The tax consequences of converting a non-Roth IRA annuity to a Roth IRA

This document contains final regulations that amend the Income Tax Regulations (26 CFR Part 1) under section 408A of the Code relating to Roth IRAs. Section 408A of the Code, which was added by section 302 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788), establishes the Roth IRA as a type of individual retirement plan, effective for taxable years beginning on or after January 1, 1998.

The identifying characteristic of Roth IRAs is that all contributions to Roth IRAs are after-tax contributions (that is, an IRA owner cannot take a deduction for a contribution made to a Roth IRA) but qualified distributions are tax-free. A qualified distribution from a Roth IRA is a distribution that is made: (1) at least 5 years after the account owner (or the account owner's spouse) made a Roth IRA contribution, and (2) after age 59\1/2\, after death, on account of disability, or for a first-time home purchase.

A taxpayer whose modified adjusted gross income for a year does not exceed $100,000 (and who, if married, files jointly) \1\ may convert an amount held in a non-Roth IRA(that is, a traditional IRA or SIMPLE IRA) to an amount held in a Roth IRA. If a taxpayer converts an amount held in a non-Roth IRA to a Roth IRA, the taxpayer must include the value of the non-Roth IRA being converted in gross income (to the extent the conversion is not a conversion of basis in the non-Roth IRA).

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Guidelines For Roth IRA Contributions

From the IRS:

Although Roth IRAs are popular retirement arrangements, some taxpayers may be confused about whether they can contribute to a Roth IRA. Here are some helpful guidelines:

• Income Limits To contribute to a Roth IRA, you must have taxable compensation (e.g., wages, salary, tips, professional fees, bonuses). These limits vary depending on your filing status.
• Age There is no age limitation for Roth IRA contributions.
• Contribution Limits In general, if your only IRA is a Roth IRA, the maximum 2007 contribution limit is the lesser of your taxable compensation or $4,000 ($5,000 if age 50 or older). The maximum contribution limit phases out depending on your modified adjusted gross income.
• Spousal Roth IRA You can make contributions to a Roth IRA for your spouse provided you meet the income requirements.

Time Contributions to a Roth IRA can be made at any time during the year or by the due date of your return for that year (not including extensions).

Roth IRA contributions are not tax deductible and are not reported on your tax return. On the other hand, you do not have to pay tax on any qualified distributions, distributions that are a return of your regular Roth IRA contributions, or distributions that are rolled over into another Roth IRA.

For complete information and definitions of terms, get Publication 590,

Individual Retirement Arrangements. Visit the IRS Web site at IRS.gov, or call 800-TAX-FORM (800-829-3676) to request a free copy of the publication.

Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• Publication 590, Individual Retirement Arrangements (PDF 461K)

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