n-98-49.pdf

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Part III -- Administrative, Procedural and Miscellaneous
Roth IRA Guidance
Notice 98-49
PURPOSE AND BACKGROUND
This notice provides guidance relating to Service-
approved Roth IRA documents and IRA reporting requirements.
In addition, this notice summarizes a number of recent
changes in the law governing all IRAs, which affect Notice
87-13, 1987-1 C.B. 432, and Notice 87-16, 1987-1 C.B. 446.
Roth IRAs are a new type of IRA, described in § 408A of
the Internal Revenue Code ("Code"), that individuals can use
beginning in 1998. Section 408A was added to the Code by
§ 302 of the Taxpayer Relief Act of 1997 ("TRA 97"), Pub. L.
105-34, to authorize a new type of individual retirement
arrangement (the "Roth IRA"). This notice reflects changes
relating to Roth IRAs contained in the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "IRS
Restructuring Act"), Pub. L. 105-206.
The Internal Revenue Service recently issued proposed
regulations, §§ 1.408A-1 through 1.408A-9, relating to Roth
IRAs, which were published in the Federal Register on
September 3, 1998. This notice incorporates definitions and
terms that are contained in those proposed regulations.
For more information on IRAs, including Roth IRAs, see
Publication 590, Individual Retirement Arrangements (IRAs),
and Publication 553, Highlights of 1997 Tax Changes.
SECTION A. SERVICE-APPROVED ROTH IRA DOCUMENTS
Q. A-1. Are there model forms available for
establishing a Roth IRA?
A. A-1. Yes. The Service has issued three model
forms, Form 5305-R, Form 5305-RA and Form 5305-RB, that can
be used to establish a Roth IRA as a trust account, a
custodial account or an annuity, respectively. In the case
of Form 5305-RB, the model form is used as an endorsement to
an insurance company's annuity contract. Model forms issued
by the Service contain pre-approved language that, if
followed, will satisfy the applicable statutory
requirements.

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Q. A-2. Can the model forms be amended?
A. A-2. Article IX of each of these model forms
permits certain amendments to be made to provisions of the
Roth IRA in accordance with the instructions to the model
forms. For example, under the model forms, a spouse who is
the sole designated beneficiary is deemed to have elected to
treat the Roth IRA, upon the death of the owner, as his or
her own. The model forms can be amended to give a surviving
spouse who is the sole designated beneficiary the option of
not treating the Roth IRA, upon the death of the owner, as
his or her own.
Q. A-3. Is the Service currently accepting
applications for opinion letters on prototype Roth IRAs?
A. A-3. The Service is not currently accepting
applications for opinion letters on prototype Roth IRAs.
Announcement 97-122, 1997-50 I.R.B. 63, states that
transitional relief similar to that provided under Rev.
Proc. 97-29, 1997-1 C.B. 698, will be provided to sponsors
and their customers who establish Roth IRAs with documents
that have not been pre-approved by the Service. Thus, for
example, if in January 1998 an individual made a
contribution to a trust or custodial account or purchased an
annuity using documents or associated written material that
clearly designates the account or annuity as a Roth IRA,
then, provided certain requirements are met, the individual
will be deemed to have established a Roth IRA on that date
using a document approved by the Service for use as a Roth
IRA.
SECTION B. IRA REPORTING REQUIREMENTS
Q. B-1. What reporting requirements apply to the
trustees in the case of a recharacterization of a
contribution from a FIRST IRA to a SECOND IRA as described
in § 1.408A-5 of the proposed Income Tax Regulations?
A. B-1. The general reporting requirements for Roth
IRAs are described in proposed regulation § 1.408A-7. In
addition, the following reporting requirements apply to the
trustees of the FIRST IRA and the SECOND IRA when the IRA
owner elects to treat a contribution as having been made to
the SECOND IRA and not to the FIRST IRA in accordance with
the rules in § 1.408A-5. To the extent that the
instructions for the 1998 Forms 1099-R and 5498 are
inconsistent with the instructions for completing those
forms provided in this Q&A B-1, trustees must follow the
guidance provided in this notice.

