How Roth conversions affect family inheritances

Conversion income and traditional IRA basis

Converting traditional IRA assets includes the otherwise taxable amount in gross income for the year distributed or transferred, including direct trustee transfers and transfers between accounts with the same trustee. The portion representing returned basis is excluded.

Traditional IRA basis allocation combines all traditional IRAs, including traditional SEP and traditional SIMPLE IRAs, and treats the year's distributions together. A separately held IRA is not an isolated contract for this calculation.

The calculation uses combined year end balances plus outstanding rollovers. Use the transaction year's instructions rather than treating one account's balance as the whole calculation.

When inherited Roth IRA withdrawals qualify

An inherited Roth IRA withdrawal is excluded from income as a qualified distribution when it occurs after the owner's death and after the five taxable year qualification period.

That period begins with the owner's first taxable year of a regular Roth IRA contribution or, if earlier, a conversion contribution. It ends with the owner's fifth consecutive taxable year.

Death does not restart the period. The inherited account's period is independent of the beneficiary's own Roth IRA period.

If a surviving spouse treats the Roth IRA as their own, the applicable period ends at the earlier ending of the deceased owner's period or the spouse's own period.

Beneficiary withdrawal deadlines still apply

Roth IRA owners have no required minimum distributions during life. After death, beneficiary distribution rules apply as though the owner died before the required beginning date.

A designated beneficiary who is not an eligible designated beneficiary must empty the inherited Roth IRA by the end of the calendar year containing the tenth anniversary of the owner's death.

Only eligible designated beneficiaries may use life expectancy payments beyond that deadline. A sole spouse beneficiary may delay distributions under the spouse rules.

For more on beneficiary categories and distribution timing, open the inherited account guides below.

The traditional IRA inheritance comparison

A lump sum from an inherited traditional IRA is taxable in the year received as income in respect of a decedent, up to the deceased owner's taxable balance.

That taxable balance includes appreciation and accrued income through death, reduced by nondeductible basis. The right to receive this income does not receive a basis adjustment at death.

Qualified Roth IRA withdrawal treatment concerns income tax. It does not establish an exclusion from the owner's gross estate.

Records to keep with the conversion

Form 8606 Part II reports conversions of part or all of traditional IRAs to Roth IRAs. Use the transaction year's instructions.

Keep Forms 8606 and supporting statements, attachments, worksheets and records until all IRA distributions have been made, so the nontaxable portion can be verified.

Two related terms

Income in respect of a decedent includes the taxable portion of an inherited traditional IRA lump sum received by a beneficiary. It includes appreciation and accrued income through death, reduced by nondeductible basis.

Gross estate includes the value of property to the extent of the deceased owner's interest at death.

Investor Advantage perspective

Keep the family's circumstances at the center of the conversation about retirement assets.

"So knowing a good snapshot of that investor's current profile will help marry your investment to what's most beneficial to them."

Common questions