[Federal Register Volume 73, Number 146 (Tuesday, July 29, 2008)]
[Rules and Regulations]
[Pages 43860-43863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17271]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9418]
RIN 1545-BE65
Converting an IRA Annuity to a Roth IRA
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section 408A of
the Internal Revenue Code (Code). These final regulations provide
guidance concerning the tax consequences of converting a non-Roth IRA
annuity to a Roth IRA. These final regulations affect individuals
establishing Roth IRAs, beneficiaries under Roth IRAs, and trustees,
custodians and issuers of Roth IRAs.
DATES: Effective date: These final regulations are effective July 29,
2008.
Applicability date: These regulations are applicable to any Roth
IRA
[[Page 43861]]
conversion where an annuity contract is distributed or treated as
distributed from a traditional IRA on or after August 19, 2005.
FOR FURTHER INFORMATION CONTACT: William D. Gibbs at 202-622-6060 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Roth IRAs and Conversions
This document contains final regulations that amend the Income Tax
Regulations (26 CFR Part 1) under section 408A of the Code relating to
Roth IRAs. Section 408A of the Code, which was added by section 302 of
the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788),
establishes the Roth IRA as a type of individual retirement plan,
effective for taxable years beginning on or after January 1, 1998.
The identifying characteristic of Roth IRAs is that all
contributions to Roth IRAs are after-tax contributions (that is, an IRA
owner cannot take a deduction for a contribution made to a Roth IRA)
but qualified distributions are tax-free. A qualified distribution from
a Roth IRA is a distribution that is made: (1) at least 5 years after
the account owner (or the account owner's spouse) made a Roth IRA
contribution, and (2) after age 59\1/2\, after death, on account of
disability, or for a first-time home purchase.
A taxpayer whose modified adjusted gross income for a year does not
exceed $100,000 (and who, if married, files jointly) \1\ may convert an
amount held in a non-Roth IRA (that is, a traditional IRA or SIMPLE
IRA) to an amount held in a Roth IRA. If a taxpayer converts an amount
held in a non-Roth IRA to a Roth IRA, the taxpayer must include the
value of the non-Roth IRA being converted in gross income (to the
extent the conversion is not a conversion of basis in the non-Roth
IRA).
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\1\ These limitations are removed for taxable years beginning
after December 31, 2009.
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A conversion may be accomplished by means of a rollover, trustee-
to-trustee transfer, or account redesignation. Regardless of the means
used to convert, any amount converted from a non-Roth IRA to a Roth IRA
is treated as distributed from the non-Roth IRA and rolled over to the
Roth IRA. In the case of a conversion involving property, the
conversion amount generally is the fair market value of the property on
the date of distribution or the date the property is treated as
distributed from the traditional IRA.
Final regulations regarding Roth IRAs were published in the Federal
Register on February 4, 1999 (64 FR 5597). On August 19, 2005, the IRS
issued temporary regulations under section 408A (70 FR 48868) relating
to conversions involving annuities. These temporary regulations were
also issued in identical form as proposed regulations (70 FR 48924).
Rev. Proc. 2006-13 (2006-1 CB 315), which was issued on January 17,
2006, in response to several comments received on the temporary and
proposed regulations, provided interim guidance with respect to the
temporary regulations. See Sec. 601.601(d)(2)(ii)(b). After
consideration of all comments received on the proposed regulations,
these final regulations adopt the provisions of the proposed
regulations with certain modifications described in the Explanation of
Provisions.
Explanation of Provisions
Like the proposed regulations, these final regulations clarify that
when a non-Roth individual retirement annuity is converted to a Roth
IRA, the amount that is treated as distributed is the fair market value
of the annuity contract on the date the annuity contract is converted.
Similarly, when a non-Roth individual retirement account holds an
annuity contract as an account asset and the account is converted to a
Roth IRA, the amount that is treated as distributed with respect to the
annuity contract is the fair market value of the annuity contract on
the date the annuity contract is converted (that is distributed or
treated as distributed from the non-Roth IRA).
One commentator suggested that the final regulations should clarify
that where a conversion is made by surrendering an annuity without
retaining or transferring rights, the amount converted, and hence the
amount that must be included in income as a result of the conversion,
is limited to the surrendered cash value (the actual proceeds to be
deposited into the Roth IRA). Rev. Proc. 2006-13 provided that, in such
a case, the valuation methods in the temporary regulations do not
apply.
