Take, skip or Roth convert an RMD amount? | Ed Slott and Company, LLC

Take, skip or Roth convert an RMD amount?

I’d appreciate comments re the 2 questions below since there probably are no definite answers when there are so many uncertainties and unknown future events, including the returns on invested assets, that can alter the outcome of any decision.

An IRA owner (age 85) has 2 traditional IRA’s, his IRA-1 with a university beneficiary and his IRA-2 with a son beneficiary (age 52) and which is the IRA from which the owner takes his RMD each year and on which he pays a 25% U.S. income tax.

The IRA owner is in poor health and expects that he will die within 2-3 years and that the university will quickly receive his IRA-1 assets which will more than satisfy his RMD of about $30,000. for the year of his death so that he will not have to also take an RMD in that year.

If he does not take an RMD, his son’s inherited IRA will be about $30,000. larger but its future RMD’s will probably be taxed at the son’s marginal tax rate of 33% for another 13 years and the son will inherit $22,500. less than he would have if the father took a $30,000. distribution in the year of his death.

Q. 1: Is it better for this IRA owner to take his RMD in the year of his death with more cash to his son or to to leave that RMD amount in the IRA his son will inherit?

Q. 2: Or it a better choice for him to add to his existing Roth IRA, of which the son is the beneficiary, by doing a Roth IRA conversion of the $30,000. at a cost of $7,500.?

It is better to coordinate with the university and the son such that the owner does not take his RMD until late in the year. If he passes before that the distribution to the university will satisfy the year of death tax free. If by chance that RMD is late, the IRS will likely waive the penalty with a properly filed 5329 waiver request by the university. The son needs to know the strategy because he is jointly responsible for the year of death RMD and is only relieved of that responsibility if the university takes at least the RMD amount from the IRA, but they will probably distribute the entire IRA account. As for Roth conversions before death to leverage owner's lower tax rate than the son, these can only be done after the RMD is satisfied by converting additional amounts, so this will only be possible in December after the owner takes the RMD and then converts additional amounts at year end. The timing aspects in the year of death will probably eliminate conversions in that year.

Thank you, Alan, for your comments.  With my inability to see what might be the best alternative, I was hoping you might favor one of them:  the owner taking his RMD, vs delaying it so that the university will take it, vs taking his RMD and then doing a Roth conversion.  Probably one would need a crystal ball to know the answer.


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