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Michael Devault

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Everything posted by Michael Devault

  1. According to my calculations, the elective deferral limit should increase to $19,000 in 2019. The "age 50" catch-up will remain at $6,000. And, the 415 limit should increase from $55,000 to $56,000. The IRS should publish an official list of COLA adjustments in a few days.
  2. I'm sorry for not responding sooner, MoeMoney. I've been away from the office for several days. I used the example in an attempt to simplify the discussion. In doing so, the over-simplification might be a bit misleading. I've seen loans work "mechanically" in a couple of ways. In one, the account balance does, indeed, continue to be credited with earnings. However, the portion used to collateralize the loan is charged with interest at a rate that's a bit higher than the rate being credited to the account. Thus, while the account balance increases, the loan increases at a greater rate. Upon default, the account continues to be credited with earnings, but the loan also increases with interest until an offset can be made. It's easy to see that at some point, the entire balance may be "upside-down," where the loan plus accrued interest is more than the account value. This method is typically used on accounts that credit a fixed rate of interest. In the other method, the amount issued as a loan is actually taken from the account value. Since the money is no longer in the account, it of course is no longer subject to gains/losses. The loan is charged a rate of interest, such as prime plus 1%, and when loan repayments are made, the principal element is returned to the account value while the interest element is paid to the entity administering the loan. If the loan is defaulted, it continues to grow at the specified interest rate until an offset distribution is available. Depending on the earnings of the account, this, too, can cause the unfortunate situation where the loan exceeds the account value. In either case, the loan causes a reduction of the future value of the account below what it would have been had the loan not been made. This is one of the primary reasons not to take a loan from a 403(b) or any other type of retirement account. I hope this answers your question.
  3. Well, it's not quite that simple. It's a common misconception that a qualified plan loan constitutes the borrowing of the participant's money. The loan is actually made as a separate transaction using the account as collateral. The value of your account continues to fluctuate based on investment gains and losses. The loan, on the other hand, is separate and likely bears a fixed rate of interest. It's similar in some respects to a car loan. When you purchase a car, you sign a loan agreement stating that you'll repay the loan over Y years at % interest. You're obligated to repay the loan regardless of what happens to the value of the car. For example, if the car is "totaled" in a wreck and it's value reduces to nothing, you still have to repay the loan. In the same respect, your 403(b) loan is an agreement to repay the lender interest at the specified interest rate. While you're using your account as collateral for the loan, you're not actually borrowing "your" money, so you're not paying interest to yourself. Rather, you're borrowing money from the plan and the plan is the entity earning the interest. Like I said earlier, your plan administrator should be able to tell you how much it will take to settle the loan. Depending on the investment results of your account, the loan repayment could exceed the account value. HTH.
  4. Under the IRS Regulations, when a 403(b) loan is not repaid, it creates a taxable event. In this instance, it caused what is known as a deemed distribution, which generated the Form 1099-R that you received. However, because you had not yet attained age 59½, an actual distribution of cash to offset the loan could not be made due to the fact that a qualifying event (death, disability, etc.) for a distribution had not occurred. Thus, while you received a 1099, the loan actually remained on your account and continued to accrue interest. Further, it will continue to do so until a qualifying event occurs, at which time a portion of the account balance will be used to actually repay the loan. I suggest that you contact the plan administrator for details. Since you mentioned that you're out of work, your separation from service is most likely considered a qualifying event that will permit an offset so the loan can be repaid and stop the accrual of additional interest. I hope this helps. Best of luck to you!!
  5. If you plan to use the fixed amortization method, it would probably be best to use the account value as of the date those distributions begin, March 1 in your example. The reason is because the results of that method yields a static amount that must be taken each and every year during the amortization period, so you'll likely want to figure that amount such that it will fully amortize the account. While the Rev. Rul. states that the amortization method provides the annual amount to be distributed, I can't image the IRS objecting to taking that amount out quarterly, just as long as it's done consistently.
  6. The rules are found it Rev. Rul. 2002-62. Specifically the provision defining account balance is reproduced, below. The ruling provides an example that uses the balance as of December 31 of the prior year, but it also states that it must be determined "in a reasonable manner based on the facts and circumstances." If the IRA didn't exist on the prior December 31, it would seem reasonable to use the balance at the time distributions begin, especially if you use either the fixed amortization or fixed annuitization method of determining the payment amount. If you use the required minimum distribution method, it would seem reasonable to use the current balance to determine the first year's distribution amount and the prior December 31 balance for subsequent years. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002 to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on the December 31 of the prior year or on a date within a reasonable period before that year’s distribution.
