Roth IRAs

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8816]

RIN 1545-AW62

Roth IRAs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to Roth IRAs

under section 408A of the Internal Revenue Code (Code). Roth IRAs were

created by the Taxpayer Relief Act of 1997 as a new type of IRA that

individuals can use beginning in 1998. Section 408A was amended by the

Internal Revenue Service Restructuring and Reform Act of 1998. On

September 3, 1998, a notice of proposed rulemaking was published in the

Federal Register (63 FR 46937) under Code section 408A. Written

comments were received regarding the proposed regulations. On December

10, 1998, a public hearing was held on the proposed regulations. The

final regulations affect individuals establishing Roth IRAs,

beneficiaries under Roth IRAs, and trustees, custodians or issuers of

Roth IRAs.

DATES: Effective date: The final regulations are effective on February

3, 1999.

Applicability date: The final regulations are applicable to taxable

years beginning on or after January 1, 1998, the effective date for

section 408A.

FOR FURTHER INFORMATION CONTACT: Cathy A. Vohs, (202) 622-6030 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in Secs. 1.408A-2, 1.408A-

4, 1.408A-5, and 1.408A-7 of the final regulations have been reviewed

and approved by the Office of Management and Budget in accordance with

the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control

number 1545-1616. Responses to this collection of information are

mandatory.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

Estimated average annual burden per respondent/recordkeeper: 1

minute for designating an IRA as a Roth IRA and 30 minutes for

recharacterizing an IRA contribution. The estimated burdens for the

other reporting/recordkeeping requirements in the these final

regulations are reflected in the burden of Forms 8606, 1040, 5498, and

1099R.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Office of

Management and Budget, Attn: Desk Officer for the Department of the

Treasury, Office of Information and Regulatory Affairs, Washington, DC

20503, with copies to the Internal Revenue Service, Attn: IRS Reports

Clearance Officer, OP:FS:FP, Washington, DC 20224.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On September 3, 1998, a notice of proposed rulemaking was published

in the Federal Register (63 FR 46937) under section 408A of the

Internal

[[Page 5598]]

Revenue Code (Code). The proposed regulations provide guidance on

section 408A of the Code, which was added by section 302 of the

Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788), and

established the Roth IRA as a new type of individual retirement plan,

effective for taxable years beginning on or after January 1, 1998. The

provisions of section 408A were amended by the Internal Revenue Service

Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat.

685). In addition, Notice 98-50 (1998-44 I.R.B. 10) provides guidance

on reconverting an amount that had previously been converted and

recharacterized. This notice solicited public comments concerning

reconversions.

Written comments were received on the proposed regulations and

Notice 98-50. A public hearing was held on the proposed regulations and

Notice 98-50 on December 10, 1998. After consideration of all the

comments, the proposed regulations under section 408A are adopted as

revised by this Treasury decision.

Explanation of Provisions

Overview

A Roth IRA generally is treated under the Code like a traditional

IRA with several significant exceptions. Similar to traditional IRAs,

income on undistributed amounts accumulated under Roth IRAs is exempt

from Federal income tax, and contributions to Roth IRAs are subject to

specific limitations. Unlike traditional IRAs, contributions to Roth

IRAs cannot be deducted from gross income, but qualified distributions

from Roth IRAs are excludable from gross income.

In general, comments received on the proposed regulations did not

request significant changes. Thus, the final regulations retain the

general structure and substance of the proposed regulations.

General Provisions and Establishment of Roth IRAs

Commentators asked for clarification regarding whether a Roth IRA

may be established for the benefit of a minor child or anyone else who

lacks the legal capacity to act on his or her own behalf. On this

point, the IRS and Treasury intend that the rules for traditional IRAs

also apply to Roth IRAs. Thus, for example, a parent or guardian of a

minor child may establish a Roth IRA on behalf of the minor child.

However, in the case of any contribution to a Roth IRA established for

a minor child, the compensation of the child for the taxable year for

which the contribution is made must satisfy the compensation

requirements of section 408A(c) and Sec. 1.408A-3.

Regular Contributions

Several commentators requested clarification of the treatment of

excess Roth IRA contributions under sections 4973, 408(d)(5), and

219(f)(6). Commentators asked for clarification regarding the removal

of excess Roth IRA contributions after the contributor's Federal tax

return due date has passed. The final regulations clarify that,

pursuant to section 4973(f), excess contributions may be applied, on a

year-by-year basis, against the annual limit for regular contributions

to the extent that the Roth IRA owner is eligible to make regular Roth

IRA contributions for a taxable year but does not otherwise do so.

However, in response to several requests for clarification, the IRS and

Treasury note that the rules under section 408(d)(5) for the tax-free

distribution of certain excess traditional IRA contributions after the

IRA owner's Federal income tax return due date do not apply to Roth

IRAs because Roth IRA contributions are always tax-free on distribution

(except to the extent that they accelerate income inclusion under the

4-year spread). Similarly, section 219(f)(6), which provides for the

deductibility of excess traditional IRA contributions in subsequent

taxable years, has no application to Roth IRAs because contributions to

Roth IRAs are never deductible.

Another commentator asked for clarification whether contributions

to education IRAs are disregarded for purposes of applying the

limitation on regular contributions to Roth IRAs. No change has been

made to the final regulations on this point because the final

regulations retain the definition of an IRA provided in the proposed

regulations, which excludes an education IRA under section 530. Thus,

contributions to an education IRA are disregarded in applying the Roth

IRA contribution limitation (and in applying the contribution

limitation for traditional IRAs).

Conversions

In response to certain comments, the final regulations clarify that

conversions and recharacterizations made with the same trustee may be

accomplished by redesignating the account or annuity contract, rather

than by the opening of a new account or the issuance of a new annuity

contract for each conversion or recharacterization.

As requested by commentators, the final regulations provide that a

change in filing status or a divorce does not affect the application of

the 4-year spread for 1998 conversions. Thus, if a married Roth IRA

owner who is using the 4-year spread files separately or divorces

before the full taxable conversion amount has been included in gross

income, the remainder must be included in the Roth IRA owner's gross

income over the remaining years in the 4-year period, or, if

applicable, in the year for which the remainder is accelerated due to

distribution or death.

Two commentators questioned why the proposed regulations require

that a surviving spouse be the sole beneficiary of all a Roth IRA

owner's Roth IRAs in order to elect to continue application of the 4-

year spread after the Roth IRA owner's death. The IRS and Treasury view

this result as compelled by the statutory language of section

408A(d)(3)(E)(ii)(II). That section provides that the surviving spouse

must acquire the ``entire interest'' in any Roth IRA to which a

conversion contribution to which the 4-year spread applies is

``properly allocable.'' Under the aggregation and ordering rules of

section 408A(d)(4), all a Roth IRA owner's Roth IRAs are treated as a

single Roth IRA, and a conversion contribution is therefore allocable

to all the owner's Roth IRAs. Thus, a surviving spouse must be the sole

beneficiary of all a Roth IRA owner's Roth IRAs in order to acquire the

entire interest in any Roth IRA to which a 1998 conversion contribution

is properly allocable.

Commentators also asked the IRS and Treasury to clarify whether

Roth IRA distributions that are part of a series of substantially equal

periodic payments begun under a traditional IRA prior to conversion to

a Roth IRA are subject to income acceleration during the 4-year spread

period and the 10-percent additional tax on early distributions under

section 72(t). The final regulations clarify that those distributions

are subject to income acceleration to the extent allocable to a 1998

conversion contribution with respect to which the 4-year spread

applies. The final regulations further clarify, however, that the

additional 10-percent tax under section 72(t) will not apply, even if

the distributions are not qualified distributions (as long as they are

part of a series of substantially equal periodic payments).

Under the proposed regulations, if an IRA owner has reached age

70\1/2\, any amount distributed (or treated as distributed because of a

conversion) from the IRA for a year consists of the required minimum

distribution to the extent that an amount equal to the required minimum

distribution for that year has not yet been distributed (or

[[Page 5599]]

treated as distributed); as a required minimum distribution, that

amount cannot be converted to a Roth IRA. Although one commentator

requested that this rule be retained in the final regulations, other

commentators objected to it. A number of commentators asked the IRS and

Treasury to adopt a rule allowing an IRA owner who wishes to convert a

traditional IRA to a Roth IRA in the year he or she turns 70\1/2\ to

leave the amount of his or her required minimum distribution with

respect to such IRA in the IRA until April 1 of the following year,

provided the conversion is accomplished by means of a trustee-to-

trustee transfer. The commentators note that this rule applies in the

case of trustee-to-trustee transfers between traditional IRAs. The

final regulations retain the rule that the required minimum

distribution amount is ineligible for rollover, including such a

distribution for the year that the individual reaches age 70\1/2\,

because, pursuant to section 408A(d)(3)(C), a conversion is treated as

a distribution regardless of whether the conversion is accomplished by

a trustee-to-trustee transfer. Accordingly, the required minimum

distribution amount is ineligible for rollover, and as such, is also

ineligible to be converted to a Roth IRA.

Additionally, several commentators suggested that the rule in the

proposed regulations is inconsistent with section 401(a)(9), which

generally requires that IRA distributions begin by April 1 of the

calendar year following the calendar year in which the IRA owner

reaches age 70\1/2\. These commentators argued that, under section

401(a)(9), distributions made during the calendar year in which the IRA

owner reaches age 70\1/2\ should not be considered required minimum

distributions under sections 401(a)(9) and 408(a)(6) and (b)(3).

However, the proposed regulations under sections 401(a)(9) and

408(a)(6) and (b)(3) provide that the first year for which

distributions are required under section 401(a)(9) is the year in which

the IRA owner reaches age 70\1/2\, and that distributions made prior to

April 1 of the following calendar year are treated as made for that

first year. The regulations under section 402(c) and the proposed

regulations under sections 401(a)(9) and 408(a)(6) and (b)(3) provide

that the first amount distributed during a calendar year is treated as

a required minimum distribution to the extent that the amount required

to be distributed for that calendar year under section 401(a)(9) has

not been distributed. For these reasons, the final regulations retain

the rule of the proposed regulations.

Recharacterizations of IRA Contributions

The final regulations clarify that the computation of net income

under Sec. 1.408-4(c)(2)(iii) in the case of a commingled IRA may

include net losses on the amount to be recharacterized.

Commentators asked the IRS and Treasury to clarify whether an

amount converted from a SEP IRA or SIMPLE IRA to a Roth IRA may be

recharacterized back to the SEP IRA or SIMPLE IRA from which the amount

was converted. The final regulations provide that Roth IRA conversion

contributions from a SEP IRA or SIMPLE IRA may be recharacterized to a

SEP IRA or SIMPLE IRA (including the original SEP IRA or SIMPLE IRA).

Another commentator also asked for clarification whether it is

necessary to track the source of assets (i.e., as employer or employee

contributions) converted from a SEP IRA or SIMPLE IRA to a Roth IRA for

purposes of determining whether such assets may be recharacterized. The

prohibition on recharacterizing employer contributions to a SEP IRA or

SIMPLE IRA set forth in the final regulations only applies to those

contributions at the time they are made to the SEP IRA or SIMPLE IRA.

