Treasury Releases Regulations on Valuation of Annuity Contracts Involved
in Roth Conversions
Courtesy of IRS
The Treasury Department and the IRS issued proposed and temporary regulations
today clarifying the amount of income that must be reflected when a traditional
IRA account that holds an annuity contract (or a traditional IRA that
is itself an annuity) is converted into a Roth IRA.
Generally, when a traditional IRA is converted into a Roth IRA, the
fair market value of the account is included in the individual's income,
as if it were distributed. However, the absence of a specific rule addressing
converted annuity contracts has led some taxpayers to believe that the
amount includable in income upon conversion is the cash surrender value
(i.e., that amount that would be available upon immediate surrender of
the contract). This in turn has led to the development and promotion
of specially- designed annuity contracts that are intended to suppress
the amount of income which must be recognized upon conversion. These
contracts provide for temporarily depressed cash surrender values that
later "spring" up to a more realistic value. Under the rules applicable
to Roth IRAs, the amounts received under those contracts will ultimately
be tax-free, if they are paid after a 5-year holding period and attainment
of age 59.
The regulations specify that the full fair market value must be included
in income upon conversion and provide standards for determining that
fair market value. For example, if the conversion occurs soon after the
contract was sold, the fair market value is generally its original purchase
price.
These regulations, which will be effective for transfers made on or
after August 19, 2005, will prevent taxpayers from using artificial devices
to understate the value of the contract.
For links to proposed regulations, click
here.
