Can You Move Amounts
Into a Roth IRA?(p60)

You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA.

You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, the 1-year waiting period does not apply.

You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.

• Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
• Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
• Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.

You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. For 2010 conversions, special rules apply. See How to treat 2010 conversions to Roth IRAs next.

If you converted amounts from a traditional IRA in 2010 to a Roth IRA, any amount you have to include in income as a result of the conversion is generally included in income in equal amounts in 2011 and 2012. If you also took a distribution from your Roth IRA in 2010 or 2011, see Distributions from Roth IRAs, later, to figure the taxable amount for 2011. Otherwise, include on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b, the amount from your 2010 Form 8606, line 20a.

A change in filing status or a divorce does not affect the application of the 2-year income spread rule for 2010 conversions.

If you include the taxable part of a 2010 conversion in equal amounts over the 2-year period (2011 and 2012) and in 2010 or 2011 any amount allocable to the taxable amount of the conversion is distributed from the Roth IRA, you generally have to include in income for 2011 the ratable (one-half) portion for the year and the part of the distribution made during the year that is allocable to the 2012 taxable part of the conversion.

Any amount allocable to the conversion that is included in income in 2010 or 2011 because of a distribution from the Roth IRA first reduces the taxable amount that is reportable in income in 2012. The taxable amount that is reportable in income in 2011 is reduced next. The most that can be included in income because of a distribution of a conversion amount for any one year is the total amount required to be included in income for 2011 and 2012 minus the amounts included in income in all preceding years in the period.

If you received a distribution from your Roth IRA in 2011, you must complete Form 8606 to figure the taxable part of the distribution and any taxable amount allocable to the 2010 conversion.

If you received a distribution from your Roth IRA in 2010, but not in 2011, see the example below to figure the amount to enter on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b.

In January 2010 you converted $20,000 to a new Roth IRA from a traditional IRA. In December 2010 you took a distribution of $12,000 from your Roth IRA. You completed Part II of Form 8606 for 2010 showing a $20,000 taxable conversion on line 18. You spread the taxable amount over 2011 and 2012 and entered $10,000 on lines 20a and 20b. The $20,000 conversion was the only amount put into your Roth IRA, so the entire $12,000 distribution was allocable to the taxable part of the conversion shown on your 2010 Form 8606, line 33. You did not have any transactions involving your Roth IRA for 2011. Since you already included $12,000 (line 15b of your 2010 Form 1040) of the $20,000 in income in 2010, only $8,000 remains to be taxed in 2011 and 2012. For 2011, you must include the smaller of the amount on line 20a of your 2010 Form 8606 or the amount that remains to be taxed due to the 2010 conversion. In this case, you include the $8,000 on your 2011 Form 1040, line 15b. You will not have any amount to report in 2012 due to your 2010 conversion because you have already reported the entire taxable amount of your 2010 conversion ($20,000) in your income for 2010 and 2011 ($12,000 in 2010 and $8,000 in 2011).

If a Roth IRA owner who is including amounts in income ratably over 2011 and 2012 dies before including all of the amounts in income, any amounts not included must generally be included in the owner’s gross income for the year of death. However, if the owner’s surviving spouse receives the entire interest in all the owner’s Roth IRAs, that spouse can continue to ratably include the amounts in income in 2011 and 2012. The election cannot be made or changed after the due date (including extensions) for the surviving spouse’s tax return that include the date of the owner’s death. Any amount includible in the decedent’s (owner’s) gross income for the year of death under this rule must be reported on the decedent’s final income tax return.

For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1.

You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

• Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan);
• Annuity plan;
• Tax-sheltered annuity plan (section 403(b) plan); or
• Governmental deferred compensation plan (section 457 plan).

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways.

• Rollover. You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. Since the distribution is paid directly to you, the payer generally must withhold 20% of it.
• Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA.

You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid. These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA. For 2010 rollovers, special rules apply. See How to treat 2010 rollovers to Roth IRAs next.

If you rolled over an amount from a qualified retirement plan to a Roth IRA in 2010 and did not elect to include the entire amount in income in 2010 by checking the box on line 24 of your 2010 Form 8606, see Publication 575 for information about figuring and reporting the amount you must include in income in 2011.

For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1.

If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. The contribution is treated as a qualified rollover contribution.

The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers.

The rollover must be completed before the end of the 1-year period beginning on the date you received the payment.

The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed.

You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers.

A rollover from a Roth IRA to an employer retirement plan is not allowed.

A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA.

If you roll over an amount from one Roth IRA to another Roth IRA, the 5-year period used to determine qualified distributions does not change. The 5-year period begins with the first taxable year for which the contribution was made to the initial Roth IRA. See What are Qualified Distributions, later.

If you are a qualified taxpayer and you received qualified settlement income, you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. Qualified settlement income that is contributed to a Roth IRA, or to a designated Roth account, will be:

• Included in your taxable income for the year the qualified settlement income was received, and
• Treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed.

For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1.

If you are a qualified airline employee, you may contribute any portion of an airline payment you receive to a Roth IRA. The contribution must be made within 180 days from the date you received the payment. The contribution will be treated as a qualified rollover contribution. The rollover contribution is included in income to the extent it would be included in income if it were not part of the rollover contribution. Also, any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can contribute to your Roth IRA.

An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. The payment also must be made both:

• Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and
• In respect of the qualified airline employee's interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount.

An airline payment amount shall not include any amount payable on the basis of the carrier's future earnings or profits.

A qualified airline employee is an employee or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006.

For more information, see Form 8935, Airline Payments Report. This form will be sent to you within 90 days following an airline payment. The form will indicate the amount of the airline payment that is eligible to be rolled over to a Roth IRA.