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Part 21. Customer Account Services

Chapter 6. Individual Tax Returns

Section 5. Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA)

21.6.5  Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA)

21.6.5.1  (10-30-2006)
Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) Overview

  1. This section covers Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA). It includes:

    • Regular IRA

    • Spousal IRA

    • Simplified Employee Pensions (SEP)

    • Savings Incentive Match Plans for Employees (SIMPLE)

    • IRA Rollover

    • Roth IRA

    • Coverdell Education Savings Accounts (ESA)

    • Archer MSA and Long Term Care Insurance Contracts

    • Health Savings Accounts (HSA)

    • IRAF Codes

    • Related Information

  2. During taxpayer contact when:

    • It appears that there may be a hardship situation,

    • The taxpayer asks to be referred to the Taxpayer Advocate Service (TAS), or

    • The contact meets TAS criteria, and you can’t resolve the taxpayer’s issue within 24 hours:
      Prepare and forward Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance order), to the local TAS. See IRM 21.1.3.18, Taxpayer Advocate Services (TAS) Guidelines, for more information.

  3. The Pension Protection Act of 2006, (Pub L No. 109-280) enacted on August 17, 2006, allows penalty free IRA distributions for qualified military reservists. See IRM 21.6.5.4.4, Premature Distributions, for additional information.

  4. HR 1499, The Heroes Earned Retirement Opportunities Act (Pub. L. No. 109-227), enacted on May 29, 2006 allows military personnel to include their tax exempt combat pay in income for calculating their IRA contribution. Military personnel have until May 29, 2009 to make IRA contributions for 2004 and 2005. This law is effective for tax years beginning after 2003. See Publication 3, Armed Forces' Tax Guide, for additional information.

  5. The Katrina Tax Relief Act of 2005 (KETRA) enacted on September 23, 2005 and the Gulf Opportunity (GO) Zone Act of 2005 enacted on December 21, 2005, provides tax-favored withdrawals, recontributions, and loans for taxpayers with funds in certain retirement plans. These legislative acts were enacted for taxpayers impacted by Hurricanes Katrina, Rita, and Wilma. The legislative provisions include:

    • Up to $100,000 of qualified income distributions are exempt from the 10% penalty for certain premature retirement plan distributions to residents of disaster areas who have sustained an economic loss

    • Allowing the inclusion of the distribution averaged into the taxpayer's income over a three-year period

    • Allowing the tax free recontribution of retirement plan distributions withdrawn for home purchases or construction for a home in the disaster area that was not purchased or constructed as a result of the disaster

    • Increasing the amount of loans from tax-exempt retirement plans available to individuals residing in disaster areas

    • A one year suspension for payments due on qualifying plan loans

  6. Publication 4492, Information for Taxpayers affected by Hurricanes Katrina, Rita, and Wilma, was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005. See this publication for details and guidance on the legislative changes related to retirement plans.

  7. Form 8915, Qualified Hurricane Katrina, Rita, and Wilma Retirement Plan Distributions and Repayments, was developed for use by eligible individuals impacted by Hurricanes Katrina, Wilma, and Rita to report distributions received from their qualified retirement plans for expenses related to the disasters.

  8. See Publication 575, Pension and Annuity Income, and Publication 590, Individual Retirement Arrangements (IRAs), (Including SEP-IRAs and SIMPLE IRAs), for additional information.

21.6.5.2  (10-01-2007)
What Is an Individual Retirement Arrangement (IRA)?

  1. An Individual Retirement Arrangement (IRA) is a personal savings plan that gives tax advantages for setting aside money for retirement.

    1. Contributions to the plan may be fully or partially deductible depending on the type of IRA. Roth IRAs are explained in IRM 21.6.5.4.7, Roth Individual Retirement Arrangement (IRA).

    2. The allowable IRA deduction may be less than the contributions, if the taxpayer or spouse is covered by an employer retirement plan any time during the year.

    3. The IRA deduction may be reduced or eliminated depending on filing status and amount of income.

  2. Generally, IRA amounts (including earnings and gains) are not taxed until distributed. In some cases, amounts are not taxed at all if distributed according to the rules.