  7. While you didn't mention your age, I'll first mention that section(72)(t) does two things: First, it establishes the 10% penalty for distributions prior to age 59½. Second, it provides for a number of exceptions to that penalty. Thus, if you have already attained age 59½, the section is not applicable. Also, as krow36 mentions, if you separate from service after you attain age 55, the 10% penalty does not apply to distributions taken from a 403(b). This exception does not apply, however, to distributions from IRAs even if the IRA was created by a rollover from a 403(b). Now back to your question. When you begin taking distributions under the "substantially equal periodic payments" provision, the account balance used to calculate the distribution amount is the balance of the IRA at the time the distributions begin. Also, keep in mind two other things: The IRS provides three specific methods that you are permitted to use in calculating the amount of distribution. Be sure to use one of those methods. Once the distributions begin, you must continue until the later of 5 years or attainment of age 59½ and may not change the amount of the distribution. Discontinuation or changing the amount will result in all of the "forgiven" penalties to be recovered. Hope this helps.
  8. Revenue Ruling 90-24 was one of many rulings made obsolete by Revenue Ruling 2009-18, which was issued in June, 2009. Hope this helps.
  9. Hi, Steve. On the contrary, I haven't retired. Still working 40+ per week, just not as active in the 403(b) area as I once was. I still check the board periodically and, if there's a question I feel qualified to answer, I do so. I think you misunderstood my response. There should be no change to the elective deferral limit unless the September CPI for September reached an unprecedented level. Similarly, there will be no increase to social security benefits. However, I understand that Medicare Part B premiums for upper income taxpayers will increase, even thought the base premium will not. Another fine example of our tax dollars working hard for us.
  10. I've done some calculations on this. The contribution limit is indexed to the CPI for the months of July, August and September. For July and August, the index was 238.654 and 238.316. respectively. In order for the limit to increase, the index for September will have to rise to 251.440, a level never reached. My guess: No change.
  11. In a round about way, it does. Rev. Proc. 2007-71 provides model language for written plan documents that is required by the final 403(b) regulations. The model language in the revenue procedure was written to conform with the new regulations. The regulations were effective July 26, 2007 and generally became applicable for plan years beginning after December 31, 2008. It was the regulations that supercede Rev. Rul. 90-24 (and a host of other guidance that the IRS had provided in prior years!). Hope this helps. By the way, I seem to recall that the revenue procedure was written by Bob Architect. If my recollection is correct, be aware that Bob left the IRS for a more lucrative position elsewhere.
  12. The September CPI was just announced this morning. According to my calculations, which are based on my understanding of the rules for indexing, the deferral limit for 2013 will increase to $17,500. The catch-up will remain at $5,500. However, please keep in mind that these are not official numbers. The IRS should publish the official limits, as well as other related limits, in a few days.
  13. Texas has no inheritance tax in cases where the date of death is January 1, 2005 or later. We have no state estate tax, either. Hope this helps.
  14. The inflation adjustments are based on the Consumer Price Index in July, August and September of the year prior to the year to be adjusted. Thus, the adjustments for 2013 will be based on the CPI for July, August and September of 2012. The numbers for July and August have already been announced, but September's numbers won't be announced until mid-October. However, if September's index doesn't change from the August index, it should cause the elective deferral limit to increase to $17,500 for 2013. Please keep in mind that the above is based on my interpretation and calculations. We will have to wait on the annoucement from the IRS for the official word.
  15. The Employee Benefits Security Administration (a division of the Department of Labor) has established some guidance on this topic. Basically, ERISA plans have to take reasonable means to locate missing participants. There is a "safe harbor" list of things that you can do to be deemed to have taken those reasonable steps to locate the participant. If and when those steps fail, payment can be made to the unclaimed property fund in the state of the particant's last known address. You might check the EBSA website (here's a link) and conduct a search on "missing participants" to see if there is anything that's helpful. I also urge you to contact your plan's legal counsel to make sure that you do all that is required.
  16. As I pointed out, the only thing that would prevent the person from making withdrawals is plan language to the contrary. While it is highly doubtful that the plan language chosen regarding in-service withdrawals would be more restrictive than the law allows, there is a possibility that it is. So, as Joel suggests, it would be a good idea to find out for sure what the plan says. There's bound to be someone in the employer's administrative office who can provide an answer.
  17. Joel is correct that required distributions are not required until after severance of employment. If a person works past age 70½, the year in which they sever employment becomes the first distribution year. However, if an employee has an account balance as of December 31, 1986, that balance is required to be distributed at age 75, even if still employed. But this is not relevant in this example, since the original post indicated that we are to assume no pre-1987 contributions.
