Roth IRA with taxable conversion and ownership assumed from deceased spouse
Taxpayer under 59.5 assumed ownership of a Roth IRA from a deceased spouse (and did not title it as an inherited IRA). This Roth IRA includes $10k that was converted from a traditional IRA in a taxable conversion.
Does taxpayer continue to track the 5-year clock, starting in the year of the conversion, for the $10k taxable conversion amount to be able to be withdrawn without penalty before age 59.5?
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-11 02:01
Yes. The ordering rules apply to any distributions since the surviving spouse’s owned Roth is not yet qualified. The Roth IRA basis is now combined and needs to be tracked including the amount of regular Roth IRA contributions, and the amount and year of Roth conversions made by either spouse. In other words, the remaining Roth IRA is treated as if it was the surviving spouse’s own all along.
Conversely, had the inherited Roth been maintained separately, once the holding period counting both the time pre death and after death reached 5 years, the inherited Roth would have been qualified, and all distribution would have been tax and penalty free. The conversion would not have to be held 5 years since distributions from an inherited account after the owner’s death are free of all 10% penalties.
While it’s possible that a considerable tax and penalty free distribution could be made, it is very possible that a larger tax and penalty free distribution could have been made had the inherited account retained it’s status awhile longer.