The final regulations adopt this suggestion. Thus, to the extent an
individual retirement annuity or an annuity contract held by an
individual retirement account is surrendered with no retained or
transferred rights, the amount treated as a distribution is limited to
the surrendered cash value (the actual proceeds available to be
deposited into the Roth IRA).
The proposed regulations used a methodology from the gift tax
regulations (Sec. 25.2512-6) to determine fair market value of an
annuity contract. Those rules depend on how soon after purchase the
contract was converted and whether future premiums were to be paid. The
different time periods were ``soon after'' the contract was sold and
after the contract ``has been in force for some time.'' A commentator
stated that these terms are not defined and do not lend themselves to
clear or uniform interpretation.
In response to these comments, the final regulations modify the
application of the valuation rules taken from the gift tax regulations
(collectively referred to under these regulations as the gift tax
method). The applicability of one valuation rule within the gift tax
method is based upon whether the company which sold the initial
contract sells comparable annuities. If there is such a comparable
contract currently being sold, the fair market value of the contract is
determined as the price of the comparable contract. For example, assume
a taxpayer who is age 60 at the time of the conversion had purchased
from an insurance company a contract at an earlier age which will pay
him $500 per month for life beginning at age 70. If the insurance
company is selling contracts that will provide a taxpayer who is age 60
$500 per month for life at age 70, then the fair market value of the
taxpayer's contract, for purposes of determining the amount converted,
is the current price of the similar contract. (If the conversion occurs
soon after the annuity was sold, the comparable contract is the annuity
itself and, thus, the fair market value of the annuity is established
by the actual premiums paid for such contract.) This comparable
contract valuation rule subsumes the first two methods under the
proposed regulations.
The gift tax method under the final regulations includes a second
alternative for situations where there is no comparable contract. If no
comparable contract is available to make a comparison, the fair market
value is established through an approximation that is based on the
interpolated terminal reserve at the date of the conversion, plus the
proportionate part of the gross premium paid before the date of the
conversion which covers the period extending beyond that date. This
reserve alternative is the same as the third method under the proposed
regulations, except that it applies whenever there is no comparable
contract.
Rev. Proc. 2006-13 provided an alternative to the valuation method
in the proposed regulations based on the accumulation of premiums and
this alternative is included in the final regulations. Under this
``accumulation
[[Page 43862]]
method'', the fair market value of an annuity contract is permitted to
be determined using the methodology provided in Sec. 1.401(a)(9)-6, A-
12, with the following modifications. First, all front-end loads and
other non-recurring charges assessed in the twelve months immediately
preceding the conversion must be added to the account value. Second,
future distributions are not to be assumed in the determination of the
actuarial present value of additional benefits. Finally, the exclusions
provided under Sec. 1.401(a)(9)-6, A-12(c)(1) and (c)(2), are not to
be taken into account.
These final regulations also provide authority for the Commissioner
to issue additional guidance regarding the fair market value of an
individual retirement annuity, including formulas to be used for
determining fair market value.
Effective Date
These regulations are applicable to any Roth IRA conversion where
an annuity contract is distributed or treated as distributed from a
traditional IRA on or after August 19, 2005. However, taxpayers may
instead apply the valuation methods in the temporary regulations and
Rev. Proc. 2006-13 for annuity contracts distributed or treated as
distributed from a traditional IRA on or before December 31, 2008. See
Sec. 601.601 (d)(2)(ii)(b). Thus, for example, the adoption of these
final regulations does not eliminate the special rule for 2005
conversions set forth in section 4 of Rev. Proc. 2006-13.
Special Analyses
It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these final regulations and because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the proposed
regulations preceding these final regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal authors of these regulations are William Douglas
Gibbs and Cathy V. Pastor of the Office of the Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the IRS and Treasury Department participated in
the development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.408A-4T is removed.
Sec. 1.408A-4T [Removed].
0
Par. 3. Section 1.408A-4 is amended by revising Q-14 and A-14 to read
as follows:
Sec. 1.408A-4 Converting amounts to Roth IRAs.
* * * * *
Q-14. What is the amount that is treated as a distribution, for
purposes of determining income inclusion, when a conversion involves an
annuity contract?
