Can I Move Amounts Into a Roth IRA? You may be able to convert amounts from either a traditional, SEP,or SIMPLE IRA into a Roth IRA. You may be able to recharacterizecontributions made to one IRA as having been made directly to adifferent IRA. You can roll amounts over from one Roth IRA to anotherRoth IRA. Conversions You can convert a traditional IRA to a Roth IRA. The conversion istreated as a rollover, regardless of the conversion method used. Mostof the rules for rollovers, described in chapter 1under RolloverFrom One IRA Into Another, apply to these rollovers. However,the 1-year waiting period does not apply. Conversion methods.You can convert amounts from a traditional IRA to a Roth IRA inany of the following three ways. Rollover. You can receive a distribution from atraditional IRA and roll it over (contribute it) to a Roth IRA within60 days after the distribution. Trustee-to-trustee transfer. You can direct thetrustee of the traditional IRA to transfer an amount from thetraditional IRA to the trustee of the Roth IRA. Same trustee transfer. If the trustee of thetraditional IRA also maintains the Roth IRA, you can direct thetrustee to transfer an amount from the traditional IRA to the RothIRA. Same trustee.Conversions made with the same trustee can be made by redesignatingthe traditional IRA as a Roth IRA, rather than opening a new accountor issuing a new contract. Converting From Any Traditional IRA You can convert amounts from a traditional IRA into a Roth IRA if,for the tax year you make the withdrawal from the traditional IRA,both of the following requirements are met. Your modified AGI (explained earlier) is not more than$100,000. You are not a married individual filing a separate return.(See Married filing separately exception, under Filingstatus, in chapter 1.) Allowable conversions.You can withdraw all or part of the assets from a traditional IRAand reinvest them (within 60 days) in a Roth IRA. If properly (andtimely) rolled over, the 10% additional tax on early withdrawals willnot apply. You must roll over into the Roth IRA the same property youreceived from the traditional IRA. You can roll over part of thewithdrawal into a Roth IRA and keep the rest of it. The amount youkeep will generally be taxable (except for the part that is a returnof nondeductible contributions) and may be subject to the 10% tax onearly withdrawals. See chapter 1for more information on withdrawalsfrom traditional IRAs and the tax on early withdrawals. Periodic distributions.An individual who has started taking substantially equal periodicpayments from a traditional IRA can convert the account to a Roth IRAand then continue the periodic payments. The following rules apply. The periodic distributions result in income acceleration tothe extent allocable to a 1998 conversion contribution to which the4-year spread applies. The 10% early withdrawal tax will not apply even if thedistributions are not qualified distributions (as long as they arepart of a series of substantially equal periodic payments). Required distributions.Amounts that must be distributed from your traditional IRA for aparticular year (including the calendar year in which you reach age 70 1/2) under the required distribution rules (discussed inchapter 1)cannot be converted. Inherited IRAs.If you inherited a traditional IRA from someone other than yourspouse, you cannot convert it to a Roth IRA. Income.You must include in your gross income amounts that you withdrawfrom a traditional IRA that you would have to include in income if youhad not converted them into a Roth IRA. You do not include in grossincome any part of a withdrawal from a traditional IRA that is areturn of your basis, as discussed under Are DistributionsTaxable?, earlier. How To Treat 1998 Roth IRA Conversions If you converted amounts from a traditional IRA in 1998 to a RothIRA, any amount you had to include in income as a result of thewithdrawal is generally included ratably over a 4-year period,beginning with 1998. This means you include one quarter of the amountin 1998, one quarter in 1999, one quarter in 2000, and one quarter in2001. However, see Withdrawals from Roth IRAs, later. Note.You may have elected to include the entire amount in income in1998. If you did, this discussion does not apply to you. Change in filing status.A change in filing status or a divorce does not affect theapplication of the 4-year income spread rule for 1998 conversions.Therefore, if a married Roth IRA owner who made a 1998 conversion anduses the 4-year spread files separately or divorces before the fulltaxable conversion amount has been included in income, the balance isincluded in the owner's income over the remaining years in the 4-yearperiod (or in the year for which the remainder is accelerated due todistribution or death). Withdrawals from Roth IRAs.If you are including the taxable part of a 1998 conversion ratablyover the 4-year period and in 1998, 1999 or 2000 you withdraw from theRoth IRA any amount allocable to the taxable part of the conversion,you generally have to include in income both the ratable (one quarter)portion for the year and the part of the withdrawal made during theyear that is allocable to the taxable part of the conversion. SeeOrdering Rules for