Mary Kay Foss

It seems to me that a sale of the real estate would be a prohibited transaction. The only way to get rid of it without a PT would be a distribution. I don't see why you couldn't distribute say "an undivided 12% interest" in the parcel. Of course the employee would have to fork over the 20% withholding. That could be avoided if they could find an IRA custodian that would accept an undivided interest in real estate. I have a client who is receiving RMDs from an IRA that holds a triple net lease on a piece of real estate. So far, the rents have been enough to make the payments but soon we will have to start distributing the property itself. Fortunately we don't have to worry about withholding from an IRA.

I have a client who is the "young" partner in a three person partnership. The other two partners are each 10 years older than she is. The partnership had a DB plan, the contribution for the older two was (of course) much larger than the one for her. The preparers of the partnership return allocated the contributions based upon how much was put away for each partner. Since the partnership itself paid the contributions for all three partners as well as the other five employee, my client was paying 1/3 of the expense and not getting to deduct 1/3 of the total cost. We provided the FSA mentioned above to the return preparers that agreed they had made an error. They amended the partnership return and I amended my client's return and she got a tax refund. One of the other two partners was extremely unhappy about this result. They no longer have a DB plan.

It would be a prohibited transaction for the Roth IRA to purchase a residence that the owner lives in. It would disqualify the Roth IRA. It doesn't seem to be a good idea anyway. The Roth wouldn't be able to deduct property taxes or mortgage interest if any. In addition, you'd need to find a custodian for the Roth. It's hard to find a custodian that will take any unusual assets. Custodians charge higher fees for the management of unusual assets; those fees aren't deductible if they come out of the IRA and could be lost to the 2% limitation or AMT if paid outside the IRA. I agree with Barry, the Grant Thornton deal sounds like a scam.

Your question was answered by Appleby above. If a plan had after tax contributions before 1987 and if it kept track of those contributions separately, then those contributions can be distributed tax free. Of course any earnings on them would be taxable. If the plan did not have after tax contributions before 1987, all distributions are taxed pro rata. Some of the basis is recovered with each distribution but not all of it. It doesn't matter what source the plan takes the distribution from, after-tax contributions can only be recovered tax-free if they were made before 1987 and the employer kept track of them separately.

He would be able to deduct all of it, his $12k deferral, the $2k catchup and the $12k employer contribution.

It depends. If the after-tax contributions were all made before 1987, they can be distributed first with no tax. If there were any after-tax contributions made in 1987 or later, a prorata recovery of basis is required. I'm not sure what you mean by "partial distribution," though.

The spouse's options are to (1) roll it to an IRA (either new or existing) in her name, (2) roll it to her account in the same plan or (3) leave it in the name of the deceased spouse. The advantage of the third choice is that withdrawals are then available without a 10% penalty. There is no time limit for doing a rollover, except that the survivor's executor cannot complete it. The usual recommendation with a survivor under age 59.5 is to defer the rollover until that age is attained. If it's rolled to her account in the employer plan, access may be a problem. You need a distributable event to withdraw funds from an employer plan. There's no such requirement with an IRA. The plan may have some restrictions on how long a beneficiary can maintain funds within that qualified plan, but most plans are much more flexible when the surviving spouse is the beneficiary.

Since the owner of the account was under 70.5 there are two choices for payouts. The beneficiaries can use their individual life expectancies or take the entire distribution by December 31 of the 5th year after the death (5-year rule). The distributions over life expectancy start out very low. You use the single life table which you can find in IRS Pub 590 or the IRS Regulations. For example, a beneficiary that will be 47 in the year after the death, has a 37 year life expectancy. That means he/she would divide the balance on 12/31 of the year of death by 37 and take that amount out by the following 12/31. The distribution will be less than 3% of the balance. The next year they use 36.0 as the factor (the life expectancy decreases by 1.0 each year). They can take a larger amount but there is a 50% penalty for taking less than the required amount annually. With the 5 year rule, nothing needs to be taken until the 5th year but then it's all gone. I'd recommend that they go with life expectancy. The amounts are small and if they have a large need for funds at some point, they can take a larger distribution.

