IRS Answers Questions on Taxability of Roth
Conversions
September 11, 2009 (PLANSPONSOR.com) - In Notice
2009-75, the Internal Revenue Service provides guidance in
the form of a Q&A on the tax treatment of eligible
rollover distributions from qualified plans into a Roth
IRA.
The guidance further clarifies that a qualified plan is
a qualified plan described in § 401(a), an annuity plan
described in § 403(a), a plan described in §403(b), or a
governmental § 457(b) plan.
The IRS says that if an eligible rollover distribution
from an eligible employer plan is rolled over to a Roth IRA
and the distribution is not made from a designated Roth
account, then the amount that would be includible in gross
income were it not part of a qualified rollover
contribution is included in the distributee's gross
income for the year of the distribution. In other words,
the amount included in gross income is equal to the amount
rolled over, reduced by the amount of any after-tax
contributions that are included in the amount rolled
over.
The guidance states that the special rules relating to
net unrealized appreciation at § 402(e)(4) and certain
optional methods for calculating tax available to
participants born on or before January 1, 1936, are not
applicable.
If an eligible rollover distribution made from a
designated Roth account in an eligible employer plan is
rolled over to a Roth IRA, the amount rolled over is not
includible in the distributee's gross income.
According to the Notice, before January 1, 2010,
individuals with a modified adjusted gross income (MAGI)
that exceeds $100,000, and individuals who are married and
file a separate return, are not allowed to roll over a
distribution from an eligible employer plan to a Roth IRA
unless the distribution is made from a designated Roth
account. However, at the end of 2009, both the MAGI limit
and the separate return limit will expire.
A rollover distribution made before 2010 that is
ineligible to be rolled over to a Roth IRA due to the
income or filing status restrictions may be rolled over to
a non-Roth IRA that can then be converted into a Roth IRA
on or after January 1, 2010.
Notice 2009-75 is
here
.
Rebecca Moore
editors@plansponsor.com