within 60 days. The mandatory distribution requirement does not apply to students with special needs.
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12. SIMPLE IRA Plan Basics

12.1 What is a SIMPLE IRA plan?

A Savings Incentive Match Plan for Employees (SIMPLE) gives eligible businesses with 100 or fewer employees a way to help employees save for retirement without complicated paperwork and procedures. Each employee sets up a SIMPLE IRA, which is a tax-deferred retirement account. The employer makes tax-deductible contributions to the SIMPLE IRAs. Employees may also contribute to their SIMPLE IRAs through payroll deductions.

12.2 What companies are eligible to start a SIMPLE IRA plan?

Small businesses, including self-employed individuals, with 100 or fewer employees that do not maintain any other qualified retirement plan are eligible.

12.3 Which employees are eligible for a SIMPLE IRA plan?

While employers may choose more-liberal eligibility requirements, they must include all employees who meet both of the following requirements:
  • Received compensation of at least $5,000 in any two preceding years
  • Reasonably expect to receive at least $5,000 in the current calendar year
Age is not a consideration. Employers may exclude nonresident aliens or employees covered by a collective agreement.

12.4 How much can an employer contribute to an employee's SIMPLE IRA?

Employer contributions are mandatory and can be accomplished in one of three ways:
  • Match employee contribution dollar for dollar, up to 3 percent of the employee compensation. 
  • Contribute 2 percent of compensation for all eligible employees who have earned at least $5,000 during the year, including employees who choose not to make their own contributions.
  • In two of any five years, the employer could choose to contribute only 1 percent. 

12.5 How much can an employee contribute to a SIMPLE IRA?

For tax years 2013 and 2014, employees may contribute a specified percentage of their income up to a maximum $12,000 ($14,500 for those age 50 and older) through regular payroll deductions. 

12.6 What are the advantages of a SIMPLE IRA plan?

For employers:
  • Tax benefits: deductions for both employee deferrals and matching contributions
  • Ease: a retirement plan that's easier to set up and more economical to administer than a 401(k) plan
For employees:
  • Tax benefits: contributions and earnings are tax-free until withdrawn
  • Retirement plan: employees of small businesses build retirement savings
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13. SIMPLE IRA Employer Deadlines

13.1 When is the adoption deadline for a SIMPLE IRA?

An employer may open a SIMPLE IRA for a tax year on any date between January 1 and October 1 of that year. New employers established after October 1 of the year can establish a SIMPLE IRA plan as soon as administratively possible. 

13.2 What is the deadline for SIMPLE IRA contributions?

The employer must deposit employee contributions no later than 30 days after the close of the month in which the payroll deduction takes place. The deadline for employer contributions is the employer's tax return due date (including extensions).

13.3 Are SIMPLE IRA plans maintained on a calendar-year or fiscal-year basis?

SIMPLE IRA plans must be maintained on a calendar-year basis.
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14. SIMPLE IRA Tax Benefits for Employees

14.1 Does participating in a SIMPLE IRA plan affect my other IRA contributions?

If you participate in a SIMPLE IRA plan, the IRS considers you an active participant in an employer-sponsored retirement plan. This can affect whether you can deduct contributions to a Traditional IRA, depending on your income. However, you can participate in a SIMPLE IRA plan and still contribute to an IRA, subject to IRS rules on IRA eligibility. A SIMPLE IRA plan contribution does not count against your limit for Traditional or Roth IRA contributions.

14.2 Can I transfer funds from a SIMPLE IRA to another IRA?

You must participate in a SIMPLE IRA plan for at least two years to be eligible to make a tax-free rollover. The two-year period begins on the first day on which the employer deposits a contribution into the SIMPLE IRA. You can roll over a SIMPLE IRA into another SIMPLE IRA, a qualified plan, a tax-sheltered annuity (section 403(b) plan), or a state or local government deferred-compensation plan (section 457 plan). Consult a tax advisor for more information.

14.3 How are SIMPLE IRA distributions taxed?

Distributions from a SIMPLE IRA are generally taxed like distributions from a Traditional IRA. Funds withdrawn prior to age 59 1/2 are generally subject to early-withdrawal penalties. Distributions taken (before age 59 1/2) during the first two years of participation in a SIMPLE IRA are subject to a 25 percent penalty; after two years' participation, the penalty decreases to 10 percent.

14.4 When do I need to start taking money out of my SIMPLE IRA?

You must receive the first distribution by April 1 of the year following the year you reach age 70 1/2 and then annually by December 31.
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15. SEP Plan Basics

15.1 What is a SEP plan? What is a SEP IRA?

A Simplified Employee Pension (SEP) plan is an employer-sponsored retirement plan that uses IRAs to minimize cost and paperwork. Each employee sets up a SEP IRA, which is a tax-deferred retirement account. A business or self-employed individual makes tax-deductible contributions to the SEP IRA. Once an employer makes a contribution to a SEP IRA for an employee, the funds belong to the employee and are subject to Traditional IRA rules. Each employee directs his or her own investments.

15.2 What types of businesses can set up a SEP plan?

Businesses of any size, including:
  • Sole proprietorships, including a self-employed individual
  • Partnerships
  • Corporations
  • Tax-exempt entities, such as nonprofits 

15.3 Who can receive SEP IRA contributions?

While employers may choose more-liberal eligibility requirements, they must include employees who meet all of the following requirements:
  • Are age 21 or older
  • Have worked for the employer during any three of the preceding five years
  • Earn at least $550.
Employers can exclude nonresident aliens and employees covered by collective bargaining agreements.

15.4 How much can an employer contribute to a SEP IRA?

The maximum annual contribution for each employee for 2013 is either 25 percent of the first $255,000 of compensation or $51,000, whichever is less. The maximum annual contribution for each employee for 2014 is either 25 percent of the first $260,000 of compensation or $52,000, whichever is less.

15.5 What are the advantages of a SEP?

For employers:
  • Tax benefits: employer contributions are tax-deductible business expenses.
  • Flexibility: employers can decide how much to contribute, up to the IRS-imposed limitations, or whether to contribute at all.
  • Ease: a retirement plan that's easier to set up and more economical to administer than a 401(k) plan.
For employees:
  • Tax benefits: contributions and earnings are tax-free until withdrawn.
  • Retirement plan: employees build retirement savings.
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16. SEP Employer Deadlines

16.1 What is the deadline for establishing a SEP plan?

An employer must establish SEP plans by the business's tax-filing deadline (including extensions).

16.2 What is the deadline for SEP contributions?

An employer must contribute to SEP plans by the business's tax-filing deadline (including extensions).
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17. SEP IRA Tax Benefits for Employees

17.1 What's the difference between a SEP IRA and a Traditional IRA?

Once an employer makes a contribution to a SEP IRA for an employee, the funds belong to the employee (employees are immediately 100 percent vested in their SEP IRA funds) and are subject to Traditional IRA rules. Each employee directs his or her own investments. Only businesses (employers) can contribute to SEP IRAs. In contrast, only individuals can contribute to Traditional IRAs.

17.2 Does SEP plan participation affect my eligibility to contribute to other IRAs?

If you participate in a SEP plan, you are considered an active participant in an employer-sponsored retirement plan. This may affect whether you can deduct Traditional IRA contributions, depending on your income. However, you can participate in a SEP plan and still contribute to an IRA. A SEP plan contribution does not count against your limit for Traditional or Roth IRA contributions.

17.3 How are SEP IRA distributions taxed?

Distributions from a SEP IRA are generally taxed like distributions from a Traditional IRA. Funds withdrawn prior to age 59 1/2 are generally subject to early-withdrawal penalties.
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