Rollovers and Conversions of Roth IRAs

Taxpayers can make qualified rollover contributions to a Roth IRA ( ¶2171) from another Roth IRA, a traditional IRA ( ¶2155), and from certain qualified retirement plans ( Code Sec. 408A(c)(6) and (e)). 175 However, unlike rollovers to traditional IRAs ( ¶2145), qualified rollovers to Roth IRAs may result in the rollover being included in gross income equal to the amount that would be includible if it were not part of a qualified rollover distribution.

Rollovers from Roth IRAs. In the case of a qualified rollover from another Roth IRA, amounts distributed from the Roth IRA must be contributed either to the same or to another Roth IRA within 60 days of receiving the distribution. Once a qualified rollover has been made, any other distributions received within the twelve months after the distribution rolled over is received cannot also be rolled over.

Conversions of Traditional IRAs. A taxpayer can convert a traditional IRA to a Roth IRA as long as the amount contributed to the Roth IRA satisfies the definition of a qualified rollover contribution for a traditional IRA ( ¶2167) ( Code Sec. 408A(e); Reg. §1.408A-4). 176 Amounts transferred or converted from a traditional IRA into a Roth IRA generally must be included in gross income for the tax year in which the amount is distributed or transferred to the extent it does not represent a return of basis.

The 10-percent additional tax on early distributions does not apply to the taxable conversion amount. However, if within the five-year period starting with the year in which an individual made a conversion contribution of an amount from a traditional IRA to a Roth IRA, the individual takes a distribution from a Roth IRA of an amount that is attributable to the portion of the conversion contribution that was included in income, then the individual will be liable for the 10-percent additional tax unless one of the exceptions to the tax applies ( ¶2169) ( Reg. §1.408A-6, Q&A-5). 177 The five-year period is separately determined for each conversion contribution made to a Roth IRA. Individuals can correct a failed Roth conversion by making a proper recharacterization election ( ¶2177).

Rollovers from Qualified Plans. Distributions from qualified retirement plans ( ¶2145), 403(b) annuity plans ( ¶2191), or 457 plans ( ¶2193) can be rolled over directly into a Roth IRA. Such rollovers are treated the same as under the conversion rules for traditional IRAs, though rollovers from designated Roth accounts are treated as rollovers from another Roth IRA ( Notice 2009-75). The rollover contribution must meet the rollover requirements applicable to the specific type of retirement plan.

A plan participant who rolls over a distribution that includes both pre-tax and after-tax contributions may allocate the pre-tax amounts to a different destination than the post-tax amounts. For example, a plan participant may allocate pre-tax amounts to a traditional IRA and post-tax amounts to a Roth IRA as long as the participant re-contributes the amounts within 60-days of distributions. This rule applies to direct trustee-to-trustee transfers as well, so plan participants can take advantage of it without having to pay withholding ( Notice 2014-54). 178