[Federal Register Volume 64, Number 23 (Thursday, February 4, 1999)]
[Rules and Regulations]
[Pages 5597-5611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2550]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8816]
RIN 1545-AW62
Roth IRAs
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to Roth IRAs
under section 408A of the Internal Revenue Code (Code). Roth IRAs were
created by the Taxpayer Relief Act of 1997 as a new type of IRA that
individuals can use beginning in 1998. Section 408A was amended by the
Internal Revenue Service Restructuring and Reform Act of 1998. On
September 3, 1998, a notice of proposed rulemaking was published in the
Federal Register (63 FR 46937) under Code section 408A. Written
comments were received regarding the proposed regulations. On December
10, 1998, a public hearing was held on the proposed regulations. The
final regulations affect individuals establishing Roth IRAs,
beneficiaries under Roth IRAs, and trustees, custodians or issuers of
Roth IRAs.
DATES: Effective date: The final regulations are effective on February
3, 1999.
Applicability date: The final regulations are applicable to taxable
years beginning on or after January 1, 1998, the effective date for
section 408A.
FOR FURTHER INFORMATION CONTACT: Cathy A. Vohs, (202) 622-6030 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in Secs. 1.408A-2, 1.408A-
4, 1.408A-5, and 1.408A-7 of the final regulations have been reviewed
and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control
number 1545-1616. Responses to this collection of information are
mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Estimated average annual burden per respondent/recordkeeper: 1
minute for designating an IRA as a Roth IRA and 30 minutes for
recharacterizing an IRA contribution. The estimated burdens for the
other reporting/recordkeeping requirements in the these final
regulations are reflected in the burden of Forms 8606, 1040, 5498, and
1099R.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Office of
Management and Budget, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC
20503, with copies to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, OP:FS:FP, Washington, DC 20224.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On September 3, 1998, a notice of proposed rulemaking was published
in the Federal Register (63 FR 46937) under section 408A of the
Internal
[[Page 5598]]
Revenue Code (Code). The proposed regulations provide guidance on
section 408A of the Code, which was added by section 302 of the
Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788), and
established the Roth IRA as a new type of individual retirement plan,
effective for taxable years beginning on or after January 1, 1998. The
provisions of section 408A were amended by the Internal Revenue Service
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat.
685). In addition, Notice 98-50 (1998-44 I.R.B. 10) provides guidance
on reconverting an amount that had previously been converted and
recharacterized. This notice solicited public comments concerning
reconversions.
Written comments were received on the proposed regulations and
Notice 98-50. A public hearing was held on the proposed regulations and
Notice 98-50 on December 10, 1998. After consideration of all the
comments, the proposed regulations under section 408A are adopted as
revised by this Treasury decision.
Explanation of Provisions
Overview
A Roth IRA generally is treated under the Code like a traditional
IRA with several significant exceptions. Similar to traditional IRAs,
income on undistributed amounts accumulated under Roth IRAs is exempt
from Federal income tax, and contributions to Roth IRAs are subject to
specific limitations. Unlike traditional IRAs, contributions to Roth
IRAs cannot be deducted from gross income, but qualified distributions
from Roth IRAs are excludable from gross income.
In general, comments received on the proposed regulations did not
request significant changes. Thus, the final regulations retain the
general structure and substance of the proposed regulations.
General Provisions and Establishment of Roth IRAs
Commentators asked for clarification regarding whether a Roth IRA
may be established for the benefit of a minor child or anyone else who
lacks the legal capacity to act on his or her own behalf. On this
point, the IRS and Treasury intend that the rules for traditional IRAs
also apply to Roth IRAs. Thus, for example, a parent or guardian of a
minor child may establish a Roth IRA on behalf of the minor child.
However, in the case of any contribution to a Roth IRA established for
a minor child, the compensation of the child for the taxable year for
which the contribution is made must satisfy the compensation
requirements of section 408A(c) and Sec. 1.408A-3.
Regular Contributions
Several commentators requested clarification of the treatment of
excess Roth IRA contributions under sections 4973, 408(d)(5), and
219(f)(6). Commentators asked for clarification regarding the removal
of excess Roth IRA contributions after the contributor's Federal tax
return due date has passed. The final regulations clarify that,
pursuant to section 4973(f), excess contributions may be applied, on a
year-by-year basis, against the annual limit for regular contributions
to the extent that the Roth IRA owner is eligible to make regular Roth
IRA contributions for a taxable year but does not otherwise do so.
However, in response to several requests for clarification, the IRS and
Treasury note that the rules under section 408(d)(5) for the tax-free
distribution of certain excess traditional IRA contributions after the
IRA owner's Federal income tax return due date do not apply to Roth
IRAs because Roth IRA contributions are always tax-free on distribution
(except to the extent that they accelerate income inclusion under the
4-year spread). Similarly, section 219(f)(6), which provides for the
deductibility of excess traditional IRA contributions in subsequent
taxable years, has no application to Roth IRAs because contributions to
Roth IRAs are never deductible.
Another commentator asked for clarification whether contributions
to education IRAs are disregarded for purposes of applying the
limitation on regular contributions to Roth IRAs. No change has been
made to the final regulations on this point because the final
regulations retain the definition of an IRA provided in the proposed
regulations, which excludes an education IRA under section 530. Thus,
contributions to an education IRA are disregarded in applying the Roth
IRA contribution limitation (and in applying the contribution
limitation for traditional IRAs).
Conversions
In response to certain comments, the final regulations clarify that
conversions and recharacterizations made with the same trustee may be
accomplished by redesignating the account or annuity contract, rather
than by the opening of a new account or the issuance of a new annuity
contract for each conversion or recharacterization.
As requested by commentators, the final regulations provide that a
change in filing status or a divorce does not affect the application of
the 4-year spread for 1998 conversions. Thus, if a married Roth IRA
owner who is using the 4-year spread files separately or divorces
before the full taxable conversion amount has been included in gross
income, the remainder must be included in the Roth IRA owner's gross
income over the remaining years in the 4-year period, or, if
applicable, in the year for which the remainder is accelerated due to
distribution or death.
Two commentators questioned why the proposed regulations require
that a surviving spouse be the sole beneficiary of all a Roth IRA
owner's Roth IRAs in order to elect to continue application of the 4-
year spread after the Roth IRA owner's death. The IRS and Treasury view
this result as compelled by the statutory language of section
408A(d)(3)(E)(ii)(II). That section provides that the surviving spouse
must acquire the ``entire interest'' in any Roth IRA to which a
conversion contribution to which the 4-year spread applies is
``properly allocable.'' Under the aggregation and ordering rules of
section 408A(d)(4), all a Roth IRA owner's Roth IRAs are treated as a
single Roth IRA, and a conversion contribution is therefore allocable
to all the owner's Roth IRAs. Thus, a surviving spouse must be the sole
beneficiary of all a Roth IRA owner's Roth IRAs in order to acquire the
entire interest in any Roth IRA to which a 1998 conversion contribution
is properly allocable.
Commentators also asked the IRS and Treasury to clarify whether
Roth IRA distributions that are part of a series of substantially equal
periodic payments begun under a traditional IRA prior to conversion to
a Roth IRA are subject to income acceleration during the 4-year spread
period and the 10-percent additional tax on early distributions under
section 72(t). The final regulations clarify that those distributions
are subject to income acceleration to the extent allocable to a 1998
conversion contribution with respect to which the 4-year spread
applies. The final regulations further clarify, however, that the
additional 10-percent tax under section 72(t) will not apply, even if
the distributions are not qualified distributions (as long as they are
part of a series of substantially equal periodic payments).
Under the proposed regulations, if an IRA owner has reached age
70\1/2\, any amount distributed (or treated as distributed because of a
conversion) from the IRA for a year consists of the required minimum
distribution to the extent that an amount equal to the required minimum
distribution for that year has not yet been distributed (or
[[Page 5599]]
treated as distributed); as a required minimum distribution, that
amount cannot be converted to a Roth IRA. Although one commentator
requested that this rule be retained in the final regulations, other
commentators objected to it. A number of commentators asked the IRS and
Treasury to adopt a rule allowing an IRA owner who wishes to convert a
traditional IRA to a Roth IRA in the year he or she turns 70\1/2\ to
leave the amount of his or her required minimum distribution with
respect to such IRA in the IRA until April 1 of the following year,
provided the conversion is accomplished by means of a trustee-to-
trustee transfer. The commentators note that this rule applies in the
case of trustee-to-trustee transfers between traditional IRAs. The
final regulations retain the rule that the required minimum
distribution amount is ineligible for rollover, including such a
distribution for the year that the individual reaches age 70\1/2\,
because, pursuant to section 408A(d)(3)(C), a conversion is treated as
a distribution regardless of whether the conversion is accomplished by
a trustee-to-trustee transfer. Accordingly, the required minimum
distribution amount is ineligible for rollover, and as such, is also
ineligible to be converted to a Roth IRA.
Additionally, several commentators suggested that the rule in the
proposed regulations is inconsistent with section 401(a)(9), which
generally requires that IRA distributions begin by April 1 of the
calendar year following the calendar year in which the IRA owner
reaches age 70\1/2\. These commentators argued that, under section
401(a)(9), distributions made during the calendar year in which the IRA
owner reaches age 70\1/2\ should not be considered required minimum
distributions under sections 401(a)(9) and 408(a)(6) and (b)(3).
However, the proposed regulations under sections 401(a)(9) and
408(a)(6) and (b)(3) provide that the first year for which
distributions are required under section 401(a)(9) is the year in which
the IRA owner reaches age 70\1/2\, and that distributions made prior to
April 1 of the following calendar year are treated as made for that
first year. The regulations under section 402(c) and the proposed
regulations under sections 401(a)(9) and 408(a)(6) and (b)(3) provide
that the first amount distributed during a calendar year is treated as
a required minimum distribution to the extent that the amount required
to be distributed for that calendar year under section 401(a)(9) has
not been distributed. For these reasons, the final regulations retain
the rule of the proposed regulations.
Recharacterizations of IRA Contributions
The final regulations clarify that the computation of net income
under Sec. 1.408-4(c)(2)(iii) in the case of a commingled IRA may
include net losses on the amount to be recharacterized.
Commentators asked the IRS and Treasury to clarify whether an
amount converted from a SEP IRA or SIMPLE IRA to a Roth IRA may be
recharacterized back to the SEP IRA or SIMPLE IRA from which the amount
was converted. The final regulations provide that Roth IRA conversion
contributions from a SEP IRA or SIMPLE IRA may be recharacterized to a
SEP IRA or SIMPLE IRA (including the original SEP IRA or SIMPLE IRA).
Another commentator also asked for clarification whether it is
necessary to track the source of assets (i.e., as employer or employee
contributions) converted from a SEP IRA or SIMPLE IRA to a Roth IRA for
purposes of determining whether such assets may be recharacterized. The
prohibition on recharacterizing employer contributions to a SEP IRA or
SIMPLE IRA set forth in the final regulations only applies to those
contributions at the time they are made to the SEP IRA or SIMPLE IRA.