  3. For 2007, if covered by a retirement plan at work, the taxpayer’s deduction for contributions to a traditional IRA is reduced (phased out) if the modified adjusted gross income (AGI) is:

    1. More than $83,000 but less than $103,000 for married filing joint or qualifying widow(er) taxpayers.

    2. More than $52,000 but less than $62,000 for single or head of household taxpayers.

    3. Less than $10,000 for married filing separate taxpayers.

  4. For more information on deductible amounts, see Publication 590, Individual Retirement Arrangements (IRAs).

21.6.5.3  (10-01-2006)
Individual Retirement Arrangement (IRA) Research

  1. Individual Retirement Arrangement (IRA) information is found on the Individual Retirement Account File (IRAF), MFT 29. See IRM 21.6.5.4.11, Individual Retirement Account File (IRAF) Overview, for researching IRAF accounts on MFT 29.

  2. Additional information is available in:

    • Publication 590, Individual Retirement Arrangements (IRAs). See this publication for a detailed explanation of IRAs.

    • Publication 575, Pension and Annuity Income. See this publication for more information about rollovers.

    • Publication 560, Retirement Plans for Small Business. See this publication for more information about Simplified Employee Pensions (SEP).

    • Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. See this publication for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. It was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

    • Publication 3, Armed Forces Tax Guide. See this publication for information on HR 1499, Heroes Earned Retirement Opportunities Act.

21.6.5.3.1  (10-01-2006)
Regular or Traditional Individual Retirement Arrangement (IRA)

  1. An individual establishes a regular Individual Retirement Arrangement (IRA). The maximum deductible amount is limited to the least of the following:

    • The amount of compensation for the tax year.

    • $2,000.00, for tax years prior to 2002. See paragraph (2) below for maximum deductible contributions for tax year (TY) 2002 and subsequent tax years. or

    • The amount of the actual IRA contribution.

  2. Beginning with TY 2002, the maximum deductible contribution limit increases as shown below.

    Year Regular Year Additional If 50 or Over
    2002–2004 $3,000 2002–2005 $500
    2005–2007 $4,000 2006–thereafter $1,000
    2008–thereafter $5,000    

    Note:

    The $5,000 limit for regular IRA contributions will be increased based on cost of living for tax years beginning after 2008.

21.6.5.3.2  (10-01-2006)
Spousal Individual Retirement Arrangement (IRA)

  1. A spousal Individual Retirement Arrangement (IRA) is a separate IRA established for a spouse, who may or may not receive compensation.

  2. There is no provision for a joint IRA.

  3. For 2007, in the case of a married filing joint return, up to $4,000 (up to $5,000 if age 50 or older) can be contributed to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation. For more information, see Spousal IRA Limits in Publication 590, Individual Retirement Arrangements (IRAs).

21.6.5.3.3  (10-01-2005)
Employer Plans Deemed to be Individual Retirement Arrangements (IRAs)

  1. A qualified employer retirement plan will be treated as an Individual Retirement Arrangements (IRA) (traditional or Roth) and not as a qualified plan if:

    1. The employer elects to allow employees to make voluntary employee contributions.

    2. Contributions are made to a separate account or annuity established under the plan and meet the requirements of an IRA.

  2. These amendments apply to plan years beginning after December 31, 2002.

  3. See Publication 590, Individual Retirement Arrangements (IRA’s), for more information on Deemed IRAs.

21.6.5.3.4  (10-01-2007)
Simplified Employee Pension (SEP)

  1. A SEP allows an employer to make contributions toward his/her own (if a self-employed individual) and employees’ retirement.

    1. For TY 2006 plan years, the annual limit on the amount of employer contributions to a SEP was the lesser of 25% of an eligible employee’s compensation up to $44,000, ($45,000 for TY 2007).

    2. Contributions are generally tax deductible by the contributor and tax deferred (including earnings) for the plan participant until withdrawn. Maximum contributions are generally greater than IRAs.

    3. Special rules apply when computing the maximum deduction for a self-employed person.

    4. See Publication 560, Retirement Plans for Small Business, for more information about SEP’s.

  2. Taxpayers may make regular IRA contributions to a SEP-IRA up to the established maximum for traditional IRAs.

  3. A SEP–IRA may not be designated as a Roth IRA.

21.6.5.3.5  (10-01-2007)
Savings Incentive Match Plan for Employees (SIMPLE)

  1. A Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan is a simplified retirement plan for small businesses. Generally, employers must have 100 or fewer employees to maintain a SIMPLE IRA Plan. See information in Publication 560, Retirement Plans for Small Business, on the requirements employers must satisfy to set up a SIMPLE plan.

