FAQ to the IRS regarding an IRA

These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.

The freely available Adobe Acrobat Reader software is required to view, print, and search the any publications and forms listed below. The below questions and answers are general IRA questions.

Specific questions regarding your type of IRA may also be found in sections for Traditional IRA , Roth IRA and SIMPLE IRA .

Q1. Can I contribute to a traditional IRA if I have other retirement plans?

A. Yes, you can contribute to a traditional IRA whether or not you are covered by another retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer-sponsored retirement plan. [Note that contributions to a Roth IRA are not deductible and income limits apply.] See Publication 590  for further information.

Q2. Can I deduct losses in my IRA accounts on my income tax return?

A. No, neither IRA losses nor IRA gains are taken into account on your tax return.

Q3. Can I contribute to an IRA if I have other retirement plans?

A. Yes, you can contribute to a traditional IRA whether or not you are covered by another retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer-sponsored retirement plan. [Note that contributions to a Roth IRA are not deductible and income limits apply.]  See Publication 590 for further information.

Q4. How can I convert my traditional IRA to a ROTH IRA?

A. You can convert amounts from a traditional IRA to a Roth IRA by:

Please consult your financial institution to determine if there are any other items that need to be considered when converting a traditional IRA to a Roth IRA. For example, there may be additional income tax consequences upon such a conversion.

Q5. How much do I have to take out of my IRA at age 70-1/2?

A. Required minimum distributions apply each year after you turn 70-1/2. The required minimum distribution for each year is calculated by dividing your IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.  You can determine your applicable distribution period or life expectancy by using the Tables in Appendix C of Publication 590.

Q6. I am receiving distributions of substantially equal payments from my IRA in order to satisfy the minimum distribution rules and, therefore, avoid the 10% additional tax under Code section 72(t). May I change my substantially equal payments because of the downtrend in the stock market?

A. Let’s explain a bit about the 10% additional tax under Code section 72(t) first. This Code section applies a 10% tax on distributions from an IRA unless the recipient meets one of several exceptions: such as being over age 59-1/2 or being a beneficiary after the death of the holder of the IRA.

An exception from the 10% additional tax for an IRA owner younger than age 59-1/2 occurs when the recipient receives their distributions as part of what is called "a series of substantially equal periodic payments". A series of substantially equal periodic payments are payments based on the life expectancy of the recipient (or expectancies if there is more than one recipient).

For example, assume Peter is age 52 and still working. Peter wants to start receiving distributions from an IRA that he has but not incur the additional 10% tax of section 72(t). After speaking with his IRA trustee, Peter discovers that someone aged 52 has a remaining life expectancy of 24 years. Peter and the IRA trustee then base Peter’s distributions on the 24 years figure. Because Peter’s distributions are based on his life expectancy – even though he is younger than age 59-1/2 – his distributions are not subject to the additional 10% tax under section 72(t). Of course, the distributions are still subject to regular income tax.

Now, as for the question above, regarding whether someone can make a change in a series of substantially equal periodic payments. Generally, the answer would be “yes”, but you would be subject to the 10% additional tax imposed under section 72(t). However, Revenue Ruling 2002-62 provides for a one-time modification without the imposition of the 10% tax of section 72(t). But any later change would trigger the 10% additional tax under section 72(t).

Q7. Do I qualify to set up a SEP or a SIMPLE-IRA plan?

A. Any employer can establish a SEP. However, if you establish a SEP, you may be restricted in maintaining another plan at the same time. Note that Salary Reduction SEPs (SARSEPs) cannot be established after 1996.

Generally, only an employer with 100 or fewer employees can establish a SIMPLE-IRA plan. If you establish a SIMPLE-IRA, you cannot maintain any other retirement plan at the same time.

Q8. How do I amend my SEP or SIMPLE-IRA plan for EGTRRA?

A. If you’re using a prototype plan, you will receive an amended plan from the financial institution that provided you with the plan. If, for some reason, you don’t receive (or haven’t yet received) a new plan document, contact your financial institution.

While the financial institution provides many administrative services for your plan, it is the responsibility of you – the plan sponsor – to ensure that the plan is kept up-to-date with current law.

If you’re using a Model plan, you should have already adopted an updated Model plan by the end of 2002. See Form 5305-SEP, Form 5305A-SEP, Form 5304-SIMPLE or Form 5305-SIMPLE .

Q9. What is the deadline for establishing a SEP or a SIMPLE-IRA plan?

A. You can establish a SEP for a year as late as the due date (including extensions) of your company’s income tax return for that year.

You can establish a SIMPLE-IRA plan effective on any date between January 1 and October 1 of the year for which you make your first contribution. However, if you previously maintained a SIMPLE-IRA plan, you can set up a SIMPLE-IRA plan effective only on January 1 of the year for which you make your first contribution. Also, a SIMPLE-IRA plan cannot have an effective date before you actually adopt the plan.

