ROTH IRAs
Including Technical Corrections in the IRS Restructuring and Reform Act of 1998^{^[1]}
and the Final Regulations^{^[2]}

or
All You Ever Wanted to Know About Roth IRAs But Were Afraid to Ask

By Noel C. Ice
www.TrustsAndEstates.net

WHAT IS A ROTH IRA?

What is the Basic Approach Used in this Outline For Explaining the Roth IRA Rules?	The approach I will take in this memorandum is to parse IRC^{^[3]} §408A, word by word, not necessarily in the order in which the statute was drafted, explicating the statute by means of questions which the statute answers (we hope).
	By the end of this memo, the statute will have been quoted in its entirety and virtually all of the final regulations will also have been reproduced verbatim. This approach has the advantage of at least being thorough, and the conclusions subject to some sort of empirical check, which in this case is particularly apropos, because the statute is new, the final regulations brand new, and even the commentators differ on its precise meaning in some cases. I will, of course, add comments as appropriate, and at the end of the memo will devote a series of questions and answers to issues that are outside of the statutory language, and hence, not amenable to the parsing method.
	This is not a user-friendly memo. I know that. One day I will write a “nutshell” version. For now, I am sticking to original source material more than I would like, adding copious comments when I think called for.
Have Final Regulations Governing Roth IRAs Been Issued Yet? (Yes.)	Final regulations governing Roth IRAs were issued by the IRS on February 3, 1999.^{^[4]}
How Long Does it Take to Establish a Roth IRA? (1 Minute)	The IRS is required by law to answer questions like this. Obviously, this question does not refer to how long it takes to sign one’s name. So the question must refer to the whole process, from beginning to end. Taxpayer’s will be delighted to know ‑but their advisors who are typically paid by the hour will be dismayed to find out‑ that the [e]stimated average annual burden per respondent/recordkeeper: [is] 1 minute for designating an IRA as a Roth IRA . . . ^{^[5]}
What are the Effective and the Applicability Dates of the Final Regulations? (2/3/99 and 1/1/98.)	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.^{^[6]} * * * Sections 1.408A-1 through 1.408A-8 apply to taxable years beginning on or after January 1, 1998.^{^[7]}
What is a Roth IRA? (An IRA, Except as Otherwise Provided.)	(a) General rule. Except as provided in this section [§408A], a Roth IRA shall be treated for purposes of this title [Title 26 of the US Code, i.e., the Internal Revenue Code] in the same manner as an individual retirement plan.^{^[8]} (b) Roth IRA. For purposes of this title, the term “Roth IRA” means an individual retirement plan (as defined in section 7701(a)(37)) which is designated (in such manner as the Secretary may prescribe) at the time of the establishment of the plan as a Roth IRA. Such designation shall be made in such manner as the Secretary may prescribe.^{^[9]} [Emphasis added.]So, except as otherwise provided in §408A, a Roth IRA is just like an ordinary IRA (Individual Retirement Account/Annuity). The “except” part is where the sizzle is, because there are some very important differences. 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; however ‑and here is the payoff‑, qualified distributions from Roth IRAs are excludable from gross income.^{^[10]}
How Are Roth IRAs Described (and Traditional IRAs Distinguished) in the Final Regulations?	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.^{^[11]}
Where is the Roth IRA Statute Found? (408A)	An ordinary IRA is created and described by IRC §408. The Roth IRA is described in §408A.
What is the Statutory Basis of the Roth IRA? (TPRA §788 and IRSRRA §685.)	Section 408A of the Internal Revenue Code (Code), which was added by section 302 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788), establishes the Roth IRA as a new type of individual retirement plan, effective for taxable years beginning on or after January 1, 1998. The provisions of section 408A were amended by the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685).^{^[12]}
What Are the Most Important Differences Between a Roth IRA and a Traditional IRA?	Each of the differences will be discussed in detail below. However, here is a preview: (1) Contributions to a Roth IRA are not deductible.^{^[13]} (2) The rules for making a regular $2000 Roth IRA contribution are more liberal than in the case of a traditional IRA. The adjusted gross income limitations are higher and there is no penalty for being an active participant in a qualified plan. (2) Distributions from a Roth IRA (if qualified) are income tax free.^{^[14]} (3) And, finally, there are no minimum required lifetime distributions.^{^[15]}
	The final regulations state the matter this way: A Roth IRA can be established with any bank, insurance company, or other person authorized in accordance with §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 §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 §1.408A-5 for rules for recharacterizing certain IRA contributions.^{^[16]}
What Are the Primary Tax Benefits of a Roth IRA? (Qualified Distributions Are Tax Free, and there are No Minimum Required Distributions During Life.)	If certain conditions are met, distributions from a Roth IRA are tax-free. Further, neither the mandatory minimum distributions rules of IRC §§401(a)(9) and 408(a)(6) & (b)(3) nor the old incidental death benefit rule apply during the life of the Roth IRA owner. (A) Exclusions from gross income. Any qualified distribution from a Roth IRA shall not be includible in gross income.^{^[17]} *** * * ***
	(5) Mandatory distribution rules not to apply before death. Notwithstanding subsections (a)(6) and (b)(3) of section 408 (relating to required distributions), the following provisions shall not apply to any Roth IRA: (A) Section 401(a)(9)(A) [i.e., the minimum required distribution rules applicable during the lifetime of the participant, after age 701/2]. (B) The incidental death benefit requirements of section 401(a) [a rule that benefits are primarily for the benefit of the participant and not for the benefit of the participant’s beneficiaries].^{^[18]} [Emphasis added.]
Is a Roth IRA an IRA? (Yes.)	The statute is explicit that a Roth IRA is a type of IRA and is to be treated the same as an ordinary IRA, except as otherwise provided. Again: (a) General rule. Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan. (b) Roth IRA. For purposes of this title, the term “Roth IRA” means an individual retirement plan (as defined in section 7701(a)(37)) which is designated (in such manner as the Secretary may prescribe) at the time of the establishment of the plan as a Roth IRA. Such designation shall be made in such manner as the Secretary may prescribe.^{^[19]} [Emphasis added.]
When §408A Refers to an Individual Retirement Plan, What Does it Mean? (An IRA.)	As indicated in IRC 408A(b) quoted above, an individual retirement plan has the definition used in §7701(a)(37). §7701(a)(37) reads as follows: (37) Individual retirement plan. The term "individual retirement plan" means --
	(A) an individual retirement account described in section 408(a), and (B) an individual retirement annuity described in section 408(b).
	§408(a) describes a conventional IRA. Is a SEP IRA an individual account described in §408(a)? Well, yes; but SEPs appear to be excluded under §408A(f).^{^[20]}
How Do the Minimum Required Distribution Rules Apply to a Roth IRA? (They Apply At Death, But Not During The Life Of The Original Roth Ira Owner.)	As mentioned above, a big advantage of a Roth IRA is the minimum required distribution (MRD) rules do not apply during the lifetime of the Roth IRA owner, even after the owner has reached age 701/2. However, the rules do apply at death.
	Q- 14. What minimum distribution rules apply to a Roth IRA? A- 14. (a) No minimum distributions are required to be made from a Roth IRA under section 408(a)(6) and (b)(3) (which generally incorporate the provisions of section 401(a)(9)) while the owner is alive. The post- death minimum distribution rules under section 401(a)(9)(B) that apply to traditional IRAs, with the exception of the at-least-as-rapidly rule described in section 401(a)(9)(B)(i), also apply to Roth IRAs. [Which means that the 5-year rule or its exception always apply, even if death is after the normal RBD. See below. ]
In Applying the Post-Death MRD Rules, Is the Roth IRA Owner Treated as Having Died Before, or After, the RBD? (Before.)	(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 [of all Roth IRAs, apparently] is the decedent's spouse, such spouse may delay distributions until the decedent would have attained age 70 ½ or [if spouse is the beneficiary of any Roth IRA, whether or not the spouse is the sole beneficiary of all Roth IRAs, the spouse] may treat the [or any?] Roth IRA [of which the spouse is the sole beneficiary] 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.^{^[21]} I added the bracketed language to Treas. Reg. §1.408A-6, Q&A 14 above because I believe it to be the more precise IRS position on the subject.
What is the Applicable Date for a purposes of the Roth IRA Minimum Required Distribution Rules (MRDs)? (Date of Death.)	As indicated above,^{^[22]} a deceased Roth IRA owner is treated as having died prior to the RBD. Therefore, the date of death is always treated as the applicable date, because it will always be earlier than the RBD.
Are Distributions From Roth IRAs and Traditional IRAs Treated Separately Under the Minimum Required Distribution Rules? (Yes.)	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.^{^[23]}
Nomenclature: What is a Traditional IRA and What is a Regular Contribution? (A Traditional IRA is an IRA that is not a Roth IRA and a Regular Contribution is a Nonrollover Contribution of $2000 or less.)	The IRS regulations employ the term traditional IRA to refer to an IRA that is not a Roth IRA, education IRA, etc. The term regular contribution is used to to refer to a contribution to a Roth IRA that is not a qualified rollover contribution. Q- 1. What types of contributions are permitted to be made to a Roth IRA? A- 1. There are two types of contributions that are permitted to be made to a Roth IRA: regular contributions and qualified rollover contributions (including conversion contributions). The term regular contributions means contributions other than qualified rollover contributions.^{^[24]}
What Other Special Nomenclature is Used in the Final Regulations?	The final regulations employ the following eleven defined terms: Q- 1. Are there any special definitions that govern in applying the provisions of §§1.408A-1 through 1.408A-7 and this section? A- 1. Yes, the following definitions govern in applying the provisions of §§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). (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 §1.408A-4 A-8. (2) Conversion. The term conversion means a transaction satisfying the requirements of §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 §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 §1.408A-4 A-1.
	(5) Modified AGI. The term modified AGI is defined in §1.408A-3 A-5. (6) Recharacterization. The term recharacterization means a transaction described in §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 §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).^{^[25]}

