rp-06-13.pdf

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Part III

Administrative, Procedural and Miscellaneous

26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 408 and 408A; §1.408A-4T.)

Rev. Proc. 2006-13

SECTION 1. PURPOSE
This revenue procedure provides safe harbor methods that are permitted
to be used in determining the fair market value of an annuity contract for
purposes of determining the amount includible in gross income as a result of the
conversion of a traditional IRA to a Roth IRA, as described in Q&A-14 of
§1.408A-4T of the temporary regulations. The safe harbor method provided in
Section 3 of this revenue procedure is available to determine the fair market
value of an annuity contract that has not yet been annuitized with respect to any
Roth IRA conversion described in A-14 of §1.408A-4T until further guidance is
issued. The simplified safe harbor method provided in Section 4 of this revenue
procedure is available where such a conversion occurs before January 1, 2006.
SECTION 2. BACKGROUND
Under §408(d) of the Code and A-7 of § 1.408A-4 of the regulations, any
amount that is converted from a traditional IRA to a Roth IRA is includible in
gross income as a distribution for the taxable year in which the amount is
distributed or transferred from the traditional IRA. In the case of a conversion
involving property, the conversion amount generally is the fair market value of the

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property on the date of distribution or the date the property is treated as
distributed from the traditional IRA. Under A-1 of §1.408A-7, any amount
converted from a traditional IRA to a Roth IRA is treated as a distribution for
which a Form 1099-R must be filed by the trustee maintaining the traditional IRA.
Temporary regulations under § 408A regarding the valuation of annuity
contracts upon conversion of a traditional IRA were published in the Federal
Register on August 22, 2005 (T.D. 9220, 2005-39 I.R.B. 596 [70 FR 48868]).
Section 1.408A-4T, A-14 of the temporary regulations states that, when a
traditional individual retirement annuity is converted to a Roth IRA, the amount
that is treated as distributed is the fair market value of the annuity contract on the
date the annuity contract is converted. Similarly, when a traditional individual
retirement account holds an annuity contract as an account asset and the
account is converted to a Roth IRA, the amount that is treated as distributed with
respect to the annuity contract is the fair market value of the annuity contract on
the date the annuity contract is distributed or treated as distributed from the
traditional IRA.
A-14 of §1.408A-4T does not apply to a conversion of a traditional IRA
where the conversion is accomplished by the complete surrender of an annuity
contract for its cash value and the reinvestment of the cash proceeds in a Roth
IRA, but only if the surrender extinguishes all benefits and other characteristics of
the contract. A-14 of §1.408A-4T does not apply in that circumstance because
the contract is not being converted. Instead, the cash from the surrendered
contract is reinvested in the Roth IRA.

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A-14 of §1.408A-4T also provides rules for determining the fair market
value of an annuity contract in the case of a conversion. These rules vary
depending on certain factors, including whether the conversion occurs soon after
the contract was sold, whether there has been a material change in market
conditions, and whether future premiums are to be paid. A-14 of §1.408A-4T
applies to any conversion where an annuity contract is distributed or treated as
distributed from a traditional IRA on or after August 19, 2005. As indicated in the
preamble to the temporary regulations, no implication is intended concerning
whether or not a rule adopted in the regulations is applicable law for earlier
conversions.
The temporary regulations also provide authority for the Commissioner to
issue additional guidance regarding the fair market value of an annuity contract,
including formulas to be used in determining fair market value. The Service and
Treasury requested and received comments regarding this anticipated guidance.
Commentators indicated that a more specific methodology for valuing the annuity
contracts is needed and noted that they are currently implementing the method
under A-12 of §1.401(a)(9)-6 of the regulations for valuing annuity contracts that
have not yet been annuitized.
Under A-12 of §1.401(a)(9)-6, an employee’s entire interest under an
annuity contract that has not yet been annuitized (which is used to determine the
employee’s required minimum distribution) is the sum of the following: (1) the
dollar amount credited to the employee or beneficiary under the contract (which
may not be reduced to reflect any surrender charges under the contract) and (2)

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the actuarial present value of any additional benefits (such as survivor benefits in
excess of the account balance, any guaranteed minimum benefits, and any
charges that are expected to be refunded, rebated or otherwise reversed at a
later date) that will be provided under the contract.
For this purpose, the actuarial present value of any additional benefits is to
be determined using reasonable actuarial assumptions, including reasonable
assumptions as to future distributions, and without regard to an individual's
health. However, paragraph (c)(1) of A-12 of §1.401(a)(9)-6 provides that the
actuarial present value of the additional benefits may be disregarded if: (1) the
sum of the dollar amount credited to the employee or beneficiary under the
contract and the actuarial present value of the additional benefits is no more than
120 percent of the dollar amount credited to the employee or beneficiary under
the contract and (2) the additional benefits satisfy certain other requirements.
Also, paragraph (c)(2) of A-12 of §1.401(a)(9)-6 provides that the actuarial value
of the right to receive a final payment upon death that does not exceed the
excess of the premiums paid less the amount of prior distributions may also be
disregarded if it is the only additional benefit under the contract. Because some
benefits may be disregarded, the methodology of A-12 of §1.401(a)(9)-6 does not
always reflect the full value of all of the benefits under the contract.
SECTION 3. SAFE HARBOR METHOD FOR ROTH IRA CONVERSIONS
The Service and Treasury recognize that it may be difficult to determine
the fair market value of an annuity contract under the temporary regulations.
Moreover, the Service and Treasury believe it is appropriate to permit the use of

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a modified version of the methodology applied under A-12 of §1.401(a)(9)-6 as a
safe harbor method to be used in determining the fair market value of such an
annuity contract. Accordingly, this revenue procedure provides that, until further
guidance is issued, for purposes of determining the amount includible in gross
income as a result of the conversion of a traditional IRA to a Roth IRA as
described in A-14 of §1.408A-4T, the fair market value of an annuity contract that
has not yet been annuitized is permitted to be determined using the methodology
provided in A-12 of §1.401(a)(9)-6 with the following modifications:
1. All front-end loads and other non-recurring charges assessed in the
twelve months immediately preceding the conversion must be added
to the account value.
2. Future distributions are not to be assumed in the determination of the
actuarial present value of additional benefits.
3. The exclusions provided under paragraphs (c)(1) and (c)(2) of A-12 of
§1.401(a)(9)-6 are not to be taken into account.
SECTION 4. SIMPLIFIED SAFE HARBOR METHOD FOR PRE-2006 ROTH
IRA CONVERSIONS
The Service and Treasury recognize that Forms 1099-R must soon be
issued for Roth IRA conversions occurring in 2005. Accordingly, this section 4
provides that, in the case of a Roth IRA conversion where an annuity contract
that has not yet been annuitized is distributed or treated as distributed before
January 1, 2006, for purposes of determining the amount includible in gross
income as a result of the conversion of a traditional IRA to a Roth IRA as

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described in A-14 of §1.408A-4T, the fair market value of the contract is
permitted to be determined using the methodology provided in
A-12 of §1.401(a)(9)-6 except that all front-end loads and other non-recurring
charges assessed in the twelve months immediately preceding the conversion
must be added to the account value.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Larry Isaacs and
Robert Walsh of the Employee Plans, Tax Exempt and Government Entities
Division. For further information regarding this revenue procedure, contact the
Employee Plans taxpayer assistance telephone service between the hours of
8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday, by calling (877)
829-5500 (a toll-free number). Mr. Isaacs and Mr. Walsh may be reached at
(202) 283-9888 (not a toll-free number).