  2. The employer must make matching contributions or nonelective contributions to employee’s SIMPLE IRA.

  3. Special rules apply to SIMPLE IRAs. Refer to Publication 560, Retirement Plans for Small Business, for special rules and Publication 590, Individual Retirement Arrangements (IRA’s), for additional information.

  4. Taxpayers may not make regular IRA contributions to SIMPLE IRAs.

  5. A SIMPLE IRA cannot be designated as a Roth IRA.

  6. Contributions to a SIMPLE IRA are not included in the regular IRA contribution limit.

  7. Under a SIMPLE IRA Plan, an eligible employee may elect to have his/her employer make salary reduction contributions of up to $6,000 annually to his/her SIMPLE IRA. For tax years beginning after December 31, 2001, see the table below for the applicable dollar amount.

    Year Applicable Dollar Amount Additional if 50 or Over
    2002 $7,000 $500
    2003 $8,000 $1,000
    2004 $9,000 $1,500
    2005 $10,000 $2,000
    2006 $10,000 $2,500
    2007 $10,500 $2,500

21.6.5.3.6  (10-01-2007)
Individual Retirement Arrangement (IRA) Rollover

  1. A rollover is a tax-free (see discussion of Roth IRAs later) distribution of cash or other assets from one retirement plan that is contributed (rolled over) to another retirement plan.

  2. A rollover cannot be deducted on the tax return, but the distribution must be reported (even if it is not includible in gross income).

  3. Required minimum distributions and distributions from inherited IRAs (from someone other than taxpayer’s spouse) may not be rolled over.

    Note:

    The Pension Protection Act of 2006, enacted on August 17, 2006, (Pub L No. 109-280), provides that, beginning January 1, 2007, non-spouses may directly transfer amounts inherited from a qualified employer-sponsored retirement plan into an individual IRA account. The account must be set up as an inherited retirement account which allows the beneficiary to spread out the distributions over their life expectancy.

  4. A taxpayer may roll over the taxable part of any eligible rollover distribution from a qualified employer retirement plan.

  5. Beginning in 2002, after-tax contributions may be rolled into an IRA. See Publication 590, Individual Retirement Arrangements (IRA’s), for information on when after-tax contributions may be rolled over to a qualified employer plan.

  6. Beginning with TY 2002, the 60-day period for IRA rollovers can be waived in certain situations such as casualty, disaster or other events beyond the individual’s reasonable control.

  7. See Publication 590, Individual Retirement Arrangements (IRA’s), for more information on eligible rollover distributions.

  8. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. This publication was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

21.6.5.3.6.1  (10-01-2006)
Hardship 401(k) or 403(b) Distributions

  1. Certain hardship distributions made after December 31, 1999 are not eligible rollover distributions and may not be rolled over to any IRA. Hardship distributions of an employee’s elective contributions to a 401(k) plan may not be rolled over. Likewise, hardship distributions of contributions made to a 403(b) plan under a salary reduction agreement may not be rolled over.

  2. See Publication 571, Tax Sheltered Annuity Plans (403(b) Plans) for Employees of Public Schools and Certain Tax-Exempt Organizations, for more information about 403(b) plans.

  3. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. This publication was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

21.6.5.4  (10-01-2006)
Individual Retirement Arrangement (IRA) Procedures

  1. This section provides information on:

    • Individual Retirement Arrangements (IRAs)

    • Coverdell Education Savings Accounts (ESAs)

    • Archer Medical Savings Accounts (MSAs) and Long-Term Care Insurance Contracts

    • Health Savings Accounts (HSAs)

    • Individual Retirement Account File (IRAF) (MFT 29)

21.6.5.4.1  (10-01-2007)
Nondeductible IRA Contributions/Form 8606

  1. Nondeductible contributions are those contributions to a traditional IRA which are within the contribution limit but do not qualify as deductible.

  2. Earnings on nondeductible contributions are not taxed until distributed.

  3. Nondeductible contributions are not taxed when withdrawn from the IRA.

  4. Form 8606, Non Deductible IRAs, is used to report:

    • Nondeductible IRA contributions

    • Distributions from traditional, SEP, or SIMPLE IRAs, if nondeductible contributions to traditional IRAs were made in 2005 or an earlier year

    • Distributions from Roth IRAs

    • Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.

