Roth Conversion Questions
86 year old widow has a TIRA naming her 3 children as beneficiaries. 1st question: When she dies and children split her IRA to individual IRA’s in their names, can they later convert these to Roth IRA’s? 2nd question: If she converts her IRA to a Roth electing to defer taxes to 2011 and 2012, and she dies in the meantime, when are taxes due? 3rd question: She has already taken her basis from her IRA in the form of RMD’s. If she converts it to a Roth, dies and children split it to individual Roth’s, are their RMD’s taxable for the first 5 years?
Permalink Submitted by Alan Spross on Fri, 2010-03-26 21:59
Non spouse beneficiaries cannot convert inherited IRAs to inherited or owned Roth IRAs at this time.
If the widow converts to a Roth and then passes prior to 2012, the income must be reported on her final tax return for the year of death. The executor also has the authority to recharacterize all or part of the conversion up till the extended due date for the return.
With respect to basis, every conversion and RMD she has done uses some of the basis, but she cannot use it all up until the total IRA has been converted. Therefore, she has only used up SOME part of her basis and her latest 8606 would show how much basis she has left on line 14.
If her children inherit her Roth before the 5 year period is fulfilled, their RMDs are applied first to regular contributions, next to conversions, and last to earnings. Therefore, if they stick to RMDs only, they should not get to earnings until after the 5 year holding period is met. The holding period continues after the owner dies and includes the beneficiary holding time as well. The RMDs would therefore be tax free since earnings would not be reached in 5 years unless distributions are larger than the RMD amount.