n-09-75.pdf

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Part III – Administrative, Procedural and Miscellaneous

Rollovers from Employer Plans to Roth IRAs

Notice 2009-75

I. PURPOSE

This notice describes the federal income tax consequences of rolling over
an eligible rollover distribution from a qualified plan described in § 401(a) of the
Internal Revenue Code (Code), an annuity plan described in § 403(a), a plan
described in § 403(b), or an eligible governmental plan under § 457(b) to a Roth
IRA described in § 408A.
II. BACKGROUND

Section 401(k) sets forth rules for qualified cash or deferred arrangements
under which an employee may make an election between cash and an employer
contribution to a plan qualified under § 401(a). Section 403(b) permits a similar
salary reduction agreement under which payments are made to a § 403(b) plan.
Amounts contributed pursuant to these qualified cash or deferred arrangements
and salary reduction agreements are defined in § 402(g)(3) as elective deferrals.
A designated Roth contribution is described in § 402A, which was added
to the Code by section 617(a) of the Economic Growth and Tax Relief
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 103) (EGTRRA), for
taxable years beginning after December 31, 2005. A designated Roth
contribution is an elective deferral, as described in § 402(g)(3)(A) or (C) of the
Code, that has been designated by an employee, pursuant to § 402A, as not
excludable from the employee's gross income. Under § 402A(b)(2), designated
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Roth contributions made to the plan must be maintained in a separate account (a
designated Roth account).
Under § 402(a), a distribution from a plan qualified under § 401(a)
generally is taxable under § 72 to the distributee in the taxable year distributed.
However, pursuant to § 402A(d)(1), a qualified distribution from a designated
Roth account is excludable from gross income. A qualified distribution is defined
in § 402A(d)(2) as a distribution that is made after completion of a specified
5-year period and the satisfaction of other specified requirements. If the
distribution is not a qualified distribution, then, pursuant to § 72, the distribution is
included in the distributee's gross income to the extent allocable to income on the
contract and excluded from gross income to the extent allocable to investment in
the contract (commonly referred to as basis).
Section 402(c) sets forth rules under which an eligible rollover distribution
from a plan qualified under § 401(a) may be rolled over to an eligible retirement
plan. In such a case, the distribution generally is not currently includible in the
distributee’s gross income. An eligible retirement plan means an individual
retirement plan or an “eligible employer plan.” An individual retirement plan (IRA)
is defined in § 7701(a)(37) as an individual retirement account described in
§ 408(a) or an individual retirement annuity described in § 408(b). For purposes
of this notice, an eligible employer plan means a plan qualified under § 401(a),
including a profit-sharing or stock bonus plan (whether or not the plan includes a
qualified cash or deferred arrangement under § 401(k)), a money purchase
pension plan, or a defined benefit pension plan; a § 403(a) annuity plan; a
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§ 403(b) plan; and an eligible § 457(b) plan maintained by a governmental
employer described in § 457(e)(1)(A) (a “governmental § 457(b) plan”).
Under §§ 402(c)(8) and 402A(c)(3), a distribution from a designated Roth
account may be rolled over only to another designated Roth account or to a Roth
IRA under § 408A. A Roth IRA is a type of IRA under which contributions are not
deductible and qualified distributions are excludable from gross income. Under
§ 408A(d)(2), a qualified distribution from an individual’s Roth IRA is a distribution
that is made (1) after the 5-taxable-year period beginning with the first taxable
year for which the individual had a Roth IRA; and (2) after age 59½, after death,
on account of disability, or for a first-time home purchase under certain
circumstances. Section 408A(d)(4) sets forth special ordering rules for the return
