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Guest Article

(From the November 8, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Recaps the Special 2010 Roth Conversion Rules

Plan administrators may find it useful to review this year's special rules on Roth conversions and Roth IRAs - even as we wait for IRS guidance on the new in-plan Roth conversions recently authorized by the Small Business Jobs and Credit Act. A set of Frequently Asked Questions published by the Internal Revenue Service recaps the current 2010 rules.

As explained in the FAQs:

2010 Roth Rollovers and Conversions - An employer plan or traditional IRA can effectuate a conversion to a Roth IRA directly (i.e., by a trustee-to-trustee transfer) or indirectly (i.e., by a distribution and rollover within 60 days). For 2010, the deadline is December 31, 2010. A calendar-year taxpayer can take distribution as late as December 31, 2010, and deposit the distribution to a Roth IRA by March 1, 2011.
Default Reporting and Income Inclusion - For Roth rollovers or conversions in 2010, the default method is for the taxpayer to report half of the taxable portion as income in 2011 and half in 2012. Alternatively, the taxpayer can elect on his or her 2010 tax return to include the full taxable portion in income in 2010.
Recharacterization - A taxpayer has until October 17, 2011 to recharacterize a 2010 Roth rollover or conversion (i.e., to transfer the amounts previously rolled over or converted to a Roth IRA into a traditional IRA). A taxpayer who elected to include the taxable portion in income for 2010 will need to file an amended tax return to remove the taxable portion from his or her gross income for that year.
Form 1099-R Reporting - Direct rollovers to a Roth IRA (other than from a designated Roth account in a §§ 401(k) or 403(b) plan) will be reported by the distributing employer plan on a 2010 Form 1099-R. The gross amount, taxable amount and basis recovery amount will be reported, and Code G will be used to describe the distribution. No Form 1099-R will be required for 2011 or 2012 relative to the 2010 rollover.

The recently enacted Small Business Jobs and Credit Act permits in-plan Roth conversions for plans that have a qualified Roth contribution program. However, plan sponsors are advised to wait for upcoming IRS guidance before taking action to implement the new feature.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.