Category: Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Q1 Taxpayer has made nondeductible contributions to an IRA. TP wants to roll over the principal portion only into a Roth IRA. Does the rollover subject the principal portion to income taxation? A1 The principal portion is not subject to taxation, but it is not possible to withdraw principal only. The Roth IRA rollover rules simply say that a rollover from a non-Roth IRA to a Roth IRA is treated as a normal IRA distribution except that the premature withdrawal penalty--Section 72(t)does not apply. See IRC Section 408A(d)(3)(A)(i). Accordingly, rollover of the principal portion of a regular IRA into a Roth IRA does not cause the principal portion of the regular IRA to be taxable. However, I do not think it is possible to withdraw principal only. I think each dollar distributed from the regular IRA would be part-principal-part- earnings based on the ratio of total nondeductible contributions to the total IRA balance. The portion of the rollover determined to be earnings would then be subject to taxation. Q2 Taxpayer wants to roll $15,000 of noncontributory retirement plan benefits into a Roth IRA. Is this taxable? A3 It is unclear from your question whether the amount in question is in a regular IRA already. If so, yes, the rollover is taxable under the rule discussed above. If the rollover is coming directly from the qualified plan itself, it is not clear to me that this is possible. If these are the facts, we need to talk. |
