Kathy

I should clarify my point. We would never hold up the transfer of an IRA to a successor custodian who has officially accepted the transfer. We simply tell our shareholders not to transfer the RMD. (However, in the end we follow their specific written instructions. If they indicate they have taken the RMD from another IRA, we will go ahead and do it.)

According to the information on the Form 5305-SIMPLE, you can treat the years before you first established the SIMPLE as years for which you made the 3% contribution -so, yes, you can make a 1% contribution for the first two years of a SIMPLE Plan. However, I seem to remember another rule regarding retirement plans - that the employer "intend" to maintain a retirement plan. I think you could make the point that an employer who sets up a SIMPLE with a 1% match for 2 years and then terminates it never really intended to have a qualified retirement plan in the first place - instead, was just looking for a quick and easy tax shelter. I think the IRS would frown on that.

Furthermore, the proposed regulations under 401(a)(9) state that you may not transfer your required minimumd distribution. So, although your client could take the RMD from another IRA and it is not due until the end of the year, most of us who take the conservative approach won't allow a transfer of an RMD. Maybe someday when the regulations are finalized this will be addressed.

I would say you have two choices - assuming he is eligible to deduct a traditional IRA contribution and the contribution was for 1998 and (will be) reported on a 1998 Form 5498 (due in May), he could deduct the full $2,000 and then include 1/4 of the conversion in his taxable income (assuming he also met the requirements to convert). If I'm reading it right, that would cost less than the other option which is: you could go to the broker and ask if the $2,000 plus related earnings could be recharacterized from a traditional IRA contribution to a Roth IRA contribution, rather than converted, since his tax return is on extension. Then there is no deduction but smaller taxable conversion. If you go the first route, I don't think you need any recharacterization. It was a deductible IRA contribution on and then a taxable distribution on conversion, eligible for the 4-year spread.

Since the rules now require that all Roth IRAs be lumped together as a single Roth for distribution purposes and since you are now responsible for determining how much you contributed, how much you converted, and how much is earnings, the technically correct answer is - YES, it's ok to make your $2,000 contribution to the same Roth IRA account into which you converted your traditional IRA. However, the practical question is, did the trustee/custodian of your Roth IRA code the contribution correctly? Tha is, did they know that it was a contribution and not a rollover/conversion? I would check your statements to make sure that they reported it as a 1998 contribution. If you can't tell by the statements, give them a call to verify that it will be reported to the IRS as a 1998 contribution on the Form 5498.

It is very permissible for an employer to make distributions from a qualified retirement plan more than 3 months after the termination date of the employee. The employer is bound by the plan document which often states that distribution for participants terminated during the year won't be made until after the annual valuation for that year or even not until the participant has incurred a one-year break-in-service, which means it could be at least a year before you are eligible to receive a distribution from the plan. Congress has allowed for the tax advantages offered these plans in order to encourage people to save for their retirement. Therefore, the rules are geared more toward making it difficult for participants to get money out before retirement age. If you have concerns about distributions you should first read your Summary Plan Description and then, if you still have questions, speak with your employer about the plan’s distribution policies.

The client is probably referring to excess accumulations - It used to be that, if you didn't make a proper election to grandfather your large IRA on your tax-return ('86 thru '88 I think???) and you took periodic annual distributions in excess of $150,000 or one very large ($650,000???) lump sum distribution (again, I'm not positive on the exact numbers) you would owe an excise tax. This has been repealed. There is still (I think) an excise tax owed by the estate of a deceased IRA holder whose IRA is substantial. I remember one client whose required minimum distributions put him over the amount for which an excise tax would be owed. Wouldn't that be a great problem to have????

One more thing. The thresholds are based on your modified adjusted gross income, not just your net earned income. You must have some income from your own personal services in order to be elgible to contribute to an IRA but your MAGI (which also includes other types of income such as dividends, interest, etc....) must be below the limits. Ok, maybe you better just go see your accountant to make sure.

