Return to www.Rollover.net Home                                                         Fourth Quarter 2010

REQUIRED MINIMUM DISTRIBUTIONS HAVE RETURNED

Because of a provision in The Worker, Retiree, and Employer Recovery Act of 2008, Required Minimum

Distributions (RMDs) were suspended for 2009. This one-year suspension included RMDs from IRAs and

employer-sponsored defined contribution retirement plans for account owners and beneficiaries. However,

the suspension is over, and RMDs must again be taken for 2010 and beyond.

Basics of RMDs

Generally, IRA holders and participants in qualified retirement plans (QRPs) who are over the age of 70 ½

are required to withdraw a portion of their IRA or plan assets each year to satisfy their RMD. The RMD

rules apply to Traditional IRAs, Simplified Employee Pension Plans (SEP), SIMPLE IRAs, and all QRPs,

such as 401(k), 403(b), 457(b), Profit Sharing, and Money Purchase Plans. Note that Roth IRA rules do not

contain RMD requirements for IRA holders; however, RMDs are required for participants in designated Roth

type retirement accounts in 401(k)s and 403(b)s. Also note that distributions are required for beneficiaries, as

outlined later in this article.

Traditional, SEP, and SIMPLE IRA RMD deadlines

Traditional IRA owners are required to begin taking distributions from their IRAs in the year in which they

reach age 70 ½. However, the IRA owner may choose to delay the first RMD until April 1 of the year fol-

lowing the year they turn 70 ½. If the first distribution is delayed, a second payment for the second (cur-

rent) year’s RMD must be made by December 31 in the same year. Note that since RMDs were suspended

for 2009, those who turned 70 ½ in 2009 are allowed to take their first RMD by December 31, 2010 (no

delay to April 1, 2011 allowed for this distribution).

Qualified Retirement Plans RMD deadlines

The same rule of mandatory distributions applies to QRPs, and the required beginning date (RBD) is April 1

of the calendar year following the calendar year in which the participant turned 70 ½. However, the plan

may have an exception that extends the RBD to April 1 of the year following the calendar year in which

the participant retires. Note that owners of 5% or more of the business do not have this option and must

begin RMDs from the plan at age 70 ½. Also note that if a participant intends to roll their plan assets into

an IRA, the RMD must be taken prior to the rollover into the IRA.

Beneficiaries Included

In addition to RMD waivers for IRA and plan participants, beneficiaries who inherited deceased IRA or

plan participants’ assets were also granted a 2009 RMD suspension. Individuals who were taking periodic

distributions from an inherited IRA were allowed to stop withdrawals for 2009. However, they must begin

again in 2010.

If the five-year payout option was previously selected, 2009 is excluded as one of the five years for deter-

mining the final payout. As an example, if an IRA or retirement plan holder died in 2008, the account bal-

ance would have to be paid to the beneficiary by the end of the year of the fifth anniversary of death, which

would normally have occurred on December 31, 2013. However, by eliminating 2009 as one of the years,

the balance must be paid from the inherited IRA or plan by December 31, 2014.

Failing to take distributions

The penalty for failure to take RMDs on a timely basis can be very costly. An IRA owner, retirement plan

participant, or beneficiary who fails to take a correct RMD in any given year is subject to a 50% penalty

on the amount of the RMD that was not taken. Since 2010 is quickly coming to an end, now is the time to

make sure that all RMDS for 2010 have been completed.

Retirement

Plans Quarterly

4th Quarter 2010

TAX STRATEGIES FOR 2010 ROTH CONVERSIONS

Effective January 1, 2010, the adjusted gross income (AGI) eligibility

restriction was eliminated for Roth conversions. This allows tax-

payers with AGI of $100,000 or more to convert their Traditional,

SEP, SIMPLE (after two years) IRAs, or retirement plan assets to

Roth IRAs. In the past, conversions were not allowed for married

people filing separate returns. Now, in addition to the elimination of

the AGI barrier, married couples filing separate tax returns are also

allowed to convert in 2010 and beyond. Please note, the AGI waiver

is for conversions only and AGI limits still apply for those (filing single,

joint, and married filing separate) making contributions to Roth IRAs.

