[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.408-4]

[Page 492-494]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.408-4  Treatment of distributions from individual retirement 
arrangements.

    (a) General rule--(1) Inclusion in income. Except as otherwise 
provided in this section, any amount actually paid or distributed or 
deemed paid or distributed from an individual retirement account or 
individual retirement annuity shall be included in the gross income of 
the payee or distributee for the taxable year in which the payment or 
distribution is received.
    (2) Zero basis. Notwithstanding section 1015(d) or any other 
provision of the Code, the basis (or investment in the contract) of any 
person in such an account or annuity is zero. For purposes of this 
section, an assignment of an individual's rights under an individual 
retirement account or an individual retirement annuity shall, except as 
provided in Sec. 1.408-4(g) (relating to transfer incident to divorce), 
be deemed a distribution to such individual from such account or annuity 
of the amount assigned.
    (b) Rollover contribution--(1) To individual retirement arrangement. 
Paragraph (a)(1) of this section shall not apply to any amount paid or 
distributed from an individual retirement account or individual 
retirement annuity to the individual for whose benefit the account was 
established or who is the owner of the annuity if the entire amount 
received (including the same amount of money and any other property) is 
paid into an individual retirement account, annuity (other than an 
endowment contract), or bond created for the benefit of such individual 
not later than the 60th day after the day on which he receives the 
payment or distribution.
    (2) To qualified plan. Paragraph (a)(1) of this section does not 
apply to any amount paid or distributed from an individual retirement 
account or individual retirement annuity to the individual for whose 
benefit the account was established or who is the owner of the annuity 
if--
    (i) No amount in the account or no part of the value of the annuity 
is attributable to any source other than a rollover contribution from an 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a) or a rollover contribution from an annuity plan 
described in section 403(a) and the earnings on such sums, and
    (ii) The entire amount received (including the same amount of money 
and any other property) represents the entire amount in the account and 
is paid into another such trust or plan (for the benefit of such 
individual) not later than the 60th day after the day on which the 
payment or distribution is received.

This subparagraph does not apply if any portion of the rollover 
contribution described in paragraph (b)(2)(i) of this section is 
attributable to an employees' trust forming part of a plan or an annuity 
under which the individual was an employee within the meaning of

[[Page 493]]

section 401(c)(1) at the time contributions were made on his behalf 
under the plan.
    (3) To section 403(b) contract. [Reserved]
    (4) Frequency limitation. (i) For taxable years beginning on or 
before December 31, 1977, paragraph (b)(1) of this section does not 
apply to any amount received by an individual from an individual 
retirement account, annuity or bond if at any time during the 3-year 
period ending on the day of receipt, the individual received any other 
amount from an individual retirement account, annuity or bond which was 
not includible in his gross income because of the application of 
paragraph (b)(1) of this section.
    (ii) [Reserved]
    (c) Excess contributions returned before due date of return--(1) 
Excess contribution. The rules in this paragraph (c) apply for purposes 
of determining net income attributable to IRA contributions made before 
January 1, 2004, and returned pursuant to section 408(d)(4). The rules 
in Sec. 1.408-11 apply for purposes of determining net income 
attributable to IRA contributions made on or after January 1, 2004, and 
returned pursuant to section 408(d)(4). For purposes of this paragraph, 
excess contributions are the excess of the amounts contributed to an 
individual retirement account or paid for an individual retirement 
annuity during the taxable year over the amount allowable as a deduction 
under section 219 or 220 for the taxable year.
    (2) General rule. (i) Paragraph (a)(1) of this section does not 
apply to the distribution of any excess contribution paid during a 
taxable year to an account or annuity if: the distribution is received 
on or before the date prescribed by law (including extensions) for 
filing the individual's return for such taxable year; no deduction is 
allowed under section 219 or section 220 with respect to the excess 
contribution; and the distribution is accompanied by the amount of net 
income attributable to the excess contribution as of the date of the 
distribution as determined under subdivision (ii).
    (ii) The amount of net income attributable to the excess 
contributions is an amount which bears the same ratio to the net income 
earned by the account during the computation period as the excess 
contribution bears to the sum of the balance of the account as of the 
first day of the taxable year in which the excess contribution is made 
and the total contribution made for such taxable year. For purposes of 
this paragraph, the term ``computation period'' means the period 
beginning on the first day of the taxable year in which the excess 
contribution is made and ending on the date of the distribution from the 
account.
    (iii) For purposes of paragraph (c)(2)(ii), the net income earned by 
the account during the computation period is the fair market value of 
the balance of the account immediately after the distribution increased 
by the amount of distributions from the account during the computation 
period, and reduced (but not below zero) by the sum of: (A) the fair 
market value of the balance of the account as of the first day of the 
taxable year in which the excess contribution is made and (B) the 
contributions to the account made during the computation period.
    (3) Time of inclusion. (i) For taxable years beginning before 
January 1, 1977, the amount of net income determined under subparagraph 
(2) is includible in the gross income of the individual for the taxable 
year in which it is received. The amount of net income thus distributed 
is subject to the tax imposed by section 408(f)(1) for the year 
includible in gross income.
    (ii) [Reserved]
    (4) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. On January 1, 1975, A, age 55, who is a calendar-year 
taxpayer, contributes $1,500 to an individual retirement account 
established for his benefit. For 1975, A is entitled to a deduction of 
$1,400 under section 219. For 1975, A does not claim as deductions any 
other items listed in section 62. A's gross income for 1975 is $9,334. 
On April 1, 1976, $107 is distributed to A from his individual 
retirement account. As of such date, the balance of the account is 
$1,498 [$1,605 - $107]. There were no other distributions from the 
account as of such date. The net amount of income earned by the account 
is $105 [$1,498 + $107 - (0 + $1,500)]. The net income attributable to 
the excess contribution is $7. [$105x($100/$1,500)]. A's adjusted gross 
income for 1975 is his gross income for 1975 ($9,334) reduced by

