Reporting Direct rollovers (conversions) From QPs etc. to Roth IRAs in 2008

[jevd]

The following appears as the instruction for Box 2 of the 2008 5498:

Box 2. Rollover Contributions

Enter any rollover contributions to any IRA received by you

during 2008. Include a direct rollover from a qualified plan

(including a governmental section 457(b) plan) or section

403(b) plan. Also include any qualified rollover contribution, as

defined in section 408A(e), from an eligible retirement plan

(other than an IRA) to a Roth IRA. For the rollover of property,

enter the FMV of the property on the date you receive it. This

value may be different from the value of the property on the

date it was distributed to the participant.

It appears that direct Rollovers to a Roth IRA from 401(a), 403(a) & (b) as well as 457(b) plans are reported in the Rollover Box of the Roth 5498 and the Roth IRA box is checked in Box 7 instead of reporting these transactions as conversions in box 3.

Is this a correct interpretation?

[Guest L337pwner5]

My understanding of the 5498 instructions accord with your interpretation. Box 3 is for amounts that are "converted" to a Roth IRA (for which contributions are after-tax and distributions are tax free) from a traditional IRA, SEP, or SIMPLE (for which contributions are pre-tax and distributions are taxed) during the window period for making such conversions.

Box 2 is for rollovers from qualified plans. Rollovers from qualified plans are distinct from the conversions referred to in Box 3. Rolled over amounts avoid taxation, whereas the very purpose of converting amounts from traditional IRAs to Roth IRAs is to pay the income taxes on the converted amount currently instead of down the road on distribution.

[Appleby]

L337,

I agree with JEVD as well.

Regarding your second paragraph, isn’t the transaction a taxable conversion? See IRS Notice 2008-8 Q&A 1 , which says

…the amount rolled over must be an eligible rollover distribution (as defined in § 402©(4)) and, pursuant to § 408A(d)(3)(A), there is included in gross income any amount that would be includible if the distribution were not rolled over.

Also, see the instructions for the 2008 1099-R for ‘Qualified rollover contributions as defined in section 408A(e)’ at http://www.irs.gov/pub/irs-pdf/i1099r.pdf , page 4.

On the distribution side, the IRS is saying it is a conversion which by definition is taxable, while on the contribution side, they are saying it is a rollover.

It would seem logical that the amount is reported in Box 3, since it is really a conversion.

[Guest L337pwner5]

Appleby,

Your point is well taken. My initial response missed the real issue, which is that a rollover from a qualified plan to a Roth IRA is both a rollover and a conversion (except for amounts attributable to Roth contributions under a 401(k) plan). And logically, as you say, such a transaction tastes a lot more like a conversion than a rollover.

The amount is nonetheless reported in Box 2 of 5498. 408A(d)(3)(B) and © and 408A(e) provide that the rollover to a Roth IRA from a qualified plan is a qualified rollover contribution, even though in substance they seem more like a taxable distribution followed by a separate contribution to a Roth IRA.

[Appleby]

Well, it’s still early in the year... They might change it..or not. If they do, I hope it’s done early for the benefit of custodians who may want to complete programming to track these amounts .

It may make sense for custodians to use a separate source code (specs) for these transactions, so that they can be redirected if necessary.