Inherited 457 to Beneficiary Roth IRA

Submitted by Mhotchkiss on Thu, 2016-01-14 19:18

I believe a non-spouse bene can direct transfer their beneficial interest in a decedent’s 457 plan directly to an inherited Roth IRA. I believe taxes would be due on the transferred amount as a conversion. I have a couple of questions – 1) could all/part of this now beneficial Roth IRA be recharacterized and, if so, what would it go to? and, 2) would paying the taxes out of the proceeds of the 457 in transit to the bene Roth IRA be able to satisfy the RMD required on the bene Roth IRA?
-m



Submitted by Alan - IRA critic on Thu, 2016-01-14 23:43

  1. m- good question, first time I have seen it. Yes, the inherited Roth could be fully or partially recharacterized to an inherited TIRA using the usual recharacterization procedures and deadlines. This option is not mentioned in the IRS Pubs, but was addressed in Notice 2008-30, Q 7 in light of the fact that back then there was still a 100k MAGI income limit for Roth rollovers, so there had to be a recharacterization option. That said, it is rare that a non spouse beneficiary even does a direct rollover to an inherited Roth, and therefore IRA custodians are quite likely not to have dealt with recharacterization requests from the inherited Roth. There could be considerable resistance.
  2. Withholding here is tricky. If beneficiary wants to withhold then the recharacterization will have to be partial. Otherwise the beneficiary could squeeze a tax free RMD out of the inherited Roth while a full recharacterization would eliminate the taxes on the Roth rollover. So one way to approach this would be to distribute the RMD (not taxable Roth distribution)  and then recharacterize the remainder. That would leave the taxes in place for the RMD amount of the Roth rollover but the RMD  distribution would not be taxable. But since this could become a processing and reporting  mess,  to reduce confusion it would be better to recharacterize the full amount and then take the taxable RMD from the newly created inherited TIRA with the desired withholding rate.

Submitted by David Mertz on Fri, 2016-01-15 00:55

  • Withholding on a distribution from the 457(b) would never make it to the Roth IRA; it would be permanently distributed since it is not eligible for indirect rollover.  It *will* satisfy at least a portion of any RMD needed from the 457(b).  Since this withholding would never become part of the Roth IRA, it could not satisfy any RMD from the Roth IRA (and there won’t be any RMD needed from the Roth IRA until the following year anyway).
  • Alan’s comment appears to be referring to satisfying the Roth IRA’s RMD for the following year, the year in which a recharacterization is performed.  I agree, it’s a bit messy.  Just like a recharacterization of an owned IRA, I believe that any amount recharacterized to an inherited traditional IRA would result in an adjusted year-end balance in the inherited traditional IRA and an RMD from the inherited traditional IRA instead of from the inherited Roth IRA (possibly a slightly different amount due to the amount of earnings or loss accompanying the amount recharacterized).  Although it doesn’t seem to be addressed anywhere since owned Roth IRAs are not subject to RMDs, if the recharacterization is a partial recharacterization, it seems that the amount on which the inherited Roth IRA RMD was calculated would have to be adjusted as well, probably decreased by the same amount as the balance on which the RMD for the inherited traditional IRA is calculated is increased (the amount transferred).  If the original RMD from the inherited Roth IRA had already been satisfied by a distribution from the inherited Roth IRA, some or all of that distribution would end up being more than necessary and would entirely satisfy the RMD on the amount of the inherited Roth IRA that could not be recharacterized because it had already been distributed.  Following my reasoning, there would still be an RMD due from the inherited traditional IRA created by the recharacterization.

Submitted by [email protected] on Fri, 2016-01-15 16:13

thanks for the input.  Let me see if I follow – In late 2015 mom dies.  Child inherits the 457 as named beneficiary. In early 2016, plan sponsor notifiies bene of options.  Child decides to take the 457 and convert to Beneficial Roth IRA.  2016 is the first year a bene RMD is required.  In the process of making this “conversion” to Bene Roth IRA, taxes are withheld from the proceeds.  You’re saying these would not satisfy the RMD on the bene Roth IRA since it doesn’t exist until the balance hits the account.  Now I’m wondering that since the 457 was child’s at beginning of 2016, wouldn’t there be an RMD required on the balance, that would have to be taken prior to conversion anyway, and those withheld taxes would satisfy that?  The first year of an RMD on the Bene Roth would be 2017?

Submitted by Alan - IRA critic on Fri, 2016-01-15 17:08

m, yes that is correct. Child must satisfy the inherited 457 RMD prior to or at the time of the direct rollover. The withholding is being taken from the 457 plan and only the net is included in the direct rollover to the inherited Roth IRA. The 2016 457 RMD was satisfied by the withholding. There is no inherited Roth or inherited TIRA RMD due until 12/31/2017 for 2017. The inherited Roth can be recharacterized before 10/15/2017 to an inherited TIRA which will eliminate the tax bill on the direct  rollover to the inherited Roth, but not on the withholding taken from the 457. The 2017 IRA RMD should not be taken until after the recharacterization to an inherited TIRA, and withholding for 2017 could also be taken from the 2017 inherited TIRA RMD distribution.

Submitted by [email protected] on Fri, 2016-01-15 17:47

great, thanks!

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