Regular (ANNUAL) CONTRIBUTIONS TO Traditional (Non-Roth) IRAs

When the IRS Uses the Term “Traditional IRA,” What Is Meant?	The IRS uses the term “traditional IRA” to refer to IRAs described in IRC §408 (a) or (b), other than SIMPLE IRAs or Roth IRAs. (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.^{^[26]}
Is It Necessary to Know the Rules Applicable to Traditional IRAs In Order to Understand The Regular Contribution Limits to Roth IRAs? (Yes.)	To a certain extent it is necessary to understand the rules applicable to traditional IRAs in order to understand the rules applicable to Roth IRAs, if for no other reason than that the Roth IRA rules make reference to and in many cases incorporate the normal IRA rules. Therefore, without turning this memo into a full explication of the normal IRA rules, those rules will be discussed briefly so far as necessary. The limit on Roth IRA contributions is defined by reference to the limit on traditional IRA contributions: The aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual shall not exceed the excess (if any) of — (A) the maximum amount allowable as a deduction under section 219, over (B) the aggregate amount of contributions for such taxable year to all other individual retirement plans (other than Roth IRAs) maintained for the benefit of the individual.^{^[27]}
What Statute Governs Traditional IRAs? (§408.)	Normal or traditional IRAs are governed by IRC §408, for the most part. This statute is too long to quote in its entirety here, though I am sorely tempted to, to make a point. The traditional IRA limits are not particularly easy to describe, and to describe them in detail here would be a significant digression. Nevertheless, a summary will be attempted.
What Statute Governs Contributions to Traditional IRA? (§219.)	IRC §219 governs contributions to traditional IRAs. A complete copy of this statute §219, including the special rules that apply only to volunteer firefighters, dogcatchers and certified paleo-ornithologists, is contained in the following footnote, which represents tax simplification at its worst.^{^[28]} I quote this statute in its entirety, in part for your ready reference, and in part to make the point I wanted to make when I did not quote §408 in full.
Where Can One Find A Good Summary of the Traditional IRA Rules? (Pub. 590.)	A very good (free) source of information is the IRS’ own publication on the subject, Pub. 590. Dave Foltz, an attorney with Comerica Bank, recently called my attention to the fact that this publication was 8 pages in 1978, 48 pages in 1992 and 66 pages in 1997! The regulations explaining the minimum required distribution rules are only slightly longer, but then they are single-spaced using small type.
	When you consider that tens of millions of Americans have IRAs, it is somewhat of an insult to the electorate that their own representatives would pass a law this important and universal in its application that at its simplest level takes 66 pages to explain in layperson language.
	Publication 590 can be found on the world wide web in a number of places, including: http://www.benefitslink.com/index.cgi/forms/pub590.html This cite is a link found on David Baker’s employee benefits web site: http://www.benefitslink.com/index.shtml.
Do the Final Regulations Contain a Summary of the Regular Roth IRA Contribution Limits? (Yes.)	The Roth final regulations summarize the traditional IRA contribution limits as follows: 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.^{^[29]}
Do the Final Regulations Give Examples Illustrating the Limits on Regular Roth IRA Contributions? (Yes.)	(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.^{^[30]}
How Much Can an Individual Contribute to a Traditional IRA? ($2000.)	The basic deduction limit under the traditional IRA rules is $2000 per year, if neither the taxpayer nor the taxpayer’s spouse is an active participant in a qualified plan and if the taxpayer has $2000 in compensation. (If the taxpayer has less than $2000 in compensation, the limit is the lesser amount.)
Are There AGI Limits Applicable to Traditional IRA Regular Contributions? (Yes, If Either the Taxpayer or Spouse is an Active Participant in a Qualified Plan.)	If the taxpayer is married and has at least $4000 in compensation, and has adjusted gross income that does not exceed the applicable limits, the taxpayer and the taxpayer’s spouse could each contribute $2000 to either a traditional IRA or to a Roth IRA, or to a combination of the two. If either the taxpayer or the taxpayer’s spouse is an active participant in a qualified plan —including being eligible to contribute to a 401(k) plan even if the taxpayer or spouse elects not to contribute—, the amount deductible if contributed to a traditional IRA depends on the taxpayer’s adjusted gross income (AGI). A similar rule applies to a regular Roth IRA, but the AGI limits are higher and there is no reduction for being an active participant in a qualified plan.
Executive Summary of Deduction and AGI Limits Applicable to Traditional IRAs.	Here is an executive summary of the traditional IRA deduction limits. If the taxpayer is unmarried and is an active participant in a qualified plan, then the taxpayer cannot make a deductible IRA contribution if the taxpayer has $40,000 or more in AGI (adjusted for inflation after 1998). Between $30,000 and $40,000 the $2000 deduction limit is phased out pro rata.
	If the taxpayer is married filing separately, then unless the spouses are not living together, no contribution can be made to a traditional IRA if either spouse is an active participant in a qualified plan.
	If the taxpayer is married filing jointly and is an active participant in a qualified plan, the taxpayer cannot make a deductible traditional IRA contribution if the taxpayer has AGI over $60,000 (adjusted for inflation after 1998). Between $50,000 and $60,000 the $2000 deduction limit is phased out pro rata. (The $10,000 difference rises to $20,000 in the case of a joint return for a taxable year beginning after December 31, 2006). Note that this limit is inapplicable to a Roth IRA, which has AGI limits that are quite different.
	If the taxpayer is married filing jointly and is not an active participant in a qualified plan, but the taxpayer’s spouse is an active participant in a qualified plan, then the applicable dollar amount is $150,000 and the phase-out amount is $10,000.^{^[31]} Such a taxpayer can deduct $2000 if AGI is $150,000 or less, can deduct $1000 if AGI is $155,000, and can deduct nothing if AGI is $160,000 or more.
What is the Limit on Spousal IRAs?	As with traditional IRAs, a special rule for married taxpayers permits one spouse to treat the other spouse's compensation as his or her own for purposes of the limit on regular contributions.^{^[32]}
What Changes to §219 Were Wrought By the IRS Restructuring and Reform Act?	Until 1998, the AGI limits applied without modification to both a husband and wife if either was an active participant in a qualified plan. Under the old rules, a married individual filing jointly would be treated as an active participant if the individual’s spouse was an active participant. The IRS Restructuring and Reform Act of 1998 eased this rule in those cases where the taxpayer is not an active participant in a qualified plan, but the taxpayer’s spouse is. (See executive summary above.) In that case, the new rules provide that the applicable dollar amount is $150,000 and the phase-out amount is $10,000.^{^[33]} The rules change daily for the tax practitioner, often for the worse, but occasionally for the better.
How Does the Statute Describe the Phase-Out Rule?	The phase out of the deduction, which I simply described as pro-rata, is described in the statute more precisely as follows: (A) In general. The amount determined under this paragraph with respect to any dollar limitation shall be the amount which bears the same ratio to such limitation as — (i) the excess of — (I) the taxpayer's adjusted gross income for such taxable year, over (II) the applicable dollar amount, bears to (ii) $10,000 ($20,000 in the case of a joint return for a taxable year beginning after December 31, 2006).^{^[34]}
Can a Taxpayer Make a Nondeductible Contribution to a Traditional IRA? (Yes.)	A taxpayer can make a nondeductible contribution to a traditional IRA no matter what the taxpayer’s AGI and whether or not the taxpayer or spouse is an active participant in a qualified plan; but with the advent of the Roth IRA, no one should ever make a nondeductible contribution if the Roth IRA is available as an alternative. Unfortunately, the AGI limits may make the Roth IRA unavailable as an alternative.
	The rules on nondeductible traditional IRA contributions are found in §408(o).^{^[35]} The advantage of making a nondeductible contribution to a traditional IRA is that the growth while in the IRA is tax-free. Of course the original amount contributed is recovered tax free, but, unlike a qualified distribution from Roth IRA, the earnings on nondeductible contributions to a traditional IRA are taxable when withdrawn.
Do the AGI Limits Apply to a Nondeductible Traditional IRA Contribution? (No.)	The amount that can be contributed to a nondeductible traditional IRA is the same as that which can be contributed to a regular deductible IRA ($2000), except that there are no AGI limitations. Of course, the AGI limits apply to a traditional IRA only if the taxpayer or spouse is an active participant in a qualified plan; but then, if the taxpayer or spouse is not an active participant in a qualified plan, the taxpayer would certainly prefer a deductible traditional IRA contribution to a nondeductible traditional IRA contribution.
	The concept of an AGI limit is common to both Roth IRAs and traditional IRAs; unfortunately, the limits do not correspond exactly. See below.