Once such contributions have been made to a SEP IRA or a SIMPLE IRA,
the SEP IRA or SIMPLE IRA may be converted to a Roth IRA and
subsequently recharacterized (provided, in the case of a SIMPLE IRA,
that the two-year rule has been satisfied prior to the conversion).
Commentators asked for clarification regarding whether an election
to recharacterize an IRA contribution may be made on behalf of a
deceased IRA owner. The final regulations provide that the election to
recharacterize an IRA contribution may be made by the executor,
administrator, or other person charged with the duty of filing the
decedent's final Federal income tax return.
Commentators also asked whether an excess contribution to an IRA
made in a prior year, and applied against the contribution limits in
the current year under section 4973, may be recharacterized. Only
actual contributions may be recharacterized; thus, excess contributions
actually made for a prior year and deemed to be current-year
contributions for purposes of section 4973, are not contributions that
are eligible to be recharacterized (unless the recharacterization would
still be timely with respect to the taxable year for which the
contributions were actually made). This rule applies to any excess
contribution, whether made to a traditional or a Roth IRA.
Commentators asked for clarification regarding a conduit IRA that
is converted to a Roth IRA and subsequently recharacterized back to a
traditional IRA. The IRS and Treasury note that a conduit IRA that is
converted to a Roth IRA and subsequently recharacterized back to a
traditional IRA retains its status as a conduit IRA because the effect
of the recharacterization is to treat the amount recharacterized as
though it had been transferred directly from the original conduit IRA
into another conduit IRA.
Commentators also asked whether a recharacterization is subject to
withholding. A recharacterization is not a designated distribution
under section 3405 and, therefore, is not subject to withholding.
The final regulations also provide rules regarding the
``reconversion'' of an amount that has been transferred from a Roth IRA
to a traditional IRA by means of a recharacterization after having been
earlier converted from a traditional IRA to a Roth IRA. After
publication of the proposed regulations, the IRS and Treasury issued
Notice 98-50, which provides interim rules regarding Roth IRA
reconversions made during 1998 and 1999. Notice 98-50 stated that the
interim rules were intended to clarify and supplement the proposed
regulations and permitted taxpayers to rely on those rules as if
incorporated in the proposed regulations. Notice 98-50 noted that the
IRS and Treasury were considering whether the final regulations should
provide that a taxpayer is not eligible to reconvert an amount before
the end of the taxable year in which the amount was first converted (or
the due date for that taxable year), or that a taxpayer who transfers a
converted amount back to a traditional IRA in a recharacterization must
wait until the passage of a fixed number of days before reconverting.
Although Notice 98-50 invited interested parties to submit comments on
those approaches, little comment was received on that issue. The final
regulations provide reconversion rules for 2000 and subsequent years
that generally differ from the interim rules of Notice 98-50. However,
for 1998 and 1999, the final regulations continue the interim rules of
Notice 98-50.
Effective January 1, 2000, an IRA owner who converts an amount from
a traditional IRA to a Roth IRA during any taxable year and then
transfers that amount back to a traditional IRA by means of a
recharacterization may not
[[Page 5600]]
reconvert that amount from the traditional IRA to a Roth IRA before the
beginning of the taxable year following the taxable year in which the
amount was converted to a Roth IRA or, if later, the end of the 30-day
period beginning on the day on which the IRA owner transfers the amount
from the Roth IRA back to a traditional IRA by means of a
recharacterization. As under Notice 98-50, any amount previously
converted is adjusted for subsequent net income in determining the
amount subject to the limitation on subsequent reconversions.
A reconversion made before the later of the beginning of the next
taxable year or the end of the 30-day period that begins on the day of
the recharacterization is treated as a ``failed conversion'' (a
distribution from the traditional IRA and a regular contribution to the
Roth IRA), subject to correction through a recharacterization back to a
traditional IRA. For these purposes, only a failed conversion resulting
from a failure to satisfy the statutory requirements for a conversion
(e.g., the $100,000 modified adjusted gross income limit) is treated as
a conversion in determining when an IRA owner may make a reconversion.
Thus, an IRA owner whose taxable year is the calendar year and who
converts an amount to a Roth IRA in 2000 and then transfers that amount
back to a traditional IRA on January 18, 2001 because his or her
adjusted gross income for 2000 exceeds $100,000 cannot reconvert that
amount until February 17, 2001 (the first day after the end of the 30-
day period beginning on the day of the recharacterization transfer)
because the failed conversion made in 2000 is treated as a conversion
for purposes of the reconversion rules. However, if that IRA owner
inadvertently attempts to reconvert that amount before February 17,
2001, the attempted reconversion is not treated as a conversion for
purposes of the reconversion rules (although it is otherwise treated as
a failed conversion). Therefore, the IRA owner could transfer the
amount back to a traditional IRA in a recharacterization and reconvert
it at any time on or after February 17, 2001. If the IRA owner does
reconvert the amount on or after February 17, 2001, he or she cannot
reconvert that amount again until 2002.
As indicated above, the final regulations continue the interim
rules of Notice 98-50 applicable for 1998 and 1999. Therefore, an IRA
owner who converts an amount from a traditional IRA to a Roth IRA
during 1998 and then transfers that amount back to a traditional IRA by
means of a recharacterization may reconvert that amount once (but no
more than once) on or after November 1, 1998 and on or before December
31, 1998; the IRA owner may also reconvert that amount once (but no
more than once) during 1999. Similarly, an IRA owner who converts an
amount from a traditional IRA to a Roth IRA during 1999 that has not
been converted before and then transfers that amount back to a
traditional IRA by means of a recharacterization may reconvert that
amount once (but no more than once) on or before December 31, 1999. In
contrast to the rule for years after 1999, a failed conversion is not
treated as a conversion for these 1998 and 1999 interim rules.
As did Notice 98-50, the final regulations provide that a
reconversion made during 1998 or 1999 for which the IRA owner was not
eligible is deemed to be an ``excess reconversion'' and does not change
the IRA owner's taxable conversion amount. Instead, the excess
reconversion and the last preceding recharacterization are not taken
into account for purposes of determining the IRA owner's taxable
conversion amount, and the IRA owner's taxable conversion amount is
based on the last reconversion that was not an excess reconversion. An
excess reconversion is otherwise treated as a valid reconversion. The
final regulations grandfather conversions and reconversions made before
November 1, 1998.
Distributions
In response to concerns raised in the comments regarding potential
double taxation, the final regulations clarify that a nonqualified
distribution from a Roth IRA is taxed only to the extent that the
amount of the distribution, when added to all previous distributions
(whether or not they were qualified distributions) and reduced by the
taxable amount of such previous distributions, exceed the owner's
contributions to all his or her Roth IRAs.
Commentators also asked for clarification regarding whether a
beneficiary may aggregate his or her inherited Roth IRAs with other
Roth IRAs maintained by such beneficiary. The final regulations provide
that a beneficiary's inherited Roth IRA may not be aggregated with any
other Roth IRA maintained by such beneficiary (except for other Roth
IRAs that the beneficiary inherited from the same decedent), unless the
beneficiary, as the spouse of the decedent and sole beneficiary of the
Roth IRA, elects to treat the Roth IRA as his or her own.
In addition, commentators also asked for clarification regarding
whether the 5-taxable year period for determining whether a
distribution is a qualified distribution starts over for subsequent
Roth IRA contributions if the entire account balance in a Roth IRA is
distributed to the Roth IRA owner before he or she makes any other Roth
IRA contributions. In such a case, the 5-taxable-year period does not
start over. However, if an initial Roth IRA contribution is made to a
Roth IRA that subsequently is revoked within 7 days, or if an initial
Roth IRA contribution is recharacterized, the initial contribution does
not start the 5-year period. The final regulations provide that an
excess contribution that is distributed in accordance with section
408(d)(4) does not start the 5-year period.
One commentator questioned the rule in the proposed regulations
providing that a distribution allocable to a conversion contribution is
treated as made first from the portion (if any) that was includible in
gross income as a result of the conversion. The IRS and Treasury note
that this result is plainly compelled by section 408A(d)(4)(B)(ii).
Another commentator inquired about the treatment of all conversions as
designated distributions under section 3405; the commentator suggested
that conversions effected by means of trustee-to-trustee transfers
should not be treated as designated distributions subject to
withholding. However, section 408A(d)(3) treats all Roth IRA
conversions as distributions regardless of how they are effected.
Reporting Requirements
The final regulations retain the reporting rules set forth in the
proposed regulations.
Effective Date
The final regulations are applicable to taxable years beginning on
or after January 1, 1998, the effective date for section 408A.
Special Analyses
It has been determined that the final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Further, it is
hereby certified, pursuant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act, that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. The cost of the collection of
information is insignificant because the primary reporting burden is on
the individual
[[Page 5601]]
and not the small entity. Therefore the collection of information will
not have a substantial economic impact. Therefore, a regulatory
flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rulemaking preceding these
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting Information: The principal author of the final regulations
is Cathy A. Vohs, Office of Associate Chief Counsel (Employee Benefits
and Exempt Organizations). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.408A-1 also issued under 26 U.S.C. 408A.
Sec. 1.408A-2 also issued under 26 U.S.C. 408A.
Sec. 1.408A-3 also issued under 26 U.S.C. 408A.
Sec. 1.408A-4 also issued under 26 U.S.C. 408A.
Sec. 1.408A-5 also issued under 26 U.S.C. 408A.
Sec. 1.408A-6 also issued under 26 U.S.C. 408A.
Sec. 1.408A-7 also issued under 26 U.S.C. 408A.
Sec. 1.408A-8 also issued under 26 U.S.C. 408A.
Sec. 1.408A-9 also issued under 26 U.S.C. 408A. * * *
Par. 2. Sections 1.408A-0 through 1.408A-9 are added to read as
follows:
Sec. 1.408A-0 Roth IRAs; table of contents.
This table of contents lists the regulations relating to Roth IRAs
under section 408A of the Internal Revenue Code as follows:
Sec. 1.408A-1 Roth IRAs in general.
Sec. 1.408A-2 Establishing Roth IRAs.
Sec. 1.408A-3 Contributions to Roth IRAs.
Sec. 1.408A-4 Converting amounts to Roth IRAs.
Sec. 1.408A-5 Recharacterized contributions.
Sec. 1.408A-6 Distributions.
Sec. 1.408A-7 Reporting.
Sec. 1.408A-8 Definitions.
Sec. 1.408A-9 Effective date.
Sec. 1.408A-1 Roth IRAs in general.
This section sets forth the following questions and answers that
discuss the background and general features of Roth IRAs:
Q-1. What is a Roth IRA?
A-1. (a) A Roth IRA is a new type of individual retirement plan
that individuals can use, beginning in 1998. Roth IRAs are described in
section 408A, which was added by the Taxpayer Relief Act of 1997 (TRA
97), Public Law 105-34 (111 Stat. 788).
(b) Roth IRAs are treated like traditional IRAs except where the
Internal Revenue Code specifies different treatment. For example,
aggregate contributions (other than by a conversion or other rollover)
to all an individual's Roth IRAs are not permitted to exceed $2,000 for
a taxable year. Further, income earned on funds held in a Roth IRA is
generally not taxable. Similarly, the rules of section 408(e), such as
the loss of exemption of the account where the owner engages in a
prohibited transaction, apply to Roth IRAs in the same manner as to
traditional IRAs.
