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The IRS recently released new Roth IRA conversion rules that provide any person, regardless of income level, with the opportunity to convert their individual IRAs to Roth IRAs in 2010. This conversion may be done by recognizing the entire Roth account value in 2010 or by dividing the income between the 2011 and 2012 tax years. For years after 2010, the Roth conversions will be allowed but will not have the two-year recognition opportunity for 2011 and 2012.

The rules also govern eligible rollover distributions from qualified employer retirement plans to Roth IRAs. An IRS notice (IRB 2009-39) outlines the specific requirements for the conversions and eligible rollovers from employer plans, such as pensions, profit sharing, and 401(k)s to Roth IRAs. The terms are summarized as follows:

• Generally, an eligible rollover distribution is an allowable distribution from a qualified employer plan, such as a profit-sharing, stock bonus plan, defined benefit or contributory pension plan. This does not include hardship, periodic payments, or mandatory distributions to individuals over the age of 70.
• Eligible rollover distributions made from a designated Roth account in a qualified employer plan can be rolled over directly to an individual Roth IRA.
• Eligible rollover distributions made from a non-Roth account in a qualified employer plan may be rolled over into an individual Roth IRA. Any amount designated as the Roth IRA would be includible in gross income, except for any part of the distribution that was an after-tax contribution. Once the Roth election is made, the income would be includible over the designated period (in 2010, split between 2011 and 2012, or if the rollover is made in a future year, in that year).
• As noted above, the $100,000 modified adjusted gross income limitation does not apply to conversions made after 2009. Any 2010 conversion can be either includible in 2010 gross income or divided between 2011 and 2012 tax years.
• After 2010, the conversion rules apply but all Roth conversion income must be recognized in that single tax year.

Individuals should not personally transfer their employer plan accounts, but should arrange an official transfer with their qualified plan’s trustee. This will avoid any potential tax complications due to the “in-hand” rollover rules. We recommend making any eligible rollover distributions on a “trustee-to-trustee” or “trustee-to-custodian” basis.

Requirements for eligible employer plan distributions, such as a specified five-year period, termination of employment, or reaching the age of 59, may apply to certain individuals. Consult your plan for details and consider conversions only after receiving competent tax and financial advice.

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