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Ask the Expert: Leaving a Roth IRA to grandchildren

I pay tax each year on my IRA’s required minimum distribution (RMD), and then convert it to a Roth IRA, with my grandchildren as beneficiaries. I understand the money can't be withdrawn for five years and you must be 59½ for it to be tax-free. My grandchildren are in their teens. When I pass, and the Roth is 5 years old, could they withdraw the money without penalties before they are 59½?

Yes. But you have a different problem: Like many people, you mistakenly assumed you can convert your RMD to a Roth IRA. Not so. Any conversion must be an additional withdrawal. If your RMD is $20,000 and you want to convert $10,000, for example, you must withdraw $30,000 — a taxable $20,000 RMD, plus a taxable $10,000 conversion to the Roth.

You can withdraw Roth contributions anytime, tax-free. It’s the earnings that aren't tax-free until you're 59½ and have owned the account for five years. Earnings withdrawn before age 59½ are taxable and subject to an early-withdrawal penalty.

If your Roth is 5 years old when your grandchildren inherit it, they'll be able to take withdrawals without incurring any tax or penalty, regardless of their ages. They must empty the account within 10 years of your death; but they can do so earlier if they wish.

The bottom line

You can’t convert an RMD to a Roth IRA. Talk to your accountant about fixing this mistake.

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Your Sept. 19 column said a New York law "grants an unlimited tax exemption on income from government pensions." Is that just for New York State government pensions or does it also apply to federal government pensions?

New York doesn't tax federal, state or municipal pensions, or Social Security. But these are all subject to federal income tax.

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