A self-employed person can contribute to a Roth IRA as long as they have net earned income and it is less than the threshold amounts ($110,000 for single taxpayer, $160,000 for married taxpayer filing joint return and less than $10,000 for married taxpayer filing separately) Participation in an employer sponsored retirement plan does not come into the picture with a Roth. For the traditional IRA, you can contribute as long as you have net earned income and are below age 70 (calendar year when you attain age 70 1/2). Again, participation in an employer sponsored retirement plan does not come into play until we go to determine whether your traditional IRA contribution is deductible or not. If you are a participant in a SEP or a SIMPLE, your traditional IRA contribution may not be deductible if your adjusted gross income is too high - over $40,000 for a single, over$60,000 for married/joint or over $10,000 for married/separately. If you make a nondeductible traditional IRA contribution, make sure to report it on a Form 8606. Isn't it a little late to be talking about this? Or are we planning ahead? If so, the limits for deducting a 1999 traditional IRA contribution are $41,000 for single, $61,000 for married/joint and $10,000 for married/separately.

Thanks for your responses. Let me add that this has come up with respect to establishing Roth IRAs. I'm still trying to peg down the exact article. I'll let you know.

I know, I know. The “I” in IRA stands for individual. I have told that to clients a million times - no matter what the attorney who drafted your trust tells you, you can't "transfer" the IRA to the trust (before your death) without creating a taxable distribution. I have always thought this to be the gospel according to the IRS (Treasury, Congress, whom ever...) But, I have recently had 2 different clients tell me they read somewhere (where they can't remember) that you can move your IRA to your trust prior to your death without causing a taxable transaction. What have I missed now? As usual, I am thanking you in advance for your assistance. Kathy

First you must check with your plan administrator and read your Summary Plan Description to see what you are entitled to and when you are entitled to it. Then, if you are entitled to a distribution, you should establish a traditional IRA to receive the direct rollover from the plan. Once you have the traditional IRA established to receive the distribution, you'll have to fill out all sorts of paperwork from the plan administrator - indicating you have received and read information regarding the taxability of any distributions from the plan. Your best bet is to work closely with the plan administrator to make sure you complete the paperwork correctly to receive a direct rollover into your IRA. Once the money has been rolled into the traditional IRA (this process can take a while depending upon when you're entitled to a distribution (after a break-in-service or after the end of the year of termination, etc...) and when the plan distributes (only after a valuation date?) you can then convert the traditional IRA to a Roth. You may convert as little or as much of your traditional IRA to a Roth as you like, as long as your MAGI is under $100,000 for the year. If you are married you must also file a joint return for the year of conversion. Roth IRAs are great, especially for young people who have years and years for it to accumulate tax-free earnings. However, they are a bigger benefit if you can pay the taxes on the converted amounts from a source outside of your IRA. To this end, you might want to consider how much you can afford to pay in taxes and work backwards from there determining how much you can convert without having to pay taxes from the IRA money.

Wow! Thanks to all - this has been a very helpful discussion! Since we are in the process of amending IRA documents anyway, I think I will look into the issue further. I'll let everyone know if I come across anthing else pertinent to the topic. Thanks again for the great input!

Maybe, maybe not... see my question dated 4/10/99 "naming your own beneficiary for an inherited IRA???" The IRS has ruled in PLRs that it can be done but it seems to violate trust law.

The deadline to CONVERT a traditional IRA to a Roth IRA for 1998 (in order to spread the tax consequences over 4 years) was 12/31/1998. You may still make 1998 Roth IRA contributions (lesser of $2,000 or your earned income) until 4/15/99 and these will start your 5 year clock for qualifed withdrawals as of 1/1/98. If you are still interested in converting and your income is low enough, you can just convert small portions of your traditional IRA each year, thereby spreading the tax consequences out a little bit. Also, I think there is legislation pending which will increase or eliminate the $100,000 limit on MAGI for eligibility to convert - watch for updates on that.

Yes, you should have received 2 forms 1099-R - one showing the distribution from the 401(k) (code "G" if it was a direct rollover to the IRA or a "1" or "7" if the check was made payable to you and you rolled it) and one showing the taxable distribution from the traditional IRA to the Roth IRA. You'll need to get a Form 8606 to report the conversion. You can get that at the IRS web site: www.irs.ustreas.gov.

