QCDs and Roth Conversions: Today's Slott Report Mailbag | Ed Slott and Company, LLC

QCDs and Roth Conversions: Today's Slott Report Mailbag

By Sarah Brenner, JD
IRA Analyst
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Question:

Hello,

I’ve been a follower of Ed’s expertise for over 10 years. The information has always been helpful and clearly explained.

At this time, I’m looking to help a client minimize her taxes. She recently inherited an IRA from her father. She has taken the “Stretch IRA” option and is now receiving her required distributions.

Can she utilize a Qualified Charitable Distribution to her church (verified 501c3) to reduce her tax liability and still maintain the stretch IRA?


Answer:

Yes. Qualified Charitable Distributions (QCDs) are available to beneficiaries. A beneficiary can satisfy her required minimum distribution (RMD) by doing a QCD from an inherited IRA. However, the rules for QCDs that apply to IRA owners also apply to beneficiaries. This includes the rule that the beneficiary must be age 70 ½. If the client is not yet 70 1/2, she cannot do a QCD from the inherited IRA.


Question:

I started annual contributions to separate Roth IRA accounts for my wife and me at least 15 years ago.   Then, three years ago I began annual Roth conversions from an IRA account.

Do the original Roth IRA accounts that were opened 15 years ago satisfy the "5 year rule" for the Roth conversions from the last 3 years or does each conversion have a separate holding period?

Scott


Answer:

Hi Scott,

This can be a confusing area of the rules. This is because there are two separate five-year rules for Roth IRA distributions.

The first five-year rule is for qualified tax-free distributions of earnings. This rule begins with your first tax-year contribution or conversion to a Roth IRA. It never restarts with subsequent conversions. Your first contributions that you made 15 years ago would start this five- year period and your subsequent conversions would not restart it.

The second five-year rule is for penalty-free distributions of converted funds if you are under age 59 ½. If you are under 59 ½ you must wait five years before you can access your converted funds penalty-free. This five-year period restarts with each conversion. This rule is not a concern if you are over age 59 ½.


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