ANNUAL (NON ROLLOVER) Regular CONTRIBUTIONS TO A ROTH IRA

How Much Can One Contribute to a Roth IRA Each Year? (The Short Answer is $2000.).	The short answer to the question of how much can be contributed to a Roth IRA each year is $2000. However, there are many, many exceptions, all of which are discussed elsewhere in this paper. As stated above, the Roth IRA annual contribution limit is tied to the limitations applicable to regular IRA contributions, and is reduced by any regular IRA contributions.
Do Contributions to Educational IRAs Reduce the Annual Roth IRA Contribution Limits? (No.)	Contributions to an education IRA do not reduce the contributions available to fund a Roth IRA because the definition of IRA as used in the final regulations does not include an education IRA, which is defined under IRC §530 and not §408. Contributions to an education IRA are disregarded in applying the Roth IRA contribution limitation (and in applying the contribution limitation for traditional IRAs).^{^[36]}
Can Anyone Contribute to a Roth IRA? (No.)	A major problem with the Roth IRA is that not everyone is eligible to contribute to one. A Taxpayer whose adjusted gross income (AGI) exceeds the “applicable dollar amount” is either limited or prevented from making a contribution to a Roth IRA. (ii) the applicable dollar amount is — (I) in the case of a taxpayer^{^[37]} filing a joint return, $150,000, (II) in the case of any other taxpayer (other than a married individual filing a separate return), $95,000, and (III) in the case of a married individual filing a separate return, zero.^{^[38]}
	Note that there are different limits applicable to Roth IRA rollovers.^{^[39]} These will be discussed later.
	Taxpayers whose adjusted gross income exceeds the “applicable dollar amount” may still contribute to a Roth IRA if the excess is within 10 to 15 thousand dollars. In the inimitable style of the IRC, the pro rata phase out is described as follows:
	(A) Dollar limit. The amount determined under paragraph (2) for any taxable year shall not exceed an amount equal to the amount determined under paragraph (2)(A) for such taxable year, reduced (but not below zero) by the amount which bears the same ratio to such amount as — (i) the excess of — (I) the taxpayer's adjusted gross income for such taxable year, over (II) the applicable dollar amount, bears to
	(ii) $15,000 ($10,000 in the case of a joint return or a married individual filing a separate return). The rules of subparagraphs (B) and (C) of section 219(g)(2) shall apply to any reduction under this subparagraph.^{^[40]}
	219(g)(2)(B)&(C), in turn, provide: (B) No reduction below $200 until complete phaseout. No dollar limitation shall be reduced below $200 under paragraph (1) unless (without regard to this subparagraph) such limitation is reduced to zero. (C) Rounding. Any amount determined under this paragraph which is not a multiple of $10 shall be rounded to the next lowest $10. ^{^[41]}
What Does “Adjusted Gross Income” Mean Under the Statute? (The Same as Under a Traditional IRA, Except that the Amount of a Roth IRA Rollover is Excluded.)	Until 2005, “adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that any amount included in gross income under subsection (d)(3) shall not be taken into account.”^{^[42]}
	Income included under (d)(3) means income recognized as a result of the rollover from a traditional IRA to the Roth IRA, the point being that such income is ignored in determining eligibility to make a regular Roth IRA contribution. Not taking the conversion from the regular to the Roth IRA into account can indirectly affect such things as the amount of passive losses that the taxpayer can theoretically recognize in determining AGI. For example, under the statute, as amended, the taxpayer can compute AGI as if passive losses would be available, when in fact they will be lost as a result of the recognition of the conversion income.
Does Adjusted Gross Income Include Minimum Required Distributions For Purposes of Regular Roth IRA Contributions? (Yes, Both Before and After 2004.)	It is true that after 2004, minimum required distributions (MRDs) will be ignored for purposes of computing the AGI limitations applicable for Roth IRA rollovers; however, MRDs are taken into account in determining AGI for purposes of applying the regular Roth IRA contribution limits both before and after 2004. 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.^{^[43]}
After 2004, Is Income Includible As a Result of the Application of the Minimum Required Distribution Limits Taken Into Account For Purposes of Determining the AGI Limits Applicable to Roth IRA Conversions? (No.)	(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).^{^[44]} [Emphasis added.]
Is Income that is Recognized as a Result of a Qualified Rollover Contribution Taken Into Account In Determining the Roth IRA Contribution Limits? (No.)	Since a taxpayer cannot make a Roth IRA contribution in excess of the traditional IRA contribution limits allowable, it is important that the statute allows the taxpayer to exclude income recognized as a result of rollover Roth IRA contributions for this purpose. (B) Coordination with limit. A qualified rollover contribution shall not be taken into account for purposes of paragraph (2) [which provides that “the maximum amount allowable as a deduction under section 219 with respect to such individual for such taxable year . . . over the aggregate amount of contributions for such taxable year to all other individual retirement plans (other than Roth IRAs)“^{^[45]}
How Do the Final Regulations Describe Compensation For Roth Contribution Purposes? (The Same as With a Traditional IRA.)	Distinguish between the AGI limits and the compensation limits. The AGI limits must be consulted to determine who is eligible to make a Roth IRA contribution or rollover, but there is a separate compensation limitation on the $2000 traditional IRA or Roth IRA contribution. The size of a traditional IRA or regular Roth IRA contribution is limited to the lesser of (i) compensation or (ii) $2000. 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.^{^[46]}
Is an Income Tax Deduction Allowed For a Contribution to a Roth IRA? (No.)	“No deduction shall be allowed under section 219 [or under any other section, for that matter] for a contribution to a Roth IRA.”^{^[47]}
How Much Can an Individual Contribute Each Year to a Roth IRA? ($2000, if No Other Limits Apply.)	(2) Contribution limit. The aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual shall not exceed the excess (if any) of — (A) the maximum amount allowable as a deduction under section 219 with respect to such individual for such taxable year (computed without regard to subsection (d)(1) or (g) of such section), over (B) the aggregate amount of contributions for such taxable year to all other individual retirement plans (other than Roth IRAs) maintained for the benefit of the individual.^{^[48]}
	The reference to the §219(d)(1)&(g) limitations above are important because these limits are inapplicable in the case of a Roth IRA regular contribution. IRC §219(d)(1) provides, in the case of a traditional IRA: (1) Beneficiary must be under age 701/2. No deduction shall be allowed under this section with respect to any qualified retirement contribution for the benefit of an individual if such individual has attained age 701/2 before the close of such individual's taxable year for which the contribution was made.^{^[49]}
	And IRC §219(g)(1) provides, in the case of a traditional IRA: (g) Limitation on deduction for active participants in certain pension plans. (1) In general. If (for any part of any plan year ending with or within a taxable year) an individual or the individual's spouse is an active participant, each of the dollar limitations contained in subsections (b)(1)(A) and (c)(1)(A) for such taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2).^{^[50]}
	What all this means is that an individual cannot contribute any more to a Roth IRA than he or she can to an ordinary IRA, and that any contribution to an ordinary IRA will reduce the amount available for contribution to a Roth IRA; except that the limitation on contributions after age 701/2, and the AGI and active participation limitations^{^[51]} applicable to traditional IRAs, do not apply to Roth IRAs. Of course Roth IRAs have their own AGI limits. The fact that the limits are not the same contributes some confusion to the area. Unlike a traditional IRA, a Roth IRA can receive contributions from a 71-year-old who is an active participant in a qualified plan, if the special Roth AGI limits can be met.
Does a Contribution to a SEP-IRA or Simple IRA Reduce the Amount that a Taxpayer Can Contribute to a Roth IRA? (No.)	Technical Corrections in the IRS Restructuring and Reform Act of 1998 make it clear that contributions to a SEP-IRA or Simple IRA do not reduce the amount otherwise available for contribution to a Roth IRA. (2) contributions to any such pension or account [i.e., “a simplified employee pension or a simple retirement account”] shall not be taken into account for purposes of subsection (c)(2)(B).^{^[52]}
	Subsection (c)(2)(B) provides that “the aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual shall not exceed the excess (if any) of . . . the aggregate amount of contributions for such taxable year to all other individual retirement plans (other than Roth IRAs) maintained for the benefit of the individual.”^{^[53]}
Do The Traditional IRA Contribution Limits Apply to Roth IRA Rollover Contributions? (No.)	It is important to note that the traditional IRA contribution limitations under discussion do not apply to Roth IRA rollovers, a subject that will be discussed in detail later.
May Contributions to a Roth IRA Be Made After Age 701/2? (Yes.)	“Contributions to a Roth IRA may be made even after the individual for whom the account is maintained has attained age 701/2.”^{^[54]}
Can Contributions to a Roth IRA Made After the End of the Year be Treated as Having Been Made on the Last Day of the Preceding Year? (Yes.)	(7) Time when contributions made. For purposes of this section, the rule of section 219(f)(3) shall apply.^{^[55]} §219(f)(3), in turn, provides: (3) Time when contributions deemed made. For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).^{^[56]} [Emphasis added.]
	The final regulations are more to the point: (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 §1.408A-5 regarding recharacterization of certain contributions.)^{^[57]}
	Since no deduction is allowed for a contribution to a Roth IRA, the main significance of fixing the contribution year is for purposes of computing the 5-year time period required for tax free distributions, discussed below, and for computing the annual^{^[58]} deduction limitations for regular Roth IRA contributions.
	Interestingly, for purposes of the distribution rules of subsection (d), the due dates would include extensions. (7) Due date. For purposes of this subsection, the due date for any taxable year is the date prescribed by law (including extensions of time) for filing the taxpayer's return for such taxable year.^{^[59]}
	§408A(d) covers the definition of a “qualified distribution” (including the 5-year rule), rollovers from non Roth IRAs to Roth IRAs, etc.
Is There a Special Rule For Married Taxpayers Filing Separately And Living Apart Applicable In Applying the Contribution Limits and the Rollover Limits? (Yes.)	“(D) Marital status. Section 219(g)(4) shall apply for purposes of this paragraph.”^{^[60]} [Emphasis added.] The paragraph referred to is §408A(c)(3), which contains the limitation on contributions in §408A(c)(3)(A)&(C) by reference to the “applicable dollar amount” ($150,000/$90,000), and which also contains the $100,000 adjusted gross income limit on rollover eligibility described in §408A(c)(3)(B). §219(g)(4), in turn, provides:
	(4) Special rule for married individuals filing separately and living apart. A husband and wife who — (A) file separate returns for any taxable year, and (B) live apart at all times during such taxable year, shall not be treated as married individuals for purposes of this subsection.
Is There a Penalty if an Individual Exceeds the Regular Roth IRA Contribution Limits? (Yes, There is a 6% Excise Tax, For Starters.)	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 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.^{^[61]}

