Mary Kay Foss

A conduit trust is a qualified trust. Form 1041 is required in any year that the trust has $100 of gross income. If the Roth RMD were paid to the trust (say, in January) and the trustee invested the funds and paid them to the beneficiary quarterly, it's possible that the trust could earn $100 - which it would pay to the beneficiary and a Form 1041 would be required. Ordinarily, though you wouldn't expect that Forms 1041 would be necessary for a conduit trust that is the beneficary of a Roth IRA. The Roth RMD/tax free income would likely be considered principal of the trust and not required to be reported. If the IRA were a traditional IRA, each year the RMD would be income to the trust. The trust would deduct any expenses, trustee fees, accounting fees, etc and the net income would be payable to the beneficiary. If you don't want to file Forms 1041 there's still a problem but at least the cost of preparing them would be deductible without worrying about a 2% limitation on an individual Form 1040.

The Roth IRA does not have a Required Beginning Date for the owner of the account so any death is a death before the RBD. For both a Roth IRA and a traditional IRA with a death before the RBD the two payout choices are life expectancy or five year rule with the life expectancy the default. I hope that's more clear than my last post. The beneficiary of an inherited Roth IRA must commence benefits by 12/31 of the year after the death, but that's as close as you come to an RBD with a Roth. The regs that you cite regarding annuities encompass the case where the IRA or qualified plan owner has purchased an annuity before the RBD and commenced payments. Any annuity's payout period cannot exceed the life of the owner and the designated beneficiary, it's possible to use an annuity for a stretch but problems may result if the beneficiary dies prematurely for example. I don't think that trusts are all that expensive; of course I make a living preparing trust returns as well as other income tax returns. If someone used a conduit trust (which the IRS seems to want) and allowed the trustee to accelerate withdrawals for certain needs of the beneficiary the trust reporting should be very simple and could be handled by a layman.

The default method for distributing an inherited IRA whether it's a traditional or a Roth is to make payments over the beneficiaries life expectancy per the IRS tables. In some IRA agreements, the inherited benefits must be paid out within 5 years when the owner dies before benefits are required to be distributed. A ROTH IRA is always treated as if the owner died before required distributions commence. This 5 year rule was the default before 2001. When a child is the beneficiary, they are entitled to all of the benefits - timing of the payout is what differs. Payments over life expectancy is the slowest way that benefits are paid; this gives the maximum stretch. But anyone who is named directly as a beneficiary can withdraw as much as they want in any year so long as they at least take the minimum. The stretch concept merely means that the beneficiary named is younger than the owner of the account so benefits can be paid over a longer time period. If you don't trust the beneficiary to just take the minimum, you need to use a trust to guarantee the stretch. A 401k plan typically does not give the opportunities for stretching the payments. If the beneficary of the 401k is not a spouse, good estate planning often dictates that the benefits be rolled to an IRA at retirement. Inherited benefits from a traditional IRA or 401k are subject to income tax when they are received. The Roth IRA payments are nontaxable (if the account's been in place 5 years or more). All types of inherited retirement benefits can be subject to a 50% penalty if the minimum amount is not withdrawn each year.

I'm not sure if this is the answer you're looking for, but after the 1989 Wood decision the IRS continued to litigate. The Tax Court followed Wood in two 1996 cases (Childs TC Memo 1996-267; and Thompson TC Memo 1996-266). In 1999 IRS issued a private ruling saying that an error made by a financial institution caused a $200,000 IRA to be taxable. Check LTR 199901029.

Did the Message Boards forget to "spring ahead" or is it just me thinking that I'm posting an hour ago.

California has a unique way of taxing nonresdients and part-year residents. You calculate a tax on your entire income and pay CA the ratio of the CA adjusted gross income to the total adjusted gross income. Technically, you're not paying tax on your distribution, but it helps put you in a higher tax bracket. I don't know if other states use a similar method, but we need the money here in CA.

I wish that the IRA custodian would file the Form 990-T. Quite often they rely on the IRA owner. Normally Form 990-T is due May 15 for a calendar year entity, but IRA UBIT must be reported by April 15 (a very busy deadline). The other bad news about UBIT in an IRA is that there is no reliance on the prior year if you owe tax for the first time. Once income is over $1,000 and tax is due you get an underpayment penalty if no Form 990-T was required the previous year. For a final insult to injury item with UBIT and IRAs, the tax is supposed to be deposited with a Federal coupon at the bank. An IRA is treated as a corporation for tax payments and underpayment purposes; that's what causes these nasty quirks. If anyone is thinking of investing in a partnership in the IRA, Please Do Not. :angry:

The phase out works like this: (1). If Modified Adjusted Gross Income (which is defined in the Roth regs) is less than $160,000 but more than $150,000, subtract $150,000 from your actual Modified Adjusted Gross Income. (2). Divide the difference by the width of the phaseout range ($10,000) to determine the percentage that is not deductible. (3). Multiply the percentage by the maximum contribution ($3,500 or $3,000 depending upon your age). (4) Subtract the result in (3) from the maximum contribution. (5) If the remaining amount is $200 or more, that's your contribution limit. If it's greater than $1 but less than $200, you can contribute $200. A piece of cake, right?

Help. I feel like I've become a ghost with the new software. The Boards don't remember me so I have to log in each time. Whenever I read a board it says that 0 members and 0 guests are there. In addition, although the topic areas that have unread messages are darker when I go to the threads they're all grayed out so I have to remember when is the last time I accessed the boards to figure out if there are unread messages or not. Is this AO(hel)L or what's up. Mary Kay Foss

The exception in 72(t) references Code Section 213. I have always interpreted it as the expenses that would be deductible on the IRA owner's Form 1040; those would include expenses of a spouse and dependent children. The total must be deductible (in excess of the 7.5% floor) whether they itemize deductions or not.