Once such contributions have been made to a SEP IRA or a SIMPLE IRA,

the SEP IRA or SIMPLE IRA may be converted to a Roth IRA and

subsequently recharacterized (provided, in the case of a SIMPLE IRA,

that the two-year rule has been satisfied prior to the conversion).

Commentators asked for clarification regarding whether an election

to recharacterize an IRA contribution may be made on behalf of a

deceased IRA owner. The final regulations provide that the election to

recharacterize an IRA contribution may be made by the executor,

administrator, or other person charged with the duty of filing the

decedent's final Federal income tax return.

Commentators also asked whether an excess contribution to an IRA

made in a prior year, and applied against the contribution limits in

the current year under section 4973, may be recharacterized. Only

actual contributions may be recharacterized; thus, excess contributions

actually made for a prior year and deemed to be current-year

contributions for purposes of section 4973, are not contributions that

are eligible to be recharacterized (unless the recharacterization would

still be timely with respect to the taxable year for which the

contributions were actually made). This rule applies to any excess

contribution, whether made to a traditional or a Roth IRA.

Commentators asked for clarification regarding a conduit IRA that

is converted to a Roth IRA and subsequently recharacterized back to a

traditional IRA. The IRS and Treasury note that a conduit IRA that is

converted to a Roth IRA and subsequently recharacterized back to a

traditional IRA retains its status as a conduit IRA because the effect

of the recharacterization is to treat the amount recharacterized as

though it had been transferred directly from the original conduit IRA

into another conduit IRA.

Commentators also asked whether a recharacterization is subject to

withholding. A recharacterization is not a designated distribution

under section 3405 and, therefore, is not subject to withholding.

The final regulations also provide rules regarding the

``reconversion'' of an amount that has been transferred from a Roth IRA

to a traditional IRA by means of a recharacterization after having been

earlier converted from a traditional IRA to a Roth IRA. After

publication of the proposed regulations, the IRS and Treasury issued

Notice 98-50, which provides interim rules regarding Roth IRA

reconversions made during 1998 and 1999. Notice 98-50 stated that the

interim rules were intended to clarify and supplement the proposed

regulations and permitted taxpayers to rely on those rules as if

incorporated in the proposed regulations. Notice 98-50 noted that the

IRS and Treasury were considering whether the final regulations should

provide that a taxpayer is not eligible to reconvert an amount before

the end of the taxable year in which the amount was first converted (or

the due date for that taxable year), or that a taxpayer who transfers a

converted amount back to a traditional IRA in a recharacterization must

wait until the passage of a fixed number of days before reconverting.

Although Notice 98-50 invited interested parties to submit comments on

those approaches, little comment was received on that issue. The final

regulations provide reconversion rules for 2000 and subsequent years

that generally differ from the interim rules of Notice 98-50. However,

for 1998 and 1999, the final regulations continue the interim rules of

Notice 98-50.

Effective January 1, 2000, an IRA owner who converts an amount from

a traditional IRA to a Roth IRA during any taxable year and then

transfers that amount back to a traditional IRA by means of a

recharacterization may not

[[Page 5600]]

reconvert that amount from the traditional IRA to a Roth IRA before the

beginning of the taxable year following the taxable year in which the

amount was converted to a Roth IRA or, if later, the end of the 30-day

period beginning on the day on which the IRA owner transfers the amount

from the Roth IRA back to a traditional IRA by means of a

recharacterization. As under Notice 98-50, any amount previously

converted is adjusted for subsequent net income in determining the

amount subject to the limitation on subsequent reconversions.

A reconversion made before the later of the beginning of the next

taxable year or the end of the 30-day period that begins on the day of

the recharacterization is treated as a ``failed conversion'' (a

distribution from the traditional IRA and a regular contribution to the

Roth IRA), subject to correction through a recharacterization back to a

traditional IRA. For these purposes, only a failed conversion resulting

from a failure to satisfy the statutory requirements for a conversion

(e.g., the $100,000 modified adjusted gross income limit) is treated as

a conversion in determining when an IRA owner may make a reconversion.

Thus, an IRA owner whose taxable year is the calendar year and who

converts an amount to a Roth IRA in 2000 and then transfers that amount

back to a traditional IRA on January 18, 2001 because his or her

adjusted gross income for 2000 exceeds $100,000 cannot reconvert that

amount until February 17, 2001 (the first day after the end of the 30-

day period beginning on the day of the recharacterization transfer)

because the failed conversion made in 2000 is treated as a conversion

for purposes of the reconversion rules. However, if that IRA owner

inadvertently attempts to reconvert that amount before February 17,

2001, the attempted reconversion is not treated as a conversion for

purposes of the reconversion rules (although it is otherwise treated as

a failed conversion). Therefore, the IRA owner could transfer the

amount back to a traditional IRA in a recharacterization and reconvert

it at any time on or after February 17, 2001. If the IRA owner does

reconvert the amount on or after February 17, 2001, he or she cannot

reconvert that amount again until 2002.

As indicated above, the final regulations continue the interim

rules of Notice 98-50 applicable for 1998 and 1999. Therefore, an IRA

owner who converts an amount from a traditional IRA to a Roth IRA

during 1998 and then transfers that amount back to a traditional IRA by

means of a recharacterization may reconvert that amount once (but no

more than once) on or after November 1, 1998 and on or before December

31, 1998; the IRA owner may also reconvert that amount once (but no

more than once) during 1999. Similarly, an IRA owner who converts an

amount from a traditional IRA to a Roth IRA during 1999 that has not

been converted before and then transfers that amount back to a

traditional IRA by means of a recharacterization may reconvert that

amount once (but no more than once) on or before December 31, 1999. In

contrast to the rule for years after 1999, a failed conversion is not

treated as a conversion for these 1998 and 1999 interim rules.

As did Notice 98-50, the final regulations provide that a

reconversion made during 1998 or 1999 for which the IRA owner was not

eligible is deemed to be an ``excess reconversion'' and does not change

the IRA owner's taxable conversion amount. Instead, the excess

reconversion and the last preceding recharacterization are not taken

into account for purposes of determining the IRA owner's taxable

conversion amount, and the IRA owner's taxable conversion amount is

based on the last reconversion that was not an excess reconversion. An

excess reconversion is otherwise treated as a valid reconversion. The

final regulations grandfather conversions and reconversions made before

November 1, 1998.

Distributions

In response to concerns raised in the comments regarding potential

double taxation, the final regulations clarify that a nonqualified

distribution from a Roth IRA is taxed only to the extent that the

amount of the distribution, when added to all previous distributions

(whether or not they were qualified distributions) and reduced by the

taxable amount of such previous distributions, exceed the owner's

contributions to all his or her Roth IRAs.

Commentators also asked for clarification regarding whether a

beneficiary may aggregate his or her inherited Roth IRAs with other

Roth IRAs maintained by such beneficiary. The final regulations provide

that a beneficiary's inherited Roth IRA may not be aggregated with any

other Roth IRA maintained by such beneficiary (except for other Roth

IRAs that the beneficiary inherited from the same decedent), unless the

beneficiary, as the spouse of the decedent and sole beneficiary of the

Roth IRA, elects to treat the Roth IRA as his or her own.

In addition, commentators also asked for clarification regarding

whether the 5-taxable year period for determining whether a

distribution is a qualified distribution starts over for subsequent

Roth IRA contributions if the entire account balance in a Roth IRA is

distributed to the Roth IRA owner before he or she makes any other Roth

IRA contributions. In such a case, the 5-taxable-year period does not

start over. However, if an initial Roth IRA contribution is made to a

Roth IRA that subsequently is revoked within 7 days, or if an initial

Roth IRA contribution is recharacterized, the initial contribution does

not start the 5-year period. The final regulations provide that an

excess contribution that is distributed in accordance with section

408(d)(4) does not start the 5-year period.

One commentator questioned the rule in the proposed regulations

providing that a distribution allocable to a conversion contribution is

treated as made first from the portion (if any) that was includible in

gross income as a result of the conversion. The IRS and Treasury note

that this result is plainly compelled by section 408A(d)(4)(B)(ii).

Another commentator inquired about the treatment of all conversions as

designated distributions under section 3405; the commentator suggested

that conversions effected by means of trustee-to-trustee transfers

should not be treated as designated distributions subject to

withholding. However, section 408A(d)(3) treats all Roth IRA

conversions as distributions regardless of how they are effected.

Reporting Requirements

The final regulations retain the reporting rules set forth in the

proposed regulations.

Effective Date

The final regulations are applicable to taxable years beginning on

or after January 1, 1998, the effective date for section 408A.

Special Analyses

It has been determined that the final regulations are not a

significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these regulations. Further, it is

hereby certified, pursuant to sections 603(a) and 605(b) of the

Regulatory Flexibility Act, that the collection of information in these

regulations will not have a significant economic impact on a

substantial number of small entities. The cost of the collection of

information is insignificant because the primary reporting burden is on

the individual

[[Page 5601]]

and not the small entity. Therefore the collection of information will

not have a substantial economic impact. Therefore, a regulatory

flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed rulemaking preceding these

regulations was submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Drafting Information: The principal author of the final regulations

is Cathy A. Vohs, Office of Associate Chief Counsel (Employee Benefits

and Exempt Organizations). However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Sec. 1.408A-1 also issued under 26 U.S.C. 408A.

Sec. 1.408A-2 also issued under 26 U.S.C. 408A.

Sec. 1.408A-3 also issued under 26 U.S.C. 408A.

Sec. 1.408A-4 also issued under 26 U.S.C. 408A.

Sec. 1.408A-5 also issued under 26 U.S.C. 408A.

Sec. 1.408A-6 also issued under 26 U.S.C. 408A.

Sec. 1.408A-7 also issued under 26 U.S.C. 408A.

Sec. 1.408A-8 also issued under 26 U.S.C. 408A.

Sec. 1.408A-9 also issued under 26 U.S.C. 408A. * * *

Par. 2. Sections 1.408A-0 through 1.408A-9 are added to read as

follows:

Sec. 1.408A-0 Roth IRAs; table of contents.

This table of contents lists the regulations relating to Roth IRAs

under section 408A of the Internal Revenue Code as follows:

Sec. 1.408A-1 Roth IRAs in general.

Sec. 1.408A-2 Establishing Roth IRAs.

Sec. 1.408A-3 Contributions to Roth IRAs.

Sec. 1.408A-4 Converting amounts to Roth IRAs.

Sec. 1.408A-5 Recharacterized contributions.

Sec. 1.408A-6 Distributions.

Sec. 1.408A-7 Reporting.

Sec. 1.408A-8 Definitions.

Sec. 1.408A-9 Effective date.

Sec. 1.408A-1 Roth IRAs in general.

This section sets forth the following questions and answers that

discuss the background and general features of Roth IRAs:

Q-1. What is a Roth IRA?

A-1. (a) A Roth IRA is a new type of individual retirement plan

that individuals can use, beginning in 1998. Roth IRAs are described in

section 408A, which was added by the Taxpayer Relief Act of 1997 (TRA

97), Public Law 105-34 (111 Stat. 788).