TAXATION OF DISTRIBUTIONS FROM A ROTH IRA

Are Distributions From a Roth IRA Tax Free? (Yes, if it is a Qualified Distribution.)	If the distribution from a Roth IRA is a “qualified distribution,” it is excluded from income for income tax purposes: “Any qualified distribution from a Roth IRA shall not be includible in gross income.”^{^[62]}
How Are Roth IRAs Taxed?	The final regulations explain the rules simply enough: 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 591/2, 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.^{^[63]}
What is a Qualified Distribution? (Generally, it is a Distribution Made After 59½, Death or Disability.)	Here is the statutory language: (2) Qualified distribution. For purposes of this subsection — (A) In general. The term “qualified distribution” means any payment or distribution —
	(i) made on or after the date on which the individual attains age 59½, (ii) made to a beneficiary (or to the estate of the individual) on or after the death of the individual,
	(iii) attributable to the individual's being disabled (within the meaning of section 72(m)(7)), or
	(iv) which is a qualified special purchase distribution.^{^[64]} [Emphasis added.]
What is a Qualified Special Purchase Distribution? (A Distributions For First Home Purchases.)	(5) Qualified special purpose distribution. For purposes of this section, the term “qualified special purpose distribution” means any distribution to which subparagraph (F) of section 72(t)(2) applies.^{^[65]} In case you were wondering, IRC §72(t)(2)(F), in turn, provides: (F) Distributions from certain plans for first home purchases. Distributions to an individual from an individual retirement plan, which are, qualified first-time homebuyer distributions (as defined in paragraph (8)). Distributions shall not be taken into account under the preceding sentence if such distributions are described in subparagraph (A), (C), (D), or (E) or to the extent paragraph (1) does not apply to such distributions by reason of subparagraph (B).^{^[66]}
***Are There Any Important Exceptions to the Qualified Distribution Definition. Yes. Distributions Within 5-years, For Example?)	A very important exception to the qualified distribution definition is for distributions within 5-years of the initial contribution. (B) Distributions within nonexclusion period. A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the 1st taxable year for which the individual made a contribution to a Roth IRA (or such individual's spouse made a contribution to a Roth IRA) established for such individual.^{^[67]}
Can a Taxpayer Start the 5-year Period Running With a Token Contribution Now? (Yes.)	The statute, as amended, appears to say that if a Roth IRA was established more than five years prior to the distribution, it makes no difference that contributions to the already established Roth IRA were made within five years of the distribution! This reading is supported by the Senate Committee Reports to the IRS Restructuring and Reform Act of 1998.^{^[68]} Query, what happens if you set up a Roth IRA today, with a $1 contribution, withdraw it tomorrow, and make a “real” Roth IRA contribution or rollover 5-years from now? Is the 5-year distribution rule a concern any longer? I don’t think it is. One cautionary note: you still have to meet the AGI limits in the year the Roth IRA is established.
If The Taxpayer Withdraws an Initial Contribution, Will the 5-Year Period Begin Anew With Respect to a Subsequent Contribution? (No.)	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.^{^[69]}
	Prior to its amendment, IRC §408A(d)(2(B)(ii) applied a separate five year waiting period for Roth rollover IRAs. Prior to its amendment, IRC §408A(d)(2(B) read:
	(B) Certain distributions within 5-years. A payment or distribution shall not be treated as a qualified distribution under subparagraph (A) if — (i) it is made within the 5-taxable year period beginning with the 1st taxable year for which the individual made a contribution to a Roth IRA (or such individual's spouse made a contribution to a Roth IRA) established for such individual, or (ii) in the case of a payment or distribution properly allocable (as determined in the manner prescribed by the Secretary) to a qualified rollover contribution from an individual retirement plan other than a Roth IRA (or income allocable thereto), it is made within the 5-taxable year period beginning with the taxable year in which the rollover contribution was made.^{^[70]}
	While the provision just quoted was still in effect, the IRS indicated that it was important to keep rollover Roth IRAs and annual contribution Roth IRAs separate,^{^[71]} but the IRS Restructuring and Reform Act of 1998 would appear to make this no longer necessary. My reading of the recent amendments is that the five-year period begins, not when a particular contribution is made, but when the first contribution is made, and that the rule is the same for rollovers as for other contributions. The final regulations are in accord with this interpretation.
	Q- 2. When does the 5-taxable-year period described in A-1 of this section (relating to qualified distributions) begin and end?
Does an Excess Contribution Start the 5-Year Period Running? (No.)	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.^{^[72]}
In Order to Avoid Recapture Under the 5-Year Rule, Does the Taxpayer Look to the Anniversary Date of the Initial Establishment of the Roth IRA? (No.)	Note that the statute does not require that the distribution be on the 5th anniversary of the establishment of the Roth IRA. Rather, the distribution must be made after the end of the 5 taxable year period in order to entirely avoid income taxation. So, if a contribution were made on April 14 of 2002 which was attributed to taxable year 2001, the first tax free distribution of earnings could be made January 1, 2006, taxable year 6, a total of 3 years, 8 months and 16 days.
Does the 5-Year Wait Apply to a Death Beneficiary? (Yes, But the Beneficiary Gets Credit For the Time Elapsed While the Owner Was Alive.)	The beneficiary is subject to the same 5-year waiting period as the taxpayer, except that the beneficiary gets credit for the time that passed while the taxpayer was still alive. Q- 7. Is the 5-taxable-year period described in A-1 of this section redetermined when a Roth IRA owner dies?
Does the Tacking Rule Apply in the Case of a Spousal Roth IRA Rollover? (Yes.)	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.^{^[73]}
If the Beneficiary is the Roth IRA Owner’s Spouse, and the Spouse Elects to Treat the Roth IRA As His or Her Own, How is the 5-Year Period Computed With Respect to the Inherited IRA and With Respect to Other Roth IRAs the Spouse May Own? (The Spouse Gets the Best of All Possible Worlds.)	The final regulations give the taxpayer’s spouse a very surprising break here: (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.^{^[74]}
If the Beneficiary is the Roth IRA Owner’s Spouse, and the Spouse Elects to Treat 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? (No.)	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 §1.408A-2A-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.^{^[75]}
Can the Distribution of An Excess IRA Contribution Be Treated as a Qualified Distribution? (No.)	(C) Distributions of excess contributions and earnings. The term “qualified distribution” shall not include any distribution of any contribution described in section 408(d)(4) and any net income allocable to the contribution.^{^[76]} 408(d)(4) overrides the general rule of 408(d)(1) that causes inclusion of IRA distributions in gross income under §72. §408(d)(4) provides that 408(d)(1) “does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity to the extent that such contribution exceeds the amount allowable as a deduction under section 219 if” (1) the contribution is returned before the due date of the individual’s tax return (including extensions if applicable), (2) no deduction is allowed under §219, and the income attributable to the excess contribution is returned as well.^{^[77]}
	I think that this provision is in the statute simply to insure that the income on the returned contribution will be taxed.
How is a Distribution Taxed If It Is Not a Qualified Distribution? (The First Distributions Will Likely Be Treated as a Recovery of Basis.)	If a distribution is not a qualified distribution, it is not necessarily exempt from income, but it (or most of it) probably will be. If the taxpayer has already paid tax on the amount distributed, then it would be tax exempt, even if not part of a qualified distribution. If (or rather, since) the account has earnings and appreciation, it is necessary to determine whether it is the earnings and appreciation that is being distributed as a part of the nonqualified distribution, or whether it is after-tax contributions that are being returned. The IRS Restructuring and Reform Act of 1998 gives us ordering rules with which to make this determination.
	The Preamble to the final regulations describes the rule this way: 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.^{^[78]} (Emphasis added.)
Is A Distribution Allocable to a Conversion Contribution Treated as Made First From the Portion that was Includable in Gross Income as a Result of the Conversion? (Yes.)	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).^{^[79]}
Are Nonqualified Distributions Subject to the 10% Premature Distribution Tax? (Yes.)	Recall §408A(a): (a) General rule. Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan.^{^[80]}
	As in the case of a traditional IRA, a nonqualified distribution from a Roth IRA, if includable in income, will now be subject to the 10% premature distribution tax of §72(t), if the taxpayer is under age 591/2, for example. In addition, even previously taxed distributions (which are therefore not includable in income when distributed) will be subject to §72(t) if a rollover contribution is withdrawn before the end of the 5-year period.^{^[81]} This is a matter that will be discussed later in this outline.
How Are the Traditional IRA Distribution Taxation Rules Found in §408(d)(2) Coordinated With Roth IRAs? (Roth IRAs and Traditional IRAs are Aggregated Separately.)	IRC §408(d) is a fairly comprehensive section, which specifies the income tax treatment of distributions from IRAs. The first two paragraphs of 408(d) read as follows: (1) IN GENERAL. -- Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.
	(2) SPECIAL RULES FOR APPLYING SECTION 72. -- For purposes of applying section 72 to any amount described in paragraph (1) --
	(A) all individual retirement plans shall be treated as 1 contract, (B) all distributions during any taxable year shall be treated as 1 distribution, and (C) the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year with or within which the taxable year ends.
	For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year.^{^[82]}
	§408A(d)(4)(A), provides: (A) Aggregation rules. Section 408(d)(2) shall be applied separately with respect to Roth IRAs and other individual retirement plans.

