April 07, 1999
Taxpayers May Still Correct
Improper Roth IRA Conversions
WASHINGTON - Some tax returns this year have reported the conversion
of a traditional individual retirement arrangement (IRA) into a Roth IRA
despite the taxpayer’s income being above the $100,000 limit for making
such conversions. The Internal Revenue Service says that taxpayers who
do not qualify for Roth IRA conversions have until the filing deadline
to correct their mistake and avoid possible penalties.
Roth IRAs first became available in 1998. Taxpayers may transfer
("convert") amounts in a traditional IRA to a Roth IRA if their income
-- not counting the taxable amount of the conversion -- is not more than
$100,000 and they are not married filing separately. The same income
limit applies to both single and joint returns.
Those who converted traditional IRAs to Roth IRAs in 1998 and now find
that they exceeded the $100,000 income limit should correct these
"failed conversions" by transferring the conversion amount plus related
earnings back to traditional IRAs ("recharacterizations"). They should
contact the IRA trustee to do this. If their 1999 income will not exceed
$100,000, they may convert all or part of a traditional IRA to a Roth
IRA this year.
Ineligible taxpayers must usually recharacterize by April 15. Those who
get filing extensions have until their extended due date to
recharacterize. Failure to correct the mistake could mean a ten-percent
early withdrawal tax for those under age 59½ and an excess contribution
tax if a person put too much into a Roth IRA in 1998.
A taxpayer who has already filed a tax return reporting a Roth IRA
conversion and who recharacterizes it by April 15 should file an amended
return using Form 1040X, and attach Form 8606, “Nondeductible IRAs,” to
report the IRA transactions.
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