Q. What happens if the taxpayer thinks his AGI is under the $100,000 limit, but it turns out he is wrong?
A. The 1998 Technical Corrections Act allows a roll back into a traditional IRA by the due date for filing the tax return (with extensions).
Q. Is the conversion taxable amount added into the taxpayer's AGI for purposes of the AGI limits?
A. No. However, AGI for purposes of the AGI limits is not AGI as reported on one's tax return, but is AGI as determined under IRC § 219(g)(3), except that any amount included in income from a rollover from a traditional IRA to a Roth IRA is disregarded. AGI under § 219(g)(3) is determined after application of includible Social Security and Railroad Retirement benefits and disallowance or limitation of certain passive activity losses and credits, but without regard to exclusion of income from certain U.S. savings bonds, exclusion of adoption expenses, exclusion of foreign source income and deduction for contributions to a traditional IRA. It is clear that the $100,000 AGI limit applies to taxpayers filing jointly as well as unmarried taxpayers.
Q. Can a taxpayer convert only a part of his traditional IRA to a Roth IRA?
A. Yes. Taxpayers can select an amount from a traditional IRA to roll over and convert into a Roth IRA.
Q. Can a taxpayer roll over from a qualified plan directly to a Roth IRA?
A. No. Taxpayers first must roll into a traditional IRA and then convert that traditional IRA to a Roth IRA.
Q. Can a taxpayer convert his traditional IRA to a Roth IRA after 70-1/2?
A. Yes, but one must be sure to take out the minimum distribution for the year first. And, under present law, that minimum distribution adds to one's AGI. That is, a taxpayer who has a large minimum distribution, for example, more than $100,000, will not be able to convert an existing traditional IRA to a Roth IRA. Effective beginning in 2005, minimum required distributions from IRAs will be excluded from the definition of AGI solely for purposes of determining eligibility to convert from a traditional IRA to a Roth IRA.
Q. What if a taxpayer dies in the four-year period when the income is supposed to be recognized from a 1998 Roth IRA conversion?
A. The 1998 Technical Corrections Act requires this income to be included in the decedent's last income tax return, but the Roth IRA continues to be valid. The Technical Corrections Act, however, has a special rule allowing a spouse who inherits a Roth IRA to elect to continue to pay the income tax over the mandatory four-year period.
Q. Do the minimum required distributions rules, applicable to taxpayers who reach age 70-1/2, apply to Roth IRAs?
A. There are no mandatory distribution requirements for a Roth IRA during the lifetime of the taxpayer (or the lifetime of both the taxpayer and the taxpayer's spouse); distribution is required only after death. Roth IRAs thus offer an estate building advantage: a taxpayer who does not need the money can keep it in this tax-free account until death.
Q. Is the Roth IRA safe from creditors?
A. Not necessarily. Although in most states traditional IRAs are safe from creditors, creditor protection for IRAs is determined by state law, not federal, and references in state laws likely are to IRC § 408 regarding traditional IRAs, not IRC § 408A regarding Roth IRAs. This is the case in Kansas. State laws may need to be changed for Roth IRAs to be similarly protected.
Q. What is the deadline for doing a 1998 conversion of a traditional IRA to a Roth IRA?
A. To qualify as a 1998 conversion, a direct trustee-to-trustee transfer must occur by December 31, 1998, or a distribution from the traditional IRA must be made by December 31, 1998, with a contribution to a Roth IRA within 60 days after the distribution.
Q. Will Congress change the rules for Roth IRAs?
A. No one can guarantee what future Congresses may do. Many taxpayers fear that Congress will change the rules and end up taxing Roth IRAs. However, it is likely Roth IRAs, even if they are shut down in the future, will continue to be worthwhile if set up now.
The foregoing article has been prepared by Bever Dye, LC, as a service to our clients for informational purposes only and does not constitute legal advice. It is designed to provide general information concerning recent developments and topics of interest in the areas of tax and estate planning law. Do not take action in reliance on items contained in this article without obtaining the advice of an attorney.