Conversion taxation and aggregation

A conversion to a Roth IRA is technically a distribution from a

Traditional, SEP, SIMPLE (after two years) IRA, or retirement plan,

and a rollover to a Roth IRA. Under IRC Section 408(d)(2), the

values of all IRAs (not including Roth IRAs) are aggregated and

treated as one IRA for purposes of determining taxation of distribu-

tions. For example, if an individual has an IRA that consists of

pre-tax dollars valued at $100,000 and another “non-deductible

IRA" valued at $5,000 (no earnings), $105,000 must be the value

used to determine the taxable portion of a distribution from either

of the IRAs. Note, however, that a conversion from an IRA does

not include the value of assets held in retirement plans, nor does a

conversion from a retirement plan to an IRA include the value of

assets held in other retirement plans or IRAs.

Tax considerations

Three key tax points should be addressed for those who are

considering a conversion to a Roth IRA. First, the year 2010 is the

last year for the current low income tax rates before they sunset in

2011. Secondly, for conversions in the year 2010 (one year only) a

taxpayer can choose to either:

1. Include the entire taxable income in their 2010 tax return

2. Defer taxation by reporting 50% of the taxable amount

converted in 2011 and 50% in 2012. Note that unless a

taxpayer affirmatively elects full taxation in 2010, a 2010

Roth conversion will be taxed “ratably" over the 2011 and

2012 tax years.

The third key point to consider is how the tax will be paid. Will it

be paid from assets outside of the IRA, or will assets be withdrawn

from the IRA to settle the tax due.

Withdrawals to pay tax

If an individual intends to do a 2010 conversion and anticipates a

withdrawal of assets from the Roth IRA to pay the tax and is under

the age of 59 ½, a 10% premature distribution penalty may be due

in addition to ordinary income tax. In addition, any tax due on

amounts withdrawn from the Roth IRA prior to 2012 will be accel-

erated to the year of the distribution (see the First Quarter 2010

Retirement Plans Quarterly article Withdrawals After 2010 Conver-

sions for details).

Observation

The 2010 elimination of the AGI barrier and married filing separate

restriction for conversions does present an opportunity for many

individuals. The rush to do Roth Conversions in 2010 may be historic,

especially if Congress does not extend the current low tax rates. Note,

however, that it is highly recommended that an individual seek

the aid of a competent tax advisor or tax attorney to determine if a

conversion is the best course of action.

ROTH CONVERTERS BEWARE OF PENALTIES

When converting from a Traditional to a Roth IRA, tax is due on the

entire distribution amount in the year of the distribution. However,

many individuals are unaware that estimated tax payments may be

due on the converted amount prior to the normal tax filing deadline. If

tax filers do not plan accordingly for a substantial increase in adjusted

gross income due to the Roth IRA conversion, they may be facing

penalties for underpayments of estimated income tax payments.

An IRS formula determines whether a tax filer meets the requirements

for payment of estimated taxes, either through withholding on taxable

income received or by remittance of estimated tax payments sent

directly to the IRS by the tax filer.

Numerous tax filers who were assessed underpayment penalties

for deficient estimated tax payments for Roth conversion amounts

requested relief from the IRS. A Chief Counsel Advice Memorandum

(CCA 200105062) indicated that the IRS may not grant relief to tax

filers assessed penalties for failing to comply with estimated income

tax rules (IRC Sec. 6654).

To determine if estimated taxes are required, a competent tax advisor

should be consulted for guidance.

IRS ANNOUNCES COST-OF-LIVING ADJUSTMENTS

FOR 2011

On October 28, the Internal Revenue Service announced cost-of-living

adjustments applicable to dollar limitations for plans and other items

for tax year 2011. Due to little to no change in certain indices, there

were no changes for many of the contribution and catch-up limits for

2011, such as the elective deferrals of $16,500.

