John Olsen

Warren: How could the basis in an IRA being converted to a Roth EVER exceed the amount being converted? The basis of the converted assets is the same percentage of the total amount converted as the basis of the original "regular" IRA was of the total of those regular IRA assets. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

Skrambo: Don't feel all alone. The 8606 Instructions would mystify ANYBODY! That form - particularly the part about Roth "re-characterizations" - is the stuff of which accountants' nightmares are made. John Olsen

Your wife can contribute up to $2,000.

Kathy, Thanks for the references. My previous remarks notwithstanding (not "inoperative", just "notwithstanding"), I can certainly appreciate the difficulties of a Trustee trying to adhere to the intricate - and sometimes incongruent - requirements of Federal AND State law. Your citatation of the "only grantor may ammend" problem is an apt example. What incenses me is not the legitimate reluctance of a Trustee to act in areas unclear and potentially hazardous to those to whom the Trustee owes duty, but the knee-jerk response of "it's not our policy" to requests for the most innocuous accomodations. I recall the functionary at XXX, a VERY well known financial firm, who, when I was discussing an IRA beneficiary designation I was trying to get that Trustee to accept, informed me that "we don't get into things like 'per stirpes'". ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

And we all know what ERISA stands for, right? Every Ridiculous Idea Since Adam. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

I don't think it's a question of being "bolder" - merely of being less absurdly restrictive. Trustees (including Fidelity)have made administrative policies which are MORE RESTRICTIVE than the Code and Regs require. In my opinion, the changes we're seeing are simply the overdue responses of hidebound functionaries to the legitimate demands, on the part of their customers, that they be allowed the advantages conferred by Law. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

Your wife is eligible if you file Jointly and your joint AGI is less than 160K (contribution allowability is phased out for MFJ taxpayers with AGIs between 150K and 160K). She need not even have earned income, so long as you earn at least as much as the two of you will contribute to your RESPECTIVE Roth IRA accounts. Contributions to each account are limited to 2K/yr. There are NO JOINT IRAs. "I" stands for INDIVIDUAL. John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

The 5 Year "holding period" during which distributions from ANY ROTH IRA are NOT "qualified distributions" begins on January 1st of the tax year in which the FIRST contribution to ANY Roth IRA was made. (Prop. Reg. 1.408A-6; IRC 408A(d)(2)(B)). That period can actually be as short as 3 years and 8 months (e.g.: taxpayer contributed to a Roth IRA on 4/14/99 for 1998. The period ends on 12/31/2003). Note that this "five year clock" is COMPLETELY SEPARATE FROM the "5 year clock" pertaining to Regular IRA-Roth IRA "conversions". John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

If you name several children as beneficiaries of a single IRA, the Required Minimum Distribution will be based on the life of the participant and the beneficiary with the SHORTEST life expectancy (which translates to the LE of the OLDEST kid). At P's death, that oldest kid's LE will determine the payout period. By contrast, if you have a separate IRA for each kid, you can use each kid's LE. Moreover, what if one child wants to accelerate distributions but the others do not? Will the Trustee accomodate such desires?

A ROTH IRA is not an investment. It is a way to OWN an investment. You can "fund" your ROTH IRA with a CD. In which case, you get all the guarantees (and all the limitations) of a CD. Or you could fund that Roth IRA with a single stock or an stock mutual fund. In which case, you get NO guarantee of Principal OR of a minimum return, but the potential for higher growth (than a CD). Again, a Roth IRA is a program - a way of holding property, with its own rules as to allowable contributions and distributions, and tax treatment. Factors such as Guarantee of Principal, Rate of Return, etc. are functions, NOT of HOW the investment is owned (Roth IRA vs., say, a "regular" investment account, with no tax qualifications), but of WHAT TYPE OF INVESTMENT the money is in. Hope that helps. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

For MOST folks, naming the Surviving Spouse as beneficiary is usually best. This provides the most flexibility (the surviving spouse has distribution options not available to non-spousal beneficiaries). If you name a Contingent Beneficiary (and you SHOULD) the surviving spouse can always DISCLAIM all or part of the IRA, if it appears, at that time, that it would be best for the money to pass to that contingent beneficiary. If you have SEVERAL kids and want to name the kids, I HIGHLY RECOMMEND SPLITTING YOUR IRA INTO SEVERAL SEPARATE ACCOUNTS, giving each account its own beneficiary (AND contingent beneficiary). There are situations in which a CHARITY, as beneficiary of an IRA, makes sense - either the charity, outright, or a Charitable Remainder Trust. However, this is not a "usual situation". ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

An IRA, by definition, is an INDIVIDUAL account. It cannot be a Joint Account. Or, for that matter, in your Living Trust.

