The Treasury Department and the IRS issued temporary regulations and a proposed rule on August 19 designed to clarify the treatment of annuities when a traditional IRA is converted into a Roth IRA under section 408A of the IRC. When such conversions are made, the fair market value of the account is included in the individual's income as if were distributed, Treasury notes, but some taxpayers believed that amount should be the cash surrender value of the contract. Moreover, a number of annuities were designed to specifically suppress the amount of income that would be recognized upon conversion. The temporary regulation specifically states that the full fair market value must be included in income upon conversion, and provides standards for determining what is fair market value. The regulations are effective on transfer made on or after August 19.
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