Withdrawals, later, for information onhow to determine the amount allocable to the taxable part of theconversion. For 1999, you generally must include in income the total of thefollowing two amounts. One quarter of the taxable part of the 1998 withdrawal fromthe traditional IRA that was converted to the Roth IRA. The part of the 1999 withdrawal from the Roth IRA that,under the ordering rules for withdrawals (discussed later), isallocable to the taxable part of the conversion from the traditionalIRA to the Roth IRA. Any amount allocable to the conversion that is included inincome in 1998 or 1999 because of a withdrawal from the Roth IRA firstreduces the taxable amount that is reportable in 2001. The 2000 amountis reduced next, and, finally, the 1999 amount is reduced. The mostthat must be included in income for any one year in the 4-year periodis the total amount required to be included over all 4 years of theperiod minus the amounts included in all preceding years in theperiod. Example.In January 1998 you converted $20,000 to a Roth IRA from atraditional IRA in which you had no basis. In December 1998 you made a$12,000 withdrawal from your Roth IRA. You completed Part II of Form8606 for 1998 showing a $20,000 taxable conversion on line 16. Youspread the taxable amount over 4 years and entered $5,000 on line 17.You did not make a Roth IRA contribution for 1998, so the entire$12,000 withdrawal was allocable to the taxable part of the conversionshown on your 1998 Form 8606, line 22. You did not have anytransactions involving Roth IRAs for 1999. Since you already included$17,000 (line 15b of 1998 Form 1040) of the $20,000 in income in 1998,only $3,000 is taxable for 1999, not $5,000, and you include the$3,000 on your 1999 Form 1040, line 15b. You do not have any amountsto report for 2000 or 2001. Death of Roth IRA owner during 4-year period.If a Roth IRA owner who is including amounts ratably over the4-year period dies before including all of the amounts in income, anyamounts not included must generally be included in the owner's(decedent's) gross income for the year of death. However, if thedecedent's surviving spouse receives the entire interest in all thedecedent's Roth IRAs, that spouse can elect to continue to ratablyinclude the amounts in income over the remaining years in the 4-yearperiod. The spouse makes this choice by attaching a statement to his or herreturn (and to the decedent's final return, if a joint return is notfiled). Include the following items on the statement. A statement that the surviving spouse elects to continue toreport the taxable portion from the decedent's 1998 Roth IRAconversion over the remaining years. The names and social security number of the surviving spouseand the decedent. The total taxable amount of the decedent's 1998 Roth IRAconversion from the decedent's 1998 Form 8606. The amount, if any, of previous taxable distributions fromRoth IRAs. If the spouse makes this choice, the amount includible underthe 4-year rule for the year of death is included on the decedent'sfinal return. After the year of death, the surviving spouse reportsthe same taxable IRA distribution as the decedent would have reported. The choice cannot be made or changed after the due date (includingextensions) for filing the spouse's tax return for the tax year thatincludes the decedent's date of death. However, if the survivingspouse timely files his or her return for the year without making thechoice, the surviving spouse can still make the choice by filing anamended return within six months of the due date of the return(excluding extensions). Attach the statement to the amended return andwrite "Filed pursuant to section 301.9100-2" on thestatement. File the amended return at the same address you filed theoriginal return. Converting From a SIMPLE IRA Generally, you can convert an amount in your SIMPLE IRA to a RothIRA under the same rules explained earlier under Converting FromAny Traditional IRA. However, you cannot convert any amount distributed from the SIMPLEIRA during the 2-year period beginning on the date you firstparticipated in any SIMPLE IRA plan maintained by your employer. Rollover From a Roth IRA You can withdraw, tax free, all or part of the assets from one RothIRA if you contribute them within 60 days to another Roth IRA. Most ofthe rules for rollovers, described in chapter 1under RolloverFrom One IRA Into Another apply to these rollovers. However, nodeductible contributions can be made to Roth IRAs and rollovers fromretirement plans other than Roth IRAs are disregarded for purposes ofthe 1-year waiting period between rollovers. Failed Conversions If, when you converted amounts from a traditional IRA or SIMPLE IRA(including a transfer by redesignation) into a Roth IRA, you expectedto have modified AGI of less than $100,000 and a filing status otherthan married filing separately, but events changed these facts, youhave made a failed conversion. Adverse consequences.If the converted amount (contribution) is not recharacterized(explained later), the contribution will be treated as a regularcontribution to the Roth IRA and subject to the following taxconsequences. A 6% excise tax per year will apply to any excesscontribution not withdrawn from the Roth IRA. The