Lame Duck

Blinky, I'm not an accountant or an actuary so I might be looking at this wrong, but I think you made one error in your calculation on the taxes payable for the $900 investment. Since the $900 is an after tax investment, it would not be taxed again when it is removed. Asuuming the investment was made in some kind of tax deferred vehicle, you would be taxed on gains of $712. After taxes at 15%, you would be left with $605 plus the original $900, for a total amount of $1,505. When added to the traditional IRA distribution (after tax) of $9,133, you have a total net value of $10,638. This is still $107 less than the net value of the Roth IRA. The result would be different if the $900 was in vested in a taxable account and the gains were taxed every year, but that calculation is a little more than my tired brain can puzzle through at the moment.

The first question is whether the money in your Roth-IRA is attributable to contributions or a conversion. If it is regular roth-IRA contributions, the contributions can be recovered witout tax (you already paid it) and without being subject to the 10% penalty under code Section 72(t). (See Treas Reg. 1.408A-6(b) Q & A 5(a)) If the distribution is attributable to a conversion, the answer is slightly different. The conversion amount will be recovered without tax since you've already paid the tax. However, it will be subject to the 10% penalty if the distribution occurs within the 5-year period commencing with the first day of the taxable year in which the conversion is made. (See Treas Reg. 1.408A-6(b) Q & A 5(b)) Distributions of earnings will be subject to both income taxes and penalties if they do not meet the requirements for a qualified distribution.

Lawyers multiply like rabbits.

Even though he has 1 $40,000 limit, it is possible that deferrals and employer contributions under the 403(b) will not reach that level. If that is the case, he would be able to establish some plan that would allow him to make a contribution up to the single $40,000 limit if he is not part of an ASG, even if he is precluded from salary deferrals.

Based on what goldtpa stated as the functions of the "management company" I do not see it as providing mangement functions to the school. The mangement functions of the school are provided by the principal as an employee of the school, not as an employee of his own business, which provides sales and advertising for the school. If his business was providing the day to day management functions of a school principal. I would agree with you that 414(m)(5) applies. If you see sales and advertising as a normal management function for a school, then 414(m)(5) would apply. However, I still believe the most pertinent question is still, What benefit will he receive from setting up his own 401(k) if he is particpating ni the scholl's 403(b)?

414(m)(2)(B)(ii) requires that "10 percent or more of the interests in such organization (first org or A org) is held by persons who are highly compensated employees (within the meaning of 414(q)) of the first organization or any organization described in subparagraph (A)." If your principal does not have the requisite ownership interest, he doesn't meet the requirmenets of an ASG. Secondly, are the services he provides services normally provided by an employee of a first org or an A org? I'm not sure that "sales, advertising, etc." are traditionally provided by employees of a vocational school. Thirdly, and probably most important, what benefit does he expect to derive from a 401(k) plan? The deferral limits under the 403(b) and the 401(k) must be aggregated on an individual basis. Your client would only be able to defer a maximum of $12,000 ($14,000 if 50 or older) between the two plans. I don't see any benefit to him from setting up a plan under which he will, in all probability, be unable to utilize the deferral opportunities.

Money from either a Roth or traditional IRA can be removed at any time. However, it may be subject to a 10% penalty if the distribution occurs prior to age 59 1/2. There are certain exceptions to the 10% penalty, one of which is a first time home buyer acquiring a principal residence. Based on your question, you appear to meet the requirements for the exception and would not incur the 10% penalty. Distributions from a Roth IRA that have not been held for 5 years are considered to be non-qualified distributions and would be subject to the 10% penalty unless they meet one of the exceptions. First time home buyer is an exception to the penalty. However, your contributions to the Roth have already been taxed and will be returned to you, tax free. If you can do so, it would be advisable to leave the earnings in the Roth so they will become eligible for tax free distributions. The removal of your principal contributions will not affect the tax free potential of the earnings.

What if you reverse the situation and W is now receiving all the income from the business and H is receiving nothing? Does this mean H is no longer an employee for benefit accrual purposes? I have seen several cases where this format is followed in order to maximize the benefits for both spouses. The plan uses a high 3 average for benefit purposes and looks at all years of service for purposes of determining the high 3.