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When I started taking care of my (now 93 year old) uncle back in 2001, I thought it would be a good idea to convert, over time, his traditional IRA into a Roth IRA. I was told it wouldn't be cost effective.

Every year since, the RMD puts him in a higher tax bracket. One year it even made him pay more for his Medicare. The interest, dividends, and capital gains he earns increase the size of his RMD and his taxbill.

I still think that gradually moving his money into a ROTH is the way to go. He will be leaving his IRA to me and I'd prefer to inherit a ROTH IRA. (An inherited ROTH IRA is still tax free, isn't it? And doesn't require minimum distributions?)

Does the 5 year holding period apply to people older than 59 1/2? -- If my uncle starts converting his traditional IRA to a ROTH but dies before 5 years -- will the monies he has converted to a ROTH be converted back to a traditional IRA? and if it is, what becomes of the extra taxes paid due to the earlier conversions -- are they just lost?

If the IRA is not converted (or not completely converted)in my uncle's lifetime, can an inherited traditional IRA be converted to an inherited ROTH IRA?

Thanks.
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(An inherited ROTH IRA is still tax free, isn't it? And doesn't require minimum distributions?)

A non-spousal inherited ROTH requires minimum distributions.
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(An inherited ROTH IRA is still tax free, isn't it? And doesn't require minimum distributions?)

A non-spousal inherited ROTH requires minimum distributions.



but still not taxable , yes??
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(An inherited ROTH IRA is still tax free, isn't it?

Distributions are taxed the same way they would have been to the decedent. (See more below.)

And doesn't require minimum distributions?)

Except for spouses, inherited Roths are subject to RMD's.

Does the 5 year holding period apply to people older than 59 1/2?

Yes

If my uncle starts converting his traditional IRA to a ROTH but dies before 5 years -- will the monies he has converted to a ROTH be converted back to a traditional IRA? and if it is, what becomes of the extra taxes paid due to the earlier conversions -- are they just lost?

The inherited IRA remains a Roth, and the 5-year clock keeps ticking, with credit for time ticked during his life. Eventually it will meet the 5 year test.

If the IRA is not converted (or not completely converted)in my uncle's lifetime, can an inherited traditional IRA be converted to an inherited ROTH IRA?

No.

Having answered your questions, I claim my lecture time. You wrote:

I still think that gradually moving his money into a ROTH is the way to go. He will be leaving his IRA to me and I'd prefer to inherit a ROTH IRA.

Well, there's a shocker. I may be overreacting to a poor choice of words, but exactly whose interests are you looking after here? I don't know if you have a legal fiduciary role here or not, but on strictly ethical grounds you need to attend to your uncle's best interest, not yours.

Since passive voice has stuck again I don't know who told you that conversion wouldn't be cost effective, but that person may well have been telling the truth. You have said that the RMD's have sometimes kicked him into a higher bracket. That means that conversion income would also be in that higher bracket. You mentioned that at least once the RMD has meant a higher Medicare B premium. Conversion income could make this a regular occurrence.

It's certainly not clear to me that conversions would best serve your uncle.

Phil
Rule Your Retirement Home Fool
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Thanks to all for the answers and info.

Phil,

I take care of ALL my uncle's needs, 24/7 and have done so for 12 years now. I put his interests before my own. At times, this has been to the detriment of my own needs -- e.g. for sleep, medical attention, attention to my own finances, my own home.

My uncle appreciates all that I do for him and wants what is best for me as well. (He also recognizes more than I do that if I don't take care of myself, I won't be in any condition to take care of him. I tend to think I'll have more time for me 'later'.)

My "preferences" are simply that, 'what I would prefer'. If I were one to act merely on my preferences rather than what would be best for my uncle, I wouldn't be asking questions and I would have changed his traditional IRA to a ROTH IRA long ago.

The answers to my questions will help me determine not only what is best for my uncle but also whether, in the case of his IRA, my preferences and his best interests are aligned.

As far as the RMD kicking my uncle into a higher tax bracket is concerned:

if he had NO RMD he would be in a lower tax bracket, would pay less taxes on his Soc Security benefits, etc.

The purpose of 'gradually moving his money' would be to AVOID putting him into a yet higher tax bracket (by only transferring an amount each year that would leave him in the same bracket).

I do not recall now who said that the conversion wouldn't be cost effective. It was more than 10 years ago. At the time, I don't think the person thought my uncle would live much longer. It was generally believed he would not live a year after his first stroke and the death of his wife. (Surprise, surprise what a strong will to live, enjoyment of life, and good care can do. I expect him to set longevity world records.)

Thank you, Phil, for being concerned about my uncle's welfare. I hope I have allayed your fears.
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My uncle appreciates all that I do for him and wants what is best for me as well. (He also recognizes more than I do that if I don't take care of myself, I won't be in any condition to take care of him. I tend to think I'll have more time for me 'later'.)

Having been in your situation and lived to tell the tale, and having watched a childhood friend kill himself while caring for his elders, I'll warn you to be careful of that "later." You might want to drop by the Taking Care of Parents board if you haven't already.

Phil
Rule Your Retirement Home Fool
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