[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Proposed Rules]
[Pages 46937-46951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23664]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-115393-98]
RIN 1545-AW62
Roth IRAs
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to Roth
IRAs. Roth IRAs were created by the Taxpayer Relief Act of 1997 as a
new type of IRA that individuals can use beginning in 1998. The
proposed regulations reflect changes relating to Roth IRAs contained in
the Internal Revenue Service Restructuring and Reform Act of 1998. The
proposed regulations affect individuals establishing Roth IRAs,
beneficiaries under Roth IRAs, and trustees, custodians or issuers of
Roth IRAs. This document also provides notice of a public hearing on
these proposed regulations.
DATES: Written comments must be received by December 2, 1998. Outlines
of topics to be discussed at the public hearing scheduled for Thursday,
December 10, 1998, at 10 a.m. must be received by Thursday, November
19, 1998.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-115393-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-106177-97), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in room 2615, Internal
Revenue Building, 1111
[[Page 46938]]
Constitution Avenue NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Cathy A. Vohs, (202) 622-6030; concerning the public hearing, Michael
Slaughter (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information 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. Comments on the collections of information should be received by
November 2, 1998. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the IRS, including whether
the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collections of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collections of information in these proposed regulations are in
Secs. 1.408A-2, 1.408A-4, 1.408A-5, and 1.408A-7. This information is
required by the IRS to comply with the provisions of the Taxpayer
Relief Act of 1997, and in particular, with section 408A(b), (c), and
(d). This information will be used by individuals and businesses or
other for-profit institutions, and not-for-profit institutions, such as
trustees, custodians or issuers of Roth IRAs, in establishing Roth IRAs
and recharacterizing IRA contributions. This information will also be
used by: (1) the IRS and individuals converting traditional IRAs to
Roth IRAs to calculate the amount includible in gross income on account
of such conversions, (2) the IRS and individuals receiving
distributions from Roth IRAs to calculate the amount includible in
gross income on account of such distributions, (3) the IRS and
individuals recharacterizing IRA contributions to properly account for
such recharacterizations, and (4) the IRS and trustees, custodians or
issuers of Roth IRAs to properly report (a) the amount of contributions
to and distributions from Roth IRAs, and (b) recharacterizations of IRA
contributions (including Roth IRA contributions). The collections of
information are required to obtain the benefit of having a Roth IRA.
The likely respondents and/or recordkeepers are individuals, and
trustees, custodians, or issuers of Roth IRAs. The burden for (1)
calculating the amount includible in gross income on account of
conversions and Roth IRA distributions, and (2) accounting for
recharacterizations is reflected in the burden for Form 8606. The
burden for electing to continue the 4-year spread of income inclusion
(only applicable to certain spousal beneficiaries) is reflected in the
burden for either Form 8606 or Form 1040, whichever is applicable. The
burden for reporting contributions is reflected in the burden for Form
5498. The burden for reporting distributions is reflected in the burden
for Form 1099-R. Estimated total annual reporting/recordkeeping burden:
125,000 hours (50,000 hours for designating an IRA as a Roth IRA, plus
75,000 hours for recharacterizing an IRA contribution). 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. Estimated number of respondents/recordkeepers:
3,150,000 (3,000,000 respondents for designating an IRA as a Roth IRA,
plus 150,000 respondents for recharacterizing an IRA contribution).
Estimated annual frequency of responses: on occasion.
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.
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
Section 408A of the Internal Revenue Code (Code), which was added
by section 302 of the Taxpayer Relief Act of 1997, Public Law 105-34
(111 Stat. 788), establishes 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).
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 a Roth IRA 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. These proposed
regulations set forth specific rules for Roth IRAs in accordance with
the provisions of section 408A.