If you're deducting payments to your minor daughter on your schedule C, you should be preparing Form W-2 for her. There is no social security requirement when a parent hires a minor child so that shouldn't be a deterrant. The Roth IRA contribution is not reported on Form 1040, but a $3000 salary would be enough so that a return is required. The IRS gets reports from custodians on Roth contributions and may inquire what's up, if no return is filed by your daughter.

A nonrefundable credit is one that is not paid to you in cash. The nonrefundable credit can reduce your tax to such an extent that it creates a refund of the withholding or other prepayments of tax. If you owed no tax before the credit, they would not send you a check for the credit. Look at your return again, the refund is actually withheld taxes, isn't it? I'm not sure what provisions there are for this credit if the funds used to create the credit are withdrawn. Other federal tax credits provide for "recapture" when you undo whatever thing the tax law was encouraging you to do. In your case, I'd defer as much as possible and not take anything out.

You do not need to process two distributions. The spouse will get the decedent's RMD for the year of death if he/she had not previously taken it. The spouse's first distribution as a beneficiary based on his/her single life expectancy occurs in the year after the death. The spouse can do a rollover also and switch to the uniform table for distributions. If the rollover is accomplished during the year of death, the spouse's first distribution from the rollover account will occur in the year after death. The rollover can be done at any time; the spouse will sometimes receive one or two distributions as a beneficiary before the rollover. Distributions are much smaller under the uniform table so many spouses roll over as soon as possible to get the maximum tax deferral from the IRA assets.

After a rollover, the IRA is treated as if it had always belonged to the new owner. Anything the previous owner could do, can be done by the new owner. Thus, any basis that the former owner had is allocated prorata to the alternate payee. A 72t stream of payments can come from the new IRA.

I wish that more IRA owners were aware of the UBIT. Even with the $1,000 exemption and the ability to deduct prior losses, the tax can add up because the compressed rates for trusts are used. Not only that, if the tax is over $1,000 there will be an underpayment penalty. IRS applies the corporate rules for making estimated tax payments; a corporation cannot rely on the fact that no tax was owed for the prior year. Back to the original question. I have had clients who have paid the UBIT from their personal funds. We have relied on the old ruling that allows IRA expenses to be paid outside the IRA. This treatment doesn't deplete the IRA but doesn't give a tax deduction to anyone either.

I agree with Bruce's suggestion of naming the spouse as the beneficiary with the trust as a contingent beneficiary. There have been rulings where this was an effective way of completing the funding of a credit shelter trust. LTR 9630034 is an example. In that ruling they avoided triggering all of the income tax upon funding by having the spouse disclaime "a fraction" of the IRA. It must be carefully done. Even when the IRD is not triggered immediately upon funding, massive income taxes are possible. Each year the IRA custodian would pay the Minimum Required Distribution to the trust. The trustee would then follow the trust agreement. If the trust pays out income to beneficiaries, it will generally pay out trust accounting income. The IRA distribution may be all or mostly principal. IRA distributions paid to a trust that are not distributed to beneficiaries are subject to tax at the compressed income tax rates that apply to trusts. When using an IRA to fund a credit shelter trust you're saving estate taxes while incurring income taxes, be sure to consider this fully in your planning.

A 2003 conversion to Roth could be recharacterized up until October 15, 2004. In addition, an executor can recharacterize if the owner of the account passes away before October 15, 2004. If the concern is whether the Roth conversion occurs timely, it may be best to convert now and study the situation between now and 10/15/2004.

Section 72 of the IRC says that "unrecovered investment" as of the death of the annuitant are deductible on the final income tax return. See 72(b)(3) and (b)(4).

