I have certain common stocks in my self-directed IRA-SEP that are worth considerably less than I paid for them. I'm considering establishing a Roth IRA and transferring these stocks to it. If I die before the 5 year ban on distribution from the Roth IRA, how will the beneficiaries of my Roth IRA be affected?

Your beneficiaries will need to begin withdrawals from the Roth by December 31 of the year after you pass away. The five year rule still applies but should not pose a problem unless they cash out the entire account immediately. Earnings are taxed if withdrawn within 5 years but it will take some time for the earnings to materialize.

The beneficiaries take distributions based upon their life expectancy. The first distributions are presumed to come out of the amount that you transferred into the account (your basis); income is distributed once all the basis is recovered.

If your beneficiaries are young enough it could be that no income is distributed within the five year period. Also if you have a spouse beneficiary, the spouse can roll over the Roth with no current distributions required.

If there are relatively large dollars involved you may want to have a tax pro who knows about IRAs do some calculations for you.

Mary,

Actually, the beneficiary’s options are as follows:

1 take distributions over his/her (the beneficiary’s) life expectancy-nonrecalculated. If this option is chosen, then distributions must begin by December 31 of the year following the year the IRA owner dies. (This is the default option)

2. Fully distribute the assets by December 31 of the fifth year following the year the IRA owner dies.