Explanation of Provisions
General Provisions and Establishment of Roth IRAs
Proposed Sec. 1.408A-1 contains general provisions regarding Roth
IRAs, and proposed Sec. 1.408A-1 contains provisions regarding the
establishment of Roth IRAs. As described in proposed Sec. 1.408A-1, a
Roth IRA is treated for Federal tax purposes in the same manner as an
individual retirement plan except as otherwise provided in section 408A
and the proposed regulations. Thus, all the rules of section 408 and
the regulations under section 408 apply to Roth IRAs to the extent they
are not inconsistent with section 408A or these proposed regulations.
Section 408A(b) defines a Roth IRA as an individual retirement plan
which is designated at the time of its establishment as a Roth IRA.
That section also grants the Secretary of the Treasury authority to
prescribe the manner for designating an individual retirement plan as a
Roth IRA. Proposed Sec. 1.408A-2 provides that a Roth IRA instrument
must clearly designate the IRA as a Roth IRA, and that designation
cannot later be changed. Thus, a taxpayer may not designate an IRA as a
Roth IRA and later redesignate the Roth IRA as a traditional IRA or
otherwise treat the Roth IRA as though it were a traditional IRA for
Federal tax purposes.
[[Page 46939]]
Regular Contributions
Proposed Sec. 1.408A-3 sets forth rules regarding regular (i.e.,
non-conversion) contributions to a Roth IRA. Unlike contributions to
traditional IRAs, contributions to Roth IRAs are not deductible under
any circumstances. A taxpayer's regular contributions to all his or her
Roth IRAs for a year are limited to the lesser of $2,000 or the
taxpayer's compensation for that year. As with traditional IRAs, a
special rule for married taxpayers permits one spouse to treat the
other spouse's compensation as his or her own for purposes of the limit
on regular contributions. The limit is reduced by any amounts that the
taxpayer contributes for that year to an individual retirement plan
other than a Roth IRA (although employer contributions, including
elective contributions, to a SEP or SIMPLE IRA Plan do not reduce the
contribution limit). Additionally, the contribution limit (determined
without regard to any reduction for traditional IRA contributions) is
phased out for modified adjusted gross income between $95,000 and
$110,000 for single taxpayers, between $150,000 and $160,000 for
married taxpayers filing joint returns, and between $0 and $10,000 for
married taxpayers filing separate returns. Any contribution in excess
of the contribution limit is subject to the 6-percent excise tax under
section 4973 unless it is distributed to the taxpayer (with allocable
net income) under section 408(d)(4) by the Federal income tax return
due date (with extensions) for the year of the contribution.
The proposed regulations define the terms compensation and modified
adjusted gross income. The definition of compensation is the same as
that applicable under section 219(f)(1) for determining the amount, if
any, that a taxpayer may contribute to a traditional IRA. This
definition does not include amounts transferred from one individual to
another by gift (for example, a gift from a parent to a child). The
definition of modified adjusted gross income is based on the definition
of adjusted gross income applicable under section 219(g)(3)(A) for
determining the amount, if any, that a taxpayer may deduct for a
contribution to a traditional IRA where the taxpayer is an active
participant in an employee plan. However, the definition of modified
adjusted gross income applicable to Roth IRAs provides that any amount
includible in gross income because of a Roth IRA conversion is
disregarded in determining modified adjusted gross income.
Additionally, for taxable years beginning after December 31, 2004,
modified adjusted gross income does not include the amount of any
required minimum distribution from an IRA for purposes of determining
conversion eligibility.
As with traditional IRAs, regular contributions to a Roth IRA may
be made as late as the Roth IRA owner's Federal income tax return due
date (not including extensions) for the taxable year to which they
relate. Thus, Roth IRA contributions may be made by most taxpayers for
taxable year 1998 at any time until April 15, 1999. Unlike traditional
IRAs, contributions to a Roth IRA may be made after the Roth IRA owner
has reached age 70\1/2\.
