Converting an IRA Annuity to a Roth IRA, 48868-48871 [05-16403]
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Federal Register / Vol. 70, No. 161 / Monday, August 22, 2005 / Rules and Regulations
pounds deducted from the possession
limit for the additional trip. The
Regional Administrator will issue this
authorization automatically, without
request from the vessel owner. A
rebated possession limit may be
combined with other additional trips as
described in paragraph (c)(5)(ii) of this
section.
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[FR Doc. 05–16613 Filed 8–19–05; 8:45 am]
BILLING CODE 3510–22–S
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 522
Implantation or Injectable Dosage
Form New Animal Drugs; Flunixin
AGENCY:
Food and Drug Administration,
HHS.
ACTION:
Final rule.
SUMMARY: The Food and Drug
Administration (FDA) is amending the
animal drug regulations to reflect
approval of a supplemental abbreviated
new animal drug application (ANADA)
filed by Phoenix Scientific, Inc. The
supplemental ANADA provides for
veterinary prescription use of flunixin
meglumine solution by intravenous
injection in lactating dairy cattle for
control of fever associated with bovine
respiratory disease and endotoxemia,
and for control of inflammation in
endotoxemia.
DATES:
This rule is effective August 22,
2005.
John
K. Harshman, Center for Veterinary
Medicine (HFV–104), Food and Drug
Administration, 7500 Standish Pl.,
Rockville, MD 20855, 240–276–9808, email: john.harshman@fda.gov.
SUPPLEMENTARY INFORMATION: Phoenix
Scientific, Inc., 3915 South 48th Street
Ter., St. Joseph, MO 64503, filed a
supplemental ANADA 200 124 that
provides for veterinary prescription use
of Flunixin Meglumine Injection
intravenously in lactating dairy cattle
for control of fever associated with
bovine respiratory disease and
endotoxemia, and for control of
inflammation in endotoxemia. The
supplemental ANADA is approved as of
July 18, 2005, and the regulations are
amended in 21 CFR 522.970 to reflect
the approval. The basis of approval is
discussed in the freedom of information
summary.
FOR FURTHER INFORMATION CONTACT:
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In accordance with the freedom of
information provisions of 21 CFR part
20 and 21 CFR 514.11(e)(2)(ii), a
summary of safety and effectiveness
data and information submitted to
support approval of this application
may be seen in the Division of Dockets
Management (HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
FDA has determined under 21 CFR
25.33(a)(1) that this action is of a type
that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.
DEPARTMENT OF THE TREASURY
§ 522.970
Roth IRAs and Conversions
Internal Revenue Service
26 CFR Part 1
[TD 9220]
RIN 1545–BE66
Converting an IRA Annuity to a Roth
IRA
Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary Regulations.
AGENCY:
SUMMARY: This document contains
temporary regulations under section
408A of the Internal Revenue Code
(Code). These temporary regulations
provide guidance concerning the tax
consequences of converting a non-Roth
IRA annuity to a Roth IRA. These
temporary regulations affect individuals
establishing Roth IRAs, beneficiaries
under Roth IRAs, and trustees,
custodians and issuers of Roth IRAs.
The text of these temporary regulations
List of Subject in 21 CFR Part 522
also serves as the text of proposed
Animal drugs.
regulations set forth in a notice of
I Therefore, under the Federal Food,
proposed rulemaking in the Proposed
Drug, and Cosmetic Act and under
Rules section of this issue of the Federal
authority delegated to the Commissioner Register.
of Food and Drugs and redelegated to the
DATES: Effective Date: These regulations
Center for Veterinary Medicine, 21 CFR
are effective August 19, 2005.
part 522 is amended as follows:
Applicability Date: These regulations
are applicable to any Roth IRA
PART 522—IMPLANTATION OR
conversion where an annuity contract is
INJECTABLE DOSAGE FORM NEW
distributed or treated as distributed
ANIMAL DRUGS
from a traditional IRA on or after August
19, 2005.
I 1. The authority citation for 21 CFR
part 522 continues to read as follows:
FOR FURTHER INFORMATION CONTACT:
Concerning the regulations, Cathy A.
Authority: 21 U.S.C. 360b.
Vohs, 202–622–6060.
I 2. Section 522.970 is amended by
SUPPLEMENTARY INFORMATION:
revising paragraph (e)(2)(iii) to read as
follows:
Background
Flunixin.
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(e) * * *
(2) * * *
(iii) Limitations. Do not slaughter for
food use within 4 days of last treatment.
A withdrawal period has not been
established for use in preruminating
calves. Do not use in calves to be
processed for veal. For Nos. 000061 and
059130: Do not use in dry dairy cows.
Milk that has been taken during
treatment and for 36 hours after the last
treatment must not be used for food. For
Nos. 055529 and 057561: Not for use in
lactating or dry dairy cows.
Dated: August 10, 2005.
Stephen F. Sundlof,
Director, Center for Veterinary Medicine.
[FR Doc. 05–16499 Filed 8–19–05; 8:45 am]
BILLING CODE 4160–01–S
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This document contains temporary
regulations that amend the Income Tax
Regulations (26 CFR part 1) under
section 408A of Code relating to Roth
IRAs. Section 408A of the Code, which
was added by section 302 of the
Taxpayer Relief Act of 1997, Public Law
105–34 (111 Stat. 788), establishes the
Roth IRA as a type of individual
retirement plan, effective for taxable
years beginning on or after January 1,
1998.