of after-tax contributions in the case of a distribution from a Roth IRA. Under
these ordering rules, after-tax contributions are recovered before income.
A taxpayer may convert an amount held in an IRA that is not a Roth IRA
(non-Roth IRA) to an amount held in a Roth IRA, pursuant to the rules in § 408A
relating to qualified rollover contributions. A conversion may be accomplished by
means of a rollover, trustee-to- trustee transfer, or account redesignation.
Regardless of the means used to convert, any amount converted from a non-
Roth IRA to a Roth IRA is treated as distributed from the non-Roth IRA and rolled
over to the Roth IRA.
In the case of such a conversion, the taxpayer must include in gross
income the value of the non-Roth IRA being converted (other than the amount of
any after-tax contributions included in the conversion). For taxable years
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beginning before January 1, 2010, such a conversion is not permitted to be made
by a taxpayer whose modified adjusted gross income for the year of the
distribution exceeds $100,000 (or who, if married, does not file jointly). The
regulations under § 408A, in particular §§ 1.408A-4 and 1.408A-5, provide
guidance relating to conversions from a non-Roth IRA to a Roth IRA (including
special rules where a non-Roth IRA annuity is converted into a Roth IRA
annuity). These sections of the regulations were issued in 1999 and, thus, do not
reflect the statutory revisions described below. Treasury and the Internal
Revenue Service expect to incorporate the guidance in this notice into the
regulations when those regulations are updated to reflect those statutory
revisions.
Under §§ 402A and 408A (as amended by a technical correction in section
108(d) of the Worker, Retiree, and Employer Recovery Act of 2008, Pub. Law
No. 110-458, 122 Stat. 5092 (WRERA 2008)), an eligible rollover distribution
made from a designated Roth account in an eligible employer plan can be rolled
over to a Roth IRA.
Prior to enactment of section 824 of the Pension Protection Act of 2006,
Public Law 109-280 (120 Stat. 780) (PPA ’06), an eligible rollover distribution
from an eligible employer plan not made from a designated Roth account could
be rolled over to a non-Roth IRA and then converted to a Roth IRA, but could not
be rolled over to a Roth IRA without an intervening rollover to a non-Roth IRA
followed by a conversion to a Roth IRA. See Notice 2008-30, 2008-12 I.R.B.
638.
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Section 824 of PPA ’06 amended the definition of qualified rollover
contribution in § 408A of the Code (relating to Roth IRAs) for distributions on or
after January 1, 2008, to allow the recipient of an eligible rollover distribution not
made from a designated Roth account to roll over the amount of the distribution
to a Roth IRA without first contributing that amount to a non-Roth IRA. The Joint
Committee on Taxation Report explains the change made by section 824 of PPA
’06 as follows:
The provision allows distributions from tax qualified retirement
plans, tax-sheltered annuities, and governmental 457 plans to be
rolled over directly from such plan into a Roth IRA, subject to the
present law rules that apply to rollovers from a traditional IRA into a
Roth IRA. For example, a rollover from a tax-qualified retirement
plan into a Roth IRA is includible in gross income (except to the
extent it represents a return of after-tax contributions), and the 10-
percent early distribution tax does not apply.
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Thus, under § 402A and § 408A, as amended by section 824 of PPA ’06, a
rollover from an eligible employer plan (other than from a designated Roth
account) to a Roth IRA results in the same federal income tax consequences for
a participant as a rollover to a non-Roth IRA immediately followed by a
conversion to a Roth IRA (except that the special rule at § 408(d)(2) for
aggregating after-tax amounts would not apply).
For taxable years beginning before January 1, 2010, a rollover from an
eligible employer plan not made from a designated Roth account is available only
to a taxpayer whose modified adjusted gross income for the year of the
distribution does not exceed $100,000 (and who, if married, files jointly). The