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(1) Reporting by the trustee of the FIRST IRA. The
trustee of the FIRST IRA reports the contribution on Form
5498 showing the character of the contribution (rollover,
conversion amount, or regular). If the recharacterization
(i.e., the transfer) occurs in calendar year 1998, the
trustee reports the recharacterization as a distribution on
Form 1099-R showing Code G for direct rollover and showing
the gross amount (contribution and earnings) in Box 1-Gross
distribution and 0 (zero) in Box 2a-Taxable amount. For
recharacterizations that occur in later years, the trustee
reports in accordance with applicable Federal tax forms and
instructions. For recharacterizations that occur in 1999,
it is anticipated that the instructions to Form 1099-R will
indicate that the trustee reports the recharacterization as
a distribution on Form 1099-R showing new Code R for
recharacterization and showing the gross amount
(contribution and earnings) in Box 1-Gross distribution and
0 (zero) in Box 2a-Taxable amount.
(2) Reporting by the trustee of the SECOND IRA. For
recharacterized amounts received on or before December 31,
1998, that are recharacterized as amounts contributed in
calendar year 1998, the trustee of the SECOND IRA reports
the contribution as a rollover contribution on a 1998 Form
5498. For recharacterized amounts received after December
31, 1998, the trustee reports in accordance with applicable
Federal tax forms and instructions. It is anticipated that
the instructions to the 1999 Form 5498 will provide that a
recharacterized amount received by the trustee of the SECOND
IRA will continue to be reported as a rollover contribution,
but that (a) the checkbox entitled "Roth conv." on the 1998
Form 5498 will be retitled to identify a contribution as a
recharacterization, (b) the trustee of the SECOND IRA will
check both the box identifying the contribution as a
recharacterization contribution and the box that identifies
the type of IRA involved, and (c) the recharacterization
must be reported on a Form 5498 that is separate from any
Form 5498 otherwise required for the SECOND IRA.
Q. B-2. How does a trustee report on Form 1099-R a
distribution from a Roth IRA that contains both regular and
1998 conversion contributions?
A. B-2. In the case of a distribution from a Roth IRA
that contains both regular and 1998 conversion
contributions, the trustee must use Code K in Box 7 of Form
1099-R.
SECTION C. OTHER RECENT CHANGES TO IRAS

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Q. C-1. What effect does the recharacterization of a
contribution (as described in § 1.408A-5 of the proposed
Income Tax Regulations) have on the rules governing the
nontaxable return of basis in the case of traditional IRA
distributions?
A. C-1. Part III, "Distributions," of Notice 87-16,
sets forth the rules for calculating the nontaxable return
of basis in the case of distributions from traditional IRAs.
These rules continue to apply except as modified below.
The total IRA account balances, the total nondeductible
contributions, and the distribution amount (as these terms
are used in Notice 87-16) for an individual for a taxable
year are each adjusted to reflect recharacterized amounts
contributed to, or distributed from, the traditional IRAs.
For purposes of making this adjustment, the contribution
that is being recharacterized as a contribution to the
SECOND IRA is treated as having been originally contributed
to the SECOND IRA on the same date and (in the case of a
regular contribution) for the same taxable year that the
contribution was made to the FIRST IRA. If the
recharacterization transaction occurs after the close of the
taxable year and if the recharacterization transaction
involves a regular contribution for the prior taxable year,
the recharacterization is disregarded for the prior taxable
year in determining the total IRA account balances.
Q. C-2. Are there any new exceptions to the 10-percent
additional tax on early distributions from IRAs?
A. C-2. Yes. Section 203 of TRA 97 added
§ 72(t)(2)(E) to the Code, which provides that the
additional 10-percent tax does not apply to IRA
distributions for qualified higher education expenses of the
IRA owner, the owner's spouse, or a child or grandchild of
either. Qualified higher education expenses include
tuition, supplies, and, for students who are at least half-
time, room and board. (See Notice 97-60, 1997-46 I.R.B. 8.)
Section 303 of TRA 97 added § 72(t)(2)(F) to the Code,
which provides that the additional 10-percent tax does not
apply to an IRA distribution to acquire a first-time home
for the IRA owner or a member of his or her family. To
qualify, the distribution must be used for costs normally
associated with acquiring a principal residence and the IRA
owner (and if married, the owner's spouse), generally, must
not have had an ownership interest in a principal residence
for the previous 2 years. If the distributed money is not
used for such purpose, the money can be recontributed by the
120th day after the distribution to the IRA without

