The 10-Year Rule and Roth Conversions: Today's Slott Report Mailbag | Ed Slott and Company, LLC

The 10-Year Rule and Roth Conversions: Today's Slott Report Mailbag

Sarah Brenner, JD
Director of Retirement Edcuation
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Question:

A client of mine born in 1952 passed away in March 2021 and the IRA passed to her mother who is 91 years old. So, the 10 year rule applies to liquidate the IRA as she is not an eligible designated beneficiary (EDB). If the mother passes away at age 95 and leaves the inherited IRA to her son – how long does the son have to liquidate the account???

All the best

Stevan


Answer:

Hi Stevan,

Interestingly enough, the mother IS an EDB in this case! She is “not more than 10 years younger than the IRA owner.” However, based on her age, stretching payments over her life expectancy will only allow for about 5 years of payments. If she would pass away, the son as the successor beneficiary of an EDB would then have 10 years to empty the account.

An EDB can also elect the 10-year rule when the IRA owner dies prior to their required beginning date. This could be another option for her. If she dies prior to end of the 10-year period, her son, as her successor beneficiary, must distribute any remaining funds by the end of that same 10-year period. In this case, that would mean the inherited IRA must be distributed by December 31, 2031.


Question:

I am 43 years old and would like to pull $12K out of my employer-sponsored 401(k) and roll it into a Roth IRA. Can this be done, and if so, is there a penalty for doing so? Will I be taxed on the $12K if I roll it into a Roth?

Mark

Answer:

Hi Mark,

There are several issues here. First, in order to be eligible to convert funds from your 401(k), you must be eligible to take a distribution. Based on your age, if you are still working for the employer, that may not be possible. If you are eligible to take a distribution, you can choose to do a Roth IRA conversion if the funds are eligible for rollover. If the funds are pretax, they will be taxed when you convert (i.e., directly rolled over into a Roth IRA), but there will not be a 10% penalty. There is never a 10% penalty on a distribution that is converted to a Roth IRA.


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