Q-2. What are the significant differences between traditional IRAs
and Roth IRAs?
A-2. There are several significant differences between traditional
IRAs and Roth IRAs under the Internal Revenue Code. For example,
eligibility to contribute to a Roth IRA is subject to special modified
AGI (adjusted gross income) limits; contributions to a Roth IRA are
never deductible; qualified distributions from a Roth IRA are not
includible in gross income; the required minimum distribution rules
under section 408(a)(6) and (b)(3) (which generally incorporate the
provisions of section 401(a)(9)) do not apply to a Roth IRA during the
lifetime of the owner; and contributions to a Roth IRA can be made
after the owner has attained age 70\1/2\.
Sec. 1.408A-2 Establishing Roth IRAs.
This section sets forth the following questions and answers that
provide rules applicable to establishing Roth IRAs:
Q-1. Who can establish a Roth IRA?
A-1. Except as provided in A-3 of this section, only an individual
can establish a Roth IRA. In addition, in order to be eligible to
contribute to a Roth IRA for a particular year, an individual must
satisfy certain compensation requirements and adjusted gross income
limits (see Sec. 1.408A-3 A-3).
Q-2. How is a Roth IRA established?
A-2. A Roth IRA can be established with any bank, insurance
company, or other person authorized in accordance with Sec. 1.408-2(e)
to serve as a trustee with respect to IRAs. The document establishing
the Roth IRA must clearly designate the IRA as a Roth IRA, and this
designation cannot be changed at a later date. Thus, an IRA that is
designated as a Roth IRA cannot later be treated as a traditional IRA.
However, see Sec. 1.408A-4 A-1(b)(3) for certain rules for converting a
traditional IRA to a Roth IRA with the same trustee by redesignating
the traditional IRA as a Roth IRA, and see Sec. 1.408A-5 for rules for
recharacterizing certain IRA contributions.
Q-3. Can an employer or an association of employees establish a
Roth IRA to hold contributions of employees or members?
A-3. Yes. Pursuant to section 408(c), an employer or an association
of employees can establish a trust to hold contributions of employees
or members made under a Roth IRA. Each employee's or member's account
in the trust is treated as a separate Roth IRA that is subject to the
generally applicable Roth IRA rules. The employer or association of
employees may do certain acts otherwise required by an individual, for
example, establishing and designating a trust as a Roth IRA.
Q-4. What is the effect of a surviving spouse of a Roth IRA owner
treating an IRA as his or her own?
A-4. If the surviving spouse of a Roth IRA owner treats a Roth IRA
as his or her own as of a date, the Roth IRA is treated from that date
forward as though it were established for the benefit of the surviving
spouse and not the original Roth IRA owner. Thus, for example, the
surviving spouse is treated as the Roth IRA owner for purposes of
applying the minimum distribution requirements under section 408(a)(6)
and (b)(3). Similarly, the surviving spouse is treated as the Roth IRA
owner rather than a beneficiary for purposes of determining the amount
of any distribution from the Roth IRA that is includible in gross
income and whether the distribution is subject to the 10-percent
additional tax under section 72(t).
Sec. 1.408A-3 Contributions to Roth IRAs.
This section sets forth the following questions and answers that
provide rules regarding contributions to Roth IRAs:
Q-1. What types of contributions are permitted to be made to a Roth
IRA?
A-1. There are two types of contributions that are permitted to be
[[Page 5602]]
made to a Roth IRA: regular contributions and qualified rollover
contributions (including conversion contributions). The term regular
contributions means contributions other than qualified rollover
contributions.
Q-2. When are contributions permitted to be made to a Roth IRA?
A-2. (a) The provisions of section 408A are effective for taxable
years beginning on or after January 1, 1998. Thus, the first taxable
year for which contributions are permitted to be made to a Roth IRA by
an individual is the individual's taxable year beginning in 1998.
(b) Regular contributions for a particular taxable year must
generally be contributed by the due date (not including extensions) for
filing a Federal income tax return for that taxable year. (See
Sec. 1.408A-5 regarding recharacterization of certain contributions.)
Q-3. What is the maximum aggregate amount of regular contributions
an individual is eligible to contribute to a Roth IRA for a taxable
year?
A-3. (a) The maximum aggregate amount that an individual is
eligible to contribute to all his or her Roth IRAs as a regular
contribution for a taxable year is the same as the maximum for
traditional IRAs: $2,000 or, if less, that individual's compensation
for the year.
(b) For Roth IRAs, the maximum amount described in paragraph (a) of
this A-3 is phased out between certain levels of modified AGI. For an
individual who is not married, the dollar amount is phased out ratably
between modified AGI of $95,000 and $110,000; for a married individual
filing a joint return, between modified AGI of $150,000 and $160,000;
and for a married individual filing separately, between modified AGI of
$0 and $10,000. For this purpose, a married individual who has lived
apart from his or her spouse for the entire taxable year and who files
separately is treated as not married. Under section 408A(c)(3)(A), in
applying the phase-out, the maximum amount is rounded up to the next
higher multiple of $10 and is not reduced below $200 until completely
phased out.
(c) If an individual makes regular contributions to both
traditional IRAs and Roth IRAs for a taxable year, the maximum limit
for the Roth IRA is the lesser of--
(1) The amount described in paragraph (a) of this A-3 reduced by
the amount contributed to traditional IRAs for the taxable year; and
(2) The amount described in paragraph (b) of this A-3. Employer
contributions, including elective deferrals, made under a SEP or SIMPLE
IRA Plan on behalf of an individual (including a self-employed
individual) do not reduce the amount of the individual's maximum
regular contribution.
(d) The rules in this A-3 are illustrated by the following
examples:
Example 1. In 1998, unmarried, calendar-year taxpayer B, age 60,
has modified AGI of $40,000 and compensation of $5,000. For 1998, B
can contribute a maximum of $2,000 to a traditional IRA, a Roth IRA
or a combination of traditional and Roth IRAs.
Example 2. The facts are the same as in Example 1. However,
assume that B violates the maximum regular contribution limit by
contributing $2,000 to a traditional IRA and $2,000 to a Roth IRA
for 1998. The $2,000 to B's Roth IRA would be an excess contribution
to B's Roth IRA for 1998 because an individual's contributions are
applied first to a traditional IRA, then to a Roth IRA.
Example 3. The facts are the same as in Example 1, except that
B's compensation is $900. The maximum amount B can contribute to
either a traditional IRA or a Roth (or a combination of the two) for
1998 is $900.
Example 4. In 1998, unmarried, calendar-year taxpayer C, age 60,
has modified AGI of $100,000 and compensation of $5,000. For 1998, C
contributes $800 to a traditional IRA and $1,200 to a Roth IRA.
Because C's $1,200 Roth IRA contribution does not exceed the phased-
out maximum Roth IRA contribution of $1,340 and because C's total
IRA contributions do not exceed $2,000, C's Roth IRA contribution
does not exceed the maximum permissible contribution.
Q-4. How is compensation defined for purposes of the Roth IRA
contribution limit?
A-4. For purposes of the contribution limit described in A-3 of
this section, an individual's compensation is the same as that used to
determine the maximum contribution an individual can make to a
traditional IRA. This amount is defined in section 219(f)(1) to include
wages, commissions, professional fees, tips, and other amounts received
for personal services, as well as taxable alimony and separate
maintenance payments received under a decree of divorce or separate
maintenance. Compensation also includes earned income as defined in
section 401(c)(2), but does not include any amount received as a
pension or annuity or as deferred compensation. In addition, under
section 219(c), a married individual filing a joint return is permitted
to make an IRA contribution by treating his or her spouse's higher
compensation as his or her own, but only to the extent that the
spouse's compensation is not being used for purposes of the spouse
making a contribution to a Roth IRA or a deductible contribution to a
traditional IRA.
Q-5. What is the significance of modified AGI and how is it
determined?
A-5. Modified AGI is used for purposes of the phase-out rules
described in A-3 of this section and for purposes of the $100,000
modified AGI limitation described in Sec. 1.408A-4 A-2(a) (relating to
eligibility for conversion). As defined in section 408A(c)(3)(C)(i),
modified AGI is the same as adjusted gross income under section
219(g)(3)(A) (used to determine the amount of deductible contributions
that can be made to a traditional IRA by an individual who is an active
participant in an employer-sponsored retirement plan), except that any
conversion is disregarded in determining modified AGI. For example, the
deduction for contributions to an IRA is not taken into account for
purposes of determining adjusted gross income under section 219 and
thus does not apply in determining modified AGI for Roth IRA purposes.
Q-6. Is a required minimum distribution from an IRA for a year
included in income for purposes of determining modified AGI?
A-6. (a) Yes. For taxable years beginning before January 1, 2005,
any required minimum distribution from an IRA under section 408(a)(6)
and (b)(3) (which generally incorporate the provisions of section
401(a)(9)) is included in income for purposes of determining modified
AGI.
(b) For taxable years beginning after December 31, 2004, and solely
for purposes of the $100,000 limitation applicable to conversions,
modified AGI does not include any required minimum distributions from
an IRA under section 408(a)(6) and (b)(3).
Q-7. Does an excise tax apply if an individual exceeds the
aggregate regular contribution limits for Roth IRAs?
A-7. Yes. Section 4973 imposes an annual 6-percent excise tax on
aggregate amounts contributed to Roth IRAs that exceed the maximum
contribution limits described in A-3 of this section. Any contribution
that is distributed, together with net income, from a Roth IRA on or
before the tax return due date (plus extensions) for the taxable year
of the contribution is treated as not contributed. Net income described
in the previous sentence is includible in gross income for the taxable
year in which the contribution is made. Aggregate excess contributions
that are not distributed from a Roth IRA on or before the tax return
due date (with extensions) for the taxable year of the contributions
are reduced as a deemed Roth IRA contribution for each
[[Page 5603]]
subsequent taxable year to the extent that the Roth IRA owner does not
actually make regular IRA contributions for such years. Section 4973
applies separately to an individual's Roth IRAs and other types of
IRAs.
Sec. 1.408A-4 Converting amounts to Roth IRAs.
This section sets forth the following questions and answers that
provide rules applicable to Roth IRA conversions:
Q-1. Can an individual convert an amount in his or her traditional
IRA to a Roth IRA?
A-1. (a) Yes. An amount in a traditional IRA may be converted to an
amount in a Roth IRA if two requirements are satisfied. First, the IRA
owner must satisfy the modified AGI limitation described in A-2(a) of
this section and, if married, the joint filing requirement described in
A-2(b) of this section. Second, the amount contributed to the Roth IRA
must satisfy the definition of a qualified rollover contribution in
section 408A(e) (i.e., it must satisfy the requirements for a rollover
contribution as defined in section 408(d)(3), except that the one-
rollover-per-year limitation in section 408(d)(3)(B) does not apply).