I'm surprised about your initial premise that nonspouse beneficiaries can receive RMDs from a qualified plan. The 401(a)(9) regulations allow it but I've yet to see a qualified plan that will allow a nonspouse beneficiary any deferral at all. The plan document always trumps the law. Actually the larger companies seem more interested in paying off nonspouse beneficiaries rapidly than the small ones. I guess they have enough trouble dealing with their ex-employees and don't need to deal with ex-employee's heirs. I recommend that all my single clients roll qualified plan benefits to an IRA whenever they have a distributable event. I've also recommended that Keogh and closely-held small employers allow in-service distributions before retirement. Periodically they can roll most benefits to an IRA aand reduce the risk of having a nonspouse beneficiary having to take payments out of the qualified plan over a short time period. My understanding is the same as a previous poster that the IRS doesn't like qualified plans without an employer. To avoid trouble I think they should be shut down as soon as possible - 5 years sounds too long.

Some IRA agreements allow the owner to specify which persons can be consulted for investment advice and which should not be. The Northern Trust Company has an adoption agreement that is very detailed in this regard. When doing estate planning the DC participant may want to plan an IRA rollovers to handle some of the problem.

I think that the new law should not discourage investment in deductible traditional IRAs and 401k and other qualified plan deferrals. The tax deduction (at rates up to 35%) out weighs the lower tax on dividends and capital gains up to 2006, in my opinion. Congress seems reluctant to tackle the AMT. The new law increases the exemption temporarily but when that sunsets more taxpayers than ever will be hit by this annoying tax. State taxes are not likely to decrease based on the federal law changes. Taxes are not deductible for AMT so we have another widening in the gap between regular taxable income and AMT income. Even with a 20% capital gains rate taxpayers often pay AMT in a year with large capital gains because of failure in the methodology in calculating the AMT capital gains tax. The marriage penalty relief must be as much of a joke in New York as it is in California. Doubling the standard deduction does nothing for taxpayers in a state with income taxes so high that nonhome owners itemize deductions. I'm not usually a negative person but I don't see many positives in the new tax law. Calculating the tax on dividends will be difficult and it may be difficult to collect higher fees to make the required calculations.

The social security number is the correct number to furnish in this case. As long as the trust is revocable and the grantor is alive, that's what the IRS wants you to use. I've had bad situations where the grantor used an EIN for trust investments in a revocable trust. The IRS wouldn't certify the W-9 and they withhold 30% tax from all income.

The provision that allows this was part of the EGTRRA changes in 2001. I've seen similar statements and it makes me a little nervous. First, the Qualified Plan must accept IRAs. This would take a plan amendment after 2001. Secondly,the Qualified Plan has to allow for loans. Not all of them do for smaller companies that had been S corporations or partnerships. It may take a plan amendment to allow for loans. Third, the loan interest may not be deductible. If you compare this type of loan with a low rate equity line which is often deductible it may not be that attractive. Finally, the Qualified Plan Regs treat loans as distributions when made unless all of the requirements are met. Many times it's just easier to take a distribution instead of dotting all the is and crossing all the ts for five years.

The 20% mandatory withholding applies to payments that could be rolled over but are not. Generally periodic payments are subject to voluntary withholding which uses the same rules as someone receiving wage or salary payments. I have my PLRs on a disc because I subscribe to a Tax Analysts service. I understand there are ways to retreive PLRs on the web but I'm uncertain of the procedure. Good luck!

Thanks to everyone who helped clear up my misunderstanding. You made it clear without treating me like a dummy! That shows you really know your stuff.

I'm confused, I ordinarily only deal with retirement distributions not 401k administration, but...... Sec 401 (k)(2)(B)(i) says that employer contributions made pursuant to the employee's election may not be distributable earlier than age 59.5. I thought that meant that the employee deferrals could be distributed as part of an in-service withdrawal but I thought that employer match and profit sharing could not. Could someone please explain this?

I believe what they're referring to is the Daily Valuation done by some 401k plans. Participants in these plans can go online and see what there account balance is on any given day. Normally daily valuation would not be a feature of an IRA. My take on the regs is that you use the information that is normally made available by the custodian but you can't ignore information that is more timely than some other plans provide.