  5. Taxpayers meeting requirements to file Form 8606, must file the form even if they do not file a tax return for the tax year. See Publication 590, Individual Retirement Arrangements (IRA’s), for additional details.

  6. Process loose Forms 8606, as follows:

    If Then
    A paper return was filed Associate the form with the return.

    Exception:

    If the applicable tax period has dropped to retention register, forward the loose Form 8606 to the Alpha file.

    Note:

    Follow procedures in IRM 21.5.1.5.3CIS Source Documentation if Form 8606 was scanned into CIS.

    Electronic return was filed

    1. File the form using TC 290 for 00, blocking series 05 (non-refile DLN).

    2. Do not use an "attachment" or an "association" form for routing to Files.

    No return was filed Forward to Alpha File

    Note:

    Follow procedures in IRM 21.5.1.5.3CIS Source Documentation if Form 8606 was scanned into CIS.

    There is indication a return will be filed Input TC 930 (current year only). Refer to IRM 21.5.1.4.4.1, TC 930 Push Codes.
    Taxpayer submits $50 penalty payment Refund payment to taxpayer with a letter explaining the penalty is currently not assessed.

21.6.5.4.2  (10-01-2006)
IRA Taxes

  1. If the taxpayer does not conform to the rules governing IRAs, additional taxes are assessed. These taxes are assessed on the Individual Master File (IMF) and/or the Individual Retirement Account File (IRAF).

  2. Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is used to report additional taxes on:

    • Individual Retirement Arrangements (IRAs)

    • Other qualified retirement plans

    • Coverdell Education Savings Accounts (ESAs)

    • Qualified Tuition Programs (QTPs)

    • Archer Medical Savings Accounts (MSAs)

    • Health Savings Accounts (HSAs)

21.6.5.4.3  (10-01-2006)
Excess Contributions Tax

  1. An excess contribution is an amount contributed to an Individual Retirement Arrangement (IRA) in excess of the amount of compensation for the tax year, or $2,000 ($4,000 if taxpayer contributed to a spousal IRA), whichever is less, for tax years prior to TY 2002. See IRM 21.6.5.4.7.1, Contribution Limits, and See IRM 21.6.5.3.1, Regular or Traditional Individual Retirement Arrangement (IRA), for information about contribution limits for years after 2002.

  2. The 6% excise tax is assessed on the Individual Retirement Account File (IRAF, MFT 29), each year on any excess amount in an IRA account at the end of the year.

  3. The 6% excise tax is not assessed if excess contributions, plus earnings, are withdrawn before the return due date, including extensions:

    1. The 6% tax is assessed for the year an excess contribution was made and each year after, until the excess is withdrawn, or later exhausted as an allowable current year contribution.

    2. The person entitled to the deduction for either a regular or spousal IRA must pay the tax on excess contributions.

    3. The tax cannot be more than 6% of the value of the IRA on the last day of the year.

21.6.5.4.4  (10-30-2006)
Premature Distributions

  1. Premature distributions are amounts withdrawn, or considered withdrawn, from an Individual Retirement Arrangement (IRA) before the owner reaches age 591/2.

    Note:

    The age attainment rule does not apply to age 591/2 when determining an early distribution.

    • Premature distributions are included in gross income and may be subject to an additional 10% tax.

    • The 10% tax is assessed on IMF (MFT 30), not IRAF (MFT 29).

  2. Additional tax does not apply to premature distributions which are:

    1. Received after permanent total disability of the owner.

    2. Received after the death of the owner.

    3. Rolled over to another retirement plan or IRA (including conversions to Roth IRAs).

    4. Part of a series of substantially equal payments over the owner’s life (an annuity).

      Note:

      Rev. Rul. 2002-62, dated October 3, 2002, allows taxpayers who meet certain criteria to make a one time switch, without penalty, to a method of determining the amount of their payment based on the value of their account as it changes from year to year. For complete information, see Rev. Rul. 2002-62.

    5. A return of nondeductible contributions.

    6. Used to pay medical expenses in excess of 7.5% of AGI.

    7. Used by certain unemployed, or self-employed taxpayers to pay health insurance premiums.

    8. Used for qualified higher education expenses. This exception does not apply to distributions prior to 1998.

    9. Distributions (up to $10,000) used to buy or rebuild a first home. This exception does not apply to distributions prior to 1998.

    Note:

    See additional exceptions in the instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

  3. The Pension Protection Act of 2006, (Pub L No. 109-280) enacted on August 17, 2006, allows penalty free IRA distributions for qualified military reservists. Under the provision:

    • The 10% early distribution tax that normally applies to most retirement distributions received before age 59 1/2 is eliminated for eligible military reservists.

    • Eligible military reservists activated after September 11, 2001 and before December 31, 2007, and called to active duty for at least 180 days qualify for this relief.

    • Active duty reservists can choose to re-contribute part or all of these distributions to an IRA. If the reservists active duty ended before August 17, 2006, they have until August 17, 2008 to make these special contributions. No deduction is available for these contributions.

    • If the 10% tax was already paid on a distribution, eligible reservists may file Form 1040X Amended U.S. Individual Income Tax Return, to claim a refund. The words "Active Duty" should be written on the top of the form. Part II, Explanation of Changes, should include the date they were called to active duty, the amount of the retirement distribution and the amount of early distribution tax paid.

  4. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. This publication was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

21.6.5.4.5  (10-30-2006)
Excess Accumulations

  1. Upon reaching the age of 701/2, most IRA owners are required to start receiving at least minimum distributions from their IRAs (see Roth IRAs later in this section). Excess accumulations result when actual distributions from an IRA during the year are less than the required minimum distribution for the year.

    1. A taxpayer must receive the initial distribution by April 1 of the year following the year in which he/she reaches age 701/2.

    2. Subsequent required distributions (including the one for the year following the year owner reaches 701/2) must be made by December 31 of each year.

    3. The taxpayer may be subject to a 50% excise tax on the difference between the required distribution and the actual distribution.

      Note:

      The age attainment rule does not apply to age 701/2 when determining minimum required distributions.

  2. The Pension Protection Act of 2006, enacted on August 17, 2006 (Pub L No. 109-280), provides an exclusion from gross income for taxpayers at least 701/2 years of age who contribute funds from their IRA to a charitable organization. The provision provides:

    • The distribution is made from a traditional IRA or ROTH IRA and is donated directly to a qualified charity.

    • The distribution counts against the required minimum distribution for the year.

    • The maximum tax free distribution amount is $100,000.00 per taxpayer per taxable year.

    • The provision is limited to tax years 2006 and 2007.

    • The contribution cannot be taken as a charitable deduction on Schedule A, Itemized Deductions.

  3. A 50% excise tax is assessed on excess accumulations and is assessed on the Individual Retirement Arrangement File (IRAF), MFT 29.

  4. The excise tax is waived if the taxpayer establishes that the excess accumulation was due to a reasonable error and steps are being taken to remedy the situation. Refer to Publication 590, Individual Retirement Arrangements (IRA’s), for additional information. An IRAF (MFT 29) account must be established before a waiver can be granted. See IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144, for procedures to establish the IRAF (MFT 29) account.

    Note:

    In 2006, the instruction to include payment for the excise tax on excess accumulations when submitting a waiver, was deleted from the Publication 590.

21.6.5.4.6  (10-01-2002)
Excess Distributions

  1. Before January 1, 1997 taxpayers were subject to a 15% excise tax when the threshold amount was exceeded. Refer to Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, for exceptions and additional information.

21.6.5.4.7  (10-01-2002)
Roth Individual Retirement Arrangement (IRA)

  1. With a Roth IRA:

    • Contributions are nondeductible.

    • Distributions may be tax free depending on how and when the taxpayer withdraws money from the account.

    • Account must be designated as a Roth IRA when it is established.

  2. Trustees of Roth or ordinary IRAs report information regarding distributions and contributions on Form 1099R, Distribution From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and Form 5498, IRA Contribution Information.

21.6.5.4.7.1  (01-04-2006)
Contribution Limits

  1. Contribution limits on regular IRAs and Roth IRAs are coordinated. The maximum total yearly contribution that can be made by an individual to all IRAs (deductible, nondeductible, and Roth) is the lesser of:

    • $3,000 for 2002–2004

    • Additional $500 if age 50 or older for 2002-2005

    • $4,000 for 2005-2007

    • Additional $1,000 if age 50 or older for 2006 and thereafter

    • $5,000 for 2008 and thereafter

    • Or, the individual’s taxable compensation for the year (This does not include rollovers.)


    IRA contributions may be affected by modified adjusted gross income (AGI) limits. See Publication 590, Individual Retirement Arrangements (IRA’s), for additional details.

