Can I convert a Beneficiary IRA to Roth?

Submitted by bob malecki on Fri, 2010-01-08 20:02

I want to convert the traditional beneficiary ira that I inherited from my mother in 2006 to my Roth IRA that I opened last year using the new conversion opportunity for 2010. Can I convert this inherited ira to my Roth or the spousal beneficiary rule still in effect?

Thanks
Bob



Submitted by Alan Spross on Fri, 2010-01-08 20:11

Bob,
At present you still cannot convert a non spouse inherited IRA to an inherited (or owned) Roth IRA. Only a spousal beneficiary can convert to a Roth.

However, because a non spouse qualified plan beneficiary (eg 401k) CAN convert to an inherited Roth IRA. Possibly this inconsistency will lead to legislation in the future that will allow your conversion, but at present this is not possible.

Perhaps you can use the account you opened to convert one of your OWN traditional IRA accounts, if you have one.

Also, note that while your RMD from the inherited IRA was waived for 2009, you will have to take your 2010 RMD as usual.



Submitted by bob malecki on Fri, 2010-01-08 20:26

Bummer, but thanks for the update. It’s been a few years since I reviewed the RMD calculations. Can you point me to a resource for determining that calculation?

Bob



Submitted by Alan Spross on Fri, 2010-01-08 20:44

Pub 590, p 36.

You should have taken:
1) Your mother’s RMD for 2006 (or prior years), if she was not current with her RMDs and was subject to RMDs that must begin by 4/1 of the year following the year she would have turned 70.5.
2) Your beneficiary RMD for 2007 based on your own life expectancy and using the 12/31/06 balance
3) Same for 2008
4) RMDs were waived for 2009
5) RMD for 2010 must be taken by 2010 year end.



Submitted by bob malecki on Tue, 2010-01-12 18:16

Thanks, one more question: I want to move $6K from my bene. ira to my Roth to cover my 2010 Roth contribution. Last year I just took a cash distribution from my bene. ira and then deposited it into my Roth to cover my 2009 contribution. I did this as well in 2008 which also covered my RMD.

So, for 2010, since both accounts are with the same custodian, I’d like to do an “in kind” transfer of some stock or mutual fund accounts to fund my 2010 Roth contribution and have that also cover my RMD. Would this be in compliance, or do I need to liquidate some of the stocks in my beneficiary ira and then transfer the cash over to my Roth?

Thanks,
Bob



Submitted by Alan Spross on Tue, 2010-01-12 18:29

First, you must have earned income to make a regular Roth IRA contribution, and the contribution must be in cash. So hope you had the earned income in 2008 and 2009 as well. If you take the RMD in shares, you would have to sell them or have the cash from another source to make the Roth contribution. If a rollover would have been allowable, THEN you could have transferred in kind property from IRA to IRA.

That said, you CAN take your RMD from the inherited IRA and use it to fund a regular contribution to your Roth as long as you have an equal amount of earned income. This is NOT a rollover because you cannot roll over any RMD, and the RMD distribution is not directly linked to the Roth contribution. The Roth custodian would just code it as a regular Roth contribution.



Submitted by bob malecki on Tue, 2010-01-12 18:44

Ok,thanks. Just to clarify, when you state “earned income”, you are just referring that I need to have made at least the amount of the contribution through my consulting business or some other source of non-passive income, correct?



Submitted by Alan Spross on Tue, 2010-01-12 19:21

Correct.
Forms of earned income (technically taxable compensation) include W-2 salary, commissions, net self employment income, alimony received or nontaxable combat pay. A net self employment loss does not reduce your other earned income.

The following are NOT earned income: Earnings from property ownership, investment income, deferred compensation received. passive income and amounts that you can exclude from income such as foreign earned income.



Submitted by bob malecki on Wed, 2010-01-13 17:43

Before I posted my original question on this thread, I had completed a Roth conversion form and sent it in to my self directed ira custodian. Last week they said that they needed to research/determine if I can convert from my bene. ira to my Roth. We know the answer to this.