Key Issues (in my purely personal judgment): FIRST: 1. Regular IRAs require that you begin taking distributions no later than 4/1 following your age 70 1/2. ROTH IRAs have no "must begin by" restrictions. You can elect NEVER to withdraw ANY money during your lifetime. This, combined with the fact that... 2. Regular IRAs require a MINIMUM distibution each year, once you hit age 70 1/2. ROTHs have no minimum distributions. ... means that you can, if you wish, accumulate a LOT more money in a ROTH than in a Regular IRA by the time you die at a ripe old age, if you would prefer never to touch that money during your lifetime [not a common choice, but it does happen] SECOND: IRAs distributions are taxable, both to the participant AND to the beneficiaries. ROTH distributions are generally not. Obviously, 'tis better to get TAX FREE income than TAXABLE income. THIRD: ALL IRA money (like all Profit Sharing, Pension, 401(k) money, etc.) is FULLY includible in the TAXABLE ESTATE of the owner for ESTATE tax purposes, unless it passes to a charity. FOURTH: You can GET AT your ROTH money with fewer restrictions than you can get to your REGULAR IRA money. The annual contributions you make to a ROTH can ALWAYS be withdrawn with no tax or penalty. FIFTH: Do you want the tax break now or later? I STRONGLY suggest that anyone who is weighing the pros and cons of a ROTH vs. a REGULAR IRA consider consulting a PRO. This CAN get VERY complicated. And a LOT of the published material is just flat WRONG! Hope that is of some help. John L Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

It is worth mentioning, I suppose, that the BEST way to deal with the difficulties of beneficiary designations and payout elections for IRAs and qualified plans IS TO DO PROPER PLANNING BEFORE THE PARTICIPANT HAS REACHED THE REQUIRED BEGINNING DATE. On April 1st, following the participant's Age 70 1/2, several things get "carved in stone". Choices become irrevocable, INCLUDING "DEFAULT" CHOICES YOU MAY NOT KNOW ABOUT. The choice of beneficiaries is CRUCIAL. So, in my opinion, is the election to use Annual Recalculation. That election is the DEFAULT for the participant on the IRS model 5305 form, and many financial institutions follow that model, EVEN TO THE POINT OF MAKING IT THE DEFAULT FOR A SPOUSAL BENEFICIARY. What's the problem? The problem is, for VERY little benefit (the opportunity to reduce, SLIGHTLY, the amount one is REQUIRED to take, beginning at the Required Beginning Date), one runs the risk of having one's HEIRS forced to take distributions over a MUCH SMALLER period than would be available were the "term certain" election made (also known as "election NOT to re-calculate). For anyone with IRA or qualified plan accounts, who is approaching age 70, I STRONGLY urge you to get competent counsel on your options, AND THE CONSEQUENCES OF EACH. ***************** John L Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO Where the IRA or qualified plan is payable to a Trust, I suggest SERIOUS attention! Not only must a Trust pass several tests to be considered a "designated beneficiary trust", but, it's a trust which will be funded by a "pecuniary bequest", the result could be that the ENTIRE IRA BALANCE PAID TO THAT TRUST WILL BE TAXABLE TO THE ESTATE IN THE YEAR OF FUNDING. Natalie Choate spends considerable attention to this problem in Chapter 2 of her book. And a discussion on the specifics of this problem has been ongoing for weeks now, on the ABA-PTL Estate Planners List, on the Web.

Dave, I was confusing [i get confused a LOT!] the Life Expectancy payout required under 401(a)(9)(B)(iii) (the Term Certain method you referred to, employing Table V life expectancy) and the three alternate ways of determining the amount of Substantially Equal Periodic Payments for 72(t)(3)(A). Why I would do that, I don't know. I don't drink. But if I keep up messing around with 401(a)(9) much longer, I'm gonna go back on the sauce!

Dave, You say that the beneficiary in this case can take distributions over life expectancy, "but only under the term certain method". What is your source for that? Why would the other two methods for S.E.P.P. not be available? John Olsen

Dave, Thanks for the correction. I misspoke in saying that distributions on death are, by definition, qualified distributions. They are not, UNLESS they're made after the five-year period beginning with the first IRA contribution. When CONVERTED assets are involved, the CONVERTED assets are not subject to tax, BUT THE EARNINGS ARE. Thanks for keeping me "honest", Dave. I gotta go back and re-read Natalie's supplement. Again. John Olsen

Kathy, A distribution by reason of the death of the participant is, by definition, a "qualified distribution".

