Life and Death Planning for Retirement Benefits

246 / 507

246 Life and Death Planning for Retirement Benefits
 Typically the deemed regular contribution to the Roth IRA resulting from a failed
conversion will be an “excess contribution.” See CCA 2001-48051.
5.4.07 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. Se an 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 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.
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., E)), a Roth
conversion is not considered a rollover for purposes of the one-rollover-per-year limitation in
(see , so a Roth conversion may occur even if it is within 12 months of a
tax-free traditional IRA-to-IRA rollover. Reg. 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. A).
Both partial and total conversions are allowed. An eligible individual 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.
5.4.08 Mechanics of conversion from other traditional plans
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. B).
Se 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. 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 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.