Advanced Underwriting Consultants

Question of the Day – July 22

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

Question:  My client is a retired minister.  He has a 403(b) account that we are considering rolling over to an IRA.  Is there any compelling tax reason to leave the money in a 403(b) account?

Answer:  There might be.

Unlike with IRA distributions, a retired minister can use distributions from his 403b plan tax-free as part of a housing allowance.  There are certain requirements for the minister to be eligible for such tax-free distributions.  For a full explanation, see this article:

http://ministrycpa.blogspot.com/2012/10/403b-retirement-distributed-as-housing.html

That would be a potential advantage to him to leaving the money in a 403(b) plan instead of rolling it over to an IRA.

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 10

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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:  Can my client satisfy her IRA minimum distribution requirements by taking extra distributions from her 403b account?

Answer:  No.

Here’s an excerpt from IRS Publication 560:

Required Distributions

A qualified plan must provide that each participant will either:

  • Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or
  • Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant’s entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period).

These distribution rules apply individually to each qualified plan. You cannot satisfy the requirement for one plan by taking a distribution from another. The plan must provide that these rules override any inconsistent distribution options previously offered.

Here’s a link to a handy IRS chart on RMDs.  Mid-way down the chart the point is made that 403b plan RMDs may be taken from other 403b plans, but not from IRAs.

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 – March 5

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

Question:  My client just realized that she contributed too much to her 403b plan in 2012.  What should she do?

Answer:  The IRS website has information about correcting an excess contribution to a 403b tax sheltered annuity:

Correction of excess deferrals during year.   If you have excess deferrals for a year, a corrective distribution may be made only if both of the following conditions are satisfied.

  • You or your employer designate the distribution as an excess deferral to the extent you have excess deferrals for the year.
  • The correcting distribution is made after the date on which the excess deferral was made.

Correction of excess deferrals after the year.   If you have excess deferrals for a year, you may receive a corrective distribution of the excess deferral no later than April 15 of the following year. The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made.

Tax treatment of excess deferrals not attributable to Roth contributions.   If the excess deferral is distributed by April 15, it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed.

Tax treatment of excess deferrals attributable to Roth contributions.   For these rules, see Regulations section 1.402(g)-1(e).

Therefore, if the client has the employer (or plan custodian) to distribute the excess deferral (and earnings) prior to April 15, it will cure the excess contribution.  The excess contribution would be included in income for 2012, and the earnings withdrawn will be included in income in 2013.

 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 – October 15

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Here’s the question of the day.

Question:  What’s the deadline to make a contribution of unpaid sick pay into a 403 b plan after retirement?

Answer:  Two and one half months after severance OR the end of the tax year, whichever is longer.

Here’s an excerpt from the IRS website:

Post-Severance Contributions: Plans may permit ….contributions to be made to 403(b) plans after an employee separates from service.

Elective deferrals: Employees may defer some (up to their annual deferral limits) of their regular, accrued vacation and sick pay into their 403(b) accounts if received by the later of 2 ½ months from the date of severance or the end of the limitation year (in most cases, calendar year) in which the severance occurred.

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 – May 25

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

Question: Will an employee’s deferral contributions to a 403b plan reduce her potential Social Security retirement income?

Answer: No.

While employee deferral contributions are not generally subject to income taxes, they are subject to Social Security taxes.  Employer contributions are not subject to Social Security taxes.

Since deferrals are subject to FICA taxes, they are part of the taxpayer’s Social Security wage base upon which retirement benefits are based.

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 – February 8

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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 is a teacher, age 57, who has retired from a school district.  She does some substitute teaching with the same district.  Will she be able to take distributions from her 403(b) without violating the in-service distribution rule?

Answer: Probably not, but it’s up to the plan administrator to decide.

Distributions from a 403(b) plan will be partly or completely restricted prior to the recipient’s age 59 ½ unless the participant dies, is disabled or has a severance from employment.  The question under the facts above is whether someone who has “retired” but continues to work part-time has severed from employment.  We are unaware of any IRS rulings on this specific question.

In the absence of clear direction, it will be up to the plan administrator to decide whether the severance condition has been met or not.

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 19

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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 government employee client who participates in a 457(b) plan, a 403(b) plan and a 401(a) plan at the same employer.  The client expects to retire later this year.  How do the deferral limits and overall contribution limits would apply to the plans?

Answer: The salary deferral limit for the 457(b) plan stands on its own—it is not reduced by elective or employer contributions to either of the other two plans.  For 2012, the basic maximum deferral limit for a 457 plan is $17,000.

If the client has under-contributed to the 457 plan in the past, she has the option to defer an extra $17,000 over the basic limit because she is within three years of retirement.  If that extra deferral limit is not available to her, she can defer an extra $5,000 over the basic $17,000 because she is age 50 or older.

The salary deferral limit for the 403(b) plan is $17,000 for 2012.  That limit is not affected by 401(a) contributions at all; as contributions to a 401(a) plan are considered employer contributions.

Contributions—employer and employee–to the 401(a) and 403(b) plans cannot exceed the $50,000 limit in 2012.  Each plan has its own $50,000 that does not have to be coordinated with the other.

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 12

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

Question: My client works for a government organization, and contributes to both a Section 457(b) plan and a 403(b) plan.  The client is highly compensated.  Does the client’s participation in the 457 plan affect his ability to maximize contributions to the 403b plan?

Answer: No.

Although 457(b) plans look identical to other salary deferral plans such as 401(k) or 403(b), they are in fact not a qualified plan at all; but are technically, non-qualified deferred compensation plans sponsored by a governmental unit or tax-exempt organization.

This being the case, salary deferral contributions to a 457(b) plan may safely be ignored when looking at multiple job limitations for qualified plans, and conversely, contributions to a qualified plan do not limit contributions to a 457(b) plan.  Thus, a client may make the maximum salary deferral to both a 457(b) plan and a 403(b) plan whether at the same employer or with different employers.  Likewise, employer contributions to a 457(b) plan do not count against the code Section 415 contribution limit of $49,000 per year.

However, if a client is employed by two or more employers, each of which have a 457(b) plan, the employee’s contributions to one 457(b) plan do count against contributions to other 457(b) plans.  The client is limited to one 457(b) plan maximum contribution no matter how many different 457(b) plans the employee might participate in.

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.