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Roth Conversions for Inherited Retirement Plans

Roth conversions

Photo credit: diedoe

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 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 (original owner, now deceased) 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, although most of that discussion has dried up over the past several years. However, with recent proposed changes threatening to change the inherited retirement plan landscape, we may see a change in this rule sometime soon, you never know. Until a change is actually put in place, 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 inherited IRA. The new Roth IRA would continue to be subject to RMD, however tax would have been paid up front during the conversion, so future RMD would be tax-free.

In the year of the conversion, you still have to take your regular taxable RMD from the QRP, but the remainder of the account is eligible for 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).

One Comment

  1. Savvy History says:

    That picture! Oh my! Ha ha ha.

    I learned a lot about inheritance here. I’m trying to learn about it while our parents are both alive so we can help them set things up correctly. I didn’t Congress was even thinking about toying with that law.

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