ROTH CONVERT INHERITED PSP & IRA
Looking to confirm my understanding on 2 issues:
Issue 1:
I have a client that inherited a small (self-employed-only participant) profit sharing plan from his dad when he died back in early 2000s. We transferred into a decedent PSP account, & have been taking the RMD since. Based upon my research, I am under the impression that this account may be eligible to be converted to a ROTH IRA?
If we chose not to convert this particular account, then am I correct that it would NOT be included in the calculation of my client’s taxable conversion amount, since not a traditional IRA, SEP or Simple?
My client has significant after-tax traditional IRA tax-basis in other accounts for purposes of calculating the taxable portion of the ROTH conversion.
Issue 2:
My understanding that a NON-spouse inherited IRA cannot be converted to a ROTH IRA?
This is the same client, again, inherited from his dad.
Am I correct that this account balance would be included in the calculation of my client’s taxable conversion amount, since a traditional IRA?
As a side note, my client’s income is pushing $1 million, but due to alimony, his AGI is only about $500K thru 2012 tax year. Due to AMT his effective FED tax rate on contemplated ROTH conversions is only 28% vs. marginal tax rate of 35%.
My initial gut feeling is that he may be better off converting more in 2011 & 2012 due to the impact that the alimony is having on the 28% (AMT rate) vs. his marginal tax rate @ 35%, which will likely resume post 2012/alimony, not to mention the prospect of tax rates increasing. Any thoughts on this?
Input is greatly appreciated!
Permalink Submitted by Alan Spross on Wed, 2011-11-09 22:48
Issue 1: Yes, all or part of the inherited PSP could be converted to an INHERITED (not owned) Roth IRA. Therefore, the RMDs would have to continue as before the conversion. You are also correct that the balance in the inherited PSP does NOT count for purposes of calculating the taxable portion of his owned IRA conversions.
Issue 2: Under current law, an inherited non spouse IRA cannot be converted. That said, I would not be surprised to see this changed at some point, particularly with respect to this inconsistency with an inherited qualified plan, which CAN be converted. It would be an easy source of more accelerated tax revenue. However, any basis or lack of basis in an inherited IRA is kept totally separate and therefore does NOT affect the taxable portion of owned TIRA conversions. If there were basis in the inherited TIRA, it would require a different 8606 than the 8606 for the owned TIRAs since any basis cannot be combined.
With respect to conversion timing, I expect that the 35% rate could well be increasing, if not in 2013 then shortly thereafter. However, I can’t help you with the AMT issues, particularly since there is a credit for prior year minimum tax that would have to be recognized in any analysis. But tax software would have to be used in any event to explore different conversion amount scenarios.
Permalink Submitted by DAVID DAMASKA on Fri, 2011-11-11 18:58
[quote=”[email protected]“]Issue 1: Yes, all or part of the inherited PSP could be converted to an INHERITED (not owned) Roth IRA. Therefore, the RMDs would have to continue as before the conversion. You are also correct that the balance in the inherited PSP does NOT count for purposes of calculating the taxable portion of his owned IRA conversions.
Issue 2: Under current law, an inherited non spouse IRA cannot be converted. That said, I would not be surprised to see this changed at some point, particularly with respect to this inconsistency with an inherited qualified plan, which CAN be converted. It would be an easy source of more accelerated tax revenue. However, any basis or lack of basis in an inherited IRA is kept totally separate and therefore does NOT affect the taxable portion of owned TIRA conversions. If there were basis in the inherited TIRA, it would require a different 8606 than the 8606 for the owned TIRAs since any basis cannot be combined.
With respect to conversion timing, I expect that the 35% rate could well be increasing, if not in 2013 then shortly thereafter. However, I can’t help you with the AMT issues, particularly since there is a credit for prior year minimum tax that would have to be recognized in any analysis. But tax software would have to be used in any event to explore different conversion amount scenarios.[/quote]
Alan:
Re. your response (above), would the inherited IRA year-end account value be included in the denominator of the total value of all IRA, SEP & Simples to calculate the taxable amount (%) of ROTH Conversions since the inherited IRA is NOT eligible for conversion?
I am duly impressed by your depth of knowledge!
Thanks!
Permalink Submitted by Alan Spross on Fri, 2011-11-11 19:18
No, it would not be included with the value of the owned accounts.
The non spouse inherited TIRA is kept separate in all respects from owned accounts, ie. it has it’s own separate RMD requirements and any basis inherited from the owner is not combined with any non inherited basis the owner has in owned IRA accounts. Therefore, if owned TIRA accounts are to be converted to a Roth IRA, both the value of the inherited TIRA and any basis that might exist in the inherited IRA are not included in the calculation.