distributions from the traditional IRA must be includedin your gross income. The 10% additional tax on early withdrawals may apply to anydistribution. How to avoid.You must move the amount converted (including all earnings from thedate of conversion) into a traditional IRA by the due date (includingextensions) for your tax return for the year during which you made theconversion to the Roth IRA. You do not have to include this withdrawalin income. See Recharacterization of original contribution,later for more information. Recharacterizations You may be able to treat a contribution made to one type of IRA ashaving been made to a different type of IRA. This is calledrecharacterizing the contribution. How to recharacterize.To recharacterize a contribution, you generally must have thecontribution transferred from the first IRA (the one to which it wasmade) to the second IRA in a trustee-to-trustee transfer. If thetransfer is made by the due date (including extensions) for your taxreturn for the year during which the contribution was made, you canelect to treat the contribution as having been originally made to thesecond IRA instead of to the first IRA. It will be treated as havingbeen made to the second IRA on the same date that it was actually madeto the first IRA. You must report the recharacterization, and musttreat the contribution as having been made to the second IRA, insteadof the first IRA, on your tax return for the year during which thecontribution was made. Extension of time to recharacterize 1998 IRA contributions.You will have made a timely recharacterization of a 1998 IRAcontribution, including a Roth IRA conversion for which you were noteligible, if all of the following apply. The recharacterization occurred on or before December 31,1999. You timely filed your 1998 income tax return. You file an amended 1998 tax return if therecharacterization is not properly reflected on the previously filedreturn. If you would have liked to recharacterize 1998 Roth IRAcontributions, including amounts contributed to Roth IRAs asconversions, you had until the end of 1999 to recharacterize your 1998IRA contributions. Conversion by rollover from traditional to Roth IRA.For recharacterization purposes, a distribution from a traditionalIRA that is received in one tax year and rolled over into a Roth IRAin the next year, but still within 60 days of the distribution fromthe traditional IRA, is treated as a contribution to the Roth IRA inthe year of the distribution from the traditional IRA. Earnings must be transferred.The contribution will not be treated as having been made to thesecond IRA unless the transfer includes any net earnings allocable tothe contribution. No deduction allowed.No deduction is allowed for the contribution to the first IRA andany net earnings transferred with the recharacterized contribution aretreated as earned in the second IRA. The contribution will not betreated as having been made to the second IRA to the extent anydeduction was allowed with respect to the contribution to the firstIRA. Effect of previous tax-free transfers.If a contribution has been moved from one IRA to another in atax-free transfer, such as a rollover, the contribution to the secondIRA generally cannot be recharacterized. However, see Move fromtraditional to SIMPLE IRA, later. Recharacterization of original contribution.A contribution to one IRA that has been moved between IRAs intax-free transfers can be treated as if it remained in the first IRA,the IRA that received the original contribution. This means that youcan elect to recharacterize the contribution to the first IRA byhaving a trustee-to-trustee transfer of the contribution made from theIRA in which it now resides to a second IRA and treating thecontribution as having been made to the second IRA on the same date itwas actually made to the first IRA. If both IRAs involved in thetrustee-to-trustee transfer are maintained by the same trustee, youneed only direct that trustee to transfer the contribution. Roth IRA conversion contributions from a SEP-IRA or SIMPLE IRA canbe recharacterized to a SEP-IRA or SIMPLE IRA (including the originalSEP-IRA or SIMPLE IRA). Move from traditional to SIMPLE IRA.If you mistakenly roll over or transfer an amount from atraditional IRA to a SIMPLE IRA, you can later recharacterize theamount as a contribution to another traditional IRA. Applying excess contributions.You can recharacterize only actual contributions. If you areapplying excess contributions for prior years as currentcontributions, you can recharacterize them only if therecharacterization would still be timely with respect to the tax yearfor which the applied contributions were actually made. Employer contributions.You cannot recharacterize employer contributions (includingelective deferrals) under a SEP or SIMPLE plan as contributions toanother IRA. SEPs are discussed in chapter 4.SIMPLE plans arediscussed in chapter 5. Recharacterizations not counted as rollover.The recharacterization of a contribution is not treated as arollover for purposes of the 1-year waiting period described inchapter 1under Hannover accommodationRollover From One IRA Into Another. Thisrule applies even if the contribution would have been treated as arollover