Can I Move Amounts Into a Roth IRA?

You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from one Roth IRA to another Roth IRA.

Conversions

You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, the 1-year waiting period does not apply.

Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.

1. Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
2. Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
3. Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

Same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.

Converting From Any Traditional IRA

You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

1. Your modified AGI (explained earlier) is not more than $100,000.
2. You are not a married individual filing a separate return. (See Lived apart from spouse under Filing status, in chapter 1.)

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% tax on early distributions. See chapter 1 for more information on distributions from traditional IRAs and the tax on early distributions.

Periodic distributions. An individual who has started taking substantially equal periodic payments from a traditional IRA can convert the account to a Roth IRA and then continue the periodic payments. The following rules apply.

1. The periodic distributions result in income acceleration to the extent allocable to a 1998 conversion contribution to which the 4-year spread applies.
2. The 10% early distribution tax will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments).

Required distributions. Amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70 1/2) under the required distribution rules (discussed in chapter 1) cannot be converted.

Inherited IRAs. If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA.

Income. You must include in your gross income distributions from a traditional IRA that you would have to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable?, earlier.

If you must include any amount in your gross income, you may have to make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

How To Treat 1998 Conversions

If you converted amounts from a traditional IRA in 1998 to a Roth IRA, any amount you had to include in income as a result of the distribution is generally included ratably over a 4-year period, beginning with 1998. This means you included one quarter of the amount in 1998, and one quarter in 1999, and must include one quarter in 2000, and one quarter in 2001. However, see Distributions from Roth IRAs, later.

Note. You may have elected to include the entire amount in income in 1998. If you did, this discussion does not apply to you.

Change in filing status. A change in filing status or a divorce does not affect the application of the 4-year income spread rule for 1998 conversions. Therefore, if a married Roth IRA owner who made a 1998 conversion and uses the 4-year spread files separately or divorces before the full taxable conversion amount has been included in income, the balance is included in the owner's income over the remaining years in the 4-year period (or in the year for which the remainder is accelerated due to distribution or death).

Distributions from Roth IRAs. If you are including the taxable part of a 1998 conversion ratably over the 4-year period and in 2000 any amount allocable to the taxable part of the conversion is distributed from the Roth IRA, you generally have to include in income both the ratable (one quarter) portion for the year and the part of the distribution made during the year that is allocable to the taxable part of the conversion. See Ordering Rules for Distributions, later, for information on how to determine the amount allocable to the taxable part of the conversion.

For 2000, you generally must include in income the total of the following two amounts.

1. One quarter of the taxable part of the 1998 distribution from the traditional IRA that was converted to the Roth IRA.
2. The part of the 2000 distribution from the Roth IRA that, under the ordering rules for distributions (discussed later), is allocable to the taxable part of the 1998 conversion from the traditional IRA to the Roth IRA.

Any amount allocable to the 1998 conversion that is included in income in 2000 because of a distribution from the Roth IRA reduces the taxable amount that is reportable in 2001. The most that must be included in income for 2000 is the total amount required to be included over all 4 years of the period minus the amounts included in all preceding years in the period.

Death of Roth IRA owner during 4-year period. If a Roth IRA owner who is including amounts ratably over the 4-year period dies before including all of the amounts in income, any amounts not included must generally be included in the owner's (decedent's) gross income for the year of death. However, if the decedent's surviving spouse receives the entire interest in all the decedent's Roth IRAs, that spouse can elect to continue to ratably include the amounts in income over the remaining years in the 4-year period.

The spouse makes this choice by attaching a statement to his or her return (and to the decedent's final return, if a joint return is not filed). Include the following items on the statement.

• A statement that the surviving spouse elects to continue to report the taxable portion from the decedent's 1998 Roth IRA conversion over the remaining years.
• The names and social security number of the surviving spouse and the decedent.
• The total taxable amount of the decedent's 1998 Roth IRA conversion from the decedent's 1998 Form 8606.
• The amount, if any, of previous taxable distributions from Roth IRAs.

If the spouse makes this choice, the amount includible under the 4-year rule for the year of death is included on the decedent's final return. After the year of death, the surviving spouse reports the same taxable IRA distribution as the decedent would have reported.

The choice cannot be made or changed after the due date (including extensions) for filing the spouse's tax return for the tax year that includes the decedent's date of death. However, if the surviving spouse timely files his or her return for the year without making the choice, the surviving spouse can still make the choice by filing an amended return within six months of the due date of the return (excluding extensions). Attach the statement to the amended return and write "Filed pursuant to section 301.9100-2" on the statement. File the amended return at the same address you filed the original return.

Converting From a SIMPLE IRA

Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained earlier under Converting From Any Traditional IRA.

However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer.

Rollover From a Roth IRA

You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, no deductible contributions can be made to Roth IRAs and rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers.

Failed Conversions

If, when you converted amounts from a traditional IRA or SIMPLE IRA (including a transfer by redesignation) into a Roth IRA, you expected to have modified AGI of less than $100,000 and a filing status other than married filing separately, but events changed these facts, you have made a failed conversion.

Adverse consequences. If the converted amount (contribution) is not recharacterized (explained later), the contribution will be treated as a regular contribution to the Roth IRA and subject to the following tax consequences.

1. A 6% excise tax per year will apply to any excess contribution not withdrawn from the Roth IRA.
2. The distributions from the traditional IRA must be included in your gross income.
3. The 10% additional tax on early distributions may apply to any distribution.

How to avoid. You must move the amount converted (including all earnings from the date of conversion) into a traditional IRA by the due date (including extensions) for your tax return for the year during which you made the conversion to the Roth IRA. You do not have to include this distribution (withdrawal) in income. See Recharacterization of original contribution, later, for more information.

