Mary Kay Foss

Instructions for Form SS-4 list a separate telephone number for each IRS district. (wonder how they'll handle this with restructuring). I've also attached a completed SS-4 to the initial Form 5500-EZ and obtained the number that way.

The deduction for medical insurance premiums and expenses for self-employed persons was okayed in TAM 9409006. The PPC Tax Action Memo reporting on it (TAM-337 4/5/94) warned that if an insured plan is offered through a cafeterial plan, the nondiscrimination rules for high=level employees must be complied with. The IRS Tech advice relied on Rev Rul 71-588. This doesn't answer your question but it explains the sole proprietor angle.

There is also an exception for medical expenses in excess of 7.5% of AGI. We've used this when one spouse is disabled and the other spouse takes IRA withdrawals in a year of large medical expenses.

There should be no problems. You'll want to have the funds transferred directly to the IRA custodian so there is no federal income tax withheld. When you transfer from the traditional IRA to the Roth IRA, you'll want that handled by a transfer as well. The Roth and the traditional IRA can be with the same custodian. The other thing to be sure of is that your 401k allows inservice distributions. If only hardship withdrawals are allowed the consequences of your plan could be severe.

The RMD for an IRA can only be satisfied by a distribution from an IRA. IRS notice from the late 1980's allows the RMD to be calculated from each IRA separately then satisfying the total amount from just one account -- pro rata distributions are not required. However, you can't mix types of plans to meet an IRA RMD.

I have clients who have a specific dollar figure in mind when taking the SEPPOLE route to avoid penalty. What I advise is that they divide up an IRA or rollover an amount from a qualified plan that will provide the dollar figure they need. If they want to maximize the payments we use Method 3 and a high side of reasonable interest rate and the oldest reasonable mortality table. It takes some trial and error but you can figure out the beginning amount of the fund needed to generate the amount the client requires. Method 1 cannot be used in this way but either 2 or 3 will allow you to get the payment that you need. All of this is allowed because you need not aggregate IRAs or 401 plans for this purpose.

I'm sorry I was not specific in my last reply. The shares bought with after-tax contributions can't be rolled over to an IRA or to another 401k. Also the special treatment for the net unrealized appreciation only applies when you leave a plan with that employer's securities and take the shares directly. If you transfer those shares to a new employer's plan or your own created qualified plan, the benefit is lost.

My clients generally get information from the custodian or directly from the source (partnership, etc) about the filing requirement. I've only had one custodian that will prepare the return "on request." In other cases, we've had to obtain checks from the custodian so that the account holder can pay the tax. Earlier this month, I prepared Form 990-T for a client that had invested in a Cable-TV deal. We used the info provided on Schedule K-1 showing that there were suspended losses to offset all of the passive income and more. Two days after he filed it, the client got a copy of a form filed by the custodian. Just two minor problems, they filed federal only and in CA you must file with the state as well and secondly, they paid tax when none is due. I'll bet we have a rough time collecting the funds back from IRS. All in all, I don't know what the requirement is but if the trustee/custodians are liable I hope their failure gets some publicity. Since a 990-T for an IRA is due 4/15, it would be nice if the custodians let the account holders know if the form is due and who is filing it on a timely basis.

Mountain Man I didn't mean to imply that you have to sell the employer stock immediately, I just wanted to make the point that if you did sell it immediately there's no 10% penalty. The employer reports to IRS an average basis for all the shares in the plan so I don't think you can do much planning about which shares have been sold. However, all of the shares are treated as long term. You only worry about short-term gains if shares are sold in the year after receipt for an amount higher than the value when distributed. In such a case only the excess over the value when distributed is a short-term gain. You can't rollover the shares bought with the after-tax contributions but any such shares always qualify for the special capital gain treatment. Shares bought with pre-tax contributions only benefit if they're part of a lump-sum distribution. Leaving the 401k plan by rolling over the excess over the shares you want distributed will be a lump sum. If you just take a partial distribution and leave some shares behind, you can't use the special capital gain provision on pre-tax contrib (& employer matching) shares. It's not a one-time thing, you can sell the shares at any time after you receive them and you can sell as many or as few as you want. The only downside is the short-term gain for appreciation in the first year after receipt.

The regs do not apply to an IRA. Capital gains rates apply when a plan distributes employer securities with a current market value in excess of the plan's cost. If that is your situation, the plan's cost of the shares is taxable to you at ordinary income tax rates. A 10% penalty will apply if you're under 59.5 and don't meet one of the exceptions in Sec. 72t. If the shares are immediately sold the difference between the market value when distributed and the plan cost is taxed at capital gains rates. Those rates could be as low as 10% depending on your other income. If you retain the employer stock and have the plan roll the balance of the distribution to an IRA, there should be no federal withholding. If there are no employer securities in your plan, rolling it to an IRA is the best choice as mentioned in the previous replies.