I'm back... The PLR to which I was referring is PLR 9106044 and 9106045 - issued to 2 sisters who were each the beneficiary of 50% of their deceased father's IRA. The article I have from 1997 on this goes on to state that an IRA is a trust whose validity is determined by state law. According to trust law, a trust is not created until the creator or grantor of the trust signs the necessary documents spelling out the terms of the trust. Once the trust is established, only the creator or grantor may alter its terms.... legal advisors could take issue with the IRS' position... I think that's the position I'm going to continue to stick with.

The amounts which are includible in your taxable income because they were properly converted from a traditional IRA to a Roth don't increase your MAGI for the purposes of determining your eligibility for the Roth.

SONNI, No, you're not missing anything. All of your IRAs are lumped together for determining the percentage of any distribution in which you will have a tax-free return of basis. This means that you will now have a basis in your rollover IRA and my gut feeling is that, if you roll it over into another employer sponsored plan in the future, you will continue to have a basis in it but I'm not sure how the reporting goes from there . Wierd, huh?? Kathy

The focus is on annuities because, before 403(B)(7) was added to the code (in 1974 by ERISA), 403(B) specified that the investment had to be an annuity. Now you can have mutual funds or annuities but annuities have such a foothold in that market that it's hard for mutual funds to get in. Even the IRS publication on these types of plans is called "Publication 571, Tax-Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations." On the inside it says, when we use the term TSA we also mean custodial accounts which hold mutual funds but then goes on to talk about annuities through out. It makes it tough on us mutual funds!!

Hey John, why not tell us what you really think? But really, I don't think trustees have arbitrarily imposed restrictions on accounts for which they are the fiduciary. It is important to remember that the tax code is not the only set of rules that we have to follow and sometimes it gets complicated trying to match the tax code with other federal requirements and state law. I remember the uproar when the IRS approved (through a private letter ruling) the transfer of a decedent’s IRA to two different trustees, one for each of the two sisters who inherited their father’s IRA. The question I saw raised over and over again was – how could someone, other than the one who created it, change the trust? The IRA holder was the one who executed the trust agreement appointing the trustee and creating the trust and he was the only one with the authority to change the trustee, not the beneficiaries. Granted, there is nothing in the tax code that I can find which specifically prohibits the non-spouse beneficiary of a decedent’s IRA from naming a beneficiary of their own. However, there is also nothing which permits it either (there is a specific provision for spouses to be able to treat inherited IRAs as there own which implies they may then designate a beneficiary for death distributions). So, since I’m only a lowly accountant, I was hoping to get some legal beagles’ ideas on the other rules and regulations which also might come into play here – such as trust law.

Nope distributions which meet the definition of qualified education expenses are not subject to penalties. But, they're not in your IRA to grow on a tax deferred basis anymore either and they can't be put back (unless rolled back within 60 days of the distribution).

You need to get a Form 8606 which will walk you through determining the taxability of your nondeductible traditional IRA. The first question is: was this your only IRA or do you have others? With traditional IRAs you first lump them all together and then determine what percentage of the total value represents your basis (your nondeductible contributions). Then, if you only convert part of that total, the same percentage of your converted amount is treated as a return of your bais and the rest is treated as a taxable distribution of earnings, growth and previously deducted contributions. You should have been filing a Form 8606 for each year that you made nondeductible contributions to your IRA which is how you (and the IRS) determine your basis in your IRA.

According to the Wall Street Journal, Fidelity has decided to allow the beneficiary of a decedant's IRA designate their own beneficiary on the account in order to allow the assets to coninue on in tax-deferred status. I am assuming they mean that the second beneficiary would continue to take distributions over the life expectancy of the first minus one for each year that has passed but the article doesn't state that. It was my understanding that it is trust law and not tax law which prohibits changes to a trust once the grantor (origianl IRA holder) has passed away - they created the trust agreement and once they are gone, no changes can be made??? Is anyone else following Schwab and Fidelity in doing this? Any ideas on why no one has done it in the past but now it's ok? Has something changed or are they just getting bolder and more aggresive?

Thank you QDROphile!!!! I really should have known that one - will we all be having a 25th birthday party for ERISA this September?