Roth conversion for a 72 year old

Submitted by Carrie Baeten on Fri, 2022-11-04 19:31

Hi,
I have a gal who passed away. She is age 72. She did take an IRA distribution this year. We just did a conversion switching her IRA to a Roth IRA. She just passed away. Her husband is getting a death benefit on the Roth IRA. Does he need to do any type of RMD on this or in the future?



Submitted by Alan - IRA critic on Fri, 2022-11-04 22:15

No, he can elect to assume ownership of the inherited Roth IRA anytime prior to 12/31/2023 and there will be no RMDs due from the inherited Roth. If she turned 72 this year the first distribution she took was applied to her 2022 RMD, and she could not convert any of that distribution, but could have converted an additional amount. If he is over 59.5, his Roth holding period will have begun in the first year that either spouse made their first Roth contribution.

Submitted by Carrie Baeten on Mon, 2022-11-07 14:37

Hi,So can you confirm this?  I’m assuming the husband can either take the Roth IRA death benefit or roll it ino the inherited Roth IRA.  We are aware that regardless he  will pay taxes on the amount that that the insurance company had given him prior to the Roth conversion.  If he takes it as a death benefit, is there any reason that he may not want to?  I am thinking that he will be  in a good situation as the death benefit, which is double the amount he needs to pay taxes on, he can then do what he chooses.  If he does an inherited roth ira, then I am thinking that he may not be able to touch the money for 5 years since he has no other roths and she just did the conversion a month ago before she passed.  Am I thinking about this correctly?  Thank you.

Submitted by Alan - IRA critic on Mon, 2022-11-07 18:14

  • Yes, you are correct. There are many different combinations of tax and RMD issues here. FIrst, it must be determined if she took her full RMD on the TIRA before converting what was left. If she did not, the shortfall becomes an excess Roth contribution that he inherited, and it must be removed as such. That would complicate things.
  • Assuming the above is not a problem, he has 3 options for the inherited Roth IRA annuity. I take it that the death benefit makes the inherited Roth IRA worth about double the amount of the conversion that was done to create it. Under Roth IRA distribution rules, this is a non qualified Roth IRA because the 5 year holding period has not been completed. Therefore, if he wants to avoid taxes on the gains from the death benefit, he cannot take out more than the converted amount prior to 2027 because the 5 years will not be completed prior to 2027. He could withdraw up to the converted amount without tax or penalty anytime.
  • If he maintains this as an inherited Roth IRA, he will have to take annual beneficiary RMDs each year starting in 2023. However, if he has reached 59.5, he should elect to assume ownership of the inherited Roth IRA. That eliminates the annual RMDs, but he still would be taxed on distributions that exceed the converted amount until 2027. 
  • SInce he is the surviving spouse beneficiary, even if the insurance company were to require a distribution of the entire balance, he would have 60 days to roll it over to his own Roth IRA to avoid taxes, but he would still have need to wait until 2027 to take out any more than the converted amount without tax being due. 

Submitted by Carrie Baeten on Fri, 2022-11-11 16:27

I am being told by the investment variable annuity company that we are not able to pull any money out of the roth IRA for 5 years and that we should be doing a spousal IRA.  Does that make sense?

Submitted by Alan - IRA critic on Sat, 2022-11-12 01:30

Unless there is a contractual limitation included in the annuity, it does not make sense. IRS rules allow distributions anytime, but if the inherited Roth is not yet qualified, taking out more than the amount contributed to the Roth would result in gains being distributed and those gains would be taxable until the Roth was held at least 5 years including the time the owner held it.

Submitted by Carrie Baeten on Fri, 2022-11-11 16:46

I just wanted to confirm if someone inherits a roth IRA from their spouse, are they able to use the funds in the first 5 years without penalty?

Submitted by Alan - IRA critic on Sat, 2022-11-12 01:32

There is never a penalty on an inherited IRA distribution. Should the spousal beneficiary assume ownership and removes gains before age 59.5, there would be a penalty on the gains.

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