Under Code section 408A, a Roth IRA
is treated like a traditional IRA with
several significant exceptions. Like
amounts held in traditional IRAs,
amounts held in Roth IRAs generally are
exempt from Federal income tax under
Code section 408(e)(1). Likewise,
contributions to traditional IRAs and
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Federal Register / Vol. 70, No. 161 / Monday, August 22, 2005 / Rules and Regulations
Roth IRAs are subject to specific
limitations.
The identifying characteristic of Roth
IRAs is that all contributions are aftertax contributions, and qualified
distributions are tax free. Thus, unlike
certain contributions to traditional IRAs,
which may be deductible, contributions
to Roth IRAs cannot be deducted from
gross income. Distributions from a
traditional IRA are includible in gross
income except to the extent attributable
to a return of basis. However, qualified
distributions from Roth IRAs are
excludible from gross income. Under
section 408A(d)(2), a qualified
distribution from a Roth IRA is a
distribution that is made: (1) At least 5
years after the account owner (or the
account owner’s spouse) made a Roth
IRA contribution, and (2) after age 591⁄2,
after death, on account of disability, or
for a first-time home purchase.
A taxpayer whose modified adjusted
gross income for a year does not exceed
$100,000 may convert an amount held
in a non-Roth IRA (i.e., a traditional IRA
or SIMPLE IRA) to an amount held in
a Roth IRA. This conversion requires
taking into income the value of the nonRoth IRA being converted (to the extent
the conversion is not a conversion of
basis in the non-Roth IRA), essentially
converting the value into an after-tax
rollover contribution to the Roth IRA. 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. The
conversion amount is generally
includible in gross income for the year
of the conversion under section
408(d)(1) and (2). In the case of a
conversion involving property, the
conversion amount generally is the fair
market value of the property on the date
of distribution or the date the property
is treated as distributed from the
traditional IRA.
Final regulations regarding Roth IRAs
were published in the Federal Register
on February 4, 1999 (64 FR 5597).
Section 1.408A–4 provides rules
relating to converting amounts from a
traditional IRA to a Roth IRA. Section
1.408A–4, A–7, which sets forth the tax
consequences of converting an amount
held in a traditional IRA to a Roth IRA,
provides that any amount that is
converted to a Roth IRA is includible in
gross income as a distribution according
to the rules of section 408(d)(1) and (2)
for the taxable year in which the amount
is distributed or transferred from the
traditional IRA.
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Under A–1 of § 1.408A–7, any amount
converted from a non-Roth IRA to a
Roth IRA is treated as a distribution for
which a Form 1099–R, ‘‘Distributions
From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRA, Insurance
Contracts,’’ must be filed by the trustee
maintaining the non-Roth IRA.
48869
Fair Market Value of Annuity Contracts
Before the enactment of section 408A,
the need to value an annuity contract as
a result of distribution from a qualified
plan or IRA rarely arose. The
distribution of an annuity contract from
a qualified plan or a traditional IRA is
generally not a taxable event because, in
most cases, the distributed annuity
account contract continues to be subject
to requirements necessary for tax
deferral, e.g., the annuity remains
subject to the minimum distribution
requirements of section 401(a)(9). In
such a case, no amount is includible in
income until amounts are actually
distributed from the annuity contract.
However, in certain situations, the Code
provides that the fair market value of an
individual retirement annuity is treated
as a taxable distribution. For example,
under section 408(e), the fair market
value of the annuity is included in
taxable income if the annuity ceases to
be an individual retirement annuity
because of violations of requirements set
forth under that subsection.
Section 25.2512–6 of the Gift Tax
Regulations provides rules regarding the
valuation of certain life insurance
contracts for gift tax purposes.1 Under
these rules, the value of a life insurance
contract or of a contract for the payment
of an annuity issued by a company
regularly engaged in the selling of
contracts of that character is established
through the sale of the particular
contract by the company, or through the
sale by the company of comparable
contracts. In addition, § 25.2512–6
provides that, as the value of an
insurance policy through sale of
comparable contracts is not readily
ascertainable when the gift is of a
contract which has been in force for
some time and on which further
premium payments are to be made, the
value may be approximated by adding
to the interpolated terminal reserve at
the date of the gift the proportionate
part of the gross premium last paid
before the date of the gift which covers
the period extending beyond that date.
If, however, because of the unusual
nature of the contract, such
approximation is not reasonably close to
the full value, this method may not be
used. Thus, this method may not be
used to determine the fair market value
of an insurance policy where the reserve
does not reflect the value of all relevant
features of the policy. These gift tax
valuation rules also apply for purposes
of commercial annuity contracts. See
Examples 1 and 2 of § 25.2512–6. In
addition, under § 20.2031–8 of the
Estate Tax Regulations, the same rules
govern the valuation of such life
insurance and commercial annuity
contracts for estate tax purposes. See
§§ 20.2031–7(b) and 20.2039–1(c).