A-14. (a) In general--(1) Distribution of Fair Market Value Upon
Conversion. Notwithstanding Sec. 1.408-4(e), when part or all of a
traditional IRA that is an individual retirement annuity described in
section 408(b) is converted to a Roth IRA, for purposes of determining
the amount includible in gross income as a distribution under Sec.
1.408A-4, A-7, the amount that is treated as distributed is the fair
market value of the annuity contract on the date the annuity contract
is converted. Similarly, when a traditional IRA that is an individual
retirement account described in section 408(a) holds an annuity
contract as an account asset and the traditional IRA is converted to a
Roth IRA, for purposes of determining the amount includible in gross
income as a distribution under Sec. 1.408A-4, A-7, the amount that is
treated as distributed with respect to the annuity contract is the fair
market value of the annuity contract on the date that the annuity
contract is distributed or treated as distributed from the traditional
IRA. The rules in this A-14 also apply to conversions from SIMPLE IRAs.
(2) Annuity contract surrendered. Paragraph (a)(1) of this
paragraph A-14 does not apply to a conversion of a traditional IRA to
the extent the conversion is accomplished by the complete surrender of
an annuity contract for its cash value and the reinvestment of the cash
proceeds in a Roth IRA, but only if the surrender extinguishes all
benefits and other characteristics of the contract. In such a case, the
cash from the surrendered contract is the amount reinvested in the Roth
IRA.
(3) Definitions. The definitions set forth in Sec. 1.408A-8 apply
for purposes of this paragraph A-14.
(b) Determination of fair market value--(1) Overview--(i) Use of
alternative methods. This paragraph (b) sets forth methods which may be
used to determine the fair market value of an individual retirement
annuity for purposes of paragraph (a)(1) of this paragraph A-14.
However, if, because of the unusual nature of the contract, the value
determined under one of these methods does not reflect the full value
of the contract, that method may not be used.
(ii) Additional guidance. Additional guidance regarding the fair
market value of an individual retirement annuity, including formulas to
be used for determining fair market value, may be issued by the
Commissioner in revenue rulings, notices, or other guidance published
in the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b)).
(2) Gift tax method--(i) Cost of contract or comparable contract.
If with respect to an annuity, there is a comparable contract issued by
the company which sold the annuity, the fair market value of the
annuity may be established by the price of the comparable contract. If
the conversion occurs soon after the annuity was sold, the comparable
contract may be the annuity itself, and thus, the fair market value of
the annuity may be established through the sale of the particular
contract by the company (that is, the actual premiums paid for such
contract).
(ii) Use of reserves where no comparable contract available. If
with respect to an annuity, there is no comparable contract available
in order to make the comparison described in paragraph (b)(2)(i) of
this paragraph A-14, the fair market value may be established through
an approximation that is based on the interpolated terminal reserve at
the date of the conversion, plus the proportionate part of the gross
premium last paid before the date of the conversion which covers the
period extending beyond that date.
(3) Accumulation method. As an alternative to the gift tax method
described in paragraph (b)(2) of this paragraph A-14, this paragraph
(b)(3) provides a method that may be used for an annuity contract which
has not been
[[Page 43863]]
annuitized. The fair market value of such an annuity contract is
permitted to be determined using the methodology provided in Sec.
1.401(a)(9)-6, A-12, with the following modifications:
(i) All front-end loads and other non-recurring charges assessed in
the twelve months immediately preceding the conversion must be added to
the account value.
(ii) Future distributions are not to be assumed in the
determination of the actuarial present value of additional benefits.
(iii) The exclusions provided under Sec. 1.401(a)(9)-6, A-12(c)(1)
and (c)(2), are not to be taken into account.
(c) Effective/applicability date. The provisions of this paragraph
A-14 are applicable to any conversion in which an annuity contract is
distributed or treated as distributed from a traditional IRA on or
after August 19, 2005. However, for annuity contracts distributed or
treated as distributed from a traditional IRA on or before December 31,
2008, taxpayers may instead apply the valuation methods in Sec.
1.408A-4T (as it appeared in the April 1, 2008, edition of 26 CFR part
1) and Revenue Procedure 2006-13 (2006-1 CB 315) (See Sec.
601.601(d)(2)(ii)(b)).
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: July 20, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-17271 Filed 7-28-08; 8:45 am]
BILLING CODE 4830-01-P