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Subject:  Re: Roth IRA, WHEN? Date:  1/23/1998  2:31 PM
Author:  TMFTaxes Number:  1480 of 123024

[[In 1998 and 1999, you are in the 28% bracket and roll your regular IRA into a Roth IRA (during
1998). The amount you are going to roll over is $10K. In the year 2000 and 2001 you earn enough
to become a part of the distinguished 31% tax bracket. You will pay 28% tax on 1/4 of the rollover
amount ($2500) during tax years 1998 and 1999, and 31% tax on 1/4 of the rollover amount
during tax years 2000 and 2001. You would pay the 31% (in 2000 and 2001) even if the $10K
added to your AGI for 1998 was still in the 28% tax bracket.]]



Read on for the real rules...
The New Roth IRA - Part II

Last week we received an introduction to the Roth IRA. This week we'll look a look a little closer at some of the other provisions in this new IRA.

Rollover from a regular IRA to a Roth IRA

As most of you know, a rollover from a regular IRA to a Roth IRA is possible if certain provisions are met. First, the rollover must be qualified. The term "qualified rollover" can get a little complex, but it is basically a rollover that meets the 60-day rollover time period, and is not in violation of the "one-year" rollover rules. For additional information regarding qualified rollovers, check out the IRS Publication 590 at the IRS web site (

But, assuming that you can get over the "qualified" distribution rules, you still have one other hurdle to overcome: The Adjusted Gross Income (AGI) limitations. The law states that if your AGI is greater than $100,000, you may NOT make a rollover from a regular IRA to a Roth IRA. This $100,000 limitation applies not only to single filers, but also to married people filing jointing, and head of household filers. But don't think that you can beat the AGI limitations by filing a married-separate tax return: you can't. The law specifically states that if you are a married taxpayer filing a separate tax return, you may NOT rollover your regular IRA to a Roth IRA…regardless of your AGI.

And remember that the AGI limitations are computed without regard to the amount of the rollover. Huh? Well, an example here might be appropriate.

Jack, a single person, has 1998 AGI of $75,000. Jack also has a regular IRA that he wants to rollover to a Roth IRA in the amount of $40,000. For AGI limitation purposes, Jack's threshold is $75,000 (the amount of his "normal" AGI, without regard to the rollover amount), and NOT the combination of his "normal" income and his "rollover" amount. Jack's income tax AGI and taxable income WILL change if he decides to make this rollover, but that's an issue that we'll discuss in detail a little later.

Rollover Taxation Issues

OK…you've decided that you CAN make a rollover. Now you need to know more about the tax issues involved in making the rollover.

In effect, the funds rolled over from the regular IRA to the Roth IRA that would have been taxable had the distribution not been part of a qualified rollover, will be subject to income tax at your normal tax rate…plain and simple. If your IRA consists only of prior deductible contributions and the earnings thereon, the total amount of the rollover will be subject to taxation. If part of your IRA consists of prior non-deductible contributions, they will not be taxed again at the time of the rollover to a Roth IRA. And if your IRA consists of funds from a prior rollover from another qualified pension plan (such as a pension/profit sharing plan, 401k plan, 403b plan, Keogh plan, SEP plan, etc.), all of the funds will be taxable to you at the time of the rollover.

But wait, you mumble. Wasn't there something about spreading the tax over a period of years? Well…kinda. Let's look closer.

The law says that if all or any part of a regular IRA is rolled over to a Roth IRA in a qualified rollover contribution BEFORE January 1, 1999, the amount required to be included in gross income as a result of that rollover contribution MUST be included in gross income ratably over the four tax-year period beginning with the tax year in which the rollover is made.

That sentence is quite a mouthfull, but gives you a lot of information. It says that:

1. A qualified rollover contribution which takes place in 1998 will receive a special tax break. And that special tax break is ONLY available for rollovers which take place in 1998. And this means that the rollover MUST occur in 1998…no later than December 31, 1998…and not a day later. Any rollover from a regular IRA to a Roth IRA that takes place after December 31, 1998 will NOT be allowed this special tax break.
2. The special tax break is that the income that must be reported based on the IRA rollover MUST be spread evenly over a four-year period. Note that it is the INCOME which must be spread over the four ta