Advanced Underwriting Consultants

Question of the Day – April 11

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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 73 year old client participated in a designated Roth account as part of her former employer’s 401K plan.  She left a substantial balance in the account when she retired earlier this year.  Is she required to take required minimum distributions (RMDs)?

Answer:  Yes.

The RMD rules that apply to regular 401K account balances also apply to designated Roth accounts.  If the client was not an owner of the company sponsoring the plan and retired from the plan-sponsoring employer this year, she must take an RMD from the account based on the December 31, 2012 designated Roth account balance.

The first RMD must be taken on or before April 1, 2014.

The client can avoid having to take post-2013 RMDs during her lifetime by rolling over the designated Roth account to a Roth IRA.  Roth IRAs have no RMD requirements while the taxpayer is still alive.

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. 

Question of the Day – April 2

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

Question:  I have a self-employed doctor client who is sponsoring a 401(k) plan for his business.  He has two other employees who are contributing to the safe harbor plan.  The doctor made $200,000 of self-employment income in 2012, and contributed $17,000 in deferrals to the 401(k) plan in that year.  How much should his matching contribution be?

Answer:  In this case, the safe harbor method would allow the employer to contribute an adjusted five percent of the doctor’s net earnings from self-employment to the doctor’s 401(k) account.

The 401(k) plan matching contribution for a self-employed person is equal to an adjusted plan contribution percentage times the individual’s net earnings from self-employment.  This formula consists of two elements:

(1) an adjusted plan contribution percentage, and

(2) net earnings from self-employment.

First, the self-employed person must determine the adjusted plan contribution percentage.  In this example the unadjusted plan contribution percentage used for W-2 employees is 5%, so the self-employed owner would use an adjusted percentage of 4.76%.  See the table below:

Rate Table for Self-Employed

Plan contribution rate as %

Self-Employed Rate as Decimal

1

.009901

2

.019608

3

.029126

4

.038462

5

.047619

6

.056604

7

.065421

8

.074074

9

.082569

10

.090909

11

.099099

12

.107143

13

.115044

14

.122807

15

.130435

16

.137931

17

.145299

18

.152542

19

.159664

20

.166667

21

.173554

22

.180328

23

.186992

24

.193548

25

.200000

Second, net earnings from self-employment are determined.  The first step in calculating net earnings is to determine net profit from self-employment.  That number may be found on

  • Line 31, Schedule C (Form 1040),
  • Line 3, Schedule C-EZ (Form 1040),
  • Line 36, Schedule F (Form 1040), or
  • Box 14 , Code A, Schedule K-1 (Form 1065).

Take net profit from self-employment and subtract the deduction for self-employment tax, taken from Line 27 on Form 1040.  The resulting number is net earnings from self-employment.  In this example, assuming the doctor’s self-employment tax for 2012 was $17,240, the net earnings from self-employment would be $200,000 minus $17,240, or $182,760.

Multiply net earnings from self-employment by the proper factor from the table to determine the pension contribution for the self-employed client.  In this case that would be $182,760 times 4.76 percent, or a contribution of $8,699.

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. 

Question of the Day – September 5

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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 has an existing loan against her 401K account, and she recently terminated her employment.  If she takes a distribution of her 401K account balance, will the 20% mandatory withholding rule apply to the loan balance?

Answer:  Yes, unless she repays the loan prior to the distribution of the account.

Under Regulation Section 1.72(p)-1, a loan balance can give rise to two kinds of taxable distributions:

  1. A deemed distribution or
  2. A distribution of an offset amount.

A deemed distribution occurs when a plan loan fails to meet the requirements of the tax code to be a valid qualified plan loan.  Such deemed distributions are treated as taxable distributions from the plan, and are subject to ordinary income tax and the penalty tax if the participant is younger than 59 ½.  A deemed distribution is not eligible for rollover.

Since only rollover distributions are subject to 20% mandatory withholding, a deemed distributions is not subject to mandatory withholding.

A distribution of an offset amount is also taxable and subject to the penalty tax.  The most usual type of distribution of an offset amount is a loan balance that remains unsatisfied after a participant separates from service.  The unpaid loan balance is eligible for rollover if the participant replaces the funds within an IRA or other qualified plan within 60 days of the time of the offset.

Since the offset amount is eligible for rollover, it is subject to 20% mandatory withholding.

If there are insufficient funds in the 401K account to cover the mandatory withholding associated with the cash balance plus the offset amount, the regulations provide that only the available cash will be used for mandatory withholding.

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. 

Question of the Day – January 17

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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 a 401(k) plan participant retires in the year she turns 55—even if she is actually 54 on the day of retirement—does she qualifies for the age 55 exception to the 10% penalty tax on distributions from that 403b plan?

Answer: Yes.

The IRS has interpreted the age 55 separation requirement to be satisfied if the participant separates from service during the calendar year in which he reaches age 55, even if the actual separation date is before her 55th birthday.  See IRS Notice 87-13, A-20, which says:

A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.

Thus, the taxpayer qualifies for the exception to the penalty tax.

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.