(b) An amount can be converted by any of three methods--
(1) An amount distributed from a traditional IRA is contributed
(rolled over) to a Roth IRA within the 60-day period described in
section 408(d)(3)(A)(i);
(2) An amount in a traditional IRA is transferred in a trustee-to-
trustee transfer from the trustee of the traditional IRA to the trustee
of the Roth IRA; or
(3) An amount in a traditional IRA is transferred to a Roth IRA
maintained by the same trustee. For purposes of sections 408 and 408A,
redesignating a traditional IRA as a Roth IRA is treated as a transfer
of the entire account balance from a traditional IRA to a Roth IRA.
(c) Any converted amount is treated as a distribution from the
traditional IRA and a qualified rollover contribution to the Roth IRA
for purposes of section 408 and section 408A, even if the conversion is
accomplished by means of a trustee-to-trustee transfer or a transfer
between IRAs of the same trustee.
(d) A transaction that is treated as a failed conversion under
Sec. 1.408A-5 A-9(a)(1) is not a conversion.
Q-2. What are the modified AGI limitation and joint filing
requirements for conversions?
A-2. (a) An individual with modified AGI in excess of $100,000 for
a taxable year is not permitted to convert an amount to a Roth IRA
during that taxable year. This $100,000 limitation applies to the
taxable year that the funds are paid from the traditional IRA, rather
than the year they are contributed to the Roth IRA.
(b) If the individual is married, he or she is permitted to convert
an amount to a Roth IRA during a taxable year only if the individual
and the individual's spouse file a joint return for the taxable year
that the funds are paid from the traditional IRA. In this case, the
modified AGI subject to the $100,000 limit is the modified AGI derived
from the joint return using the couple's combined income. The only
exception to this joint filing requirement is for an individual who has
lived apart from his or her spouse for the entire taxable year. If the
married individual has lived apart from his or her spouse for the
entire taxable year, then such individual can treat himself or herself
as not married for purposes of this paragraph, file a separate return
and be subject to the $100,000 limit on his or her separate modified
AGI. In all other cases, a married individual filing a separate return
is not permitted to convert an amount to a Roth IRA, regardless of the
individual's modified AGI.
Q-3. Is a remedy available to an individual who makes a failed
conversion?
A-3. (a) Yes. See Sec. 1.408A-5 for rules permitting a failed
conversion amount to be recharacterized as a contribution to a
traditional IRA. If the requirements in Sec. 1.408A-5 are satisfied,
the failed conversion amount will be treated as having been contributed
to the traditional IRA and not to the Roth IRA.
(b) If the contribution is not recharacterized in accordance with
Sec. 1.408A-5, the contribution will be treated as a regular
contribution to the Roth IRA and, thus, an excess contribution subject
to the excise tax under section 4973 to the extent that it exceeds the
individual's regular contribution limit. This is the result regardless
of which of the three methods described in A-1(b) of this section
applies to this transaction. Additionally, the distribution from the
traditional IRA will not be eligible for the 4-year spread and will be
subject to the additional tax under section 72(t) (unless an exception
under that section applies).
Q-4. Do any special rules apply to a conversion of an amount in an
individual's SEP IRA or SIMPLE IRA to a Roth IRA?
A-4. (a) An amount in an individual's SEP IRA can be converted to a
Roth IRA on the same terms as an amount in any other traditional IRA.
(b) An amount in an individual's SIMPLE IRA can be converted to a
Roth IRA on the same terms as a conversion from a traditional IRA,
except that an amount distributed from a SIMPLE IRA during the 2-year
period described in section 72(t)(6), which begins on the date that the
individual first participated in any SIMPLE IRA Plan maintained by the
individual's employer, cannot be converted to a Roth IRA. Pursuant to
section 408(d)(3)(G), a distribution of an amount from an individual's
SIMPLE IRA during this 2-year period is not eligible to be rolled over
into an IRA that is not a SIMPLE IRA and thus cannot be a qualified
rollover contribution. This 2-year period of section 408(d)(3)(G)
applies separately to the contributions of each of an individual's
employers maintaining a SIMPLE IRA Plan.
(c) Once an amount in a SEP IRA or SIMPLE IRA has been converted to
a Roth IRA, it is treated as a contribution to a Roth IRA for all
purposes. Future contributions under the SEP or under the SIMPLE IRA
Plan may not be made to the Roth IRA.
Q-5. Can amounts in other kinds of retirement plans be converted to
a Roth IRA?
A-5. No. Only amounts in another IRA can be converted to a Roth
IRA. For example, amounts in a qualified plan or annuity plan described
in section 401(a) or 403(a) cannot be converted directly to a Roth IRA.
Also, amounts held in an annuity contract or account described in
section 403(b) cannot be converted directly to a Roth IRA.
Q-6. Can an individual who has attained at least age 70\1/2\ by the
end of a calendar year convert an amount distributed from a traditional
IRA during that year to a Roth IRA before receiving his or her required
minimum distribution with respect to the traditional IRA for the year
of the conversion?
A-6. (a) No. In order to be eligible for a conversion, an amount
first must be eligible to be rolled over. Section 408(d)(3) prohibits
the rollover of a required minimum distribution. If a minimum
distribution is required for a year with respect to an IRA, the first
dollars distributed during that year are treated as consisting of the
required minimum distribution until an amount equal to the required
minimum distribution for that year has been distributed.
(b) As provided in A-1(c) of this section, any amount converted is
treated as a distribution from a traditional IRA and a rollover
contribution to a Roth
[[Page 5604]]
IRA and not as a trustee-to-trustee transfer for purposes of section
408 and section 408A. Thus, in a year for which a minimum distribution
is required (including the calendar year in which the individual
attains age 70\1/2\), an individual may not convert the assets of an
IRA (or any portion of those assets) to a Roth IRA to the extent that
the required minimum distribution for the traditional IRA for the year
has not been distributed.
(c) If a required minimum distribution is contributed to a Roth
IRA, it is treated as having been distributed, subject to the normal
rules under section 408(d)(1) and (2), and then contributed as a
regular contribution to a Roth IRA. The amount of the required minimum
distribution is not a conversion contribution.
Q-7. What are the tax consequences when an amount is converted to a
Roth IRA?
A-7. (a) Any amount that is converted to a Roth IRA is includible
in gross income as a distribution according to the rules of section
408(d)(1) and (2) for the taxable year in which the amount is
distributed or transferred from the traditional IRA. Thus, any portion
of the distribution or transfer that is treated as a return of basis
under section 408(d)(1) and (2) is not includible in gross income as a
result of the conversion.
(b) The 10-percent additional tax under section 72(t) generally
does not apply to the taxable conversion amount. But see Sec. 1.408A-6
A-5 for circumstances under which the taxable conversion amount would
be subject to the additional tax under section 72(t).
(c) Pursuant to section 408A(e), a conversion is not treated as a
rollover for purposes of the one-rollover-per-year rule of section
408(d)(3)(B).
Q-8. Is there an exception to the income-inclusion rule described
in A-7 of this section for 1998 conversions?
A-8. Yes. In the case of a distribution (including a trustee-to-
trustee transfer) from a traditional IRA on or before December 31,
1998, that is converted to a Roth IRA, instead of having the entire
taxable conversion amount includible in income in 1998, an individual
includes in gross income for 1998 only one quarter of that amount and
one quarter of that amount for each of the next 3 years. This 4-year
spread also applies if the conversion amount was distributed in 1998
and contributed to the Roth IRA within the 60-day period described in
section 408(d)(3)(A)(i), but after December 31, 1998. However, see
Sec. 1.408A-6 A-6 for special rules requiring acceleration of inclusion
if an amount subject to the 4-year spread is distributed from the Roth
IRA before 2001.
Q-9. Is the taxable conversion amount included in income for all
purposes?
A-9. Except as provided below, any taxable conversion amount
includible in gross income for a year as a result of the conversion
(regardless of whether the individual is using a 4-year spread) is
included in income for all purposes. Thus, for example, it is counted
for purposes of determining the taxable portion of social security
payments under section 86 and for purposes of determining the phase-out
of the $25,000 exemption under section 469(i) relating to the
disallowance of passive activity losses from rental real estate
activities. However, as provided in Sec. 1.408A-3 A-5, the taxable
conversion amount (and any resulting change in other elements of
adjusted gross income) is disregarded for purposes of determining
modified AGI for section 408A.
Q-10. Can an individual who makes a 1998 conversion elect not to
have the 4-year spread apply and instead have the full taxable
conversion amount includible in gross income for 1998?
A-10. Yes. Instead of having the taxable conversion amount for a
1998 conversion included over 4 years as provided under A-8 of this
section, an individual can elect to include the full taxable conversion
amount in income for 1998. The election is made on Form 8606 and cannot
be made or changed after the due date (including extensions) for filing
the 1998 Federal income tax return.
Q-11. What happens when an individual who is using the 4-year
spread dies, files separately, or divorces before the full taxable
conversion amount has been included in gross income?
A-11. (a) If an individual who is using the 4-year spread described
in A-8 of this section dies before the full taxable conversion amount
has been included in gross income, then the remainder must be included
in the individual's gross income for the taxable year that includes the
date of death.
(b) However, if the sole beneficiary of all the decedent's Roth
IRAs is the decedent's spouse, then the spouse can elect to continue
the 4-year spread. Thus, the spouse can elect to include in gross
income the same amount that the decedent would have included in each of
the remaining years of the 4-year period. Where the spouse makes such
an election, the amount includible under the 4-year spread for the
taxable year that includes the date of the decedent's death remains
includible in the decedent's gross income and is reported on the
decedent's final Federal income tax return. The election is made on
either Form 8606 or Form 1040, in accordance with the instructions to
the applicable form, for the taxable year that includes the decedent's
date of death and cannot be changed after the due date (including
extensions) for filing the Federal income tax return for the spouse's
taxable year that includes the decedent's date of death.
(c) If a Roth IRA owner who is using the 4-year spread and who was
married in 1998 subsequently files separately or divorces before the
full taxable conversion amount has been included in gross income, the
remainder of the taxable conversion amount must be included in the Roth
IRA owner's gross income over the remaining years in the 4-year period
(unless accelerated because of distribution or death).
Q-12. Can an individual convert a traditional IRA to a Roth IRA if
he or she is receiving substantially equal periodic payments within the
meaning of section 72(t)(2)(A)(iv) from that traditional IRA?
A-12. Yes. Not only is the conversion amount itself not subject to
the early distribution tax under section 72(t), but the conversion
amount is also not treated as a distribution for purposes of
determining whether a modification within the meaning of section
72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part
of the original series of substantially equal periodic payments will be
nonqualified distributions from the Roth IRA until they meet the
requirements for being a qualified distribution, described in
Sec. 1.408A-6 A-1(b). The additional 10-percent tax under section 72(t)
will not apply to the extent that these nonqualified distributions are
part of a series of substantially equal periodic payments.
Nevertheless, to the extent that such distributions are allocable to a
1998 conversion contribution with respect to which the 4-year spread
for the resultant income inclusion applies (see A-8 of this section)
and are received during 1998, 1999, or 2000, the special acceleration
rules of Sec. 1.408A-6 A-6 apply. However, if the original series of
substantially equal periodic payments does not continue to be
distributed in substantially equal periodic payments from the Roth IRA
after the conversion, the series of payments will have been modified
and, if this modification occurs within 5 years of the first payment or
prior to the individual becoming disabled or attaining age 59\1/2\, the
taxpayer will be subject to the recapture tax of section 72(t)(4)(A).