The Distribution Ordering Rules

Does the Owner Have a Basis in Contributions to the Roth IRA? (Often, Yes.)	It is a fundamental (though not in all cases universal) concept of income taxation that income is only taxed once and that the cost or other basis of an asset is recaptured tax free if the asset is sold or exchanged. Now tax has already been paid on amounts contributed to a Roth IRA. Therefore, even if a distribution is not a qualified distribution, all or a portion of the amount distributed will have already been taxed; and, consequently, the taxpayer will have a basis in it.
	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.^{^[83]}
	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.^{^[84]}
If Amounts Are Withdrawn From a Roth IRA, How Are Those Amounts Allocated or Attributed? In Other Words, Are There Any Ordering Rules? (Yes.)	Both before and after the IRS Restructuring and Reform Act, withdrawals from Roth IRAs received very favorable treatment. Originally, the statute simply provided that if a distribution was made, the taxpayer’s contributions (basis) would be treated as distributed first. While retaining this original approach, the IRS Restructuring and Reform Act of 1998 replaced this broadly favorable rule with a more precise set of ordering rules.
	The Senate Committee Reports to the IRS Restructuring and Reform Act of 1998 describes the new rules this way:
	Ordering rules. Ordering rules will apply to determine what amounts are withdrawn in the event a Roth IRA contains both conversion amounts (possibly from different years) and other contributions. Under these rules, regular Roth IRA contributions will be deemed to be withdrawn first, then converted amounts (starting with the amounts first converted). Withdrawals of converted amounts will be treated as coming first from converted amounts that were includible in income. As under present law, earnings will be treated as withdrawn after contributions. For purposes of these rules, all Roth IRAs, whether or not maintained in separate accounts, will be considered a single Roth IRA.^{^[85]}
How is Basis Recaptured in the Case of a Distribution that is Not a Qualifying Distribution?	I would describe the ordering rules as treating distributions as coming from contributions (i.e., not income) first, and in the following order: (1) from non-rollover contributions first, (2) from taxable rollover contributions second, and (3) from nontaxable rollover contributions next. Only after all contributions have been recovered is income recognized.
The Ordering Statute Itself.	The new statute, §408A(d)(4)(B), is somewhat imposing, but the essential import is that after-tax contributions to a Roth IRA (including rollovers) will come out first, and it is only after all previously taxed contributions are recovered that distributions will be taxable, and then only if the distribution is a not a qualified distribution. The statute —IRC §408A(d)(4)(B)—, as amended, provides:
Are Contributions Made to all Roth IRAs Considered First? (Yes.)	Ordering rules. For purposes of applying this section and section 72 [the section that imposes a tax on IRA distributions] to any distribution from a Roth IRA, such distribution shall be treated as made — (i) from contributions to the extent that the amount of such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate contributions to the Roth IRA, and
Within the Class of Contributions, Are Rollover Contributions Considered Last on a FIFO Basis? (Yes.)	(ii) from such contributions in the following order: (I) Contributions other than qualified rollover contributions to which paragraph (3) applies. (II) Qualified rollover contributions to which paragraph (3) applies on a first-in, first-out basis.
Are Rollover Contributions (Considered on a FIFO Basis) Allocated First to Amounts Previously Included in Income? (Yes.)	Any distribution allocated to a qualified rollover contribution under clause (ii)(II) shall be allocated first to the portion of such contribution required to be included in gross income.^{^[86]}[Emphasis added.] I assume that the phrase “required to be includable in gross income” is a reference to previously taxed regular and rollover contributions, which means it would be tax-free at this point. A hasty reading (to which I do not subscribe) might give the opposite impression: that the allocation is made to distributions now required to be taxed.
	The final regulations confirm the more careful reading: (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.^{^[87]}
How Were the Ordering Rules Described Under the Proposed Regulations?	The proposed regulations contained in the preamble an explanation of the ordering rules that was not retained in the preamble to the final regulations. Because I think that this explanation may be helpful in understanding the methodology involved, I quote it below: The proposed regulations provide aggregation and ordering rules for Roth IRAs in accordance with section 408A(d)(4). Under these rules, a Roth IRA is not aggregated with a non-Roth IRA, but all a taxpayer's Roth IRAs are aggregated with each other. Roth IRA distributions are treated as made first from Roth IRA contributions and second from earnings. Distributions that are treated as made from contributions are treated as made first from regular contributions and then from conversion contributions on a first-in, first-out basis. A distribution allocable to a particular conversion contribution is treated as consisting first of the portion (if any) of the conversion contribution that was includible in gross income by reason of the conversion.
	The final regulations provide that, in applying these aggregation and ordering rules: all distributions from all of a taxpayer's Roth IRAs during a taxable year are aggregated; all regular contributions made for the same taxable year to all the individual's Roth IRAs are aggregated and added to the undistributed total regular contributions for prior taxable years; all conversion contributions received during the same taxable year by all the individual's Roth IRAs are aggregated (with a special rule for a conversion contribution made by distribution during 1998 and rollover during 1999 to which the 4-year spread applies); and rollovers between Roth IRAs are disregarded. The final regulations also provide special rules for applying the aggregation and ordering rules in the case of recharacterizations under section 408A(d)(6). Distributions of excess contributions and allocable net income pursuant to section 408(d)(4) are treated differently under the ordering rules. Specifically, an excess contribution that is distributed under section 408(d)(4) is treated as though it was never contributed, and any allocable net income thereon is includible in gross income for the taxable year of the contribution without regard to whether the taxpayer still has undistributed basis in his or her Roth IRAs. The final regulations provide that, for purposes of these ordering rules, different types of contributions are allocated pro rata among multiple Roth IRA beneficiaries after the Roth IRA owner's death.^{^[88]}
	In sum, if a nonqualifying distribution is made, the distribution will be treated as having been made out of non rollover contributions first, which means the distribution proceeds will be tax free to that extent. After all non-rollover contributions have been deemed distributed, nonqualifying distributions will be treated as coming out of rollover contributions on a FIFO basis, and within the distributions attributable to rollover contributions, the previously taxed contributions will be deemed to be distributed first, which means these distribution proceeds will be tax free. Any remaining amounts will be allocated to income and appreciation, and therefore taxed.
	Except for 1998 Rollovers from a traditional IRA to a Roth IRA on which 4-year income averaging is elected (which are a special case), the ordering rules go a long way towards mitigating the downside risk of establishing a Roth IRA. The worst that can happen is that income on the account will be recaptured, but then only if the distribution is nonqualifying (e.g., made within five years of establishment) and then only after the amounts on which tax has already been paid have been distributed tax-free.
	Example: Suppose a taxpayer contributes $2000 per year to a Roth IRA for three years, and in year three also makes a $1 million Roth Rollover contribution. In year four the taxpayer withdraws $5000 and in year five withdraws $50,000. The $5000 withdrawal in year three is tax-free, representing a recapture of $5000 of the $6000 non-rollover contributions. Another $1000 would be recaptured in year four tax-free. Of the remaining $49,000 nonqualifying distribution made in year four, it too would be nontaxable because it would be attributed to the portion that has already been taxed when rolled over. (I think.)
	The rule would be different if the rollover were made in 1998 and the taxpayer elected to spread income recognition attributable to the rollover over four years, as permitted for 1998 rollovers only. The technical corrections require that income deferred under this special provision be recaptured if distributions are made within the four-year period. This is discussed in detail later in this outline.
What is the Literal Text of the Final Regulations Regarding the Ordering Rules?	The literal text of the regulations is lengthy. I have not yet decided whether these rules are complex or just seem that way when articulated. 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.
	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 §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. (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 §1.408A-5, then, pursuant to §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 §1.408A-5, then pursuant to §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 §1.408A-5 A-3, the effect of income or loss (determined in accordance with §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.^{^[89]}
How Are Distributions Allocable to a 1998 Conversion Taxed Under the 4-Year Spread Rule?	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 §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 §1.408A-4 A-11(b).^{^[90]}
Are all Roth IRAs to Be Aggregated For Purposes of the Ordering Rules? (Probably Yes.)	The statute is somewhat ambiguous with respect to whether all Roth IRAs are to be aggregated for purposes of applying the ordering rules, but it is implied that this is the case. Immediately prior to §408A(d)(4)(B), the ordering rules quoted above, there is an aggregation rule:
	(A) Aggregation rules. Section 408(d)(2) shall be applied separately with respect to Roth IRAs and other individual retirement plans.^{^[91]}
	In this regard I note that 408(d)(2)(A) requires that “all individual retirement plans shall be treated as 1 contract.”^{^[92]}
	On the other hand Subparagraph (B) begins: For purposes of applying this section and section 72 to any distribution from a Roth IRA, such distribution shall be treated as made . . . ”^{^[93]} [Emphasis added.]
How Are Corrective Distributions Treated Under the Ordering Rules? (They Are Disregarded.)	(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.^{^[94]}
Do the Final Regulations Give Examples of the Operation of the Ordering Rules? (Yes.)	I confess that the complexity of the statute makes me less than certain about the operation of the ordering rules in a given situation. The concept is simple, but the law and regulations are so detailed and convoluted that I am reluctant to rely on my own summations above. The final regulations contain nine examples, and I am simply going to list them here. If you are interested, read them; if not, skip it.
	Q- 10. Are there examples to illustrate the ordering rules described in A-8 and A-9 of this section? A- 10. Yes. The following examples illustrate the ordering rules in A-8 and A-9 of this section:
	Example (1). In 1998, individual B converts $80,000 in his traditional IRA to a Roth IRA. B has a basis of $20,000 in the conversion amount and so must include the remaining $60,000 in gross income. He decides to spread the $60,000 income by including $15,000 in each of the 4 years 1998-2001, under the rules of §1.408A-4 A-8. B also makes a regular contribution of $2,000 in 1998. If a distribution of $2,000 is made to B anytime in 1998, it will be treated as made entirely from the regular contributions, so there will be no Federal income tax consequences as a result of the distribution.
	Example (2). The facts are the same as in Example 1, except that the distribution made in 1998 is $5,000. The distribution is treated as made from $2,000 of regular contributions and $3,000 of conversion contributions that were includible in gross income. As a result, B must include $18,000 in gross income for 1998: $3,000 as a result of the acceleration of amounts that otherwise would have been included in later years under the 4-year-spread rule and $15,000 includible under the regular 4-year-spread rule. In addition, because the $3,000 is allocable to a conversion made within the previous 5 taxable years, the 10-percent additional tax under section 72(t) would apply to this $3,000 distribution 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 591/2, 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 §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.

