Can a Non-Spouse Beneficiary Do a 60-Day Rollover?

This week’s Slott Report Mailbag looks at whether required minimum distributions (RMDs) can be used as a qualification for a Roth IRA contribution and dissects a situation involving the Roth recharacterization process. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

Can I meet the earned income qualification for contributing to a Roth IRA by using the required mandatory distribution from an IRA account?

Answer:
Required minimum distributions from your IRA (although taxable) do not count as earned income (compensation). Earned income includes wages from working. Here’s another look at the question, “Can I re-invest my RMD?”
 

2.

Hi,

I started two separate Roth accounts last year (2014), and rolled from a Traditional IRA account shares of a company that was distributing stock over a four-month period during 2014. One of the accounts rolled all of the distributions into a Roth, (which ended up being 22,759 shares), while the other only rolled over the first distribution (3,258 shares). I tried rolling over the additional distributed shares of the second account (8,971 shares) on 12-31-2014, but decided to recharacterize the 8,971 shares, since I didn’t want to pay the taxes (for 2014) in 2015. The day I recharacterized the 8,971 shares, the stock was worth less than on 12-31-14.

My question is: since I have substantial gains on the previous 22,759 share account (with a different broker), along with the original 3,258 shares (with a second broker), does the recharacterization affect the gains in these other two accounts? If so, is there a way I can undo the recharacterization and pay all the taxes on the total in the two Roth accounts? I have enough in separate cash accounts to handle the taxes either way. My intentions were to wait until December over the next few years, and then only roll enough of the traditional IRA 8,971 shares to keep me in the same tax bracket.

Thanks,

Garland

Answer:
Whenever you convert funds to a Roth IRA, you can recharacterize (unconvert) them by October 15 of the year after the conversion. When you do a recharacterization, you must include the gains or losses attributable to the amount being recharacterized using the value of all the assets in that Roth IRA. You don’t have to include gains or losses from investments in other Roth IRAs in that calculation. After a recharacterization, you are allowed to reconvert the same funds after the later of the year after the conversion or 30 days after the date of the recharacterization.

You should consult with an advisor about your transactions if you moved your shares in a series of 60-day rollovers or if your recharacterization transaction did not include earnings or losses attributable to those shares.

3.

My father passed away last year and his three children are beneficiaries of his IRA. My mother was named on the IRA as the primary beneficiary, but she passed in 2004. The three children decided to take the RMD (required minimum distribution) based on my age and to spread the distributions over five years. The IRA custodian would not allow this year’s distribution to be transferred directly to my IRA. They instead sent a check directly to me. The amount was $24,100. I have received many different opinions on how I should handle this. One advisor told me to put the entire amount into an IRA and deduct from taxes. I believe that since the check came directly to me, I have to declare the funds as income and then can make a $6,500 contribution to my IRA.  

What is the correct way to proceed to minimize my tax liability, and how much can I contribute to an IRA?

Thank you

Answer:
Because the check was made payable to you, it is taxable to you and cannot be rolled over to an IRA. A non-spouse beneficiary can NEVER do a 60-day rollover of inherited IRA funds. If you are eligible for an IRA contribution this year, you can use part of that distribution to fund your IRA.

A distribution from an inherited IRA also can NEVER go directly into an IRA in your own name. That is the same thing as receiving a check payable to you – it is a taxable distribution.