Ask the Experts – October 6, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.

Question: I have a 50 year old client who recently did an in-service conversion of her 403b account to a designated Roth account. She now wants to take a hardship distribution from her designated Roth account. Does she have to worry about the 10% penalty tax on the distribution of converted amounts?

Answer: Yes.

Just as with regular Roth IRA conversions, there is a special tax rule about withdrawing converted amounts within five years of the conversion. Here is the applicable Q & A from Notice 2010-84.

Q-12. Are there any special rules relating to the application of the 10% additional tax under § 72(t) for distributions allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years?

A-12. Yes, pursuant to §§ 402A(c)(4)(D) and 408A(d)(3)(F), if an amount allocable to the taxable amount of an in-plan Roth rollover is distributed within the 5-taxable-year period beginning with the first day of the participant’s taxable year in which the rollover was made, the amount distributed is treated as includible in gross income for the purpose of applying § 72(t) to the distribution.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – April 7

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client contributed $6,500 to a Roth IRA last year, but it turns out he earned too much to contribute anything. He has already withdrawn the contribution and its earnings, but is he subject to the 10% early distribution penalty on the earnings?

Answer: We think so.

Neither Congress nor the IRS has addressed the precise issue of whether earnings from excess contributions are subject to the 10% early distribution penalty. Since there’s no special rule, the general rule—that the 10% penalty applies to early distributions—should apply to any gain earned from the excess contribution.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – March 11

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: If my client earns $20,000 and makes the maximum contribution of $17,500 towards her designated Roth 401(k), can she also contribute $5,500 to her Roth IRA, or is she limited at $2,500?

Answer: The IRS hasn’t addressed this issue, but based on the language of the Internal Revenue Code, we think the answer is yes; she can contribute the full $5,500 to her Roth IRA.

Code Section 219(b) tells us that the contribution limit toward a Roth IRA in 2014 is the lesser of:

(A) $5,500 or

(B) “an amount equal to the compensation includible in the individual’s gross income” in 2014 (emphasis added).

Elective deferrals to a traditional employer-sponsored plan of up to $17,500 are not includible in an employee’s gross income on the year. For example, if your client made a $17,500 elective deferral to a traditional 401(k) account, her IRA contribution limit would be reduced to $2,500—the amount of compensation includible in her gross income.

However, elective deferrals contributed to a designated Roth account are includible in gross income, and therefore shouldn’t reduce the limit imposed under Section 219(b). In other words, 100 percent of her compensation, $20,000, is includible in her gross income, and so the $5,500 limit applies (i.e. the lesser of the $5,500 limit and her $20,000 compensation that is includible in gross income).

It might seem like an odd result since your client is contributing more money ($23,000) to her retirement plans than she earns, but based on the statutory language, this should be allowed.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – March 4

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.

Question: Even though 2013 has ended and my client has already filed his income tax return for 2013, can he still make a contribution to a Roth IRA for 2013?

Answer: Yes, he can generally make contributions until April 15.

According to the IRS in Publication 590:

You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).

Therefore, most taxpayers can make a contribution for 2013 by April 15, 2014.

If a contribution is made between January 1 and April 15, the taxpayer should tell the sponsor for which year the contribution is made (i.e. the current year or the previous year). If the taxpayer does not specify which year, the sponsor can assume, and report to the IRS, that the contribution is for the current year.

Contributions to Roth IRAs are not reported on an individual’s tax return, so there should be no need for your client to amend his return.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – January 17

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.

Question: My client participates in a Roth 401(k). Can his employer match his designated Roth contributions?

Answer: Yes, but the matching contributions would not be deposited into the designated Roth account. The employer’s matching contribution must be made into a pre-tax account, as if the employer was matching contributions on traditional, pre-tax contributions. The employer must establish a separate account and keep the designated Roth contributions completely separate from its matching pre-tax contribution.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.