An individual taxpayer whose modified adjusted gross income for a year is not more than $100,000 may convert an amount held in a traditional IRA to a Roth IRA. The amount converted is subject to tax to the same extent that it would be if the amount were distributed to the taxpayer from the traditional IRA and not rolled over to another traditional IRA or to a qualified retirement plan.If a conversion involves property, the conversion amount generally is the fair market value of the property on the date of distribution, or deemed distribution, from the traditional IRA. However, because there was no specific rule dealing with converted annuity contracts, some taxpayers claimed that the amount includible in gross income upon the conversion of a traditional IRA to a Roth IRA is the cash surrender value of the annuity contract.
As a result, some companies developed and promoted specially designed annuity contracts that are intended to suppress the amount of income that must be recognized upon conversion. These contracts provide for temporarily depressed cash surrender values that later increase to a more realistic value.
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