New Planning Opportunities for Roth IRA Conversions by Non-Spouse Beneficiaries (May 6, 2008)

In the past, only a spousal beneficiary had the ability to convert an inherited qualified retirement plan into a Roth IRA.  Further, even for those spousal beneficiaries who qualified, they first had to roll qualified plan assets into a traditional IRA in order to accomplish the ultimate Roth conversion.  However, in 2008, the IRS issued Notice 2008-30 which allows non-spousal beneficiaries to roll over inherited qualified retirement plan assets into a Roth IRA.  In addition, the new changes allow taxpayers to rollover these inherited assets from the qualified plan directly to a Roth IRA without the need to set up first a traditional IRA.   

While these new changes offer a possible estate planning opportunity for clients and beneficiaries who inherit qualified plan assets, there are some limitations.  First, the inherited plan must be one which permits these rollovers.  Second, the non-spouse beneficiary must still meet the requirements already in place regarding modified adjusted gross income (MAGI).  Until 2010, a beneficiary will not qualify for the Roth conversion if the beneficiary has MAGI over $100,000.  Starting January 1, 2010, the MAGI limitations will be removed for Roth conversions.

Given these limitations, a high income beneficiary will be unable to do a Roth conversion until 2010 and is unaffected by the new changes.  For those lower income beneficiaries who would qualify, other considerations such as income taxes on the conversion would need to be considered before entering into a conversion.  In addition, the beneficiary would want to consider if the estate of the decedent paid estate tax on the retirement account, and whether, as such, any income tax deduction is available to the beneficiary for the estate tax paid on this income in respect of a decedent (I.R.D.) to help lessen the income tax blow of a Roth conversion.

Despite these new changes only adding to the conundrum that has become qualified plan and retirement planning, they do provide a valuable alternative for those non-spouse beneficiaries who fit the requirements and may benefit from a Roth conversion.

If you have any questions regarding this article or other trusts and estates issues, please contact William Pate at 910.692.6866 or wpate@poynerspruill.com or Craig Dalton at 919.783.2943 or craigdalton@poynerspruill.com.

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To ensure compliance with requirements imposed by the IRS, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding tax related penalties or promoting, marketing or recommending to another party any tax related matter addressed herein.