Inherited 457 roll into IRA, then convert to Roth?
My client’s father passed away recently with about $70k in his 457 plan. The client needs some of it for expenses related to funeral arrangements, etc. Can he roll the entire amount into a Bene IRA, convert it to a Roth (thereby deferring the income taxes until 2011 and 2012), and make immediate cash withdrawals from the Roth?
Permalink Submitted by Alan Spross on Tue, 2010-04-06 19:06
First, to roll the plan to any IRA, it must be a government 457b plan. These plans that are not government plans cannot be transferred to an IRA.
Client can convert directly to a INHERITED Roth IRA from the government 457b. If transferred to an inherited TIRA first, it CANNOT be converted, so he should avoid that if he wants to convert.
The inherited Roth will be subject to RMDs, but he does not have to worry about the 5 year conversion holding period because a death distribution (Code 4) never incurs a 10% penalty. However, there IS a problem with taking inherited Roth distributions from a 2010 conversion because the taxable income will be accelerated for those who report the conversion in 2011 and 2012.
For example, if he converts 70k, 35 would be taxable in each year for 2011 and 2012. But if he takes distribution of 10,000 this year, it will change the taxable income to 10,000 in 2010, 35,000 in 2011 and 25,000 in 2012. Conversely, if he takes the 10k for funeral expenses directly from the 457 and converts the remaining 60k, his taxable income will be 10k for 2010, 30k for 2011 and 30k for 2012, a deferral of 5k for an extra year.
Also, if his father passed in an RMD year, the RMD will have to be satisfied from the 457, but the RMD will be credited against the funeral costs. Finally, he needs to remember that he cannot ROLL these funds over. Any movement of funds between custodians must be done by direct trustee transfer.