Question:
I was given your information by a financial advisor who follows your articles. I have a unique situation with a client who is a high earner with several old 401(k) accounts. My idea was to have her fund an IRA with a contribution for 2023 and 2024. Then I was going to have her do the Roth conversion with no tax liability. She currently has no IRAs. My question is: If I roll over her 401(k)s later in 2024, would she still be subject to the pro-rata rule? When I contacted my back office, they said that at the time of conversion she will not have an IRA, so she should be all set. However, my thought is that the pro-rata rule applies on a calendar year basis, so she would be subject to the pro-rata IRA rule.
Sincerely,
Matt
Answer:
Hi Matt,
You are correct. The pro-rata rule is applied by looking at the value of all traditional IRAs, including SEP and SIMPLE IRAs (but not inherited IRAs), as of the end of the year that a Roth conversion (or other IRA distribution) takes place. So, to avoid the pro-rata rule, have your client wait until next year to do the 401(k) rollovers.
Question:
I inherited both a traditional and a Roth IRA from my unmarried partner, who passed away in 2021. He had started taking RMDs. I am less than 10 years younger than him. My question is whether I have to empty both accounts within 10 years of his death? No one is giving me an answer one way or another. I did take a distribution from the traditional IRA on the advice of the custodian.
Thanks for any help!
Answer:
Since you aren’t more than 10 years younger than your partner, you qualify as an “eligible designated beneficiary.” As an EDB, you can stretch required minimum distributions (RMDs) from the traditional inherited IRA over your lifetime. You are not subject to the 10-year payout rule on this account. You should have already taken RMDs from the inherited traditional IRA for both 2022 and 2023. Regarding the inherited Roth IRA, as an EDB you have a choice. You can elect lifetime stretch RMDs just like you are doing on the traditional IRA, or you can elect the 10-year rule with no annual RMDs. This is a popular election by EDBs for inherited Roth IRAs as it allows the account to sit untouched and grow tax-free for a decade.
https://www.irahelp.com/slottreport/pro-rata-rule-and-inherited-ira-rmds-today%E2%80%99s-slott-report-mailbag
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