Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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 Typically the deemed regular contribution to the Roth IRA resulting from a failed conversion will be an “excess contribution.” See ¶ 5.3.05 , CCA 2001-48051.

Mechanics of traditional IRA-to-Roth IRA conversions

There are three methods a participant can use to convert assets from a traditional IRA to a Roth IRA: 1. A distribution from a traditional IRA may be contributed (rolled over) to a Roth IRA within 60 days after the distribution is made. See ¶ 2.7 and ¶ 5.6.05 (B) regarding this deadline.

2. An amount may be transferred directly from the traditional IRA to the Roth IRA, with the same or a different trustee (or custodian). See ¶ 2.6.01 (E).

3. The traditional IRA can simply be “redesignated” as a Roth IRA maintained by the same trustee or custodian; this is treated as a transfer of the entire account balance. Reg. § 1.408A-4 , A-1(b)(3). All three of these transactions are considered rollovers (“a distribution from the traditional IRA and a qualified rollover contribution to the Roth IRA”). Although a Roth conversion generally must meet the requirements applicable to other types of rollovers (see, e.g. , ¶ 5.2.02 (E)), a Roth conversion is not considered a rollover for purposes of the one-rollover-per-year limitation in § 408(d)(3)(B) (see ¶ 2.6.05 ), so a Roth conversion may occur even if it is within 12 months of a tax-free traditional IRA-to-IRA rollover. Reg. § 1.408A-4 , A-1(a), (c). Prior to the arrival of Roth IRAs, “rollovers” were always tax-free, and most people still associate that word with tax-free transfers from one retirement plan to another. In contrast, the rollover of funds from a traditional IRA to a Roth IRA is taxable. ¶ 5.4.03 (A). Both partial and total conversions are allowed. An eligible individual ( ¶ 5.4.02 ) may choose to convert all, part, or none of his traditional IRA to a Roth IRA. There is no minimum or maximum dollar or percentage amount that must or may be converted. A participant can transfer a distribution from a traditional 401(a), 403, or governmental 457(b) plan to a Roth IRA either by direct rollover or by 60-day (indirect) rollover. ¶ 5.4.01 (B). See ¶ 2.6.01 for definitions of direct, indirect, and 60-day rollover. The direct rollover is preferable because it avoids the mandatory 20 percent withholding of federal income taxes otherwise applicable to the taxable portion of the distribution. ¶ 2.3.02 (C). Generally, when a plan is about to make a distribution to an employee, the plan MUST offer the employee the option of having the distribution sent, via direct rollover, to any eligible retirement plan (which includes a Roth IRA) and MUST comply with the employee’s request for such a direct rollover. See ¶ 2.6.01 (C). Plan-to-Roth IRA rollovers, like traditional IRA-to-Roth IRA rollovers, are called “qualified rollover contributions.” Only traditional IRA-to-Roth IRA transfers are also called “conversions,” according to the IRS in Notice 2008-30, Section II, Introductory paragraph. This book uses “conversion” for both types of rollover. Mechanics of conversion from other traditional plans