Getting Your Financial Ducks In A Row Rotating Header Image

Roth Conversions for Inherited Retirement Plans

monkey typing by pdimages-com If you have an IRA or a 401(k) that you’ve inherited, you may wonder if it is possible to convert that account over into a Roth IRA.  After all, you’ve got to take RMD (Required Minimum Distributions) from the account since it’s inherited, why couldn’t you just pay all the tax upfront and roll it over?

Well, there are two answers to this question, one for inherited IRAs, and one for inherited qualified retirement plans (QRPs, such as 401(k) or 403(b) plans).  And like many other things in this wonderful tax code of ours – the two kinds of plans are treated differently today, but may be subject to change in the near future.

It should be noted that we’re talking about non-spouse beneficiaries here.  A spouse has pretty much the same rights as the decedent had, so if the decedent was eligible for a Roth conversion, the spouse most likely is as well.

Inherited IRA

For an inherited IRA, current law does not allow you to convert the funds to a Roth IRA.  This is pretty much cut-and-dried, with no interpretation necessary.

There is a great deal of conjecture about whether or not Congress will specifically change this ruling to match the QRP rule – since the QRP rule has only been available for a year or so.  Until it’s actually undertaken, this rule will continue to apply.

Inherited QRP

If you’ve inherited a qualified retirement plan (QRP), this account IS eligible for conversion to a Roth IRA.  The new Roth IRA (and it must be a new account) must be titled as inherited, just the same as if you were rolling over the QRP funds into a traditional IRA.  The new Roth IRA would continue to be subject to RMD, however tax would have been paid up front so future RMD would be tax-free.

In the year of the conversion, you would still have to take your regular taxable RMD from the QRP, but the remainder of the account would be eligible for the Roth conversion.  Keep in mind that this conversion has to be a direct (trustee-to-trustee) conversion, and also must be a direct conversion into the Roth IRA (without rolling over to a traditional IRA first, as was the former method for QRP to Roth conversion).

Photo by www.PDImages.com
IRA Owner's ManualClick the link to pick up a copy of An IRA Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.

One Comment

  1. […] Roth Conversions for Inherited Retirement Plans from Getting Your Financial Ducks in a Row […]

%d bloggers like this: