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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 3837
Experience:  Providing Financial, Tax & Business advice since 1986
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Not sure what else to describe. Is there a specific question

Customer Question

Not sure what else to describe. Is there a specific question - something for me to clarify?

I am looking for a tax accountant -related question. The below drop down does not seem to list that type expert.
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.
Thank you for your question! Could you please state how we could help you today?
Customer: replied 1 year ago.


I typed the question on the Home page spot. Anyway, here it is:


 


Company retiree begins to receive deferred compensation payouts under a Plan that states that its payment provisions are meant to comply with Section 409A of the IRS code. Retiree starts own mini-business. Can the retiree apply some of the yearly def'd comp payouts, pre tax, to a traditional SEP IRA? If this is not allowed, because instead the retiree must pay ordinary income tax on each entire distro, can you suggest either A) a professional who may know whether there is another way of mitigating tax implications of deferred comp payouts (e.g. perhaps big insurance companies have some such investment vehicles)or B) someone who counsels people regarding tax and investment of deferred comp payouts?


 


THX

Expert:  Lane replied 1 year ago.


Hi, I can help with this:

Yes, you can most certainly contribute some of the payouts to traditional SEP IRA.

Actually, the source of the dollars that you contribute to the SEP are irrelevant. They can be from the 409a plan payouts Or other dollars.

What matters is that you have income from this mini-business to be offset by the sep contributions.

A 409(a) plan (non-qualified deferred compensation) payout is taxed as other distributions would be ... but how you use those dollars is YOUR business.

Here's an overview of 401(a) from the IRS:

http://www.irs.gov/Retirement-Plans/409A-Nonqualified-Deferred-Compensation-Plans




Hope this helps

Lane



Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid. BUT, if you have QUESTIONS, or need clarification, COME BACK here.

But again, feel free to bookmark this page to come back for reference.

Customer: replied 1 year ago.


My specific questions I don't think are answered.


Can I avoid paying ordinary income tax on a portion of yearly def'd comp distribution BY designating the portion as a contribution to a traditional SEP IRA - just as one can defer tax on salary put into a traditional IRA?


 


If the answer is no, then can you suggest either A) a professional who may know whether there is another way of mitigating tax implications of deferred comp payouts (e.g. perhaps big insurance companies have some such investment vehicles)or B) someone who counsels people regarding tax and investment of deferred comp payouts?


 


thx

Expert:  R. Klein, EA replied 1 year ago.
Thanks for asking today.

No, you cannot change the nature of a deferred compensation distribution. It is taxable income in the year received and cannot be dumped back into another deferred income "pot".

However, as long as you have another business activity with self-employment, you may be able to contribute into another IRA or SEP-IRA as long as you have Earned Income (the distribution does not qualify) and you have not exceed any annual limitations.

AS for any distributions you receive in the current year, once you pay the tax on the money, you can re-invest the remainder into a life insurance product or annuity and defer income tax again for a number of years. Life insurance and annuity products allow you to take after-tax dollars and defer tax until you receive distributions. When you receive a distribution in the future from one of these products, only the gain is subject to income tax; any return of principal is not.

I hope this clarifies the situation a bit.
Customer: replied 1 year ago.


Thank you. A last question: What is the specific source of your first paragraph above - beginning with "No. You cannot..."?

Expert:  R. Klein, EA replied 1 year ago.
I would need some time to research and give you an exact IRC code section, but if I had to guess, tit probably is in the IRC between sections 400 and 415. Do you need me to research this in detail?
Customer: replied 1 year ago.


I do need definitive response. Subsequent to that, no further questions. Thx If you are busy, getting back to me today on that is not a necessity. If you need to contact me XXXXXXXXXX /p>

 


thx

Expert:  R. Klein, EA replied 1 year ago.
409A(c) Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter or any other rule of law...

This is a convoluted way to say "it is includable in gross income".

There are no provisions that allow any offset, so identifying a section that does not exist is impossible.
Expert:  Lane replied 1 year ago.

Hi, original expert here just checking back in.


... we just wanted to point out to you (in an effort to tie all this together)that although you can't specifically designate the deferred comp. payout money as anything other that what it is (taxable)...

Contributing those same dollars (or any other dollars) in the same tax year, to a SEP IRA will have the same effect.


As long as you are generating income from the mini-business you mention, the TAX DEDUCTION for the dollars contributed will OFFSET THE TAX on the 409(a) payout.

Hope this helps



Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid. BUT, if you have QUESTIONS, or need clarification, COME BACK here.

And feel free to bookmark this page for reference.

Lane
Customer: replied 1 year ago.

I do understand that concept. What I am awaiting is the definitive answer offered to me in the below exchange, copied from abovve.


THX


 


 


 


 


 



Thank you. A last question: What is the specific source of your first paragraph above - beginning with "No. You cannot..."?










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You have received an Answer!





Monday, January 14, 2013 1:31 PM EST




I would need some time to research and give you an exact IRC code section, but if I had to guess, tit probably is in the IRC between sections 400 and 415. Do you need me to research this in detail?










You replied










I do need definitive response. Subsequent to that, no further questions. Thx If you are busy, getting back to me today on that is not a necessity. If you need to contact me my cell is 267 968 7553





Expert:  Lane replied 1 year ago.


We pay taxes on an annual basis ...

Lets say you receive 10,000 from the 401(a) payout.

If you contribute 10,000 to a SEP IRA you get to deduct the 10,000.

you will have EFFECTIVELY removed the tax from gthe 409a payout.

That's it

Expert:  Lane replied 1 year ago.


IRS guidance on SEPS and other small business plans

http://www.irs.gov/pub/irs-pdf/p560.pdf


IRS guidance on Non-Qualified Deferred Compensation plans

http://www.irs.gov/Retirement-Plans/409A-Nonqualified-Deferred-Compensation-Plans

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