[[Page 5605]]
Q-13. Can a 1997 distribution from a traditional IRA be converted
to a Roth IRA in 1998?
A-13. No. An amount distributed from a traditional IRA in 1997 that
is contributed to a Roth IRA in 1998 would not be a conversion
contribution. See A-3 of this section regarding the remedy for a failed
conversion.
Sec. 1.408A-5 Recharacterized contributions.
This section sets forth the following questions and answers that
provide rules regarding recharacterizing IRA contributions:
Q-1. Can an IRA owner recharacterize certain contributions (i.e.,
treat a contribution made to one type of IRA as made to a different
type of IRA) for a taxable year?
A-1. (a) Yes. In accordance with section 408A(d)(6), except as
otherwise provided in this section, if an individual makes a
contribution to an IRA (the FIRST IRA) for a taxable year and then
transfers the contribution (or a portion of the contribution) in a
trustee-to-trustee transfer from the trustee of the FIRST IRA to the
trustee of another IRA (the SECOND IRA), the individual can elect to
treat the contribution as having been made to the SECOND IRA, instead
of to the FIRST IRA, for Federal tax purposes. A transfer between the
FIRST IRA and the SECOND IRA will not fail to be a trustee-to-trustee
transfer merely because both IRAs are maintained by the same trustee.
For purposes of section 408A(d)(6), redesignating the FIRST IRA as the
SECOND IRA will be treated as a transfer of the entire account balance
from the FIRST IRA to the SECOND IRA.
(b) This recharacterization election can be made only if the
trustee-to-trustee transfer from the FIRST IRA to the SECOND IRA is
made on or before the due date (including extensions) for filing the
individual's Federal income tax return for the taxable year for which
the contribution was made to the FIRST IRA. For purposes of this
section, a conversion that is accomplished through a rollover of a
distribution from a traditional IRA in a taxable year that, 60 days
after the distribution (as described in section 408(d)(3)(A)(i)), is
contributed to a Roth IRA in the next taxable year is treated as a
contribution for the earlier taxable year.
Q-2. What is the proper treatment of the net income attributable to
the amount of a contribution that is being recharacterized?
A-2. (a) The net income attributable to the amount of a
contribution that is being recharacterized must be transferred to the
SECOND IRA along with the contribution.
(b) If the amount of the contribution being recharacterized was
contributed to a separate IRA and no distributions or additional
contributions have been made from or to that IRA at any time, then the
contribution is recharacterized by the trustee of the FIRST IRA
transferring the entire account balance of the FIRST IRA to the trustee
of the SECOND IRA. In this case, the net income (or loss) attributable
to the contribution being recharacterized is the difference between the
amount of the original contribution and the amount transferred.
(c) If paragraph (b) of this A-2 does not apply, then the net
income attributable to the amount of a contribution is calculated in
the manner prescribed by Sec. 1.408-4(c)(2)(ii) (disregarding the
parenthetical clause in Sec. 1.408-4(c)(2)(iii)).
Q-3. What is the effect of recharacterizing a contribution made to
the FIRST IRA as a contribution made to the SECOND IRA?
A-3. The contribution that is being recharacterized as a
contribution to the SECOND IRA is treated as having been originally
contributed to the SECOND IRA on the same date and (in the case of a
regular contribution) for the same taxable year that the contribution
was made to the FIRST IRA. Thus, for example, no deduction would be
allowed for a contribution to the FIRST IRA, and any net income
transferred with the recharacterized contribution is treated as earned
in the SECOND IRA, and not the FIRST IRA.
Q-4. Can an amount contributed to an IRA in a tax-free transfer be
recharacterized under A-1 of this section?
A-4. No. If an amount is contributed to the FIRST IRA in a tax-free
transfer, the amount cannot be recharacterized as a contribution to the
SECOND IRA under A-1 of this section. However, if an amount is
erroneously rolled over or transferred from a traditional IRA to a
SIMPLE IRA, the contribution can subsequently be recharacterized as a
contribution to another traditional IRA.
Q-5. Can an amount contributed by an employer under a SIMPLE IRA
Plan or a SEP be recharacterized under A-1 of this section?
A-5. No. Employer contributions (including elective deferrals)
under a SIMPLE IRA Plan or a SEP cannot be recharacterized as
contributions to another IRA under A-1 of this section. However, an
amount converted from a SEP IRA or SIMPLE IRA to a Roth IRA may be
recharacterized under A-1 of this section as a contribution to a SEP
IRA or SIMPLE IRA, including the original SEP IRA or SIMPLE IRA.
Q-6. How does a taxpayer make the election to recharacterize a
contribution to an IRA for a taxable year?
A-6. (a) An individual makes the election described in this section
by notifying, on or before the date of the transfer, both the trustee
of the FIRST IRA and the trustee of the SECOND IRA, that the individual
has elected to treat the contribution as having been made to the SECOND
IRA, instead of the FIRST IRA, for Federal tax purposes. The
notification of the election must include the following information:
the type and amount of the contribution to the FIRST IRA that is to be
recharacterized; the date on which the contribution was made to the
FIRST IRA and the year for which it was made; a direction to the
trustee of the FIRST IRA to transfer, in a trustee-to-trustee transfer,
the amount of the contribution and net income allocable to the
contribution to the trustee of the SECOND IRA; and the name of the
trustee of the FIRST IRA and the trustee of the SECOND IRA and any
additional information needed to make the transfer.
(b) The election and the trustee-to-trustee transfer must occur on
or before the due date (including extensions) for filing the
individual's Federal income tax return for the taxable year for which
the recharacterized contribution was made to the FIRST IRA, and the
election cannot be revoked after the transfer. An individual who makes
this election must report the recharacterization, and must treat the
contribution as having been made to the SECOND IRA, instead of the
FIRST IRA, on the individual's Federal income tax return for the
taxable year described in the preceding sentence in accordance with the
applicable Federal tax forms and instructions.
(c) The election to recharacterize a contribution described in this
A-6 may be made on behalf of a deceased IRA owner by his or her
executor, administrator, or other person responsible for filing the
final Federal income tax return of the decedent under section
6012(b)(1).
Q-7. If an amount is initially contributed to an IRA for a taxable
year, then is moved (with net income attributable to the contribution)
in a tax-free transfer to another IRA (the FIRST IRA for purposes of A-
1 of this section), can the tax-free transfer be disregarded, so that
the initial contribution that is transferred from the FIRST IRA to the
SECOND IRA is treated as a recharacterization of that initial
contribution?
A-7. Yes. In applying section 408A(d)(6), tax-free transfers
between IRAs are disregarded. Thus, if a
[[Page 5606]]
contribution to an IRA for a year is followed by one or more tax-free
transfers between IRAs prior to the recharacterization, then for
purposes of section 408A(d)(6), the contribution is treated as if it
remained in the initial IRA. Consequently, an individual may elect to
recharacterize an initial contribution made to the initial IRA that was
involved in a series of tax-free transfers by making a trustee-to-
trustee transfer from the last IRA in the series to the SECOND IRA. In
this case the contribution to the SECOND IRA is treated as made on the
same date (and for the same taxable year) as the date the contribution
being recharacterized was made to the initial IRA.
Q-8. If a contribution is recharacterized, is the
recharacterization treated as a rollover for purposes of the one-
rollover-per-year limitation of section 408(d)(3)(B)?
A-8. No, recharacterizing a contribution under A-1 of this section
is never treated as a rollover for purposes of the one-rollover-per-
year limitation of section 408(d)(3)(B), even if the contribution would
have been treated as a rollover contribution by the SECOND IRA if it
had been made directly to the SECOND IRA, rather than as a result of a
recharacterization of a contribution to the FIRST IRA.
Q-9. If an IRA owner converts an amount from a traditional IRA to a
Roth IRA and then transfers that amount back to a traditional IRA in a
recharacterization, may the IRA owner subsequently reconvert that
amount from the traditional IRA to a Roth IRA?
A-9. (a)(1) Except as otherwise provided in paragraph (b) of this
A-9, an IRA owner who converts an amount from a traditional IRA to a
Roth IRA during any taxable year and then transfers that amount back to
a traditional IRA by means of a recharacterization may not reconvert
that amount from the traditional IRA to a Roth IRA before the beginning
of the taxable year following the taxable year in which the amount was
converted to a Roth IRA or, if later, the end of the 30-day period
beginning on the day on which the IRA owner transfers the amount from
the Roth IRA back to a traditional IRA by means of a recharacterization
(regardless of whether the recharacterization occurs during the taxable
year in which the amount was converted to a Roth IRA or the following
taxable year). Thus, any attempted reconversion of an amount prior to
the time permitted under this paragraph (a)(1) is a failed conversion
of that amount. However, see Sec. 1.408A-4 A-3 for a remedy available
to an individual who makes a failed conversion.
(2) For purposes of paragraph (a)(1) of this A-9, a failed
conversion of an amount resulting from a failure to satisfy the
requirements of Sec. 1.408A-4 A-1(a) is treated as a conversion in
determining whether an IRA owner has previously converted that amount.
(b)(1) An IRA owner who converts an amount from a traditional IRA
to a Roth IRA during taxable year 1998 and then transfers that amount
back to a traditional IRA by means of a recharacterization may
reconvert that amount once (but no more than once) on or after November
1, 1998 and on or before December 31, 1998; the IRA owner may also
reconvert that amount once (but no more than once) during 1999. The
rule set forth in the preceding sentence applies without regard to
whether the IRA owner's initial conversion or recharacterization of the
amount occurred before, on, or after November 1, 1998. An IRA owner who
converts an amount from a traditional IRA to a Roth IRA during taxable
year 1999 that has not been converted previously and then transfers
that amount back to a traditional IRA by means of a recharacterization
may reconvert that amount once (but no more than once) on or before
December 31, 1999. For purposes of this paragraph (b)(1), a failed
conversion of an amount resulting from a failure to satisfy the
requirements of Sec. 1.408A-4 A-1(a) is not treated as a conversion in
determining whether an IRA owner has previously converted that amount.
(2) A reconversion by an IRA owner during 1998 or 1999 for which
the IRA owner is not eligible under paragraph (b)(1) of this A-9 will
be deemed an excess reconversion (rather than a failed conversion) and
will not change the IRA owner's taxable conversion amount. Instead, the
excess reconversion and the last preceding recharacterization will not
be taken into account for purposes of determining the IRA owner's
taxable conversion amount, and the IRA owner's taxable conversion
amount will be based on the last reconversion that was not an excess
reconversion (unless, after the excess reconversion, the amount is
transferred back to a traditional IRA by means of a
recharacterization). An excess reconversion will otherwise be treated
as a valid reconversion.
(3) For purposes of this paragraph (b), any reconversion that an
IRA owner made before November 1, 1998 will not be treated as an excess
reconversion and will not be taken into account in determining whether
any later reconversion is an excess reconversion.
(c) In determining the portion of any amount held in a Roth IRA or
a traditional IRA that an IRA owner may not reconvert under this A-9,
any amount previously converted (or reconverted) is adjusted for
subsequent net income thereon.