[[Page 494]]

the amount allowable to A as a deduction under section 219 ($1,400), or 
$7,934. A will include the $7 of the $107 distributed on April 1, 1976, 
in his gross income for 1976. Further, A will pay an additional income 
tax of $.70 for 1976 under section 408(f)(1).

    (d) Deemed distribution--(1) General rule. In any case in which an 
individual retirement account ceases to be an individual retirement 
account by reason of the application of section 408(e)(2), paragraph 
(a)(1) of this section shall apply as if there were a distribution on 
the first day of the taxable year in which such account ceases to be an 
individual retirement account of an amount equal to the fair market 
value on such day of all of the assets in the account on such day. In 
the case of a deemed distribution from an individual retirement annuity, 
see Sec. 1.408-3(d).
    (2) Using account as security. In any case in which an individual 
for whose benefit an individual retirement account is established uses, 
directly or indirectly, all or any portion of the account as security 
for a loan, paragraph (a)(1) of this section shall apply as if there 
were distributed on the first day of the taxable year in which the loan 
was made an amount equal to that portion of the account used as security 
for such loan.
    (e) Distribution of annuity contracts. Paragraph (a)(1) of this 
section does not apply to any annuity contract which is distributed from 
an individual retirement account and which satisfies the requirements of 
paragraphs (b) (1), (3), (4) and (5) of section 408. Amounts distributed 
under such contracts will be taxable to the distributee under section 
72. For purposes of applying section 72 to a distribution from such a 
contract, the investment in such contract is zero.
    (f) Treatment of assets distributed from an individual retirement 
account for the purchase of an endowment contract. Under section 
408(e)(5), if all, or any portion, of the assets of an individual 
retirement account are used to purchase an endowment contract described 
in Sec. 1.408-3(e) for the benefit of the individual for whose benefit 
the account is established--
    (1) The excess, if any, of the total amount of assets used to 
purchase such contract over the portion of the assets attributable to 
life insurance protection shall be treated as a rollover contribution 
described in section 408(d)(3), and
    (2) The portion of the assets attributable to life insurance 
protection shall be treated as a distribution described in paragraph 
(a)(91) of this section, except that the provisions of section 408(f) 
shall not apply to such amount.
    (g) Transfer incident to divorce--(1) General rule. The transfer of 
an individual's interest, in whole or in part, in an individual 
retirement account, individual retirement annuity, or a retirement bond, 
to his former spouse under a valid divorce decree or a written 
instrument incident to such divorce shall not be considered to be a 
distribution from such an account or annuity to such individual or his 
former spouse; nor shall it be considered a taxable transfer by such 
individual to his former spouse notwithstanding any other provision of 
Subtitle A of the Code.
    (2) Spousal account. The interest described in this paragraph (g) 
which is transferred to the former spouse shall be treated as an 
individual retirement account of such spouse if the interest is an 
individual retirement account; an individual retirement annuity of such 
spouse if such interest is an individual retirement annuity; and a 
retirement bond of such spouse if such interest is a retirement bond.

[T.D. 7714, 45 FR 52793, Aug. 8, 1980, as amended by T.D. 9056, 68 FR 
23588, May 5, 2003]