IRA Conversion to Roth
I am 71 and am starting to convert my large IRA early. If I convert say $25,000 a year over next 20 years and put the money into a Roth.
- When I die and the ROTH is inherited into my Special Needs son Special Needs Trust will the trust have to convert any RMD of this money?
- As I convert this money into an existing ROTH will the 5 year rule apply for each $25,000 conversion?
Permalink Submitted by Alan - IRA critic on Thu, 2024-12-19 10:07
The trust will inherit a Roth IRA and will have to take RMDs, but they will be non taxable. If the trust also inherits a traditional IRA, it cannot be converted as only IRA owners can convert.
When you convert there is no 5 year holding period for each conversion as that does not apply after age 59.5. Your Roth IRA will be fully qualified after age 59.5 and your first Roth contribution of any kind was over 5 years ago, so your Roth may already be qualified as you indicated an existing Roth. The 5 years runs continually during your life and after your death, so if the trust only takes RMDs that first come from your Roth contributions, the 5 years will clearly be reached before any Roth earnings are distributed and therefore all distributions to the trust will be tax free.
Once you reach 73 you will be subject to RMDs and must complete your entire RMD before converting any amount. Since both the RMD and the conversion will be taxable, you would probably convert more this year and next year since RMDs will not be due for those two years.
Permalink Submitted by BruceM on Fri, 2024-12-20 16:03
Hi Alan
Just a question of clarification on your comment above on Roth conversions and the 5 year rules.
My understanding is there are two 5 year rules as relate to a Roth IRA:
The 5 year rule for determining when the Roth conversion (from a TIRA) becomes mixed together with existing Roth basis such that a withdrawal of the conversion amount is not subject to the 10% early withdrawal rule. Here, the Roth conversion must be held for 5 years OR to age 59 1/2, whichever comes sooner. There is a 5 year holding rule per Roth conversion until age 59 1/2.
The 5 year rule for determining if a Roth withdrawal is a qualified withdrawal thus none of the withdrawal amount is subject to taxation. Here, the withdrawal must be both after age 59 1/2 AND a Roth IRA must have been held at least 5 years.
Where I’ve heard of the second condition being applied is if a retiree who is over 59 1/2 takes a part time job, primarily to keep busy, and so makes a contribution to her RIRA. If she has never held a Roth, then qualified withdrawals will not commence until the beginning of the 6th year of the year of the first Roth contribution (or conversion)
Would you agree?
Permalink Submitted by Alan - IRA critic on Fri, 2024-12-20 16:49
Yes, that’s correct. Roth regular basis can still be withdrawn anytime tax and penalty free and if the first contribution was just made in the last 5 years, there is probably more basis in the Roth than earnings, and that basis comes out first.