(b) Roth IRAs are treated like traditional IRAs except where the

Internal Revenue Code specifies different treatment. For example,

aggregate contributions (other than by a conversion or other rollover)

to all an individual's Roth IRAs are not permitted to exceed $2,000 for

a taxable year. Further, income earned on funds held in a Roth IRA is

generally not taxable. Similarly, the rules of section 408(e), such as

the loss of exemption of the account where the owner engages in a

prohibited transaction, apply to Roth IRAs in the same manner as to

traditional IRAs.

Q-2. What are the significant differences between traditional IRAs

and Roth IRAs?

A-2. There are several significant differences between traditional

IRAs and Roth IRAs under the Internal Revenue Code. For example,

eligibility to contribute to a Roth IRA is subject to special modified

AGI (adjusted gross income) limits; contributions to a Roth IRA are

never deductible; qualified distributions from a Roth IRA are not

includible in gross income; the required minimum distribution rules

under section 408(a)(6) and (b)(3) (which generally incorporate the

provisions of section 401(a)(9)) do not apply to a Roth IRA during the

lifetime of the owner; and contributions to a Roth IRA can be made

after the owner has attained age 70\1/2\.

Sec. 1.408A-2 Establishing Roth IRAs.

This section sets forth the following questions and answers that

provide rules applicable to establishing Roth IRAs:

Q-1. Who can establish a Roth IRA?

A-1. Except as provided in A-3 of this section, only an individual

can establish a Roth IRA. In addition, in order to be eligible to

contribute to a Roth IRA for a particular year, an individual must

satisfy certain compensation requirements and adjusted gross income

limits (see Sec. 1.408A-3 A-3).

Q-2. How is a Roth IRA established?

A-2. A Roth IRA can be established with any bank, insurance

company, or other person authorized in accordance with Sec. 1.408-2(e)

to serve as a trustee with respect to IRAs. The document establishing

the Roth IRA must clearly designate the IRA as a Roth IRA, and this

designation cannot be changed at a later date. Thus, an IRA that is

designated as a Roth IRA cannot later be treated as a traditional IRA.

However, see Sec. 1.408A-4 A-1(b)(3) for certain rules for converting a

traditional IRA to a Roth IRA with the same trustee by redesignating

the traditional IRA as a Roth IRA, and see Sec. 1.408A-5 for rules for

recharacterizing certain IRA contributions.

Q-3. Can an employer or an association of employees establish a

Roth IRA to hold contributions of employees or members?

A-3. Yes. Pursuant to section 408(c), an employer or an association

of employees can establish a trust to hold contributions of employees

or members made under a Roth IRA. Each employee's or member's account

in the trust is treated as a separate Roth IRA that is subject to the

generally applicable Roth IRA rules. The employer or association of

employees may do certain acts otherwise required by an individual, for

example, establishing and designating a trust as a Roth IRA.

Q-4. What is the effect of a surviving spouse of a Roth IRA owner

treating an IRA as his or her own?

A-4. If the surviving spouse of a Roth IRA owner treats a Roth IRA

as his or her own as of a date, the Roth IRA is treated from that date

forward as though it were established for the benefit of the surviving

spouse and not the original Roth IRA owner. Thus, for example, the

surviving spouse is treated as the Roth IRA owner for purposes of

applying the minimum distribution requirements under section 408(a)(6)

and (b)(3). Similarly, the surviving spouse is treated as the Roth IRA

owner rather than a beneficiary for purposes of determining the amount

of any distribution from the Roth IRA that is includible in gross

income and whether the distribution is subject to the 10-percent

additional tax under section 72(t).

Sec. 1.408A-3 Contributions to Roth IRAs.

This section sets forth the following questions and answers that

provide rules regarding contributions to Roth IRAs:

Q-1. What types of contributions are permitted to be made to a Roth

IRA?

A-1. There are two types of contributions that are permitted to be

[[Page 5602]]

made to a Roth IRA: regular contributions and qualified rollover

contributions (including conversion contributions). The term regular

contributions means contributions other than qualified rollover

contributions.

Q-2. When are contributions permitted to be made to a Roth IRA?

A-2. (a) The provisions of section 408A are effective for taxable

years beginning on or after January 1, 1998. Thus, the first taxable

year for which contributions are permitted to be made to a Roth IRA by

an individual is the individual's taxable year beginning in 1998.

(b) Regular contributions for a particular taxable year must

generally be contributed by the due date (not including extensions) for

filing a Federal income tax return for that taxable year. (See

Sec. 1.408A-5 regarding recharacterization of certain contributions.)

Q-3. What is the maximum aggregate amount of regular contributions

an individual is eligible to contribute to a Roth IRA for a taxable

year?

A-3. (a) The maximum aggregate amount that an individual is

eligible to contribute to all his or her Roth IRAs as a regular

contribution for a taxable year is the same as the maximum for

traditional IRAs: $2,000 or, if less, that individual's compensation

for the year.

(b) For Roth IRAs, the maximum amount described in paragraph (a) of

this A-3 is phased out between certain levels of modified AGI. For an

individual who is not married, the dollar amount is phased out ratably

between modified AGI of $95,000 and $110,000; for a married individual

filing a joint return, between modified AGI of $150,000 and $160,000;

and for a married individual filing separately, between modified AGI of

$0 and $10,000. For this purpose, a married individual who has lived

apart from his or her spouse for the entire taxable year and who files

separately is treated as not married. Under section 408A(c)(3)(A), in

applying the phase-out, the maximum amount is rounded up to the next

higher multiple of $10 and is not reduced below $200 until completely

phased out.

(c) If an individual makes regular contributions to both

traditional IRAs and Roth IRAs for a taxable year, the maximum limit

for the Roth IRA is the lesser of--

(1) The amount described in paragraph (a) of this A-3 reduced by

the amount contributed to traditional IRAs for the taxable year; and

(2) The amount described in paragraph (b) of this A-3. Employer

contributions, including elective deferrals, made under a SEP or SIMPLE

IRA Plan on behalf of an individual (including a self-employed

individual) do not reduce the amount of the individual's maximum

regular contribution.

(d) The rules in this A-3 are illustrated by the following

examples:

Example 1. In 1998, unmarried, calendar-year taxpayer B, age 60,

has modified AGI of $40,000 and compensation of $5,000. For 1998, B

can contribute a maximum of $2,000 to a traditional IRA, a Roth IRA

or a combination of traditional and Roth IRAs.

Example 2. The facts are the same as in Example 1. However,

assume that B violates the maximum regular contribution limit by

contributing $2,000 to a traditional IRA and $2,000 to a Roth IRA

for 1998. The $2,000 to B's Roth IRA would be an excess contribution

to B's Roth IRA for 1998 because an individual's contributions are

applied first to a traditional IRA, then to a Roth IRA.

Example 3. The facts are the same as in Example 1, except that

B's compensation is $900. The maximum amount B can contribute to

either a traditional IRA or a Roth (or a combination of the two) for

1998 is $900.

Example 4. In 1998, unmarried, calendar-year taxpayer C, age 60,

has modified AGI of $100,000 and compensation of $5,000. For 1998, C

contributes $800 to a traditional IRA and $1,200 to a Roth IRA.

Because C's $1,200 Roth IRA contribution does not exceed the phased-

out maximum Roth IRA contribution of $1,340 and because C's total

IRA contributions do not exceed $2,000, C's Roth IRA contribution

does not exceed the maximum permissible contribution.

Q-4. How is compensation defined for purposes of the Roth IRA

contribution limit?

A-4. For purposes of the contribution limit described in A-3 of

this section, an individual's compensation is the same as that used to

determine the maximum contribution an individual can make to a

traditional IRA. This amount is defined in section 219(f)(1) to include

wages, commissions, professional fees, tips, and other amounts received

for personal services, as well as taxable alimony and separate

maintenance payments received under a decree of divorce or separate

maintenance. Compensation also includes earned income as defined in

section 401(c)(2), but does not include any amount received as a

pension or annuity or as deferred compensation. In addition, under

section 219(c), a married individual filing a joint return is permitted

to make an IRA contribution by treating his or her spouse's higher

compensation as his or her own, but only to the extent that the

spouse's compensation is not being used for purposes of the spouse

making a contribution to a Roth IRA or a deductible contribution to a

traditional IRA.

Q-5. What is the significance of modified AGI and how is it

determined?

A-5. Modified AGI is used for purposes of the phase-out rules

described in A-3 of this section and for purposes of the $100,000

modified AGI limitation described in Sec. 1.408A-4 A-2(a) (relating to

eligibility for conversion). As defined in section 408A(c)(3)(C)(i),

modified AGI is the same as adjusted gross income under section

219(g)(3)(A) (used to determine the amount of deductible contributions

that can be made to a traditional IRA by an individual who is an active

participant in an employer-sponsored retirement plan), except that any

conversion is disregarded in determining modified AGI. For example, the

deduction for contributions to an IRA is not taken into account for

purposes of determining adjusted gross income under section 219 and

thus does not apply in determining modified AGI for Roth IRA purposes.

Q-6. Is a required minimum distribution from an IRA for a year

included in income for purposes of determining modified AGI?

A-6. (a) Yes. For taxable years beginning before January 1, 2005,

any required minimum distribution from an IRA under section 408(a)(6)

and (b)(3) (which generally incorporate the provisions of section

401(a)(9)) is included in income for purposes of determining modified

AGI.

(b) For taxable years beginning after December 31, 2004, and solely

for purposes of the $100,000 limitation applicable to conversions,

modified AGI does not include any required minimum distributions from

an IRA under section 408(a)(6) and (b)(3).

Q-7. Does an excise tax apply if an individual exceeds the

aggregate regular contribution limits for Roth IRAs?

A-7. Yes. Section 4973 imposes an annual 6-percent excise tax on

aggregate amounts contributed to Roth IRAs that exceed the maximum

contribution limits described in A-3 of this section. Any contribution

that is distributed, together with net income, from a Roth IRA on or

before the tax return due date (plus extensions) for the taxable year

of the contribution is treated as not contributed. Net income described

in the previous sentence is includible in gross income for the taxable

year in which the contribution is made. Aggregate excess contributions

that are not distributed from a Roth IRA on or before the tax return

due date (with extensions) for the taxable year of the contributions

are reduced as a deemed Roth IRA contribution for each

[[Page 5603]]

subsequent taxable year to the extent that the Roth IRA owner does not

actually make regular IRA contributions for such years. Section 4973

applies separately to an individual's Roth IRAs and other types of

IRAs.

Sec. 1.408A-4 Converting amounts to Roth IRAs.

This section sets forth the following questions and answers that

provide rules applicable to Roth IRA conversions:

Q-1. Can an individual convert an amount in his or her traditional

IRA to a Roth IRA?

A-1. (a) Yes. An amount in a traditional IRA may be converted to an

amount in a Roth IRA if two requirements are satisfied. First, the IRA

owner must satisfy the modified AGI limitation described in A-2(a) of

this section and, if married, the joint filing requirement described in

A-2(b) of this section. Second, the amount contributed to the Roth IRA

must satisfy the definition of a qualified rollover contribution in

section 408A(e) (i.e., it must satisfy the requirements for a rollover

contribution as defined in section 408(d)(3), except that the one-

rollover-per-year limitation in section 408(d)(3)(B) does not apply).

