Inherited Roth

[Kea]

Client's deceased father was receiving a pension. Client can now receive a death benefit that is treated like an inherited IRA. Other options include lump-sum or Inherited Roth. I've never heard of this last option. If she takes this option, she pays tax on the full amount. When it goes into the Inherited Roth, there are no more taxes? This sounds like a really good deal. With any other inherited IRA, the tax benefit cannot be extended past 5 years. This sounds like it is a conversion to a Roth just like for your own. (The $100K income limit does still apply - so she may want to wait until next year.)

Am I missing something? Has anyone else heard of this option? I could not find any reference to it in Quickfinders. She did not see this option when working with her Dad's other IRAs. Is this option available on any inherited IRA?

Thanks

[kcjenkins]

Here's a link to a good review of inherited Roth IRAs. http://www.fairmark.com/rothira/inherit.htm

Other than that, I'd want to look at the client's paperwork, to see exactly what the options are, and the qualifiers. That paperwork should have all the details, restrictions, etc spelled out. I've never heard of this option either, so I would have to read it before I could advise on it.

[Kea]

That's a good article, but it doesn't really apply (I don't think). She's not inheriting a Roth IRA. This is a death benefit from the company where he had his pension (Teacher Retirement System of Texas). Her dad never contributed this money to any kind of IRA. But the options for how to receive the death benefit seem to be identical to how to receive an inherited traditional IRA - with this new Roth option.

With all the other options, you pay the tax on the amount and then pay tax on any future earnings. But if you can turn it into a Roth and never pay taxes on it again seems like a pretty good deal.

It does seem plausible, since this is an option with your own IRA.

[joanmcq]

If she converts to an inherited IRA, she only pays tax on the RMDs as they come out. I am currently writing a class on retirement distributions and I've never heard of a pension being coverted to a Roth. An inherited Roth 401k can be converted to an inherited Roth IRA...

[Kea]

If she converts to inherited IRA, she still has to take it out over 5 years (with the options listed in the instructions). She's in her 40s, so even if she pays tax on the whole thing now, she can potentially get a lot of tax free growth over the rest of her life.

Also, it is not the pension being converted to a Roth. The pension stopped with the death of her father. This is a lump sum $10K death benefit that is the same for all TRS retirees' beneficiaries - regardless of the amount of the retirees' pensions.

[RoyDaleOne]

http://www.fairmark.com/news/08032701-inherit-convert.htm

On March 5, 2008, the IRS released Notice 2008-30, spelling out the details for converting employer-plan funds directly into Roth IRAs.

[Kea]

Interesting. If she wants to do the Roth conversion, it would probably be better to do it in 2010 to avoid the $100K cap. Maybe by then, they will have decided on the clarifications. At which point she can choose the 5 year payout if the Roth option is eliminated.

Maybe better just to wait.

Thanks

[kcjenkins]

Thanks for that link. It makes it a lot clearer, even tho it leaves a lot of questions.

[RoyDaleOne]

If we only knew what our links know....

I for one link to nothing.

[joanmcq]

If she converts to inherited IRA, she still has to take it out over 5 years (with the options listed in the instructions). She's in her 40s, so even if she pays tax on the whole thing now, she can potentially get a lot of tax free growth over the rest of her life.

Not true, the new legislation allows for a rollover to a bene IRA, which can then be distributed over the bene's life expectancy.

[Kea]

That option wasn't listed in her paperwork. I don't know if it's available in this case.