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.

Was a 2002 distribution paid to the participant or his spouse? If not, there is exposure to a 50% penalty for that year. The spouse should have taken a 2003 distribution based on the 12/31/2002 value in the account. If that amount wasn't paid, it should be paid to her estate ASAP -- another possible 50% penalty. Now for your real question. Since she died in 2003, you need her age in 2003. Determine the factor for that age based upon the single life table. Reduce the factor by 1.0 to get the divisor for the 2004 RMD. The entire amount would be paid to the estate by the end of the single life period (reduced by 1) determined above. Subsquent payments would be determined by reducing the factor by 1 for each of the later years. These rules are used to calculate Required Minimums. The executor of the estate could claim payments at a faster pace. If the executor wants to close the estate so he/she can be discharged before the payment period is over, he/she can ask the probate court to assign interests in the IRA to the heirs. The assignment will do nothing to lengthen or shorten the payout period but it will allow the estate to be closed. Each heir can cash in their share if they want or continue to receive annual payments.

I couldn't find the cite but I remember that the IRS said that a Roth conversion is taxable in the year it begins if that year is earlier than the time the conversion is complete. In this situation I don't know what would constitute the beginning. If the owner made a request in 2003 that was not acted upon until 2004, it could be that the proper year is 2004.

The QDRO -- on paper still makes this confusing. If there is a real QDRO issued by a court, etc -- the whole deal; it can specify a $ amount of benefit that the wife is to receive. She could then receive that amount each month in addition to the SEPP to get her to her desired target. I don't like the idea of the owner-employees taking SEPPs from a qualified plan as being separated from service -- but that's not your question. The final answer is, with a valid QDRO there is no 10% penalty and payments can be structured as the alternate payee and the plan adminstrator agree.

Did he move? He used to be in Northern California, just a few miles So. of my office.

If you have an UBI investment in a qualified plan or an IRA that generates $1,000 of gross income you must file the Form 990-T. BUT, you can offset the income with UBI losses from years that you were not required to file. When a limited partnership interest is held, the loss K-1s should be kept until Form 990-T is required. Presuming of course that the investment eventually becomes profitable!

I also looked in vain for the answer to this question but came up with a workable solution on my own. If the taxpayer completes Form 5329 for 2001, 2002 and 2003 and sends the forms and the 10% penalties to the IRS, interest will be assessed from the original due date of the Form 5329 (4/15 of 2002, 2003 and 2004) until the date IRS receives the check. The taxpayer could calculate the interest on his or her own (there are programs that do this for you) and include the interest in the tax payment. This may save some interest while the Forms are "in the mail." I was researching this because I had a client who wanted to stop the payments midyear and not wait until they filed the tax return to assess the current year's 10% penalty plus interest. I'm not sure how you'd do that one. Maybe use the Form 5329 for 2003 and cross out the year to add 2004. Also check to see what your state filing requirements are. In CA there is a 2.5% penalty whenever the IRS 10% penalty applies. I believe WI assesses 3%. Good luck!

Was the trust the beneficiary of the IRA? If so, then you apply the tests in the regs to see if you can "look through" the trust and use the trust beneficiary's life expectancy. If the trust is not required to distribute each year's RMD, then you also have to consider contingent beneficiaries to determine the life expectancy to use for RMDs. The term of the trust (15 years for a 20 year old beneficiary) has no bearing on the calculation of RMDs. The trustee can always request a distribution greater than the RMD to meet the requirements to pay principal to the trust beneficiary at the specified ages. No adjustment to the life expectancy used for RMDs occurs. If the trust is not the IRA beneficiary, I'm not sure how you expect this situation to work. If for example, the estate is the beneficiary and the executor decides to use the IRA to fund a trust under the will -- the trust beneficiary's age is irrelevant. When the estate is the beneficiary and if the decedent was taking RMDs before death, you use the remaining life expectancy of the owner from the single life table. If the owner hadn't reached the required beginning date, then the five year rule applies. Although IRA distributions are taxable income they generally aren't trust accounting income. The trust will pay a lot of income taxes before the IRA is fully distributed to the trust beneficiary.

I'm not sure that I understand the question either, but since there is no 10% penalty on distributions pursuant to a QDRO why are you using the SEPP route? Normally you can't do SEPP from a Qualified Plan unless there's a separation from service. If they're both separated from service, who is the employer? Maybe I shouldn't have looked at this on a Sunday!

I interpreted the question differently. If a plan makes an inkind distribution, the participant is taxed at the fair market value of the asset. That fair market value becomes their basis. However, if the inkind distribution is of employer stock, the plan's cost of the stock would be the basis. If the inkind distribution was of employer stock and it didn't qualify as a lump sum distribution, the plan's cost is used for after tax contributions that were invested and fair market value is the basis for the rest.

This wasn't part of your question, but I felt that I had to comment. If I had an opportunity to invest in a company that I expect to be highly profitable, I would not use my IRA. If the IPO hits a home run, instead of long term capital gains all of the appreciation would eventually come out of the IRA as ordinary income. If the company doesn't make it, the IRA has no deduction for the loss. The individual would have one. If you expect a quick run up in value, you could withdraw funds from the IRA, invest them and put them back after 60 days... if you could sleep nights during the interim. If we were in the IPO glory days, you might have enough of a profit so sell just enough to do a rollover within 60 days and retain the rest for long term gains and further appreciation. The old *eggs in one basket* is another consideration. Having your investments and your livelihood tied up at the same place could be risky.