I called them today and they said that I can do a beneficiary ira ‘death distribution’. I’ve Google’d around for a while and cannot find out if this method will allow me to convert the assets to my Roth, or if this is just a lump payout with no Roth converion. My goal is to basically convert the assets into my Roth and close down the bene. ira, then grow my funds in the Roth tax-free. If this does not work, then I would keep the funds in the bene. ira. Any thoughts on this or resources online for further research?

Thanks



Submitted by Al Fry on Wed, 2010-01-13 18:35

Non-spouses can never do a rollover (get a distribution, then roll it into anything other thn a taxable account).



Submitted by Alan Spross on Wed, 2010-01-13 20:26

As indicated, you cannot get these funds into a Roth IRA. Any distribution paid out cannot be rolled over and will be taxable.

However, as you stated, it is best to retain the beneficiary IRA and check periodically to see if the rules have changed. Right now the conflicting situation exists where a non spouse beneficiary of an employer plan can convert, but an inherited IRA cannot be converted. Perhaps Congress will realize how inconsistent this is and make changes. Therefore, if you are willing to wait you may eventually be able to do this conversion, but you cannot convert at this time.



Submitted by bob malecki on Wed, 2010-01-13 20:30

Thanks, yes very frustrating! Is there any watchlist or resource that I can monitor for this change?



Submitted by Alan Spross on Wed, 2010-01-13 20:39

You might follow this site or similar sites that track retirement plan distribution changes. You could also try to follow Congressional legislation sites if you want an advance notice of what is being discussed to get an idea of what the chances are or how long this might take. Sites of retirement plan administrators and even your IRA custodian would announce any changes if they were made or even in discussion.



Submitted by David Schwartz on Wed, 2014-05-14 21:23

Hi All — Thank you in advance for your wisdom! Is it still the case that a non-spouse bene of an IRA, now an Inherited IRA, can NOT roll it over / convert it into a Roth? In this case, a Trust (Yes: I argued against this years ago…) was the beneficiary and I am one of the Trust’s beneficiaries. The current year RMD is already taken (again, very unfortunately, at an accelerated RMD factor based on the original IRA owner’s age and not my own…). Thanks!



Submitted by Alan - IRA critic on Wed, 2014-05-14 23:06

  • As of now, an inherited TIRA still cannot be converted to an inherited Roth IRA. This is inconsistent with the rules for inherited 401k or 403b plans, for which a non spouse beneficiary CAN convert to an inherited Roth IRA. This inconsistency may well lead to an eventual change in the governing legislation to allow inherited TIRAs to be converted – but not yet.
  • The original owner’s age would only apply if the trust was NOT qualified for look through treatment OR if the oldest beneficiary of the trust is older than the decedent. Is that the case?


Submitted by David Schwartz on Thu, 2014-05-15 14:03

Alan — Thanks for that info! Will check next year, I guess, to see if those legislative changes have been made.On the age / factor – yes, unfortunately, the Trust was deemed not be look-through (hinged on the purported premise of not being able to unambiguously identify all the contingent beneficiaries….) (something I again tried to argue against…)



Submitted by Bruce Steiner on Thu, 2014-05-15 23:30

PLR 200235038 suggests that you don’t have to “unambiguously identify” everyone, and that it’s enough if nothing can ever go to anyone older than the measuring life, or to anyone other than an individual or another trust having the same restrictions.  See my article on this in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.kkwc.com/docs/AR20041209132954.pdf.  If the trust still doesn’t qualify, you might consider whether you can fix it by decanting it.  



