Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, November 8, 1993 TAG: 9311060031
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
Do I have to pay taxes on this? If so, do I add this amount to my earnings when I fill out my taxes? Do I pay both federal and state taxes? How about the state from which I received this amount?
A: David Lucas, a certified public accountant with the Roanoke firm of Lucas & Boatwright, said the answer to your question depends on two possible scenarios.
Under the first one, if the $6,000 represents a distribution of estate property received as an inheritance, such distributions are generally treated as nontaxable events for both federal and Virginia income tax purposes.
There's an exception to this general rule, however. Lucas said that exception occurs if the cash received by the beneficiary would have been taxable to the decedent had it been paid to the decedent prior to death. This is referred to as the "income in respect of decedent" rule, and would occur if the $6,000 represented a distribution from, for example, an Individual Retirement Account in the decedent's name.
In the second scenario, the family member would have left behind estate property which could not be readily distributed to the beneficiaries. The property then produced income prior to the estate's distributing the $6,000.
In that second instance, a portion of the distribution could then be deemed income that is taxable to the beneficiary. If this situation exists, Lucas said, you will receive a Form 1041: Schedule K-1 from the estate indicating how much income to report.
Lucas said the potential tax ramifications for the state from which the estate distribution was received cannot be answered without knowing which state is involved.
Shedding light on 401(k)
Q: Will you please clarify some misunderstanding in reference to 401(k) plans?
1. Is there a new law mandating changes in investment opportunities?
2. When does the law take effect?
3. Are any companies exempt?
4. I understand that if your present plan offers only three options for investment - a fixed income, a stock equity plan and company stock - a fourth or even fifth option must be added.
5. I also understand the provisions for control of your investment and frequencies of change are altered.
I have read several articles concerning the changes, but it is all very confusing.
A: J. Gregory Tinaglia of Investment Management Corp. in Roanoke said there is a new regulation, although it is not mandatory. It is known as 404(c) for its section of the tax code.
This section protects an employer from lawsuits by employees complaining about the results of their investment decisions. But to gain this protection, the employer must provide detailed investment information and several options for investments.
Tinaglia believes that about 50 percent of employers probably will take advantage of this section. That's because it provides for a first-class plan and offers a defense to lawsuits by employees. A good plan also attracts top workers, he said, because people are interested in this retirement program.
Some employers might feel compliance with the section is too expensive, but Tinaglia said this problem can be handled.
The regulation takes effect for a 401(k) plan on the first day of the second plan year after Oct. 13, 1992. Tinaglia pointed out that means employers will start adopting the changes during 1994 on the anniversary date of each individual plan.
In answer to your third question, the 404(c) plan is not a mandate. Every employer who wants to be exempt simply does not comply. Those who adopt the plan will do so voluntarily and must take some affirmative action to come under the provisions of the section.
As to your fourth question, Tinaglia said employers who adopt the section must offer at least three investment choices. Company stock, however, does not count. If the employer you cited decides to come under the provisions of 404(c), it must offer a fourth alternative. It need not offer a fifth but is free to do so. Any employer can have the minimum three choices, provided company stock isn't among them.
Finally, the minimum requirement of the section is that employers must provide for investment changes at least quarterly - and more often if some of the choices are volatile. Thus employees might be given an opportunity every month to alter their investment allocations.
Tinaglia said there is a trend in any case toward daily opportunities for employees to change investment decisions in their 401(k) plan. He said it is now possible to provide this opportunity relatively inexpensively.
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010. Or leave a recorded message for her by calling (703) 981-3434 and when asked for a mailbox number, press 66639 (MONEY), followed by the # symbol.
by CNB