The options to an IRA beneficiary, with respect to how much must be withdrawn and when, depend upon (a) whether the IRA participant had reached her Required Beginning Date (4/1, following the year in which she turned age 70 1/2), and, if so, (B) whether Life participant had been Recalculating her life expectancy annually, for Required Minimum Distribution purposes If P died PRIOR to RBD, then the general rule is the Five Year Rule. That is, the entire account must be distributed by 12/31 of the year containing the 5th anniversary of the participant's death. The exception to the 5 year rule is the "SEPP" (Substantially Equivalent Periodic Payments) rule, which permits distribution over the beneficiary's life expectancy, provided distributions commence by 12/31 of the year following participant's death. The foregoing assumes that the beneficiary qualifies as a "DESIGNATED BENEFICIARY". If not, the ENTIRE account must be distributed by 12/31 of the year following death. Surviving spouses have additional options. If the participant lived beyond her RBD, the Rule is "at least as rapidly as" was the account was being distributed. That does NOT mean quite what it says. For example, if P died, having timely designated P's child as beneficiary, and P had, during lifetime, been taking Required Minimum Distributions based on P's life expectancy only (which happens a lot, chiefly by reason of ignorance), that does NOT mean that, at P's death, C is stuck with the same payout. C is stuck with the payout P COULD HAVE used, legally, which was - the remainder of the JOINT life expectancy of P and C (NOW no longer constrained by the MDIB rule), assuming P did not elect Annual Recalculation. If P were using Annual Recalculation, C can use C's life expectancy as of P's first distribution year, reduced by the number of years since death. This stuff gets VERY complicated. I HIGHLY recommend a couple of books for those involved in planning such things. Seymore Goldberg's "How To Pay Less On Your Retirement Savings" (a Lasser paperback) is an EXCELLENT general treatment, written for the layperson. Sy also has a couple of books written for professional advisors. The "Bible" of Qualified Plan Distribution books, in my opinion, is Natalie Choate's "Life and Death Planning For Retirement Benefits". It's paperback, and SEVENTY NINE BUCKS! And it's probably the best $79 I ever spent. Just wish I'd bought it sooner. Goldberg's Lasser book is available at most bookstores. Choate's is available through her web site: www.ataxplan.com ******* John L. Olsen, CLU, ChFC Olsen Financial Group Estate Planning, Investments, & Insurance Services St. Louis, MO

Both ROTH and Regular IRAs have a 60-day "window" during which any withdrawals may be re-deposited [in the same or a different account, so long as it's TITLED the same) without triggering either tax on the income (if any) or the 72(t) penalty. Your facts situation has two parts. The Regular IRA-Roth conversion was one. There was no 10% penalty, because that penalty does not apply to conversions. The second part concerns the "window", which applies, as I said, to Roths, as well as regular IRAs.

Roth IRAs, like other IRAs, may be Custodial accounts. The Custodian doesn't own the account. I think you're confusing an IRA Trust with a "regular" trust. The former is an INDIVIDUALLY OWNED asset. The Trust is there because the law requires IRAs to be Trusteed or Custodial accounts. But the beneficial ownership MUST vest in an INDIVIDUAL. You CANNOT own an IRA inside your Living Trust or Corporation or Family Limited Partnership. YOU have to own it.

I'd like to ask that client who named his Corporation as beneficiary of his qualified plan one question: WHY? If one knew what the client is trying to accomplish, one might be able to suggest alternatives. Just off the top of my head, this route strikes me as being VERY short on both flexibility and leverage. Of course, I might be missing something obvious. (I often do). Query: Can a Corporation take an Income Tax deduction for the estate tax paid on that IRD? John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

A Roth IRA is an INDIVIDUAL Retirement Account. Like ALL IRAs, it MUST be owned by an INDIVIDUAL.

LE190: The Trust CANNOT "continue on" without making distributions until daughter's age 50. It MUST make distributions, in accordance with the RMD rules.

The oldest daughter's ACTUAL life expectancy was not a factor in the original RMD. The MINIMUM DISTRIBUTION INCIDENTAL BENEFIT (MDIB) rules required that her age be no more than 10 years younger than the participant. As for the point that there can be no CHANGE in payout, there is no change. The RMD participant was entitled to was his life expectancy AND THAT OF HIS BENEFICIARY - a. if a Designated Beneficiary existed on the RBD, and b. in accordance with MDIB rules, if applicable. I know of no Regulation or Code Section which says that participant LOSES the right to take the ALLOWABLE RMD by taking accelerated distributions (as, for example, taking them over 1 life expectancy). A colleague of mine, to whom I mentioned this problem, brought up a GREAT point. At the participant's RBD, this Trust was APPARENTLY a Revocable one. At THAT TIME, the rules required that a Trust, to be a designated beneficiary trust, had to be IRREVOCABLE. Those rules were changed in '97 to allow a Trust which IS IRREVOCABLE AT PARTICIPANT'S DEATH. Query whether the Trust, EVEN IF ITS PROVISISONS PROVIDED THAT IT WAS IRREVOCABLE AT DEATH, would have qualified under the "old" rules. (As we all know, a Revocable Living Trust becomes DE FACTO irrevocable at death, because the only party who can revoke it is now gone. But the Proposed Regs required LANGUAGE to that effect. Personally, if I were the Trustee, I would be comfortable with making distributions in accordance with the remainder of Oldest Daughter's life expectancy at dad's death. But is the Trustee willing to do that? ... interesting case, this! John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO