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.

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.

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.

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:

IRA contributions may be affected by modified adjusted gross income (AGI) limits. See Publication 590, Individual Retirement Arrangements (IRAs), for additional details. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for information pertaining to foreign exclusions or deductions.

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

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

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.

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.

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:

See Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

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.

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 contribution does not start a new five-year period.

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 (IRAs), for more information.

Qualified distributions from a Roth IRA are not includible in gross income and are not subject to 10% tax on early withdrawals.

A qualified distribution is any payment or distribution from a Roth IRA that meets the following requirements:
It has been at least 5 years from the beginning of the year in which the taxpayer first set up and contributed to the Roth IRA and the distribution is:

See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified distributions.

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.

Treat nonqualified distributions from a Roth IRA as:

Amounts converted into a Roth IRA in 1998 and subject to four-year spread income inclusion are accelerated for amounts withdrawn before 2001.

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

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

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.

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

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.

The following may be rolled over into a Roth IRA.

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.

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

The general IRA rollover/conversion rules must be met.

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.

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

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.

The taxpayer in some cases needed to:

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

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

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

Follow normal procedures for abatement of penalty if applicable.

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:

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

Pub. L. No. 107-16 provides that certain colleges and universities may sponsor prepaid tuition programs under Section 529. Both prepaid and savings programs may be sponsored by states.

Pub. L. No. 107-16 provides that a prepaid program sponsored by a college or university must hold amounts in trust, and must have received a ruling or determination from the Service that the program meets the applicable requirements of Section 529.

Beginning in 2002, if a taxpayer contributes to a Coverdell Education Savings Account, the taxpayer may also contribute to a Section 529 program. See Publication 970, Tax Benefits for Education, for more information about Section 529 programs.

See Pub. L. No. 107–16 that further defines qualified higher educational expenses which can be paid with funds from a Coverdell Education Savings Account or a Section 529 program.

The earnings portion of a Qualified Tuition Program (QTP) distribution that exceeds qualified higher education expenses is included in gross income and is subject to a 10% additional tax unless an exception applies. This additional tax is reported on Part II, Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.

Beginning in 2004, a distribution from a QTP established and maintained by an eligible educational institution (generally private colleges and universities) can be excluded from income if the amount distributed is not more than qualified educational expenses. For more information on tax-free QTP distributions, see Chapter 8 in Publication 970, Tax Benefits for Education.

The Military Family Tax Relief Act of 2003 (Pub. L. No. 108-121) exempts the additional 10% tax for withdrawals from Section 529 QTP accounts for non-educational use made because of attendance at United States service academies (i.e., U.S. Military Academy, U.S. Naval Academy, U.S. Air Force Academy, U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy). See IRM 21.6.5.1, Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) Overview, for additional information.

Effective for tax years beginning after December 31, 2001.

Pub. L. No. 107–16 liberalized rules for the exclusion of income from the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program. See Publication 970, Tax Benefits for Education, for more information.

Before a beneficiary reaches age 30, the balance in a Coverdell Education Savings Account may be transferred or rolled over into another Coverdell Education Savings Account for the beneficiary or a member of the former beneficiary’s family who is under or over age 30.

Transfers upon death or divorce to a spouse/member of beneficiary’s family under age 30 are generally not taxable and the spouse or family member treats the account as his or her own.

The Balanced Budget Act of 1997 permits eligible individuals to establish a Medicare Advantage Medical Savings Account (MSA), IRC section 138. MSAs are administered through the Federal Medicare program. See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information on Medicare Advantage MSAs.

Medicare Advantage MSA distributions are reported on Form 8853, Archer MSAs and Long Term Care Insurance Contracts, Section B, Medicare Advantage MSA Distributions.

See the table below for Medicare Advantage MSA guidelines:

The Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, for returns filed after 2000, was extensively revised to add Medicare Advantage MSA Accounts.

Form 8853 must be filed if, during the tax year, the taxpayer or spouse (if filing joint):

For TY 2006, Form 8853, Section A, Archer MSAs, is used to figure Archer MSA deductions, excess contributions, and taxable distributions and additional tax from Archer MSAs. Section A contains three parts:

Section B, Medicare Advantage MSA Distributions, is used to report Medicare Advantage MSA Distributions, figure taxable distributions and additional tax.

Section C, Long Term Care (LTC) Insurance Contracts, is used to report Long-Term Care Insurance contracts.

Within limits, contributions to an Archer MSA are:

The taxpayer or spouse may not contribute to an Archer MSA if the employer made any contributions ( Form W-2, Box 12 with Code R).

The deduction is limited to:

Contributions for a particular tax year can be made until the due date (without regard to extensions) for the individual income tax return for that year.

The Archer MSA deduction is the smaller of:

The taxpayer is taxed on all distributions received in the tax year from all Archer MSAs to the extent the distributions were not used for qualified medical expenses of the account holder, his spouse, or dependents.

Distributions not for medical expenses are also subject to an additional 15% tax unless made:

The taxpayer may roll over a distribution (withdrawal) of assets from one MSA into another MSA or health savings account (HSA). Generally, the distribution must be rolled over within 60 days following the distribution to qualify as tax-free.

Form 8853, Section A, Part IIl, is used for computing any taxable distributions and the additional 15% tax.

Medicare Advantage Medical Savings Account (MSA) distributions are reported on Form 8853, Section B.

The taxpayer does not make contributions to a Medicare Advantage MSA account. Contributions are governed by Part B of title XVIII of the Social Security Act (Medicare makes contributions to the account).

The taxpayer is taxed on distributions received in the tax year to the extent the distributions were not used for unreimbursed qualified medical expenses.

Distributions not for unreimbursed qualified medical expenses are also subject to an additional 50% tax to the extent they reduce the prior year account balance below an established floor unless made after the account holder:

Trustee-to-Trustee transfers of Medicare Advantage MSA accounts are permitted.

A separate Form 8853, with Section B completed, must be filed for each spouse if both spouses received distributions from a Medicare Advantage MSA.

The taxpayer must complete Form 8853, Section C, if the taxpayer (policyholder) or spouse (if filing jointly) was a policyholder who received payments made on a per diem or other periodic basis under a qualified LTC insurance contract or received certain accelerated death benefits on a per diem or other periodic basis.

A separate Form 8853, Section C, must be filed for each insured person for whom the taxpayer received payments.

Any taxable benefits are reported on Form 8853, Section C, Line 28 and on line 21 of Form 1040, U.S. Individual Tax Return.

The individual owning the proceeds of the qualified LTC contract is required to report the income for tax purposes, regardless of whether the payment is assigned to a third party.

Amounts paid as reimbursements for qualified LTC services under a qualified LTC contract are excluded from income.

Amounts paid as accelerated death benefits are fully excludable from income if the insured has been certified by a physician as terminally ill. These amounts are excludable, to the same extent they would be if paid under a qualified LTC insurance contract, if the insured has been certified by a licensed health care practitioner as chronically ill.

An eligible individual can establish a Health Savings Accounts (HSA). An eligible individual (for any month) is:

Generally, an HDHP is a health plan that meets certain requirements for deductibles and out-of-pocket expenses.

In the table below, the annual deductible (other than for premiums) are at least the amount given. The out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed the amount given.

For a Health Savings Account (HSA) established by an employee, the employee, the employee’s employer or both may contribute to the HSA of the employee in a given year.

For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA.

Family members may also make contributions to an HSA on behalf of another family member as long as that other family member is an eligible individual.

The maximum annual contributions and for individuals (and their spouses covered under the HDHP) between the ages of 55 and 65, the catch-up contributions, are as follows:

After an individual is enrolled in Medicare after age 65, contributions, including catch-up contributions, cannot be made to an individual’s HSA.

Contributions made by an eligible individual or made by a family member on behalf of an individual, are:

For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made.

Distributions from a Health Savings Account (HSA) used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse or dependents, are excludable from gross income. The amounts in an HSA can be used for qualified medical expenses and are excludable from gross income even if the individual is not currently eligible for contributions to the HSA.

Qualified medical expenses are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in IRC section 213(d) but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred after the HSA has been established.

For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under IRC section 213.

Health insurance premiums are not considered qualified medical expenses except for the following:

Any amount of the distribution not used exclusively for qualified medical expenses of the account beneficiary, spouse or dependents is includible in gross income of the account beneficiary and is subject to an additional 10% tax on the amount includible in income.

Form 8889, Health Savings Accounts (HSAs), Part II, HSA Distributions , is used to compute the taxable amount of the HSA distribution. It is included in the total amount reported on line 21 of the 2009 Form 1040, U.S. Individual Income Tax Return. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to line 21. The additional 10% tax, if applicable, is included in the total amount reported on the 2009 Form 1040, line 60. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to line 60.