The Application of the IRC §72(t) Premature Distribution Tax to Roth IRA Withdrawals

Does the §72(t) Premature Distribution 10% Penalty Tax For Distributions Prior to Age 591/2 Apply on Roth IRA Rollovers Required to be Included in Ordinary Income? (No, In General.)	As a general rule, the premature distribution tax (imposed by §72(t)) does not apply on the income required to be recognized as a result of a Roth IRA rollover. (A) In general. Notwithstanding section 408(d)(3) [which defines rollovers exempt from income tax] in the case of any distribution to which this paragraph [sic] [§408A(d)(3)?, rollovers to a Roth IRA from an IRA other than a Roth IRA] applies — *** * * * (i) (ii) section 72(t) shall not apply, . . .^{^[95]} and (iii)**
	If the 10% premature distribution tax does not apply to a Roth IRA rollover, after it is withdrawn, then you might think (and some did) that a Roth IRA rollover followed immediately by a withdrawal would be clever way for a person under 591/2 to effect a withdrawal without paying a penalty. Congress quickly closed this loophole: The IRS Restructuring and Reform Act of 1998 now makes an exception to the general rule (that Roth IRA distributions are immune from 72(t)) in the case of nonqualifying distributions attributable to rollovers that are withdrawn within 5-years, even if not subject to income tax. See below.
	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 January 1, 1999, while the 5-taxable-year period for purposes of A-1(b) of this section begins on January 1, 1998.^{^[96]}
Are There Any Exceptions to the Inapplicability of the Premature Distribution Tax to Roth IRA Rollovers? (Yes.)	Distributions from a Roth IRA, if not included in income, would, under prior law, not be subject to the premature distribution tax, because that tax only applies to distributions included in income. Hence a technique was suggested of making a Roth IRA rollover (on which income tax would have to be paid), relying on the exception from 72(t) provided in IRC §408A(d)(3)(A)(ii), quoted immediately above, and then taking a nontaxable distribution from the Roth IRA which would be exempt from 72(t), not because of an exception, but because it was nontaxable. 408A(d)(3)(F) was added to redress this loophole:
	(F) Special rule for applying section 72. (i) In general. If — (I) any portion of a distribution from a Roth IRA is properly allocable to a qualified rollover contribution described in this paragraph, and (II) such distribution is made within the 5-taxable year period beginning with the taxable year in which such contribution was made,
	then section 72(t) shall be applied as if such portion were includible in gross income. (ii) Limitation. Clause (i) shall apply only to the extent of the amount of the qualified rollover contribution includible in gross income under subparagraph (A)(i) [i.e., (d)(3)(A)(i) Rollover from traditional IRA to Roth IRA].^{^[97]} [Emphasis added.]
Are Non Rollover Roth IRA Contributions Immune From the Premature Distribution Tax No Matter What? (Yes.)	The combination of the 408A(F)(i)(I) phraseology, the 408A(F)(ii) limitation, and the ordering rules of 408A(d)(4)(B) all lead to the conclusion that the premature distribution tax can apply only to previously taxed rollover contributions, not to income and not to nonqualifying distributions attributable to non-rollover Roth IRA contributions. Distributions of these amounts are still immune from the 10% premature distribution tax, no matter when withdrawn. The ordering rules treat distributions as coming from non-rollover contributions first, from taxable rollover contributions second, and from nontaxable rollover contributions next.
Can the Premature Distribution Tax Apply to a Nontaxable Qualifying Distribution? (Yes.)	The 5-year period necessary to escape the premature distribution tax is not the same 5-year period used to determine whether a distribution is a qualifying distribution. Even if a distribution is a qualifying distribution —meaning that a Roth IRA has been established for at least 5-years— then a nontaxable premature distribution tax could still apply, if the taxpayer is under age 591/2 at the time, because the 5-year period referred to in §408A(d)(3)(F)(i)(II) begins “with the taxable year in which such contribution was made”^{^[98]} rather than “within the 5-taxable-year period beginning with the 1st taxable year for which the individual made a contribution to a Roth IRA”^{^[99]} and because the statute makes the tax applicable “as if such portion were includible in gross income.”^{^[100]}
If an IRA Owner is Taking Substantially Equal Distributions From a Traditional IRA in Order to Avoid the Premature Distribution Tax, Can the Traditional IRA be Converted to a Roth IRA, Without “Modifying” the Payment and Thus Triggering Recapture Tax? (Yes, But the Tax May Be Triggered Later Unless the Distributions Are Continued After the Rollover.)	The following regulation could prove very important for persons who, in order to avoid the 10% premature distribution tax of IRC §72(t), had begun taking a series of substantially equal distributions (prior to age 591/2) from an IRA, before converting to a Roth IRA. Careful reading may be in order here. It appears to me that the penalty is avoided by continuing to take the distributions from the Roth IRA, but that in that case, some of those distributions may be nonqualified. Moreover, if the distributions are not continued, the recapture tax under 72(t) may apply. 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. [However,] 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 §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 §1.408A-6 A-6 apply.^{^[101]} 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 591/2, the taxpayer will be subject to the recapture tax of section 72(t)(4)(A).^{^[102]}
Are 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 Subject To Income Acceleration During The 4-Year Spread Period And The 10-Percent Additional Tax On Early Distributions Under Section 72(t)? (Yes.)	This rule has a double impact on distributions in 1998 on which the 4-year spread rule is applicable. 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).^{^[103]}

