Roth conversion in year of death?

Submitted by Jeff Weintraub on Wed, 2020-12-02 17:28

The owner of a traditional IRA died in 11/2020. Is it possible for the spouse (and primary beneficiary) of the deceased owner to convert some or all of this IRA to the Roth of the deceased in 12/2020, prior to the end of the tax year? Or would the spouse need to first re-title the traditional IRA (or transfer the IRA to her own traditional IRA) in order to roll funds into a Roth before the end of the year? The spouse is wondering if it is possible to keep the funds in the deceased spouse’s estate but take advantage of the lower tax rates as a married joint filer in 2020 versus the higher rates that she will face as a single filer in 2021 and beyond when performing a Roth conversion.



Submitted by Alan - IRA critic on Wed, 2020-12-02 20:05

The surviving spouse must either elect ownership of the inherited IRA, or transfer a portion of the IRA retitled in beneficiary format to her own Roth IRA as a conversion. The IRA would never be in the decedent’s estate unless the surviving spouse disclaimed the IRA, and there was no contingent beneficiary named.  There is still enough time to have the TIRA retitled, and then transferred in whole or in part to an existing or new Roth IRA of the spouse, but she will have to proceed quickly to get this done in time for a 2020 conversion.

Submitted by Jeff Weintraub on Fri, 2020-12-04 02:48

Thank you very much for the response. She has moved forward with transferring the deceased spouses IRA into her own (and the custodian has already completed the transfer!).  Follow-up question … how much should she convert before the end of the year? The surviving spouse is an active, healthy 79 year old and the value of her traditional IRA is now ~$1 million. This year is her final chance to take advantage of the more favorable married joint tax rates. She has ample after-tax money outside of the IRA (currently earning nearly nothing due to very low CD rates) to cover the cost of a potentially very large 2020 tax bill. At the minimum, it seems logical for her to at least convert ~$250,000 to get her to the top of the 24% federal bracket of $326,600, but the big question is, should she convert even more this year?  She recognizes that she may be subject to the IRMAA’s for Medicare part B and D in 2022, although she might be able to get it waived due to the life changing event of the death of her spouse and the assumed much lower income moving forward. The additional 3.8% investment tax would be unavoidable though.  Although she will also be paying state tax, she will absolutely not be moving to a state with no tax in the future. She is also not particularly charitably inclined.  Is maxing out the 24% bracket the sweet spot for this client or would it be wiser for her to be even more aggressive this year and convert a larger amount further lowering her future tax liability for herself (due to lower RMD’s) and her heirs? I understand that there is likely no definitive ‘right’ answer due to future unknowns, but thoughts would be appreciated. 

Submitted by Bruce Steiner on Sat, 2020-12-05 00:09

Based on these facts, that’s likely to be a good plan.  

Submitted by Alan - IRA critic on Fri, 2020-12-04 03:37

Sounds obvious that a conversion this month subject to the lower joint filer rates is a good idea.  Perhaps she does not have much income subject to NIIT, and the conversion is not itself subject to NIIT, but a large one will subject the types of income that are to the NIIT. It is not clear how much other joint income they have for 2020,  and the MAGI for IRMAA premiums in 2022 could be breached into the one or two higher IRMAA tiers. The 2020 IRMAA premium can be factored in as an increase of the marginal tax rate. While this is somewhat complex, it may be even more complex to model out what her marginal rate would be in future years, as whatever is not converted this year will push up future RMDs.  Her reduced SS check will probably be subject to 85% inclusion in income, but this is another variable. Once an IRMAA tier is breached there is no additional IRMAA tax until the next tier is breached. A tax program will have to be used to fine tune the optimal conversion amount, but I think she should probably stay short of the 32% bracket.

Add new comment

Log in or register to post comments