  2. Taxpayers are allowed to contribute to a Roth IRA after age 701/2.

  3. Excess contributions are subject to 6% tax under IRC Section 4973.

21.6.5.4.7.2  (10-01-2005)
Excess Contributions

  1. Treat an excess contribution which is distributed from a Roth IRA before the return due date for the year the contribution was made as an amount not contributed.

  2. An excess contribution distributed after the return due date for the year the contribution was made is treated as a regular distribution from the Roth IRA.

21.6.5.4.7.3  (10-01-2006)
Phase Out (Income Limit)

  1. The maximum yearly contribution that can be made to a Roth IRA is phased out based on modified adjusted gross income (AGI) and filing status as follows:

    • Single, Head of Household or Married Filing Separate (and did not live with spouse at any time during year) - less than $110,000

    • Married Filing Joint or Qualifying Widow(er) - less than $160,000

    • Married Filing Separately (did live with spouse at any time during year) - less than $10,000


    See Publication 590, Individual Retirement Arrangements (IRA’s), for additional information.

21.6.5.4.7.4  (10-01-2002)
Five-Year Holding Period

  1. The five-year holding period is satisfied if Roth distributions (including distributions allocable to conversion contributions) are not made before the end of the five-tax year period beginning with the first tax year that the taxpayer made a contribution to a Roth IRA.

  2. As with other IRAs a regular contribution can be made by the due date for filing a tax return for the year, without regard to extensions. In this case, the five tax year holding period begins with the tax year that a contribution is first made to a Roth IRA. A subsequent conversion does not start a new five-year period.

  3. Distribution of a Roth conversion amount within five years of the conversion may cause the 10% additional tax on early distributions to be imposed; even if the amount distributed is not includible in gross income. See Publication 590, Individual Retirement Arrangements (IRA’s), for more information.

21.6.5.4.7.5  (10-01-2004)
Qualified Distributions

  1. Qualified distributions from a Roth IRA are not includible in gross income and are not subject to 10% tax on early withdrawals. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified distributions.

21.6.5.4.7.6  (10-01-2002)
Nonqualified Distributions

  1. Nonqualified distributions may be includible in gross income. Contributions are withdrawn tax free. Earnings are included in gross income and may be subject to 10% tax on early withdrawals. See Publication 590, Individual Retirement Arrangements (IRAs), for details on nonqualified distributions from an IRA.

  2. Treat nonqualified distributions from a Roth IRA as:

    1. Made from regular contributions first and then conversion contributions on a first in first out (FIFO) basis.

    2. All of an individual’s Roth IRAs are treated as a single Roth IRA.

    3. No part of a distribution is treated as earnings until the total of all distributions from all the taxpayer’s Roth IRAs exceed the amount of contributions to all the taxpayer’s Roth IRAs.

21.6.5.4.7.7  (10-01-2002)
Acceleration of Income Inclusion

  1. Amounts converted into a Roth IRA in 1998 and subject to four-year spread income inclusion are accelerated for amounts withdrawn before 2001.

  2. For amounts in (1) above, the taxpayer must include in income the amount otherwise includible under the four-year rule, plus the lesser of:

    1. The amount of the withdrawal treated as made from the 1998 conversion contribution, or

    2. The remaining taxable amount of the conversion not included in income under the four-year rule in current or prior years.

  3. In later years, if there are no further withdrawals, the amount includible in income is the lesser of:

    1. The amount otherwise required under the four-year rule (determined without regard to withdrawal), or

    2. The remaining taxable amount of conversion.

  4. If an account contains both conversion and contributory amounts, or conversion amounts from different years, "Ordering Rules" determine which amounts are withdrawn for tax purposes.

    1. Regular Roth IRA contributions are treated as withdrawn first.

    2. Converted amounts (starting with amounts first converted). Withdrawals of converted amounts will be treated as coming first from converted amounts that were includible in income. Earnings will continue to be treated as withdrawn after contributions.

21.6.5.4.7.8  (10-01-2006)
Minimum Distribution

  1. The minimum distribution rules applying to other IRAs generally do not apply to Roth IRAs while the owner is alive.

  2. However, after the death of a Roth IRA owner, certain minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs. See Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

21.6.5.4.7.9  (10-01-2007)
Rollovers and Conversions into Roth IRAs

  1. The following may be rolled over into a Roth IRA.

    1. Distributions from a Roth IRA may be rolled over tax free to another Roth IRA.

    2. Amounts in a traditional IRA can be converted into a Roth IRA if the taxpayer’s modified AGI (for ROTH IRA purposes) for the tax year is not more than $100,000 and the taxpayer, does not file a married, filing separate tax return.

