Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

that prevented an eligible individual who rolled money from a traditional nonIRA retirement plan to a traditional IRA from immediately converting the traditional IRA to a Roth IRA. Sandy Example: In 2010, Sandy, age 28, has compensation income of $300,000 and participates in a 401(k) plan at her job. Because of her high income, she is not eligible to make a regular contribution to a Roth IRA. So instead she makes a nondeductible regular contribution of $5,000 to a traditional IRA on June 1, 2010. Soon thereafter she converts the account to a Roth IRA. If she has no other IRAs at any time during 2010, her conversion will be “tax-free,” because the converted account contains nothing other than her own after-tax contribution. If she does have other IRAs in 2010, the conversion will be taxed under the “cream-in-the-coffee” rule; see ¶ 5.4.03 (B). There is an excise tax of six percent imposed on “regular” contributions to Roth IRAs in excess of the applicable limits ( ¶ 5.3.03 ), just as there is for excess contributions to traditional IRAs. § 4973 ; Reg. § 1.408A-3 , A-7. See ¶ 2.1.08 regarding the penalty on (and how to correct) excess IRA contributions. 5.4 Conversion of Traditional Plan or IRA to a Roth IRA The other main way to create a Roth IRA, besides making annual-type “regular” contributions from compensation income (¶ 5.3) , is to transfer funds to a Roth IRA from a traditional IRA or nonIRA plan. The amount so transferred is generally included in the participant’s gross income as if it had been distributed to him. § 408A(d)(3)(A) – (C) . This type of contribution is called a “ qualified rollover contribution ” in the Code ( § 408A(c)(3)(B) ), a “ Roth conversion ” in this book. Since there is no limit on the amount that can be converted from a traditional plan or IRA to a Roth IRA, a conversion contribution can be a much more substantial amount than the few thousand dollars per year maximum regular Roth IRA contribution ( ¶ 5.3.03 ). This Chapter describes the Federal income tax treatment of Roth conversions. State income tax treatment is not covered in this book. See ¶ 5.5 for how a Roth conversion interacts with the 10 percent penalty on early distributions. See ¶ 5.6.05 (B) regarding the deadline for completing a Roth conversion. Penalty for excess Roth IRA contributions

This ¶ 5.4 deals with Roth IRA conversions by the participant. Regarding the ability or inability of a beneficiary to convert an inherited plan or IRA to a Roth IRA, see ¶ 3.2.04 (for the surviving spouse) or ¶ 4.2.05 (for other beneficiaries).

Prior to September 27, 2010, a Roth IRA was the only possible destination for “conversions.” See Reg. § 1.401(k)-1(f)(3) , third sentence. Effective after that date, distributions from traditional cash-or-deferred (CODA) plan accounts ( ¶ 5.7.01 ) can be “converted” into a DRAC (see ¶ 5.7.11 ), but (other than such “in-plan conversions”) funds from a traditional plan or IRA can be rolled only into a Roth IRA and can NOT be rolled or converted to a DRAC.

What type of plan may be converted to a Roth IRA