Recharacterizations

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.

How to recharacterize. To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. It will be treated as having been made to the second IRA on the same date that it was actually made to the first IRA. You must report the recharacterization, and must treat the contribution as having been made to the second IRA, instead of the first IRA, on your tax return for the year during which the contribution was made.

If you timely file your return without making the election, you can still make the choice by filing an amended return within six months of the due date of the return (excluding extensions). Report the recharacterization on the amended return and write "Filed pursuant to section 301.9100-2" on the return. File the amended return at the same address you filed the original return.

Net income must be transferred. The contribution will not be treated as having been made to the second IRA unless the transfer includes any net income allocable to the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be transferred. If there was a loss, the net income you must transfer may be a negative amount.

No deduction allowed. No deduction is allowed for the contribution to the first IRA and any net income transferred with the recharacterized contribution is treated as earned in the second IRA. The contribution will not be treated as having been made to the second IRA to the extent any deduction was allowed with respect to the contribution to the first IRA.

Conversion by rollover from traditional to Roth IRA. For recharacterization purposes, a distribution from a traditional IRA that is received in one tax year and rolled over into a Roth IRA in the next year, but still within 60 days of the distribution from the traditional IRA, is treated as a contribution to the Roth IRA in the year of the distribution from the traditional IRA.

Effect of previous tax-free transfers. If a contribution has been moved from one IRA to another in a tax-free transfer, such as a rollover, the contribution to the second IRA generally cannot be recharacterized. However, see Move from traditional to SIMPLE IRA, later.

Recharacterization of original contribution. A contribution to one IRA that has been moved between IRAs in tax-free transfers can be treated as if it remained in the first IRA, the IRA that received the original contribution. This means that you can elect to recharacterize the contribution to the first IRA by having a trustee-to-trustee transfer of the contribution made from the IRA in which it now resides to a second IRA and treating the contribution as having been made to the second IRA on the same date it was actually made to the first IRA. If both IRAs involved in the trustee-to-trustee transfer are maintained by the same trustee, you need only direct that trustee to transfer the contribution.

Roth IRA conversion contributions from a SEP-IRA or SIMPLE IRA can be recharacterized to a SEP-IRA or SIMPLE IRA (including the original SEP-IRA or SIMPLE IRA).

Move from traditional to SIMPLE IRA. If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA.

Applying excess contributions. You can recharacterize only actual contributions. If you are applying excess contributions for prior years as current contributions, you can recharacterize them only if the recharacterization would still be timely with respect to the tax year for which the applied contributions were actually made.

Employer contributions. You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. SEPs are discussed in chapter 4. SIMPLE plans are discussed in chapter 5.

Recharacterizations not counted as rollover. The recharacterization of a contribution is not treated as a rollover for purposes of the 1-year waiting period described in chapter 1 under Rollover From One IRA Into Another. This rule applies even if the contribution would have been treated as a rollover contribution by the second IRA if it had been made directly to the second IRA rather than as a result of a recharacterization of a contribution to the first IRA.

Reconversions

You cannot convert and reconvert an amount during the same taxable year, or if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.

How Do I Recharacterize a Contribution?

To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA that you have elected to treat, for federal tax purposes, the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.

• The type and amount of the contribution to the first IRA that is to be recharacterized.
• The date on which the contribution was made to the first IRA and the year for which it was made.
• A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income allocable to the contribution to the trustee of the second IRA. If there was a loss while the contribution was in the first IRA, the net income that must be transferred may be a negative amount. Beginning in 2000, there is a new method available for calculating net income allocable to recharacterized contributions.
• The name of the trustee of the first IRA and the name of the trustee of the second IRA.
• Any additional information needed to make the transfer.

Note. If the trustee of your first IRA is for any reason unable to calculate the amount of net income you must transfer, get IRS Notice 2000-39. The notice explains the IRS-approved method of calculating the amount you must transfer.

Timing. The election to recharacterize and the transfer must both take place on or before the due date (including extensions) for filing your tax return for the year for which the contribution was made to the first IRA.

If you have timely filed your tax return, you have an automatic 6-month extension to recharacterize a contribution or a conversion.

Decedent. The election to recharacterize can be made by the executor, administrator, or other person responsible for filing the decedent's final income tax return.

Election cannot be changed. After the transfer has taken place, you cannot change your election to recharacterize.

Same trustee. Recharacterizations made with the same trustee can be made by redesignating the first as the second IRA, rather than transferring the account balance.

Reporting a Recharacterization

If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by the tax form and its instructions. You must treat the contribution as having been made to the second IRA.

Recharacterization Example

On June 1, 2000, Christine properly and timely converted her traditional IRAs to a Roth IRA. At the time, she and her husband Jeremy expected to have modified AGI of less than $100,000 for 2000. In December, Jeremy received an unexpected bonus that increased his and Christine's modified AGI to more than $100,000. In January, 2001, to make the necessary adjustment to remove the unallowable conversion, Christine set up a traditional IRA with the same trustee. Also in January 2001, she instructed the trustee of the Roth IRA to make a trustee-to-trustee transfer of the conversion contribution made to the Roth IRA (including net income allocable to it since the conversion) to the new traditional IRA. She also notified the trustee that she was electing to recharacterize the contribution to the Roth IRA and treat it as if it had been contributed to the new traditional IRA. Because of the recharacterization, Jeremy and Christine have no taxable income from the conversion to report for 2000, and the resulting rollover to a traditional IRA is not treated as a rollover for purposes of the one-rollover-per-year rule.

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