JOINT COMMITTEE ON TAXATION
May 5, 1998
C. MODIFICATION OF MINIMUM DISTRIBUTION REQUIREMENTS TO DETERMINE AGI FOR ROTH IRA CONVERSIONS
Present Law
Under present law, uniform minimum distribution rules generally apply to all types of tax-favored retirement vehicles, including qualified retirement plans and annuities, individual retirement arrangements ("IRAs") other than Roth IRAs, and tax-sheltered annuities (sec 403(b)).
Under present law, distributions are required to begin no later than the participant's required beginning date (sec. 401(a)(9)). The required beginning date means the April 1 of the calendar year following the later of (1) the calendar year in which the employee attains age 70-1/2, or (2) the calendar year in which the employee retires. In the case of an employee who is a 5-percent owner (as defined in section 416), the required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70-1/2. The Internal Revenue Service has issued extensive Regulations for purposes of calculating minimum distributions. In general, minimum distributions are includible in gross income in the year of distribution. An excise tax equal to 50 percent of the required distribution applies to the extent a required distribution is not made.
Under present law, all or any part of amounts held in a deductible or nondeductible IRA may be converted into a Roth IRA. Only taxpayers with adjusted gross income ("AGI") of $100,000 or less are eligible to convert an IRA into a Roth IRA. In the case of a married taxpayer, AGI is the combined AGI of the couple. Married taxpayers filing a separate return are not eligible to make a conversion.
Description of Proposal
The proposal would modify the definition of AGI to exclude required minimum distributions from the taxpayer's AGI solely for purposes of determining eligibility to convert from an IRA to a Roth IRA. As under present law, the required minimum distribution would not be eligible for conversion and would be includible in gross income.
Effective Date
The proposal would be effective for taxable years beginning after December 31, 2004.
Amendment No. 2339 to H.R. 2676
SEC. 5008. MODIFICATION OF AGI LIMIT FOR CONVERSIONS TO ROTH IRAS.
(a) IN GENERAL. -- Section 408A(c)(3)(C)(i) (relating to limits based on modified adjusted gross income) is amended to read as follows:
"(i) adjusted gross income shall be determined in
the same manner as under section 219(g)(3), except
that --
"(I) any amount included in gross income under
subsection (d)(3) shall not be taken into account,
and
"(II) any amount included in gross income by
reason of a required distribution under a provision
described in paragraph (5) shall not be taken into
account for purposes of subparagraph (B)(i)."
(b) EFFECTIVE DATE. -- The amendment made by this section shall apply to taxable years beginning after December 31, 2004.
PRESS RELEASE #105-312
May 5, 1998
WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) today unveiled the offsets for the IRS reform package, H.R. 2676.
The bill was reported out of the Senate Finance Committee on March 31 with the first five years fully offset in compliance with the Budget Act, but without full funding for the second five years. Under the Senate's pay-as-you-go budget rules, legislation must be fully paid for over ten years, or else a budget point of order can be brought against the bill on the Senate floor.
"It has been critically important to me that we reform the IRS in a comprehensive manner, and fully address the serious problems that have been brought before the Finance Committee. It is also important to me that we completely offset the legislation without getting bogged down in a firefight over controversial revenue raisers. Today, I am happy to report that those goals don't have to be mutually exclusive," Roth stated.
The additional offsets for the legislation that Roth intends to offer in an amendment Tuesday evening are:
o A provision to tighten the definition of operating losses that
are eligible for a special ten year carry back;
o A provision that would modify the rollover rules for Roth
IRAs;
o A four year extension of the current law user fees charged by
the IRS for private letter rulings;
o A dedication of the balance on the pay go scorecard;
o A change in the effective date of the foreign tax credit
revenue raiser, already part of the legislation, to tax years
beginning after 1998.
The text of Roth's statement scheduled for delivery on the Senate floor follows:
"Mr. President, I send an amendment to the desk and ask for its immediate consideration.
"Mr. President, under the Senate's budget rules, the first year, first five years, and second five years of revenue losses in a tax bill must be offset with either mandatory savings or revenue increases.
"When the Finance Committee marked up the underlying bill, the first five years of revenue loss were offset. The second five years of revenue loss were not fully offset. The IRS restructuring bill was short in excess of $9 billion in the last five years. During the markup, I indicated that I would work with the Budget Committee to attempt to find offsets so that the bill would be fully paid for over the last five years.
"Finding offsets was not an easy task. Every major revenue raiser I considered brought forth opposition from different members. After several weeks of reviewing options, I have developed a package, in consultation with my Ranking Member, Senator Moynihan, and the leadership.
"Mr. President, this pay-for package contains three new revenue raisers and change to a revenue raiser in the underlying bill.
"The first revenue raiser comes from the Administration's budget. This proposal would tighten the definition of operating losses that are eligible for a special ten year carry back. Congress intended this treatment to be limited to a narrow category of activities. This proposal simply clarifies the types of losses eligible for this special treatment. This proposal is noncontroversial.