If you will receive employer securities as part of your 401k distribution, you will pay tax on the plan's cost of the securities. A 10% penalty will also apply if you're under 59.5. If the securities are sold immediately the unrealized appreciation will be subject to tax at capital gains rates. The capital gains rate could be as low as 10% depending on your other income. To make the decision you need to know what the plan's cost of the securities is and the current value of the employer stock. I advise many people who have been in the plan a long time to take some or all of the stock directly and roll the balance of the distribution to an IRA. Once you roll employer stock to an IRA you are no longer eligible for the special treatment described in Notice 98-24. Also the 20% federal withholding only applies to cash distributed. If someone takes shares only, there is no withholding required.

I agree with answers from KJohnson and BPickerCPA but I wanted to expand on a few points. The IRA custodian generally will payout the year's RMD in the year of death before processing any rollover or transfer of assets. As Barry says, it still must be done but the custodian may handle it automatically. The "at least as rapidly" rule only applies if the balance stays in the Husband's IRA. A spousal rollover to a new account allows a fresh choice of beneficiaries and a recalc or term certain election. If the Husband's IRA is combined with the Wife's IRA, her beneficiary choices and recalc election made when distributions began will prevail. This could accelerate the distributions to her considerably.

I agree with the answers provided by KJohnson and BPicker but I wanted to clarify a couple of points. First, in the year of death the RMD is supposed to be claimed as if the decedent had not passed away. The custodian normally will not allow a rollover or transfer of the account without the year's RMD being distributed. Also, the recalculation election goes by the wayside if the IRA owner dies and the spouse rolls over to a new IRA. The survivor makes his or her own elections as to beneficiaries and recalculation. The problem with rolling it to an existing IRA owned by the spouse is that elections may have already been made (if the spouse is past the RBD) regarding beneficiaries and to recalc or not.

Form 8606 Part III gets you to the right answer. It's basically the amount received ($7,000) reduced by the 1998 AND 1999 installments of 4-year spread. If the individual doesn't meet an exception under 72(t) there will be a 10% penalty on the entire $7,000 as well.

Your employer's plan is not a factor. The biggest hurdle is modified adjusted gross income, a single person must have $95,000 or less and married person's filing a joint return $150,000 or less of modified adjusted gross income in order to contribute the full $2,000. A reduced deduction is allowed if a single person has modified adjusted gross income of $110,000 or less but more than $95,000; a similar phase-out range between $150,000 and $160,000 applies for marrieds filing jointly. You must also have $2,000 of earned income but I assumed that was a given because you're covered by an employer plan.

I've been looking at old questions and came across this one. Pub 590 does say that the loss from an investment in an IRA is a misc deduction subject to 2% limitation. IRS Notice 89-25 (1989-1 CB 662) Q&A 7 indicates that a loss is deductible. The Northern Calif IRS district at a meeting with CPAs said that the such a loss would be ordinary and deducted from gross income.

Instructions to Form 5329 indicate that it could be filed without an Amended Return. The taxpayer and preparer must sign the Form 5329 (not required when attached to a return) and they don't really explain how they want the check sent. Saving some additional paper would be good for the trees.

Try PENSCO Pension Services Inc, 250 Montgomery Street, San Francisco, CA 94104 (415) 274-5600. Web Address: http://www.SelfDirectedIRA.com The latest issue of their newsletter has an article, "Can your IRA invest in Real Estate?" One of my clients transferred to them when previous custodian became nervous about real estate in the IRA and we've been happy. They also take trust deeds and other unusual assets.

QTIP Trusts and IRAs are very complicated. I'm responding to your second question. Many estate planning attorneys in Northern California are suggesting that spouses enter into an agreement so that the IRA is always allocated to the second-to-die. Such a provision takes away the potential problem you've described in your second question. The changes to the proposed regulations say that a Trust named as a beneficiary must be irrevocable at the Grantor's death. If an executor must make a QTIP Election is the trust irrevocable? I'm only a CPA not an attorney but I think it may not be. Good luck in finding a definite answer.

An extremely inexpensive program (alas no fancy graphics) is available as part of Tax Tools. Order from CFS Income Tax 805/522-1157. Besides the Early distributions under the IRS Rev Proc it does RMD calculations, simple tax projections and a number of IRS forms. I use it for SS-4s and Powers of Attorney.

The interest rate at the start of payments is one "not to exceed" a reasonable interest rate. For the 120% AFR, I use the Section 7520 rate which is the last one listed in the Internal Revenue Bulletin when they publish the rates monthly. Some rulings have allowed 120% of one of the other published AFR rates. You have to read the letter rulings to see which one.