| Date: | 05/18/2010 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Personal Income Tax
This Technical Information Release (TIR) explains the Massachusetts personal income tax treatment of a conversion from a traditional IRA to a Roth IRA in a taxable year beginning in 2010.
I. Federal Law: Conversion of a traditional IRA to a Roth IRA in 2010
Under the provisions of Internal Revenue Code (IRC or Code) § 408A, "Roth IRAs," the rollover amount from a traditional IRA to a Roth IRA is treated as a distribution. In general, the amount includible in federal gross income in the year of a qualified rollover contribution from a traditional IRA to a Roth IRA is the amount of previously deductible contributions plus the amount attributable to growth (e.g., interest, dividends and appreciation).
If a taxpayer made only deductible contributions to a traditional IRA, then any distributions from the IRA are fully taxable to the owner or beneficiary as ordinary income. However, if nondeductible contributions were made, the owner has a cost basis in the IRA. An individual's cost basis in distributions made from a traditional IRA is the sum of the nondeductible contributions made to the IRA minus any prior withdrawals or distributions of nondeductible contributions. The recovery of this basis is not recognized as taxable income.
Under the federal Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), taxpayers regardless of income level are allowed to convert traditional IRAs to Roth IRAs effective for tax years beginning after December 31, 2009. Previously, only taxpayers with federal adjusted gross incomes of $100,000 or less could exercise this option.
For Roth IRA conversions completed in 2010, under IRC § 408A(d)(3), unless a taxpayer elects otherwise, the amount includible in gross income as a result of the conversion is includible in income ratably in 2011 and 2012. [1] In general, unless a taxpayer elects to include the income in 2010, none of the amount includible in gross income as a result of a conversion occurring in 2010 is included in income in 2010, and half of the income resulting from the conversion is includible in gross income in 2011 and half in 2012.
II. Massachusetts Treatment: Conversion of a traditional IRA to a Roth IRA in 2010
For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. Among the Code sections that G.L. c. 62, § 1(c) includes as exceptions and adopts based on the Code "as amended and in effect for the taxable year" is IRC § 408A. [2]
Massachusetts generally adopts the federal rollover rules in IRC § 408A with certain adjustments explained in Part III, below. [3] G.L. c. 62, § 2(a)(3)(A) provides:
In the case of a distribution within the meaning of subsection (d)(3) of section 408A of the Code as amended and in effect for the taxable year, any amount included as income for federal tax purposes under said section 408A by reason of such distribution shall be included in gross income and, to the extent such distribution is included in adjusted gross income under subsection (c), shall be taken into account in determining taxable income under this chapter in the same manner as under subparagraph (A) of said subsection (d)(3) of said section 408A of said Code.
For Roth IRA conversions in 2010, unless a taxpayer elects for federal purposes to include the applicable conversion amount in gross income in 2010, the taxpayer must include the applicable Massachusetts gross income from the conversion ratably in 2011 and 2012. Thus, unless the federal election applies, none of the amount includible in Massachusetts gross income as a result of a conversion occurring in 2010 is included in Massachusetts gross income in 2010, and half of the income resulting from the conversion is includible in Massachusetts gross income in 2011 and half in 2012.
III. Massachusetts Adjustments
Massachusetts has a specific statute that does not allow a personal income tax deduction for contributions to a traditional IRA regardless of an allowable federal deduction for such contributions. G.L. c. 62, § 2(d)(1)(F). Accordingly, under G.L. c. 62, § 2(a)(3)(A), amounts contributed to traditional IRAs for which no Massachusetts personal income tax deduction was previously allowed will not be subject to tax when the IRA is converted to a Roth IRA.
Example. A taxpayer has a traditional IRA with a value of $20,000, consisting of $10,000 of contributions that were deducted for federal purposes but subject to Massachusetts tax, and $10,000 of accumulated earnings or appreciation. The taxpayer converts the traditional IRA to a Roth IRA in 2010, and as a result of the conversion, $20,000 is includible in gross income for federal income tax purposes. Unless the taxpayer elects otherwise, $10,000 of the income resulting from the conversion is included in gross income in 2011, and $10,000 is included in 2012. As an alternative, for federal income tax purposes, the taxpayer may elect to include the entire $20,000 in gross income in 2010.
For Massachusetts personal income tax purposes, G.L. c. 62, § 2(a)(3)(A) provides that only the portion of the rollover previously not subject to Massachusetts tax, i.e., the $10,000 of earnings and appreciation, is includible in gross income. Unless the taxpayer has made a federal election, $5,000 of the income resulting from the conversion is included in Massachusetts gross income in 2011, and $5,000 is included in 2012. However, if the taxpayer makes the federal election to include the entire federal amount in gross income in 2010, the taxpayer must include the entire Massachusetts amount of $10,000 in gross income in 2010.
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MTF:adh
May 18, 2010
TIR 10-8