2011 Roth Conversions, Naming Minors as Beneficiaries Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

The holiday season is upon us. It is time for friends, family and financial security. The answers to these consumer questions can help you wrap up your year-end planning. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

Dear Ed and Company,

I was planning to convert my IRA to a Roth IRA, because I figured the tax consequences would be less in 2010. However, I read in “Consumer Reports Money Adviser” that there is a 5-year waiting period before I can withdraw money from the Roth, reportedly as follows:

“The second five-year waiting period refers to when you convert a traditional IRA to a Roth IRA. You have to wait at least five years from the first day of the ta year that you made the conversion to take a qualified distribution. So if you made the switch on March 3, 2010, the five-year clock started on January 1, 2010.”

Is this correct? I don’t recall reading this in your articles in “Investment News.” I am 83 years old, and have been taking RMD (required minimum distributions) from the traditional IRA, but I don’t need the distributions.

Many thanks for your help, and best wishes for the holiday season.

George Nimick

Answer:
In your case, when converting to a Roth IRA you will not have to wait five years to make withdrawals penalty and income tax free. When you convert to a Roth IRA you are paying income tax on the taxable portion of the conversion. However, the earnings on the converted amount must stay in for five years, assuming this is your first Roth IRA, to be income tax free. This is generally not a problem because you have the ability to withdraw all the converted funds first before you get to the earnings in the first five years. If you decide to convert to a Roth IRA you annual required minimum distribution in that year must come out first and then you can convert any amount you would like.

2.

Ed and IRA Experts –

Is it wise to name minor grandchildren as primary beneficiaries of a Roth IRA or would it be better to name the parents.

Thanks,

Eileen

Answer:
If you want children to receive the IRA proceeds at your death you are better off naming them as primary beneficiaries. In that case, they, at your death, will be able to use their own age for life expectancy purposes. But, keep in mind that if you should die while they are still minors and there is no trust or guardian in place for the minors, then the court would appoint a guardian. Also, if they are not a minor, when they inherit directly that the stretch is not a guarantee because they have access to the money at will. To guarantee the stretch you might want to consider naming a trust for the child as beneficiary of the IRA>

3.

With the new tax law, a 2011 conversion will incur taxes over what period and when will payments be due?

Thanks,

Mike

Answer:
On a 2011 Roth IRA conversion the income is included in your income for 2011 and the tax due on the taxable portion of the conversion must be paid with your return for that year. However, you will have until April 15, 2012 to pay the income tax. The ability to spread the converted amount over 2011 and 2012 is only for 2010 conversions.