Conversions
Proposed Sec. 1.408A-4 provides rules regarding Roth IRA
conversions. In general, a taxpayer whose modified adjusted gross
income does not exceed $100,000 may ``convert'' an amount held in a
non-Roth IRA (i.e., a traditional IRA or SIMPLE IRA) to a Roth IRA. The
conversion may be made in one of three ways: (1) a distribution from a
non-Roth IRA may be rolled over to a Roth IRA within 60 days; (2) an
amount in a non-Roth IRA of one financial institution may be
transferred in a trustee-to-trustee transfer to a Roth IRA of a
different financial institution; or (3) an amount in a non-Roth IRA may
be transferred to a Roth IRA of the same financial institution. (In the
third case, no physical transfer of assets is necessary, but the
instrument governing the non-Roth IRA must, of course, be replaced by a
Roth IRA instrument.) The conversion amount must be a qualified
rollover contribution under section 408A(e) and, therefore, must
satisfy section 408(d)(3) (other than the one-rollover-per-year rule of
that section). Any amount distributed from a non-Roth IRA prior to the
1998 taxable year may not be contributed to a Roth IRA as a conversion
contribution.
In the case of a conversion made by means of a distribution and
rollover contribution, the $100,000 limit applies to the year in which
the distribution from the non-Roth IRA is made. For married taxpayers,
the $100,000 limit applies to the joint modified adjusted gross income
of the couple, and a married taxpayer filing a separate return is not
allowed to convert regardless of modified adjusted gross income
(although a taxpayer who has lived apart from his or her spouse for the
entire taxable year is treated as not married for these purposes).
The proposed regulations provide that amounts held in a SEP IRA or
a SIMPLE IRA may be converted to a Roth IRA. In the case of a SIMPLE
IRA, a conversion may be done only after the expiration of the 2-year
period described in section 72(t)(6). See Q&A I-2 of Notice 98-4 (1998-
2 I.R.B. 25). Once a SEP IRA or SIMPLE IRA has been converted to a Roth
IRA, the SEP IRA or the SIMPLE IRA becomes a Roth IRA and ceases to be
part of a SEP or a SIMPLE IRA Plan; thus, no SEP or SIMPLE IRA Plan
contributions may be made to the Roth IRA. Amounts held in retirement
plans other than IRAs--such as section 401(a) qualified plans and
section 403(b) annuity contracts--cannot be directly converted to a
Roth IRA.
Any amount converted from a non-Roth IRA to a Roth IRA is treated
as distributed from the non-Roth IRA and rolled over to the Roth IRA
regardless of the actual means by which the conversion is effected. The
conversion amount is generally includible in gross income for the year
of the conversion under sections 408(d)(1) and 408(d)(2). For this
purpose, in the case of a conversion effected by an actual distribution
and rollover contribution (rather than a trustee-to-trustee transfer or
a transfer between IRAs of the same financial institution), the year of
the distribution from the non-Roth IRA is the year that the conversion
amount is includible in gross income.
The conversion amount generally is not subject to the 10-percent
additional tax under section 72(t). However, section 408A(d)(3)(F)
provides that the 10-percent tax applies to a distribution of a
conversion amount made within the 5-taxable-year period beginning with
the taxable year in which the conversion to which it is attributable
was made. Additionally, the proposed regulations provide that a
taxpayer s conversion of an amount from a non-Roth IRA from which the
taxpayer was receiving a series of substantially equal periodic
payments under section 72(t)(2)(A)(iv) will not be treated as a
modification of that series under section 72(t)(4) and thus will not
trigger recapture of the section 72(t) tax on previous distributions
from the non-Roth IRA as long as the series of substantially equal
periodic payments is continued under the Roth IRA (or if section
72(t)(4) would otherwise not apply).