Q-10. Are there examples to illustrate the rules in this section?
A-10. The rules in this section are illustrated by the following
examples:
Example 1. In 1998, Individual C converts the entire amount in
his traditional IRA to a Roth IRA. Individual C thereafter
determines that his modified AGI for 1998 exceeded $100,000 so that
he was ineligible to have made a conversion in that year.
Accordingly, prior to the due date (plus extensions) for filing the
individual's Federal income tax return for 1998, he decides to
recharacterize the conversion contribution. He instructs the trustee
of the Roth IRA (FIRST IRA) to transfer in a trustee-to-trustee
transfer the amount of the contribution, plus net income, to the
trustee of a new traditional IRA (SECOND IRA). The individual
notifies the trustee of the FIRST IRA and the trustee of the SECOND
IRA that he is recharacterizing his IRA contribution (and provides
the other information described in A-6 of this section). On the
individual's Federal income tax return for 1998, he treats the
original amount of the conversion as having been contributed to the
SECOND IRA and not the Roth IRA. As a result, for Federal tax
purposes, the contribution is treated as having been made to the
SECOND IRA and not to the Roth IRA. The result would be the same if
the conversion amount had been transferred in a tax-free transfer to
another Roth IRA prior to the recharacterization.
Example 2. In 1998, an individual makes a $2,000 regular
contribution for 1998 to his traditional IRA (FIRST IRA). Prior to
the due date (plus extensions) for filing the individual's Federal
income tax return for 1998, he decides that he would prefer to
contribute to a Roth IRA instead. The individual instructs the
trustee of the FIRST IRA to transfer in a trustee-to-trustee
transfer the amount of the contribution, plus attributable net
income, to the trustee of a Roth IRA (SECOND IRA). The individual
notifies the trustee of the FIRST IRA and the trustee of the SECOND
IRA that he is recharacterizing his $2,000 contribution for 1998
(and provides the other information described in A-6 of this
section). On the individual's Federal income tax return for 1998, he
treats the $2,000 as having been contributed to the Roth IRA for
1998 and not to the traditional IRA. As a result, for Federal tax
purposes, the contribution is treated as having been made to the
Roth IRA for 1998 and not to the traditional IRA. The result would
be the same if the conversion amount had been transferred in a tax-
free transfer to another traditional IRA prior to the
recharacterization.
Example 3. The facts are the same as in Example 2, except that
the $2,000 regular contribution is initially made to a Roth IRA and
the recharacterizing transfer is made to a traditional IRA. On the
individual's Federal income tax return for 1998, he treats the
[[Page 5607]]
$2,000 as having been contributed to the traditional IRA for 1998
and not the Roth IRA. As a result, for Federal tax purposes, the
contribution is treated as having been made to the traditional IRA
for 1998 and not the Roth IRA. The result would be the same if the
contribution had been transferred in a tax-free transfer to another
Roth IRA prior to the recharacterization, except that the only Roth
IRA trustee the individual must notify is the one actually making
the recharacterization transfer.
Example 4. In 1998, an individual receives a distribution from
traditional IRA 1 and contributes the entire amount to traditional
IRA 2 in a rollover contribution described in section 408(d)(3). In
this case, the individual cannot elect to recharacterize the
contribution by transferring the contribution amount, plus net
income, to a Roth IRA, because an amount contributed to an IRA in a
tax-free transfer cannot be recharacterized. However, the individual
may convert (other than by recharacterization) the amount in
traditional IRA 2 to a Roth IRA at any time, provided the
requirements of Sec. 1.408A-4 A-1 are satisfied.
Sec. 1.408A-6 Distributions.
This section sets forth the following questions and answers that
provide rules regarding distributions from Roth IRAs:
Q-1. How are distributions from Roth IRAs taxed?
A-1. (a) The taxability of a distribution from a Roth IRA generally
depends on whether or not the distribution is a qualified distribution.
This A-1 provides rules for qualified distributions and certain other
nontaxable distributions. A-4 of this section provides rules for the
taxability of distributions that are not qualified distributions.
(b) A distribution from a Roth IRA is not includible in the owner's
gross income if it is a qualified distribution or to the extent that it
is a return of the owner's contributions to the Roth IRA (determined in
accordance with A-8 of this section). A qualified distribution is one
that is both--
(1) Made after a 5-taxable-year period (defined in A-2 of this
section); and
(2) Made on or after the date on which the owner attains age 59\1/
2\, made to a beneficiary or the estate of the owner on or after the
date of the owner's death, attributable to the owner's being disabled
within the meaning of section 72(m)(7), or to which section 72(t)(2)(F)
applies (exception for first-time home purchase).
(c) An amount distributed from a Roth IRA will not be included in
gross income to the extent it is rolled over to another Roth IRA on a
tax-free basis under the rules of sections 408(d)(3) and 408A(e).
(d) Contributions that are returned to the Roth IRA owner in
accordance with section 408(d)(4) (corrective distributions) are not
includible in gross income, but any net income required to be
distributed under section 408(d)(4) together with the contributions is
includible in gross income for the taxable year in which the
contributions were made.
Q-2. When does the 5-taxable-year period described in A-1 of this
section (relating to qualified distributions) begin and end?
A-2. The 5-taxable-year period described in A-1 of this section
begins on the first day of the individual's taxable year for which the
first regular contribution is made to any Roth IRA of the individual
or, if earlier, the first day of the individual's taxable year in which
the first conversion contribution is made to any Roth IRA of the
individual. The 5-taxable-year period ends on the last day of the
individual's fifth consecutive taxable year beginning with the taxable
year described in the preceding sentence. For example, if an individual
whose taxable year is the calendar year makes a first-time regular Roth
IRA contribution any time between January 1, 1998, and April 15, 1999,
for 1998, the 5-taxable-year period begins on January 1, 1998. Thus,
each Roth IRA owner has only one 5-taxable-year period described in A-1
of this section for all the Roth IRAs of which he or she is the owner.
Further, because of the requirement of the 5-taxable-year period, no
qualified distributions can occur before taxable years beginning in
2003. For purposes of this A-2, the amount of any contribution
distributed as a corrective distribution under
A-1(d) of this section is treated as if it was never contributed.
Q-3. If a distribution is made to an individual who is the sole
beneficiary of his or her deceased spouse's Roth IRA and the individual
is treating the Roth IRA as his or her own, can the distribution be a
qualified distribution based on being made to a beneficiary on or after
the owner's death?
A-3. No. If a distribution is made to an individual who is the sole
beneficiary of his or her deceased spouse's Roth IRA and the individual
is treating the Roth IRA as his or her own, then, in accordance with
Sec. 1.408A-2
A-4, the distribution is treated as coming from the individual's own
Roth IRA and not the deceased spouse's Roth IRA. Therefore, for
purposes of determining whether the distribution is a qualified
distribution, it is not treated as made to a beneficiary on or after
the owner's death.
Q-4. How is a distribution from a Roth IRA taxed if it is not a
qualified distribution?
A-4. A distribution that is not a qualified distribution, and is
neither contributed to another Roth IRA in a qualified rollover
contribution nor constitutes a corrective distribution, is includible
in the owner's gross income to the extent that the amount of the
distribution, when added to the amount of all prior distributions from
the owner's Roth IRAs (whether or not they were qualified
distributions) and reduced by the amount of those prior distributions
previously includible in gross income, exceeds the owner's
contributions to all his or her Roth IRAs. For purposes of this A-4,
any amount distributed as a corrective distribution is treated as if it
was never contributed.
Q-5. Will the additional tax under 72(t) apply to the amount of a
distribution that is not a qualified distribution?
A-5. (a) The 10-percent additional tax under section 72(t) will
apply (unless the distribution is excepted under section 72(t)) to any
distribution from a Roth IRA includible in gross income.
(b) The 10-percent additional tax under section 72(t) also applies
to a nonqualified distribution, even if it is not then includible in
gross income, to the extent it is allocable to a conversion
contribution, if the distribution is made within the 5-taxable-year
period beginning with the first day of the individual's taxable year in
which the conversion contribution was made. The 5-taxable-year period
ends on the last day of the individual's fifth consecutive taxable year
beginning with the taxable year described in the preceding sentence.
For purposes of applying the tax, only the amount of the conversion
contribution includible in gross income as a result of the conversion
is taken into account. The exceptions under section 72(t) also apply to
such a distribution.
(c) The 5-taxable-year period described in this A-5 for purposes of
determining whether section 72(t) applies to a distribution allocable
to a conversion contribution is separately determined for each
conversion contribution, and need not be the same as the 5-taxable-year
period used for purposes of determining whether a distribution is a
qualified distribution under A-1(b) of this section. For example, if a
calendar-year taxpayer who received a distribution from a traditional
IRA on December 31, 1998, makes a conversion contribution by
contributing the distributed amount to a Roth IRA on February 25, 1999
in a qualifying rollover contribution and makes a regular contribution
for 1998 on the same date, the 5-taxable-year period for purposes of
this A-5 begins on
[[Page 5608]]
January 1, 1999, while the 5-taxable-year period for purposes of A-1(b)
of this section begins on January 1, 1998.
Q-6. Is there a special rule for taxing distributions allocable to
a 1998 conversion?
A-6. Yes. In the case of a distribution from a Roth IRA in 1998,
1999 or 2000 of amounts allocable to a 1998 conversion with respect to
which the 4-year spread for the resultant income inclusion applies (see
Sec. 1.408A-4 A-8), any income deferred as a result of the election to
years after the year of the distribution is accelerated so that it is
includible in gross income in the year of the distribution up to the
amount of the distribution allocable to the 1998 conversion (determined
under A-8 of this section). This amount is in addition to the amount
otherwise includible in the owner's gross income for that taxable year
as a result of the conversion. However, this rule will not require the
inclusion of any amount to the extent it exceeds the total amount of
income required to be included over the 4-year period. The acceleration
of income inclusion described in this A-6 applies in the case of a
surviving spouse who elects to continue the 4-year spread in accordance
with Sec. 1.408A-4 A-11(b).
Q-7. Is the 5-taxable-year period described in A-1 of this section
redetermined when a Roth IRA owner dies?
A-7. (a) No. The beginning of the 5-taxable-year period described
in A-1 of this section is not redetermined when the Roth IRA owner
dies. Thus, in determining the 5-taxable-year period, the period the
Roth IRA is held in the name of a beneficiary, or in the name of a
surviving spouse who treats the decedent's Roth IRA as his or her own,
includes the period it was held by the decedent.
(b) The 5-taxable-year period for a Roth IRA held by an individual
as a beneficiary of a deceased Roth IRA owner is determined
independently of the 5-taxable-year period for the beneficiary's own
Roth IRA. However, if a surviving spouse treats the Roth IRA as his or
her own, the 5-taxable-year period with respect to any of the surviving
spouse's Roth IRAs (including the one that the surviving spouse treats
as his or her own) ends at the earlier of the end of either the 5-
taxable-year period for the decedent or the 5-taxable-year period
applicable to the spouse's own Roth IRAs.
Q-8. How is it determined whether an amount distributed from a Roth
IRA is allocated to regular contributions, conversion contributions, or
earnings?