Under A–12 of § 1.401(a)(9)–6, an
employee’s entire interest under an
annuity contract is the dollar amount
credited to the employee or beneficiary
under the contract plus the actuarial
value of any additional benefits (such as
survivor benefits in excess of the
account balance) that will be provided
under the contract. This rule requiring
that the value of additional benefits
under an annuity contract be included
in the employee’s entire interest, for
purposes of determining the required
minimum distribution under section
401(a)(9), is based on the general
requirement that the fair market value of
all assets must be reflected in valuing an
account balance under a defined
contribution plan. However, certain
additional benefits may be disregarded
for purposes of calculating the required
minimum distribution, such as when
there is a pro-rata reduction in
additional benefits for a withdrawal and
a guaranteed return of premiums upon
death, to reflect the fact that
distributions are being made to satisfy
section 401(a)(9).
Rev. Proc. 2005–25 (2005–17 I.R.B.
962), provides safe harbor formulas that,
if used to determine the value of a life
insurance contract, retirement income
contract, endowment contract, or other
contract providing life insurance
protection that is distributed or
otherwise transferred from a qualified
plan, will meet the definition of fair
market value for purposes of applying
the rules of section 402(a) (as well as
sections 79, 83, and 402(b)).
1 In Rev. Rul. 59–195 (1959—1 C.B. 18), the IRS
ruled that, in situations similar to those in which
an employer purchases and pays the premiums on
an insurance policy on the life of one of its
employees and subsequently sells such policy, on
which further premiums must be paid, the value of
such policy for computing taxable gain in the year
of purchase should be determined under the
method of valuation prescribed in § 25.2512–6 of
the Gift Tax Regulations.
Explanation of Provisions
These temporary regulations under
section 408A clarify that, when a nonRoth individual retirement annuity is
converted to a Roth IRA, the amount
that is treated as distributed is the fair
market value of the annuity contract on
the date the annuity contract is
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Federal Register / Vol. 70, No. 161 / Monday, August 22, 2005 / Rules and Regulations
converted. Similarly, when a non-Roth
individual retirement account holds an
annuity contract as an account asset and
the account is converted to a Roth IRA,
the amount that is treated as distributed
with respect to the annuity contract is
the fair market value of the annuity
contract on the date the annuity contract
is distributed or treated as distributed
from the non-Roth IRA.
Some taxpayers and their advisers
assert that the only amount includible
in income as a distribution when a nonRoth individual retirement annuity is
converted to a Roth IRA is the cash
surrender value of the contract, even
when the cash surrender value does not
accurately reflect the fair market value
of the contract. In particular, some
advisers market a transaction in which
taxpayers are encouraged to invest their
non-Roth IRA funds in a single
premium annuity contract with
significant artificial penalties that apply
in the first year (or years) of the contract
if the annuity is surrendered, causing
the annuity to have a low cash
surrender value in the early years of the
contract. Under this transaction, shortly
after the annuity contract is purchased
by the non-Roth IRA, the taxpayer
converts the IRA to a Roth IRA. In such
a case, the taxpayer asserts that the only
amount includible in gross income as a
result of the conversion is the low cash
surrender value. This assertion is made
even though the surrender penalties are
unlikely to be paid because the
taxpayers do not expect to surrender the
contract during the early years. In this
case, the taxpayers expect that the
ultimate payments under the contract
will be qualified distributions from the
Roth IRA (i.e., tax-exempt), and thus,
they also expect the artificially
depressed cash surrender value to be the
only amount ever includible in gross
income.
In another situation, a taxpayer
purchases a non-Roth individual
retirement variable annuity with a
guaranteed minimum death benefit
equal to the highest account value ever
attained under the contract, adjusted for
withdrawals. If an amount is withdrawn
from the contract, the death benefit is
reduced dollar for dollar (rather than a
pro-rata reduction) by the amount of the
withdrawal. Prior to the date of
conversion, the annuity has a death
benefit far in excess of the account value
and the taxpayer withdraws from the
IRA annuity all but a minimum account
value that will keep the IRA annuity in
force. Because the withdrawal reduces
the guaranteed minimum death benefit
on a dollar-for-dollar basis, the
remaining death benefit will be
significantly greater than the current
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account value, and accordingly, the
current account value will not reflect
the fair market value of the contract. For
example, suppose such an individual
retirement variable annuity has a
guaranteed minimum death benefit of
$200,000 with an account value of
$100,000. The taxpayer withdraws
$99,000 leaving a $1,000 account value
and a $101,000 death benefit ($200,000
less $99,000)). The taxpayer then
converts the IRA annuity into a Roth
IRA and takes the position that the
$1,000 account value is the conversion
amount even though the account value
does not reflect the fair market value of
the additional $100,000 that will be
paid upon the taxpayer’s death. In this
case, the taxpayer expects that the entire
benefit payment of $101,000 will be a
qualified distribution from the Roth IRA
(i.e., tax-exempt), and thus, expects that
the $1,000 account value on the date of
conversion will be the only amount ever
includible in gross income.
The IRS and Treasury Department
have concluded that cash surrender
value is not always an appropriate
measure of fair market value with
respect to non-Roth IRA annuities that
are converted to Roth IRA annuities.