Taxpayers making conversions during 1998 are eligible for a 4-year
spread under which a conversion amount can be included in income
ratably over taxable years 1998 through 2001 rather than solely in
1998. Special rules apply to this 4-year spread if a taxpayer dies
before inclusion of the full conversion amount. In such a case, any
remaining includible portion of the conversion amount generally must be
included in
[[Page 46940]]
the taxpayer s gross income for the taxable year that includes the date
of his or her death. However, if the taxpayer's surviving spouse is the
sole beneficiary of all the taxpayer's Roth IRAs (as determined under
the aggregation rule of section 408A(d)(4)(A)), the spouse may elect to
continue application of the 4-year spread. Finally, the distribution of
any amount attributable to a 1998 conversion to which the 4-year spread
applies will accelerate the inclusion of any amount otherwise deferred
to a later taxable year.
A required minimum distribution may not be converted to a Roth IRA
because section 408(d)(3)(E) prohibits the rollover of any such
distribution. Under the proposed regulations, if a non-Roth IRA owner
has reached age 70\1/2\, any amount distributed (or treated as
distributed because of a conversion) from the IRA for that 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 treated as distributed). Thus, if a taxpayer
who is required to receive a minimum distribution of $10,000 from his
or her non-Roth IRA for a taxable year attempts to convert $11,000 to a
Roth IRA prior to receiving the required minimum distribution, $10,000
of the conversion amount would be treated as the required minimum
distribution and would be ineligible for conversion. This result is not
affected by the means through which the taxpayer effects the conversion
or by whether an amount greater than or equal to $10,000 remains in the
taxpayer's non-Roth IRA after the conversion.
Recharacterizations of IRA Contributions
Proposed Sec. 1.408A-5 provides special rules for the
recharacterization of IRA contributions (including Roth IRA regular and
conversion contributions). Section 408A(d)(6) provides that, except as
otherwise provided by the Secretary of the Treasury, an IRA
contribution that is transferred to another IRA in a trustee-to-trustee
transfer on or before the Federal income tax return due date (with
extensions) for the taxable year of the contribution is treated as made
to the transferee IRA and not the transferor IRA. Section 408A(d)(6)
requires that the transfer include allocable net income on the
contribution and that no deduction be allowed for the contribution to
the transferor IRA. This statutory provision was intended to permit a
taxpayer who had converted an amount held in a non-Roth IRA to a Roth
IRA and later discovered that his or her modified adjusted gross income
for the year of the conversion exceeded $100,000 to correct the
conversion by retransferring the converted amount to a non-Roth IRA.
The proposed regulations interpret section 408A(d)(6) liberally to
provide broad relief to taxpayers who wish to change the nature of an
IRA contribution (and not only to allow taxpayers to correct Roth IRA
conversions for which they were ineligible). Moreover, the proposed
regulations make application of section 408A(d)(6) elective by the
taxpayer and permit the taxpayer to recharacterize all or any portion
of an IRA contribution.
Under the proposed regulations, a taxpayer may elect whether to
recharacterize a contribution made to one type of IRA by having it
transferred in a trustee-to-trustee transfer to a different type of
IRA. As with a conversion, a recharacterization can be effected simply
by transferring IRA assets between two IRAs of a single financial
institution. Regardless of how effected, a recharacterization transfer
is not considered a rollover for purposes of the one-rollover-per-year
rule of section 408(d)(3). The taxpayer makes the election to
recharacterize by notifying both the transferor IRA trustee and the
transferee IRA trustee and by providing certain information to these
trustees (including a direction to make the transfer). Notification to
the trustees constitutes the taxpayer's election to apply section
408A(d)(6), and the taxpayer cannot revoke or modify that election
after the recharacterization transfer has been made. A recharacterized
contribution will be treated for Federal income tax purposes as having
been contributed to the transferee IRA (rather than the transferor IRA)
on the same date and for the same taxable year that the contribution
was initially made to the transferor IRA. In effect, the transferee IRA
``steps into the shoes'' of the transferor IRA with respect to the
taxpayer's original contribution.
