Mary Kay Foss

Belgarath, in *Hitchhiker* 42 wasn't the answer to the meaning of life, it was the answer to the Ultimate Question. The next book in the series provided the Ultimate Question. At the end of *Hitchhiker* I believe that rats went on a speaking tour with the answer. They said that the ultimate question was: *How many roads must a man walk down before you call him a man?* With an LLC, members are supposed to take guaranteed payments instead of salary. The LLC deducts the guaranteed payments in determining net income divided by the members. Many partnerships use guaranteed payments for medical insurance premiums that the individual partner can deduct on page 1 of their 1040.

During lifetime all RMDs are determined based upon the uniform table unless the sole beneficiary is a spouse who is more than 10 years younger than the owner. It doesn't matter if the beneficiary is older, younger or nonexistent, the uniform table is used. After death is when the age of the beneficiary is important because it determines how fast or slowly the retirement account must be distributed.

The five year rule only applies when the participant has not reached the Required Beginning Date. In your situation, the age of the participant is irrelevant. When the beneficiary (spouse) begins distributions they are based upon her life expectancy in the year after the participant's death. The life expectancy is measured by the Single Life Table in the Sec 401(a)(9) regs. If she were to live for an extended period of time, she could consult the Single Life Table each year to determine the factor for her Required Minimum Distribution. Once she passed away, the factor is fixed and is reduced by one each year. For example, let's say that she was 69 when her husband died and 70 the next year. Her first RMD would be determined by dividing the value at 12/31 of the year he died by 17.0 (the factor for age 70). The next year when the estate begins distributions it divides the year end balance by 16.0; 15.0 the next year, etc etc. The plan itself could have a provision for a faster payout, but what I've outlined above is what the regulations say. The estate could take distributions faster or the executor may ask the court to assign the benefits to the estate's beneficaries but nothing will increase or decrease the distribution period.

They should go back and pay the tax. The penalty is assessed on Form 5329. The form can be attached to Form 1040-x or filed separately. Interest will be owed from the April 15 that the tax return was due until the IRS receives the payment. The Internal Revenue Code allows for waivers of the 50% penalty but not this one. The statute of limitations is not going to save you. It is interesting that the 10% penalty tax is not treated as a tax that is dischargeable in bankruptcy; it seriously has to be paid. Check out your state law as well. Some states impose their own penalty when the 10% penalty is owed on the federal return.

The basis allocated is determined at year end. See Form 8606 for the process. It can be tricky, I know someone who only had an IRA with nondeductible contributions in it that he converted to Roth. In December, he was terminated and rolled his 401(k) into an IRA. That made the tax on the Roth conversion much greater than he expected.

In addition to the 10% penalty, there is interest on those penalties back to the original one.

This year with the requirement for *qualified dividends* and *ordinary dividends* the IRS added some new rules for 1099s. If dividends are paid to the buyer of shares sold short, and the short sale hasn't closed yet, the dividends are reported on Form 1099-MISC.

I don't understand the attraction of investing in real estate with an IRA, even a Roth IRA. Property taxes must be paid by the IRA (no one gets a deduction for them); there may be other expenses, weed cutting etc. that would be deductible by a private investor. Although there is no tax with a Roth, the 15% capital gains tax rate seems pretty attractive for a real estate investor. But that isn't what you asked......... There is a prohibited transaction if you buy or sell anything to/from your Roth IRA. Selling to a relative would also be a prohibited transaction. If you sold to a third party with the understanding that it would be resold to a family member, that would also be a PT. It only works if you just market the real estate when you're ready and sell it to a third party who will do with it what they will.

In your first fact pattern the suviving spouse was a beneficiary for 50% of the benefit. When more than one beneficiary is named, the beneficiaries may split the account by December 31 of the year following the death. Beneficiaries are determined as of September 30 of the year after the death, so it's more straight forward to split the account by September 30 of the year after the death. The surviving spouse can always use her life expectancy for inherited benefits. If she keeps her interest in the same IRA, benefits can commence as late as Dec 31 of the year the deceased spouse would reach age 70-1/2. Distributions could be taken before that time on a voluntary basis. No penalty would apply for a survivor under age 59-1/2 because the distributions are from an inherited account. She could name a beneficiary to receive the benefits if she does not live to the life expectancy per the IRS tables, but no *stretch out* of benefits is available. The single life table in the 1.409(a)(1) regulations is used for distributions. The table is also available in Pub. 590. If the surviving spouse of a decedent who had not reached the RBD rolls over her benefit, she can name new beneficiaries. The account will be treated as if it had always been hers. A 10% penalty will apply on distributions before age 59-1/2 unless one of the exceptions in 72t (other than death) applies. Distributions must begin based on her RBD; no later than April 1 of the year after she attains age 70-1/2. If the decedent had passed the RBD and the surviving spouse elects to keep her interest in the same IRA, benefits must commence by 12/31 of the year after the death. As with a pre-RBD death, a beneficiary can be named but the benefits cannot be extended beyond the survivor's life expectancy as measured by the single life table in the year after the death. If the surviving spouse does a rollover, the same rules apply as if the death occurred before the owner's RBD. It's less likely that she'd be under 59-1/2 so the 10% penalty is not a major threat. I hate the phrase "treat the IRA as his/her own." I think that all beneficiaries should take some action (like a rollover) if they want the account treated as theirs. How do you distinguish between someone *treating the account as their own* or taking payments as a beneficiary? In rulings, IRS sometimes says that the survivor has treated the account as their own when they would be otherwise penalized for not taking a distribution. I always look upon this tactic as an excuse rather than an action. Sorry, had to blow off some steam about it!

