When will Roth IRA funds become totally qualified to my beneficiaries?

Submitted by Frank Miyamura on Fri, 2016-07-15 03:30

I’m 70 years old and single. I’ve read parts of 590B and I am confused about when my Roth IRAs are totally tax free (qualified) to my heirs.
I started a contributory Roth IRA shortly after they became available in the late 1990’s.
Since I retired, I began using funds from my 457B to do Roth conversions each year beginning in 2013. I plan on doing Roth IRA conversions until all 457B funds are depleted (by 2017) and then maybe use my TIRA (by 2022) if I live that long. I am paying owed Federal & State taxes on all converted funds from outside the 457B account.
Upon my death, are all distributions from my Roth IRAs (From contributions, conversions, and earnings) qualified to my beneficiaries? Being named beneficiaries, can they choose to stretch it, take the 5 year option or lump sum beginning the year after I pass on?
My goal is to transfer funds to my beneficiaries tax free without tax consequences other than entering the RMD $ amount on 1040 line 15a and 0 on line 15b each year. No form 8606 to worry about.
Do you see any problems in continuing my Roth IRA conversion program each year? Do I understand the rules correctly? Next year, I will begin taking my RMDs from my 457B and TIRA separately before converting funds each year. I understand that until I fully convert my TIRA, I will have to file form 8606 each year.
Thank you in advance for your help. It’s greatly appreciated!! Frank



Submitted by Alan - IRA critic on Fri, 2016-07-15 04:30

  • Your Roth IRA has been fully qualified since you reached 59.5 since you had held the Roth 5 years at that time. Once your Roth is qualified, all money rolled into it is also immediately qualified. When your beneficiaries inherit a qualified Roth, all their distributions are tax free, although they still must take annual RMDs.
  • Since a Roth owner is always deemed to pass prior to the required beginning date (because a Roth HAS NO RBD), your beneficiaries can create separate inherited Roth IRA accounts and elect either annual life expectancy RMDs or the 5 year rule. Each beneficiary can make their own election, but the separate accounts should be established no later than the end of the year following the year of your death. They can always withdraw more than the RMD, just cannot withdraw less.
  • Beneficiaries would report inherited Roth distributions exactly as you said, on line 15a only and no 8606 needed.
  • Not sure which year you reach 70.5, but starting in that year you must take your 457b RMD before converting any additional amounts. You cannot convert any of the RMD.
  • I assume the 457b is a govt 457. Otherwise, you could not be doing rollovers or conversions from it.
  • You understand the rules very well. Only question is that you seem to be planning on converting everything. Once your RMDs start doing the conversions can spike your marginal tax rate, especially if you have other income from SS or pensions. You would not want to pay a higher rate on these conversions than you would pay on your later RMDs if you do not convert. If your conversion plan factors in beneficiary tax rates, you would generally tend to convert more if your own rate is lower than what you expect your beneficiaries tax rate to be.

Submitted by Frank Miyamura on Fri, 2016-07-15 06:46

Alan, Thank you so much for your rapid and thorough response. I’m drafting a Non-Spouse Roth IRA guide to give each of my beneficiaries and your info helps greatly. Your comments regarding continuing conversions are valid. However, who is to say what tax rates will be in the future and if congress will change Roth IRA law. A crap shoot at best.  Thanks again.   Frank 

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