Inherited Roth
A client passed away in 2011 after doing a 2010 Roth conversion. His spouse is the beneficiary of this and his contributory Roth. Is there any reason not to roll both of his Roths into hers? Can she still pay the conversion tax over 2011 and 2012?
Permalink Submitted by Alan Spross on Thu, 2011-02-17 23:17
As long as his spouse is the sole beneficiary of the Roth IRA account holding the conversion, the surviving spouse can defer the conversion income to 2011 and 2012. This would be accomplished on the 2010 joint return by NOT checking the box on Form 8606 that opts out of the deferral. The surviving spouse has until 10/17 to make the final decision on that and also if she wants to recharacterize all or part of the conversion. There may be cases where this would be advisable. If she defers, she just reports the 2011 income on the final joint return and the 2012 on her single return.
Some Roth IRA agreements automatically make the sole surviving spouse beneficiary the owner of the Roth IRA. If not, she should generally assume ownership of the account. About the only reason I can think of NOT to assume ownership would be if she will need to take distributions from the Roth that would be enough to reach the earnings (after all regular and conversion balances have been withdrawn first) AND she is not yet 59.5. In that case taking out earnings from an owned Roth would result in taxation of the earnings and an early withdrawal penalty prior to 59.5. The 5 year conversion holding requirement to avoid the penalty would also apply until 2015 if she took ownership because the death distribution coding is eliminated once she assumes ownership and the decedent Roth is treated as if it had been hers all along.
Note that if the above is an issue and she opts to keep it inherited to avoid any penalties, she might also be subject to RMDs starting in the year the decedent spouse would have reached 70.5. As owner, there would be NO RMDs. Also, note that if she failed to take an RMD required as beneficiary, then she becomes owner by default.
So you should look at both spouse’s ages, the character of all their Roths, and her need to tap this Roth for funds before it is qualified or before she is 59.5. If she already had a Roth of her own that is qualified, then these other problems are eliminated and she should assume ownership, at least after she makes a final decision on recharacterization. As you can see, it can get complicated.
Permalink Submitted by Christine Carleton on Fri, 2011-02-18 13:47
Thank you Alan. I appreciate your timely and thorough reply!