Michael Devault

It is my understanding that once the money is rolled into the profit sharing plan, it would lose its identity as IRA, thus no longer be subject to the RMD rules. Instead, it would have to be distributed under the terms of the PS plan.

Take a look at Pub 590 for use in preparing 2001 returns. It can be downloaded using this link: http://ftp.fedworld.gov/pub/irs-pdf/p590.pdf On page 28, it says to use table III in Appendix C for determining Required Minimum Distributions. Care to guess what Table III is? Hint: It'll give you the answer you want! Hope this helps.

I believe that your assessment is correct. There is a subtle difference in the language of the text of the proposed regulations. The table in 1.401(a)(9)-5 A-4 refers to a "distribution period." However, when referring to payments to a beneficiary, the regulations always refer to the beneficiary's life expectancy, not a distribution period. That's my story, and I'm stickin' to it!

Today's (10/23/01) Federal Register contains proposed regulations regarding catch-up contributions for individuals over age 50. Here's a link: http://frwebgate.access.gpo.gov/cgi-bin/ge...26566-filed.pdf

1. The contribution limit will be $3,000 in 2002 thru 2004. It will increase to $4,000 for 2005 thru 2007. Then, in 2008 and after, it will become $5,000. (There are some catch-up provisions for those over age 50, but you're a long way from that!) 2. The distributions you describe would not be "qualified distributions" as defined in the Internal Revenue Code. Thus, after you withdraw your contributions (which would not be taxed), further withdrawals would be included in your gross income and possibly subjected to a 10% premature distribution penalty. However, an exception to the penalty exists of the distributions are not more than "qualifed higher education expenses." You should look at IRS Publication 590 for more information. It can be downloaded from the IRS' website. Hope this is of some benefit to you. Good luck!

If you converted your traditional IRA to a Roth IRA in 1998, you could spread the taxes evenly over a four year period. Your tax return for 2001 will be the last year that you have to include a part of the amount converted in income.

In my opinion, yes. The prohibited transaction exemption would seem to allow the proposed transaction.

I believe that Prohibited Transactoin Class Exemption 92-6 may shed some light on this. It says that it's OK to sell an individual life insurance or annuity contract to a participant, a relative of a participant, an employer or another employee benefit plan if: 1. The participant is the insured under the contract, 2. Such relative is a family member, 3. "The contract would, but for the sale, be surrendered by the plan" 4. If sold to anyone other than the insured, the insured has to agree to the sale, 5. The amount received by the plan is at least equal to the amount necessary to put the plan in the same cash position as it would have been if it had retained the policy and surrendered it, 6. the plan can't discriminate in favor of plan participants who are officers, shareholders or HCEs. Hope this helps out!

I believe that whenever the ownership is changed, the original owner will likely experience a taxable event, regardless of the new owner. The gain will be ordinary income to the original owner. Of additional concern is whether the change of ownership will effect the income tax exemption of the death proceeds. The so-called "transfer for value" rule may cause the death benefit to be taxable. Look at IRC section 101 for details. Hope this helps a bit.

I believe the advice given by the agent is wrong. A SEP is nothing more than an IRA (controlled by the participant) into which employer contributions are made. SARSEPs differ only in the fact that salary reduction employee contributions are also permitted. Once the contributions reach the IRA, they are treated just like any other IRA. Since IRAs can be rolled over or transferred, in whole or in part, there is nothing in the law that would prevent you from transferring a portion of your IRA. It may be that the product vendor is preventing the transfer? Further, future contributions are not dependent on a particular funding vehicle. SEP (and SARSEP) contributions can be made to any IRA of the participants choosing. Take a look at IRC section 408(k)(4). The employer contributions may not be conditioned on the employee's keeping any part of the contribution into the IRA, nor may the employer prohibit withdrawals from the plan. Hope this is of some benefit to you. Good luck!

As the law is currently written, yes. However, keep an eye out for a technical correction on this matter. It's commonly believed that failure to change the contribution limit to 25% was a Congressional oversight.

Zahoric, there have been countless complaints filed with various state insurance departments which generally lead to no where. The states generally take the position that if no insurance law has been violated, there is no issue in which they should become involved. When they receive a complaint, they forward a copy to the offending insurance company which, in turn, responds to the client and the insurance department. Case closed. Another approach is for the policy owner to keep screaming until something is done. This "squeeky wheel gets the grease" approach may work, but companies are pretty tough on these issues. Sorry that I can't give you a more positive outlook.

