Kathy

Yes, you may have different IRA accounts. You may leave your traditional IRA just as it is until you reach age 70 1/2 if you want. You may also contribute to a Roth IRA this year, as long as you meet the income restrictions. Next year, you can choose to make either a Roth (subject to income restrictions) contribution or traditional IRA contribution or you can choose to split your maximum $2,000 IRA contribution between the two types of accounts (again, subject to the income restrictions on the Roth IRA.) You can choose not to contribute in a year. You can choose to open yet another IRA somewhere else next year and another the year after that. Isn't it great the options we have!?!?!?!

Maybe. The total amount an individual may contribute to IRAs for a year is the lesser of earned income or $2,000. Anyone who is under 70 1/2 and has earned income may contribute to a traditional IRA. Anyone who meets the income restrictions (MAGI under $150,000 for a married couple filing a joint return or $95,000 for a single individual) may contribute to a Roth IRA. You may contribute $1,000 to one and $1,000 to another or any combination which falls within the limits mentioned above as long as the total does not exceed the lesser of your earned income or $2,000. Some people who are covered by a qualified plan at work and whose income falls with in the phase out range for deductibiltiy contribute up to the deductible amount to their traditional IRA and the rest of the $2,000 to a Roth. Some people who are in the phase out range for a Roth (between $150,000 and $160,000 for a married couple filing a joint return) contribute the maximum allowed to the Roth and the rest of the $2,000 limit to their traditional. Again I say, aren't all the options great!?!?!?!?!

The 3% minimum top-heavy employer contribution required under a Model SARSEP does not eliminate the need to do the nondiscrimination test on the salary deferrals. The HCE's slary deferal is still limited to the lesser of $10,000 or 125% of the average deferral percentage (diluted by those who are eligible but choose not to contribute anything) of the Non-HCE group.

The deductible limit under section 404 of the code is a plan wide limit and is 15% of eligible compensation (defined by the plan document) which is total compensation of eligible employees reduced by any salary deferrals for cafeteria plans, 401(k), 403(B) or SARSEP (SIMPLE too I assume?????), limited to $160,000. The individual limits found in section 415 of the Code apply on a participant by participant basis and are the lesser of 25% of compensation (Net Earned Income for partner/self-employed) or $30,000. If your plan allocates on an "integrated" or "new comparability" formula, it is entirely possible for someone to receive an allocation of 22% of Net Earned Income.

Almost any of the 7,000 to 8,000 mutual funds out there will be more than happy to help you set up your IRA. You can choose to open one at each different fund or find a Custodian who can hold many funds for you in one IRA. I would recommend though that you seek the assistance of a financial professional - a Certified Financial Planner or the like can help you analyse your goals and objectives and your risk tolerance and then help you sort through the many funds available. For more info on funds, here is one site I like to visit: http://www.fundspot.com/main.shtml And, of course, I would love to help you set up an IRA if you would like.

For what it's worth, my two cents worth: Pension plans are not supposed to permit in-service distributions. Profit Sharing Plans can for certain specified reasons - hardship, employer money which has been in the plan for a specified period of time, attainment of a certain age, etc... but Pension plans are supposed to be for retirement and not before. Therefore, if the plan document does not specifically allow distribution upon retirement age even though the person is still working, don't do it.

OZZY, this is where it gets really weird. Since you made the recharacterization in 1999, it will be reported to you on a 1999 Form 1099-R which you should receive early in the year 2000, assuming all of the systems haven't shut down at the stroke of midnight and taken us back to the year 1900. So, you will have to complete your tax return (specifically the Form 8606) without benefit of a Form 1099-R. I believe the form asks for a letter of explanation to be attached.

Ok, you're probably going to need to confirm this with your tax advisor but here goes: Since you are into or past your 70 1/2 year, your required minimum distribution was not eligible to be converted to a Roth. So, let's say you had $1,000 in your traditional, you converted the entire amount to a Roth but then realized that your RMD ($100 for purposes of this discussion) was not eligible to go into the Roth as a conversion so you took a distribution of that amount. I would look at it as a correction of a mistake in converting it in the first place, and simply pay taxes on it. Then I am assuming you recharacterized the $900 plus earnings that was left in your Roth IRA back to a traditional IRA. So, I think you are fine there - just pay taxes on the RMD. But, a more basic concept to understand is that money coming out of a Roth is first treated as a tax-free, penalty-free distribution of your own contributions. Then, once those have been distributed, the next money that comes out is your converted amounts (on which you have already paid taxes). If the conversion occurred fewer than 5 years prior, those amounts would be subject to a 10% premature distribution penalty but only if they would be subject to that penalty if the distribution occurred from your traditional IRA. Since you are over 59 1/2, you would not be subject to a penalty on a distribution from your traditional IRA and therefore will not be subject to a penalty on a distribution of conversion money from the Roth IRA (regardless of the holding period). Finally, once you have received back all of your own contributions and converted amounts, the earnings are distributed. Those will be subject to income tax if you have not had a Roth IRA for at least 5 tax years but, since you are over 59 1/2, they will not be subject to a 10% premature distribution penalty. Hope that helps and doesn't muddy the water.