The recharacterization transfer must include allocable earnings on
the original contribution, and the proposed regulations provide that
the rules of Treasury Regulations Sec. 1.408-4(c)(2)(ii) apply for
determining such allocable earnings. If the original contribution has
experienced net losses as of the time of the recharacterization, the
transfer of the entire original contribution less such losses will
generally constitute a transfer of the entire contribution. The
taxpayer must treat the contribution as made to the transferee IRA on
his or her Federal income tax return for the year to which the original
contribution (to the transferor IRA) relates.
Amounts that cannot be recharacterized include amounts paid into an
IRA by tax-free rollover or transfer (other than a rollover or transfer
from a traditional IRA to a SIMPLE IRA) and employer contributions
under a SIMPLE IRA Plan or a SEP. The proposed regulations also provide
that, once an amount has been contributed to an IRA, any tax-free
rollover or transfer of that amount to another IRA may be disregarded
in applying the recharacterization rules. Thus, for example, if a
taxpayer contributes $2,000 to a Roth IRA during a taxable year and
rolls that contribution over to another Roth IRA during the following
taxable year, the rollover between Roth IRAs is disregarded, and the
taxpayer may recharacterize the $2,000 Roth IRA contribution by having
it transferred from the second Roth IRA to a traditional IRA in
accordance with section 408A(d)(6) and the proposed regulations.
Distributions
Proposed Sec. 1.408A-6 provides rules for the treatment of Roth IRA
distributions. Under section 408A(d), qualified distributions from a
Roth IRA are not includible in gross income. A qualified distribution
is a distribution that is both (1) made after the end of the 5-taxable-
year period that begins with the first taxable year for which an
individual first makes any regular or conversion contribution to a Roth
IRA and (2) made at any time after the Roth IRA owner has reached age
59\1/2\, made to a beneficiary (or to the Roth IRA owner's estate)
after the Roth IRA owner's death, attributable to the Roth IRA owner's
being disabled within the meaning of section 72(m)(7), or made for a
first-time home purchase to which section 72(t)(2)(F) applies. The
proposed regulations provide that any distribution from a Roth IRA made
to the surviving spouse of a Roth IRA owner who has elected to treat
the Roth IRA as his or her own in accordance with the terms of the
trust instrument or under Q&A-4 of Proposed Treasury Regulations
Sec. 1.408-8 is not treated as made after the Roth IRA owner's death.
The proposed regulations provide that the 5-taxable-year period for
determining whether a distribution is a qualified distribution is not
recalculated when a Roth IRA owner dies. Thus, if a Roth IRA owner
contributes an amount to a Roth IRA in 1998 and dies in 2004, a
distribution made to a beneficiary in 2004 will be a qualified
distribution. Generally, the 5-taxable-year period with respect to a
beneficiary's inherited Roth IRA is determined independently of the 5-
[[Page 46941]]
taxable-year period for any Roth IRA of which the beneficiary is the
owner. However, if the beneficiary of a Roth IRA is the surviving
spouse of the Roth IRA owner and if the surviving spouse owns his or
her own Roth IRA, the 5-taxable-year period for both the Roth IRA of
which the surviving spouse is the beneficiary and the Roth IRA of which
the surviving spouse is the owner ends with the earlier of the 5-
taxable-year periods for the two Roth IRAs.
A Roth IRA distribution other than a qualified distribution is
generally includible in the taxpayer's gross income to the extent that
the distribution, when added to all prior distributions from the
taxpayer's Roth IRAs (whether or not those distributions were qualified
distributions) exceeds the taxpayer's total contributions to all his or
her Roth IRAs. To the extent includible in gross income, such a
distribution will also be subject to the 10-percent additional tax of
section 72(t) unless there is an applicable exception under that
section. Such a distribution, however, will not be includible in gross
income if it is rolled over to another Roth IRA in accordance with
section 408(d)(3). Also, a distribution of an excess contribution under
section 408(d)(4) is not includible in gross income (although the
allocable net income that must be distributed with the excess
contribution is includible in gross income for the taxable year of the
excess contribution).