(b) An amount can be converted by any of three methods--

(1) An amount distributed from a traditional IRA is contributed

(rolled over) to a Roth IRA within the 60-day period described in

section 408(d)(3)(A)(i);

(2) An amount in a traditional IRA is transferred in a trustee-to-

trustee transfer from the trustee of the traditional IRA to the trustee

of the Roth IRA; or

(3) An amount in a traditional IRA is transferred to a Roth IRA

maintained by the same trustee. For purposes of sections 408 and 408A,

redesignating a traditional IRA as a Roth IRA is treated as a transfer

of the entire account balance from a traditional IRA to a Roth IRA.

(c) Any converted amount is treated as a distribution from the

traditional IRA and a qualified rollover contribution to the Roth IRA

for purposes of section 408 and section 408A, even if the conversion is

accomplished by means of a trustee-to-trustee transfer or a transfer

between IRAs of the same trustee.

(d) A transaction that is treated as a failed conversion under

Sec. 1.408A-5 A-9(a)(1) is not a conversion.

Q-2. What are the modified AGI limitation and joint filing

requirements for conversions?

A-2. (a) An individual with modified AGI in excess of $100,000 for

a taxable year is not permitted to convert an amount to a Roth IRA

during that taxable year. This $100,000 limitation applies to the

taxable year that the funds are paid from the traditional IRA, rather

than the year they are contributed to the Roth IRA.

(b) If the individual is married, he or she is permitted to convert

an amount to a Roth IRA during a taxable year only if the individual

and the individual's spouse file a joint return for the taxable year

that the funds are paid from the traditional IRA. In this case, the

modified AGI subject to the $100,000 limit is the modified AGI derived

from the joint return using the couple's combined income. The only

exception to this joint filing requirement is for an individual who has

lived apart from his or her spouse for the entire taxable year. If the

married individual has lived apart from his or her spouse for the

entire taxable year, then such individual can treat himself or herself

as not married for purposes of this paragraph, file a separate return

and be subject to the $100,000 limit on his or her separate modified

AGI. In all other cases, a married individual filing a separate return

is not permitted to convert an amount to a Roth IRA, regardless of the

individual's modified AGI.

Q-3. Is a remedy available to an individual who makes a failed

conversion?

A-3. (a) Yes. See Sec. 1.408A-5 for rules permitting a failed

conversion amount to be recharacterized as a contribution to a

traditional IRA. If the requirements in Sec. 1.408A-5 are satisfied,

the failed conversion amount will be treated as having been contributed

to the traditional IRA and not to the Roth IRA.

(b) If the contribution is not recharacterized in accordance with

Sec. 1.408A-5, the contribution will be treated as a regular

contribution to the Roth IRA and, thus, an excess contribution subject

to the excise tax under section 4973 to the extent that it exceeds the

individual's regular contribution limit. This is the result regardless

of which of the three methods described in A-1(b) of this section

applies to this transaction. Additionally, the distribution from the

traditional IRA will not be eligible for the 4-year spread and will be

subject to the additional tax under section 72(t) (unless an exception

under that section applies).

Q-4. Do any special rules apply to a conversion of an amount in an

individual's SEP IRA or SIMPLE IRA to a Roth IRA?

A-4. (a) An amount in an individual's SEP IRA can be converted to a

Roth IRA on the same terms as an amount in any other traditional IRA.

(b) An amount in an individual's SIMPLE IRA can be converted to a

Roth IRA on the same terms as a conversion from a traditional IRA,

except that an amount distributed from a SIMPLE IRA during the 2-year

period described in section 72(t)(6), which begins on the date that the

individual first participated in any SIMPLE IRA Plan maintained by the

individual's employer, cannot be converted to a Roth IRA. Pursuant to

section 408(d)(3)(G), a distribution of an amount from an individual's

SIMPLE IRA during this 2-year period is not eligible to be rolled over

into an IRA that is not a SIMPLE IRA and thus cannot be a qualified

rollover contribution. This 2-year period of section 408(d)(3)(G)

applies separately to the contributions of each of an individual's

employers maintaining a SIMPLE IRA Plan.

(c) Once an amount in a SEP IRA or SIMPLE IRA has been converted to

a Roth IRA, it is treated as a contribution to a Roth IRA for all

purposes. Future contributions under the SEP or under the SIMPLE IRA

Plan may not be made to the Roth IRA.

Q-5. Can amounts in other kinds of retirement plans be converted to

a Roth IRA?

A-5. No. Only amounts in another IRA can be converted to a Roth

IRA. For example, amounts in a qualified plan or annuity plan described

in section 401(a) or 403(a) cannot be converted directly to a Roth IRA.

Also, amounts held in an annuity contract or account described in

section 403(b) cannot be converted directly to a Roth IRA.

Q-6. Can an individual who has attained at least age 70\1/2\ by the

end of a calendar year convert an amount distributed from a traditional

IRA during that year to a Roth IRA before receiving his or her required

minimum distribution with respect to the traditional IRA for the year

of the conversion?

A-6. (a) No. In order to be eligible for a conversion, an amount

first must be eligible to be rolled over. Section 408(d)(3) prohibits

the rollover of a required minimum distribution. If a minimum

distribution is required for a year with respect to an IRA, the first

dollars distributed during that year are treated as consisting of the

required minimum distribution until an amount equal to the required

minimum distribution for that year has been distributed.

(b) As provided in A-1(c) of this section, any amount converted is

treated as a distribution from a traditional IRA and a rollover

contribution to a Roth

[[Page 5604]]

IRA and not as a trustee-to-trustee transfer for purposes of section

408 and section 408A. Thus, in a year for which a minimum distribution

is required (including the calendar year in which the individual

attains age 70\1/2\), an individual may not convert the assets of an

IRA (or any portion of those assets) to a Roth IRA to the extent that

the required minimum distribution for the traditional IRA for the year

has not been distributed.

(c) If a required minimum distribution is contributed to a Roth

IRA, it is treated as having been distributed, subject to the normal

rules under section 408(d)(1) and (2), and then contributed as a

regular contribution to a Roth IRA. The amount of the required minimum

distribution is not a conversion contribution.

Q-7. What are the tax consequences when an amount is converted to a

Roth IRA?

A-7. (a) Any amount that is converted to a Roth IRA is includible

in gross income as a distribution according to the rules of section

408(d)(1) and (2) for the taxable year in which the amount is

distributed or transferred from the traditional IRA. Thus, any portion

of the distribution or transfer that is treated as a return of basis

under section 408(d)(1) and (2) is not includible in gross income as a

result of the conversion.

(b) The 10-percent additional tax under section 72(t) generally

does not apply to the taxable conversion amount. But see Sec. 1.408A-6

A-5 for circumstances under which the taxable conversion amount would

be subject to the additional tax under section 72(t).

(c) Pursuant to section 408A(e), a conversion is not treated as a

rollover for purposes of the one-rollover-per-year rule of section

408(d)(3)(B).

Q-8. Is there an exception to the income-inclusion rule described

in A-7 of this section for 1998 conversions?

A-8. Yes. In the case of a distribution (including a trustee-to-

trustee transfer) from a traditional IRA on or before December 31,

1998, that is converted to a Roth IRA, instead of having the entire

taxable conversion amount includible in income in 1998, an individual

includes in gross income for 1998 only one quarter of that amount and

one quarter of that amount for each of the next 3 years. This 4-year

spread also applies if the conversion amount was distributed in 1998

and contributed to the Roth IRA within the 60-day period described in

section 408(d)(3)(A)(i), but after December 31, 1998. However, see

Sec. 1.408A-6 A-6 for special rules requiring acceleration of inclusion

if an amount subject to the 4-year spread is distributed from the Roth

IRA before 2001.

Q-9. Is the taxable conversion amount included in income for all

purposes?

A-9. Except as provided below, any taxable conversion amount

includible in gross income for a year as a result of the conversion

(regardless of whether the individual is using a 4-year spread) is

included in income for all purposes. Thus, for example, it is counted

for purposes of determining the taxable portion of social security

payments under section 86 and for purposes of determining the phase-out

of the $25,000 exemption under section 469(i) relating to the

disallowance of passive activity losses from rental real estate

activities. However, as provided in Sec. 1.408A-3 A-5, the taxable

conversion amount (and any resulting change in other elements of

adjusted gross income) is disregarded for purposes of determining

modified AGI for section 408A.

Q-10. Can an individual who makes a 1998 conversion elect not to

have the 4-year spread apply and instead have the full taxable

conversion amount includible in gross income for 1998?

A-10. Yes. Instead of having the taxable conversion amount for a

1998 conversion included over 4 years as provided under A-8 of this

section, an individual can elect to include the full taxable conversion

amount in income for 1998. The election is made on Form 8606 and cannot

be made or changed after the due date (including extensions) for filing

the 1998 Federal income tax return.

Q-11. What happens when an individual who is using the 4-year

spread dies, files separately, or divorces before the full taxable

conversion amount has been included in gross income?

A-11. (a) If an individual who is using the 4-year spread described

in A-8 of this section dies before the full taxable conversion amount

has been included in gross income, then the remainder must be included

in the individual's gross income for the taxable year that includes the

date of death.

(b) However, if the sole beneficiary of all the decedent's Roth

IRAs is the decedent's spouse, then the spouse can elect to continue

the 4-year spread. Thus, the spouse can elect to include in gross

income the same amount that the decedent would have included in each of

the remaining years of the 4-year period. Where the spouse makes such

an election, the amount includible under the 4-year spread for the

taxable year that includes the date of the decedent's death remains

includible in the decedent's gross income and is reported on the

decedent's final Federal income tax return. The election is made on

either Form 8606 or Form 1040, in accordance with the instructions to

the applicable form, for the taxable year that includes the decedent's

date of death and cannot be changed after the due date (including

extensions) for filing the Federal income tax return for the spouse's

taxable year that includes the decedent's date of death.

(c) If a Roth IRA owner who is using the 4-year spread and who was

married in 1998 subsequently files separately or divorces before the

full taxable conversion amount has been included in gross income, the

remainder of the taxable conversion amount must be included in the Roth

IRA owner's gross income over the remaining years in the 4-year period

(unless accelerated because of distribution or death).

Q-12. Can an individual convert a traditional IRA to a Roth IRA if

he or she is receiving substantially equal periodic payments within the

meaning of section 72(t)(2)(A)(iv) from that traditional IRA?

A-12. Yes. Not only is the conversion amount itself not subject to

the early distribution tax under section 72(t), but the conversion

amount is also not treated as a distribution for purposes of

determining whether a modification within the meaning of section

72(t)(4)(A) has occurred. Distributions from the Roth IRA that are part

of the original series of substantially equal periodic payments will be

nonqualified distributions from the Roth IRA until they meet the

requirements for being a qualified distribution, described in

Sec. 1.408A-6 A-1(b). The additional 10-percent tax under section 72(t)

will not apply to the extent that these nonqualified distributions are

part of a series of substantially equal periodic payments.