    3. The amounts converted must be included in gross income as if they had been distributed from the traditional IRA except the 10% tax does not apply.

    Note:

    For distributions made in 2008 or later, eligible rollover distributions from a qualified plan may be rolled over directly to a Roth IRAs, with taxable portion of the rollover amount taxed at the time of the rollover. IRC §408A(e), as amended by section 824 of the PPA 2006. The rollover is subject to the same conditions as a conversion of a traditional IRA to a Roth IRA.

    Note:

    The $100,000 AGI limit does not include amounts added to income from the conversion of an traditional IRA into a Roth IRA.

  2. For tax years beginning after December 31, 2004, required minimum distributions will not be included in AGI when determining qualification for converting traditional IRAs into Roth IRAs.

  3. To correct an erroneous conversion of a regular IRA to a Roth IRA the taxpayer may recharacterize the conversion contribution as follows:

    If And Then
    Taxpayer converts a regular IRA to a Roth IRA Later determines he/she was not eligible (due to AGI or other limits not met) or wishes to change it back before due date of the return, including extensions The contributions and earnings may be transferred in a trustee-to-trustee transfer to a traditional IRA.
    Such a trustee-to-trustee transfer is made 1. Contributions and net income from contributions are included.
    2. No deduction was allowed in respect to the contribution to transfer to the IRA.     		Any such contributions are treated as if they were made to the transferee IRA (the IRA transferred to).

    Note:

    (1) These transfers may be between IRA trustees and IRA custodians or IRAs with same trustee or custodian.
    (2) Regular IRA and Roth IRA contributions may also be recharacterized.

  4. The general IRA rollover/conversion rules must be met.

  5. Tax Increase Prevention and Reconciliation Act of 2005 changes IRC § 408(A). Beginning in tax year 2010, conversions are no longer subject to the modified adjusted gross income requirement of $100,000. Taxpayers have two tax years to report the full amount of the conversion.

21.6.5.4.7.10  (10-01-2004)
Roth IRA Recharacterization

  1. Treas. Reg. Section 301.9100–2(b) grants taxpayers 6 months (from the unextended due date of the return) to recharacterize Roth IRA conversions without penalty.

    1. The taxpayer had to timely file the tax return.

    2. The taxpayer had to recharacterize any Roth conversion for which the taxpayer did not meet the requirements during the 6 month period.

    3. This 6 month extension was not available to taxpayers already on extension. These taxpayers had to recharacterize by the extended due date of the return.

  2. Taxpayers who filed Married Filing Separately (MFS), or had income above $100,000 and are not eligible to convert a regular IRA to a Roth IRA are subject to penalties if they do not recharacterize the conversion.

  3. The taxpayer in some cases needed to:

    1. File an amended return and change the filing status if they were eligible to do so, to avoid possible contact from Underreporter or Examination.

    2. Reconvert/recharacterize the Roth IRAs back to regular IRAs (file Form 1040X, U.S. Amended Individual Tax Return, with Form 8606, Non-Deductible IRAs, and an explanation).

  4. Pursuant to Treas. Reg. Section 301.9100–2(d), the statement: "Filed Pursuant to Section 301.9100-2(d)" was required to be written on the Form 1040X.

  5. Financial institutions were informed that taxpayers were allowed an additional six months to recharacterize.

  6. For more information on how erroneous conversions to Roth IRAs are corrected, see the instructions to Form 8606.

  7. Follow normal procedures for abatement of penalty if applicable.

21.6.5.4.7.11  (10-01-2005)
Qualified Roth Contribution Program

  1. Pub. L No. 107–16 provides that an employee may elect to make designated Roth contributions in lieu of elective deferrals under the applicable retirement plan. The program must:

    1. Maintain separate record keeping for each account.

    2. Establish separate accounts, and

    3. Elective deferrals must meet the requirements to be a designated Roth contribution.

  2. Provisions concerning deferrals as Roth contributions apply to taxable years beginning after 2005.

21.6.5.4.8  (10-01-2004)
Coverdell Education Savings Accounts (ESAs)

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