The proposed regulations provide aggregation and ordering rules for
Roth IRAs in accordance with section 408A(d)(4). Under these rules, a
Roth IRA is not aggregated with a non-Roth IRA, but all a taxpayer's
Roth IRAs are aggregated with each other. Roth IRA distributions are
treated as made first from Roth IRA contributions and second from
earnings. Distributions that are treated as made from contributions are
treated as made first from regular contributions and then from
conversion contributions on a first-in, first-out basis. A distribution
allocable to a particular conversion contribution is treated as
consisting first of the portion (if any) of the conversion contribution
that was includible in gross income by reason of the conversion.
The proposed regulations provide that, in applying these
aggregation and ordering rules: all distributions from all of a
taxpayer's Roth IRAs during a taxable year are aggregated; 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; all conversion contributions
received during the same taxable year by all the individual's Roth IRAs
are aggregated (with a special rule for a conversion contribution made
by distribution during 1998 and rollover during 1999 to which the 4-
year spread applies); and rollovers between Roth IRAs are disregarded.
The proposed regulations also provide special rules for applying the
aggregation and ordering rules in the case of recharacterizations under
section 408A(d)(6). Distributions of excess contributions and allocable
net income pursuant to section 408(d)(4) are treated differently under
the ordering rules. Specifically, an excess contribution that is
distributed under section 408(d)(4) is treated as though it was never
contributed, and any allocable net income thereon is includible in
gross income for the taxable year of the contribution without regard to
whether the taxpayer still has undistributed basis in his or her Roth
IRAs. The proposed regulations provide that, for purposes of these
ordering rules, different types of contributions are allocated pro rata
among multiple Roth IRA beneficiaries after the Roth IRA owner's death.
Unlike traditional IRAs, the pre-death minimum distribution rules
of sections 408(a)(6) and 408(b)(3) (which incorporate the rules of
section 401(a)(9)) do not apply to Roth IRAs. Under the proposed
regulations, on the death of a Roth IRA owner, the rules in Proposed
Treasury Regulations Sec. 1.408-8 apply as though the Roth IRA owner
died before his or her required beginning date. Thus, the entire amount
of the Roth IRA must generally be distributed within five years of the
Roth IRA owner's death unless it is distributed over the life
expectancy of a designated beneficiary beginning prior to the end of
the calendar year following the year of the owner's death. The proposed
regulations also provide that, where the sole beneficiary of a Roth IRA
is the Roth IRA owner's surviving spouse, the spouse may delay
distributions until the Roth IRA owner would have reached age 70\1/2\
or may treat the Roth IRA as his or her own. Under the proposed
regulations, section 401(a)(9) applies separately to Roth IRAs and
other retirement plans; it also applies separately to Roth IRAs
inherited by a beneficiary from one decedent and any other Roth IRAs of
which the beneficiary is either the beneficiary of another decedent or
the owner.
The proposed regulations provide that section 3405 withholding
applies to distributions from Roth IRAs and to Roth IRA conversions
(although transition relief is provided for 1998 conversions effected
by means of direct transfers of funds between IRAs). The proposed
regulations provide that the basis of property distributed from a Roth
IRA is its fair market value as of the date of the distribution and
that any amount distributed from a Roth IRA and contributed to a
retirement plan other than a Roth IRA is not a rollover contribution
under section 408(d)(3) or a qualified rollover contribution under
section 408A(e). The proposed regulations also provide that a transfer
of a Roth IRA by gift would constitute an assignment of the Roth IRA,
with the effect that the assets of the Roth IRA would be deemed to be
distributed to the Roth IRA owner and, accordingly, treated as no
longer held in a Roth IRA.
