Can a Roth conversion satisfy the 5-year rule?
Long before I acquired this client, he inherited a non-spousal IRA and failed to declare and start taking withdrawals over his life expectancy. Now, three years into the 5 years, we are looking for options. Can he do a Roth conversion of this inherited account, thereby paying the taxes and draining the account as required? If he can, is it still best to find the money elsewhere to pay the taxes even tho it is not as hard as it once was to get money into a Roth?
Permalink Submitted by Alan Spross on Sat, 2011-06-04 18:14
A non spouse inherited TIRA cannot be converted to an inherited OR owned Roth IRA. Only a spousal beneficiary can convert an inherited IRA to a Roth IRA.
However, the client can still restore life expectancy RMDs according to PLR 2008-11028 thereby avoiding the 5 year rule. Under this ruling the beneficiary was allowed to distribute prior year RMDs using the age and balances that applied in those prior years. The one catch is that the beneficiary was also required to pay the 50% excess accumulation tax for each delinquent year by filing a 5329 for applicable years. Since there were NO RMDs required in 2009, client may only owe the penalty for the 2010 RMD, and could then take the 2011 RMD by year end.
Here is an article that Ed released on this ruling:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…