This week's Slott Report Mailbag looks into QCDs, RMDs and inherited IRAs. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
Good afternoon. I have a quick question. Can a Roth conversion satisfy an RMD requirement in lieu of having a check sent to the client? The client is over 70 1/2. The client will still pay the taxes on the conversion. I believe this is possible because of the allowance of sending money to a charity from an IRA and still satisfying the RMD in the process. Thank you.
You make a great point! An IRA owner pays taxes on a conversion just like they do on an RMD. So, why can’t a Roth conversion satisfy an RMD? Unfortunately, the tax rules don’t work that way. An RMD is not eligible under the tax code to be either rolled over to another traditional IRA, employer plan, or converted to a Roth IRA. It must be taken prior to the rollover or conversion. You are right that a direct transfer to a charity called a Qualified Charitable Distribution (QCD) can satisfy an RMD. However, this works because a QCD is not a rollover or conversion and this provision was specifically intended to be allowed to satisfy an RMD requirement for an IRA owner.
I am a non-spousal beneficiary of an IRA from my parent who passed away in December 2016, along with my 3 siblings. Each of us are designated as 25% beneficiaries. One of the beneficiaries/siblings passed away in June 2017 before an Inherited IRA was established. How do you handle that siblings 25%?
Based on your question, it sounds like there were four children who inherited an IRA from a parent in 2016. Unfortunately, one passed away in 2017 before taking any action on the IRA fund they inherited. Because that sibling was still alive when the parent died, they are still considered to have inherited the IRA funds even though they died soon after. If they never established an inherited IRA in their name, it is unlikely that they named a successor beneficiary for the IRA funds. That 25% share will then go to the beneficiary named by default under the IRA agreement. That may very likely be the deceased sibling’s estate. If that is the case, an inherited IRA can be established for the benefit of the estate. The estate would have the same distribution options as the deceased sibling.