"The second new revenue raiser would modify the rollover rules for Roth IRAs. Under current law, individuals or married couples with adjusted gross income over $100,000 cannot rollover a traditional IRA into a Roth IRA. For purposes of the $100,000 test, minimum distributions which are required when an IRA beneficiary reaches 70 and 1/2 are counted as income.
"This second new raiser would modify current law by excluding minimum distributions from the $100,000 test. The effect of this proposal is to allow more taxpayers, at age 70 and 1/2 and above, to rollover from a traditional IRA to a Roth IRA. This proposal will enlarge the group of taxpayers who can enjoy the benefits of the Roth IRA.
"The third new raiser would extend the current law user fees charged by the IRS for private letter rulings. This extension would be effective for four years.
"Let me note that the IRS Restructuring bill uses the balance on the pay-go scorecard of approximately $400 million in the last five years as an offset. We have been informed by the Budget Committee staff that the use of the pay-go balance is appropriate in this instance.
"Finally, this amendment modifies an effective date of a revenue raiser in the Finance Committee bill. The proposal modified is the proposal to limit the carry back period of the foreign tax credit. Under this amendment, the effective date of the foreign tax credit raiser has been moved out one year to tax years beginning after 1998.
"Mr. President, I ask unanimous consent that a technical description of his amendment, and a revised revenue table for the IRS restructuring bill, prepared by the Joint Committee on Taxation, be inserted in the record."
by Gregory Kolojeski
(The following article is exclusive to the Roth IRA Web Site)
Under current rules, required minimum distributions must be taken into consideration for purposes of the $100,000 AGI test that must be passed in order to convert an existing IRA into a Roth IRA. As previously pointed out at the Roth IRA Web Site, this may be thought of as an age-discriminatory rule. It only applies to required minimum distributions and, for most, such distributions are required for the year in which one turns 70½ as well as all later years. In the year before one turns age 70½, no such distributions are required. Thus, on December 31st of the year before minimum distributions are mandated, you are not required to take any IRA distributions which would then increase your income and possibly push you past the $100,000 threshold. On January 1st of the age 70½ year, you must take into account required minimum distributions for the $100,000 test thus increasing the likelihood of not qualifying for a conversion to a Roth IRA.
The proposed change would allow minimum distributions not to be taken into account for purposes of the $100,000 AGI test. Unfortunately, this provision would not apply until after 2004. Thus, it will be no good to those who are already over age 70½ and who might benefit now from converting an IRA to a Roth IRA. If one lives long enough and this provision is still around at the time, maybe a Roth IRA conversion will then be possible in the year 2005.
The proposed change also requires one to take the required minimum distribution in the year of the conversion. This seems quite arbitrary. (Yes, required minimum distributions do not qualify for a rollover under existing IRS rules, but why shouldn't this rule be changed when it makes sense to do so?) Most of the time, you would be fully taxable on the distribution amount even if you were able to convert it, so why prohibit that amount from being converted? This is just unnecessary complexity. The Roth IRA provides a wonderful opportunity to get beyond the horribly complex minimum distributions rules, but it looks like you will be stuck with these rules in the year of the conversion if you have reached age 70½. Since the government will get its money either way (minimum distributions are taxable and conversion amounts are taxable), why should the government force the minimum distribution amount out of the plan thereby preventing its conversion to a Roth IRA?
What would a better proposal be? Why not just eliminate consideration of required minimum distributions from the $100,000 conversion test effective 1/1/98 (not in 2005) and, furthermore, not require a minimum distribution if the Roth IRA conversion is an amount greater (or some arbitrary larger amount, such as 20% of the plan balance) than that of the otherwise required minimum distribution?
The proposal is overly complicated and restrictive at best and a shell game at worst. This proposal appears to be a method of creating theoretical revenue offsets so that an IRS Restructuring bill can appear to be properly funded. It does not really address the age-discriminatory aspect of the current law; in fact, it exacerbates it. Those who will not be age 70½ until 2005 or later may ultimately benefit from the proposal (although most could likely convert earlier anyway). Those who are already age 70½ or older will just have to wait until 2005.
The proposal is both overly complex and too restrictive. When it gets to a Conference Committee for the House and Senate, maybe the conferees will clean it up. If they wanted to, they could then raise more revenue and simplify the law at the same time.
Note: The Financing Amendment passed the Senate on 5/6/98 by a 56-42 vote and then the IRS Restructuring Bill passed the Senate on 5/7/98 by a 97-0 vote. Based on the opposition of the Democrats to the provision which would expand in 2005 the ability to convert to Roth IRAs (apparently being successful or frugal enough to have accumulated a large IRA balance is not looked on favorably by some politicians), it appears unlikely that the current restrictive proposal will be broadened. It is even possible that it won't survive at all.