If you are talking about the 10% premature distribution penalty, no you don't owe it because you are over 59 1/2. That penalty only applies to people who are under 59 1/2 and don't meet one of the exceptions (disability, first-time home purchase, etc...)

IRC section 72(p) requires level amortization of the loan with payments of both principal and interest at least quarterly, otherwise the loan is treated as a distribution.

I think maybe I can help. There are several different limits which come into play here. The maximum salary deferral an employee can make is the lesser of $10,000 or 15% of pay net of pre-tax deferrals, (which is 13.04% of gross pay). The maximum total (employer and employee contributions) which can be allocated to a participant's account is the lesser of 15% of pay net of deferrals or $24,000 (which comes into play when someone's compensation exceeds $160,000 - 15% of $160,000 is $24,000). So, if I make $100,000 and I defer $10,000 from my salary my net pay is $90,000. My employer can make an additional contribution on my behalf of up to $3,500 ($90,000 x 15% = $13,500, $10,000 of which I have already contributed). The $30,000 limit is in the Tax Code but totally irrelevant until the cap on compensation exceeds $200,000. You may run into excess contributions if you make a 3% employer contribution to someone who earns less than $75,000 gross who also makes a salary deferral. I think in that case you would have to treat the excess salary deferral amounts as compensation – I’m not sure on that one though. Best not to let them do it! NOTE TO GARY: Gary, when I read IRC 408(k)(3)© in my code (may be too old?) it still limits compensation to $150,000 without tying it to 401(a)(17). I’m so used to the 401(a)(17) limit being indexed for inflation that I have used $160,000 as the capped comp in several of my SEP examples. However, I’m now concerned that the COLA doesn’t apply to SEPs – am I off base? Should we be telling people to limit SEPs to $22,500 rather than $24,000? Or is there a later version? Thanks for your help!

This is another one of those times when what the law allows and what financial institutions' systems allow may be 2 different things. The general rule is that the end result of a SEP is an IRA and that Profit Sharing and Money Purchase money may be rolled from the terminated plans to the IRA which also contains the SEP contributions. As you already pointed out, the rollovers would not be eligible to be rolled back into another qualified plan in the future but there is no legal requirement that rollovers go into conduit IRAs. However, with that being said, let me point out that the systems of some organizations are not set up to lump SEP IRAs and traditional IRAs together. So, if the client wants a single IRA for simplicity and the financial organization is saying no, you might want to consider changing financial organizations to one which can correctly report SEP contributions, individual contributions and rollover contributions all to a single IRA.

Although many of the others who participate on this message board disagree with the wisdom of doing it this way, you can withdraw your own contributions from your Roth IRA without tax or penalty any time you want. You can also withdraw converted amounts with no penalty if the distribution is used for qualified education expenses. And in fact, this is my strategy for paying for my 2 boys' education as well. I am maxing out my 401(k) so that I can borrow against it, contributing to the Roth IRA so I can withdraw my contributions from it and contributing to their Education IRAs as well. My goal is to have as much of my money growing on a tax deferred basis as possible so that I will have choices when they reach college age and decide where they want to go. And of course we're trying out all of the sports too just in case we hit on one that could lead to scholarships but that isn't looking too promising.

Gary, Do we have that information in writing somewhere? Although I believe everyone who says that is what they have heard informally from the IRS, I have yet to see anything definitive. I have had my clients hold off on distributing the 401(k) assets from the terminated plan until we have something in writing - I'm starting to get a little worried here. Thanks!!!

Hey, wait a minute - some of us do have a clue and will bend over backwards to make sure our clients stay out of trouble and do things right. Please give credit where credit is due.

You will be penalized if you withdraw the converted money prior to 1/1/2005 unless you meet one of the known exceptions to the 10% penalty - death, disability, age 59 1/2, first-time home purchase (up to $10,000), qualified education expense, certain medical or substantially equal periodic payments (no less frequently than annually..). Basically, if you would be penalized had you left the money in your traditional IRA and were now withdrawing it, you will be penalized if you withdraw it from your Roth within 5 years of the year of conversion - they closed the loophole that allowed someone who didn't meet one of those exceptions to convert, pay only ordinary income tax and then withdraw penalty free from the Roth, defeating the true purpose of the plan - to save for retirement.

Yes, assuming you file a joint tax return and she is under age 70 1/2. If you make the contribution to her traditional IRA and she is not covered by a retirement plan where she works, that contribution to her IRA of up to $2,000 is deductible (as long as your adjusted gross on your tax return is below $150,000 or you are not covered by a plan at work either.) Or you can contribute to the Roth for her as long as the MAGI on your joint return is less than $150,000. Isn't this fun? The choices we have!!!

