Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 40 - Determination of Net Income › Rule 701-40.54 - Roth Individual Retirement Accounts

Current through Register Vol. 47, No. 3, July 24, 2024
Roth individual retirement accounts were authorized in the
				  Taxpayer Relief Act of 1997 and are applicable for tax years beginning after
				  December 31, 1997. Generally, no deduction is allowed on either the federal
				  income tax return or the Iowa individual income tax return for a contribution
				  to a Roth IRA. The following subrules include information about tax treatment
				  of certain transactions for Roth IRAs.
(1)
Taxation of income derived from
				rolling over or converting existing IRAs to Roth IRAs.
At the time
				existing IRAs are rolled over to or converted to Roth IRAs in the 1998 calendar
				year or in a subsequent year, any income realized from the rollover or
				conversion of the existing IRA is taxable. However, in the case of conversion
				of existing IRAs to Roth IRAs in 1998, the taxpayer can make an election to
				have all the income realized from the conversion subject to tax in 1998 rather
				than have the conversion income spread out over four years. If the conversion
				income is spread out over four years, one-fourth of the conversion income is
				included on the 1998 Iowa and federal returns of the taxpayer and one-fourth of
				the income is included on the taxpayer's Iowa and federal returns for each of
				the following three tax years. Note that if an existing IRA for an individual
				is converted to a Roth IRA for the individual in a calendar year after 1998,
				all the income realized from the conversion is to be reported on the federal
				return and the Iowa return for that tax year for the individual. That is, when
				conversion of existing IRAs to Roth IRAs occurs after 1998, there is no
				provision for having the conversion income taxed over four years.
For example, an Iowa resident converted three existing IRAs
				  to one Roth IRA in 1998, realized $20,000 in income from the conversion, and
				  did not elect to have all the conversion income taxed on the 1998 Iowa and
				  federal returns. Because the taxpayer did not make the election so all the
				  conversion income was taxed in 1998, $5,000 in conversion income was to be
				  reported on the taxpayer's federal and Iowa returns for 1998 and similar
				  incomes were to be reported on the federal and Iowa returns for 1999, 2000, and
				  2001. Note that to the extent the recipient of the Roth IRA conversion income
				  is eligible, the conversion income is subject to the pension/retirement income
				  exclusion described in rule 701- 40.47(422).
(2)
Roth IRA conversion income for
				part-year residents.
To the extent that an Iowa resident has Roth IRA
				conversion income on the individual's federal income tax return, the same
				income will be included on the resident's Iowa income tax return. However, when
				an individual with Roth IRA conversion income in the tax year is a part-year
				resident of Iowa, the individual may allocate the conversion income on the Iowa
				return in the ratio of the taxpayer's months in Iowa during the tax year to 12
				months. In a situation where an individual spends more than half of a month in
				Iowa, that month is to be reported to Iowa for purposes of the allocation.
For example, an individual moved to Des Moines from Omaha on
				  June 12, 1998, and had $20,000 in Roth IRA conversion income in 1998. Because
				  the individual spent 7 months in Iowa in 1998, 7/12, or 60 percent, of the
				  $20,000 in conversion income is allocated to Iowa. Thus, $12,000 of the
				  conversion income should be reported on the taxpayer's Iowa return for
				  1998.
This rule is intended to implement Iowa Code section 422.7 as
				  amended by 1998 Iowa Acts, Senate File 2357.