Kathy

I'd have to think about this one for a while first and you'd have to talk to your IRA trustee but - you might be able to "recharacterize" the 1998 $2,000 traditional IRA contribution as a Roth IRA contribution and treat the rest as a conversion - the benefit of the recharacterization, if it can be done at all, is that the earnings relating to the $2,000 contribution are also recharacterized - that is, treated as if they were earned by the Roth IRA rather than the traditional. Benefit of that is the earnings are not taxable to you as part of the conversion. It might be worth checking it out. Otherwise, if you treat the whole amount as a conversion, the $2,000 you contributed in 1998 for 1998 should be reported on a Form 8606 as nondeductible and then would create a basis in the IRA converted. You won't have to pay taxes on that $2,000 either way. Hope this helps.

The spouse has a multitude of options, depending on her situation. If he was in distribution status because he passed his required beginning date and she was the designated beneficiary of the IRA as of his required beginning date, even though he was taking distributions over his single life expectancy, he might have been taking more than the required minimum distribution because he could have been taking over their joint life expectancy. You should take a look at the IRA document and the bene designation as of his RBD. She could possibly elect to leave the IRA in his name with her as bene and continue payment over their joint LE, especially if he elected not to recalculate his LE. Or she could postpone distribution from his account until he would have reached age 70 1/2 if he had not yet. Or she could choose to treat it as her own IRA, with her own bene. If she does that and is under 59 1/2 she then limits her ability to withdraw because penalties could apply. If she's over 59 1/2 and less than 70 1/2, she could postpone distributions until she turns 70 1/2 if that is her goal. If she needs money now, she could begin distributions based on her joint LE with her designated bene. She has lots of choices, depending on whether she needs money now or not, her age, her health, etc....

I agree with everyone else here - if the son leaves the money in the IRA and draws it out over his life expectancy, with the first distribution occrring by the last day of the calendar year following the year of the father's death, he will be taxed only on what he withdraws and the rest will continue to grow on a tax-deferred basis. No penalties on distribution due to death. He can always take out more than the required minimum (calculated the same way you calculate for single over 70 1/2) in a particular year if he needs cash. But, if the goal is to save on the income tax, this seems a better way to go.

I would still be VERY CAREFUL!!! If the plan is self directed, will this invesment (the loan to the brother-in-law) be available to all participants? If the guy is a really good credit risk, the others may want to get in on it as well. Could it be discrimintory to make such a great investment opportunity available to an HCE only? If the accounts are not self directed then the loan would have to be a general asset of the trust or you might have an alienation problem. Furthermore, the IRS and the DOL have slightly different definitions of disqualified person so look very carefully at both. Sounds dangerous to me.

You do not need to report your regular Roth contributions on the Form 8606. The financial organization where you open your Roth will notify the IRS of your contribution by way of a Form 5498. However, it is still the IRA holder's responsibility to keep track of contributions and conversions so KEEP YOUR STATEMENTS AND PAPERWORK!!!!!

See "Can I take out my Roth IRA contribution, not earnings,without tax or penalty? If so, does it need to be after 5 years?" for a discussion of this topic.

Correct - earnings withdrawn after 5 years but before age 59 1/2 are subject to ordinary income tax and the 10% premature distribution penalty unless a known exception applies. So, remember, no matter how many Roth accounts you have and from which Roth account you withdraw your money, the first distributions from any Roth are treated as return of your contributions. They are tax and penalty free!!! Then, once you have withdrawn your contributions, you begin to hit your converted amounts, those which were subject to income tax when converted first and First converted first. So, if I converted $5,000 in 1998 and contributed $2,000 for 1998 and then converted another $5,000 in 1999, I can withdraw up to $2,000 tax free any time. The next money I withdraw will be treated as my 1998 conversion - if I withdraw it within 5 years of its conversion and it was taxable when converted, I will now be subject to a 10% premature distribution penalty unless I am now over 59 1/2, disabled, using it for qualified medical insurance premiums while on unemployement or meet one of the other exceptions under section 72(t). Then, if I withdraw more than $7,000 the next portion withdrawn is treated as my 1999 conversion and again, the 10% penalty applies to amounts which were taxed when converted unless I meet a known exception to the penalty. Finally, if I withdraw more than the $12,000 of my own previously taxed money, I will be hitting the earnings on which I will owe income tax and a 10% penalty unless I have had a Roth IRA account for over 5 years and I am over 59 1/2, dead or disabled. If I have not had the account for 5 years but meet one of the exceptions to the penalty, I will only owe orinary income tax on the earnings, not the penalty.

If an IRA investor wants to request a PLR from the IRS to get their blessing on substantially equal, periodic payments over their life expectancy from one of their many IRA accounts to avoid the 10% premature distribution additional tax, what is the user fee? Where do I find this information for 1999?

