Death Bed Roth Conversion

[jpod]

Sanity check requested here.  Traditional IRA owner is well past 70-1/2.  He essentially pays no Federal income taxes due to minimal taxable income and massive medical expense deductions due to nursing home charges and other expenses (he's living off his after-tax savings and Soc. Security and doesn't need to take IRA distributions beyond his MRDs).  If he converted his IRA to a Roth the overall tax rate on the converted amount would be fairly low (say 15%).  Non-spouse death beneficiary is in the highest bracket (39.6%).  So, IRA owner takes his 401(a)(9) distribution on Monday, does the Roth conversion on Tuesday, then dies on Wednesday.  Are distributions to the Beneficiary completely tax-free, including the 10% penalty, whether or not those distributions satisfy the 5-year rule for "qualified distributions"?

 

[Kevin C]

Sanity check?  In this business?

i don't see a problem with the conversion after the RMD has been paid.  See 1.408A-4 Q&A 6.  However, I don't see death as an exception to the 5 year requirement in the qualified distribution rule, so it would not be a qualified distribution.  See 1.408A-6 Q&A 1.  In your scenario, the basis in the account would be basically the entire account, with the exception of investment gains for the short period. Even with it not being a qualified distribution, nearly all of it, if not all, should be a distribution of after-tax basis.  It would be a death benefit, so there should not be a 10% penalty if there was positive investment income.

[card]

Also see 1.408A-6 Q&A 7 which illustrates how to calculate the 5 year rule after the IRA owner's death. In your case, the non-spouse beneficiary would have to wait 5 years before distributions would be qualified and tax free:

Q-7. Is the 5-taxable-year period described in A-1 of this section redetermined when a Roth IRA owner dies?

A-7. (a) No. The beginning of the 5-taxable-year period described in A-1 of this section is not redetermined when the Roth IRA owner dies. Thus, in determining the 5-taxable-year period, the period the Roth IRA is held in the name of a beneficiary, or in the name of a surviving spouse who treats the decedent's Roth IRA as his or her own, includes the period it was held by the decedent.

(b) The 5-taxable-year period for a Roth IRA held by an individual as a beneficiary of a deceased Roth IRA owner is determined independently of the 5-taxable-year period for the beneficiary's own Roth IRA. However, if a surviving spouse treats the Roth IRA as his or her own, the 5-taxable-year period with respect to any of the surviving spouse's Roth IRAs (including the one that the surviving spouse treats as his or her own) ends at the earlier of the end of either the 5-taxable-year period for the decedent or the 5-taxable-year period applicable to the spouse's own Roth IRAs.