Roth IRAs are different than traditional IRAs in that the contributions are never deductible.
However, if the Roth IRA is held long enough,
the distributions are tax-free. That means you may never have to pay tax on the earnings. Annual contributions are not the only way to invest in a Roth IRA. You can also rollover eligible distributions from a traditional IRA. Such rollovers are also called conversions. The rules for rollover contributions are different from the rules for
making regular contributions to a Roth account.
Planning Opportunity in 2010
• For rollovers in 2010, the taxable amounts are included in income over two years, in 2011 and 2012. Income tax on the rollover is avoided in 2010, the year of the rollover, unless you elect to include the entire taxable amount in income in 2010. Without such an election, half the rollover amount is taxed in 2011 and the other
half is taxed in 2012.
Who Can Make Rollover Contributions?
• For rollovers to Roth IRAs for tax years after 2009, there are no longer modified adjusted gross income (MAGI) limitations or restrictions for married taxpayers filing a separate return.
How Much Can I Rollover Into a Roth IRA?
• There is no limit on the amount that you can rollover into a Roth IRA.
• The rollover can come from one or more accounts and contain both deductible and nondeductible contributions.
• A partial rollover from a traditional IRA also is allowed.
When Can I Make a Rollover to a Roth IRA?
• There is no “grace period” in which to make a rollover. Unlike Roth IRA contributions that can be made up until the due date of the return, a rollover cannot be made retroactive. Therefore, the amounts rolled from a traditional IRA to a Roth IRA during the tax year are accounted for on the tax return for that tax year.
• The transferred amount must include the earnings on the amount transferred.
• For purposes of the one-rollover-per-year rule for IRAs, a rollover from a traditional IRA to a Roth IRA does not count as a rollover.
How Are Contributions to a Roth IRA Taxed?
• Deductible contributions from traditional IRAs that are rolled into a Roth IRA are generally taxed in the same year that the rollover occurs.
• The nondeductible amounts are rolled over into a Roth IRA tax-free.
• If you rollover a combination of deductible and nondeductible amounts into the Roth IRA, you’ll need to determine how much of
the amount rolled over will be included as income. This calculation is similar to that used for determining the taxable amount of an
IRA distribution comprised of deductible and nondeductible contributions. Caution: If nondeductible IRAs are rolled over
into a Roth IRA and you also own other IRA accounts which will not be rolled over, special basis allocation rules apply. These basis allocation rules require the basis of the IRAs to be allocated among
all IRAs based on fair market value. The results of this special calculation can cause significantly higher taxes on the rollover transaction.
When Can I Take Distributions and How Are They Taxed?
• You can take distributions at any time, but they are subject to different tax consequences. Roth IRAs are never subject to the age 70½ minimum distribution requirements.
• All of the normal penalty exceptions that apply to traditional IRA distributions also apply to Roth distributions.
• When you take a distribution, regular contributions you made to the Roth are deemed to come out first, followed by rollover amounts in the order contributed. Earnings are distributed last.
• If the distribution is from a rollover that includes deductible and nondeductible amounts, the deductible amounts are considered to be
• Distributions you take from a Roth IRA five years after the account was funded and after you reach age 59½, become disabled, die, or become a firsttime homebuyer, are tax-free and penalty-free. For
rollovers, the five years is measured from the year of the rollover contribution.
• For distributions that are considered made from deductible rollover contributions and earnings not meeting the five-year or age 59½ tests, further analysis is needed to determine the taxability and penalty potential. Consult your tax advisor to determine how these amounts may be taxed.
• Distributions that are considered made from regular contributions and nondeductible rollover contributions are tax-free and penalty free, regardless of your age or any other circumstance.
• If the beneficiary of your Roth account is an individual other than your spouse, he or she must take a distribution of the balance in the account by the end of the fifth year containing the anniversary of your death, or over his or her life expectancy.
This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.
#847 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002