Rather than use the cash surrender
value as the basis for determining fair
market value, these temporary
regulations follow the gift tax
regulations in providing that the fair
market value of an individual retirement
annuity is established by the premiums
paid for such annuity if the conversion
occurs soon after the annuity was
purchased.
Under the temporary regulations, if
the conversion occurs after the annuity
contract has been in force for some time
and no further premium payments are to
be made, fair market value is
determined through the sale by the
company of comparable contracts. The
temporary regulations further provide
that, if the conversion occurs after the
annuity contract has been in force for
some time and future premium
payments are to be made, fair market
value is determined through an
approximation that is based on the
interpolated terminal reserve at the date
of the conversion, plus the
proportionate part of the gross premium
last paid before the date of the
conversion which covers the period
extending beyond that date. However, if,
because of the unusual nature of the
contract, this approximation is not
reasonably close to the full value, this
method may not be used.
These temporary regulations also
provide authority for the Commissioner
to issue additional guidance regarding
the fair market value of an individual
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retirement annuity, including formulas
to be used for determining fair market
value. The IRS and Treasury
Department expect to issue additional
guidance regarding the rules to be used
in determining the fair market value of
a non-Roth IRA annuity. It is anticipated
that such guidance will be similar to the
provisions of Rev. Proc. 2005–25 (2005–
17 I.R.B. 962, April 25, 2005), except
that the adjustment for potential
surrender charges, to the extent
permitted, will not exceed 9 percent. It
is also anticipated that such guidance
will provide that in determining fair
market value, the value of all additional
benefits (such as guaranteed minimum
death benefits) under the contract must
be taken into account. The IRS and
Treasury Department request comments
regarding this anticipated guidance. The
IRS and Treasury Department also
request comments regarding whether
the method used to calculate the fair
market value of an annuity contract that
is converted to a Roth IRA should also
apply for purposes of the determining
fair market value of an annuity contract
under sections 408(e) and 401(a)(9).
These comments may be submitted in
conjunction with the comments
submitted on the proposed regulations
discussed below.
Proposed regulations regarding the
determination of fair market value of an
annuity contract are contained in the
Proposed Rules section of the Federal
Register. The preamble and text of these
temporary regulations also serves as the
preamble and text of the proposed
regulations.
Effective Date
The temporary amendments to
§ 1.408A–4 of the regulations are
applicable to any Roth IRA conversion
where an annuity contract is distributed
or treated as distributed from a
traditional IRA on or after August 19,
2005. No implication is intended
concerning whether or not a rule to be
adopted in these regulations is
applicable law for taxable years ending
before that date.
Special Analyses
It has been determined that these
temporary regulations are not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these temporary regulations. For
applicability of the Regulatory
Flexibility Act (5 U.S.C. chapter 6), refer
to the notice of proposed rulemaking
published in the Proposed Rules section
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retirement account described in section
408(a) holds an annuity contract as an
account asset and the traditional IRA is
converted to a Roth IRA, for purposes of
determining the amount includible in
gross income as a distribution under
§ 1.408A–4, A–7, the amount that is
treated as distributed with respect to the
Drafting Information
annuity contract is the fair market value
The principal author of these
of the annuity contract on the date that
the annuity contract is distributed or
temporary regulations is Cathy A. Vohs
treated as distributed from the
of the Office of the Division Counsel/
traditional IRA.
Associate Chief Counsel (Tax Exempt
(b) Determination of fair market
and Government Entities). However,
value—(1) General rule. For purposes of
other personnel from the IRS and
Treasury Department participated in the this A–14, the fair market value of an
individual retirement annuity issued by
development of these regulations.
a company regularly engaged in the
List of Subjects in 26 CFR Part 1
selling of contracts of that character
generally is established as follows—
Income taxes, Reporting and
(A) If the conversion occurs soon after
recordkeeping requirements.
the contract was sold and there have
Adoption of Amendments to the
been no material changes in market
Regulations
conditions, the fair market value of the
I Accordingly, 26 CFR part 1 is amended contract is established through the sale
of the particular contract by the
as follows:
company (i.e., the actual premiums paid
for such contract);
PART 1—INCOME TAXES
(B) If the conversion occurs after the
I Paragraph 1. The authority citation for
contract has been in force for some time
Part 1 continues to read, in part, as
and no further premium payments are to
follows:
be made, the fair market value of the
contract is established through the sale
Authority: 26 U.S.C. 7805 * * *
by the company of comparable
§ 1.408A–4T also issued under 26 U.S.C.
408A * * *
contracts;
(C) If the conversion occurs after the
I Par. 2. Section 1.408A–4 is amended
contract has been in force for some time
by adding, in numerical order, Q–14 and
and future premium payments are to be
A–14, to read as follows:
made, the fair market value of the
contract is established through an
§ 1.408A–4 Converting amounts to Roth
IRAs.
approximation that is based on the
interpolated terminal reserve at the date
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of the conversion, plus the
Q–14. [Reserved]. For further
proportionate part of the gross premium
guidance, see § 1.408A–4T, Q–14.
last paid before the date of the
A–14. [Reserved]. For further
conversion which covers the period
guidance, see § 1.408A–4T, A–14.
extending beyond that date. However, if,
I Par. 3. Section 1.408A–4T is added to
because of the unusual nature of the
read as follows:
contract, this approximation is not
§ 1. 408A–4T Converting amounts to Roth
reasonably close to the full value, this
IRAs.
method may not be used. Thus, this
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method may not be used to determine
Q–14. What is the amount that is
the fair market value of an annuity
includable in income as a distribution
contract where the reserve does not
when a conversion involves an annuity
reflect the value of all relevant features
contract?
of the contract.