  18. I believe the answer can be found in Treasury Regulation section 1.403(b)-6(d)(1)(i). This section says: (d) Distribution of section 403(b) elective deferrals--(1) Limitation on distributions – (i) General rule. Except as provided in §1.403(b)-4(f) (relating to correction of excess deferrals) or §1.403(b)-10(a) (relating to plan termination), distributions of amounts attributable to section 403(b) elective deferrals may not be paid to a participant earlier than the earliest of the date on which the participant has a severance from employment, dies, has a hardship, becomes disabled (within the meaning of section 72(m)(7)), or attains age 59½. (ii) Special rule for pre-1989 section 403(b) elective deferrals. For special rules relating to amounts held as of the close of the taxable year beginning before January 1, 1989 (which does not apply to earnings thereon), see section 1123(e)(3) of the Tax Reform Act of 1986 (100 Stat. 2085, 2475) Public Law 99-514, and section 1011A©(11) of the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342, 3476) Public Law 100-647. (Note that I included subparagraph (ii) since you mentioned pre-1987 contributions.) The general rule says that distributions may not be made "earlier than the earliest" of the dates listed. Thus, it appears that you can make in-service distributions once you attain age 59½, regardless of employment status, absent any plan provisions to the contrary. Hope this helps.
  19. Most custodians will accept a copy of the court settlement documents as evidence that an account is to be divided. Hopefully, the court documents contain all of the informational items required of a QDRO. Of course, a cover letter explaining how it is to be carried out never hurts. You might check with the existing vendor to see if they would be willing to split the existing account into two, each maintaining the original date of issue. For example if they have account number 123, they may be willing to split it into two accounts with account number 123-A remaining as the 403(b) and account number 123-B as the IRA for the alternate payee. That way, each of the two accounts would have the appropriate account value with surrender fees remaining intact on each. Then, if the alternate payee wishes to move that account, he/she would pay the surrender fees only on that amount. The 403(b) account would not be effected by the surrender fees. Hope this is of some benefit.
  20. We maintain a 401(k) plan for about 15 employees in Texas. Our accountant charges us $350 for completing the Form 5500 for our plan. Hope this helps.
  21. Subject to the provisions of the 457(b) plan, direct rollovers from a designated Roth account to an individual Roth IRA are permitted. You should consult the plan administrator to determine the conditions under which you may make a rollover. If a rollover is permitted, the 5 year period used to measure qualified distributions will begin in the year during which you made the first contribution to the designated Roth account. See Treasury Regulation 1.402A-1, A-4(b). Hope this helps.
  22. anitje, You are correct: Distributions from non-governmental plans are, indeed, reported on Form W-2, not Form 1099-R. I failed to recongnize that you were covered by a non-governmental plan, even though you stated so in your initial post. I apologize for the oversight.
  23. The general limit on the amount of an IRA contribution is the smaller of $5,000 ($6,000 if age 50 or older) or taxable compensation. Taxable compensation includes wages, salaries, commissions, self-employment income, and other items. It does NOT include items such as pension or annuity income or deferred compensation. Since payments from a 457 plan are in the excluded group, it would be my opinion that you could not legally contribute to an IRA, based on the distribtion from your 457 plan. As a matter for your information, your former employer erred in reporting the 457 distribution on Form W-2. The instructions for Form 1099-R clearly state that distributions from a 457 plan are to be reported on that form and not on Form W-2.
  24. Part of the requirements of a 403(b) plan is that benefits are neither forfeitable or transferable. The non-transferability requirements prevent assignment of 403(b) benefits. This provision is in the Code as a protection of retirement assets, ensuring that those benefits are used for the intended purpose of generating an income at retirement. Some 403(b) plans have loan provisions, under which you can borrow funds from your 403(b) account. If your plan allows them, the law generally allows you to borrow one-half of your account balance, with a maximum loan of $50,000. Amounts borrowed must be repaid, with interest, over a 5 year period (unless used to purchase a primary residence).
  25. According to IRC section 219(g)(5), participation in a 457 plan is not taken into consideration when determining whether you are an "active participant." This section is reproduced below (with emphasis added): (5) Active participant For purposes of this subsection, the term ''active participant'' means, with respect to any plan year, an individual- (A) who is an active participant in - (i) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), (ii) an annuity plan described in section 403(a), (iii) a plan established for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing, (iv) an annuity contract described in section 403(b), (v) a simplified employee pension (within the meaning of section 408(k)), or (vi) any simple retirement account (within the meaning of section 408(p)), or (B) who makes deductible contributions to a trust described in section 501©(18). The determination of whether an individual is an active participant shall be made without regard to whether or not such individual's rights under a plan, trust, or contract are nonforfeitable. An eligible deferred compensation plan (within the meaning of section 457(b)) shall not be treated as a plan described in subparagraph (A)(iii).
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