Mary Kay Foss

The SEPP payments can be stopped when the owner becomes disabled. The individual must meet the IRS definition of disability in Section 72 which is more onerous standard than a disabilty policy or Social Security disability. If additional payments are needed after the SEPP stops, there is no 10% penalty and no prescribed timing.

The rollover is not a distribution and is not considered part of an RMD. Since it occurred after 12/31/2003 and before the first RMD, the RMD is calculated as if the rollover had not occurred. Example: Balance 12/31/03 $100,000. Rollover 5/1/2004 $60,000. Retirement in December 2004 makes first RMD due 4/1/2005. This is determined by dividing the 12/31/03 balance by the factor for her age in 2004. If she's 80 in 2004 that would be 18.7. The 2005 RMD is based on the 12/31/2004 balance and the factor for her age in 2005.

Hardship withdrawals are available to purchase a residence but a hardship withdrawal is only available if the funds cannot be obtained from any other source. If the plan allows participant loans, the maximum loans must be taken before a hardship withdrawal is requested. A loan with a longer term is allowed for amounts borrowed from a qualified plan for a home purchase. The interest isnt' deductible because the loan is not secured by the residence, it's secured by the retirement benefit. When applying for a mortgage, the plan loan will be considered as part of the person's over all indebtedness but since it's not secured by the residence it shouldn't affect the amount of mortgage that is granted.

If the Surviving Spouse is a beneficiary of the Bypass Trust he/she will be the measuring life. It's possible to have a Bypass Trust where the spouse is not a beneficiary but if you're going to do that why have a trust? The IRA sould be left to the kids directly. You are correct in saying that the survivor's actual life expectancy doesn't diminish the time period for RMDs to the trust. The children are only able to use their life expectancies at the death of the survivor if the IRA is not left to the Bypass Trust but instead is left to the survivor who rolls it over and names the kids as beneficiaries.

I have never seen any PLRs dealing with penalty waivers. We usually attach a statement to the income tax return to request the waiver. The statement always says that they took out the missing amount as soon as it was discovered and gives a reason of some sort. It might say that the individual was relying on the custodian who failed to perform or that the person is elderly and forgetful. If you attach the waiver request to the 1040 (and Form 5329) for the year that the RMD was insufficient, you never know if they approved of your reason or just missed the forms but as long as they don't assess a penalty, I'm OK with that.

If the decedent did not take his RMD in the year of death, the spouse must take the amount that he was supposed to take. That amount is not eligible for rollover. Once that requirement has been satisfied, the survivor is not required to take anything until she reaches age 70-1/2.

Most custodians issue two 1099Rs in the year that age 59-1/2 is reached so they can code them properly.

Withholding on RMDs is optional unless the recipient lives outside the U.S. Most custodians don't withhold unless the trustee requests it. Withholding generally gets passed on the the beneficiaries on Schedule K-1. The IRS never seems to tie the K-1 withholding to the beneficiary's 1040 without correspondence from the taxpayer. I wouldn't recommend that the trustee request withholding.

If you have a UBIT situation, the tax itself should come out of the IRA but the profit remains inside. I have never seen any situation where it was suggested or required that the IRA be depleted due to Unrelated Business Income. The problem that I have run across is where the IRA owner pays the UBI tax with personal funds, this could be treated as an excess contribution to the IRA. There were posts in this forum on a semi-related question that indicated that if the IRA owner paid someone outside the IRA to do the Form 990-T that an excess contribution would occur.

The Roth is by far the better vehicle for funding the CST. The only difficulty with the Roth is the income tax burden up front. Clients are reluctant to convert so much that they will acheive a higher income tax bracket in that one year that in any future years. It could be that only $50-60,000 a year in conversion will keep them within a reasonable tax bracket. In 2005 when RMDs are not considered in determining if a couple has less than 100k in Modified Adjusted Gross Income for Roth conversion purposes there should be many more conversions.

You asked if the Bypass Trust can be named as a beneficiary if it doesn't exist as of the date of death. In defining a *qualified trust* (aka see-through trust) for IRA stretch out purposes, a trust that is legal can be unfunded and still qualify. I often see people name the Family trust (which will be split upon the first death) as the contingenet beneficiary. Some others that want to be more specific will name as a contingent beneficiary "the Bypass trust to be created from the X Family Trust..." as the beneficiary. When a Bypass Trust is the beneficiary of a traditional IRA we worry about the stretch out to minimize income taxes payable by the trust. With the Roth IRA, the income taxes are not a factor but if you qualify as a see-through trust you will maximize the time period that the Roth can grow tax-free.

I first heard about these accounts a few years ago at an AICPA Estate Planning Conference. Roy Adams who does a lot of speaking about Estate Planning matters gave the presentation. My clients do not have enough assets for them to have been solicted about this idea but it's definitely out there. I thought that the IRS had commented on it recently, but I could be mistaken.

S Corp income can NEVER be used for retirement plan contributions. A corporation must pay salaries. LLC income can be used for retirement plan contributions as long as it's SE income. A corporate LLC member doesn't have SE income.

When funds are transferred from you Qualified Plan to the traditional IRA, that's a nontaxable rollover. When you convert from the traditional IRA to a Roth, it is taxable. When you have basis in the traditional IRA from after-tax contribs to the Qualified Plan or nondeductible IRA contributions you use Form 8606 to see how much of the conversion is taxable. When you make the 8606 calculation you consider ALL traditional IRAs not just the one that is being converted to Roth.

You can only rollover IRA funds to a Roth, Qualified Plan funds aren't eligible. First you must establish a traditional IRA. Once the funds are there, a Roth rollover is possible.