You are correct in assuming that you can "recharacterized" your 1999 Roth IRA contribution to a traditional IRA contribution if you find out that your MAGI is too high. The recharacterization must be done by your tax return due date (4/15/2000) and must be done by way of a trustee-to-trustee transaction. Since the income relating to the recharacterized amount must also be recharacterized (moved from the Roth to the traditional IRA)it will make it easier for you to determine that amount if you make the contribution to a separate Roth IRA. However, there is no other reason that I can see to maintain separate accounts. Furthermore, the financial institution that has your Roth should be able to help you determine the related income if you do have to move the money.

It does sound like you are missing some 1099-R forms if you only have 3 showing the first conversion and 3 showing the recharacterization. The transfer of the traditional to the new company will generate no tax reporting. However, the conversion from the transferred traditional to the new Roth should generate another 1099-R. Is it possible that the transfer occurred so late in the year that they were not able to actually accomplish the "reconversion" in 1998? I would call them to verify they understood all of your instructions to them and that they were able to accomplish it in a timely manner.

I think part of the answer depends upon the document you are using. You could use a prototype SEP which would allow for discretionary employer contributions as well as Salary Reduction. Or you could use both a 5305 SEP and the 5305A SEP in order to have employer contributions. But, if you're just using the 5305A, I guess the answer is top-heavy only.

There sure seems to be an awful lot of confusion out there about Roth IRA conversions/ Transfers. We, the custodian of a Roth IRA, sent a conversion request on behalf of one of our investors to the trustee of her traditional IRA requesting that they transfer it to us as a Roth Conversion. The form she signed clearly indicated her intention to convert the traditional to a Roth and our letter clearly indicated we would accept the transfer into a Roth IRA. However, the transferring trustee is now telling her that they will not issue a 1099-R because they are treating it as a trustee-to-trustee transfer between traditional IRAs, a transaction which is not reported to the IRS at all. They are telling her we should have transferred the money into a traditional IRA and then done the conversion for her to a Roth from there. This seems a pointless waste of time, energy and paperwork since our conversion form and acceptance letter were clear that she was requesting a distribution from her IRA with the intention of converting to the Roth (the hope being that the 1099R would show premature distribution with an known exception to the penalty). Has anyone else run into similar situations? Are there any logical explanations for this approach?

I suggest both an education IRA for the child and a Roth for the parents - the potential there is to sock away $4,500 a year, probably still not enough if your 9 year-old wants to go to private school - check out some of the calculators on the web- I did and I should be saving over $800 per month for my 9 year-old if I want him to go to private school and about the same for my 2 year-old - oh yea, right, like they don't want to eat now or wear clothes. Anyway, the $500 per year per child limit on the education IRA is a very small start. Problems with it relate to who controls the money when the child reaches 18 (or age of majority in your state), who decides to whom it gets rolled if the first child doesn't use it, etc.... The Roth gives us another avenue - we can take our own contributions out any time and our converted amounts after 5 years or for qualified education expenses for our children. If we have to tap into earnings, which I hope we won't, they'll only be subject to ordinary income tax. I'm also maxing out my 401(k) with an eye toward taking a loan from it if absolutely necessary. I sure wish my kids had some sort of athletic ability but no sign of that so far.

I question the use of the term "Custodial Account" since, although the Code provides for a responsible party on an Education IRA and provides for a parent or guardian or other to act as custodian on a UGMA/UTMA account, there is no provision in section 408 of the Code for anyone other than the beneficial owner to establish or control an IRA. Also, remember that a minor does not have the capacity to execute a contract and therefore can not be held to it. I know that some institutions allow minors with earned income to establish IRAs - however, I question the idea of someone who does not have capacity to enter into such an agreement being able to uphold there end of the deal. I would love to hear what others think on the subject.

I would be interested in knowing when you provided the necessary paperwork to the brokerage firm to convert the traditional IRA to a Roth. The brokerage firm does not always have a lot of control over how long it takes to move the underlying assets, Mutual Funds in particular. Many Mutual Funds put drop-dead dates of December 15, 1998 to convert assets from a traditional to a Roth in order to ensure they could get the transactions completed in a timely fashion. We told people we would do the very best we could right up to the very last minute but if they waited until the last minute, we warned them it might not happen, especially if we had to get the paperwork together to get it to another firm that was just as backed up as we were.

I think the confusion is due to the fact that there are two different types of 5-year clocks. The first dollars you put into a Roth, whether it is a contribution or a conversion, starts the clock ticking for the 5-year period required as one part of the "Qualified Distribution Rules" for tax-free withdrawal of earnings. What I mean by that is you have had a Roth for at least 5 tax years and you are either over 59 1/2, disabled, first time home purchase (limited to $10,000) or your beneficiary is taking the money due to your death. The second 5-year clock applies to closure of the "loophole" which previously existed. If I convert my IRA, I am taxed on it but not penalized. Prior to the most recent changes, I could then take my money out of the Roth penalty free, even if I wasn't over 59 1/2, etc... The loophole was closed by requiring each conversion to remain in the Roth for at least 5 years before I withdraw it without penalty, if I would otherwise be subject to penalties for a withdrawal from my traditional IRA. This second clock applies to each conversion separately where as the first clock I mentioned starts once and runs out in 5 years - end of story.