Reporting Requirements
Proposed 1.408A-7 sets out the reporting requirements applicable to
Roth IRAs. In general, Roth IRA trustees (including custodians and
issuers) are subject to the same reporting requirements that apply to
trustees of traditional IRAs. However, the instructions to applicable
Federal tax forms modify the information generally required from Roth
IRA trustees (as well as Roth IRA owners) in certain circumstances. For
example, conversions require the filing of a Form 1099-R and a Form
8606. The proposed regulations include special rules for reporting of
recharacterization transactions. Trustees are permitted to rely on
reasonable representations of a Roth IRA owner or distributee in
discharging their reporting obligations.
The IRS is issuing additional guidance on the reporting
requirements applicable to Roth IRAs and on other changes in the laws
relating to IRAs. This guidance will be in the form of a notice
published in the Internal Revenue Bulletin.
Reliance
Taxpayers may rely on these proposed regulations for guidance
pending the issuance of final regulations. If, and to the extent,
future guidance is more restrictive than the guidance in these proposed
regulations, the future guidance will be applied without retroactive
effect.
Proposed Effective Date
These 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 this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a
[[Page 46942]]
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 information is insignificant
because the primary reporting burden is on the individual 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,
this notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. All comments will be available for public inspection and copying.
A public hearing has been scheduled for Thursday, December 10,
1998, beginning at 10 a.m. in room 2615 of the Internal Revenue
Building, 1111 Constitution Avenue, NW, Washington, DC. Because of
access restrictions, visitors will not be admitted beyond the Internal
Revenue Building lobby more than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (preferably a signed original
and eight (8) copies) by Thursday, November 19, 1998.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of the proposed 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 in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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. An undesignated centerheading and Secs. 1.408A-0 through
1.408A-9 are added to read as follows:
Roth IRAs; Questions and Answers
Sec. 1.408A-0 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 a Roth IRA.
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.
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 a Roth IRA.
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-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
[[Page 46943]]
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, from that date forward, the Roth IRA is
treated 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.
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
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
[[Page 46944]]
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. Section 4973 applies separately
to an individual's Roth IRAs and other IRAs.
Sec. 1.408A-4 Converting amounts to Roth IRAs.
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 60 days after the distribution;
(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.
(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.
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, intending to make
a conversion, contributes amounts from a traditional IRA to a Roth IRA,
but who is ineligible to make a conversion (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. 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?
[[Page 46945]]
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 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 60 days, 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 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.
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. 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. 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).
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.
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
[[Page 46946]]
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.
(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, within 60
days after the distribution, 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 contribution that is being recharacterized?
A-2. (a) The net income attributable to the 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 contribution is calculated in the manner
prescribed by Sec. 1.408-4(c)(2)(ii).
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.
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.
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 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 purpose 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. Are there examples to illustrate the rules in this section?
A-9. 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,
[[Page 46947]]
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
$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.
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) Excess 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 excess
contribution is includible in gross income for the taxable year in
which the excess contribution was 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.
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 previous distributions
from the owner's Roth IRAs (whether or not they were qualified
distributions), 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
[[Page 46948]]
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
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 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 year include contributions made in the
following taxable year that are identified as made for the taxable
year. 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 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.
[[Page 46949]]
(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) of this A-9, 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 the ordering rules in
A-8 and A-9 of this section:
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 taxable years, the 10-percent additional tax under
section 72(t) would apply to this $3,000 distribution as if it were
includible in gross income 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.
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
[[Page 46950]]
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 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.
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.
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. The definitions are as follows:
[[Page 46951]]
(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).
(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) Modified AGI. The term modified AGI is defined in Sec. 1.408A-3
A-5.
(5) Recharacterization. The term recharacterization means a
transaction described in Sec. 1.408A-5 A-1.
(6) 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.
(7) 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).
(8) 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.
(9) Treat an IRA as his or her own. The phrase treat an IRA as his
or her own means to treat an IRA of a surviving spouse for which one is
the 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).
(10) 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.
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.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-23664 Filed 8-31-98; 11:11 am]
BILLING CODE 4830-01-U