Nevertheless, to the extent that such distributions are allocable to a

1998 conversion contribution with respect to which the 4-year spread

for the resultant income inclusion applies (see A-8 of this section)

and are received during 1998, 1999, or 2000, the special acceleration

rules of Sec. 1.408A-6 A-6 apply. However, if the original series of

substantially equal periodic payments does not continue to be

distributed in substantially equal periodic payments from the Roth IRA

after the conversion, the series of payments will have been modified

and, if this modification occurs within 5 years of the first payment or

prior to the individual becoming disabled or attaining age 59\1/2\, the

taxpayer will be subject to the recapture tax of section 72(t)(4)(A).

[[Page 5605]]

Q-13. Can a 1997 distribution from a traditional IRA be converted

to a Roth IRA in 1998?

A-13. No. An amount distributed from a traditional IRA in 1997 that

is contributed to a Roth IRA in 1998 would not be a conversion

contribution. See A-3 of this section regarding the remedy for a failed

conversion.

Sec. 1.408A-5 Recharacterized contributions.

This section sets forth the following questions and answers that

provide rules regarding recharacterizing IRA contributions:

Q-1. Can an IRA owner recharacterize certain contributions (i.e.,

treat a contribution made to one type of IRA as made to a different

type of IRA) for a taxable year?

A-1. (a) Yes. In accordance with section 408A(d)(6), except as

otherwise provided in this section, if an individual makes a

contribution to an IRA (the FIRST IRA) for a taxable year and then

transfers the contribution (or a portion of the contribution) in a

trustee-to-trustee transfer from the trustee of the FIRST IRA to the

trustee of another IRA (the SECOND IRA), the individual can elect to

treat the contribution as having been made to the SECOND IRA, instead

of to the FIRST IRA, for Federal tax purposes. A transfer between the

FIRST IRA and the SECOND IRA will not fail to be a trustee-to-trustee

transfer merely because both IRAs are maintained by the same trustee.

For purposes of section 408A(d)(6), redesignating the FIRST IRA as the

SECOND IRA will be treated as a transfer of the entire account balance

from the FIRST IRA to the SECOND IRA.

(b) This recharacterization election can be made only if the

trustee-to-trustee transfer from the FIRST IRA to the SECOND IRA is

made on or before the due date (including extensions) for filing the

individual's Federal income tax return for the taxable year for which

the contribution was made to the FIRST IRA. For purposes of this

section, a conversion that is accomplished through a rollover of a

distribution from a traditional IRA in a taxable year that, 60 days

after the distribution (as described in section 408(d)(3)(A)(i)), is

contributed to a Roth IRA in the next taxable year is treated as a

contribution for the earlier taxable year.

Q-2. What is the proper treatment of the net income attributable to

the amount of a contribution that is being recharacterized?

A-2. (a) The net income attributable to the amount of a

contribution that is being recharacterized must be transferred to the

SECOND IRA along with the contribution.

(b) If the amount of the contribution being recharacterized was

contributed to a separate IRA and no distributions or additional

contributions have been made from or to that IRA at any time, then the

contribution is recharacterized by the trustee of the FIRST IRA

transferring the entire account balance of the FIRST IRA to the trustee

of the SECOND IRA. In this case, the net income (or loss) attributable

to the contribution being recharacterized is the difference between the

amount of the original contribution and the amount transferred.

(c) If paragraph (b) of this A-2 does not apply, then the net

income attributable to the amount of a contribution is calculated in

the manner prescribed by Sec. 1.408-4(c)(2)(ii) (disregarding the

parenthetical clause in Sec. 1.408-4(c)(2)(iii)).

Q-3. What is the effect of recharacterizing a contribution made to

the FIRST IRA as a contribution made to the SECOND IRA?

A-3. The contribution that is being recharacterized as a

contribution to the SECOND IRA is treated as having been originally

contributed to the SECOND IRA on the same date and (in the case of a

regular contribution) for the same taxable year that the contribution

was made to the FIRST IRA. Thus, for example, no deduction would be

allowed for a contribution to the FIRST IRA, and any net income

transferred with the recharacterized contribution is treated as earned

in the SECOND IRA, and not the FIRST IRA.

Q-4. Can an amount contributed to an IRA in a tax-free transfer be

recharacterized under A-1 of this section?

A-4. No. If an amount is contributed to the FIRST IRA in a tax-free

transfer, the amount cannot be recharacterized as a contribution to the

SECOND IRA under A-1 of this section. However, if an amount is

erroneously rolled over or transferred from a traditional IRA to a

SIMPLE IRA, the contribution can subsequently be recharacterized as a

contribution to another traditional IRA.

Q-5. Can an amount contributed by an employer under a SIMPLE IRA

Plan or a SEP be recharacterized under A-1 of this section?

A-5. No. Employer contributions (including elective deferrals)

under a SIMPLE IRA Plan or a SEP cannot be recharacterized as

contributions to another IRA under A-1 of this section. However, an

amount converted from a SEP IRA or SIMPLE IRA to a Roth IRA may be

recharacterized under A-1 of this section as a contribution to a SEP

IRA or SIMPLE IRA, including the original SEP IRA or SIMPLE IRA.

Q-6. How does a taxpayer make the election to recharacterize a

contribution to an IRA for a taxable year?

A-6. (a) An individual makes the election described in this section

by notifying, on or before the date of the transfer, both the trustee

of the FIRST IRA and the trustee of the SECOND IRA, that the individual

has elected to treat the contribution as having been made to the SECOND

IRA, instead of the FIRST IRA, for Federal tax purposes. The

notification of the election must include the following information:

the type and amount of the contribution to the FIRST IRA that is to be

recharacterized; the date on which the contribution was made to the

FIRST IRA and the year for which it was made; a direction to the

trustee of the FIRST IRA to transfer, in a trustee-to-trustee transfer,

the amount of the contribution and net income allocable to the

contribution to the trustee of the SECOND IRA; and the name of the

trustee of the FIRST IRA and the trustee of the SECOND IRA and any

additional information needed to make the transfer.

(b) The election and the trustee-to-trustee transfer must occur on

or before the due date (including extensions) for filing the

individual's Federal income tax return for the taxable year for which

the recharacterized contribution was made to the FIRST IRA, and the

election cannot be revoked after the transfer. An individual who makes

this election must report the recharacterization, and must treat the

contribution as having been made to the SECOND IRA, instead of the

FIRST IRA, on the individual's Federal income tax return for the

taxable year described in the preceding sentence in accordance with the

applicable Federal tax forms and instructions.

(c) The election to recharacterize a contribution described in this

A-6 may be made on behalf of a deceased IRA owner by his or her

executor, administrator, or other person responsible for filing the

final Federal income tax return of the decedent under section

6012(b)(1).

Q-7. If an amount is initially contributed to an IRA for a taxable

year, then is moved (with net income attributable to the contribution)

in a tax-free transfer to another IRA (the FIRST IRA for purposes of A-

1 of this section), can the tax-free transfer be disregarded, so that

the initial contribution that is transferred from the FIRST IRA to the

SECOND IRA is treated as a recharacterization of that initial

contribution?

A-7. Yes. In applying section 408A(d)(6), tax-free transfers

between IRAs are disregarded. Thus, if a

[[Page 5606]]

contribution to an IRA for a year is followed by one or more tax-free

transfers between IRAs prior to the recharacterization, then for

purposes of section 408A(d)(6), the contribution is treated as if it

remained in the initial IRA. Consequently, an individual may elect to

recharacterize an initial contribution made to the initial IRA that was

involved in a series of tax-free transfers by making a trustee-to-

trustee transfer from the last IRA in the series to the SECOND IRA. In

this case the contribution to the SECOND IRA is treated as made on the

same date (and for the same taxable year) as the date the contribution

being recharacterized was made to the initial IRA.

Q-8. If a contribution is recharacterized, is the

recharacterization treated as a rollover for purposes of the one-

rollover-per-year limitation of section 408(d)(3)(B)?

A-8. No, recharacterizing a contribution under A-1 of this section

is never treated as a rollover for purposes of the one-rollover-per-

year limitation of section 408(d)(3)(B), even if the contribution would

have been treated as a rollover contribution by the SECOND IRA if it

had been made directly to the SECOND IRA, rather than as a result of a

recharacterization of a contribution to the FIRST IRA.

Q-9. If an IRA owner converts an amount from a traditional IRA to a

Roth IRA and then transfers that amount back to a traditional IRA in a

recharacterization, may the IRA owner subsequently reconvert that

amount from the traditional IRA to a Roth IRA?

A-9. (a)(1) Except as otherwise provided in paragraph (b) of this

A-9, an IRA owner who converts an amount from a traditional IRA to a

Roth IRA during any taxable year and then transfers that amount back to

a traditional IRA by means of a recharacterization may not reconvert

that amount from the traditional IRA to a Roth IRA before the beginning

of the taxable year following the taxable year in which the amount was

converted to a Roth IRA or, if later, the end of the 30-day period

beginning on the day on which the IRA owner transfers the amount from

the Roth IRA back to a traditional IRA by means of a recharacterization

(regardless of whether the recharacterization occurs during the taxable

year in which the amount was converted to a Roth IRA or the following

taxable year). Thus, any attempted reconversion of an amount prior to

the time permitted under this paragraph (a)(1) is a failed conversion

of that amount. However, see Sec. 1.408A-4 A-3 for a remedy available

to an individual who makes a failed conversion.

(2) For purposes of paragraph (a)(1) of this A-9, a failed

conversion of an amount resulting from a failure to satisfy the

requirements of Sec. 1.408A-4 A-1(a) is treated as a conversion in

determining whether an IRA owner has previously converted that amount.

(b)(1) An IRA owner who converts an amount from a traditional IRA

to a Roth IRA during taxable year 1998 and then transfers that amount

back to a traditional IRA by means of a recharacterization may

reconvert that amount once (but no more than once) on or after November

1, 1998 and on or before December 31, 1998; the IRA owner may also

reconvert that amount once (but no more than once) during 1999. The

rule set forth in the preceding sentence applies without regard to

whether the IRA owner's initial conversion or recharacterization of the

amount occurred before, on, or after November 1, 1998. An IRA owner who

converts an amount from a traditional IRA to a Roth IRA during taxable

year 1999 that has not been converted previously and then transfers

that amount back to a traditional IRA by means of a recharacterization

may reconvert that amount once (but no more than once) on or before

December 31, 1999. For purposes of this paragraph (b)(1), a failed

conversion of an amount resulting from a failure to satisfy the

requirements of Sec. 1.408A-4 A-1(a) is not treated as a conversion in

determining whether an IRA owner has previously converted that amount.

(2) A reconversion by an IRA owner during 1998 or 1999 for which

the IRA owner is not eligible under paragraph (b)(1) of this A-9 will

be deemed an excess reconversion (rather than a failed conversion) and

will not change the IRA owner's taxable conversion amount. Instead, the

excess reconversion and the last preceding recharacterization will not

be taken into account for purposes of determining the IRA owner's

taxable conversion amount, and the IRA owner's taxable conversion

amount will be based on the last reconversion that was not an excess

reconversion (unless, after the excess reconversion, the amount is

transferred back to a traditional IRA by means of a

recharacterization). An excess reconversion will otherwise be treated

as a valid reconversion.

(3) For purposes of this paragraph (b), any reconversion that an

IRA owner made before November 1, 1998 will not be treated as an excess

reconversion and will not be taken into account in determining whether

any later reconversion is an excess reconversion.