A–14. (a) In general. Notwithstanding
(2) Additional guidance. Additional
§ 1.408–4(e), when part or all of a
guidance regarding the fair market value
traditional IRA that is an individual
of an individual retirement annuity,
retirement annuity described in section
including formulas to be used for
408(b) is converted to a Roth IRA, for
determining fair market value, may be
purposes of determining the amount
issued by the Commissioner in revenue
includible in gross income as a
rulings, notices, or other guidance
distribution under § 1.408A–4, A–7, the published in the Internal Revenue
amount that is treated as distributed is
Bulletin (See § 601.601(d)(2)(ii)(b)).
(c) Effective date. The provisions of
the fair market value of the annuity
contract on the date the annuity contract this A–14 are applicable to any
conversion where an annuity contract is
is converted. Similarly, when a
distributed or treated as distributed
traditional IRA that is an individual
of this issue of the Federal Register.
Pursuant to section 7805(f) of the Code,
these temporary regulations will be
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
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48871
from a traditional IRA on or after August
19, 2005.
(d) Definitions. The definitions set
forth in § 1.408A–8 apply for purposes
of this A–14.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: August 9, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary for Tax
Policy.
[FR Doc. 05–16403 Filed 8–19–05; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF LABOR
Mine Safety and Health Administration
30 CFR Parts 5, 15, 18, 19, 20, 22, 23,
27, 28, 33, 35, and 36
RIN 1219–AB38
Fees for Testing, Evaluation, and
Approval of Mining Products;
Correction
Mine Safety and Health
Administration (MSHA), Labor.
ACTION: Direct final rule; correction.
AGENCY:
SUMMARY: This document corrects a
direct final rule published in the
Federal Register of August 9, 2005,
regarding fees for testing, evaluation,
and approval of mining products.
DATES: Effective on August 22, 2005.
FOR FURTHER INFORMATION CONTACT:
Rebecca J. Smith, Acting Director, Office
of Standards, Regulations, and
Variances, MSHA, 1100 Wilson Blvd.,
Room 2313, Arlington, Virginia 22209–
3939, smith-rebecca@dol.gov, (202) 693–
9440 (telephone), (202) 693–9441
(facsimile).
In rule FR
Doc. 05–15495 published on August 9,
2005 (70 FR 46336), make the following
corrections:
1. On page 46336, in the first column,
under ADDRESSES, change the e-mail
address from ‘‘comments@msha.gov’’ to
‘‘zzmsha-comments@dol.gov’’.
2. On page 46337, in the third
column, in the second full paragraph, in
the second sentence, change the word
‘‘revised’’ to ‘‘existing’’.
3. On page 46338, in the first column,
in the first full paragraph, in the sixth
sentence, change the term ‘‘part 5’’ to
‘‘part 15’’.
SUPPLEMENTARY INFORMATION:
§ 5.30
[Corrected]
4. On page 46342, in the second
column, after the rule text of paragraph
(d), remove the five asterisks.
I
E:\FR\FM\22AUR1.SGM
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]]>Agencies
[Federal Register Volume 70, Number 161 (Monday, August 22, 2005)]
[Rules and Regulations]
[Pages 48868-48871]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-16403]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9220]
RIN 1545-BE66
Converting an IRA Annuity to a Roth IRA
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary Regulations.
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SUMMARY: This document contains temporary regulations under section
408A of the Internal Revenue Code (Code). These temporary regulations
provide guidance concerning the tax consequences of converting a non-
Roth IRA annuity to a Roth IRA. These temporary regulations affect
individuals establishing Roth IRAs, beneficiaries under Roth IRAs, and
trustees, custodians and issuers of Roth IRAs. The text of these
temporary regulations also serves as the text of proposed regulations
set forth in a notice of proposed rulemaking in the Proposed Rules
section of this issue of the Federal Register.
DATES: Effective Date: These regulations are effective August 19, 2005.
Applicability Date: These regulations are applicable to any Roth
IRA conversion where an annuity contract is distributed or treated as
distributed from a traditional IRA on or after August 19, 2005.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Cathy A.
Vohs, 202-622-6060.
SUPPLEMENTARY INFORMATION:
Background
Roth IRAs and Conversions
This document contains temporary regulations that amend the Income
Tax Regulations (26 CFR part 1) under section 408A of Code relating to
Roth IRAs. Section 408A of the Code, which was added by section 302 of
the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788),
establishes the Roth IRA as a type of individual retirement plan,
effective for taxable years beginning on or after January 1, 1998.
Under Code section 408A, a Roth IRA is treated like a traditional
IRA with several significant exceptions. Like amounts held in
traditional IRAs, amounts held in Roth IRAs generally are exempt from
Federal income tax under Code section 408(e)(1). Likewise,
contributions to traditional IRAs and
[[Page 48869]]
Roth IRAs are subject to specific limitations.
