Beneficial IRA to Roth
My client just graduated from college (age 22) and inherited an IRA of her aunt (passed away in her 50’s). Since she has very little income this year I was hoping we might be able to convert this IRA with American Funds to a Roth. They told me this is not permitted. They are usually accurate in their advice but just thought I would double-check.
I suppose she could take a $5000+ distribution to fund a contributory Roth and pay the taxes on the beneficiary IRA distribution. That might be the best available option. She will not show much other income this year so I thought it would be a good time to get some money in her Roth.
She started the Roth in June 2003, over 5 years ago. Will the contributions be available to her if she needs them for an unseen emergency? (I know the earnings would not.)
Permalink Submitted by Alan Spross on Fri, 2008-08-22 22:56
A non spouse inherited IRA cannot be converted to a Roth IRA. See Pub 590, p 30.
Your idea is sound as long as she has enough earned income to cover a regular Roth contribution. The income from the inherited IRA would not count as earned income. But as a graduate, perhaps she will have a job to produce that earned income. This works very well in a low tax bracket. Also, the inherited IRA distributions are penalty free.
Her Roth could also provide emergency funds, since her regular contributions can be taken out without tax or penalty at any time.
Permalink Submitted by [email protected] on Sun, 2008-08-24 17:43
Thanks for the confirmation. I knew she needed earned income. Her job now is a seasonal one; she’ll probably be close to the $5000 in earned income. We’ll probably wait until closer to the end of the year before taking a distribution – should know her annual income by then.
Is there a chance IRS will consider allowing converting inherited IRAs in the future? Don’t see a big difference between this and a regular conversion – would think they would be interested in getting their tax dollars earlier since that appears to be the M.O. for traditional IRA conversions…
Permalink Submitted by Alan Spross on Mon, 2008-08-25 00:34
Yes, I think there is a chance that a non spouse will eventually be able to convert, although I don’t know how good those chances are. What has opened the door here is the unexpected provision in the Pension Protection Act that allows the non spouse beneficiary of an eligible retirement plan to convert that plan to an INHERITED Roth IRA, from which RMDs willl be required. This will probably create some demand to allow the same for an inherited traditional IRA by a non spouse. And as you say, it will accelerate revenue generation for the Treasury.
See att’d link to Notice 2008-30, Sec 824 of PPA, Q 7:
http://www.irs.gov/pub/irs-drop/n-08-30.pdf