IRA Conv and 5-year Rule for Bene Roth IRA
A client is aging (85yrs old, wife 85yrs old), planning on doing a Roth conversion. He was wondering if a 5 year rule will matter if he was to pass away. This is his first time with funds into a Roth IRA. Does a 5yr rule get waived for a spousal bene? Thanks.
Permalink Submitted by Alan - IRA critic on Mon, 2021-01-04 23:54
Conversion holding periods all end at age 59.5, so they can be ignored. However, the 5 year holding period for distributions to be qualified and tax free continue to run for the beneficiary until the inherited Roth IRA has existed 5 years combining the time he owned it with the time she held it as beneficiary. But if she already has her own Roth IRA for 5 years and rolls his into her Roth, his Roth money will be fully qualified after she rolls it over.
The 5 year holding period for qualified distributions only applies to the earnings being tax free. But if this conversion is his first contribution ever, his Roth will not have any earnings. She could distribute the conversion amount right away with no taxes due.
She should transfer the inherited Roth into her name as owner, since that will avoid RMDs as long as she lives, and if she already has a Roth it will make his Roth money qualified right away or sooner than it would have been since he had no prior Roth IRA. First she would tell the custodian she is electing to assume ownership of his Roth IRA. She can then immediately transfer it to a Roth IRA she owns without using up a 60 day rollover.