The identifying characteristic of Roth IRAs is that all
contributions are after-tax contributions, and qualified distributions
are tax free. Thus, unlike certain contributions to traditional IRAs,
which may be deductible, contributions to Roth IRAs cannot be deducted
from gross income. Distributions from a traditional IRA are includible
in gross income except to the extent attributable to a return of basis.
However, qualified distributions from Roth IRAs are excludible from
gross income. Under section 408A(d)(2), a qualified distribution from a
Roth IRA is a distribution that is made: (1) At least 5 years after the
account owner (or the account owner's spouse) made a Roth IRA
contribution, and (2) after age 59\1/2\, after death, on account of
disability, or for a first-time home purchase.
A taxpayer whose modified adjusted gross income for a year does not
exceed $100,000 may convert an amount held in a non-Roth IRA (i.e., a
traditional IRA or SIMPLE IRA) to an amount held in a Roth IRA. This
conversion requires taking into income the value of the non-Roth IRA
being converted (to the extent the conversion is not a conversion of
basis in the non-Roth IRA), essentially converting the value into an
after-tax rollover contribution to the Roth IRA. 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. The conversion amount is
generally includible in gross income for the year of the conversion
under section 408(d)(1) and (2). In the case of a conversion involving
property, the conversion amount generally is the fair market value of
the property on the date of distribution or the date the property is
treated as distributed from the traditional IRA.
Final regulations regarding Roth IRAs were published in the Federal
Register on February 4, 1999 (64 FR 5597). Section 1.408A-4 provides
rules relating to converting amounts from a traditional IRA to a Roth
IRA. Section 1.408A-4, A-7, which sets forth the tax consequences of
converting an amount held in a traditional IRA to a Roth IRA, provides
that any amount that is converted to a Roth IRA is includible in gross
income as a distribution according to the rules of section 408(d)(1)
and (2) for the taxable year in which the amount is distributed or
transferred from the traditional IRA.
Under A-1 of Sec. 1.408A-7, any amount converted from a non-Roth
IRA to a Roth IRA is treated as a distribution for which a Form 1099-R,
``Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRA, Insurance Contracts,'' must be filed by the trustee
maintaining the non-Roth IRA.
Fair Market Value of Annuity Contracts
Before the enactment of section 408A, the need to value an annuity
contract as a result of distribution from a qualified plan or IRA
rarely arose. The distribution of an annuity contract from a qualified
plan or a traditional IRA is generally not a taxable event because, in
most cases, the distributed annuity account contract continues to be
subject to requirements necessary for tax deferral, e.g., the annuity
remains subject to the minimum distribution requirements of section
401(a)(9). In such a case, no amount is includible in income until
amounts are actually distributed from the annuity contract. However, in
certain situations, the Code provides that the fair market value of an
individual retirement annuity is treated as a taxable distribution. For
example, under section 408(e), the fair market value of the annuity is
included in taxable income if the annuity ceases to be an individual
retirement annuity because of violations of requirements set forth
under that subsection.
Section 25.2512-6 of the Gift Tax Regulations provides rules
regarding the valuation of certain life insurance contracts for gift
tax purposes.\1\ Under these rules, the value of a life insurance
contract or of a contract for the payment of an annuity issued by a
company regularly engaged in the selling of contracts of that character
is established through the sale of the particular contract by the
company, or through the sale by the company of comparable contracts. In
addition, Sec. 25.2512-6 provides that, as the value of an insurance
policy through sale of comparable contracts is not readily
ascertainable when the gift is of a contract which has been in force
for some time and on which further premium payments are to be made, the
value may be approximated by adding to the interpolated terminal
reserve at the date of the gift the proportionate part of the gross
premium last paid before the date of the gift which covers the period
extending beyond that date. If, however, because of the unusual nature
of the contract, such approximation is not reasonably close to the full
value, this method may not be used. Thus, this method may not be used
to determine the fair market value of an insurance policy where the
reserve does not reflect the value of all relevant features of the
policy. These gift tax valuation rules also apply for purposes of
commercial annuity contracts. See Examples 1 and 2 of Sec. 25.2512-6.
In addition, under Sec. 20.2031-8 of the Estate Tax Regulations, the
same rules govern the valuation of such life insurance and commercial
annuity contracts for estate tax purposes. See Sec. Sec. 20.2031-7(b)
and 20.2039-1(c).
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\1\ In Rev. Rul. 59-195 (1959--1 C.B. 18), the IRS ruled that,
in situations similar to those in which an employer purchases and
pays the premiums on an insurance policy on the life of one of its
employees and subsequently sells such policy, on which further
premiums must be paid, the value of such policy for computing
taxable gain in the year of purchase should be determined under the
method of valuation prescribed in Sec. 25.2512-6 of the Gift Tax
Regulations.
