Natalie Choate's book Life and Death Planning for Retirement Benefits (Ataxplan Publications, 5th ed. 2003) is "the bible on IRA distribution planning...a must for all advisors who wish to be seriously considered IRA experts" says Ed Slott, CPA, in his new book Parlay Your IRA into a Family Fortune (Viking, 2005). To order Life and Death Planning for Retirement Benefits, or to learn more about the book and why it has sold over 32,000 copies, visit www.ataxplan.com.

Note: In the recent Rousey case, the Supreme Court this week held that IRAs are eligible for a certain bankruptcy exemption to the same extent as "qualified" pension and profit-sharing plans. Unfortunately, this holding is of minor, not major, help to IRA owners: The exemption in question is limited to amounts needed for support and is not available at all to residents of some states. IRAs are still not eligible for the big unlimited creditor protection given to ERISA plans. I will cover Rousey and other creditor protection questions in a future column.

I received dozens of great questions during the MorningstarAdvisor Web seminar, "Finding Gold in the Code," on Feb. 23. Couldn't answer them all during the session, so in my March, April, and May columns I'm tackling the leftovers. Last month, I covered NUA. This month: questions about Roth IRAs and the new "designated Roth accounts" (also called DRACs or Roth 401(k)s). In May, I'll answer the questions on pre-age 59½ distributions and other topics. If you missed the seminar, it's now available for replay.

Q. I understand that a person's "income must be under $100,000" for him to be eligible to convert his traditional IRA to a Roth, but is that gross income, taxable income, or what? Is this limit the same for married and single taxpayers? Is the limit prorated for the year of death?

Natalie: When you read the following detailed answer on the $100,000 income limit, you'll understand why I was vague in the webinar!

In the case of a married couple filing jointly, the $100,000 limit applies to the adjusted gross income (AGI) of the couple, not of each spouse. Reg. § 1.408A-4, A-2(b). Generally, no conversion is permitted if the taxpayer is married filing a separate return for the year. § 408A(c)(3)(B). However, if a "married individual has lived apart from his or her spouse for the entire taxable year, then such individual can treat himself or herself as not married for purposes of [the adjusted gross income test], file a separate return and be subject to the $100,000 limit on his or her separate modified AGI." Reg. § 1.408A-4, A-2(b).

The year you look at for applying this income limit is the year in which the distribution from the traditional IRA occurs (i.e., the distribution that is rolled over to a Roth IRA), not the year that the contribution to the Roth IRA occurs. Reg. § 1.408A-4, A-2(a). Usually, the distribution from the traditional IRA and its recontribution to the Roth IRA occur simultaneously; this rule covers the unusual case of a distribution from the traditional IRA that occurs in one taxable year, and is rolled over in the next taxable year (but still within 60 days of the distribution).

AGI is a defined term in Code § 62; however, for purposes of determining Roth IRA eligibility you do not simply look at the AGI line on the person's Form 1040. Rather, the definition of AGI for purposes of the Roth IRA income limit starts with the modified definition of AGI used under § 219(g)(3) (income limits for making a deductible contribution to a traditional IRA when the individual is also a participant in an employer plan). The § 219(g)(3) definition of AGI includes the individual's taxable Social Security benefits (§ 86), and takes into account the disallowance of "passive activity losses" (§ 469) if applicable, then requires the following further adjustments for purposes of applying the Roth conversion-eligibility test:

1. Certain income that is normally excluded from AGI is added back in, namely: income resulting from redemption of U.S. savings bonds to pay higher education expenses (§ 135); qualified adoption expenses paid by the individual's employer (§ 137); and foreign earned income and housing costs (§ 911).
2. Certain deductions normally allowed for purposes of computing AGI are not allowed for this purpose, namely the deductions for: education loan interest expenses (§ 221); tuition expenses (§ 222); and IRA contributions (§ 219).
3. Exclude any amount that is included in gross income because of the conversion of a traditional IRA to a Roth IRA. § 408A(c)(3)(C)(i).
4. For years after 2004, exclude any amount that is included in gross income by reason of a required minimum distribution from the participant's IRAs. It's not clear whether MRDs from other types of plans, or MRDs from inherited IRAs, are excluded under this rule. § 408A(c)(3)(C)(i)(II).