Zahoric, the companies that offer two tiered contracts are the ones who are generally the most reluctant to help their policy holders. In my opinion, that makes sense because the products that they offer shows some level of contempt for their customers, anyway. As you pointed out, they get the lower tier upon surrender and can only get the higher value if the contract is annuitized. What is less known is that a number of these companies use a pretty low interest assumption in determining their payout options. One company was sued over the fact that they used zero percent for calculation of payout factors on one of their products. Incredible! In my experience, these companies won't permit a 5 year payout prior to separation from service or attainment of age 59-1/2 by relying on a policy provision that couples the policy to the Internal Revenue Code for purposes of maintaining the "qualified" status of the policy. IRC section 403(B)(11) states that amounts in a 403(B) attributable to salary reduction can't be distributed unless one of the qualifiying events occur. This gets back to the discussion with RJT surrounding the differences between distributions and transfers. The two tier companies hang tight on the idea that (a) distributions require a qualifying event and (B) their policy forms don't contain provisions for transfers. Unfortunately, there's not much a client can do except (a) stay in the policy and hope that the company will treat them fairly when the contract is annuitized using the accumulation value at retirement or (B) take their lumps and transfer the lower cash value.

RJT, I agree that there is a distinction between transfers pursuant to Rev. Rul. 90-24 and direct rollovers. As you properly pointed out, direct rollovers can be made only when distributions are permitted from the 403(B), such as age 59-1/2 or separation from service (soon to be called "severance of employment"). Transfers are made under the provisions of Rev. Rul. 90-24. Prior to Rev. Rul. 90-24, the only way to transfer funds from one 403(B) to another was under the provisions of Rev. Rul 73-124. There were a number of steps involved in this type of transaction, including the involvement of the employer. Further, the entire account balance in the annuity had to be moved... no partial transfers were permitted. Rev. Rul. 90-24 did a number of things, including the revocation of Rev. Rul. 73-124, permitting of partial transfers, and allowing the transfers to be made trustee-to-trustee. In the classic sense, annuity settlement payments could be considered distributions. However, in the real world, settlement options may be used to effect trustee-to-trustee transfers. It is entirely possible for a policy owner to elect a term certain payout for 5 years, for example, and have those payments sent to another insurance company under the provisions of Rev. Rul. 90-24. Insurance companies do this every day, and, as I mentioned in my previous post, the IRS doesn't care about the contractual method of making the transfer... they just want the provisions of Rev. Rul. 90-24 to be followed. You brought up a good point. Such transfers should be completed before the Required Beginning Date. If the transfer has not been completed before then, it is quite difficult to value the policy in the payout phase for RMD purposes. However, if all the money has been transferred to a new contract, the RMD can easily be determined. If an individual has the choice between a transfer and a direct rollover, they should almost always select the direct rollover, primarily because the insurance company is required to permit it. However, as you pointed out, this is not always the case: Unless a distribution is permitted, direct rollovers are not an option. In that case, the only way to move money is by way of Rev. Rul. 90-24 transfer. Some insurance companies will not permit them because they say that the money can't be transferred unless a distributable event occurs. And, if a distributable event occurs, you can make a direct rollover. (Seems like an endless circle, doesn't it.) This is my concern about insurance companies. If they have a client who wants to move money, and their policy form permits a term certain payout, they should permit the transfer to be made. As I pointed out, some companies do so quite willingly. Others, however, try to hang onto the money like it theirs, not their clients. The latter companies are the ones that need to examine their practices. Thanks, RJT, for helping me clarify my response. As you pointed out, the distinction between direct rollovers and transfers can get cloudy at times.

