by Gregory Kolojeski
The IRS Restructuring Bill being considered by the Senate includes a technical corrections section with Roth IRA changes.
The proposed Roth IRA changes include some important differences from the technical corrections passed by the House last year. For example, there would be only one 5-year holding period. Conversions would not have separate 5-year periods. This would make it important to make a 1998 Roth IRA contribution if there is any possibility of doing a conversion in the future. This would start the 5-year holding period running and thus get it over with as soon as possible. This proposed change may also remove the necessity of having separate Roth IRAs for contributions and conversions.
Another proposed change includes making the four-year spreadout of taxable income for 1998 conversions an elective feature. There are some cases where it would not be in one's interest to spread out the taxable income over four years and this would make it possible not to have the spreadout in such cases.
Another proposal would eliminate the House bill's 10% penalty that would occur when one takes advantage of the four-year spreadout of taxable income for a 1998 conversion, but then takes distributions within five years. That proposed 10% penalty would be replaced with an acceleration feature for the taxable income spread out over four years when distributions are taken during those four years (effectively meaning that only distributions taken prior to the fourth year would accelerate taxation). This would be less onerous than the 10% penalty and more sensible as well. Note: the 10% penalty for pre-59½ distributions would still be in effect.
It seems likely that the Senate changes will be enacted with action expected in late April or in May. The technical corrections proposed by the Senate represent a considerable improvement to those in the bill passed by the House.
For the latest information on Roth IRAs, see the Roth IRA Web Site at
www.rothira.com.
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Technical Corrections Explanation: Joint Committee on Taxation
Statutory Language from Senate Finance Committee