The Profit Sharing 401(k) Council of America has some info that might interest you. You can find it at: /http://www.psca.org/index.html

The general rule is that you may take your own contributions out of your Roth IRA at anytime with no tax or penalty. Remember, all of your Roth IRA accounts are treated as a single account, from you you first withdraw your own contributions, then you withdraw your converted assets, then finally you withdraw earnings. Since converted assets have already been taxed, you will never owe income tax on them again. However, if you withdraw them within 5 years of the conversion, you may be subject to a 10% penalty on them (unless you are over 59 1/2, disabled, or use them for certain types of expenses outlined in IRC section 72(t). Earnings withdrawn from the Roth account will be subject to income tax and possibly penalties unless you have had a Roth account for at least 5 tax years and you meet certain requirements. Best to see your tax advisor as the onus to keep this all streight is yours.

You should seek the advice of a tax advisor if you have any questions about this at all. MAGI is basically AGI from the 1040 front page, before you take your deductions. Furthermore, you must add back any otherwise deductible IRA contributions, certain other excludable items (foreign earned income exclusion is one)and Series EE bond interst from IRS Form 8815. The taxable amount of the conversion is not included in MAGI. Required Minimum Distributions are included in MAGI for the next couple of years anyway.

I think I have to disagree with LCARUSI - I believe you can only exclude employees with less than 500 hours who terminated during the year - if the employee is "part-time" and earned less than 500 hours in the year but is still employed on the last day, (and they are otherwise eligible under the terms of the plan but miss a contribution soley due to lack of 500 hours) they are counted as not benefitting under the plan and therefore hurt your 410(B) test.

I may be way off base here so please someone correct me if I'm wrong but I think you can get out of the penalty for being underwitheld if you had enough tax withheld this year to equal or exceed what you owed in taxes last year. I think the logic behind the provision is that people may have unusual and unplanned extra income occasionally and shouldn't be penalized for it. However, as I said - Tax class was many many moons ago so someone please confirm for me. Thanks!

Distributions from IRAs are different than you might think. Let's say you have a $10,000 IRA in which you have a $2,000 basis because of a nondeductible contribution one year which you reported on a Form 8606. If you withdraw $2,000 from your IRA, it is treated as if it is proportionately return of basis ($400) and distribution of taxable amount (previously untaxed earnings and deducted contributions) ($1,600). That is, 20% of the distribution you take will be treated as return of basis and therefore non-taxable. The rest will be subject to income tax.

Once the money has been contributed to the IRA by way of the SEP it is IRA money. Yes you may then turn around and convert it to a Roth IRA. However, the $10,000 contribution to the SEP IRA was either employer money which was never included in taxable income or a salary deferral. The main reason for salary deferral to SEP is exclusion from taxable income. What purpose would it serve to then turn around and include that $10,000 back in taxable income in the following year?

I hope you don't mind but I'm adding to my original question in order to get it back up to the top of the list - as the year end approaches I am getting this question more and more from our smaller clients who think that a SIMPLE IRA would work a lot better for them in the long run than the more expensive 401(k). Has anyone seen anything stating that a SIMPLE can be treated as a SEP for the purpose of determining whether or not there is a successor plan to a terminated 401(k)?? Thanks for your help!!

You are not alone in your question. See mine on the 401(k) message board. Maybe someone can provide us with some direction.

{duplicate message deleted - gsl} [This message has been edited by Gary Steven Lesser (edited 12-17-98).]

{duplicate message deleted - gsl} [This message has been edited by Gary Steven Lesser (edited 12-17-98).]

I have never heard of this either. I wonder if he simply misunderstood the ability to recalculate the life expectancy of one spouse and not recalculate the life expectancy of the other (might be useful if one spouse has reason to believe his or her life expectancy is shorter than the average). However, if you use the single LE for the spouse and joint for the other, you would really be taking larger distributions than absolutely required so I think it might be ok?????? The question is, what happens when one spouse passes away?

This is something which I should know but... maybe because the sun is shining or maybe I'm having a brain cramp, I need some direction. If a client terminates a 401(k) plan to establish a SIMPLE IRA plan, can the 401(k) assets be distributed? Cite please?

The new ordering and distribution rules for Roth IRAs have done away with the primary need for the two types of Roth contributions to be maintained separately. Furthermore, Announcement 98-106 made the use of the special letter code "K" optional - that is all distributions from a Roth IRA can be reported using "J" since it is now up to the individual to determine the tax consequences of a distribution. However, many organizations' systems have not been updated yet to allow the accounts to be commingled. In our situation, we are waiting until the regulations are finalized before we update our system to commingle the accounts. Changes can be costly and the IRS has been known to change its mind before!

I think the time frame you're looking for is actually under the jurisdiction of the Department of Labor. ERISA requires that monies withheld from the employees' pay be invested as soon as they can be separated from the general assets of the employer but no later than the 15th business day after the end of the month for which they were withheld. As a general rule, the employer match doesn't have to be made/invested until the after the end of the year.

You may also want to check out Universal Pensions Inc. (UPI)(800-346-3860) and Bankers Systems (800-552-9410). Both orgainizations offer many different types of retirement plan seminars accross the country. I've attended seminars put on by both in addition to those of Corbel. I think the choice depends upon the new employees ultimate job - Corbel is great if the employee will be preparing and submitting determination letter requests or responsible for applying some of the more complicated provisions of the plan documents. I think the other two are geared a little more toward the operational aspects of retirement plans. However, I found all to be worthwhile.