Roth IRA

[GeneInAlabama]

I have a client that is a financial advisor. This morning he told me that a CPA told him that if a person converts a regular IRA to a Roth IRA and pays the tax at the time he converts it, and if he dies and passes the IRA to his beneficiary, the beneficiary has to pay tax the IRA earned from the time it was converted from a regular IRA. This just doesn't sound right to me. Do any of you know anything about this, or is this one of those things that gets twisted. He says that he was told this by a respected CPA that has been in business for a long time. Any comment on this will be appreciated.

[LindaB]

I have a client that is a financial advisor. This morning he told me that a CPA told him that if a person converts a regular IRA to a Roth IRA and pays the tax at the time he converts it, and if he dies and passes the IRA to his beneficiary, the beneficiary has to pay tax the IRA earned from the time it was converted from a regular IRA. This just doesn't sound right to me. Do any of you know anything about this, or is this one of those things that gets twisted. He says that he was told this by a respected CPA that has been in business for a long time. Any comment on this will be appreciated.

No, this doesn't sound right. I did a quick look in pub. 590 and it said that if it's been at least 5 years from the beginning of the year in which the Roth was set up, and a beneficiary receives a distribution, it is not taxable and no penalty. I didn't look further to see what happens if there is a distribution to a beneficiary in less than the 5 year period.

[GeneInAlabama]

Thanks Linda, I'll check on the less than 5 year part. It does sound a little more reasonable about owing tax if it is less than 5 years.

[LindaB]

I checked a little more, too. There might be two five year periods to look at--

1 ) 5 year period beginning with the first taxable year for which a contribution was made to a Roth

2 ) 5 year period starting with the year of a conversion contribution from a traditional IRA to Roth

For distributions to a beneficiary after the 5 years, no tax on earnings. If the distribution is within the 5 years, earnings are taxed.

[GeneInAlabama]

Thank you Linda. You gave me the information I needed. I also found that if the beneficiary waits till the end of the five years to withdraw the earnings, he doesn't have to pay tax. Also, he can withdraw the original amount converted immediately without paying tax if he leaves the earnings in the IRA for the 5 years. I appreciate your help. This client is one that has referred a good bit of business to me in the past.