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A new notice provides question and answer guidance on a Pension Protection Act of 2006 (PPA, P.L. 109-280, 8/17/2006) change allowing rollovers to Roth IRAs from qualified and other taxfavored retirement plans.
Background. Before PPA's enactment, under former Code Sec. 408A, a Roth IRA could only accept a rollover contribution of amounts distributed from another Roth IRA, from a non-Roth IRA (i.e., a traditional or SIMPLE IRA) or from a Code Sec. 402A designated Roth account. These rollover contributions to Roth IRAs are called "qualified rollover contributions." A qualified rollover contribution from a non-Roth IRA to a Roth IRA is called a "conversion." An individual who rolls over an amount from a non-Roth IRA to a Roth IRA must include in gross income any portion of the conversion amount that would be includible in gross income if the amount were distributed without being rolled over. For distributions before 2010, a conversion contribution is permitted only if the IRA owner's adjusted gross income does not exceed certain limits.
Sec. 824 of the PPA amended the definition of qualified rollover contribution in Code Sec. 408A to allow a Roth IRA to accept rollovers from other eligible retirement plans (as defined in Code Sec. 402(c)(8)(B)), effective for distributions made after Dec. 31, 2007.
Question and answer guidance. Notice 2008-30 provides the following guidance on the broadened rollover possibilities for Roth IRAs:
... Distributions from a Code Sec. 401(a) qualified plan may be rolled over to a Roth IRA. The rollover can be made through a direct rollover from the plan to the Roth IRA or an amount can be distributed from the plan and contributed (rolled over) to the Roth IRA within 60 days. In either case, the amount rolled over must be an eligible rollover distribution (as defined in Code Sec. 402(c)(4)) and, pursuant to Code Sec. 408A(d)(3)(A), there is included in gross income any amount that would be includible if the distribution were not rolled over. In addition, for tax years beginning before Jan. 1, 2010, an individual cannot make a qualified rollover contribution from an eligible retirement plan other than a Roth IRA if, for the year the eligible rollover distribution is made, he or she has modified adjusted gross income ("MAGI") exceeding $100,000 or is married and files a separate return.
... Distributions from Code Sec. 403(a) annuity plans, Code Sec. 403(b) annuity plans, and Code Sec. 457(b) also may be rolled over to a Roth IRA, subject to the limitations described above. (Code Sec. 408A(e))
... The additional tax under Code Sec. 72(t) (early withdrawal penalty) does not apply to a qualified rollover contribution from an eligible retirement plan other than a Roth IRA. However, as with conversions, if a taxable amount rolled into a Roth IRA from an eligible retirement plan other than a Roth IRA is distributed within 5 years, Code Sec. 72(t) applies to such a distribution as if it were includible in gross income. (Code Sec. 408A(d)(3)(F))
... Under Code Sec. 401(a)(31), a plan must permit a distributee of an eligible rollover distribution to elect a direct rollover to a Roth IRA.
... The plan administrator is not responsible for assuring the distributee is eligible to make a rollover to a Roth IRA. However, a distributee that is ineligible to make a rollover to a Roth IRA may recharacterize the contribution under Code Sec. 408A(d)(6).
... An eligible rollover distribution paid to an employee or the employee's spouse is subject to 20% mandatory withholding under Code Sec. 3405(c). Under Code Sec. 3405(c)(2), an eligible rollover distribution that a distributee elects, under Code Sec. 401(a)(31)(A), to have paid directly to an eligible retirement plan (including a Roth IRA) is not subject to mandatory withholding, even if the distribution is includible in gross income. Also, a distribution that is directly rolled over to a Roth IRA by a nonspouse beneficiary pursuant to Code Sec. 402(c)(1 l) is not subject to mandatory withholding. However, a distributee and a plan administrator or payor may enter into a voluntary withholding agreement for an eligible rollover distribution that is directly rolled over from an eligible retirement plan to a Roth IRA. (Code Sec. 3402(p))
... Beneficiaries may make qualified rollover contributions to Roth IRAs. For a distribution from an eligible retirement plan other than a Roth IRA, the MAGI and filing status of the beneficiary are used to determine eligibility to make a qualified rollover contribution to a Roth IRA. Under Code Sec. 402(c)(11), a plan may but is not required to permit rollovers by nonspouse beneficiaries and a rollover by a nonspouse beneficiary must be made by a direct trustee-to-trustee transfer. A nonspouse beneficiary that is ineligible to make a qualified rollover contribution to a Roth IRA may recharacterize the contribution under Code Sec. 408A(d)(6). A surviving spouse who makes a rollover to a Roth IRA may elect either to treat the Roth IRA as his or her own or to establish the Roth IRA in the name of the decedent with the surviving spouse as the beneficiary. A nonspouse beneficiary cannot elect to treat the Roth IRA as his or her own. In the case of a rollover where the beneficiary does not treat the Roth IRA as his or her own, required minimum distributions from the Roth IRA are determined under rules in Notice 2007-7, 2007-5 IRB 395, which also provides other guidance for rollovers by nonspouse beneficiaries.