(c) In determining the portion of any amount held in a Roth IRA or

a traditional IRA that an IRA owner may not reconvert under this A-9,

any amount previously converted (or reconverted) is adjusted for

subsequent net income thereon.

Q-10. Are there examples to illustrate the rules in this section?

A-10. The rules in this section are illustrated by the following

examples:

Example 1. In 1998, Individual C converts the entire amount in

his traditional IRA to a Roth IRA. Individual C thereafter

determines that his modified AGI for 1998 exceeded $100,000 so that

he was ineligible to have made a conversion in that year.

Accordingly, prior to the due date (plus extensions) for filing the

individual's Federal income tax return for 1998, he decides to

recharacterize the conversion contribution. He instructs the trustee

of the Roth IRA (FIRST IRA) to transfer in a trustee-to-trustee

transfer the amount of the contribution, plus net income, to the

trustee of a new traditional IRA (SECOND IRA). The individual

notifies the trustee of the FIRST IRA and the trustee of the SECOND

IRA that he is recharacterizing his IRA contribution (and provides

the other information described in A-6 of this section). On the

individual's Federal income tax return for 1998, he treats the

original amount of the conversion as having been contributed to the

SECOND IRA and not the Roth IRA. As a result, for Federal tax

purposes, the contribution is treated as having been made to the

SECOND IRA and not to the Roth IRA. The result would be the same if

the conversion amount had been transferred in a tax-free transfer to

another Roth IRA prior to the recharacterization.

Example 2. In 1998, an individual makes a $2,000 regular

contribution for 1998 to his traditional IRA (FIRST IRA). Prior to

the due date (plus extensions) for filing the individual's Federal

income tax return for 1998, he decides that he would prefer to

contribute to a Roth IRA instead. The individual instructs the

trustee of the FIRST IRA to transfer in a trustee-to-trustee

transfer the amount of the contribution, plus attributable net

income, to the trustee of a Roth IRA (SECOND IRA). The individual

notifies the trustee of the FIRST IRA and the trustee of the SECOND

IRA that he is recharacterizing his $2,000 contribution for 1998

(and provides the other information described in A-6 of this

section). On the individual's Federal income tax return for 1998, he

treats the $2,000 as having been contributed to the Roth IRA for

1998 and not to the traditional IRA. As a result, for Federal tax

purposes, the contribution is treated as having been made to the

Roth IRA for 1998 and not to the traditional IRA. The result would

be the same if the conversion amount had been transferred in a tax-

free transfer to another traditional IRA prior to the

recharacterization.

Example 3. The facts are the same as in Example 2, except that

the $2,000 regular contribution is initially made to a Roth IRA and

the recharacterizing transfer is made to a traditional IRA. On the

individual's Federal income tax return for 1998, he treats the

[[Page 5607]]

$2,000 as having been contributed to the traditional IRA for 1998

and not the Roth IRA. As a result, for Federal tax purposes, the

contribution is treated as having been made to the traditional IRA

for 1998 and not the Roth IRA. The result would be the same if the

contribution had been transferred in a tax-free transfer to another

Roth IRA prior to the recharacterization, except that the only Roth

IRA trustee the individual must notify is the one actually making

the recharacterization transfer.

Example 4. In 1998, an individual receives a distribution from

traditional IRA 1 and contributes the entire amount to traditional

IRA 2 in a rollover contribution described in section 408(d)(3). In

this case, the individual cannot elect to recharacterize the

contribution by transferring the contribution amount, plus net

income, to a Roth IRA, because an amount contributed to an IRA in a

tax-free transfer cannot be recharacterized. However, the individual

may convert (other than by recharacterization) the amount in

traditional IRA 2 to a Roth IRA at any time, provided the

requirements of Sec. 1.408A-4 A-1 are satisfied.

Sec. 1.408A-6 Distributions.

This section sets forth the following questions and answers that

provide rules regarding distributions from Roth IRAs:

Q-1. How are distributions from Roth IRAs taxed?

A-1. (a) The taxability of a distribution from a Roth IRA generally

depends on whether or not the distribution is a qualified distribution.

This A-1 provides rules for qualified distributions and certain other

nontaxable distributions. A-4 of this section provides rules for the

taxability of distributions that are not qualified distributions.

(b) A distribution from a Roth IRA is not includible in the owner's

gross income if it is a qualified distribution or to the extent that it

is a return of the owner's contributions to the Roth IRA (determined in

accordance with A-8 of this section). A qualified distribution is one

that is both--

(1) Made after a 5-taxable-year period (defined in A-2 of this

section); and

(2) Made on or after the date on which the owner attains age 59\1/

2\, made to a beneficiary or the estate of the owner on or after the

date of the owner's death, attributable to the owner's being disabled

within the meaning of section 72(m)(7), or to which section 72(t)(2)(F)

applies (exception for first-time home purchase).

(c) An amount distributed from a Roth IRA will not be included in

gross income to the extent it is rolled over to another Roth IRA on a

tax-free basis under the rules of sections 408(d)(3) and 408A(e).

(d) Contributions that are returned to the Roth IRA owner in

accordance with section 408(d)(4) (corrective distributions) are not

includible in gross income, but any net income required to be

distributed under section 408(d)(4) together with the contributions is

includible in gross income for the taxable year in which the

contributions were made.

Q-2. When does the 5-taxable-year period described in A-1 of this

section (relating to qualified distributions) begin and end?

A-2. The 5-taxable-year period described in A-1 of this section

begins on the first day of the individual's taxable year for which the

first regular contribution is made to any Roth IRA of the individual

or, if earlier, the first day of the individual's taxable year in which

the first conversion contribution is made to any Roth IRA of the

individual. The 5-taxable-year period ends on the last day of the

individual's fifth consecutive taxable year beginning with the taxable

year described in the preceding sentence. For example, if an individual

whose taxable year is the calendar year makes a first-time regular Roth

IRA contribution any time between January 1, 1998, and April 15, 1999,

for 1998, the 5-taxable-year period begins on January 1, 1998. Thus,

each Roth IRA owner has only one 5-taxable-year period described in A-1

of this section for all the Roth IRAs of which he or she is the owner.

Further, because of the requirement of the 5-taxable-year period, no

qualified distributions can occur before taxable years beginning in

2003. For purposes of this A-2, the amount of any contribution

distributed as a corrective distribution under

A-1(d) of this section is treated as if it was never contributed.

Q-3. If a distribution is made to an individual who is the sole

beneficiary of his or her deceased spouse's Roth IRA and the individual

is treating the Roth IRA as his or her own, can the distribution be a

qualified distribution based on being made to a beneficiary on or after

the owner's death?

A-3. No. If a distribution is made to an individual who is the sole

beneficiary of his or her deceased spouse's Roth IRA and the individual

is treating the Roth IRA as his or her own, then, in accordance with

Sec. 1.408A-2

A-4, the distribution is treated as coming from the individual's own

Roth IRA and not the deceased spouse's Roth IRA. Therefore, for

purposes of determining whether the distribution is a qualified

distribution, it is not treated as made to a beneficiary on or after

the owner's death.

Q-4. How is a distribution from a Roth IRA taxed if it is not a

qualified distribution?

A-4. A distribution that is not a qualified distribution, and is

neither contributed to another Roth IRA in a qualified rollover

contribution nor constitutes a corrective distribution, is includible

in the owner's gross income to the extent that the amount of the

distribution, when added to the amount of all prior distributions from

the owner's Roth IRAs (whether or not they were qualified

distributions) and reduced by the amount of those prior distributions

previously includible in gross income, exceeds the owner's

contributions to all his or her Roth IRAs. For purposes of this A-4,

any amount distributed as a corrective distribution is treated as if it

was never contributed.

Q-5. Will the additional tax under 72(t) apply to the amount of a

distribution that is not a qualified distribution?

A-5. (a) The 10-percent additional tax under section 72(t) will

apply (unless the distribution is excepted under section 72(t)) to any

distribution from a Roth IRA includible in gross income.

(b) The 10-percent additional tax under section 72(t) also applies

to a nonqualified distribution, even if it is not then includible in

gross income, to the extent it is allocable to a conversion

contribution, if the distribution is made within the 5-taxable-year

period beginning with the first day of the individual's taxable year in

which the conversion contribution was made. The 5-taxable-year period

ends on the last day of the individual's fifth consecutive taxable year

beginning with the taxable year described in the preceding sentence.

For purposes of applying the tax, only the amount of the conversion

contribution includible in gross income as a result of the conversion

is taken into account. The exceptions under section 72(t) also apply to

such a distribution.

(c) The 5-taxable-year period described in this A-5 for purposes of

determining whether section 72(t) applies to a distribution allocable

to a conversion contribution is separately determined for each

conversion contribution, and need not be the same as the 5-taxable-year

period used for purposes of determining whether a distribution is a

qualified distribution under A-1(b) of this section. For example, if a

calendar-year taxpayer who received a distribution from a traditional

IRA on December 31, 1998, makes a conversion contribution by

contributing the distributed amount to a Roth IRA on February 25, 1999

in a qualifying rollover contribution and makes a regular contribution

for 1998 on the same date, the 5-taxable-year period for purposes of

this A-5 begins on

[[Page 5608]]

January 1, 1999, while the 5-taxable-year period for purposes of A-1(b)

of this section begins on January 1, 1998.

Q-6. Is there a special rule for taxing distributions allocable to

a 1998 conversion?

A-6. Yes. In the case of a distribution from a Roth IRA in 1998,

1999 or 2000 of amounts allocable to a 1998 conversion with respect to

which the 4-year spread for the resultant income inclusion applies (see

Sec. 1.408A-4 A-8), any income deferred as a result of the election to

years after the year of the distribution is accelerated so that it is

includible in gross income in the year of the distribution up to the

amount of the distribution allocable to the 1998 conversion (determined

under A-8 of this section). This amount is in addition to the amount

otherwise includible in the owner's gross income for that taxable year

as a result of the conversion. However, this rule will not require the

inclusion of any amount to the extent it exceeds the total amount of

income required to be included over the 4-year period. The acceleration

of income inclusion described in this A-6 applies in the case of a

surviving spouse who elects to continue the 4-year spread in accordance

with Sec. 1.408A-4 A-11(b).

Q-7. Is the 5-taxable-year period described in A-1 of this section

redetermined when a Roth IRA owner dies?

A-7. (a) No. The beginning of the 5-taxable-year period described

in A-1 of this section is not redetermined when the Roth IRA owner

dies. Thus, in determining the 5-taxable-year period, the period the

Roth IRA is held in the name of a beneficiary, or in the name of a

surviving spouse who treats the decedent's Roth IRA as his or her own,

includes the period it was held by the decedent.

(b) The 5-taxable-year period for a Roth IRA held by an individual

as a beneficiary of a deceased Roth IRA owner is determined

independently of the 5-taxable-year period for the beneficiary's own

Roth IRA. However, if a surviving spouse treats the Roth IRA as his or

her own, the 5-taxable-year period with respect to any of the surviving

spouse's Roth IRAs (including the one that the surviving spouse treats

as his or her own) ends at the earlier of the end of either the 5-

taxable-year period for the decedent or the 5-taxable-year period

applicable to the spouse's own Roth IRAs.