You can put the nontaxable part of your qualified plan into a Roth IRA but the taxation may be slightly more complicated. If the entire 35k is rolled to a traditional IRA and then that IRA is converted to a Roth, the amount of the conversion that is taxable depends on ALL IRAs that you have. If you have another traditional IRA (whether it was created with deductible or nondeductible funds), it must be considered in determining the taxability of the conversion. The fact that the funds came from a qualified plan originally is not at all significant, only funds in a traditional IRA can be converted.

I don't think the answer is that simple. There was a court case a few years ago (Schoof 110 TC No. 1) where individuals rolled over benefits to a custodian not approved by the IRS. Even though the bogus custodian told the investors he was qualified, they were all taxable as of the date the funds were transferred to the bogus custodian. I think that anything in excess of basis in the retirement plan is taxable in the year transferred to the unregistered custodian. IRS is giving additional time to perfect a rollover that took more than 60 days if you apply for a ruling, I'm not sure that this is a case where that would apply. Contact Barry Picker or one of the experts that prepare private rulings. Good luck!

The five-year rule only applies if the IRA owner died before reaching the required beginning date. If the owner was taking RMDs, a beneficiary that does not take a distribution in the year following the death is subject to a 50% penalty. If someone is indecisive, they can take the minimum amounts based upon life expectancy for a few years while they're deciding if they want to take them more rapidly. That may be a good idea for all beneficiaries, even those that could use the 5-year rule.

When you close out a Roth IRA and receive less cash than you invested, you report the loss on Schedule A in the section for miscellaneous deductions subject to the 2% limitation. You should be able to contribute $2,000 to a new Roth account before 4/15/2004 for the 2003 tax year.

It is possible to take a tax loss in connection with a Roth IRA but not "in" the Roth IRA. A loss is available if you close out ALL Roth IRAs that you have. For example, if the Roth IRA you're concerned about is currently worth $1700 and you had contributed $3,000; you can close it out and have the $1700 distributed to you. The loss ($1,300) would be an itemized deduction subject to the 2% limitation. If you're subject to the AMT there will be no deduction allowed for the loss. You do not have a 10% penalty with a Roth IRA unless you withdraw earnings and do not meet any of the exceptions from the 10% penalty. If you have one Roth that has done well and another that has done poorly, a loss is only available if the losses exceed the gains AND all Roth IRAs are closed out in the same year. I think it's best to hope that the stock will recover or sell the fund within the Roth and invest in something you feel better about.

You can only convert to a Roth IRA from a traditional IRA so be sure that the initial rollover is from a qualified plan to a Roth. While working as an independent contractor you may be able to make additional retirement contributions. Look at SEP, traditional IRA and Roth for this purpose.

When you make deposits with Form 8109, the checks are to be made out to the Bank, not the U.S. Treasury. That's part of your problem. Usually only the bank the checks are drawn on will accept the deposits. I agree that the rules are just not very flexible when there are small or occasional tax deposits required. I deal with a small private foundation that needs to deposit federal taxes with Form 8109 whenever they owe tax. We're talking about less than $1,000 only once a year, but the rules aren't flexible.

Once the separate accounts are established, the surviving spouse is the "sole" beneficiary of the IRA and can do a rollover.

A spouse beneficiary can roll inherited benefits into an IRA or into another qualified plan. It is fine to roll it into her account in the same plan. When the spouse is the beneficiary and the participant was under 70-1/2, the spouse does not need to take RMDs until the spouse would have reached 70-1/2. To use that provision, the benefits stay in the name of the decedent with the spouse's SSN and name (as beneficiary) added.

This should work out as you plan. You need modified AGI less than 100K for the year (the conversion doesn't count towards that amount). The itemized deductions that you want to use are not ones with limitations (medical or miscellaneous deductions) and the income won't be high enough for the 3% limitation on itemized deductions to be a factor. Also, one of the advantages of the Roth is that you do have time to second guess. If the conversion is done before 12/31/2003, it can be "recharacterized" up until 10/15/2004. If the taxes don't work the way you expect, the conversion can be undone.

Earned income is necessary for all IRA contributions, traditional or Roth. In various cases, the IRS has ruled that children can have earned income if they work in a parent's business. I believe one of the examples was a 10 year old emptying waste baskets and sweeping floors. If a child can really work and get paid for it, a Roth contribution can be made.

What if the patient needed special assistance at the airport, like a wheelchair and attendant? Would you consider a gratuity to that person reimbursable? Just curious.

Practitioners Publishing Co had a sample document as part of their Practitioners Tax Action Bulletin service. It may be possible to contact them to get a copy.

How much is the SIMPLE catch-up for the current year?

Before EGTRRA non-deductible contributions could not be rolled over to an IRA. Starting last year they can be Nondeductible IRA contributions are reported on a special form--there is nothing comparable for QP nondeductible contributions It can be done but requires more record keeping

No. You cannot do the rollover. If the 401k plan is rolled to an IRA, I'm not sure how Canada would tax it. The rule here is that a U.S. resident can make an election to only report RRSP income as the amounts are withdrawn from the plan. The state of California requires that each year's earnings be reported and taxed to a California resident with an RRSP.