ROLLOVERS TO A ROTH IRA/ ROTH COnversions

What is the Difference Between a Roth IRA Conversion and a Roth Rollover? (None.)	Originally, following the statutory nomenclature, we referred to a conversion of a traditional IRA into a Roth IRA as a rollover. Unfortunately, “rollovers” can take place several different ways, some of which don’t seem like rollovers in the traditional sense, but which are treated identically; for example, the traditional IRA stays put, but the owner signs a new agreement with the custodian or trustee which makes the traditional IRA into a Roth IRA, simply by “redesignating” the form of the IRA. Or, the owner directs the trustee to transfer the IRA to the trustee of a newly established Roth IRA ‑technically a trustee to trustee transfer and not a rollover, except for the fact that the type of IRA has changed. Perhaps in order to avoid confusion over nomenclature, the regulations use the term “conversion” generically, to refer to all means of effectively changing a traditional IRA to a Roth IRA. Incidentally, and as will be discussed later, in those cases where the Roth IRA is changed back to a traditional IRA (under special rules that allow this sort of thing under particular circumstances), the term used is “recharacterization.” Where the recharacterized IRA is changed back to a Roth IRA, the term used is “reconversion.”
Can an Individual Rollover a Traditional IRA to a Roth IRA? (Yes, if the AGI and Other Conditions Are Met.)	One of the most attractive features of a Roth IRA is the ability of some persons to rollover a traditional IRA or qualified plan distribution to a Roth IRA, so that the minimum distribution rules will not apply during life and so that distributions from the Roth IRA in the future will not be subject to income tax.
What is a Roth Conversion?	The IRS calls a rollover from a traditional IRA to a Roth IRA a conversion: 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).^{^[104]}
How is a Conversion to a Roth IRA Accomplished?	(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.^{^[105]}
Can a Conversion Be Accomplished in a Trustee to Trustee Transfer? (Yes.)	(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.^{^[106]}
Is a Failed Conversion a “Conversion”? (No.)	(d) A transaction that is treated as a failed conversion under §1.408A-5 A-9(a)(1) is not a conversion.^{^[107]}
Can Anyone Make a Roth IRA Rollover? (No.)	Unfortunately, not everyone is eligible to make a Roth IRA rollover. (B) Rollover from IRA. A taxpayer shall not be allowed to make a qualified rollover contribution to a Roth IRA from an individual retirement plan other than a Roth IRA during any taxable year if, for the taxable year of the distribution to which such contribution relates — (i) the taxpayer's adjusted gross income for such taxable year exceeds $100,000, or (ii) the taxpayer is a married individual filing a separate return.^{^[108]}
What Are the Tax Consequences of a Conversion? (The Amount Rolled Over is Included in Gross Income as in the Case of Any Other IRA Distribution.)	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).^{^[109]}
Is a Qualified Rollover Contribution Taken Into Account In Determining the Roth IRA Rollover Limits on Adjusted Gross Income? (No.)	Since a taxpayer cannot make a Roth IRA rollover if the individual has adjusted gross income (AGI) over $100,000, then, unless there were a special rule excluding the rollover income, no rollover could exceed $100,000. Fortunately, the amount taken into income as a result of the rollover is excluded from the $100,000 AGI limitation. 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.^{^[110]}
In Applying the $100,000 Limit, Must a Husband and Wife Combine Their Income? (Yes, According to the Regulations, Though The Statute Suggests Otherwise.)	(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.^{^[111]}
Is a Qualified Rollover Contribution Taken Into Account In Determining The Taxable Portion of Social Security Payments? (Yes.)	Again: 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 §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..^{^[112]} [Emphasis added.]
	This result is accomplished under the statute rather obliquely as follows. (C) Definitions. For purposes of this paragraph [i.e., §408A(c)(3) “Limits based on modified adjusted gross income”]—
	(i) adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that any amount included in gross income under subsection (d)(3) shall not be taken into account . . . [this version of §408A(c)(3)(C)(i) is applicable until 2005]
	(i) adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that — (I) any amount included in gross income under subsection (d)(3) shall not be taken into account, and (II) any amount included in gross income by reason of a required distribution under a provision described in paragraph (5) shall not be taken into account for purposes of subparagraph (B)(i). [this version of §408A(c)(3)(C)(i) is applicable after 2004]^{^[113]} [Emphasis added.]
	The “amount included in gross income under subsection (d)(3)” that is not required to be taken into account is any amount that is a rollover from an IRA other than a Roth IRA (assuming (d)(3) to be §408A(d)(3), entitled “(3) Rollovers from an IRA other than a Roth IRA.”
Can a Minimum Required Distribution From a Traditional IRA Be Rolled Over to a Roth IRA? (No, No, No and No.)	In no event can a minimum required distribution (MRD) be rolled over to a Roth IRA or to any other IRA.^{^[114]}
	Treas. Reg. §1.402(c)-2 Q&A 7(a) provides in part: A-7. (a) General rule. Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. . . . ^{^[115]} [Emphasis added.] This means, for example, that if one wanted to rollover $10,000 in a year when the MRD was $90,000, one would have to withdraw a minimum of $100,000 in order to make a $10,000 rollover.
Can an Individual Make a Roth IRA Rollover in the Year He or She Reaches Age 701/2, Without First Taking the Minimum Required Distribution That is Not Due Until April 1 of the Next Year? (No.)	This is a very important issue, not easily grasped, and one that I expect many to miss: On or before April 1 of the year following the year that an individual reaches age 701/2 (the required beginning date or RBD), the individual is required to begin taking distributions from his or her IRA under the minimum required distribution (MRD) rules. The first distribution is on account of the preceding year, and the second and all subsequent MRDs must be taken by December 31, beginning with the RBD. Thus in the year that includes the RBD, an individual may have to take two distributions, one no later than April 1, and one no later than December 31. The individual will only have to take one distribution in the year of the RBD if the first MRD was taken in the year the individual reached 701/2. Now, as explained above, one cannot rollover an MRD.^{^[116]} Further, the first amounts distributed are treated as satisfying the MRD rules. Thus, one cannot make a rollover, even on January 1, without first withdrawing (and subjecting to tax) any MRDs that are due that year (even though not due until December 31).^{^[117]} This is a very tricky rule and is probably often reasonably overlooked. It applies in the case of a traditional IRA (and probably to a spousal rollover!!), and we now know —because the regulations tell us— that the rule applies to Roth IRA rollovers as well. As applied to Roth IRA rollovers, it means that in determining whether an individual is eligible to make a regular Roth IRA contribution or a rollover contribution, the individual must first take into account (and into tax, and cannot rollover) any MRD, including any MRD not due until the required beginning date, even though the RBD is in the next year! After 2004, this rule will not apply to Roth IRA rollovers, but will continue to apply to regular Roth IRA contributions.
	Q- 6. Can an individual who has attained at least age 701/2 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^{^[118]} dollars distributed during that year are treated as consisting of the required minimum distribution until an amount equal to the required minimum distribution for that year has been distributed.
	(b) As provided in A-1(c) of this section, any amount converted is treated as a distribution from a traditional IRA and a rollover contribution to a Roth IRA and not as a trustee-to-trustee transfer for purposes of section 408 and section 408A. Thus, in a year for which a minimum distribution is required (including the calendar year in which the individual attains age 701/2), 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.^{^[119]}
	Again, in the Preamble to the final regulations: 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 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.^{^[120]}
Must Minimum Required Distributions Be Included In Income For Purposes of Determining Eligibility to Make a Roth IRA Rollover (or a Roth IRA Regular Contribution)? (Yes, Before 2005.)	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.^{^[121]}
After 2004, Is Income Includible As a Result of the Application of the Minimum Required Distribution Limits Taken Into Account For Purposes of Determining the Compensation Limits Applicable to Rollover Roth IRA Contributions? (No. But the Rule is Otherwise in the Meantime.)	For tax years beginning after 12/31/2004, amounts required to be distributed under the minimum required distribution (MRD) rules will be ignored in computing the compensation limits used to determine who is eligible to make a Roth IRA rollover. (However, this new rule does not apply to the compensation limits applicable to persons making a regular Roth IRA contribution.) (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).^{^[122]} [Emphasis added.]
	The statute provides, effective for tax years beginning after 12/31/2004: (i) adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that — (I) any amount included in gross income under subsection (d)(3) [i.e., recognized because of the rollover] shall not be taken into account, and (II) any amount included in gross income by reason of a required distribution under a provision described in paragraph (5) [i.e., the minimum required distributions applicable to traditional IRAs after age 701/2, which by the way, cannot be rolled over to a Roth or any other IRA] shall not be taken into account for purposes of subparagraph (B)(i) [i.e., for purposes of the $100,000 AGI rollover limit!].^{^[123]}
	Under IRC §219(g)(3)(A), (A) Adjusted gross income. Adjusted gross income of any taxpayer shall be determined — (i) after application of sections 86 and 469, and (ii) without regard to sections 135 [sic], 137, and 911 or the deduction allowable under this section.
	The difference between the current rule and the rule in 2005 is that in and after the later date, amounts required to be distributed under the minimum distribution rules during the lifetime of the IRA owner will not be included in determining whether the taxpayer’s adjusted gross income exceeds the rollover Roth IRA AGI limits. Note that this change does not apply to the Roth IRA contribution (non-rollover) limits.
	This change is important, and it is too bad this rule is not in effect now. It means that a client interested in qualifying to make a Roth IRA rollover might need to make the rollover before the year he or she reaches 701/2, if the minimum required distributions due the following April 1 would cause the taxpayer’s AGI to exceed the $100,000 limit if made in the preceding year.
Must a Roth IRA Rollover Be a “Qualified Rollover Distribution”? (Yes.)	(6) Rollover contributions. (A) In general. No rollover contribution may be made to a Roth IRA unless it is a qualified rollover contribution.^{^[124]}
