LIST OF REQUIRED MODIFICATIONS AND INFORMATION PACKAGE
This information package contains samples of provisions that have been found to satisfy certain specific requirements of the Internal Revenue Code as amended through the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206. Such language may or may not be acceptable in specific Roth IRAs, depending on the context.
Part A, provisions 1-12, applies to Roth individual retirement accounts under Code sections 408A and 408(a). Part B, provisions 13- 21, applies to Roth individual retirement annuities under sections 408A and 408(b).
PART A: ACCOUNTS -- Roth trust or custodial accounts under Code sections 408A, 408(a) and 408(h).
(1) Statement of Requirement: The Roth IRA is organized and operated for the exclusive benefit of the individual, Code sections 408A and 408(a). Sample Language:
The account is established for the exclusive benefit of the individual or his or her beneficiaries.
(2) Statement of Requirement: Maximum permissible annual contribution and restrictions on kinds of contributions, Code sections 408A(c), 408A(d)(6), 408A(e), 219, 408(p)(1)(B), 408(p)(2)(A)(iv) and 408(d)(3)(G), Regulations section 1.219-1(c)(1) and Proposed Regulations sections 1.408A-3, -4 and -5. Sample Language:
(a) Maximum permissible amount. Except in the case of a qualified rollover contribution or a recharacterization (as defined in (e) below), no contribution will be accepted unless it is in cash and the total of such contributions to all the individual's Roth IRAs for a taxable year does not exceed $2,000, or the individual's compensation (as defined in (g) below), if less, for that taxable year. The contribution described in the previous sentence that may not exceed the lesser of $2,000 or the individual's compensation is referred to as a "regular contribution." A "qualified rollover contribution" is a rollover contribution that meets the requirements of section 408(d)(3) of the Internal Revenue Code, except the one- rollover-per-year rule of section 408(d)(3)(B) does not apply if the rollover contribution is from an IRA other than a Roth IRA (a "nonRoth IRA"). Contributions may be limited under (b) through (d) below.
(b) Regular contribution limit. If (i) and/or (ii) below apply, the maximum regular contribution that can be made to all the individual's Roth IRAs for a taxable year is the smaller amount determined under (i) or (ii).
(i) The maximum regular contribution is phased out ratably between certain levels of modified adjusted gross income ("modified AGI," defined in (f) below) in accordance with the following table:
Full
Phase-out
No
Filing Status Contribution
Range
Contribution
_____________ ____________
_________ ____________
--
Modified AGI
____________
Single or Head $95,000 or less
Between $95,000 $110,000
of Household
and
$110,000 or more
Joint Return $150,000 or less
Between $150,000 $160,000
or Qualifying
and
$160,000 or more
Widow(er)
Married-
$0
Between $0
$10,000
Separate Return
and
$10,000 or more
If the individual's modified AGI for a taxable year is in the phase-
out range, the maximum regular contribution determined under this
table for that taxable year is rounded up to the next multiple of $10
and is not reduced below $200.
(ii) If the individual makes regular contributions to both Roth and nonRoth IRAs for a taxable year, the maximum regular contribution that can be made to all the individual's Roth IRAs for that taxable year is reduced by the regular contributions made to the individual's nonRoth IRAs for the taxable year.
(c) Qualified rollover contribution limit. A rollover from a nonRoth IRA cannot be made to this IRA if, for the year the amount is distributed from the nonRoth IRA, (i) the individual is married and files a separate return, (ii) the individual is not married and has modified AGI in excess of $100,000 or (iii) the individual is married and together the individual and the individual's spouse have modified AGI in excess of $100,000. For purposes of the preceding sentence, a husband and wife are not treated as married for a taxable year if they have lived apart at all times during that taxable year and file separate returns for the taxable year.
(d) Simple IRA limits. No contributions will be accepted under a SIMPLE IRA Plan established by any employer pursuant to section 408(p). Also, no transfer or rollover of funds attributable to contributions made by a particular employer under its SIMPLE IRA Plan will be accepted from a SIMPLE IRA, that is, an IRA used in conjunction with a SIMPLE IRA Plan, prior to the expiration of the 2- year period beginning on the date the individual first participated in that employer's SIMPLE IRA Plan.
(e) Recharacterization. A regular contribution to a nonRoth IRA may be recharacterized pursuant to the rules in section 1.408A-5 of the proposed regulations as a regular contribution to this IRA, subject to the limits in (b) above.
(f) Modified AGI. For purposes of (b) and (c) above, an individual's modified AGI for a taxable year is defined in section 408A(c)(3)(C)(i) and does not include any amount included in adjusted gross income as a result of a rollover from a nonRoth IRA (a "conversion").