1
Joint Committee on Taxation, Technical Explanation of H.R. 4, the “Pension Protection Act of
2006,” as Passed by the House on July 28, 2006, and as Considered in the Senate on August 3,
2006 (JCX-38-06), August 3, 2006, at 174.
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mandatory withholding requirements provided in § 3405(c) do not apply to a
distribution paid from an eligible employer plan to a Roth IRA in a direct rollover,
even though the distribution is includible in gross income. Also, the additional
income tax on early distributions provided in § 72(t) generally does not apply to a
rollover from an eligible retirement plan to a Roth IRA. However,
§ 408A(d)(3)(F), § 1.408A-6 A-5, and Notice 2008-30, Q&A-3, describe a
special rule relating to the additional income tax on early distributions for
distributions made from a Roth IRA within a specified 5-year period after a
rollover.
This notice supplements the regulations under § 408A and Notice 2008-30
to provide additional guidance on a rollover from an eligible employer plan to a
Roth IRA. For additional information, see also Publication 590, Individual
Retirement Arrangements.
III. ROLLOVERS FROM AN ELIGIBLE EMPLOYER PLAN TO A ROTH IRA
Q-1: What amount is included in gross income as a consequence of a
rollover to a Roth IRA from an eligible employer plan (i.e., a qualified plan
described in § 401(a), an annuity plan described in § 403(a), a plan described in
§403(b), or a governmental § 457(b) plan)?
A-1: (a) Rollovers to a Roth IRA of distributions that are not made from a
designated Roth account. If an eligible rollover distribution from an eligible
employer plan is rolled over to a Roth IRA and the distribution is not made from a
designated Roth account, then the amount that would be includible in gross
income were it not part of a qualified rollover contribution is included in the
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distributee’s gross income for the year of the distribution. For this purpose, the
amount included in gross income is equal to the amount rolled over, reduced by
the amount of any after-tax contributions that are included in the amount rolled
over, in the same manner as if the distribution had been rolled over to a non-Roth
IRA that was the participant’s only non-Roth IRA and that non-Roth IRA had then
been immediately converted to a Roth IRA. Thus, the special rules relating to
net unrealized appreciation at § 402(e)(4) and certain optional methods for
calculating tax available to participants born on or before January 1, 1936 are not
applicable.
(b) Rollovers to a Roth IRA of distributions made from a designated Roth
account. If an eligible rollover distribution made from a designated Roth account
in an eligible employer plan is rolled over to a Roth IRA, the amount rolled over is
not includible in the distributee’s gross income, whether or not the distribution is a
qualified distribution from the designated Roth account.
Q-2: What are the modified adjusted gross income limitations and joint
filing requirements for a rollover to a Roth IRA of a distribution from an eligible
employer plan made either before January 1, 2010 or on or after January 1,
2010?
A-2: (a) Distributions not made from a designated Roth account
. Except
for a distribution from a designated Roth account, an eligible rollover distribution
made before January 1, 2010 from an eligible employer plan may not be rolled
over to a Roth IRA unless, for the year of the distribution, the distributee’s
modified adjusted gross income does not exceed $100,000 and, in the case of a
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married distributee, the distributee files a joint federal income tax return with his
or her spouse. The $100,000 limit and the requirement that a married distributee
file a joint return do not apply to distributions made on or after January 1, 2010.
If an eligible rollover distribution made before 2010 is ineligible to be rolled over
to a Roth IRA either because the distributee’s modified adjusted gross income
exceeds $100,000 or because a married distribute does not file a joint return, the
distribution can be rolled over into a non-Roth IRA and then the non-Roth IRA
can be converted, on or after January 1, 2010, into a Roth IRA.
(b) Distributions made from a designated Roth account
. There are no
restrictions based on the modified adjusted gross income limitations and joint
filing requirements that apply to a rollover of an eligible rollover distribution made
from a designated Roth account under an eligible employer plan to a Roth IRA.
EFFECT ON OTHER DOCUMENTS
Notice 2008-30, 2008-12 I.R.B. 638, is amplified and clarified.
CONTACT INFORMATION
The principal author of this notice is Kathleen Herrmann of Employee
Plans, Tax Exempt and Government Entities Division. Questions regarding this
notice may be sent via e-mail to RetirementPlanQuestions@irs.gov
.