A-8. (a) Any amount distributed from an individual's Roth IRA is
treated as made in the following order (determined as of the end of a
taxable year and exhausting each category before moving to the
following category)--
(1) From regular contributions;
(2) From conversion contributions, on a first-in-first-out basis;
and
(3) From earnings.
(b) To the extent a distribution is treated as made from a
particular conversion contribution, it is treated as made first from
the portion, if any, that was includible in gross income as a result of
the conversion.
Q-9. Are there special rules for determining the source of
distributions under A-8 of this section?
A-9. Yes. For purposes of determining the source of distributions,
the following rules apply:
(a) All distributions from all an individual's Roth IRAs made
during a taxable year are aggregated.
(b) All regular contributions made for the same taxable year to all
the individual's Roth IRAs are aggregated and added to the
undistributed total regular contributions for prior taxable years.
Regular contributions for a taxable year include contributions made in
the following taxable year that are identified as made for the taxable
year in accordance with Sec. 1.408A-3 A-2. For example, a regular
contribution made in 1999 for 1998 is aggregated with the contributions
made in 1998 for 1998.
(c) All conversion contributions received during the same taxable
year by all the individual's Roth IRAs are aggregated. Notwithstanding
the preceding sentence, all conversion contributions made by an
individual during 1999 that were distributed from a traditional IRA in
1998 and with respect to which the 4-year spread applies are treated
for purposes of
A-8(b) of this section as contributed to the individual's Roth IRAs
prior to any other conversion contributions made by the individual
during 1999.
(d) A distribution from an individual's Roth IRA that is rolled
over to another Roth IRA of the individual in accordance with section
408A(e) is disregarded for purposes of determining the amount of both
contributions and distributions.
(e) Any amount distributed as a corrective distribution (including
net income), as described in A-1(d) of this section, is disregarded in
determining the amount of contributions, earnings, and distributions.
(f) If an individual recharacterizes a contribution made to a
traditional IRA (FIRST IRA) by transferring the contribution to a Roth
IRA (SECOND IRA) in accordance with Sec. 1.408A-5, then, pursuant to
Sec. 1.408A-5 A-3, the contribution to the Roth IRA is taken into
account for the same taxable year for which it would have been taken
into account if the contribution had originally been made to the Roth
IRA and had never been contributed to the traditional IRA. Thus, the
contribution to the Roth IRA is treated as contributed to the Roth IRA
on the same date and for the same taxable year that the contribution
was made to the traditional IRA.
(g) If an individual recharacterizes a regular or conversion
contribution made to a Roth IRA (FIRST IRA) by transferring the
contribution to a traditional IRA (SECOND IRA) in accordance with
Sec. 1.408A-5, then pursuant to Sec. 1.408A-5 A-3, the contribution to
the Roth IRA and the recharacterizing transfer are disregarded in
determining the amount of both contributions and distributions for the
taxable year with respect to which the original contribution was made
to the Roth IRA.
(h) Pursuant to Sec. 1.408A-5 A-3, the effect of income or loss
(determined in accordance with Sec. 1.408A-5 A-2) occurring after the
contribution to the FIRST IRA is disregarded in determining the amounts
described in paragraphs (f) and (g) of this A-9. Thus, for purposes of
paragraphs (f) and (g), the amount of the contribution is determined
based on the original contribution.
Q-10. Are there examples to illustrate the ordering rules described
in A-8 and A-9 of this section?
A-10. Yes. The following examples illustrate these ordering rules:
Example 1. In 1998, individual B converts $80,000 in his
traditional IRA to a Roth IRA. B has a basis of $20,000 in the
conversion amount and so must include the remaining $60,000 in gross
income. He decides to spread the $60,000 income by including $15,000
in each of the 4 years 1998-2001, under the rules of Sec. 1.408A-4
A-8. B also makes a regular contribution of $2,000 in 1998. If a
distribution of $2,000 is made to B anytime in 1998, it will be
treated as made entirely from the regular contributions, so there
will be no Federal income tax consequences as a result of the
distribution.
Example 2. The facts are the same as in Example 1, except that
the distribution made in 1998 is $5,000. The distribution is treated
as made from $2,000 of regular contributions and $3,000 of
conversion contributions that were includible in gross income. As a
result, B must include $18,000 in gross income for 1998: $3,000 as a
result of the acceleration of amounts that otherwise would have been
included in later years under the 4-year-spread rule and $15,000
includible under the regular 4-year-spread rule. In addition,
because the $3,000 is allocable to a conversion made within the
previous 5
[[Page 5609]]
taxable years, the 10-percent additional tax under section 72(t)
would apply to this $3,000 distribution for 1998, unless an
exception applies. Under the 4-year-spread rule, B would now include
in gross income $15,000 for 1999 and 2000, but only $12,000 for
2001, because of the accelerated inclusion of the $3,000
distribution.
Example 3. The facts are the same as in Example 1, except that B
makes an additional $2,000 regular contribution in 1999 and he does
not take a distribution in 1998. In 1999, the entire balance in the
account, $90,000 ($84,000 of contributions and $6,000 of earnings),
is distributed to B. The distribution is treated as made from $4,000
of regular contributions, $60,000 of conversion contributions that
were includible in gross income, $20,000 of conversion contributions
that were not includible in gross income, and $6,000 of earnings.
Because a distribution has been made within the 4-year-spread
period, B must accelerate the income inclusion under the 4-year-
spread rule and must include in gross income the $45,000 remaining
under the 4-year-spread rule in addition to the $6,000 of earnings.
Because $60,000 of the distribution is allocable to a conversion
made within the previous 5 taxable years, it is subject to the 10-
percent additional tax under section 72(t) as if it were includible
in gross income for 1999, unless an exception applies. The $6,000
allocable to earnings would be subject to the tax under section
72(t), unless an exception applies. Under the 4-year-spread rule, no
amount would be includible in gross income for 2000 or 2001 because
the entire amount of the conversion that was includible in gross
income has already been included.
Example 4. The facts are the same as in Example 1, except that B
also makes a $2,000 regular contribution in each year 1999 through
2002 and he does not take a distribution in 1998. A distribution of
$85,000 is made to B in 2002. The distribution is treated as made
from the $10,000 of regular contributions (the total regular
contributions made in the years 1998-2002), $60,000 of conversion
contributions that were includible in gross income, and $15,000 of
conversion contributions that were not includible in gross income.
As a result, no amount of the distribution is includible in gross
income; however, because the distribution is allocable to a
conversion made within the previous 5 years, the $60,000 is subject
to the 10-percent additional tax under section 72(t) as if it were
includible in gross income for 2002, unless an exception applies.
Example 5. The facts are the same as in Example 4, except no
distribution occurs in 2002. In 2003, the entire balance in the
account, $170,000 ($90,000 of contributions and $80,000 of
earnings), is distributed to B. The distribution is treated as made
from $10,000 of regular contributions, $60,000 of conversion
contributions that were includible in gross income, $20,000 of
conversion contributions that were not includible in gross income,
and $80,000 of earnings. As a result, for 2003, B must include in
gross income the $80,000 allocable to earnings, unless the
distribution is a qualified distribution; and if it is not a
qualified distribution, the $80,000 would be subject to the 10-
percent additional tax under section 72(t), unless an exception
applies.
Example 6. Individual C converts $20,000 to a Roth IRA in 1998
and $15,000 (in which amount C had a basis of $2,000) to another
Roth IRA in 1999. No other contributions are made. In 2003, a
$30,000 distribution, that is not a qualified distribution, is made
to C. The distribution is treated as made from $20,000 of the 1998
conversion contribution and $10,000 of the 1999 conversion
contribution that was includible in gross income. As a result, for
2003, no amount is includible in gross income; however, because
$10,000 is allocable to a conversion contribution made within the
previous 5 taxable years, that amount is subject to the 10-percent
additional tax under section 72(t) as if the amount were includible
in gross income for 2003, unless an exception applies. The result
would be the same whichever of C's Roth IRAs made the distribution.
Example 7. The facts are the same as in Example 6, except that
the distribution is a qualified distribution. The result is the same
as in Example 6, except that no amount would be subject to the 10-
percent additional tax under section 72(t), because, to be a
qualified distribution, the distribution must be made on or after
the date on which the owner attains age 59\1/2\, made to a
beneficiary or the estate of the owner on or after the date of the
owner's death, attributable to the owner's being disabled within the
meaning of section 72(m)(7), or to which section 72(t)(2)(F) applies
(exception for a first-time home purchase). Under section 72(t)(2),
each of these conditions is also an exception to the tax under
section 72(t).
Example 8. Individual D makes a $2,000 regular contribution to a
traditional IRA on January 1, 1999, for 1998. On April 15, 1999,
when the $2,000 has increased to $2,500, D recharacterizes the
contribution by transferring the $2,500 to a Roth IRA (pursuant to
Sec. 1.408A-5 A-1). In this case, D's regular contribution to the
Roth IRA for 1998 is $2,000. The $500 of earnings is not treated as
a contribution to the Roth IRA. The results would be the same if the
$2,000 had decreased to $1,500 prior to the recharacterization.
Example 9. In December 1998, individual E receives a
distribution from his traditional IRA of $300,000 and in January
1999 he contributes the $300,000 to a Roth IRA as a conversion
contribution. In April 1999, when the $300,000 has increased to
$350,000, E recharacterizes the conversion contribution by
transferring the $350,000 to a traditional IRA. In this case, E's
conversion contribution for 1998 is $0, because the $300,000
conversion contribution and the earnings of $50,000 are disregarded.
The results would be the same if the $300,000 had decreased to
$250,000 prior to the recharacterization. Further, since the
conversion is disregarded, the $300,000 is not includible in gross
income in 1998.
Q-11. If the owner of a Roth IRA dies prior to the end of the 5-
taxable-year period described in A-1 of this section (relating to
qualified distributions) or prior to the end of the 5-taxable-year
period described in A-5 of this section (relating to conversions), how
are different types of contributions in the Roth IRA allocated to
multiple beneficiaries?
A-11. Each type of contribution is allocated to each beneficiary on
a pro-rata basis. Thus, for example, if a Roth IRA owner dies in 1999,
when the Roth IRA contains a regular contribution of $2,000, a
conversion contribution of $6,000 and earnings of $1,000, and the owner
leaves his Roth IRA equally to four children, each child will receive
one quarter of each type of contribution. Pursuant to the ordering
rules in A-8 of this section, an immediate distribution of $2,000 to
one of the children will be deemed to consist of $500 of regular
contributions and $1,500 of conversion contributions. A beneficiary's
inherited Roth IRA may not be aggregated with any other Roth IRA
maintained by such beneficiary (except for other Roth IRAs the
beneficiary inherited from the same decedent), unless the beneficiary,
as the spouse of the decedent and sole beneficiary of the Roth IRA,
elects to treat the Roth IRA as his or her own (see A-7 and A-14 of
this section).
Q-12. How do the withholding rules under section 3405 apply to Roth
IRAs?