(g) Compensation. For purposes of (a) above, compensation is defined as wages, salaries, professional fees, or other amounts derived from or received for personal services actually rendered (including, but not limited to commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, and bonuses) and includes earned income, as defined in section 401(c)(2) (reduced by the deduction the self employed individual takes for contributions made to a self-employed retirement plan). For purposes of this definition, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6). Compensation does not include amounts derived from or received as earnings or profits from property (including but not limited to interest and dividends) or amounts not includible in gross income. Compensation also does not include any amount received as a pension or annuity or as deferred compensation. The term "compensation" shall include any amount includible in the individual's gross income under section 71 with respect to a divorce or separation instrument described in subparagraph (A) of section 71(b)(2). In the case of a married individual filing a joint return, the greater compensation of his or her spouse is treated as his or her own compensation, but only to the extent that such spouse's compensation is not being used for purposes of the spouse making a contribution to a Roth IRA or a nondeductible contribution to a nonRoth IRA.
(3) Statement of Requirement: An investment in collectibles will be treated as a distribution, Code section 408(m). Sample Language:
If the trust acquires collectibles within the meaning of Code section 408(m) after December 31, 1981, trust assets will be treated as a distribution in an amount equal to the cost of such collectibles.
(Note to reviewer: This provision is not required if the arrangement
precludes any investments that could be construed as collectibles.
Code section 408(m)(3) provides an exception to this rule for certain
coins and precious metals.)
(4) Statement of Requirement: Prohibition against investment in life insurance, Code section 408(a)(3). Sample Language:
No part of the trust funds will be invested in life insurance contracts.
(5) Statement of Requirement: Distributions before death are not required, Code section 408A(c)(5). Sample Language:
No amount is required to be distributed prior to the death of the individual for whose benefit the account was originally established.
(6) Statement of Requirement: Distribution upon death, Code sections 408A(c)(5) and 408(a)(6) and Proposed Regulations sections 1.408A-6 and 1.408-8. Sample Language:
(a) Upon the death of the individual, distribution of the individual's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the individual's death except to the extent that an election is made to receive distributions in accordance with (i) or (ii) below.
(i) If the individual's interest is payable to a designated beneficiary, then the entire interest of the individual may be distributed over the life or over a period certain not greater than the life expectancy of the designated beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the individual died.
(ii) If the designated beneficiary is the individual's surviving spouse, the date distributions are required to begin in accordance with (i) above shall not be earlier than the later of (A) December 31 of the calendar year immediately following the calendar year in which the individual died or (B) December 31 of the calendar year in which the individual would have attained age 702.
(b) If the designated beneficiary is the individual's surviving spouse, the spouse may elect to treat the account as his or her own Roth IRA. This election will be deemed to have been made if such surviving spouse makes a regular contribution to the account, makes a rollover to or from such account, or fails to take distributions under (a) above.
(c) The amount required to be distributed each calendar year under (a)(i) or (a)(ii) above shall not be less than the quotient obtained by dividing the balance in the account as of the end of the preceding calendar year by the beneficiary's applicable life expectancy (as determined under (d) below).
(d) Life expectancy is computed by use of the expected return multiples in Table V of section 1.72-9 of the Income Tax Regulations. If the designated beneficiary is the individual's surviving spouse, then, unless otherwise elected by the surviving spouse by the time distributions are required to begin, the surviving spouse's life expectancy shall be recalculated annually. Such election shall be irrevocable by the surviving spouse and shall apply to all subsequent years. In the case of any other designated beneficiary, life expectancies shall be calculated using the attained age of such beneficiary during the calendar year in which distributions are required to begin pursuant to (a)(i) or (a)(ii) above, and payments for any subsequent calendar year shall be calculated based on such life expectancy reduced by one for each calendar year which has elapsed since the calendar year life expectancy was first calculated.
(7) Statement of Requirement: Individual's interest must be nonforfeitable, Code section 408(a)(4). Sample Language:
The interest of an individual in the balance in his or her account is nonforfeitable at all times.
(8) Statement of Requirement: Prohibition against commingling of assets, Code section 408(a)(5). Sample Language:
The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
(9) Statement of Requirement: Separate accounting for the interest of each individual under a Roth IRA established by an employer or employee association, Regulations section 1.408-2(c)(3) and Proposed Regulations section 1.408A-2. Sample Language:
Separate records will be maintained for the interest of each individual.
(Note to reviewer: The above provision is required only in Roth IRAs that are sponsored by the employer or employee association.)
(10) Statement of Requirement: Annual reports by trustees, Code sections 408(i) and 408A(d)(3)(D) and Regulations section 1.408-5. Sample Language:
The trustee of a Roth individual retirement account shall furnish annual calendar-year reports concerning the status of the account.