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incurring the 10-percent tax. This exception for a first-
time home purchase is subject to a lifetime cap of $10,000
for each IRA owner; thus, an individual and his or her
spouse would each be subject to a separate $10,000 lifetime
cap.
In addition, § 3436 of the IRS Restructuring Act added
§ 72(t)(2)(A)(vii) to the Code, which provides that the
additional 10-percent tax does not apply to a distribution
from a qualified retirement plan, including an IRA, that is
made on account of a levy under § 6331 on the qualified
retirement plan. The provision applies to distributions
made after December 31, 1999.
Previous guidance relating to § 72(t) was provided in
Part D of Notice 87-13. These rules continue to apply
except as modified above.
Q. C-3. What changes are there in the "active
participant" rules?
A. C-3. Section 301 of TRA 97 amended § 219 of the
Code to provide for increased deductible contributions to
traditional IRAs that can be made by active participants in
employer-sponsored retirement plans. In 1998, the IRA
deduction available to an unmarried active participant is
phased out ratably between adjusted gross income of $30,000
and $40,000. This phase-out range is increased annually
until 2005 when the phase-out range will be $50,000 to
$60,000. In the case of joint returns, the phase-out range
is $50,000 to $60,000 for 1998, rising to $80,000 to
$100,000 for 2007 and later years. In addition, an
individual who is not an active participant but is married
to someone who is can make a fully deductible traditional
IRA contribution if their combined adjusted gross income is
not more than $150,000, or a partially deductible
traditional IRA contribution if their combined adjusted
gross income is between $150,000 and $160,000.
Previous guidance relating to the active participant
rules was provided in Part IA of Notice 87-16. These rules
continue to apply except as modified above.
Q. C-4. Are there any changes to the permissible
investments available in an IRA?
A. C-4. Yes. Section 304 of TRA 97 amended § 408(m)
of the Code to permit IRAs to invest in certain platinum
coins and in gold, silver, platinum or palladium bullion,
provided the bullion is in the physical possession of an IRA
trustee.

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Previous guidance relating to collectibles was provided
in Part V of Notice 87-16. These rules continue to apply
except as modified above.
EFFECT ON OTHER DOCUMENTS
Notice 87-16 and Notice 87-13 are modified.
REQUEST FOR COMMENTS
The Service and Treasury invite comments and
suggestions concerning the guidance provided in this notice.
Any correspondence received will be evaluated to determine
whether additional guidance on Roth IRAs is necessary.
In particular, comments are requested on appropriate
reporting of recharacterization transactions described in
proposed regulation § 1.408A-5. The Service and Treasury
recognize that recharacterization transactions present novel
reporting issues for IRA trustees, and this notice provides
for reporting such transactions in a manner that most
closely approximates reporting for ordinary IRA
distributions, contributions and trustee-to-trustee
transfers. However, the Service and Treasury are
considering other possible reporting alternatives for
recharacterization transactions. For example, it might be
appropriate to require that the recharacterized contribution
be reported by the trustee of the SECOND IRA on a Form 5498
for the year for which it is treated as having been
contributed, even if the recharacterization occurs in the
subsequent year. Another possible approach would be to
require only the reporting by the trustee of the SECOND IRA
involved in the recharacterization transaction that would
have been required if the contribution had initially been
made to the SECOND IRA and never had been made to the FIRST
IRA.
Comments can be addressed to CC:DOM:CORP:R (Notice 98-
49), room 5228, Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044. In the alternative,
comments may be hand delivered between the hours of 8 a.m.
and 5 p.m. to CC:DOM:CORP:R (Notice 98-49), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington, DC. Alternatively, taxpayers may transmit
comments electronically via the IRS Internet site at:
http://www.irs.ustreas.gov/prod/tax_regs/comments.html.
DRAFTING INFORMATION
The principal author of this notice is Roger Kuehnle of
the Employee Plans Division. For further information

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regarding this notice, please contact the Employee Plans
Division’s taxpayer assistance telephone service at (202)
622-6074/6075 (not toll-free numbers), between the hours of
1:30 and 3:30 p.m. Eastern Time, Monday through Thursday.