Lame Duck

Taxation of the distribution depends on a lot of factors. IRs Publication 590 provides the rules for distributions from a Roth IRA.

Is this before or after the participant's RBD? What does the document say about distributions on death? Generally, the rules of 401(a)(9) apply to distributions. Prior to RBD, payments to a non-designated beneficiary must be made within five yearas of the date of death. Payments to a designated beneficiary may be made over the life expectancy of the beneficiary.(Reg 1.401(a)(9)-4 Q-1) Reg 1.401(a)(9)-4 Q-5 sets forth the requirements that must be met for the beneficiaries of a trust to be considered designated beneficiaries.

This more properly a question for a tax professional who deals with the US taxation of nonresident aliens. However, I belive that an individual can elect out of withholding on any distribution from an IRA. I would just make the election not to have withholding and let it go at that. The mandatory withholding provisions apply to plans qualified under 401(a), 403(a) and 457(b) (See IRc 3405(d)(2)(B).

We have to earn a living somehow.

Blinky, In my mind it's a foregone conclusion that someone would follow Mike's advice. I was only suggesting a possible alternative that might not be mentioned by a plan consultant. Not all of them are as reputable and honest as the members here.

If you are looking to contribute only $6,000 each on behalf of you and your spouse, you might want to consider a Simple IRA. it will allow you and your spouse to each defer $6,000 from your salaries. It would require some form of contribution, either matchng or nondiscretionary for all employees. You will need to take this into consideration when adopting the plan.

I guess I think too slowly. Seems like blinky and Belgarath beat me to the draw.

Is this an adult or minor child? If a minor child, regulation 1.414©-4(b)(6)(i) requires that the ownership of father and son be attributed to the other, thereby creating a controlled group. 1.414©-4(b)(6)(ii) provides that an individual who is in effective control (more than 50% ownership) is considered to own an interest in such business owned directly or indirectly by or for the individual's parents, grandparents and children who have attained age 21. Assuming son is an adult, I read the regs as saying dad would be considered as owning 100% of Entity 1 and son 100% of Entity B. I don't believe there is any provision in the code or regs that provide any reverse attribution in Entity 2 to dad or entity B to son that would result in a controlled group. Does anyone else read this differently? I've always found controlled group analysis to be one of the most difficult areas of pension law and usually rely on the determination of the client's tax advisor as to whether the situation is a controlled group or not.

have you looked at Rev. Proc. 2004-16, issued February 13 2004? Section 3 provides interim guidance for determining the fair market value of a life insurance policy.

It's my belief that the following rules would apply to your hypothetical. To be a qualified distribution (no tax on the distribution) there are two requirements that must be met. The first is that the assets have been in the Roth IRA for at least a 5-year period, which begins with the first day of the year in which any type of contribution is first made. In your case, the period would commence on January 1, 2004, the year in which you make the conversion. The second requirement is that it is as a result of a specific event. In your case, attainment of age 59 1/2 qualifies. Since you propose beginning the distribution in 2007 (three years), the distribution would be a nonqualified distribution. However, only a portion of the distribution may be taxable. Because of the ordering rules, you are deemed to first remove any annual contributions, followed by taxable conversion dollars. Next would be non-taxable conversion dollars. The last would be a distribution of earnings. The distribution of your conversion assets would not be taxable. There would be no tax until you had withdrawn all of the conversion assets. The withdrawal of the earnings may or may not be taxable. I beleve that if the earnings are not distributed until after the 5-year period has elapsed (distribution occurs on or after 1/1/09), they would not be subject to taxation, since they now meet the requirements of a qualified distribution (5-year holding period and after attainment of age 59 1/2). Perhaps some of the others may have a different slant on it. There should be no penalty tax on the distributions, even though it is a nonqualified distribution, since you meet one of the statutory exceptions to the penalty (attainment of age 59 1/2).

1. The proper term is conversion rather than rollover, and conversions must take place by the end of the calendar year. So, while a SEP account may be converted to a Roth IRA, at this point it could only be made for the 2004 tax year. See Treasury Regulation Section 1.408A-4, Q&A-4 2. Contributions to a Roth IRA may be made up until the due date for your tax return, not including extensions. See IRC Section 219(f)(3)

While rules regarding the filing of a divorce may vary from state to state, I believe that divorces are generally filed in the County of residence of either the petitioner or the respondent. (It's been way too many years since I studied Domestic Relations.) If both parties lived in the same county, it is likely that the divorce would have to have been filed in that county. You might want to consult a local attorney to determine what your state rules are.

There was an excellent article on deemed distributions and the reporting of interest for tax purposes that appeared in Benefitslink on February 5, 2004. I'm sorry I don't have a link to it but someoen else might.

It's too bad I can't carry a tune.

I just realized you said they were in an S-Corp. I saw the word partner and focused on that. Based on the instructions to the 5500-EZ, I'm not sure an S-Corp would qualify under the partnership rule. my last naswer may have confused you a little because I didn't get the whole question.