(11) Statement of Requirement: Substitution of non-bank trustee or custodian, Regulations section 1.408-2(e)(6)(v). Sample Language:
The non-bank trustee or custodian shall substitute another trustee or custodian if the non-bank trustee or custodian receives notice from the Commissioner of Internal Revenue that such substitution is required because it has failed to comply with the requirements of Regulations section 1.408-2(e).
(Note to reviewer: This provision is required only in IRA accounts that are sponsored by non-bank trustees or custodians.)
(12) [Reserved]
PART B. ANNUITIES -- Roth annuities under Code sections 408A and 408(b).
(13) Statement of Requirement: The Roth IRA is organized and operated for the exclusive benefit of the individual, Code sections 408A and 408(b). Sample Language:
The contract is established for the exclusive benefit of the individual or his or her beneficiaries.
(14) Statement of Requirement: Maximum permissible annual contribution and restrictions on kinds of contributions, Code sections 408A(c), 408A(d)(6), 408A(e), 219, 408(p)(1)(B), 408(p)(2)(A)(iv) and 408(d)(3)(G), Regulations section 1.219-1(c)(1) and Proposed Regulations sections 1.408A-3, -4 and -5. Sample Language:
(a) Maximum permissible amount. Except in the case of a qualified rollover contribution or a recharacterization (as defined in (e) below), no contribution will be accepted unless it is in cash and the total of such contributions to all the individual's Roth IRAs for a taxable year does not exceed $2,000, or the individual's compensation (as defined in (g) below), if less, for that taxable year. The contribution described in the previous sentence that may not exceed the lesser of $2,000 or the individual's compensation is referred to as a "regular contribution." A "qualified rollover contribution" is a rollover contribution that meets the requirements of section 408(d)(3) of the Internal Revenue Code, except the one- rollover-per-year rule of section 408(d)(3)(B) does not apply if the rollover contribution is from an IRA other than a Roth IRA (a "nonRoth IRA"). Contributions may be limited under (b) through (d) below.
(b) Regular contribution limit. If (i) and/or (ii) below apply, the maximum regular contribution that can be made to all the individual's Roth IRAs for a taxable year is the smaller amount determined under (i) or (ii).
(i) The maximum regular contribution is phased out ratably between certain levels of modified adjusted gross income ("modified AGI," defined in (f) below) in accordance with the following table:
Full
Phase-out
No
Filing Status Contribution
Range
Contribution
_____________ ____________
_________ ____________
--
Modified AGI
____________
Single or Head $95,000 or less
Between $95,000 $110,000
of Household
and
$110,000 or more
Joint Return $150,000 or less
Between $150,000 $160,000
or Qualifying
and
$160,000 or more
Widow(er)
Married-
$0
Between $0
$10,000
Separate Return
and
$10,000 or more
If the individual's modified AGI for a taxable year is in the phase-
out range, the maximum regular contribution determined under this
table for that taxable year is rounded up to the next multiple of $10
and is not reduced below $200.
(ii) If the individual makes regular contributions to both Roth and nonRoth IRAs for a taxable year, the maximum regular contribution that can be made to all the individual's Roth IRAs for that taxable year is reduced by the regular contributions made to the individual's nonRoth IRAs for the taxable year.
(c) Qualified rollover contribution limit. A rollover from a nonRoth IRA cannot be made to this IRA if, for the year the amount is distributed from the nonRoth IRA, (i) the individual is married and files a separate return, (ii) the individual is not married and has modified AGI in excess of $100,000 or (iii) the individual is married and together the individual and the individual's spouse have modified AGI in excess of $100,000. For purposes of the preceding sentence, a husband and wife are not treated as married for a taxable year if they have lived apart at all times during that taxable year and file separate returns for the taxable year.
(d) Simple IRA limits. No contributions will be accepted under a SIMPLE IRA Plan established by any employer pursuant to section 408(p). Also, no transfer or rollover of funds attributable to contributions made by a particular employer under its SIMPLE IRA Plan will be accepted from a SIMPLE IRA, that is, an IRA used in conjunction with a SIMPLE IRA Plan, prior to the expiration of the 2- year period beginning on the date the individual first participated in that employer's SIMPLE IRA Plan.
(e) Recharacterization. A regular contribution to a nonRoth IRA may be recharacterized pursuant to the rules in section 1.408A-5 of the proposed regulations as a regular contribution to this IRA, subject to the limits in (b) above.
(f) Modified AGI. For purposes of (b) and (c) above, an individual's modified AGI for a taxable year is defined in section 408A(c)(3)(C)(i) and does not include any amount included in adjusted gross income as a result of a rollover from a nonRoth IRA (a "conversion").