A-12. Distributions from a Roth IRA are distributions from an
individual retirement plan for purposes of section 3405 and thus are
designated distributions unless one of the exceptions in section
3405(e)(1) applies. Pursuant to section 3405(a) and (b), nonperiodic
distributions from a Roth IRA are subject to 10-percent withholding by
the payor and periodic payments are subject to withholding as if the
payments were wages. However, an individual can elect to have no amount
withheld in accordance with section 3405(a)(2) and (b)(2).
Q-13. Do the withholding rules under section 3405 apply to
conversions?
A-13. Yes. A conversion by any method described in Sec. 1.408A-4 A-
1 is considered a designated distribution subject to section 3405.
However, a conversion occurring in 1998 by means of a trustee-to-
trustee transfer of an amount from a traditional IRA to a Roth IRA
established with the same or a different trustee is not required to be
treated as a designated distribution for purposes of section 3405.
Consequently, no withholding is required with respect to such a
conversion (without regard to whether or not the individual elected to
have no withholding).
Q-14. What minimum distribution rules apply to a Roth IRA?
A-14. (a) No minimum distributions are required to be made from a
Roth IRA
[[Page 5610]]
under section 408(a)(6) and (b)(3) (which generally incorporate the
provisions of section 401(a)(9)) while the owner is alive. The post-
death minimum distribution rules under section 401(a)(9)(B) that apply
to traditional IRAs, with the exception of the at-least-as-rapidly rule
described in section 401(a)(9)(B)(i), also apply to Roth IRAs.
(b) The minimum distribution rules apply to the Roth IRA as though
the Roth IRA owner died before his or her required beginning date.
Thus, generally, the entire interest in the Roth IRA must be
distributed by the end of the fifth calendar year after the year of the
owner's death unless the interest is payable to a designated
beneficiary over a period not greater than that beneficiary's life
expectancy and distribution commences before the end of the calendar
year following the year of death. If the sole beneficiary is the
decedent's spouse, such spouse may delay distributions until the
decedent would have attained age 70\1/2\ or may treat the Roth IRA as
his or her own.
(c) Distributions to a beneficiary that are not qualified
distributions will be includible in the beneficiary's gross income
according to the rules in A-4 of this section.
Q-15. Does section 401(a)(9) apply separately to Roth IRAs and
individual retirement plans that are not Roth IRAs?
A-15. Yes. An individual required to receive minimum distributions
from his or her own traditional or SIMPLE IRA cannot choose to take the
amount of the minimum distributions from any Roth IRA. Similarly, an
individual required to receive minimum distributions from a Roth IRA
cannot choose to take the amount of the minimum distributions from a
traditional or SIMPLE IRA. In addition, an individual required to
receive minimum distributions as a beneficiary under a Roth IRA can
only satisfy the minimum distributions for one Roth IRA by distributing
from another Roth IRA if the Roth IRAs were inherited from the same
decedent.
Q-16. How is the basis of property distributed from a Roth IRA
determined for purposes of a subsequent disposition?
A-16. The basis of property distributed from a Roth IRA is its fair
market value (FMV) on the date of distribution, whether or not the
distribution is a qualified distribution. Thus, for example, if a
distribution consists of a share of stock in XYZ Corp. with an FMV of
$40.00 on the date of distribution, for purposes of determining gain or
loss on the subsequent sale of the share of XYZ Corp. stock, it has a
basis of $40.00.
Q-17. What is the effect of distributing an amount from a Roth IRA
and contributing it to another type of retirement plan other than a
Roth IRA?
A-17. Any amount distributed from a Roth IRA and contributed to
another type of retirement plan (other than a Roth IRA) is treated as a
distribution from the Roth IRA that is neither a rollover contribution
for purposes of section 408(d)(3) nor a qualified rollover contribution
within the meaning of section 408A(e) to the other type of retirement
plan. This treatment also applies to any amount transferred from a Roth
IRA to any other type of retirement plan unless the transfer is a
recharacterization described in Sec. 1.408A-5.
Q-18. Can an amount be transferred directly from an education IRA
to a Roth IRA (or distributed from an education IRA and rolled over to
a Roth IRA)?
A-18. No amount may be transferred directly from an education IRA
to a Roth IRA. A transfer of funds (or distribution and rollover) from
an education IRA to a Roth IRA constitutes a distribution from the
education IRA and a regular contribution to the Roth IRA (rather than a
qualified rollover contribution to the Roth IRA).
Q-19. What are the Federal income tax consequences of a Roth IRA
owner transferring his or her Roth IRA to another individual by gift?
A-19. A Roth IRA owner's transfer of his or her Roth IRA to another
individual by gift constitutes an assignment of the owner's rights
under the Roth IRA. At the time of the gift, the assets of the Roth IRA
are deemed to be distributed to the owner and, accordingly, are treated
as no longer held in a Roth IRA. In the case of any such gift of a Roth
IRA made prior to October 1, 1998, if the entire interest in the Roth
IRA is reconveyed to the Roth IRA owner prior to January 1, 1999, the
Internal Revenue Service will treat the gift and reconveyance as never
having occurred for estate tax, gift tax, and generation-skipping tax
purposes and for purposes of this A-19.
Sec. 1.408A-7 Reporting.
This section sets forth the following questions and answers that
relate to the reporting requirements applicable to Roth IRAs:
Q-1. What reporting requirements apply to Roth IRAs?
A-1. Generally, the reporting requirements applicable to IRAs other
than Roth IRAs also apply to Roth IRAs, except that, pursuant to
section 408A(d)(3)(D), the trustee of a Roth IRA must include on Forms
1099-R and 5498 additional information as described in the instructions
thereto. Any conversion of amounts from an IRA other than a Roth IRA to
a Roth IRA is treated as a distribution for which a Form 1099-R must be
filed by the trustee maintaining the non-Roth IRA. In addition, the
owner of such IRAs must report the conversion by completing Form 8606.
In the case of a recharacterization described in Sec. 1.408A-5 A-1, IRA
owners must report such transactions in the manner prescribed in the
instructions to the applicable Federal tax forms.
Q-2. Can a trustee rely on reasonable representations of a Roth IRA
contributor or distributee for purposes of fulfilling reporting
obligations?
A-2. A trustee maintaining a Roth IRA is permitted to rely on
reasonable representations of a Roth IRA contributor or distributee for
purposes of fulfilling reporting obligations.
Sec. 1.408A-8 Definitions.
This section sets forth the following question and answer that
provides definitions of terms used in the provisions of Secs. 1.408A-1
through 1.408A-7 and this section:
Q-1. Are there any special definitions that govern in applying the
provisions of Secs. 1.408A-1 through 1.408A-7 and this section?
A-1. Yes, the following definitions govern in applying the
provisions of Secs. 1.408A-1 through 1.408A-7 and this section. Unless
the context indicates otherwise, the use of a particular term excludes
the use of the other terms.
(a) Different types of IRAs--(1) IRA. Sections 408(a) and (b),
respectively, describe an individual retirement account and an
individual retirement annuity. The term IRA means an IRA described in
either section 408(a) or (b), including each IRA described in
paragraphs (a)(2) through (5) of this A-1. However, the term IRA does
not include an education IRA described in section 530.
(2) Traditional IRA. The term traditional IRA means an individual
retirement account or individual retirement annuity described in
section 408(a) or (b), respectively. This term includes a SEP IRA but
does not include a SIMPLE IRA or a Roth IRA.
(3) SEP IRA. Section 408(k) describes a simplified employee pension
(SEP) as an employer-sponsored plan under which an employer can make
contributions to IRAs established for its employees. The term SEP IRA
means an IRA that receives contributions made under a SEP. The term SEP
includes a salary reduction SEP (SARSEP) described in section
408(k)(6).
[[Page 5611]]
(4) SIMPLE IRA. Section 408(p) describes a SIMPLE IRA Plan as an
employer-sponsored plan under which an employer can make contributions
to SIMPLE IRAs established for its employees. The term SIMPLE IRA means
an IRA to which the only contributions that can be made are
contributions under a SIMPLE IRA Plan or rollovers or transfers from
another SIMPLE IRA.
(5) Roth IRA. The term Roth IRA means an IRA that meets the
requirements of section 408A.
(b) Other defined terms or phrases--(1) 4-year spread. The term 4-
year spread is described in Sec. 1.408A-4 A-8.
(2) Conversion. The term conversion means a transaction satisfying
the requirements of Sec. 1.408A-4 A-1.
(3) Conversion amount or conversion contribution. The term
conversion amount or conversion contribution is the amount of a
distribution and contribution with respect to which a conversion
described in Sec. 1.408A-4 A-1 is made.
(4) Failed conversion. The term failed conversion means a
transaction in which an individual contributes to a Roth IRA an amount
transferred or distributed from a traditional IRA or Simple IRA
(including a transfer by redesignation) in a transaction that does not
constitute a conversion under Sec. 1.408A-4 A-1.
(5) Modified AGI. The term modified AGI is defined in Sec. 1.408A-3
A-5.
(6) Recharacterization. The term recharacterization means a
transaction described in Sec. 1.408A-5 A-1.
(7) Recharacterized amount or recharacterized contribution.The term
recharacterized amount or recharacterized contribution means an amount
or contribution treated as contributed to an IRA other than the one to
which it was originally contributed pursuant to a recharacterization
described in Sec. 1.408A-5 A-1.
(8) Taxable conversion amount. The term taxable conversion amount
means the portion of a conversion amount includible in income on
account of a conversion, determined under the rules of section
408(d)(1) and (2).
(9) Tax-free transfer. The term tax-free transfer means a tax-free
rollover described in section 402(c), 402(e)(6), 403(a)(4), 403(a)(5),
403(b)(8), 403(b)(10) or 408(d)(3), or a tax-free trustee-to-trustee
transfer.
(10) Treat an IRA as his or her own. The phrase treat an IRA as his
or her own means to treat an IRA for which a surviving spouse is the
sole beneficiary as his or her own IRA after the death of the IRA owner
in accordance with the terms of the IRA instrument or in the manner
provided in the regulations under section 408(a)(6) or (b)(3).
(11) Trustee. The term trustee includes a custodian or issuer (in
the case of an annuity) of an IRA (except where the context clearly
indicates otherwise).
Sec. 1.408A-9 Effective date.
This section contains the following question and answer providing
the effective date of Secs. 1.408A-1 through 1.408A-8:
Q-1. To what taxable years do Secs. 1.408A-1 through 1.408A-8
apply?
A-1 Sections 1.408A-1 through 1.408A-8 apply to taxable years
beginning on or after January 1, 1998.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Paragraph 9. The authority citation for part 602 continues to read
as follows:
Authority: 26 U.S.C. 7805 * * *
Par.10. In Sec. 602.101, paragraph (c) is amended by adding an
entry in numerical order to the table to read as follows:
Sec. 602.101 OMB control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current
OMB
CFR part or section where identified and described control
No.
------------------------------------------------------------------------
* * * * *
1.408A-2.................................................... 1545-1616
1.408A-4.................................................... 1545-1616
1.408A-5.................................................... 1545-1616
1.408A-7.................................................... 1545-1616
* * * * *
------------------------------------------------------------------------
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: January 25, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-2550 Filed 2-3-99; 8:45 am]
BILLING CODE 4830-01-U