Submitted by Mark Punteney on Sat, 2014-05-17 21:00

My father died in 2008 at the age 79 owning a Roth IRA which he had converted from a traditional to a Roth in 1996. Moreover, he never took distributions (obviously, as a Roth IRA owner, he wasn’t required to).  My mother (his spouse), age 79 at the time of his death, was the designated (primary) beneficiary.  My parents goal “from the jump” was to take full advantage of the stretch…never touching the assets and allowing their two children (my sibling and I) to ultimately benefit by taking out minimum distributions based on our lower ages.Shortly after his death (2008), we opted to title the inherited IRA assets as a “Roth Inherited IRA” account in lieu of a new Roth IRA (in my mother’s name)…for reasons that escape me at the moment.Before I had to learn how to breathe again, I read that when a spouse inherits a Roth IRA, he/she has the option of rolling it into his/her name.  At that point, he/she is considered the “owner” of the IRA and as such, there is no RMD. However (as we did), if the spouse moves the assets into an “Inherited IRA”, he/she is treated the same as a non-spouse beneficiary, and thus subject to the same rules–RMD’s by 12/31 of the year after the IRA owner dies, and every year thereafter.  Undistributed RMD’s are subject to a 50% penalty.  Therefore, we have 5 years of undistributed RMD’s on an IRA account in excees of 100k with a beneficiary (my mother) who has a small divisor due to her short life expectancy on an IRA (Roth) where taxes have already been paid!  I calculated the penalties to be in excees of 30k!  As I researched further, to avoid the RMD penalty (50%!) for undistributed RMD’s, if the designated beneficiary elects to take all the assets under the “5 Year Rule for Distributions” (funds must be distributed by 12/31 of the fifth year after the IRA owner dies), to avoid any penalties.  In our case, that was 12/31/2013…too late!!  Thank God for the “WRER Act”…which I just recently found. This act provides a suspension for RMD’s for 2009 for IRA’s. So, because of this suspension for 2009, we have been given another year to invoke the “5 Year Rule for Distributions” or until the end of 2014.Questions for the forum:It appears my mother will avoid penalties on her inherited Roth by taking the funds out by the end of 2014. We do not want to turn these funds into non-retirement assets…even though these funds are penalty and tax-free, we would lose the stretch.   Does anyone have any ideas?       



Submitted by Alan - IRA critic on Sun, 2014-05-18 02:02

One solution is the rule where a sole spousal beneficiary who fails to take RMDs as required defaults to ownership status of the IRA, whether TIRA or Roth.  You should check the Roth agreement beneficiary clause carefully to confirm that this language is included or at least the IRS rule not overidden. But this default rule is not even necessary because even though the Roth is registered as inherited, a sole surviving spouse can still elect to roll it over whenever they want to their own IRA, whether TIRA or Roth IRA. Therefore, your mother should just have the Roth retitled in her name and name her own beneficiaries. It is important to do this ASAP, because if you are a sucessor beneficiary and your mother passes as the Roth owner, your RMDs will be based on your life expectancy. But if your mother passes as a beneficiary of the Roth and you are named as her successor beneficiary, your RMDs will be based on your mother’s age and you will lose most of your stretch. Therefore, I would not wait for her to acquire ownership by default on 1/1/2015 when she can just have the Roth put in her name now. No RMDs due, no penalty due.



Submitted by Mark Punteney on Sun, 2014-05-18 14:36

Firstly, thank you for your response and advice.  That is exactly what I want to do…retitle in her name.  Then, naming us (children) her primary beneficiaries.  I was aware the surviving spouse could always elect to do so.  However, I am concerned that if we did retitle, it would trigger penalties for the five (5) years we didn’t take the RMD’s.  If it doesn’t…as you indicate, then that’s too easy (and lucky).  Is this your understanding… no back penalties for 2009 through 2013?  Thanks so much!  



Submitted by Alan - IRA critic on Sun, 2014-05-18 17:11

A Roth owner is always deemed to pass prior to his RBD because there is no RBD. As such, the Roth agreement could either specify the default method as life expectancy (most likely) or the 5 year rule. This is why you need to check the beneficiary clause to determine what method applied as default because she apparently did not make a specific election of a method, which the IRA agreement could also have specified. So if life expectancy was the default, since she did not take a life expectancy RMD by 12/31 of the year following your father’s death, she would have defaulted to ownership at the end of that year. She would then be deemed to have owned the Roth the entire year and the RMD would be erased due to ownership. So there would be no penalty. Likewise, if the 5 year rule was the default, then there is no RMD delinquency until 12/31/2014 on which date she would become the owner and the RMD would not be required. Therefore, there is no penalty either way, but it would be good to document which method applied in the event the IRS raises the question. But it would be best not to wait until 12/31, but specifically have the inherited Roth retitled in her name right away so ownership is clear. Note that many of these options would not apply if she was not the sole beneficiary.



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