net income calculation by tricky

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									                                                                    Internal Revenue Service, Treasury                                                             § 1.408–11

                                                                    determining whether section 401(a)(9) is                     (4) Similar items designated by the
                                                                    satisfied?                                                Commissioner in revenue rulings, no-
                                                                      A–11. (a) General rule. Except as pro-                  tices, and other guidance published in
                                                                    vided in paragraph (b) of this A–11, all                  the Internal Revenue Bulletin. See
                                                                    amounts distributed from an IRA are                       § 601.601(d)(2)(ii)(b) of this chapter.
                                                                    taken into account in determining
                                                                    whether section 401(a)(9) is satisfied,                   [T.D. 8987, 67 FR 19024, Apr. 17, 2002, as
                                                                    regardless of whether the amount is in-                   amended by T.D. 9130, 69 FR 33293, June 15,
                                                                    cludible in income.                                       2004]
                                                                      (b) Amounts not taken into account.
                                                                    The following amounts are not taken                       § 1.408–11 Net income calculation for
                                                                                                                                   returned or recharacterized IRA
                                                                    into account in determining whether
                                                                                                                                   contributions.
                                                                    the required minimum amount with re-
                                                                    spect to an IRA for a calendar year has                     (a) Net income calculation for returned
                                                                    been distributed—                                         IRA contributions—(1) General rule. For
                                                                      (1) Contributions returned pursuant                     purposes of returned contributions
                                                                    to section 408(d)(4), together with the                   under section 408(d)(4), the net income
                                                                    income allocable to these contribu-                       attributable to a contribution made to
                                                                    tions;                                                    an IRA is determined by allocating to
                                                                      (2) Contributions returned pursuant                     the contribution a pro rata portion of
                                                                    to section 408(d)(5);                                     the earnings on the assets in the IRA
                                                                      (3) Corrective distributions of excess                  during the period the IRA held the con-
                                                                    simplified employee pension contribu-                     tribution. This attributable net income
                                                                    tions under section 408(k)(6)(C), to-
                                                                                                                              is calculated by using the following
                                                                    gether with the income allocable to
                                                                                                                              formula:
                                                                    these distributions; and


                                                                                                           (Adjusted Closing Balance − Adjusted Opening Balance)
                                                                        Net Income = Contribution ×
                                                                                                                         Adjusted Opening Balance.


                                                                      (2) Special rule. If an IRA is estab-                     (2) Adjusted closing balance. The term
                                                                    lished with a contribution and no other                   adjusted closing balance means the fair
                                                                    contributions, distributions or trans-                    market value of the IRA at the end of
                                                                    fers are made to or from that IRA, then                   the computation period plus the
                                                                    the subsequent distribution of the en-                    amount of any distributions or trans-
                                                                    tire account balance of the IRA pursu-                    fers (including recharacterizations of
                                                                    ant to section 408(d)(4) will satisfy the                 contributions pursuant to section
                                                                    requirement of that Internal Revenue                      408A(d)(6)) made from the IRA during
                                                                    Code section that the return of a con-                    the computation period.
                                                                    tribution be accompanied by the                             (3) Computation period. The term com-
                                                                    amount of net income attributable to                      putation period means the period begin-
                                                                    the contribution.                                         ning immediately prior to the time
                                                                      (b) Definitions. For purposes of this                   that the contribution being returned
                                                                    section the following definitions apply:                  was made to the IRA and ending imme-
                                                                      (1) Adjusted opening balance. The term                  diately prior to the removal of the con-
                                                                    adjusted opening balance means the fair                   tribution. If more than one contribu-
                                                                    market value of the IRA at the begin-                     tion was made as a regular contribu-
                                                                    ning of the computation period plus                       tion and is being returned from the
                                                                    the amount of any contributions or                        IRA, the computation period begins
                                                                    transfers (including the contribution                     immediately prior to the time the first
                                                                    that is distributed as a returned con-                    contribution being returned was con-
                                                                    tribution pursuant to section 408(d)(4)                   tributed.
                                                                    and recharacterizations of contribu-                        (4) Regular contribution. The term reg-
                                                                    tions pursuant to section 408A(d)(6))                     ular contribution means an IRA con-
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                                                                    made to the IRA during the computa-                       tribution made by the IRA owner that
                                                                    tion period.                                              is neither a trustee-to-trustee transfer

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                                                                    § 1.408(q)–1                                                            26 CFR Ch. I (4–1–08 Edition)

                                                                    from another IRA nor a rollover from                      excess regular contribution be returned to
                                                                    another IRA or retirement plan.                           her pursuant to section 408(d)(4). Pursuant to
                                                                       (c) Additional rules. (1) When an IRA                  this request, on March 1, 2005, when the IRA
                                                                                                                              is worth $16,000, the IRA trustee distributes
                                                                    asset is not normally valued on a daily                   to Taxpayer B the $600 plus attributable net
                                                                    basis, the fair market value of the                       income. The excess regular contributions to
                                                                    asset at the beginning of the computa-                    be returned are deemed to be the last two
                                                                    tion period is deemed to be the most                      made in 2004: the $300 December 15 contribu-
                                                                    recent, regularly determined, fair mar-                   tion and the $300 November 15 contribution.
                                                                    ket value of the asset, determined as of                  On November 15 the IRA was worth $11,000
                                                                    a date that coincides with or precedes                    immediately prior to the contribution. No
                                                                                                                              distributions or transfers have been made
                                                                    the first day of the computation pe-                      from the IRA and no contributions or trans-
                                                                    riod. In addition, solely for purposes of                 fers, other than the monthly contributions
                                                                    this section, notwithstanding A–3 of                      (including $300 in January and February
                                                                    § 1.408A–5, recharacterized contribu-                     2005), have been made.
                                                                    tions are taken into account for the pe-                    (ii) As of the beginning of the computation
                                                                    riod they are actually held in a par-                     period (November 15), the adjusted opening
                                                                    ticular IRA.                                              balance is $12,200 [$11,000 + $300 + $300 + $300
                                                                                                                              + $300] and the adjusted closing balance is
                                                                       (2) In the case of an IRA that has re-                 $16,000. Thus, the net income attributable to
                                                                    ceived more than one regular contribu-                    the excess regular contributions is $187 [$600
                                                                    tion for a particular taxable year, the                   × ($16,000 ¥ $12,200) ÷ $12,200]. Therefore, the
                                                                    last regular contribution made to the                     total to be distributed as returned contribu-
                                                                    IRA for the year is deemed to be the                      tions on March 1, 2005, to correct the excess
                                                                    contribution that is distributed as a re-                 regular contribution is $787 [$600 + $187].
                                                                    turned contribution under section                         [T.D. 9056, 68 FR 23588, May 5, 2003]
                                                                    408(d)(4), up to the amount of the con-
                                                                    tribution identified by the IRA owner                     § 1.408(q)–1 Deemed IRAs in qualified
                                                                    as the amount distributed as a re-                             employer plans.
                                                                    turned contribution.                                         (a) In general. Under section 408(q), a
                                                                       (3) In the case of an individual who                   qualified employer plan may permit
                                                                    owns multiple IRAs, the net income                        employees to make voluntary em-
                                                                    calculation is performed only on the                      ployee contributions to a separate ac-
                                                                    IRA containing the contribution being                     count or annuity established under the
                                                                    returned, and that IRA is the IRA that                    plan. If the requirements of section
                                                                    must distribute the contribution.                         408(q) and this section are met, such
                                                                       (d) Examples. The following examples                   account or annuity is treated in the
                                                                    illustrate the net income calculation                     same manner as an individual retire-
                                                                    under section 408(d)(4) and this section:                 ment plan under section 408 or 408A
                                                                                                                              (and contributions to such an account
                                                                      Example 1. (i) On May 1, 2004, when her IRA
                                                                    is worth $4,800, Taxpayer A makes a $1,600                or annuity are treated as contributions
                                                                    regular contribution to her IRA. Taxpayer A               to an individual retirement plan and
                                                                    requests that $400 of the May 1, 2004, con-               not to the qualified employer plan).
                                                                    tribution be returned to her pursuant to sec-             The account or annuity is referred to
                                                                    tion 408(d)(4). Pursuant to this request, on              as a deemed IRA.
                                                                    February 1, 2005, when the IRA is worth                      (b) Types of IRAs. If the account or
                                                                    $7,600, the IRA trustee distributes to Tax-               annuity meets the requirements appli-
                                                                    payer A the $400 plus attributable net in-                cable to traditional IRAs under section
                                                                    come. During this time, no other contribu-
                                                                    tions have been made to the IRA and no dis-
                                                                                                                              408, the account or annuity is deemed
                                                                    tributions have been made.                                to be a traditional IRA, and if the ac-
                                                                      (ii) The adjusted opening balance is $6,400             count or annuity meets the require-
                                                                    [$4,800 + $1,600] and the adjusted closing bal-           ments applicable to Roth IRAs under
                                                                    ance is $7,600. Thus, the net income attrib-              section 408A, the account or annuity is
                                                                    utable to the $400 May 1, 2004, contribution is           deemed to be a Roth IRA. Simplified
                                                                    $75 [$400 × ($7,600¥$6,400) ÷ $6,400]. Therefore,         employee pensions (SEPs) under sec-
                                                                    the total to be distributed on February 1,                tion 408(k) and SIMPLE IRAs under
                                                                    2005, pursuant to § 408(d)(4) is $475.
                                                                      Example 2. (i) Beginning in January 2004,
                                                                                                                              section 408(p) may not be used as
                                                                    Taxpayer B contributes $300 on the 15th of                deemed IRAs.
                                                                    each month to an IRA for 2004, resulting in                  (c) Separate entities. Except as pro-
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                                                                    an excess regular contribution of $600 for                vided in paragraphs (d) and (g) of this
                                                                    that year. Taxpayer B requests that the $600              section, the qualified employer plan

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