Q-8. How is it determined whether an amount distributed from a Roth

IRA is allocated to regular contributions, conversion contributions, or

earnings?

A-8. (a) Any amount distributed from an individual's Roth IRA is

treated as made in the following order (determined as of the end of a

taxable year and exhausting each category before moving to the

following category)--

(1) From regular contributions;

(2) From conversion contributions, on a first-in-first-out basis;

and

(3) From earnings.

(b) To the extent a distribution is treated as made from a

particular conversion contribution, it is treated as made first from

the portion, if any, that was includible in gross income as a result of

the conversion.

Q-9. Are there special rules for determining the source of

distributions under A-8 of this section?

A-9. Yes. For purposes of determining the source of distributions,

the following rules apply:

(a) All distributions from all an individual's Roth IRAs made

during a taxable year are aggregated.

(b) All regular contributions made for the same taxable year to all

the individual's Roth IRAs are aggregated and added to the

undistributed total regular contributions for prior taxable years.

Regular contributions for a taxable year include contributions made in

the following taxable year that are identified as made for the taxable

year in accordance with Sec. 1.408A-3 A-2. For example, a regular

contribution made in 1999 for 1998 is aggregated with the contributions

made in 1998 for 1998.

(c) All conversion contributions received during the same taxable

year by all the individual's Roth IRAs are aggregated. Notwithstanding

the preceding sentence, all conversion contributions made by an

individual during 1999 that were distributed from a traditional IRA in

1998 and with respect to which the 4-year spread applies are treated

for purposes of

A-8(b) of this section as contributed to the individual's Roth IRAs

prior to any other conversion contributions made by the individual

during 1999.

(d) A distribution from an individual's Roth IRA that is rolled

over to another Roth IRA of the individual in accordance with section

408A(e) is disregarded for purposes of determining the amount of both

contributions and distributions.

(e) Any amount distributed as a corrective distribution (including

net income), as described in A-1(d) of this section, is disregarded in

determining the amount of contributions, earnings, and distributions.

(f) If an individual recharacterizes a contribution made to a

traditional IRA (FIRST IRA) by transferring the contribution to a Roth

IRA (SECOND IRA) in accordance with Sec. 1.408A-5, then, pursuant to

Sec. 1.408A-5 A-3, the contribution to the Roth IRA is taken into

account for the same taxable year for which it would have been taken

into account if the contribution had originally been made to the Roth

IRA and had never been contributed to the traditional IRA. Thus, the

contribution to the Roth IRA is treated as contributed to the Roth IRA

on the same date and for the same taxable year that the contribution

was made to the traditional IRA.

(g) If an individual recharacterizes a regular or conversion

contribution made to a Roth IRA (FIRST IRA) by transferring the

contribution to a traditional IRA (SECOND IRA) in accordance with

Sec. 1.408A-5, then pursuant to Sec. 1.408A-5 A-3, the contribution to

the Roth IRA and the recharacterizing transfer are disregarded in

determining the amount of both contributions and distributions for the

taxable year with respect to which the original contribution was made

to the Roth IRA.

(h) Pursuant to Sec. 1.408A-5 A-3, the effect of income or loss

(determined in accordance with Sec. 1.408A-5 A-2) occurring after the

contribution to the FIRST IRA is disregarded in determining the amounts

described in paragraphs (f) and (g) of this A-9. Thus, for purposes of

paragraphs (f) and (g), the amount of the contribution is determined

based on the original contribution.

Q-10. Are there examples to illustrate the ordering rules described

in A-8 and A-9 of this section?

A-10. Yes. The following examples illustrate these ordering rules:

Example 1. In 1998, individual B converts $80,000 in his

traditional IRA to a Roth IRA. B has a basis of $20,000 in the

conversion amount and so must include the remaining $60,000 in gross

income. He decides to spread the $60,000 income by including $15,000

in each of the 4 years 1998-2001, under the rules of Sec. 1.408A-4

A-8. B also makes a regular contribution of $2,000 in 1998. If a

distribution of $2,000 is made to B anytime in 1998, it will be

treated as made entirely from the regular contributions, so there

will be no Federal income tax consequences as a result of the

distribution.

Example 2. The facts are the same as in Example 1, except that

the distribution made in 1998 is $5,000. The distribution is treated

as made from $2,000 of regular contributions and $3,000 of

conversion contributions that were includible in gross income. As a

result, B must include $18,000 in gross income for 1998: $3,000 as a

result of the acceleration of amounts that otherwise would have been

included in later years under the 4-year-spread rule and $15,000

includible under the regular 4-year-spread rule. In addition,

because the $3,000 is allocable to a conversion made within the

previous 5

[[Page 5609]]

taxable years, the 10-percent additional tax under section 72(t)

would apply to this $3,000 distribution for 1998, unless an

exception applies. Under the 4-year-spread rule, B would now include

in gross income $15,000 for 1999 and 2000, but only $12,000 for

2001, because of the accelerated inclusion of the $3,000

distribution.

Example 3. The facts are the same as in Example 1, except that B

makes an additional $2,000 regular contribution in 1999 and he does

not take a distribution in 1998. In 1999, the entire balance in the

account, $90,000 ($84,000 of contributions and $6,000 of earnings),

is distributed to B. The distribution is treated as made from $4,000

of regular contributions, $60,000 of conversion contributions that

were includible in gross income, $20,000 of conversion contributions

that were not includible in gross income, and $6,000 of earnings.

Because a distribution has been made within the 4-year-spread

period, B must accelerate the income inclusion under the 4-year-

spread rule and must include in gross income the $45,000 remaining

under the 4-year-spread rule in addition to the $6,000 of earnings.

Because $60,000 of the distribution is allocable to a conversion

made within the previous 5 taxable years, it is subject to the 10-

percent additional tax under section 72(t) as if it were includible

in gross income for 1999, unless an exception applies. The $6,000

allocable to earnings would be subject to the tax under section

72(t), unless an exception applies. Under the 4-year-spread rule, no

amount would be includible in gross income for 2000 or 2001 because

the entire amount of the conversion that was includible in gross

income has already been included.

Example 4. The facts are the same as in Example 1, except that B

also makes a $2,000 regular contribution in each year 1999 through

2002 and he does not take a distribution in 1998. A distribution of

$85,000 is made to B in 2002. The distribution is treated as made

from the $10,000 of regular contributions (the total regular

contributions made in the years 1998-2002), $60,000 of conversion

contributions that were includible in gross income, and $15,000 of

conversion contributions that were not includible in gross income.

As a result, no amount of the distribution is includible in gross

income; however, because the distribution is allocable to a

conversion made within the previous 5 years, the $60,000 is subject

to the 10-percent additional tax under section 72(t) as if it were

includible in gross income for 2002, unless an exception applies.

Example 5. The facts are the same as in Example 4, except no

distribution occurs in 2002. In 2003, the entire balance in the

account, $170,000 ($90,000 of contributions and $80,000 of

earnings), is distributed to B. The distribution is treated as made

from $10,000 of regular contributions, $60,000 of conversion

contributions that were includible in gross income, $20,000 of

conversion contributions that were not includible in gross income,

and $80,000 of earnings. As a result, for 2003, B must include in

gross income the $80,000 allocable to earnings, unless the

distribution is a qualified distribution; and if it is not a

qualified distribution, the $80,000 would be subject to the 10-

percent additional tax under section 72(t), unless an exception

applies.

Example 6. Individual C converts $20,000 to a Roth IRA in 1998

and $15,000 (in which amount C had a basis of $2,000) to another

Roth IRA in 1999. No other contributions are made. In 2003, a

$30,000 distribution, that is not a qualified distribution, is made

to C. The distribution is treated as made from $20,000 of the 1998

conversion contribution and $10,000 of the 1999 conversion

contribution that was includible in gross income. As a result, for

2003, no amount is includible in gross income; however, because

$10,000 is allocable to a conversion contribution made within the

previous 5 taxable years, that amount is subject to the 10-percent

additional tax under section 72(t) as if the amount were includible

in gross income for 2003, unless an exception applies. The result

would be the same whichever of C's Roth IRAs made the distribution.

Example 7. The facts are the same as in Example 6, except that

the distribution is a qualified distribution. The result is the same

as in Example 6, except that no amount would be subject to the 10-

percent additional tax under section 72(t), because, to be a

qualified distribution, the distribution must be made on or after

the date on which the owner attains age 59\1/2\, made to a

beneficiary or the estate of the owner on or after the date of the

owner's death, attributable to the owner's being disabled within the

meaning of section 72(m)(7), or to which section 72(t)(2)(F) applies

(exception for a first-time home purchase). Under section 72(t)(2),

each of these conditions is also an exception to the tax under

section 72(t).

Example 8. Individual D makes a $2,000 regular contribution to a

traditional IRA on January 1, 1999, for 1998. On April 15, 1999,

when the $2,000 has increased to $2,500, D recharacterizes the

contribution by transferring the $2,500 to a Roth IRA (pursuant to

Sec. 1.408A-5 A-1). In this case, D's regular contribution to the

Roth IRA for 1998 is $2,000. The $500 of earnings is not treated as

a contribution to the Roth IRA. The results would be the same if the

$2,000 had decreased to $1,500 prior to the recharacterization.

Example 9. In December 1998, individual E receives a

distribution from his traditional IRA of $300,000 and in January

1999 he contributes the $300,000 to a Roth IRA as a conversion

contribution. In April 1999, when the $300,000 has increased to

$350,000, E recharacterizes the conversion contribution by

transferring the $350,000 to a traditional IRA. In this case, E's

conversion contribution for 1998 is $0, because the $300,000

conversion contribution and the earnings of $50,000 are disregarded.

The results would be the same if the $300,000 had decreased to

$250,000 prior to the recharacterization. Further, since the

conversion is disregarded, the $300,000 is not includible in gross

income in 1998.

Q-11. If the owner of a Roth IRA dies prior to the end of the 5-

taxable-year period described in A-1 of this section (relating to

qualified distributions) or prior to the end of the 5-taxable-year

period described in A-5 of this section (relating to conversions), how

are different types of contributions in the Roth IRA allocated to

multiple beneficiaries?

A-11. Each type of contribution is allocated to each beneficiary on

a pro-rata basis. Thus, for example, if a Roth IRA owner dies in 1999,

when the Roth IRA contains a regular contribution of $2,000, a

conversion contribution of $6,000 and earnings of $1,000, and the owner

leaves his Roth IRA equally to four children, each child will receive

one quarter of each type of contribution. Pursuant to the ordering

rules in A-8 of this section, an immediate distribution of $2,000 to

one of the children will be deemed to consist of $500 of regular

contributions and $1,500 of conversion contributions. A beneficiary's

inherited Roth IRA may not be aggregated with any other Roth IRA

maintained by such beneficiary (except for other Roth IRAs the

beneficiary inherited from the same decedent), unless the beneficiary,

as the spouse of the decedent and sole beneficiary of the Roth IRA,

elects to treat the Roth IRA as his or her own (see A-7 and A-14 of

this section).

Q-12. How do the withholding rules under section 3405 apply to Roth

IRAs?

