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Ed Slott's Free IRA Update

March 2009

Volume 2, Number 3

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In This Issue

• Focus on – Tax Season: Establish a SEP for 2008

• Question of the Month

• News, Rulings and Other Updates

• Retirement Planning Tip

• Ed Slott’s IRA Advisor – March Issue




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March Focus: Establish a SEP IRA for 2008


For small business owners who missed the December 31 deadline to establish an Individual/Solo-k or other qualified plan, a Simplified Employee Pension (SEP) IRA plan provides another option for funding a retirement plan for 2008. SEP IRAs can be established and funded by the tax filing deadline - including extensions – of the business. For instance a sole proprietor would have until April 15, 2009 to establish and fund his SEP IRA for 2008. If he applies for an extension to file his tax return, the extension would also apply to establishing and funding his SEP IRA.


Establishing the SEP

A SEP IRA is one of the easiest employer-sponsored retirement plans to establish. In most cases, it is as simple as completing the IRS Model Form 5305-SEP agreement. Most financial institutions use this same form, but brand it by adding their logo. Business owners who want to include some of the more complex features like social security integration, and/or want to maintain the plan on a fiscal year would need to use a prototype or individually-designed SEP agreement.


Individual employees who do not already have traditional IRAs are required to complete a traditional IRA adoption agreement to establish the IRAs to which their SEP contributions would be made. Some financial institutions also require a copy of the employer’s SEP agreement.


Including Employees


The SEP IRA must cover all employees who meet the following requirements:

  • Employees who worked for the employer for at least three of the five preceding years
  • Employees who earned at least $500 for the year (for 2008)
  • Employees are who at least age 21
  • Employees who are not part of a collective bargaining agreement (union employees whose retirement benefits were determined under a collective bargaining agreement)
  • Employees who are nonresident aliens with US income from the employer


For employees who meet these requirements, the business owner is required to make SEP contributions to their IRAs. An employer can implement less restrictive requirements for eligibility. For instance, the age requirement can be less than 21, and/or the service requirement can be less than three years.


SEP Contributions

A small business owner can shelter up to $46,000 in a SEP IRA for 2008. Contributions are usually limited to the lesser of 25% of an employee’s compensation or $46,000. If the business is unincorporated, the percentage amount is limited to 20% of modified net profit for sole proprietors. The contributions are taken as a deduction on the business’ tax return.


Benefits of a SEP

A SEP IRA has some distinct advantages over qualified plans. These include:

  • They are easy to administer - no non-discrimination or top-heavy testing
  • Easy to communicate to employees
  • Low maintenance cost
  • Discretionary contributions




Whether as a last minute effort to fund a retirement plan for 2008 or to maintain the plan on an ongoing basis, a SEP IRA can allow the business owner to fund his retirement nest egg and get a tax deduction for contributions made to the plan. If it is later determined that a SEP is not the best plan for the business, it can be easily terminated and replaced by a more suitable retirement plan.


Explanations of the rules that govern IRAs are usually provided in Ed Slott’s IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of the content of the newsletter, you can preview past issues before subscribing.


Set yourself apart from the competition, and bring in millions in new IRA rollover business by subscribing to Ed Slott's IRA Advisor Newsletter and attending Ed Slott's IRA Workshops. Click here to see a schedule of upcoming workshops.

Question of the Month

Question: I would like to convert my traditional IRA to my Roth IRA this year, and from what I understand of the rules, I must take my required minimum distribution before the conversion is done. How is this rule affected by the RMD waiver for 2009?


Answer: Under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), required minimum distributions (RMDs) from defined contribution plans and IRAs are waived for 2009. Since your IRA is not subject to RMDs for 2009, you can convert the entire balance to your Roth IRA. An exception applies if you reached age 70 ½ in 2008 and deferred your 2008 RMD until 2009. Under this exception, the 2008 RMD amount must be withdrawn from your traditional IRA by April 1, 2009 and the distribution must occur bef ore the RMD conversion.


News, Rulings and Other Updates

• T.C. 2009-21: Machlay v. Commissioner: Taxpayer liable for 10% early distribution penalty - not disabled:

The taxpayer worked for the plan sponsor from 1980 to 1993, when she was fired. She was diagnosed with a medical problem for which she began to receive treatment. The plan sponsor reinstated her position, but did not include back-pay. Her medical condition worsened because she did not seek the constant care and supervision required for her illness. This resulted in her being frequently absent from work. She resigned in August 2005, because she feared she would be fired for the high volume of absences.


In 2005, she withdrew a lump-sum amount of $85,557 from her pension plan and included the amount in income.


The IRS determined that she owed the 10% early distribution penalty on the withdrawal. The Tax Court determined that she did not qualify for the disability exception under 72(t) and agreed with the IRS. As a result, she was required to pay the 10% penalty of $8,555.70.


• PLR 200905040: Spouse Allowed to Rollover Distribution From Husband’s Qualified Plan Account:

The participant named his trust as the beneficiary of his qualified plan account. His wife was the sole beneficiary and trustee of the trust. The IRS ruled that the participant’s account balance –which should have been distributed to the trust - was eligible to be rolled over to her IRA within 60 days.


Sidenote: The trust was terminated one day before the distribution occurred. The plan distributed the assets to the estate. The IRS stated that the amount should have been paid to the trust, and not the estate. Notwithstanding, the rollover was still permitted as the spouse had sole discretion over the disposition of the trust.



March’s Retirement Planning Tip:  No Compensation and Married? You May Still be Able to Fund an IRA

Generally, an individual must have taxable wages or income from self-employment in order to make a contribution to an IRA. But, an exception applies to a spouse with little to no income. Under this exception, the non-working spouse can rely on the working spouse’s income to fund his IRA providing the couple files a joint tax return and the aggregate contribution for both spouses does not exceed the taxable income of the couple for the year


So, if you are a married individual who does not have income from a job, but you are married to someone who does, you can fund your IRA providing you file a joint tax return with your spouse.



Highlights from Ed Slott’s IRA Advisor Newsletter - March 2009 Issue


The March 2009 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:


Supreme Court Rules in Favor of Ex-Spouse

In a court battle that has been ongoing since 2001, Kari Kennedy lost a $402,000 inheritance because the beneficiary form did not name her as the beneficiary, even though that is what her father wanted. The United States Supreme Court UNANIMOUSLY ruled that the ex-spouse receives the retirement plan money because she was named on the beneficiary form - even though she waived her rights to that money in a divorce decree.
Get the details in this issue... and check beneficiary forms NOW!
In this issue: 2009 Retirement Plan Contribution Limits Chart
Also in this issue...

  • All your questions are answered on the new law suspending 2009 RMDs. Chances are that you have been receiving these same questions from your clients, so now you have the answers.
  • Layoffs mean rollovers... and greater potential for costly rollover mistakes. See how to avoid these rollover mistakes during these critical times.


Feature Article
Supreme Court Rules in Favor of Ex-Spouse

  • Facts of the Case
  • The Court Proceedings
  • The Supreme Court Decision
  • What to do Now

2009 RMD Suspension Q & A

IRS Memo on RMD Compliance

  • Employee Plans Compliance Unit Looks at IRA Minimum Distribution Compliance



2009 Retirement Plan Contribution Limits

Guest IRA Expert
Leo K. Casper, CPA/PFS
Owner, Leo K. Casper, CPA and Comprehensive Financial Planning Services, LLC
Moorestown, New Jersey

401(k) Rollover Mistakes - How a Bad Situation Becomes Worse

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