Confused …Conversions , RMD , Step-up and Non-Spousal Beni
1. In meeting the RMD , can original owner take shares of mutual fund stock
equivalent to the RMD (not selling them ) and place these shares in their taxable account ? ( and , of course , paying the taxes )
2. Would these shares get a step-up upon w/drawal ?
3. If the w/drawn shares are never sold and were inherited upon death ,
would they be stepped-up again ?
4. Would it be just as easy to just sell shares prior to RMD and buy back
similar funds in taxable account ( and be sure to avoid the wash rule ) ?
5. IF stock still remains in deceased owners IRA , can non-spousal
beneficiary do 1 thru 3 above ?
6. Please correct any of the following…
Up until 70 1/2 , the original owner can convert any amount to ROTH’s if they meet the income limits or upon the new rule coming out in 2010…
can any $ be converted after 70 1/2 ?
7. Can non-spousal beneficiary convert if owner died before 70 1/2 and had not taken any withdrawals ?
8. Is it as simple as “nothing can be converted after death or age 70 1/2 ?
9. I have spent time manually (no financial calculators ) trying to determine if converting is worth it. My latest attempt tends to show that the
money spent on converting plus the growth of this money (lets say in a index fund w/ only very little dividends being taxed annually) …if this amount is passed on to heirs (with step-up ) , the amount converted less this growth will not exceed the amount if you had not converted . This seems to hold true even if converting $ in smaller tax bracket and paying a slightly higher % slowly over time as the funds come out .
Any financial wizards out there …Not sure these financial calculators include all the relevant facts . Any solid , confirmed info…something tells me this is not as simple as most of the quick answers I ve read in financial
mag’s.
Permalink Submitted by Alan Spross on Wed, 2008-06-04 21:59
Hello, Newt.
1) Yes, that is known as an “in kind distribution” and can be done as long as the new broker provides a market. This could be an issue with certain proprietary funds.
2) The basis per share in the taxable account would equal the value upon distribution from the IRA. Divide the 1099R Box 1 amount that applies to the shares by the # of shares to determine the basis. A new holding period starts after distribution.
3) Yes. The inherited basis would be the DOD value.
4) Wash sale would not apply because you cannot take a loss in the IRA. It would apply if you sold in the taxable account and bought them back in the IRA. The only differences between selling first in the IRA or not relate to commisions and clearing firm registration. There is no difference with respect to taxes.
5) Yes, any beneficiary can distribute in kind.
6) Any amount can be converted that is in excess of the RMD requirement. That starts with the year owner turns 70.5. RMD should be taken first…….then the conversion can be done.
7) Non spousal beneficiary can never convert (except by a direct Roth transfer from a qualified retirement plan, not an IRA).
8) For a non spouse, see above. A spouse beneficiary CAN convert.
9) Your basic analysis is correct. The result is equal if there is no difference in the tax rates paid for the conversion vrs the later TIRA distributions. That’s the major consideration, but there are dozens of minor ones. Even if you know exactly the cost of your conversion, you are still guessing on what the later cost of not converting will be. I am not aware of any calculators that incorporate much other than tax bracket guesttimates.
Permalink Submitted by Newt Pearson on Thu, 2008-06-05 01:10
Hello and thank you again , Allen
Couple of follow-up’s
Qt # 6 …Are you saying owner of IRA can convert to ROTH even after they have started RMD at or after 70 1/2 ? Somehow I was under impression
that original owner had to do all the converting prior to 70 1/2 or it could never be converted. ?????
Qt # 7 …Your answer…(except by a direct Roth transfer from a “qualified
retirement plan “, not an IRA) .
Are you saying a non-spousal beneficiary (upon death of original owner ) ,
can convert to a Roth if IRA inherited is a “qualified retirement plan ” ???
I don’t think I know what a “qualified retirement plan ” is vs an IRA as you
earlier mentioned . What’s the difference in the 2 ??? Explain the “qualified
plan ” that can be converted by non-spousal beneficiary .
If you are are at liberty …
Would I be correct in the following as it relates to Slott’s book on “Parlaying….”
1. He shows staggering compounding for Roth’s growth but does not mention step-up in stocks and how this can come into play if inherited .
2. He avoids a clear discussion on estate taxes consequences when
demonstrating these “stretching” figures .
3. He seems to lead the reader ( with his compounding numbers ) to
believe that converting is ” Always” best.
4. Seems like he would be very wise to hire you as a consultant to clarify
some of the nuisances when he rewrites his book with more detail . A more comprehensive , less confusing book is in order and I think you should charge a handsome fee.
If you can respond , please .
Thanks again
Newt
Permalink Submitted by Alan Spross on Thu, 2008-06-05 02:21
6) Yes, there is no age limit on conversions. The only requirement is that the RMD must be taken before the conversion and the RMD amount cannot be converted. There is even a rule that states that the RMD amount does NOT count against the 100,000 modified AGI limit.