The instructions to Form 5500 EZ which is the form used for filing an owner-only 401(k) specify that the form can be used for a plan which only covers one or more partners (and spouses) in a partnership. Therefore, you can use an owner-only 401(k) plan for your clients, even though they are divorced. You should note that this refers only to partners in a partnership. A plan which covers two unmarried owners of a corporation would, presumably, not meet this definition and be unable to file a 5500EZ.

Blinky, I agree that it is debatable, but that's what the language of 1.414©-4(b)(6) seems to say. I only threw it in as something additional that needs to be considered.

1563(e)(5)(B) and regulation 1.414©-4(b)(5)(B) limit the exception to situations where the individual is not a member of the board of dirctors, a fiduciary or an employee of such organization and does not participate in the management of the organization at any time during the taxable year. Since the spouse is an employee of the medical corporation, the exception to the controlled group rules under 1563(e)(5) would not be available. In addition, you might have attribution from one parent to another through a minor child under 1.414©-4)(b)(6)(i).

See IRS Publication 590 for an excellent and easy to understand decription of traditional and Roth IRAs. It is available online at www.irs.gov. I agree with John G that a Roth IRA is probably going to be more beneficial to your children. Since their income is probably not taxable, the tax deductible traditional IRA would not benefit them nearly as much as the Roth, where qualified distributions are tax free. You might also want to look into a 529 College Savings Plan, if your children plan on attending, since distributions may be tax free if used for qualified education expenses, at a much earlier age than with a Roth IRA. Anyone can contribute to a 529 plan on behalf of your children. See www.savingforcollege.com for information about College Savings Plans

There is one exception to the exemption from filing a Schedule B. In the September-October 2003 edition of the ASPA Journal there is a very good article on 412(i) plans by Lawrence Deutsch. In it he says, "If a 412(i) plan is top heavy, as described in Code Section 416, it may be necessary to maintan an auxiliary fund to meet those top-heavy minimum benefits not met by the insurance or annuity contracts. Thisd requirement is described at Treas. Reg. 1.416-1 QW&A M17. If an auxiliary fund is required, a funding standard account must be maintanied, and each Form 5500 filing must include a completed Schedule B.

IRA contributions must be made from some form of earned income of the IRA participant (spousal IRA excepted) so you would not be able to open an IRA for your children unless they had some form of income. That said, many people pay their children for chores around the house, e.g. making beds, cleaning room, etc. That would constitute payment for services rendered and would be earned income eligible for contribution to an IRA.

One consideration is that distributions made directly to your children as beneficiaries may be made over life expectancy. This is also possible if the trust is the beneficiary, but there are very specific rules and guidelines that must be met in order for this to be available. If they are not met, distribution of the entire amount to the trust would have to be made not later than the December 31st of the year that contains the fifth anniversary of your date of death. Due to the subatantial advantages of continued tax-deferred growth in the IRA, payments over life expectancy will generally result in a larger sum being passed to the beneficiaries.

We are wrestling with the Annual Addition applicable to plan years ending January 31, 2004. EGTRRA amended Code Section 415(d)(1) to provide that the Secretary shall adjust annually "© the $40,000 amount in subsection ©(1)(A), for increases in the cost-of-living in accordance with regulations prescribed by the Secretary." This amendment was effective for plan years beginning after December 31, 2001. Regulation Section 1.415-6(a)(2) provides that adjustments to the dollar limitation "is effective as of January 1 of each calendar year and aplpies to limitation years that end during the calendar year." Do we use $40,000 as the Code seems to specify or $41,000 as the regulations specify? Any help will be appreciated.

IRC Section 408(d)(1) provides that "any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or the distributee, as the case may be, in the manner provided under section 72." IRC Section 72(t)(1) provides that "If any taxpayer receives any amount from a qualified plan (as defined in section 4974©), the taxpayer's tax under this chapter for the taxable yerar in which such aomount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income." IRC Section 72(t)(2)(A)(iii) provides for an exception to the 10 percent additional tax for a dsitribution which is "attributable to the employee's being disabled within the meaning of subsection (m)(7)." Subsection (m)(7) provides (an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." Proof of the disability may have to be provided to the Secretary of the Treasury. Finally, IRC Section 4974©(3) and (4) provide that the term qualified retirement plan includes an individual retirement account under Section 408(a) and an individual retirement annuity under 408(b). Therefore, if your client meets the definition of disabled under 72(m)(7) distributions would not be subject to the 10% penalty. If your client does not fall within the meaning of 72(m)(7) for some reason, distributions can still be made without penalty under 72(t)(2)(A)(iv) as a series of substantially equal periodic payments made over the life expectancy of the IRA holder or the joint lives of the IRA holder and a designated beneficiary.

Any brokerage firm or mutual fund company will be able to establish a Roth IRA. Using a brokerage firm rather than a mutual fund company will give you a wider investment choice.