If the account beneficiary is no longer an eligible individual (attained age 65 and entitled to Medicare benefits, or no longer has an HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary’s gross income.

Upon death, any balance remaining in the account beneficiary’s HSA becomes the property of the individual named in the HSA as the beneficiary of the account.

The following Individual Retirement Account File (IRAF) Filing History Codes are displayed on IMF entity:

Abstract numbers must be used with any Individual Retirement Account File (IRAF) MFT 29 tax adjustment. See IRM 21.6.5.4.11.7., Individual Retirement Account File (IRAF) Tax Adjustments, for information on input of adjustments with abstract numbers. Valid item Abstract Numbers are:

The 29X amount must equal combined Abstract Numbers 160, 162, 194, 195, 233, 235, 236, and 237 amounts.

Adjustments to Individual Retirement Account File (IRAF) MFT 29 modules are Non-Source Document (NSD) adjustments if the MFT 29 module is established from input of a dummy Form 1040. Supporting documents are not attached to this type of an IRAF adjustment.

Adjustments to IRAF (MFT 29) modules are Source Document adjustments if the MFT 29 module is established from the input of TC 971 AC 144 to the corresponding IMF MFT 30 account. Supporting documents are attached to the IRAF MFT 29 adjustment.

Use blocking series (BS) 00 on all IRAF adjustments except in the following specific cases:

Effective January 2006, the input of a TC 971 AC 144 on a MFT 30 module generates a corresponding MFT 29 module for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

Installment Agreements (IA) and Direct Debit Installment Agreements are permitted on MFT 29 modules.

Systemically generated refunds, TC 846, occur on MFT 29 modules using the same programming process as MFT 30 systemic refunds.

The following conditions require establishing an MFT 29 module if one does not currently exist:

Follow these procedures to establish an MFT 29 module with the input of a TC 971 AC 144 on a MFT 30 account:

Use extreme caution when inputting these transactions. The MFT 29 module (with a TC 150) may have been established based on previous input of a dummy Form 1040 with a Form 5329 sent through processing. A subsequent TC 290 and IRAF abstract codes (based on input of TC 971 AC 144) will also post. This would create a duplicate assessment.

An Individual Retirement Account File (IRAF) adjustment or credit transfer will not post unless an entity is established on the IRAF for a particular module.

IRAF entity is established when a Form 5329 posts as a TC 150 and is updated when a later return posts.

The additional 10% tax is adjusted on the IMF account for:

No adjustment is made to the IRAF (MFT 29) account.

Determine if the 10% tax was included in the posted IMF (MFT 30) tax.

Determine if income from Form 5329, Parts I or II was included as income on the tax return.

Consider changes to income tax and/or the 10% tax.

Determine if an IMF tax adjustment is needed.

The additional tax (excise tax) on excess contributions to Traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, and HSAs from Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Parts III, IV, V, VI, and VII is adjusted on the IRAF, MFT 29.

The additional tax on excess accumulation in qualified retirement plans from Form 5329, Part VIII, is adjusted on the IRAF, MFT 29.

Source Codes (SC) and Reason Codes (RC) cannot post to MFT 29 IRAF accounts. Do not use any SC or RC when adjusting MFT 29 IRAF accounts. For information on Hold Codes, see IRM 21.5.2.4.15, Rules on Hold Codes (HC).

Transfer any remittance for IRAF using CC ADD/ADC 24. Refer to IRAF Credit Transfers below.

Transfer any additional credit using CC ADD/ADC 24.

Effective in January 2006, overpayments refund from IRAF (MFT 29) accounts. A TC 846 will systemically generate and post to IRAF (MFT 29) modules, providing freeze code conditions preventing a refund are not present. Offsets to any outstanding liabilities also apply to IRAF. Take the following action to transfer a payment from IRAF to IMF when applicable:

Send the appropriate letter to the taxpayer to explain the actions taken.

If the credit was applied to the Unidentified or Excess Collection file, prepare documentation to move the payment to the IRAF account. See IRM 21.5.7.3.6, Research Unidentified Remittances and Excess Collection File, for more information.

Internal IRAF Notices generate to notify the campus that additional action or review of the IRAF module (MFT 29) may be necessary.