1st Roth IRA 5 year rule impact on beneficiary under 59 1/2

Submitted by Robyn W on Mon, 2023-08-28 18:43

elderly family member contemplating converting their TIRA to their first Roth IRA. They are the original owner and have been taking RMD’s.

There are 4 beneficiaries(nieces/nephews), with one currently 53 years old. What impact will the 5 year rule have on the beneficiaries if the family member were to pass before the 5 year rule is met?
Understand taxes will need to paid on conversion.

Is there anything else to be aware while making this decision?

Thank you

Row



Submitted by Alan - IRA critic on Mon, 2023-08-28 19:02

  • The person will have to complete their 2023 RMD and any prior missed RMDs before converting any portion of the IRA to a Roth IRA.
  • For conversions done in 2023, the Roth including when inherited will not be qualified until 2028. Prior to 2028 the entire balance can be distributed tax and penalty free except for any gains. DIstributions to the owner or beneficiaries prior to 2028 will have to be reported on Form 8606, showing the converted amount on line 24. 
  • Since all Roth owners are treated as passing prior to their RBD, the beneficiaries subject to the 10 year rule will not have to take annual RMDs. For any beneficiary who is an EDB, annual RMDs will be required but they should be tax free since the inherited Roth will be composed mostly of conversion basis. Each beneficiary would inherit a pro rated amount of the conversion basis and any gains before the DOD.
  • Note that a full conversion added to the 2023 RMD may result in a huge tax bill this year. Perhaps partial conversions over this year and next year would reduce the tax bill, but the beneficiaries will not be able to convert any portion of the TIRA that remains when the owner passes.

Add new comment

Log in or register to post comments