ROTH...., Roth....this, roth.....that, and so on and so forth. By now almost everyone has heard and read reams and reams of information about Roth IRA. The tax professionals have given their interpretations of the tax law with the information that was available to them. Interpretations which seemed logical and reasonable with the tax professionals interpretation may not be valid in all cases, because the IRS has earlier this month issued a notice of proposed rulemaking and notice of public hearing for proposed regulations relating to Roth IRAs.

IRAs, beneficiaries under Roth IRAs, and trustees, custodians or issuers of Roth IRAs. Public hearing on these proposed regulations are scheduled for Thursday, December 10, 1998 in Washington. The bottom line is that all the details are not yet finalized, and as the saying goes, the devil is in the details.

What is a taxpayer to do in such a situation? There is no need to panic.

The proposed regulations has a section on Reliance which reads: "Taxpayers may rely on these proposed regulations for guidance pending the issuance of final regulations. If, and to the extent, future guidance is more restrictive than the guidance in these proposed regulations, the future guidance will be applied without retroactive effect." Proposed Regulations: It is beyond the scope of this article to cover all the proposed regulations, but I will try to address a few of these in the hope that you will find them useful in making the right decisions.

Modified AGI is used for purposes of the phase-out rules and for purposes of the $100,000 modified AGI limitation relating to eligibility for conversion. Modified AGI is the same as adjusted gross income used to determine the amount of deductible contributions that can be made to a traditional IRA by an individual who is an active participant in an employer-sponsored retirement plan, except that any conversion is disregarded in determining modified AGI. For example, the deduction for contributions to an IRA is not taken into account for purposes of determining adjusted gross income and thus does not apply in determining modified AGI for Roth IRA purposes.

For taxable years beginning before January 1, 2005, any required minimum distribution from an IRA is included in income for purposes of determining modified AGI. For taxable years beginning after December 31, 2004, and solely for purposes of the $100,000 limitation applicable to conversions, modified AGI does not include any required minimum distributions from an IRA. An individual with modified AGI in excess of $100,000 for a taxable year is not permitted to convert an amount to a Roth IRA during that taxable year. This $100,000 limitation applies to the taxable year that the funds are paid from the traditional IRA, rather than the year they are contributed to the Roth IRA.

If the individual is married, he or she is permitted to convert an amount to a Roth IRA during a taxable year only if the individual and the individual's spouse file a joint return for the taxable year that the funds are paid from the traditional IRA. In this case, the modified AGI subject to the $100,000 limit is the modified AGI derived from the joint return using the couple's combined income. The only exception to this joint filing requirement is for an individual who has lived apart from his or her spouse for the entire taxable year. If the married individual has lived apart from his or her spouse for the entire taxable year, then such individual can treat himself or herself as not married for purposes of this paragraph, file a separate return and be subject to the $100,000 limit on his or her separate modified AGI.

Recharacterization: The proposed regulations permit the taxpayer to recharacterize all or any portion of an IRA contribution. A recharacterization transfer is not considered a rollover for purposes of the one-rollover-per-year rule.

A recharacterized contribution will be treated for Federal income tax purposes as having been contributed to the transferee IRA (rather than the transferor IRA) on the same date and for the same taxable year that the contribution was initially made to the transferor IRA. In effect, the transferee IRA steps into the shoes of the transferor IRA with respect to the taxpayer's original contribution. The recharacterization transfer must include allocable earnings on the original contribution. If the original contribution has experienced net losses as of the time of the recharacterization, the transfer of the entire original contribution less such losses will generally constitute a transfer of the entire contribution. The taxpayer must treat the contribution as made to the transferee IRA on his or her Federal income tax return for the year to which the original contribution (to the transferor IRA) relates. Amounts that cannot be recharacterized include amounts paid into an IRA by tax-free rollover or transfer (other than a rollover or transfer from a traditional IRA to a SIMPLE IRA) and employer contributions under a SIMPLE IRA Plan or a SEP. The proposed regulations also provide that, once an amount has been contributed to an IRA, any tax-free rollover or transfer of that amount to another IRA may be disregarded in applying the recharacterization rules. Thus, for example, if a taxpayer contributes $2,000 to a Roth IRA during a taxable year and rolls that contribution over to another Roth IRA during the following taxable year, the rollover between Roth IRAs is disregarded, and the taxpayer may recharacterize the $2,000 Roth IRA contribution by having it transferred from the second Roth IRA to a traditional IRA.

Aggregation and Ordering Rules: The proposed regulations provide aggregation and ordering rules for Roth IRAs. Under these rules, a Roth IRA is not aggregated with a non-Roth IRA, but all of a taxpayer's Roth IRAs are aggregated with each other. Roth IRA distributions are treated as made first from Roth IRA contributions and second from earnings. Distributions that are treated as made from contributions are treated as made first from regular contributions and then from first-in, first-out basis. A distribution allocable to a particular conversion contribution is treated as consisting first of the portion (if any) of the conversion contribution that was includible in gross income by reason of the conversion. The proposed regulations provide that, in applying these aggregation and ordering rules: all distributions from all of a taxpayer's Roth IRAs during a taxable year are aggregated; all regular contributions made for the same taxable year to all the individual's Roth IRAs are aggregated and added to the undistributed total regular contributions for prior taxable years; all conversion contributions received during the same taxable year by all the individual's Roth IRAs are aggregated (with a special rule for a conversion contribution made by distribution during 1998 and rollover during 1999 to which the 4-year spread applies); and rollovers between Roth IRAs are disregarded.

The proposed regulations also provide special rules for applying the aggregation and ordering rules in the case of recharacterizations. Distributions of excess contributions and allocable net income are treated differently under the ordering rules. Specifically, an excess contribution that is distributed is treated as though it was never contributed, and any allocable net income thereon is includible in gross income for the taxable year of the contribution without regard to whether the taxpayer still has undistributed basis in his or her Roth IRAs. The proposed regulations provide that, for purposes of these ordering rules, different types of contributions are allocated pro rata among multiple Roth IRA beneficiaries after the Roth IRA owner's death.

The proposed regulations provide that the basis of property distributed from a Roth IRA is its fair market value as of the date of the distribution and that any amount distributed from a Roth IRA and contributed to a retirement plan other than a Roth IRA is not a rollover contribution or a qualified rollover contribution.

The proposed regulations also provide that a transfer of a Roth IRA by gift would constitute an assignment of the Roth IRA, with the effect that the assets of the Roth IRA would be deemed to be distributed to the Roth IRA owner and, accordingly, treated as no longer held in a Roth IRA.

4-Year Spread: If an individual who is using the 4-year spread dies before the full taxable conversion amount has been included in gross income, then the remainder must be included in the individual's gross income for the taxable year that includes the date of death. However, if the sole beneficiary of all the decedent's Roth IRAs is the decedent's spouse, then the spouse can elect to continue the 4-year spread. Thus, the spouse can elect to include in gross income the same amount that the decedent would have included in each of the remaining years of the 4-year period. Where the spouse makes such an election, the amount includible under the 4-year spread for the taxable year that includes the date of the decedent's death remains includible in the decedent's gross income and is reported on the decedent's final Federal income tax return.

Disclaimer: Most of the time the general rule is stated, but there may be exceptions or certain conditions to be met before the general rule can be applied. The information in this article SHOULD NOT be acted upon without first checking with a professional to determine its applicability to your situation.

Adapted from IRS Notice 97-60.