7) Yes, this is a rather unpublicized benefit of the PPA section that authorized direct Roth conversions from qualified plans. The following is copied from Notice 2008-30:
>>>>>>>>>>>.
Q-7. Can beneficiaries make qualified rollover contributions to Roth IRAs?
A-7. Yes. In the case of a distribution from an eligible retirement plan other than
a Roth IRA, the MAGI and filing status of the beneficiary are used to determine eligibility
to make a qualified rollover contribution to a Roth IRA. Pursuant to § 402(c)(11), a plan
may but is not required to permit rollovers by nonspouse beneficiaries and a rollover by
a nonspouse beneficiary must be made by a direct trustee-to-trustee transfer. A
nonspouse beneficiary that is ineligible to make a qualified rollover contribution to a
Roth IRA may recharacterize the contribution pursuant to § 408A(d)(6). A surviving
spouse who makes a rollover to a Roth IRA may elect either to treat the Roth IRA as his
or her own or to establish the Roth IRA in the name of the decedent with the surviving
spouse as the beneficiary. (See Notice 2007-7, Q&A-13, for a rule on how to title a
beneficiary IRA.) A nonspouse beneficiary cannot elect to treat the Roth IRA as his or
her own. (See Notice 2007-7, Part V.)
>>>>>> >>>>>>>>>>>
The eligible retirement plans from which these Roth rollovers can be made include 401k, 403b and 457 plans.
Thanks for the kind words, but I have not read the book and therefore the following are just my presumptions.
1) Perhaps Ed is dealing strictly with retirement plans here and if so there is no step up of any assets in these plans. Of course, there is a step up for non retirement holdings, but these are only tax free to beneficiaries, whereas a Roth distribution is tax free to the owner. The prime purpose of a retirement plan is the owner’s support in retirement and benefits to a beneficiary are referred to as “incidental benefits”.
2) Good point. The less money lost to income taxes, the greater the potential exposure to estate or inheritance taxes. But the generation that inherits the Roth bears the bulk of that exposure because that generation does not pay the taxes necessary to convert or fund the Roth in the first place. Taxes paid reduce gross estates, and therefore converting to a Roth IRA can actually reduce the estate tax exposure of the original owner in order to provide a more valuable IRA type to the beneficiary, who does not have to pay taxes on Roth distributions.
3) Converting is not always best. No one should convert amounts that are taxed at a higher rate than they expect to pay as an average in retirement. It is definitely possible to over convert, but apparently the pain of paying current taxes has resulted in only about 5% of all IRA assets residing in Roth accounts. Therefore, the vast majority are going for current tax avoidance.
4) Too late – I’m retired! 🙂
Permalink Submitted by Newt Pearson on Thu, 2008-06-05 14:56
Hello Alan
Very good .
What do you mean “retired”?
I still think Slott should pay you for all the great advice , insight and
dilemmas you help us work through . And all the time you invest helping people… I might buy semi-retired but not retired .
Thank you for your great work on this site !!!
Newt
Permalink Submitted by larry larry on Thu, 2008-06-05 18:53
[quote=”[email protected]“]Hello Alan
Very good .
What do you mean “retired”?
I still think Slott should pay you for all the great advice , insight and
dilemmas you help us work through . And all the time you invest helping people… I might buy semi-retired but not retired .
Thank you for your great work on this site !!!
Newt[/quote]
Ditto!!!!!!!!!!!!!!
Permalink Submitted by Bruce Steiner on Thu, 2008-06-05 22:38
1. The benefits of an IRA trump the benefits of the basis step-up for non-IRA assets. For example, suppose I have an extra $1,000. I put it into an IRA. It grows to $10,000. There is no basis step-up. I (or my beneficiaries) collect $10,000, pay $3,000 income tax (assuming a 30% bracket), and have $7,000 left. If I didn’t put the $1,000 into the IRA, I would have paid $300 income tax initially, and invested the remaining $700 in my taxable account. If I never had any interest, dividends or capital gains, it would grow to $7,000, and my estate would get a basis step-up. But I would almost certainly have had at least some interest, dividends or capital gains, so that absent the IRA I would end up with something less than $7,000.
2. There is estate tax even if I don’t contribute to an IRA.
3. While converting to a Roth IRA is not always beneficial, it is almost always beneficial. If only 5% of IRA assets are in Roth IRAs, it’s because (i) many IRA owners with large IRAs can’t convert because their income is over $100,000, (ii) some IRA owners don’t have enough non-IRA assets to pay the tax on the conversion, (iii) some IRA owners plan to leave their IRAs to charity, and (iv) many IRA owners receive bad advice.
4. I agree that Alan deserves our appreciation for all of his contributions to this forum.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL