ROTH CONVERSION SCENARIO – SPOUSE BENE and then TO NON-SPOUSE BENE
Hello,
Looking for some clarity/advice on the best options available for our client with significant TIRA assets. He’s 83 and contemplating a conversion (either in a lump sum or over a couple of years), though we’re concerned he may not meet the 5-year holding period due to health issues and he hasn’t yet established a ROTH IRA. We are considering the following scenario, but I want to be sure I’m not overlooking anything:
- His spouse is also 83 but in a bit better health. Should he not make the 5 year holding period, it’s my understanding that she would need to hold the assets for the remainder of HIS 5-year term before all of the earnings would be tax-free. Does this rule apply regardless of whether or not she leaves the assets in an inherited ROTH IRA or rolls it over into her own ROTH IRA?
- Assuming that rolling over to her own ROTH is the best option, would a new 5-year term start for her in the event that the above only applies to inherited ROTHs? She also has not yet established a ROTH.
- The goal is to allow for as much growth in the ROTH as possible before passing it on to the eventual NON-SPOUSE beneficiary, and in turn extending the period of time before he needs to turn on the “10 year rule”. Does this approach seem most logical?
- Should the original ROTH owner convert his TIRA over a two-year period, will there be a separate 5-year holding period for EACH contributed amount?
I’ve heard so many different versions of these rules that I’m getting more confused than not! Bottom line: the NON-SPOUSE bene won’t need the ROTH assets anytime soon, so whatever “holding period” might apply to him before the earnings are 100% tax-free isn’t an issue. I’m just more concerned with the semantics, and not negating any portion of the original ROTH conversions/earnings tax benefits. The idea of passing on the original ROTH conversion to the spouse instead of directly to the NON-SPOUSE child is simply to extend the length of the ROTH, so any additional insight and/or suggestions are very welcome.
Thanks in advance!
Robin Ross
Permalink Submitted by Alan - IRA critic on Thu, 2025-05-29 21:31
Q 1 – Yes, the 5 year holding period must be met whether or not the surviving spouse (also with no prior Roth) maintains the inherited Roth or assumes ownership. Of course, a new Roth with recent conversions will not have much in the way of earnings in the first few years. Also, note that if the account is maintained as inherited, it will be subject to beneficiary RMDs.
Q2 – Assumption of ownership is the best decision. She gets credit for his ownership period either way, but there will be no RMDs.
Q 3 – Yes.
Q 4 – No, there are no conversion holding periods after age 59.5, just the 5 year holding period for the Roth to become qualified and gains to be tax free. That starts with the first Roth contribution and additional later contributions have no effect on it. Therefore, conversions can be done over a period of years to manage the tax rate on the converted amounts. It would be a good idea to convert something this year, even a small amount to get the 5 year clock started effective 1/1/2025.
Permalink Submitted by Robin Ross on Fri, 2025-05-30 15:17
Thank you, Alan! I sincerely appreciate your prompt response and helpful information! You’ve assisted me in the past with a complicated NUA scenario, and your expertise is unmatched!
Robin