Updated Tuesday, July 22, 2014 as of 5:49 PM ET
Blogs - Ask Ed Slott
Ask Ed Slott: 403(b)s, Inherited IRAs and Roth Conversions
Friday, April 5, 2013
Print
Email
Reprints
Partner Insights

If my company matches my Roth 403(b) contributions, do I have to track the employer (pre-tax) contributions separately from my Roth 403(b) contributions, or should my employer be contributing the matching contributions to my 403(b) plan?† Iím concerned both might be going into the Roth 403(b), which would result in a pro-rata distribution when I start taking my distributions.

The plan must track the employer and employee contributions as well as the ďregularĒ 403(b) portion and the Roth 403(b) portion. The match must be allocated to the regular portion of your 403(b) account. If you believe that there is a mistake on how the plan is allocating the contributions, you should ask the plan administrator.

I am the executor of my motherís will. She has an IRA, which she makes monthly withdrawals from. She has no other savings and just a checking account that depletes monthly.†Her IRA will be split amongst four children. As the executor, how do I have monies taken from the IRA to pay off her debts before it is distributed as per her IRA beneficiary form?†The only money that will be available to pay off the debts will have to come from the IRA.

Assuming your mom has passed away, because the estate is not the IRA beneficiary, you do not control the IRA funds. Each of the four children as beneficiary controls their own portion of the IRA. If any child uses their portion to pay off momís debts, that child will still owe income tax on the inherited IRA distribution. The children may want to disclaim the IRA and then, if the funds go to your motherís estate, there will be money to pay off her debts. You should speak to an estate planning attorney, CPA or financial advisor before taking a distribution.

When is a subsequent spouse's consent required for exclusion as a beneficiary?† Would the answer be affected by the fact that the IRA is fully funded prior to the marriage?† For information purposes, the primary beneficiaries are children and grand children from a previous marriage.

Under federal law, spousal consent is not necessary to name an IRA beneficiary. However, spouses have rights under state law. For example, if you live in a community or marital property state, spousal consent is generally required to name someone other than the spouse as the beneficiary of an IRA. Those states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

I never considered the possibility of a Roth conversion due to my higher income years, but it may make sense as I wind things down.†I am 60 and contemplating full retirement. My wife (58) and I have about $1.3 million in traditional IRAs. We plan to collect Social Security at 66 or delay a bit. We have over $1 million in our brokerage account (all long-term positions earning qualified dividends).†Unless I starting draining IRAs, RMDs on top of my social income will drive my tax bracket up considerably down the road.

I am in an "income trough" for the next 6 years. Conventional wisdom says to use taxable accounts first in retirement, but it would seem to make sense to convert $60-80k per year of IRA funds to Roth over the next 6-7 years while living off my taxable account. Our cash needs are low enough that I could do this and stay in the 15%-25% tax bracket during these years and cover the distribution taxes.

Down the road, I will have a tax-efficient taxable account and healthy Roth accounts that are post-tax.†Does this strategy make general sense?

Generally, moving funds from taxable IRAs to tax-free Roth IRAs can be beneficial. The Roth IRA benefits are tax-free income in retirement Ė keeping taxable income low, even when taxes increase. Also, there are no required distributions for Roth IRA owners. If you will not need the money soon or at all, the Roth conversion can be an excellent and effective estate-planning vehicle. However, you should discuss this with an adviser beforehand. The new taxes this year on net investment income, the return of phase-outs for deductions and exemptions, and the new higher income tax bracket could all be affected by a Roth conversion.†

Comment
Be the first to comment on this post using the section below.
Post a Comment
You must be registered to post a comment.
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.
Lists
2014 Summer Reading List for Advisors

Current Issue

The July Issue is now online!


TWITTER
FACEBOOK
LINKEDIN

Industry Events

August 10, 2014 |

September 9, 2014 |

September 17, 2014 |

September 20, 2014 |

September 28, 2014 |

Already a subscriber? Log in here