Annual Limit

2011 2010

Social Security Wage Base

$106,800 $106,800

Annual Compensation Limit

$245,000 $245,000

Key Employee Compensation Limit

$160,000 $160,000

HCE Compensation

$110,000 $110,000

Elective Deferrals Limit (401(k), 403(b) & 457) $16,500 $16,500

Catch-up Contributions (401(k) & 403(b)) $5,500 $5,500

SEP Minimum Compensation

$550 $550

SIMPLE IRA Deferral Limit

$11,500 $11,500

Catch-up Contributions (SIMPLE IRA) $2,500 $2,500

IRA Contribution Limit

$5,000 $5,000

IRA Catch-Up Contributions

$1,000 $1,000

Annual DB Benefit Limit

$195,000 $195,000

Annual DC Contribution Limit

$49,000 $49,000

FIDUCIARY LIABILITY WHEN CHOOSING THE

CLASS OF 401(K) FUNDS

So, the plan sponsor finally has the 401(k) plan running smoothly.

Participants can direct their own investments from a menu of some

of the best funds on the market. In fact, the plan has hired an

investment consultant to help pick funds. The plan’s investment

committee meets with the consultant periodically to be sure the

menu is still good, and once in awhile a low-performing fund is

replaced with one believed to have better performance potential.

So is there anything else for the committee to worry about.

The fiduciary issue

Not only do plan sponsors need to be sure they’re offering a good

selection of funds for their employees, but they also need to be

concerned with the expenses and fees being charged by the invest-

ment options. Well, that’s not a problem, you say. In fact, the

participants don’t even have to worry about paying for the 401(k)

plan. Instead, many plan sponsors have an arrangement with their

recordkeeper and their consultant that neither of them invoice for

their services at all. In effect, the 401(k) plan administration is

‘‘free.’’ Is your service provider administering your plan out of the

goodness of his heart. Of course not.

Today, 401(k) service providers often receive payment from the

investment funds for marketing. These are referred to as‘‘12b-1

fees’’ or revenue sharing. These fees are embedded in the expenses

the funds charge for investment. The fees come off the top – before

earnings are calculated and before plan participants receive a

return on their investments.

As a member of the investment committee or other fiduciary for

the 401(k) plan, are you aware of how this works. More importantly,

are you aware that in many cases you could offer the identical

investment fund with lower expenses and fees, thereby providing

participants with higher returns.

Does it really matter.

What have the participants been told. Do they think the employer

is paying the expenses, or do they understand they are paying the

expenses by receiving a lower return. Here’s an example:

Assume two participants have $25,000 accounts in a 401(k)

plan. Participant A is invested in several retail class mutual

funds that pay revenue sharing fees to the plan administra-

tor. Participant B is totally invested in a money market fund,

which pays no revenue sharing fees. So Participant A is paying

plan administration expenses, but Participant B is not. On

the other hand, if administration expenses were charged to

the plan as a whole, and allocated based on account balances,

both Participants A and B would be paying the same portion

of plan expenses. Which of these alternatives is more fair and

reasonable. Each plan will need to answer that question. As a

plan fiduciary, you should clearly understand the results of how

the expenses are being paid and be sure plan participants also

understand the process.

Steps to consider

What should your investment committee do now.

• Investigate to find out what class of mutual funds is in your

investment menu.

• If your plan is using higher fee retail classes, ask your adviser

to justify the decision. If the justification seems reasonable,

be sure you and the plan participants understand how fees are

paid and by whom. If the justification does not seem reason-

able, consider using a lower expense class.

• If you are told you cannot use an institutional class of a

particular mutual fund because of a minimum investment

requirement, be sure you or your adviser asks for a waiver

of the minimum. Even if the answer is ‘no,’ you will have

evidence that you asked.

• Document everything you do. Responses to litigation makes

it clear that it is the process by which fiduciaries make deci-

sions that determines whether they were prudent, not nec-

essarily the results of those decisions. Be sure to follow a

reasonable process, and be sure to document each step along

the way.

In conclusion, 401(k) plan fiduciaries should always take appropri-

ate steps to keep plan expenses as low as reasonably possible. If

they determine that higher fees are reasonable in a particular situation,

they should document the process used to reach that decision.