What is a “Qualified Rollover Contribution”? (A Rollover From An IRA, Disregarding the Once-a-Year Rule If the Rollover is From a Traditional IRA.)	In order to make a Roth IRA rollover, the rollover must be a “qualified rollover contribution.” (e) Qualified rollover contribution. For purposes of this section, the term “qualified rollover contribution” means a rollover contribution to a Roth IRA from another such account, or from an individual retirement plan, but only if such rollover contribution meets the requirements of section 408(d)(3). For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.^{^[125]}
	Disregarding 408(d)(3)(B) means disregarding the rule that only one rollover per year is permitted.
Does the One Rollover A Year Rule Apply to Recharacterized Roth IRA Contributions and Conversions. (No.)	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. ^{^[126]}
Are the Rollover Rules Basically Very Simple? (Hardly, Though Some People Do Not Realize This.)	Many people think that the rollover rules are very simple. In fact, they are very simple compared to the rules prior to the Small Business Job Protection Act. Now the rules can be described in one subsection that can be squeezed into only two pages. §408(d)(3) is set forth in a footnote below.^{^[127]} Whether or not you consider this to be simple depends a lot on your personality.
Can a Roth IRA Rollover be Made From a Qualified Plan or a 403(b) Tax Sheltered Annuity Plan? (No.)	IRC §408A, by its terms, applies only to rollovers from other Roth IRAs and from traditional IRAs. For some reason, qualified plans are not mentioned. 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.^{^[128]}
	A rollover from a qualified plan to a Roth IRA could easily be accomplished, however, by first rolling over (or making a direct transfer) to a traditional IRA, and from there to a Roth IRA.
Can a Rollover Be Effected By Simply “Converting” a Traditional IRA to a Roth IRA? (Yes.)	(C) Conversions. The conversion of an individual retirement plan (other than a Roth IRA) to a Roth IRA shall be treated for purposes of this paragraph as a distribution to which this paragraph applies.^{^[129]}
Are Roth Rollovers Restricted to One Rollover a Year? (No, Unless the Rollover is From Another Roth IRA.)	Under the “once-a-year rule,” no more than one traditional IRA rollover can be made during any twelve-month period.^{^[130]} However, this rule does not apply to Roth IRA rollovers. 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).^{^[131]}
Can a SEP-IRA be Designated as a Roth IRA? (No, But a Rollover Might Work.)	For reasons that escape me, §408A was amended to provide that neither an SRA (a Simple Retirement Account described in §408(p)) or an SEP (a Simplified Retirement Account described in §408(k)) can be converted into a Roth IRA: (f) Individual retirement plan. For purposes of this section — (1) a simplified employee pension or a simple retirement account may not be designated as a Roth IRA . . .^{^[132]}
	However, in most cases it would appear that a rollover from the SRA or SEP to a traditional IRA, followed by a rollover or conversion to a Roth IRA, would be possible.
	I must be reading the statute incorrectly, because the final regulations address this issue as follows:
	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.^{^[133]}
In Order to Make a Rollover to a Roth IRA, Must Income Tax Be Paid on the Amount Rolled Over? (Generally, Yes.)	The primary disadvantage in making a Roth IRA rollover is that income tax must first be paid on the amount rolled over.^{^[134]} Unlike a regular rollover, no deduction is allowed for a rollover to a Roth IRA.^{^[135]} The statute is explicit on the question of income inclusion:
	(3) Rollovers from an IRA other than a Roth IRA. (A) In general. Notwithstanding section 408(d)(3), in the case of any distribution to which this paragraph applies — (i) there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution,^{^[136]} . . . .
Are There Any Special Income Tax Breaks For Roth IRA Rollovers Made Before January 1, 1999? (Yes.)	(iii) unless the taxpayer elects not to have this clause apply for any taxable year, any amount required to be included in gross income for such taxable year by reason of this paragraph [(d)(3)] for any distribution before January 1, 1999 [i.e., not April 15], shall be so included ratably over the 4-taxable year period beginning with such taxable year.^{^[137]}
	Any election under clause (iii) for any distributions during a taxable year may not be changed after the due date for such taxable year.^{^[138]} Roth IRAs established before 1999 means Roth IRAs established in 1998, because prior to 1998 there was no such thing as a Roth IRA. This is a one-shot tax break only applicable in 1999.
	In case you were wondering, a 1997 distribution from a traditional IRA cannot be converted to a Roth IRA in 1998?^{^[139]}
	Note that the election is all or nothing: a partial election procedure is not described in the statute.
	Here is how the final regulations address this special case, in the context of a conversion: 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.^{^[140]}
Is an Individual Who Makes a 1998 Conversion Required to Spread the Income Over 4 Years? (No.)	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.^{^[141]}
What Happens If a Taxpayer Who Elects the 4-Year Spread Has a Change in Filing Status After the Election (marries, files separately, etc.)	The final regulations address an issue not covered under the proposed regualtions: 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).^{^[142]}
Why Not Make 4 Rollovers, In Separate Tax Years, In Order to Avoid the Restrictions Applicable Under the Special Rule?	It is tempting to consider simply making 4 rollovers, one in each of 4 separate years, in an effort to achieve the same result as under IRC §408A(d)(3)(A)(iii). However, the income in the traditional IRA during the intervening years will not be insignificant, and in order to roll it over too, income tax would have to be paid. If the rollover was made in 1998, the income might never be taxed.
What Happens if a Roth IRA Rollover Made In 1998 is Withdrawn Early?	As indicated above, if a taxpayer does not elect out of §408A(d)(3)(A)(iii), the taxpayer will recognize any income attributable to a rollover made in 1998 from a traditional IRA to a Roth IRA ratably over four years, 1998-2001. In order to prevent taxpayers from using this provision simply as a loophole to spread the income, followed by an immediate withdrawal from the Roth IRA, the IRS Restructuring and Reform Act of 1998 amended §408A by adding elaborate provisions designed to accelerate income if withdrawals are made the first three years of the 4-year averaging period (i.e., before 2001).
	(E) Special rules for contributions to which 4-year averaging applies. In the case of a qualified rollover contribution to a Roth IRA of a distribution to which subparagraph (A)(iii) applied, the following rules shall apply: (i) Acceleration of inclusion.
	(I) In general. The amount required to be included in gross income for each of the first 3 taxable years in the 4-year period under subparagraph (A)(iii) shall be increased by the aggregate distributions from Roth IRAs for such taxable year which are allocable under paragraph (4) [i.e., 408A(d)(4), Aggregation and Ordering Rules] to the portion of such qualified rollover contribution required to be included in gross income under subparagraph (A)(i)[i.e., any distribution “which would be includible were it not part of a qualified rollover contribution”^{^[143]}].
	(II) Limitation on aggregate amount included. The amount required to be included in gross income for any taxable year under subparagraph (A)(iii) shall not exceed the aggregate amount required to be included in gross income under subparagraph (A)(iii) [i.e., because of a rollover to a Roth IRA] for all taxable years in the 4-year period (without regard to subclause (I)) reduced by amounts included [(under (A)(3)?) because of a rollover to a Roth IRA] for all preceding taxable years.^{^[144]}
	Under the statute, income tax would be owed on any distributions made in 1998, 1999 or 2000 attributable (under the ordering rules) to amounts rolled over to a Roth IRA in 1998, until the total that was originally deferred has been recognized. For example, if $100,000 were rolled over in 1998, and no withdrawals and no election to accelerate were made, $25,000 would be recognized in each of 1998, 1999, 2000 and 2001. If, however, $15,000 were withdrawn in 1999, we presume that $40,000 would be recognized in that year ($25,000 + $15,000).
Does the Original 4-Year Payment Schedule Change to Reflect a Prior Acceleration in the Tax Paid? (My Guess is No.)	At this point in the example (1999), $65,000 in tax has been paid ($25,000+$40,000), with $35,000 and two years left to go. If $50,000 were withdrawn in 2000, $35,000 is all that could be taxed under this portion of the statute (unless contributions were exhausted under the ordering rules) because only $35,000 remains. However, what if nothing were withdrawn in 2000?
	(a) Does the taxpayer still recognize $25,000 as if still under the original schedule? Or (b), is the $35,000 that is left to be paid ratably over two years ($17,500 per remaining year)? Or, (c) since the taxpayer was to have paid a total of $75,000 over the first three years, and since the taxpayer has already paid $65,000 due to the withdrawal, maybe all that is owed in year three is $10,000. In this case a $25,000 payment in year four would round out the deficit.
	My money is on (a): that the taxpayer must pay $25,000 each year, plus whatever has been withdrawn that year, not to exceed a total of $100,000 (except to the extent that the withdrawal is not a qualifying distribution and all contributions have been recaptured).
	Contrary to the usual Roth distribution rule, basis is recovered last if the 4-year averaging recapture provisions apply.
What Happens if the Taxpayer Dies Before the 4-Years is Up? (Yes.)	Acceleration on account of death will not apply if the taxpayer’s spouse inherits the Roth IRA and makes an appropriate election. (ii) Death of distributee. (I) In general. If the individual required to include amounts in gross income under such subparagraph dies before all of such amounts are included, all remaining amounts shall be included in gross income for the taxable year, which includes the date of death.
Is There An Exception to the Income Inclusion Rule in the Case of Death of the Taxpayer Within 5-Years if the Taxpayer’s Spouse is the Beneficiary of the Roth IRA? (Yes.)	(II) Special rule for surviving spouse. If the spouse of the individual described in subclause (I) acquires the individual's entire interest in *any* Roth IRA to which such qualified rollover contribution is properly allocable, the spouse may elect to treat the remaining amounts described in subclause (I) as includible in the spouse's gross income in the taxable years of the spouse ending with or within the taxable years of such individual in which such amounts would otherwise have been includible. Any such election may not be made or changed after the due date for the spouse's taxable year, which includes the date of death.^{^[145]} [Emphasis added.]
In Order for the Exception Just Described to Apply, Must the Spouse Be the Sole Beneficiary of All of the Decedents Roth IRAs? (The Answer is Not Clear.)	Consider the word “any” that is italicized and bold faced in the reproduction of IRC §408A(d)(3)(E)(ii)(II) quoted immediately above. This is a classic ambiguity. Does the statute mean that if the spouse acquires the entire interest in any one of a decedent’s several Roth IRAs, that special rule applies to that IRA; or does it mean that the spouse must acquire the entire interest in all of the decedent’s Roth IRAs. I would contend that the former reading is far more consistent with the grammar of the sentence. Can you guess how the IRS tortures that sentence? Yes, I thought you could. 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 [rather than in “any” as the statute plainly reads] 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