JLF: The period can be more than 10 years, but can't extend beyond the required beginning date for required minimum distributions. Companies have a difficult time determining the RMD on policies that are in a "payout status." Additionally, there are concerns about conflict with the direct rollover rules, since the first money out of a policy are deemed to satisfy the RMD rules, thus not transferrable. I suggest less than 10 years for two reasons: First, there's generally no reason to extend the transfer longer than that. Second, use of a less-than-ten year period avoids confusing the transfer from Eligible Rollover Distributions. Zahoric: It's my understanding that insurance companies may not discriminate in favor of a class of policyholders. In this context, a class means those policyholders that have annuities issued on the same form. If Annuitant A has their policy on form A123 and Annuitant B has a later policy on form X789, they represent two different classes. The company can permit transfers on one class, but can deny them on the other class. Most annuities used as 403(B) funding media contain provisions that allow the insurer to maintain the integrity of the 403(B) plan. Some companies "hang their hats" on that language and deny transfers prior to a distributable event. Others, as I mentioned, won't make transfers on policies with loans. In short, there seems to be no consistency in the industry regarding transfers. Some companies make them, others try to hold onto money for dear life.

It is OK to make a transfer under the provisions of Revenue Ruling 90-24 using a payout option, just as long as the option doesn't extend beyond 10 years. The IRS has informally said that it doesn't care about the contractual mechanism used to make transfers, just as long as the the transfer adheres to the provisions of Revenue Rulin 90-24. But, there's a rub: Revenue Ruling 90-24 is permissive, not mandatory. Transfers are permitted, but vendors are not required to make them. Thus, a number of insurance companies hide behind this in an effort to conserve business. (I guess they feel it's better to keep business on the books than it is to do what their customers' ask.) Also, a number of companies won't make transfers if there is an existing loan on the policy. This makes more sense, because the value in the annuity is serving as collateral for the loan. And, regulations prohibit reduction of the account balance to offset a loan prior to a distributable event. Hope this is of some help to you.

I can find nothing in the Income Tax Regulations that would cause distributions from the Roth IRA to be affected by the fact that excess contributions have been made. However, I believe that the 6% excise tax paid annually on aggregate excess contributions. In other words, if you make an excess contribution of $2,000 in 2001 (and no other contributions are ever made), you pay the tax in 2001 if the excess contribution is not withdrawn. But, you also pay the 6% tax in 2002, 2003, 2004 and so on. This annual penalty on the same contribution may make the idea less palatable. Hope this helps. Good luck!

The beneficiary pays income taxes. If you are named as beneficary, you'll have to pay the income taxes. But, the income is Income in Respect of a Decedent (IRD), so you may get some relief (but it won't be a great amount). If the estate is the beneficiary, income will be paid to the estate, where taxes will have to be paid before the net is distributed to the estate beneficaries. Hope this helps

Your participation in a 401(k) plan has no effect on your ability to contribute to a Roth IRA. To be able to contribute to a Roth IRA, you must have taxable compensation and your modified Adjusted Gross Income must be below a specified amount which depends on your federal income tax filing status. Check out IRS Publication 590 for compete details... it's available on the IRS' web site. Hope this helps.

It may be helpful to look at section 1.401-1(B)(3) of the income tax regulations. Basically, it says that plans must benefit employees in general. It goes on to say that "Among the employees to be benefited may be persons who are officers and shareholders." Since officers and shareholders are treated as employees, it would seem logical that they can participate in a qualified plan, just as long as the plan doesn't discriminate in their favor.

A lot will depend on the custodial agreement. Most agreements that I've seen prohibit the custodian from distributing IRA funds to anyone other that the owner except in the case of death or pursuant to a QDRO. Absent a QDRO, the owner will be taxed on the distribution regardless of whether the custodian makes it payable to the owner or his/her spouse. So, from a practical standpoint, the owner may as well take the distribution and give the money to his/her spouse when received. (Just like we all do every payday;) ) Hope this helps.

This provision expands the definition of "includible compensation" to include payments made within five years of termination. It would be useful in situations where employers offer incentives to older employees to retire early. These incentives generally come in the form of income payments over a specified period of time after termination. I believe this new language permits persons taking advantage of such an incentive program to continue making contributions to their 403(B) plan, if desired, for a maximum of five years. Anyone have another view on this?

There is no prohibition against it. Last year, we had reason to do the same thing: An employee had "non-employee" compensation in the form of commissions. We checked with two accountants who both said it's OK to issue a W2 and a 1099. Hope this helps.

You are correct! The IRS really made it easy for us, didn't they?

If you're interested in the cite for Judy's response, take a look at proposed regulation section 1.401(a)(9)-5, A-4(a).