IRA/CESA/HSA Q&As

Most Recent Q&As:

Question:  My client’s date of birth was November 5, 1937. Can he make a traditional IRA contribution for 2007?

Answer:  An individual can make regular contributions to a traditional IRA for any year he/she is younger than age 70½ for the entire year. An individual who reaches age 70 on November 5, 2007 is eligible to make a traditional IRA contribution for tax-year 2007 since he/she does not reach age 70½ until 2008. However, he/she cannot make a traditional IRA contribution for 2008. However, a Roth IRA may be a possibility since they have no age limit, only an income limit. (posted 9/12/07)

Question:  Did I hear this right? Can an IRA owner make a nondeductible traditional IRA contribution for each tax year through 2009 and convert to a Roth IRA in 2010 and pay taxes only on the earnings?

Answer:  Previously nondeductible contributions are nontaxable upon conversion to a Roth IRA. Only the earnings on such contributions are taxable. This may make nondeductible traditional IRA contributions more attractive to both those individuals who currently make more than the $100,000 modified adjusted gross income (MAGI) limit on conversions, and to those whose MAGI exceeds the limits for making Roth IRA contributions.

However, when determining the taxable amount of a conversion, an individual must take all of his/her traditional IRAs into account, including any previously deductible contributions and any contributions made prior to the law change the eliminates the MAGI limit for conversions starting in 2010. An IRA owner should seek the guidance of his/her tax professional regarding these rules. (posted 9/5/07)

Question:  One of our IRA owners opened a Roth IRA at another financial organization more than five years ago. He recently transferred his Roth IRA to our financial organization. He is over age 59½ and wants to know if he is eligible to take distributions without tax or penalty. How should we report his distributions on IRS Form 1099-R?

Answer:  Roth IRA owner is always able to take distributions of regular contributions without income or penalty tax. Your IRA owner is at least age 59½ and established a Roth IRA more than five years ago, which satisfies the requirements for income and penalty tax free distributions of Roth IRA earnings. Since he is at least age 59½, either Code Q or Code T will appear on Form 1099-R. Code Q means that you know that his five-year holding period has expired; Code T means that you do not know whether his five-year holding period has expired. In either case, you know that he is at least age 59½. Your IRA owner will address taxation of a Roth IRA distribution on line 15 of his IRS Form 1040 income tax return. (posted 8/29/07)

Question:  Does there need to be a Qualified Domestic Relations Order (QDRO) to divide an IRA due to a divorce? Or, is a QDRO only necessary with regard to defined benefit and defined contribution plans?

Answer:  A QDRO is not required for division of an IRA. In the event of a divorce, a court will accept a Domestic Relations Order which dictates the division of assets. This legal document can be used to initiate a transfer of IRA assets to a former spouse due to divorce.
Qualified plans, such as a 401(k), require the use of a Qualified Domestic Relations Order (QDRO) to divide the qualified plan assets due to a divorce.

A financial organization should seek advice from its compliance officer and legal counsel to determine its policy regarding documentation when an individual initiates an IRA transfer due to divorce. (posted 8/22/07)

Question:  Must all beneficiaries base their required distribution calculations on the life expectancy of the original nonspouse beneficiary rather than the life expectancy of any successor beneficiary?

Answer:  Assuming that separate accounting applies, each nonspouse beneficiary uses his/her own single life expectancy to calculate distributions from his/her share of the decedent’s IRA.

The life expectancy of a successor beneficiary can only be used to calculate death distributions if:

• The spouse was the original beneficiary
• The spouse did not treat the IRA as his/her own
• The IRA owner died before his/her required beginning date
• The original spouse beneficiary dies after September 30 of the year following the year of death but before he/she was required to take distributions from the decedent’s IRA
• The successor beneficiary is an individual rather than an entity

In that case, a successor beneficiary has the choice of calculating distributions over his/her own single life expectancy, reduction method, or the five-year rule. Life expectancy distributions must begin the end of the year following the original beneficiary’s death.

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