Roth Conversion - non-spouse beneficiary - Ed Slott and Company, LLC

Submitted by W Dobroski on Tue, 2008-02-05 01:21

Ed’s book (p 227) states that if a deceased has not held a Roth IRA
account for 5 yrs, the non-spouse beneficiary’s RMD are not tax free.

If a Roth IRA Conversion paid taxes at the time of the conversion,
would in fact the conversion amount still be penalized with additional
tax? and penalty for not meeting the 5 yr holding period requirement?
(In this estate planning example, the deceased would have been over
59.5 since first converting a TIRA and first establishing a Roth IRA)

Thanks

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Permalink Submitted by Edward Czapor on Tue, 2008-02-05 02:46

What was meant here is that RMD’s may not be tax free if any earnings were withdrawn following the ordering rules. With a Roth IRA only earnings are subject to income tax. Amounts contributed or converted are never taxed. Conversion amounts are penalized if not held for 5 years, and withdrawn before age 591/2 by an IRA owner. A beneficiary is never penalized on earnings or conversions because death is an exception to penalties. If an IRA was not established for at least 5 years either through contribution or conversion, then earnings are taxed without exception, even to a beneficiary although not penalized.

Ed C.

Permalink Submitted by Alan Spross on Tue, 2008-02-05 04:20

Ed’s posted reply is correct, but I think you may have misread the portion of the book that applied.

If the non spouse beneficiary limits himself to just the RMD amount until the 5 year holding period is reached, it is highly unlikely that earnings would be tapped. For that to happen, there would have to be a huge earnings component is relation to the converted amounts. Still, the beneficiary should attempt to determine the remaining regular and conversion amounts remaining in the account as of death. That may be a challenge if the decedent’s tax program has not captured the information or if IRA custodians have been changed. That way, the beneficiary would be able to determine how much the RMD could be exceeded without incurring taxes.