A-12. Distributions from a Roth IRA are distributions from an

individual retirement plan for purposes of section 3405 and thus are

designated distributions unless one of the exceptions in section

3405(e)(1) applies. Pursuant to section 3405(a) and (b), nonperiodic

distributions from a Roth IRA are subject to 10-percent withholding by

the payor and periodic payments are subject to withholding as if the

payments were wages. However, an individual can elect to have no amount

withheld in accordance with section 3405(a)(2) and (b)(2).

Q-13. Do the withholding rules under section 3405 apply to

conversions?

A-13. Yes. A conversion by any method described in Sec. 1.408A-4 A-

1 is considered a designated distribution subject to section 3405.

However, a conversion occurring in 1998 by means of a trustee-to-

trustee transfer of an amount from a traditional IRA to a Roth IRA

established with the same or a different trustee is not required to be

treated as a designated distribution for purposes of section 3405.

Consequently, no withholding is required with respect to such a

conversion (without regard to whether or not the individual elected to

have no withholding).

Q-14. What minimum distribution rules apply to a Roth IRA?

A-14. (a) No minimum distributions are required to be made from a

Roth IRA

[[Page 5610]]

under section 408(a)(6) and (b)(3) (which generally incorporate the

provisions of section 401(a)(9)) while the owner is alive. The post-

death minimum distribution rules under section 401(a)(9)(B) that apply

to traditional IRAs, with the exception of the at-least-as-rapidly rule

described in section 401(a)(9)(B)(i), also apply to Roth IRAs.

(b) The minimum distribution rules apply to the Roth IRA as though

the Roth IRA owner died before his or her required beginning date.

Thus, generally, the entire interest in the Roth IRA must be

distributed by the end of the fifth calendar year after the year of the

owner's death unless the interest is payable to a designated

beneficiary over a period not greater than that beneficiary's life

expectancy and distribution commences before the end of the calendar

year following the year of death. If the sole beneficiary is the

decedent's spouse, such spouse may delay distributions until the

decedent would have attained age 70\1/2\ or may treat the Roth IRA as

his or her own.

(c) Distributions to a beneficiary that are not qualified

distributions will be includible in the beneficiary's gross income

according to the rules in A-4 of this section.

Q-15. Does section 401(a)(9) apply separately to Roth IRAs and

individual retirement plans that are not Roth IRAs?

A-15. Yes. An individual required to receive minimum distributions

from his or her own traditional or SIMPLE IRA cannot choose to take the

amount of the minimum distributions from any Roth IRA. Similarly, an

individual required to receive minimum distributions from a Roth IRA

cannot choose to take the amount of the minimum distributions from a

traditional or SIMPLE IRA. In addition, an individual required to

receive minimum distributions as a beneficiary under a Roth IRA can

only satisfy the minimum distributions for one Roth IRA by distributing

from another Roth IRA if the Roth IRAs were inherited from the same

decedent.

Q-16. How is the basis of property distributed from a Roth IRA

determined for purposes of a subsequent disposition?

A-16. The basis of property distributed from a Roth IRA is its fair

market value (FMV) on the date of distribution, whether or not the

distribution is a qualified distribution. Thus, for example, if a

distribution consists of a share of stock in XYZ Corp. with an FMV of

$40.00 on the date of distribution, for purposes of determining gain or

loss on the subsequent sale of the share of XYZ Corp. stock, it has a

basis of $40.00.

Q-17. What is the effect of distributing an amount from a Roth IRA

and contributing it to another type of retirement plan other than a

Roth IRA?

A-17. Any amount distributed from a Roth IRA and contributed to

another type of retirement plan (other than a Roth IRA) is treated as a

distribution from the Roth IRA that is neither a rollover contribution

for purposes of section 408(d)(3) nor a qualified rollover contribution

within the meaning of section 408A(e) to the other type of retirement

plan. This treatment also applies to any amount transferred from a Roth

IRA to any other type of retirement plan unless the transfer is a

recharacterization described in Sec. 1.408A-5.

Q-18. Can an amount be transferred directly from an education IRA

to a Roth IRA (or distributed from an education IRA and rolled over to

a Roth IRA)?

A-18. No amount may be transferred directly from an education IRA

to a Roth IRA. A transfer of funds (or distribution and rollover) from

an education IRA to a Roth IRA constitutes a distribution from the

education IRA and a regular contribution to the Roth IRA (rather than a

qualified rollover contribution to the Roth IRA).

Q-19. What are the Federal income tax consequences of a Roth IRA

owner transferring his or her Roth IRA to another individual by gift?

A-19. A Roth IRA owner's transfer of his or her Roth IRA to another

individual by gift constitutes an assignment of the owner's rights

under the Roth IRA. At the time of the gift, the assets of the Roth IRA

are deemed to be distributed to the owner and, accordingly, are treated

as no longer held in a Roth IRA. In the case of any such gift of a Roth

IRA made prior to October 1, 1998, if the entire interest in the Roth

IRA is reconveyed to the Roth IRA owner prior to January 1, 1999, the

Internal Revenue Service will treat the gift and reconveyance as never

having occurred for estate tax, gift tax, and generation-skipping tax

purposes and for purposes of this A-19.

Sec. 1.408A-7 Reporting.

This section sets forth the following questions and answers that

relate to the reporting requirements applicable to Roth IRAs:

Q-1. What reporting requirements apply to Roth IRAs?

A-1. Generally, the reporting requirements applicable to IRAs other

than Roth IRAs also apply to Roth IRAs, except that, pursuant to

section 408A(d)(3)(D), the trustee of a Roth IRA must include on Forms

1099-R and 5498 additional information as described in the instructions

thereto. Any conversion of amounts from an IRA other than a Roth IRA to

a Roth IRA is treated as a distribution for which a Form 1099-R must be

filed by the trustee maintaining the non-Roth IRA. In addition, the

owner of such IRAs must report the conversion by completing Form 8606.

In the case of a recharacterization described in Sec. 1.408A-5 A-1, IRA

owners must report such transactions in the manner prescribed in the

instructions to the applicable Federal tax forms.

Q-2. Can a trustee rely on reasonable representations of a Roth IRA

contributor or distributee for purposes of fulfilling reporting

obligations?

A-2. A trustee maintaining a Roth IRA is permitted to rely on

reasonable representations of a Roth IRA contributor or distributee for

purposes of fulfilling reporting obligations.

Sec. 1.408A-8 Definitions.

This section sets forth the following question and answer that

provides definitions of terms used in the provisions of Secs. 1.408A-1

through 1.408A-7 and this section:

Q-1. Are there any special definitions that govern in applying the

provisions of Secs. 1.408A-1 through 1.408A-7 and this section?

A-1. Yes, the following definitions govern in applying the

provisions of Secs. 1.408A-1 through 1.408A-7 and this section. Unless

the context indicates otherwise, the use of a particular term excludes

the use of the other terms.

(a) Different types of IRAs--(1) IRA. Sections 408(a) and (b),

respectively, describe an individual retirement account and an

individual retirement annuity. The term IRA means an IRA described in

either section 408(a) or (b), including each IRA described in

paragraphs (a)(2) through (5) of this A-1. However, the term IRA does

not include an education IRA described in section 530.

(2) Traditional IRA. The term traditional IRA means an individual

retirement account or individual retirement annuity described in

section 408(a) or (b), respectively. This term includes a SEP IRA but

does not include a SIMPLE IRA or a Roth IRA.

(3) SEP IRA. Section 408(k) describes a simplified employee pension

(SEP) as an employer-sponsored plan under which an employer can make

contributions to IRAs established for its employees. The term SEP IRA

means an IRA that receives contributions made under a SEP. The term SEP

includes a salary reduction SEP (SARSEP) described in section

408(k)(6).

[[Page 5611]]

(4) SIMPLE IRA. Section 408(p) describes a SIMPLE IRA Plan as an

employer-sponsored plan under which an employer can make contributions

to SIMPLE IRAs established for its employees. The term SIMPLE IRA means

an IRA to which the only contributions that can be made are

contributions under a SIMPLE IRA Plan or rollovers or transfers from

another SIMPLE IRA.

(5) Roth IRA. The term Roth IRA means an IRA that meets the

requirements of section 408A.

(b) Other defined terms or phrases--(1) 4-year spread. The term 4-

year spread is described in Sec. 1.408A-4 A-8.

(2) Conversion. The term conversion means a transaction satisfying

the requirements of Sec. 1.408A-4 A-1.

(3) Conversion amount or conversion contribution. The term

conversion amount or conversion contribution is the amount of a

distribution and contribution with respect to which a conversion

described in Sec. 1.408A-4 A-1 is made.

(4) Failed conversion. The term failed conversion means a

transaction in which an individual contributes to a Roth IRA an amount

transferred or distributed from a traditional IRA or Simple IRA

(including a transfer by redesignation) in a transaction that does not

constitute a conversion under Sec. 1.408A-4 A-1.

(5) Modified AGI. The term modified AGI is defined in Sec. 1.408A-3

A-5.

(6) Recharacterization. The term recharacterization means a

transaction described in Sec. 1.408A-5 A-1.

(7) Recharacterized amount or recharacterized contribution.The term

recharacterized amount or recharacterized contribution means an amount

or contribution treated as contributed to an IRA other than the one to

which it was originally contributed pursuant to a recharacterization

described in Sec. 1.408A-5 A-1.

(8) Taxable conversion amount. The term taxable conversion amount

means the portion of a conversion amount includible in income on

account of a conversion, determined under the rules of section

408(d)(1) and (2).

(9) Tax-free transfer. The term tax-free transfer means a tax-free

rollover described in section 402(c), 402(e)(6), 403(a)(4), 403(a)(5),

403(b)(8), 403(b)(10) or 408(d)(3), or a tax-free trustee-to-trustee

transfer.

(10) Treat an IRA as his or her own. The phrase treat an IRA as his

or her own means to treat an IRA for which a surviving spouse is the

sole beneficiary as his or her own IRA after the death of the IRA owner

in accordance with the terms of the IRA instrument or in the manner

provided in the regulations under section 408(a)(6) or (b)(3).

(11) Trustee. The term trustee includes a custodian or issuer (in

the case of an annuity) of an IRA (except where the context clearly

indicates otherwise).

Sec. 1.408A-9 Effective date.

This section contains the following question and answer providing

the effective date of Secs. 1.408A-1 through 1.408A-8:

Q-1. To what taxable years do Secs. 1.408A-1 through 1.408A-8

apply?

A-1 Sections 1.408A-1 through 1.408A-8 apply to taxable years

beginning on or after January 1, 1998.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Paragraph 9. The authority citation for part 602 continues to read

as follows:

Authority: 26 U.S.C. 7805 * * *

Par.10. In Sec. 602.101, paragraph (c) is amended by adding an

entry in numerical order to the table to read as follows:

Sec. 602.101 OMB control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current

OMB

CFR part or section where identified and described control

No.

------------------------------------------------------------------------

* * * * *

1.408A-2.................................................... 1545-1616

1.408A-4.................................................... 1545-1616

1.408A-5.................................................... 1545-1616

1.408A-7.................................................... 1545-1616

* * * * *

------------------------------------------------------------------------

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: January 25, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 99-2550 Filed 2-3-99; 8:45 am]

BILLING CODE 4830-01-U