(g) Compensation. For purposes of (a) above, compensation is defined as wages, salaries, professional fees, or other amounts derived from or received for personal services actually rendered (including, but not limited to commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, and bonuses) and includes earned income, as defined in section 401(c)(2) (reduced by the deduction the self employed individual takes for contributions made to a self-employed retirement plan). For purposes of this definition, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6). Compensation does not include amounts derived from or received as earnings or profits from property (including but not limited to interest and dividends) or amounts not includible in gross income. Compensation also does not include any amount received as a pension or annuity or as deferred compensation. The term "compensation" shall include any amount includible in the individual's gross income under section 71 with respect to a divorce or separation instrument described in subparagraph (A) of section 71(b)(2). In the case of a married individual filing a joint return, the greater compensation of his or her spouse is treated as his or her own compensation, but only to the extent that such spouse's compensation is not being used for purposes of the spouse making a contribution to a Roth IRA or a nondeductible contribution to a nonRoth IRA.
(15) Statement of Requirement: Distributions before death are not required, Code section 408A(c)(5). Sample Language:
No amount is required to be distributed prior to the death of the individual for whose benefit the contract was originally established.
(16) Statement of Requirement: Distribution upon death, Code sections 408A(c)(5) and 408(a)(6) and Proposed Regulations sections 1.408A-6 and 1.408-8. Sample Language:
(a) Upon the death of the individual, distribution of the individual's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the individual's death except to the extent that an election is made to receive distributions in accordance with (i) or (ii) below:
(i) If the individual's interest is payable to a designated beneficiary, then the entire interest of the individual may be distributed over the life or over a period certain not greater than the life expectancy of the designated beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the individual died.
(ii) If the designated beneficiary is the individual's surviving spouse, the date distributions are required to begin in accordance with (i) above shall not be earlier than the later of (A) December 31 of the calendar year immediately following the calendar year in which the individual died or (B) December 31 of the calendar year in which the individual would have attained age 702.
(b) If the designated beneficiary is the individual's surviving spouse, the spouse may elect to treat the contract as his or her own Roth IRA. This election will be deemed to have been made if such surviving spouse makes a regular contribution to the contract, makes a rollover to or from such contract, or fails to take distributions under (a) above.
(c) Payments required under (a)(i) or (a)(ii) above must be made at intervals of no longer than 1 year and must be either nonincreasing or increasing as provided in Q&A F-3 of section 1.401(a)(9)-1 of the proposed regulations.
(d) Life expectancy is computed by use of the expected return multiples in Table V of section 1.72-9 of the Income Tax Regulations. If the designated beneficiary is the individual's surviving spouse, then, unless otherwise elected by the surviving spouse by the time distributions are required to begin, the surviving spouse's life expectancy shall be recalculated annually. Such election shall be irrevocable by the surviving spouse and shall apply to all subsequent years. In the case of any other designated beneficiary, life expectancies shall be calculated using the attained age of such beneficiary during the calendar year in which distributions are required to begin pursuant to (a)(i) or (a)(ii) above, and payments for any subsequent calendar year shall be calculated based on such life expectancy reduced by one for each calendar year which has elapsed since the calendar year life expectancy was first calculated.
(17) Statement of Requirement: Participant's interest must be nonforfeitable, Code section 408(b)(4). Sample Language:
The interest of the individual is nonforfeitable.
(18) Statement of Requirement: Contract is nontransferable by the owner, Code section 408(b)(1). Sample Language:
This contract is nontransferable by the individual.
(19) Statement of Requirement: Application of refund premiums, Code section 408(b)(2). Sample Language:
Any refund of premiums (other than those attributable to excess contributions) will be applied, before the close of the calendar year following the year of the refund, toward the payment of future premiums or the purchase of additional benefits.
(Note to reviewer: Language that meets the requirements of this provision must be included in annuities that provide for participation in dividends.)
(20) Statement of Requirement: Contract may not require fixed premiums; however, the sample language below does not violate this requirement, Code section 408(b)(2) and Proposed Regulation section 1.408-3(f). Sample Language:
If the premium payments are interrupted, the contract will be reinstated at any date prior to maturity upon payment of a premium to the insurance company, and the minimum premium amount for reinstatement shall be ____ (not to exceed $50), however, the insurance company may at its option either accept additional future payments or terminate the contract by payment in cash of the then present value of the paid up benefit if no premiums have been received for two full consecutive policy years and the paid up annuity benefit at maturity would be less than $20 per month.
(21) Statement of Requirement: Annual reports by trustees or issuers, sections 408(i) and 408A(d)(3)(D) and Regulations section 1.408-5. Sample Language:
The issuer of a Roth individual retirement annuity shall furnish annual
calendar year reports concerning the status of the annuity.