Roth Conversion Taxes and Trust as A Beneficiary for a 403b
By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: @theslottreport
Follow Us on Twitter: @theslottreport
This week’s Slott Report Mailbag looks at taxes associated with converting a Traditional IRA into a Roth; we also have a 2-part question regarding a living trust as the designated beneficiary on a 403b Plan — that living trust then designated her children as equal beneficiaries. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
Question:
Is there a way to convert a Traditional IRA into a Roth and avoid paying an enormous tax on this transition? I could lose up to $30,000 if I close the account or move it. I’m 72 years of age and am worried about next year’s taxes eating up my IRA. Would it bet better to leave it alone? -Irma
Answer:
Irma, the tax consequences of your proposed conversion depend upon your specific set of facts and circumstances. If you have a lot of deductions, for instance, your conversion may be less costly. As far as whether it’s best to just leave it alone… you really have to compare the tax you’d pay on the conversion vs. what you might otherwise pay in the future. Best of luck!
Question:
I would greatly appreciate your insights on the following situation [2 questions] regarding my mother who recently passed away in June, 2016. I am a bit confused after reviewing your Newsletter from 12/08/2015.
Mom was Age 87 at her death and still working full-time for our local university. She never took an RMD from this plan as she was still working. She designated on her 403B Plan that her living trust be the beneficiary. Her living trust then designated her children as equal beneficiaries of this trust on her death.
My 1st Question is do the kids have the option to stretch out these retirement assets over their lives by rolling things over to inherited IRAs in each of the kids’ names?
My 2nd Question relates to her IRA, from which she had routinely taken RMDs, and the kids were named as equal beneficiaries. Does each kid stretch out the Inherited IRA based on Mom’s age and subtract 1 year each subsequent year to calculate their RMD?
Many thanks for your help! -Dan
Answer:
The trust is the beneficiary of the 403(b), not the kids. Therefore, IF the trust qualifies as a see-through trust, then the trust will be able to stretch distributions over the oldest child’s life expectancy. If the trust allows, it may be able to distribute the inherited IRA in-kind to the children, but they would still all be stuck using the age of the oldest child for post-death RMD purposes.
In regards to your second question, if the children split the account and set up separate Inherited IRAs by 12/31/17 they will all generally be able to stretch distributions in their respective Inherited IRAs over their own life expectancy.