Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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Here are the types of traditional retirement plans a participant may “convert” to a Roth IRA. A. Individual retirement accounts. An “individual retirement plan” may be converted to a Roth IRA. § 408A(d)(3)(B) , (C) ; Reg. § 1.408A-4 , A-5. “ Individual retirement plans ” include individual retirement accounts (IRAs) and individual retirement trusts (IRTs; ¶ 6.1.07 ) under § 408(a) , (h) . Traditional IRA-to-Roth IRA conversions have been permitted since 1998. See ¶ 5.4.03 for the tax treatment of converting an IRA. See ¶ 5.4.07 for how to convert an IRA. The Code provides that a SEP-IRA ( § 408(k) ) or SIMPLE IRA ( § 408(p) ) cannot be “redesignated” as a Roth IRA. § 408A(f) . That prohibition is almost meaningless because, in the real world, a traditional IRA is not normally converted to a Roth IRA by being “redesignated” as a Roth IRA; it is converted by having assets transferred from the traditional IRA to an entirely different account (with a different account number and form of agreement) that is a Roth IRA. The IRS clarifies (in Reg. § 1.408A-4 , A-4) that “An amount in an individual’s SEP IRA can be converted to a Roth IRA on the same terms as an amount in any other traditional IRA,” subject to two limitations:  A SIMPLE IRA distribution “is not eligible to be rolled over into” a Roth IRA “during the 2-year period...which begins on the date that the individual first participated in any SIMPLE IRA Plan maintained by the individual’s employer....”. Reg. § 1.408A-4 , A-4(b); and,  Contributions under the SEP or SIMPLE plan may not be made to a Roth IRA. Reg. § 1.408A-4 , A-4(c). Accordingly, an employee whose only retirement plan is a SEP-IRA, and who wants a Roth and nothing but a Roth, must go through this two-step dance: Employer contribution goes into the (traditional) SEP-IRA, and the employee pulls it out and transfers it to a Roth IRA. If the employee’s plan is a SIMPLE, he must satisfy the two-year waiting period before performing the second step of the “dance.” B. NonIRA plans. Prior to 2008, the Code permitted rollovers into Roth IRAs only from IRAs and DRACs (¶ 5.7) . Thus, someone who desired to “convert” money in a traditional nonIRA retirement plan had to first roll the money to an IRA, then convert the IRA. The expanded rollover provision effective in 2008 and later years permits rollovers into Roth IRAs directly from several additional types of eligible retirement plans, eliminating the necessity of the two-step process in the conversion of nonIRA plans (though the two-step process continues to exist hypothetically in the tax treatment of these conversions; see ¶ 5.4.04 (A)). See ¶ 5.4.04 for the tax treatment of nonIRA plan-to-Roth conversions. See ¶ 5.4.08 for how to convert a nonIRA plan. Here are the types of nonIRA plans that may be converted directly to Roth IRAs: 1. Qualified retirement plans under § 401(a) (“QRPs”). § 408A(e) (first sentence), § 402(c)(8)(B)(iii) . 2. 403(a) and (b) contracts and plans. § 408A(e) (first sentence), § 402(c)(8)(B)(iv) , (vi) .