IRA DEDUCTIBILITY AND ROTH IRA ELIGIBILITY ARE AS FOLLOWS:

Traditional IRA Deductibility:

Income limits if covered by an employer-sponsored plan

Single Filer’s AGI: Married Filing Jointly AGI:

Full contribution <$56,000 <$90,000

Partial contribution $56,000 - $66,000 $90,000 - $110,000

Not eligible >$66,000 >$110,000

Maximum Joint Compensation for deductible contribution by non-covered spouse: $169,000 - $179,000

ROTH Eligibility:

Single Filer’s AGI: Married Filing Jointly AGI:

Full contribution <$107,000 <$169,000

Partial contribution $107,000 - $122,000 $169,000 - $179,000

Not eligible >$122,000 >$179,000

The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but the accuracy of the information is not guaranteed.

This newsletter is distributed with the understanding that the publisher is not engaging in any legal or accounting type of work such as practicing law or CPA services.

Member SIPC and New York Stock Exchange, Inc.

National Headquarters: One Financial Plaza • 501 North Broadway • St. Louis, Missouri 63102

(314) 342-2000 • www.stifel.com

Investment Services Since 1890

RETIREMENT PLAN SPONSOR DEADLINES

Below is a chart listing some approaching deadlines for retirement plan sponsors, as well as some required notices to employees that are

joining, or are eligible to join, a retirement plan. This chart assumes a calendar year plan.

Topic

Due Date

Description

Plans Affected

401(k) Safe-Harbor Annual Notice – Final Due

Date

12/1/10 Must be provided between 30-

90 days prior to the beginning

of the next plan year

401(k) plans looking to avoid

ADP and ACP discrimination

testing

ACA Annual Notice Deadline – automatic

enrollment annual notice to allow the right to

"opt out" of automatic plan deferrals and the

qualified default investment

12/1/10 Must be provided between 30-

90 days prior to the beginning

of the next plan year

401(k), 403(b), or 457(b) plans

that include an “automatic contri-

bution arrangement"

QACA Safe Harbor “Annual" – Notice Deadline

– Notice for a new qualified automatic contribu-

tion arrangement (QACA)

12/1/10 Must be provided between 30-

90 days prior to the beginning

of the next plan year

401(k) plans looking to avoid

ADP and ACP discrimination test-

ing through the automatic enroll-

ment safe harbor

QDIA Annual Notice Deadline – required an-

nual notice to satisfy qualified default invest-

ment alternative (QDIA) rules

12/1/10 Must be provided between 30-

90 days prior to the beginning

of the next plan year

Participant-directed defined con-

tribution plans providing a QDIA

for participants who fail to make

an election

SAR Extension – summary annual report (SAR)

if filing of Form 5500 has been extended

12/15/10 2 months after the extension

date

Defined contribution and 403(b)

plans subject to ERISA, and

defined contribution plans not cov-

ered by the PBGC

HEART Act Good Faith Amendment – provi-

sions that apply to participants who enter active

military service. Most PPA amendments that

were due on 12/31/09 included HEART.

12/31/10 Last day of plan year beginning

in 2010 (2010 for government

plans)

Qualified plans, 403(b), and

457(b) plans

PPA Extended Amendment (for certain provi-

sions) – 1) Funding limits for DB plans, 2) Vest-

ing for Cash Balance and other Hybrid Plans, 3)

Diversification requirements for DC plans with

publicly traded employer securities

12/31/10 Last day of plan year

DB plans, and defined contribu-

tion plans invested in publicly

traded securities

ADP/ACP Refund Deadline – for the 2009 plan

year, to keep plan in qualified status

12/31/10 Must refund by 12 months after

plan year-end

401(k) plans

401(k) Deferral Election for Self-Employed

Owners

12/31/10 Last day of partnership, sole

proprietorship, or LLC tax year

401(k) plans sponsored by self-

employed owners

Amending plan for testing method/election

changes – (current year, prior year, etc.)

12/31/10 Last day of applicable tax year All qualified and 403(b) plans

Update for “individually designed" plan docu-

ments in Cycle E – Nonprototype or volume

submitter plan documents

1/31/2011 Document must be amended by

1/31/11

All ERISA-based retirement plans

using an individually designed

plan document