BPickerCPA

1. No reason 2. yes 3. Form 8606 treatment

Each beneficiary has the right to take the minimum. At the same time, each bene can take more than the minimum. One bene taking a lump sum does not mean that another bene can't take minimum distributions. I don't see any reason why a plan could not be amended now to permit a longer payout as long as the payout is still within IRS guidelines. However, my not seeing a reason doesn't mean anything. Check this out with an attorney knowledgeable in ERISA rules.

There is confusion in the regs between (in the IRS' view) the required beginning date and the date that the obligation to make a required distribution accrues. My comment letter on the proposed regs asked the IRS to clarify the answer to this question, so hopefully the final regs, due out soon, will give a more definitive answer. It appears from different readings and conversations with IRS personnel that the obligation to take a minimum required distribution accrues at the beginning of the year that the taxpayer will attain age 70½. So even though the distribution need not be taken until the following 4/1, there is an obligation to make a minimum distribution. This can be deduced also from the fact that a Roth conversion cannot be made in the year a taxpayer attains age 70½ until after the MRD is taken (Roth regs). I personally disagree with the above; but I believe it to be the IRS position. In your situation, even though the taxpayer died prior to his required beginning date, the spouse would still need to take the year 2001 MRD prior to 4/1/02. In addition, she would have to take the year 2002 MRD prior to taking the IRA as her own. Like I said, I think the rule SHOULD BE like mbozek stated it. But I don't believe it is, according to the IRS.

Treat them as one conversion. It makes no difference.

Her financial planner is obviously ignorant of the Roth recharacterization rules. This always makes me question what else he might be missing. If she converted into a brand new Roth, and she moves the entire account back to a traditional IRA (it need not even be a new IRA; it can be the original), the entire conversion is negated and no tax is due. She CANNOT move more funds to make up the loss. That's asking for an excess contribution penalty.

I don't understand the dispute. What MBozek is suggesting results in the IRA being taxable to the spouse followed by a gift from the spouse. You don't need to do any rollovers to accomplish this. You could not avoid taxation to the spouse, because the only beneficiary who can even do a rollover is the spouse, so there is no way to roll it to an IRA and claim the spouse is not the beneficiary of the account. As an aside, the IRS has told me that if an account is disclaimed in a disclaimer that is NOT qualified (i.e. the disclaimant will treat it as a gift), the disclaimer will not change the designated beneficiary for minimum distribution purposes.

You can contribute to all in the same year. There are limits to each.

You can recharacterize the contribution plus earnings into a traditional IRA and not pay tax on the earnings until withdrawn. This is what I always advise clients to do.

Another option is to RECHARACTERIZE the excess Roth contribution into a traditional IRA. That would be cleaner in that you don't have to pay tax on the earnings on the excess contribution.

IRS Letter Rulings indicate that the daughter can use her life expectancy, even though the participant used his own single life expectancy while alive. However if the plan is more restrictive than IRS rules, the plan will control. Under the tax rules, there is no five year rule once the participant starts mandatory distributions at the required beginning date.

Appleby and Fidowatch are both using the word "conversion", but I think in different contexts. Fidowatch appears to mean a spousal rollover, not a Roth conversion. A roth conversion can be recharacterized; a spousal rollover (or treating the deceased spouse's account as the surviving spouse's) cannot be reversed. One a spousal rollover is done, it is too late to disclaim any portion of the account, as Appleby correctly noted.

The five year waiting period when the first Roth money went into the account in 1999 (it's a MORE THAN five year period) ends after 2003. If you convert $40K and take out $45K in 2003, you will be taxed on $5K. If you wait until 2004, nothing will be taxed. You will never pay a 10% penalty since you are over 59½.

There is no provision in the law for a dual basis in the circumstances you describe. ISOs represent a timing difference for AMT. Misc itemized deductions are an exclusion for AMT.

She will have to take the 2002 minimum distribution before doing a conversion. IF income is still under $100k, then you can do a conversion. You will not have to deal with minimum distributions from the Roth.

MBozek, Under the 2001 Act's portability provisions, I'm pretty sure it's legally permitted. It would be permitted if decedent worked at company A and spouse at company B. The spouse can transfer decedent's plan benefits from company A into spouse's plan at B. If both work at A, why would that be different. So I think all you need is for the plan to permit it. The IRS is not a problem.

John, You would not be able to upgrade the property with your own money. That is another problem. If for some reason you need an infusion of cash (e.g. no tenant due to economic downturn and the real estate tax bill is due), you cannot contribute more than the annual Roth limit, which could be as low as zero. Then what?

QDROphile, I don't disagree with you. The original question was CAN it be done. Lot's of things CAN legally be done, assuming the custodian/administrator permits it and the plan permits. That doesn't mean it's the best way to go. In this case, I can't think of any reason why it shouldn't be done, but I doubt that any administrator would permit, just from their own record keeping standpoint. Maybe I need to stop being so theoretical.

The only way it can be transferred is if the the beneficiary is the decedent's spouse. Otherwise it is an illegal rollover.

Sounds like you're reading a superceded version of the form.

No.

Your idea works, and it's a great tax free way to get into a Roth. Employer plans cannot accept after tax rollovers from an IRA.

This is really a NON-tax issue. The IRS has said it's OK. But it really is up to each custodian as to whether they will permit it. The beneficiary's beneficiary has to continue distributions on the same schedule as the original beneficiary (hence it being a non-issue for the IRS). Check to see if your custodian will permit it.

John, When the custodian insists on taking it all, people have gone to the IRS for a PLR that permits the transfer. Once they have that, the custodian can't refuse, unless they enjoy litigation.

Fidelity is wrong, but this is not a revelation. You have a better chance of getting pigs to fly than getting one of these custodians to (a) admit a mistake, and (B) issue a new 1099R. Report it the proper way, which is to have the beneficiaries report it. On his personal return, attach a statement showing the income, and a subtraction explaining that the income was reported by the beneficiaries. If you personally paid his medical expenses, you may be entitled to the medical deduction. Speak to a competent pro.

If you die 4 years into the 32 years, the successor in interest has 28 years to take the IRA, IF THE CUSTODIAN PERMITS. Some will insist on an immediate payout, so check that out. There can never be income tax on a Roth IRA after five years have passed since the account was opened. Within 5 years, only income would be taxed, not contributions or conversions, so the likelihood of a required post death distribution consisting of income is remote (but not impossible). As you can see, you can stretch a regular, or a Roth, IRA.