Q10. Can I rollover into my IRA the remaining loan balance I have from my retirement plan and make the loan payments to my IRA instead of the other plan?

A. IRAs do not permit loans. Therefore, repaying a loan balance from one plan by transferring the loan balance and making loan payments to your IRA is not allowed. If you attempted this transaction, the loan would be treated as a distribution at the time of the attempted rollover.

Q11. My bank refuses to give me a loan from my IRA-based plan. Isn't it required to allow loans?

A. IRAs are the investment vehicles for SEPs, SIMPLE-IRA plans and Payroll Deduction IRAs. As discussed in the above Q&A, IRAs do not permit loans.  So your bank isn’t allowed to give you a loan from your IRA.

Q12. If I have a Limited Liability Corporation (LLC), what IRA-based plans are available to me?

A. SEPs, SIMPLE-IRA plans and Payroll Deduction IRAs are all available to a LLC. As a general rule, these plans are available to any small business, including a business with only one employee and a business with only a self-employed employee.

Q13. What if there are no common-law employees?

A. It doesn’t matter if there are no common-law employees.

Q14. Are employees/owners of a LLC considered "employees" for purposes of a retirement plan?

A. Any employees/owners of a LLC with earned income or compensation from the LLC are treated as employees for purposes of the Internal Revenue Code.

Q15. Does my plan have to be amended because of the new law before it terminates?

A. Generally, the IRS has not required SEPs, SIMPLE-IRA plans or Payroll Deduction IRAs to be amended for the new law prior to termination. However, we suggest that you or your financial advisor review Revenue Procedure 2002-10 to determine if your plan is in compliance.

Q16. Do I still have to fund my plan in the year of termination?

A. SEPs and Payroll Deduction IRAs can be terminated at any time, provided the employees are notified. You can stop funding these plans once they are terminated.

However, SIMPLE-IRA plans are maintained and terminated on a calendar-year basis. Therefore, you must notify participants this year that you are terminating the plan prospectively for the next calendar year. Practically speaking, once the calendar year starts and you have a SIMPLE-IRA plan, you must fund it for the whole year.

Q17. What are the notification requirements to participants, etc., when a plan terminates?

A. When terminating a Payroll Deduction IRA, a SEP or a SIMPLE-IRA plan, you must notify your employees that the plan has been discontinued. You may need to notify the financial institution that you chose to handle the plan that you will no longer be making contributions. You may also need to let the institution know that you will terminate the contract or agreement with it.  You don’t need to notify the IRS of the plan’s termination.

Q18. What is the timeframe for depositing contributions into SIMPLE-IRAs and SEP-IRAs?

A. You must make the salary reduction contributions to the SIMPLE-IRA as soon as possible but no later than 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. For example, if your employees would have otherwise received compensation (instead of the elective deferrals) in March, you must deposit the deferral amounts as soon as possible but no later than April 30 th.

You must make other contributions - matching or non-elective – by the due date (including extensions) for filing your federal income tax return for the year.

Visit the Department of Labor’s Employee Benefits Security Administration  (EBSA) web site for further information on the time requirements for contributions.

Q19. Are there any restrictions on the things I can invest my IRA in?

A. The law does not permit IRA funds to be invested in collectibles such as:

The law also does not permit IRA funds to be invested in life insurance contracts. See Code section 408(m) for additional investment restrictions.

Finally, IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.

Q20. Are the investment rules different for SEPs and SIMPLE-IRA plans?

A.The investment vehicle – an IRA – for these plans is the same.  So, the investment restrictions for one are the same as for the other.

Q21. How long do I have to roll over a distribution from a retirement plan to an IRA account?

A. You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Rollovers completed after the 60-day period.   In the absence of a waiver, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer's plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions .

Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contribution, not a rollover contribution.

Example.

You received a distribution in late December 2003 from a traditional IRA that you do not roll over into another traditional IRA within the 60-day limit. You do not qualify for a waiver. This distribution is taxable in 2003 even though the 60-day limit was not up until 2004.

Automatic waiver.   The 60-day rollover requirement is waived automatically only if all of the following apply.

Other waivers.   If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. You apply by following the procedures for applying for a letter ruling. Those procedures are stated in a revenue procedure generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application.

In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:

Amount.   The rules regarding the amount that can be rolled over within the 60-day time period also apply to the amount that can be deposited due to a waiver. For example, if you received $6,000 from your IRA, the most that you can deposit into an eligible retirement plan due to a waiver is $6,000.

Extension of rollover period.   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, two special rules extend the rollover period.

Frozen deposit.   This is any deposit that cannot be withdrawn from a financial institution because of either of the following reasons.