Employee benefits & pensions: tax consequences of rollovers from employer plans to Roth IRAs.

• Author: Sirkin, Stu
• Position: Individual retirement accounts

Starting in 2010, taxpayers will be able to make rollovers from non-Roth retirement accounts to Roth individual retirement accounts (IRAs) without regard to the current $100,000 modified adjusted gross income (AGI) limit and (in 2010 only) will be able to benefit from a special two-year averaging provision (the taxable portion of the rollover is taxed in 2011 and 2012). In light of the expected attractiveness of such a rollover, the IRS has issued Notice 2009-7.5 to address the federal income tax consequences of transferring eligible rollover distributions from qualified retirement plans to Roth IRAs.

Notice 2009-75, which applies to rollover distributions from qualified plans under Secs. 401(a) and 403(b), annuity plans under Sec. 403(a), and eligible governmental plans under Sec. 457(b), supplements regulations under Sec. 408A, which were issued prior to certain legislative changes, and guidance in Notice 2008-30.

Background

Before the Pension Protection Act of 2006, P.L. 109-280 (PPA), an eligible rollover distribution from an eligible employer plan not made from a designated Roth account could be rolled over to a non-Roth IRA and then converted to a Roth IRA. A taxpayer could not roll over eligible rollover distributions to a Roth IRA directly.

Section 824 of PPA amended the definition of "qualified rollover contribution" in Sec. 408A to allow the recipient of an eligible rollover distribution not made from a designated Roth account to roll over the amount of the distribution to a Roth IRA without first contributing that amount to a non-Roth IRA. As a result, under Secs. 402A and 408A, as amended by PPA, a rollover from an eligible employer plan (other than from a designated Roth account) to a Roth IRA essentially results in the same federal income tax consequences for a participant as a rollover to a non-Roth IRA followed immediately by a conversion to a Roth IRA.

Section 512 of the Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222, removed the $100,000 modified AGI limit on rollovers from non-Roth accounts to Roth accounts. It also provided that if a taxpayer makes such a rollover in 2010, the distribution will be treated as having been made ratably over 2011 and 2012 unless the taxpayer elects to have the distribution included in income in 2010. The elimination of the modified AGI limit is permanent. However, special two-year taxation treatment is available only for 2010 rollovers.

Notice 2009-75

To clarify and...