Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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because the IRS’s regulation on Roth IRA conversions says that any transfer from a traditional IRA to a Roth IRA will be treated as (and must meet the requirements for) a rollover, even if the “conversion” is accomplished by an IRA-to-IRA transfer or even just by “redesignating” the account as a Roth. Reg. § 1.408A-4 , A-1(a), (c). B. Code allows Roth conversions from other inherited plans . The definition of qualified rollover contribution (to a Roth IRA) in § 408A(e) includes a rollover from a qualified retirement plan (QRP) if the rollover meets the requirements of § 402(c) . Unlike the provision defining qualified rollovers from an IRA ( § 408(d)(2) ; see “A” above), § 402(c) does not prohibit rollovers of inherited plans. Accordingly, a Designated Beneficiary who is entitled to a direct rollover of inherited QRP benefits (see ¶ 4.2.04 ) can require the QRP to transfer the benefits into either an inherited traditional IRA or an inherited Roth IRA. Notice 2008-30, 2008-12 IRB 638, A-7. Qualified rollover contribution as defined in § 408A(e) also includes a rollover from a 403(a) or (b) plan if it meets the requirements of § 403(b)(8) , and a rollover from a governmental 457(b) plan if it meets the requirements of § 457(e)(16) . Since § 403(b)(8) and § 457(e)(16)(B) incorporate § 402(c)(9) and § 402(c)(11) , nonspouse beneficiary Roth conversions are permitted for inherited 403 plans and governmental 457 plans in the same manner as for inherited QRPs. C. Nonspouse beneficiary Roth conversions: Various matters. A Designated Beneficiary who converts an inherited nonIRA plan to an inherited Roth IRA has the same option other Roth converters have to defer income on a 2010 conversion into 2011–2012 (see ¶ 5.4.05 ); § 408A(d)(3)(A)(iii) does not except beneficiary conversions. He also has the same ability as other Roth converters to “recharacterize” (undo; see ¶ 5.6 ) that conversion by transferring the contribution and earnings thereon to a traditional inherited IRA. Notice 2008-30, A-7. However, once he recharacterizes he can never “reconvert” ( ¶ 5.6.07 ) because he can’t convert an inherited IRA (see “A”). The minimum distribution rules apply to a beneficiary Roth conversion in the same manner as for other nonspouse beneficiary rollovers; see ¶ 4.2.04 (I). Computation of the Five-Year Period ( ¶ 5.2.05 (B)) for a beneficiary Roth conversion is unclear. For a Roth IRA that the beneficiary inherits from the deceased participant, we know the participant’s holding period “carries over” to the beneficiary; see ¶ 5.2.05 (B). Does this same “carryover” rule also apply to an “inherited” Roth IRA created by the beneficiary in connection with a nonspouse beneficiary Roth conversion, i.e., if the decedent had already completed his Five- Year Period with respect to his own Roth IRAs, do the beneficiaries get the benefit of that for an “inherited” Roth IRA they created? There is no IRS guidance on this. Even if the beneficiary wants, and can afford, a Roth conversion, he will get much more value by converting his own plans or IRAs to a Roth IRA than by converting an inherited plan to an inherited Roth IRA, if the cost is the same. “His own” Roth IRA would have no RMDs during his lifetime ( ¶ 5.2.02 (A)), and could be left to his surviving spouse for a spousal rollover (¶ 3.2) , or to another Designated Beneficiary for a stretch payout ( ¶ 1.5.05 ), after his death. In contrast, an inherited Roth IRA would have to be distributed, starting the year after the year of the participant’s death, over the beneficiary’s single life expectancy (with no possibility of flipping to a more extended payout after his death). ¶ 1.5.03 (C), ¶ 1.5.13 .