Bird

Yes. That's buying the policy and there is a prohibited transaction exemption for it.

Thanks, I guess I completely forgot that they were on a different schedule and were not indexed for inflation until later.

I assume the IRA limits themselves ($4,000 / $1,000) are unchanged? If it was in there I couldn't find it.

He didn't take a RMD from the IRA before rolling? I think he should have. If he didn't, then I think that part of the rollover was ineligible. The fix would be to include the 12/31/06 IRA balance in the calcs.

No great answers. He can buy it from the plan, but then he has to come up with the cash in order to do it. He can have the plan borrow most of the cash out and then buy it for its stripped value, but then he'd probably have to pay significant loan interest outside the plan to keep it going. If the plan permits it, he might take it as a distribution but as you note it's taxable.

I could be wrong but I don't see it that way.

FWIW, I don't see any "inherent problems" with Medusa's question or approach. In the real world, tpas are expected to provide an answer when a client says "can we do...?" Sometimes we can give a very straight answer but a lot of times we we have to say something to the effect of "well, they're no specific prohibition on the language but if it turns out to be discriminatory in operation according to the IRS then you could have a problem" - which I'm assuming is what Medusa said or will say as a caveat. Where/what is the problem?

I'm not sure on the answer either but I lean towards Belgarath's position. There was a problem with all those years of unreported income, but I don't know that the consequence or "fix" is that 100% of the proceeds are now taxable.

He can set up a SIMPLE with matching contributions and then just not make deferral contributions for himself, so then there would be no matching contributions either. Can't opt out of a SEP.

There's a whole range of safe harbor permitted disparity allocations formulas. Off the top of my head I remember 5.4% for more than 80%...4.3% I think goes from 20% to 80% of the TWB and below 20% it goes back to 5.7%.

OK to do it now and amend later - PPA amendment.

I think you're on the right track. There's no known "right" answer but at least you're doing something and have a reasonable plan. Good luck.

I don't think we have enough information to say if it is "better" but I think your approach of making sure you get the full match is reasonable. FWIW, you say "put the rest into a Roth IRA," but the limits are different and mutually exclusive. For a SIMPLE, the max employee deferral is $10,500 (plus $2,500 catchup if over age 50). The IRA limit is $4,000 (plus $1,000 catchup if over age 50). So you can do what you want and "the rest" doesn't mean anything, unless you are talking about a self-imposed savings goal/budget. (John G. maybe you missed that it is a SIMPLE IRA - 100% match on the first 3%, unless the special 1% cap is being exercised.)

It could be argued that they said you "should" use an accrual basis (and that's my opinion, for what it's worth).

I agree ("yes") but...if you're thinking that the 2007 tax return will be the final tax return, as might be read into your comments, that's incorrect. A return is due for any year that assets exist in the plan, even if it is terminated in 2007.

mjb, are you predicting that Congress will tax Roth earnings at some future date or are you just positing that it's a possibility? Of course it's a possibility, but I agree with John G that it's remote at best - certainly not enough to change someone's actions today. What's your point?

I think from what you described putting more in would be an overcontribution. Some (most? all?) custodians will give you the opportunity to add $10 (or whatever) to the initial deposit as a direct payment of the fee, i.e. it never goes in the account and doesn't count as a contribution. Ditto for annual fees, if applicable. But I think you've described a contribution and subsequent fee withdrawal. You could try to call the custodian and ask if they would re-characterize $10 of the original contribution as a direct fee payment.

Well, I'll never understand why some people insist on doing things that make no sense - why not just take the RMD and then roll over the rest? Sheesh. Anyway, from a tax standpoint, I honestly don't think what they want to do is a problem; if too much is rolled over it is an ineligible rollover and the correction is to remove it. From a plan standpoint, they're not following the terms of the document, which is a potential DQ issue. I'm not sure that on audit the IRS would do anything about it. It would probably go worse for them if there's a lot of documentation that you told them to pay the RMD first.

I think that all the benes must continue to use the life expectancy of the oldest, at least that's what I think the cite says. (I'm wondering if the IRA custodians will be able to manage this automatically.)

I don't think I'd worry about the document submission. Just keep a note in the file so that if it ever comes up you can explain it for what it was, a mistake. I might try just changing the 5500 number with the next filing. Or amend if it's only a couple of years...

That doesn't shock me, and it validates my prior comments, although I'm sorry about being careless with the terminology myself. I guess it depends on your profits and definition of "far more." But probably "yes." Keep in mind that your contribution reduces your taxable income, so your maximum employer contribution is roughly 20% of your pre-contribution profits, not 25% (there's an adjustment in there for self-employment taxes too). There's "conservative" and there's "right." No matter how badly you bungled this, you canNOT wind up with phantom taxable income. The proper way to fix it, I think, is to get the 1099-R issued as an excess contribution. Good luck.

That's a good point. I think somewhere along the line I assumed the original poster meant a regular 401(k), maybe with profit sharing.

You mean if you now make a SIMPLE 401(k) contribution, will that retroactively make it an excess contribution? I think in theory, yes. The challenge will be to either get the investment company to change their coding for the 1099-R, or to convince the IRS that they incorrectly reported it when they issue the 1099-R next year saying it was a premature distribution, not return of excess.

No, that's a bad result, at least as described. There's a difference between a return of excess contributions and a distribution. It sounds like they are treating it as if you put the money in, claimed a deduction, and then just decided that you wanted to take the money out because you felt like it, not because it was an ineligible contribution. You will be taxed and penalized, with the penalty is 25% for a SIMPLE IRA. And if you don't claim the deduction, but pay tax on the amount distributed, you've generated taxable income that you didn't really have. You need to contact them again, re-explain it (to another representative no doubt) and if you don't get the message across, ask to speak to someone else until you happen to find someone that understands what is going on.

Let's start by noting that if you had a SIMPLE IRA in place for 2007 but simply didn't fund it, there would be no problem at all with starting a SIMPLE 401(k) for 2007 (or a regular 401(k) for that matter; I get the idea you have no employees and the only reason for a SIMPLE 401(k) instead of a regular 401(k) is to avoid non-discrimination testing, which is moot if you have no other participants). If you start a 401(k), that invalidates the SIMPLE IRA, and to the extent you have made contributions, they are disallowed. Now exactly what happens to them is not certain, at least in my mind. I think that they are supposed to then be treated as regular IRA contributions, and if it turns out that you would not have been allowed to make regular IRA contributions (deductible or non-deductible), then you should be allowed to withdraw them by the due date of your tax return. I don't think there's a big issue with penalties, only tax on the earnings. But in practicality, I don't know that it's that easy...a SIMPLE IRA isn't quite the same as a regular IRA, and once the money is there I don't know how easy it is to undo it, or go through the steps of making it a "regular" IRA as just described. I think I might call the investment company and ask what happens if it turns out that the contribution that was made was no good. (I'd be curious to know that answer...I'm pretty sure they'll have to think about it a while.)