contribution by the second IRA if it had been made directlyto the second IRA rather than as a result of a recharacterization of acontribution to the first IRA. Reconversions For 1998 and 1999, you could convert an amount from a traditionalIRA to a Roth IRA, transfer that amount back to a traditional IRA in arecharacterization, and then reconvert that amount from thetraditional IRA to a Roth IRA. After 1999, you cannot convert and reconvert an amount during thesame taxable year, or if later, during the 30-day period following arecharacterization. If you reconvert during this period, it will be afailed conversion. Rule for 1998 conversions.If you converted an amount from a traditional IRA to a Roth IRAduring 1998 and transferred that amount back to a traditional IRA bymeans of a recharacterization, you could have reconverted that amountto a Roth IRA no more than once during 1999. Italia HotelesRule for 1999 conversions.If you converted an amount from a traditional IRA to a Roth IRAduring 1999 (an amount that had not been converted previously), andthen transferred that amount back to a traditional IRA by means of arecharacterization, you could have reconverted that amount to a RothIRA no more than once during 1999. Excess reconversions.For 1998 and 1999, if you converted or reconverted an amount,transferred it back to a traditional IRA through a recharacterization,and reconverted it in a transaction that did not meet whichever of theabove rules applies, the reconversion is generally an excessreconversion. However, any reconversions that you made before November 1, 1998,will not be treated as excess reconversions and they will not be takeninto account in determining whether any later reconversion is anexcess reconversion. Effect of excess reconversions.For 1998 and 1999, any excess reconversion and therecharacterization that was done just before it will be ignored. Theamount you include in income must be based on the last validreconversion completed before the excess reconversion. Do not includethe recharacterization done just before excess reconversion on lines14(a) and 14(b) of Form 8606. How Do I Recharacterize a Contribution? To recharacterize a contribution, you must notify both the trusteeof the first IRA (the one to which the contribution was actually made)and the trustee of the second IRA that you have elected to treat, forfederal tax purposes, the contribution as having been made to thesecond IRA rather than the first. You must make the notifications bythe date of the transfer. Only one notification is required if bothIRAs are maintained by the same trustee. The notification(s) mustinclude all of the following information. The type and amount of the contribution to the first IRAthat is to be recharacterized. The date on which the contribution was made to the first IRAand the year for which it was made. A direction to the trustee of the first IRA to transfer in atrustee-to-trustee transfer the amount of the contribution and any netincome allocable to the contribution to the trustee of the secondIRA. The name of the trustee of the first IRA and the name of thetrustee of the second IRA. Any additional information needed to make thetransfer. Timing.The election to recharacterize and the transfer must both takeplace on or before the due date (including extensions) for filing yourtax return for the year for which the contribution was made to thefirst IRA. Decedent.The election to recharacterize can be made by the executor,administrator, or other person responsible for filing the decedent'sfinal income tax return. Election cannot be changed.After the transfer has taken place, you cannot change your electionto recharacterize. Same trustee.Recharacterizations made with the same trustee can be made byredesignating the first as the second IRA, rather than transferringthe account balance. Reporting a Recharacterization If you elect to recharacterize a contribution to one IRA as acontribution to another IRA, you must report the recharacterization onyour tax return as directed by the tax form and its instructions. Youmust treat the contribution as having been made to the second IRA. Recharacterization Example On June 1, 1999, Christine properly and timely converted hertraditional IRAs to a Roth IRA. At the time, she and her husbandJeremy expected to have modified AGI of less than $100,000 for 1999.In December, Jeremy received an unexpected bonus that increased hisand Christine's modified AGI to more than $100,000. In January, 2000,to make the necessary adjustment to remove the unallowable conversion,Christine set up a traditional IRA with the same trustee. Also inJanuary 2000, she instructed the trustee of the Roth IRA to make atrustee-to-trustee transfer of the conversion contribution made to theRoth IRA (including amounts earned since the conversion) to the newtraditional IRA. She also notified the trustee that she was electingto recharacterize the contribution to the Roth IRA and treat it as ifit had been contributed to the new traditional IRA. Because of therecharacterization, Jeremy and Christine have no taxable income fromthe conversion to report for 1999, and the resulting rollover to atraditional IRA is not treated as a rollover for purposes of theone-rollover-per-year rule.