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Under A-12 of Sec. 1.401(a)(9)-6, an employee's entire interest
under an annuity contract is the dollar amount credited to the employee
or beneficiary under the contract plus the actuarial value of any
additional benefits (such as survivor benefits in excess of the account
balance) that will be provided under the contract. This rule requiring
that the value of additional benefits under an annuity contract be
included in the employee's entire interest, for purposes of determining
the required minimum distribution under section 401(a)(9), is based on
the general requirement that the fair market value of all assets must
be reflected in valuing an account balance under a defined contribution
plan. However, certain additional benefits may be disregarded for
purposes of calculating the required minimum distribution, such as when
there is a pro-rata reduction in additional benefits for a withdrawal
and a guaranteed return of premiums upon death, to reflect the fact
that distributions are being made to satisfy section 401(a)(9).
Rev. Proc. 2005-25 (2005-17 I.R.B. 962), provides safe harbor
formulas that, if used to determine the value of a life insurance
contract, retirement income contract, endowment contract, or other
contract providing life insurance protection that is distributed or
otherwise transferred from a qualified plan, will meet the definition
of fair market value for purposes of applying the rules of section
402(a) (as well as sections 79, 83, and 402(b)).
Explanation of Provisions
These temporary regulations under section 408A clarify that, when a
non-Roth individual retirement annuity is converted to a Roth IRA, the
amount that is treated as distributed is the fair market value of the
annuity contract on the date the annuity contract is
[[Page 48870]]
converted. Similarly, when a non-Roth individual retirement account
holds an annuity contract as an account asset and the account is
converted to a Roth IRA, the amount that is treated as distributed with
respect to the annuity contract is the fair market value of the annuity
contract on the date the annuity contract is distributed or treated as
distributed from the non-Roth IRA.
Some taxpayers and their advisers assert that the only amount
includible in income as a distribution when a non-Roth individual
retirement annuity is converted to a Roth IRA is the cash surrender
value of the contract, even when the cash surrender value does not
accurately reflect the fair market value of the contract. In
particular, some advisers market a transaction in which taxpayers are
encouraged to invest their non-Roth IRA funds in a single premium
annuity contract with significant artificial penalties that apply in
the first year (or years) of the contract if the annuity is
surrendered, causing the annuity to have a low cash surrender value in
the early years of the contract. Under this transaction, shortly after
the annuity contract is purchased by the non-Roth IRA, the taxpayer
converts the IRA to a Roth IRA. In such a case, the taxpayer asserts
that the only amount includible in gross income as a result of the
conversion is the low cash surrender value. This assertion is made even
though the surrender penalties are unlikely to be paid because the
taxpayers do not expect to surrender the contract during the early
years. In this case, the taxpayers expect that the ultimate payments
under the contract will be qualified distributions from the Roth IRA
(i.e., tax-exempt), and thus, they also expect the artificially
depressed cash surrender value to be the only amount ever includible in
gross income.
In another situation, a taxpayer purchases a non-Roth individual
retirement variable annuity with a guaranteed minimum death benefit
equal to the highest account value ever attained under the contract,
adjusted for withdrawals. If an amount is withdrawn from the contract,
the death benefit is reduced dollar for dollar (rather than a pro-rata
reduction) by the amount of the withdrawal. Prior to the date of
conversion, the annuity has a death benefit far in excess of the
account value and the taxpayer withdraws from the IRA annuity all but a
minimum account value that will keep the IRA annuity in force. Because
the withdrawal reduces the guaranteed minimum death benefit on a
dollar-for-dollar basis, the remaining death benefit will be
significantly greater than the current account value, and accordingly,
the current account value will not reflect the fair market value of the
contract. For example, suppose such an individual retirement variable
annuity has a guaranteed minimum death benefit of $200,000 with an
account value of $100,000. The taxpayer withdraws $99,000 leaving a
$1,000 account value and a $101,000 death benefit ($200,000 less
$99,000)). The taxpayer then converts the IRA annuity into a Roth IRA
and takes the position that the $1,000 account value is the conversion
amount even though the account value does not reflect the fair market
value of the additional $100,000 that will be paid upon the taxpayer's
death. In this case, the taxpayer expects that the entire benefit
payment of $101,000 will be a qualified distribution from the Roth IRA
(i.e., tax-exempt), and thus, expects that the $1,000 account value on
the date of conversion will be the only amount ever includible in gross
income.
The IRS and Treasury Department have concluded that cash surrender
value is not always an appropriate measure of fair market value with
respect to non-Roth IRA annuities that are converted to Roth IRA
annuities. Rather than use the cash surrender value as the basis for
determining fair market value, these temporary regulations follow the
gift tax regulations in providing that the fair market value of an
individual retirement annuity is established by the premiums paid for
such annuity if the conversion occurs soon after the annuity was
purchased.
Under the temporary regulations, if the conversion occurs after the
annuity contract has been in force for some time and no further premium
payments are to be made, fair market value is determined through the
sale by the company of comparable contracts. The temporary regulations
further provide that, if the conversion occurs after the annuity
contract has been in force for some time and future premium payments
are to be made, fair market value is determined through an
approximation that is based on the interpolated terminal reserve at the
date of the conversion, plus the proportionate part of the gross
premium last paid before the date of the conversion which covers the
period extending beyond that date. However, if, because of the unusual
nature of the contract, this approximation is not reasonably close to
the full value, this method may not be used.
