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By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Could you please direct me to information that tells me how any conversions I make from my regular IRA to a Roth will be taxed.  My belief was that the amount of any conversion will be taxed at whatever my tax bracket is for the year in which I make the conversion. Is that correct? Therefore, all other things being equal, it is preferable to make the conversion in years where my tax bracket is lower.

Thanks for your help.

Joann

Answer:

Joann,

You are 100% correct. Any conversion from a traditional to a Roth IRA will be taxed at your tax bracket for the year in which you make the conversion. (One is not allowed to make a “prior year conversion.”) As for your second comment – also yes. It is preferable to make conversions in years where your tax bracket is lower. However, be aware that the taxable amount converted will be added to your ordinary income for the year and could bump you into a higher bracket. One does not need to have earned income to convert, and there are no age or income restrictions. Just remember that all conversions are final – there is no going back.

Question:

Greetings:

I have a client who passed away and her IRA annuity named her trust as beneficiary.  The annuity company says there is no stretch option available and only the lump sum is available.  I have had other clients die whose non annuity IRAs listed their trust as beneficiary and we were able to use the oldest beneficiary’s life expectancy to make stretch payments.  Does the fact that the IRA is invested in an annuity trigger different IRS treatment?  Can an annuity company choose not to allow favorable IRS stretch treatment?

Looking forward to a response.  Thanks so much!

Todd

Answer:

Todd,

The tax code allows the stretch option for trusts that meet certain requirements. However, IRA custodians are not required to offer beneficiaries all the options that are available under the law. Ultimately, it is up to the custodian to allow or disallow beneficiary stretch treatments. Most providers do allow a stretch payout to a trust. However, there are some who still do not. It sounds like this annuity company is one of the few who does not. Be sure to review the custodial documents to determine what they do and do not allow. If the stretch (or some other feature) is important to a client and their current custodian does not offer it, moving the account to a custodian that does may be a possibility.

https://www.irahelp.com/slottreport/roth-conversions-and-stretch-iras-todays-slott-report-mailbag