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TRADITIONAL IRAs

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PLEASE DO NOW…

In your notebooks, please answer the

following questions:

1.If you buy a stock for $10 and then sell it for $15, what is your NET gain? Explain.

2.How many years does it take for

$10,000 to double in value if your

yearly gain is 12%?

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PLEASE DO NOW…ANSWER

1.If you buy a stock for $10 and then sell it for $15, what is your NET gain? It’s not $5. What tax bracket are you in???

2.How many years does it take for

$10,000 to double in value if your

yearly gain is 12%?

Rule of 72: 72 / Interest Rate = Number of

Years to Double

72 / 12% = 6 years

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TODAY’s GOALS

• What is a Traditional IRA?

• Who is eligible to establish a Traditional IRA?

• How can we contribute to a Traditional IRA?

• What is a rollover?

• What are distributions?

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INVESTMENT MANAGEMENT STANDARD(S)

Achievement Standard: Evaluate savings and investment options to meet short and long-term goals.

Achievement Standard: Evaluate services provided by financial deposit institutions to transfer funds.

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DEFINITIONS to KNOW

• Distribution

• RMDs

• IRA

• Direct Rollover

• Transfer

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WHAT IS A TRADITIONAL IRA?

A retirement account where contributions are tax-deductible and earnings grow on a tax-deferred basis.

An excellent supplement to an individual’s retirement income.

Assets in the traditional IRA are not taxed until they are withdrawn.

The Benefits of Traditional IRAs Video

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WHO IS ELIGIBLE TO ESTABLISH A TRADITIONAL IRA?

Any individual, regardless of age, who has taxable compensation for the year and will not reach age 70 ½ by the end of the year.

Any individual, regardless of age, who has self-employment income for the year and will not reach age 70 ½ by the end of the year.

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HOW CAN WE CONTRIBUTE TO A TRADITIONAL IRA?

1)Make a contribution to your IRA account.

2)Make a contribution to your spouse’s IRA account.

3)Transfers between IRA accounts.

4)Rollover contributions.

Why would I want to do that?!

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WHAT IS A ROLLOVER?

A rollover is a tax-free movement of assets between retirement plans.

A direct rollover is a rollover from a qualified plan, such as a 401(k).

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WHAT ARE DISTRIBUTIONS?

A removal of assets from a retirement account that is paid to the retirement account owner.

In general, distributions from a traditional IRA must occur after age 59½.

In general, distributions that occur before 59½ will be charged a 10% early distribution penalty.

There are some exceptions to the 10% penalty rule.

A traditional IRA owner must begin required minimum distributions (RMDs) the year he or she reaches age 70½.

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LET’s PRACTICE…

Jack, age 61, takes a $6,000 distribution from his traditional IRA. His income tax bracket is 35%. How much will he be taxed on the distribution?

Solution:

Taxes on Traditional IRA Distributions= Amount of Distribution * Income tax rate

Taxes on Traditional IRA Distributions= $6,000 * 35%

Taxes on Traditional IRA Distributions= $2,100

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LET’s PRACTICE MORE…

Jason, age 56, takes a $6,000 distribution from his traditional IRA. His income tax bracket is 35%. How much will he be taxed on the distribution?

Solution:

Taxes on Traditional IRA Distributions= Amount of Distribution * Income tax rate

Taxes on Traditional IRA Distributions= $6,000 * (35%+10% penalty)

Taxes on Traditional IRA Distributions= $6,000 * 45%

Taxes on Traditional IRA Distributions= $2,700

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Video

What is an IRA?

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A LOOK AHEAD…

Roth IRAs

Case Study #5

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QUESTIONS???