In addition, losses can be passed through to the shareholders' personal returns. Many corporations start as S corporations to deduct losses in the early years and become C corporations when they are retaining income to fund expansion.

Yes, the widow could roll them over into her own name but then any withdrawals from the IRA would be subject to the 10% penalty or she would have to use some other means of taking the money out that avoids penalty. If she can open an IRA in the decedent's name, that's best.

You don't have to actually itemize deductions to qualify for the exception to the 10% penalty; you just have to indicate on Form 5329 that your medical expenses exceed 7.5% (and be able to prove it if Uncle Sam ever asks).

The 10% penalty does not apply if the funds withdrawn are used for medical expenses that exceed 7-1/2% of your adjusted gross income. The penalty also does not apply if the funds are used to pay medical insurance premiums for an unemployed person. Disability is another reason that the 10% penalty is waived, but the disability must be so severe that no further work is possible based upon a medical determination. There are other exceptions that apply to IRAs only (first time home buyer and higher education).

The trust is the beneficiary and the 1099R should list the trust's name and ID #. The trust agreement will determine whether the benefiicary is taxable or not. A conduit trust is one where the entire RMD is distributed each year. In that case the trust files a return and the beneficiary pays the tax. If it's not a conduit trust, it's trickier. Trusts get to the highest federal tax bracket around $9,000 of income. If the RMD is principal to the trust, the trust pays the tax. If the agreement says to distribute income, it usually means trust income not taxable income. In California, an RMD is 10% income and 90% principal if the trust agreement doesn't provide otherwise. That means the beneficiary would pay tax on 10% of the RMD and the trust is taxable on the rest. Trusts can be a good beneficiary in many cases, but people who designate them as beneficiaries don't always understand the income tax implications.

The 10% penalty does not apply to amounts "distributed" due to an IRS levy. A hardship distribution to pay off the tax levied would be subject to the 10% penalty. So it's best for the participant that the funds go directly from the plan. I'm not sure this is what the previous post related to, but I think it's good information to be aware of.

I've always calculated SE tax after the Section 179 deduction, most computer tax return services do the same. Schedule C income is always after the Sec 179 deduction and Sec 179 deductions from partnerships reported on Schedule E are always deducted in calculating both income tax and SE tax. With the original formula described, I assumed that the starting point was income after the Sec 179 deduction.

Forms 1099 are supposed to be sent to the payees by 1/31 and the IRS by 2/28 to find and correct errors. The Form 1099 is supposed to have a telephone number that you can call to straighten out the problem. Your relative should get right on it because I imagine it takes a long time for an outfit as large as Fidelity to admit, find and correct an error. Good luck!

I agree with Katherine. If the participant is under age 59 1/2, the 1099-R should have a "2" in Box 7 because an IRS tax levy is an exception to the imposition of the 10% penalty.

The rule is that a 50% excise tax applies on the amount that was not taken out within the 5 year period. It would be calculated as 50% of the 12/31/94 value, plus 50% of the 12/31/95 value, plus 50% of the 12/31/96 value etc etc The IRS has been good about waiving penalties when an IRA owner makes a mistake and rectifies the error as soon as it is discovered. I understand that the IRS is much harder on plan administrators that make this kind of error but I don't have any actual experience with that. Individuals file Form 5329 to report these kinds of penalties and the statute does not run until the form is filed. I'd suggest that you get some legal advice. Good luck!

This is a state law question. I understand that in California a single owner or owner-spouse Keogh plan has the same bankruptcy protection as an IRA. Apparently there was a case in the last few years where a couple hired their daughter and because she was in the plan they got the full ERISA protection. Many states give protection similar to ERISA protection to all IRAs including Roth IRAs. The proposed federal legislative solution is the answer so that the treatment is equal across the nation.

I'm doing this from memory rather than looking up sources so bear with me. There used to be a maximum tax on earned income (pre 1986 Act) for that purpose there were limitations on how much of SE income from farms and small businesses was attributable to personal services. I believe that's where the 30% came from. A number of years ago IRS came out with some proposed regulations regarding SE income. It's difficult to apply SE tax when there are general partnerships with investor partners or LLCs where not all owners are active in the business. Capital was one of the factors to be considered at that time. Those regulations were pulled and aren't even in proposed form anymore. Schedule F, like Schedule C, needs some modifiying (the deduction for 50% of SE tax) but it is the base for retirement plan deduction contributions.

There is no capital gain treatment with an IRA ever. The increase in value that you recognize with your Roth conversion is ordinary income. As the previous poster noted up to $3,000 of net capital losses reduce your ordinary income - which includes the Roth conversion. Take losses if you must but it's not necessary to try to match them with Roth conversion income.

No you don't have to pay additional FICA tax when you make an early withdrawal from a 401k plan or IRA. Amounts deferred into a 401k plan are not subject to income tax, but they are subject to social security when earned. Some states also impose a penalty tax on early withdrawals. CA has a 2.5% penalty. If you take money early you pay federal and state income tax, a 10% federal penalty and possibly a state penalty.

No withholding is required from an IRA distribution. Withholding at a flat rate of 10% is used for "nonperiodic distributions." Many custodians will withhold more than 10% if requested. Maybe the individual should take 2 distributions, $20,000 with 10% withholding and a couple of days later the balance with no withholding. Sometimes it's easier to break down the problem so the custodian can fit it into their prescribed forms.