Effective for tax years beginning after December 31, 1997, the Taxpayer Relief Act of 1997 (1) ("TRA '97"), created two new forms of retirement accounts called the "Roth IRA" and the "Education IRA." (2) The purpose of this TIR is to explain the Massachusetts personal income tax treatment of these new IRAs.
1. Roth IRA
The Roth IRA allows taxpayers with federal adjusted gross income under threshold amounts ($150,000 to $160,000 for joint filers and $95,000 to $110,000 for single filers) to make nondeductible contributions up to the annual $2,000 maximum per taxpayer ($4,000 total for joint filers). I.R.C. § 408A(c). Income accruing in the IRA is exempt. I.R.C. § 408A(a). Distributions are tax-free so long as the taxpayer is at least 59-1\2 (or disabled or a "first-time homebuyer") and the account is at least 5 years old. I.R.C. § 408A(d)(1)(A), (2).
2. Education IRA
The Education IRA allows taxpayers with federal modified adjusted gross income under threshold amounts ($150,000 to $160,000 for joint filers and $95,000 to $110,000 for single filers) to make nondeductible contributions up to an annual $500 maximum, per beneficiary under age 18. I.R.C. § 530(c). Income accruing in the IRA is exempt. I.R.C. § 530(a). Distributions are tax-free to the extent they are used to pay "qualified higher education expenses." I.R.C. § 530 (d)(2)(A).
3. Rollovers from an IRA to a Roth IRA
Effective January 1, 1998, taxpayers with $100,000 or less in federal adjusted gross income, are allowed to make partial or complete rollovers from existing IRAs (deductible and nondeductible) to Roth IRAs. I.R.C. § 408A(c)(3)(B)(i). Generally, the rollover amount is treated as a distribution and included in federal gross income to the extent it is attributable to growth and previously deducted contributions. I.R.C. § 408A(d)(3)(A)(i). A special 4-tax-year averaging rule applies to partial or complete rollovers completed in 1998, whereby the taxable portion of the 1998 rollover amount is included in gross income ratably over four taxable years starting with 1998. I.R.C., § 408A(d)(3)(A)(iii).
Massachusetts gross income equals federal gross income with certain modifications, and, as a result, generally follows federal income exclusions. G.L. c. 62, §§ 1, 2, 3. However, Massachusetts adopts federal gross income as determined under the Internal Revenue Code ("IRC") as amended and in effect on January 1, 1988. G.L. c. 62, § 1. Roth and Education IRAs were enacted and became part of the IRC after January 1, 1988. I.R.C. §§ 408A; 530. Therefore, Massachusetts law does not adopt the federal exclusions for income accruing in these accounts. (3)
In addition, Massachusetts law does not adopt the Roth IRA rollover provisions because they are not part of the 1988 Code. Coincidentally, the 1988 Code provisions applicable to distributions from existing IRAs would include in Massachusetts gross income the same portion of the distributions that are includible in federal gross income under the current code. However, the 4-tax-year averaging rule does not apply for Massachusetts purposes. Therefore, the portion of the IRA rollover included in federal gross income will also be included in Massachusetts gross income. However, the entire taxable amount of any 1998 rollovers will be included in Massachusetts gross income in 1998, notwithstanding the federal 4 year averaging rules. For tax years 1999, 2000 and 2001, Massachusetts will exclude the taxable portion of any 1998 rollovers that are included in federal gross income under the averaging rules.
Further, Massachusetts allows a deduction for the portion of IRA distributions that were previously subject to Massachusetts personal income tax. The distributions are deducted from Massachusetts gross income to the extent that the aggregate amount deducted equals the aggregate amount previously included in Massachusetts gross income. G.L. c. 62, § 2(a)(2)(F).
Commissioner of Revenue
January 23, 1998
1. Enacted under Public Law 105-34, August 5, 1997. (return to text)
2. Sections 213(a) and 302(a) of TRA '97. (return to text)
3. Although Massachusetts has a specific provision which states that ". . . no tax shall be imposed . . . upon any stock bonus, pension or profit-sharing trust qualifying under [§401] of the Code or any [IRA] qualifying under [§408] of the Code," neither the Roth nor the Education IRA provisions were enacted under those IRC sections, in existence on January 1, 1988. See, G.L. c. 62, § 5(b). (return to text)