Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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that results from converting a traditional retirement plan or IRA to a Roth IRA. § 408A(c)(3)(B)(i) . The gross income resulting from a Roth conversion is disregarded solely for purpose of determining whether the taxpayer’s MAGI is low enough to make him eligible to contribute to a Roth IRA. For example, the gross income resulting from a 2010 Roth conversion is excluded from MAGI for purposes of determining whether the individual is eligible to make a regular contribution to a Roth IRA in the years 2010–2012, regardless of whether that conversion income is included in his gross income in 2010 or in 2011–2012. The conversion income is includible in the individual’s “real” gross income, and he has to pay tax on it—it is just excluded from the “MAGI” figure for purposes of determining eligibility. In order for an individual to be eligible to contribute the full Applicable Dollar Limit (ADL) ( ¶ 5.3.03 ) to a Roth IRA, his MAGI may not exceed a certain “ applicable dollar amount .” The applicable dollar amount depends on filing status, and is adjusted upwards, after 2006, for post - 2005 inflation. The applicable dollar amount was originally $95,000 for a single taxpayer, $150,000 for a married taxpayer filing a joint return, or $zero for a married taxpayer filing a separate return. § 408A(c)(3)(A) . The 2010 applicable dollar amounts are $105,000 (single), $167,000 (married filing jointly), and $zero (married filing separately). Notice 2009-94 , 2009-50 IRB 848. If MAGI exceeds these levels, the Applicable Dollar Limit amount the individual can contribute to a Roth IRA phases downward. It is reduced to zero once his income exceeds the applicable dollar amount by $15,000 (or by $10,000 in the case of a married taxpayer filing separately or married taxpayers filing jointly). § 408A(c)(3)(A) , (B)(ii) . Note that the phase-out applies to the entire ADL (including the over-50 catch-up amount), not just to the general dollar limit. So, for 2010, a single taxpayer can contribute a reduced amount of the ADL if his income is between $105,000 and $120,000 (zero if income exceeds $120,000). A married taxpayer filing jointly can contribute a reduced amount of the ADL if the couple’s income is between $167,000 and $177,000 (zero if income exceeds $177,000). A married taxpayer filing separately can contribute a reduced amount of the ADL if his income is between zero and $10,000 (zero if income exceeded $10,000). An individual who is prevented from contributing the full ADL to a Roth IRA because of the income limit can contribute his reduced ADL to the Roth and the balance of the ADL to a traditional IRA (if he is under age 70½). Reg. § 1.408A-3 , A-3(d), Example 4. D. Regular traditional IRA contribution followed by conversion. An individual who has compensation income, is under age 70½, and is prevented from making a regular contribution to a Roth IRA due to the income limit can make a regular contribution to a traditional IRA, then convert that to a Roth IRA. This anomalous situation arises because there is an income ceiling applicable to regular Roth IRA contributions but no income ceiling applicable to either traditional IRA contributions or Roth conversions. There is no waiting period or minimum holding period following the making of a contribution to a traditional IRA before the individual can convert it to a Roth IRA, just as (before direct plan-to-Roth IRA conversions were permitted; See ¶ 5.4.01 (B)) there was no waiting period