These temporary regulations also provide authority for the
Commissioner to issue additional guidance regarding the fair market
value of an individual retirement annuity, including formulas to be
used for determining fair market value. The IRS and Treasury Department
expect to issue additional guidance regarding the rules to be used in
determining the fair market value of a non-Roth IRA annuity. It is
anticipated that such guidance will be similar to the provisions of
Rev. Proc. 2005-25 (2005-17 I.R.B. 962, April 25, 2005), except that
the adjustment for potential surrender charges, to the extent
permitted, will not exceed 9 percent. It is also anticipated that such
guidance will provide that in determining fair market value, the value
of all additional benefits (such as guaranteed minimum death benefits)
under the contract must be taken into account. The IRS and Treasury
Department request comments regarding this anticipated guidance. The
IRS and Treasury Department also request comments regarding whether the
method used to calculate the fair market value of an annuity contract
that is converted to a Roth IRA should also apply for purposes of the
determining fair market value of an annuity contract under sections
408(e) and 401(a)(9). These comments may be submitted in conjunction
with the comments submitted on the proposed regulations discussed
below.
Proposed regulations regarding the determination of fair market
value of an annuity contract are contained in the Proposed Rules
section of the Federal Register. The preamble and text of these
temporary regulations also serves as the preamble and text of the
proposed regulations.
Effective Date
The temporary amendments to Sec. 1.408A-4 of the regulations are
applicable to any Roth IRA conversion where an annuity contract is
distributed or treated as distributed from a traditional IRA on or
after August 19, 2005. No implication is intended concerning whether or
not a rule to be adopted in these regulations is applicable law for
taxable years ending before that date.
Special Analyses
It has been determined that these temporary regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these temporary regulations. For
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6),
refer to the notice of proposed rulemaking published in the Proposed
Rules section
[[Page 48871]]
of this issue of the Federal Register. Pursuant to section 7805(f) of
the Code, these temporary regulations will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these temporary regulations is Cathy A.
Vohs of the Office of the Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). However, other personnel from the IRS
and Treasury Department participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for Part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.408A-4T also issued under 26 U.S.C. 408A * * *
0
Par. 2. Section 1.408A-4 is amended by adding, in numerical order, Q-14
and A-14, to read as follows:
Sec. 1.408A-4 Converting amounts to Roth IRAs.
* * * * *
Q-14. [Reserved]. For further guidance, see Sec. 1.408A-4T, Q-14.
A-14. [Reserved]. For further guidance, see Sec. 1.408A-4T, A-14.
0
Par. 3. Section 1.408A-4T is added to read as follows:
Sec. 1. 408A-4T Converting amounts to Roth IRAs.
* * * * *
Q-14. What is the amount that is includable in income as a
distribution when a conversion involves an annuity contract?
A-14. (a) In general. Notwithstanding Sec. 1.408-4(e), when part
or all of a traditional IRA that is an individual retirement annuity
described in section 408(b) is converted to a Roth IRA, for purposes of
determining the amount includible in gross income as a distribution
under Sec. 1.408A-4, A-7, the amount that is treated as distributed is
the fair market value of the annuity contract on the date the annuity
contract is converted. Similarly, when a traditional IRA that is an
individual retirement account described in section 408(a) holds an
annuity contract as an account asset and the traditional IRA is
converted to a Roth IRA, for purposes of determining the amount
includible in gross income as a distribution under Sec. 1.408A-4, A-7,
the amount that is treated as distributed with respect to the annuity
contract is the fair market value of the annuity contract on the date
that the annuity contract is distributed or treated as distributed from
the traditional IRA.
(b) Determination of fair market value--(1) General rule. For
purposes of this A-14, the fair market value of an individual
retirement annuity issued by a company regularly engaged in the selling
of contracts of that character generally is established as follows--
(A) If the conversion occurs soon after the contract was sold and
there have been no material changes in market conditions, the fair
market value of the contract is established through the sale of the
particular contract by the company (i.e., the actual premiums paid for
such contract);
(B) If the conversion occurs after the contract has been in force
for some time and no further premium payments are to be made, the fair
market value of the contract is established through the sale by the
company of comparable contracts;
(C) If the conversion occurs after the contract has been in force
for some time and future premium payments are to be made, the fair
market value of the contract is established through an approximation
that is based on the interpolated terminal reserve at the date of the
conversion, plus the proportionate part of the gross premium last paid
before the date of the conversion which covers the period extending
beyond that date. However, if, because of the unusual nature of the
contract, this approximation is not reasonably close to the full value,
this method may not be used. Thus, this method may not be used to
determine the fair market value of an annuity contract where the
reserve does not reflect the value of all relevant features of the
contract.
(2) Additional guidance. Additional guidance regarding the fair
market value of an individual retirement annuity, including formulas to
be used for determining fair market value, may be issued by the
Commissioner in revenue rulings, notices, or other guidance published
in the Internal Revenue Bulletin (See Sec. 601.601(d)(2)(ii)(b)).
(c) Effective date. The provisions of this A-14 are applicable to
any conversion where an annuity contract is distributed or treated as
distributed from a traditional IRA on or after August 19, 2005.
(d) Definitions. The definitions set forth in Sec. 1.408A-8 apply
for purposes of this A-14.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: August 9, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary for Tax Policy.
[FR Doc. 05-16403 Filed 8-19-05; 8:45 am]
BILLING CODE 4830-01-P
