Inherited IRA (Non-spouse beneficiary)

Submitted by Christopher Niessen on Wed, 2022-12-28 03:21

I inherited a traditional IRA this year, and Prudential assured me that I could convert it to a Roth IRA. (I am not a qualified beneficiary.) I can find nothing that suggests that I am actually allowed do this, but they assure me that its fine and legal. (I called, they checked, and assured me that its fine.) I selected that option on their paperwork, and the money was transferred to fidelity to an inherited Roth IRA account.
The custodian of the account (Fidelity) doesn’t think that this was allowed, but they received the money and put it into the Roth account. I had requested that Prudential withhold federal and state income tax (they did not). Do I need to get the funds recharacterized by the custodian as a traditional inherited IRA, or do I pay the taxes and move on with it as a inherited Roth IRA?
Thanks!



Submitted by Alan - IRA critic on Wed, 2022-12-28 03:55

Bad news. An inherited IRA for a non spouse cannot be converted to an owned or inherited Roth IRA, but this is allowed if the inherited account was not an IRA (eg a 401k plan). If it was an IRA and you are a non spouse beneficiary, unfortunately, you have a taxable distribution and an excess contribution to the Roth IRA that must be removed. Prudential did you no favors, and neither did Fidelity. A conversion can no longer be recharacterized, so this ineligible conversion must be treated as a regular Roth IRA excess contribution. If the amount was significant, you may also be faced with an underpayment penalty because of the taxable income and no withholding.

Submitted by Christopher Niessen on Wed, 2022-12-28 15:57

Hi-First, thank you for the quick response.  Second, I’d like to apologize for my imprecise use of language.  Your response made me realize I wasn’t appreciating the distinction between the rules for IRA and “not IRA” retirement accounts.  I called Prudential, and the account was actually from a 403(b) plan.  Given this new information, is the convesion to an inherited Roth now actually allowed?  I understand that the fact that Prudential didn’t withhold the tax as I had requested is its own problem, but the conversion to an inhertited Roth is actually OK?  Sorry for the confusion; I’m trying to figure this out as I go along…  

Submitted by Alan - IRA critic on Wed, 2022-12-28 16:47

  • Yes, a non spouse beneficiary can do a direct rollover from an inherited 403b to an inherited Roth IRA, so you are OK. These direct rollovers are not subject to withholding, therefore you will have to come up with the taxes by other means, either withholding from other income or quarterly estimates. It’s too late now for withholding for 2022, therefore if you will not have paid in enough, you could still pay a quarterly estimate by 1/15 that would reduce the penalty. Another way to reduce any underpayment penalty if this rollover was done late in the year is by filing the annualized income installment form 2210 AI. This form reduces the penalty by assigning your income to the quarter in which it was generated. This form is complex, and you will not like it. All this depends on the amount of taxable income this rollover produced, in relation to taxes you have already paid for 2022.
  • Your inherited Roth IRA will be subject to RMDs within the 10 year rule or if the 403b owner passed prior to their RBD (around age 72), there are no annual RMDs but the account must be drained in 10 years. Since the taxes are already incurred by your Roth rollover, you might as well not take distributions until the end if the owner passed prior to their RBD.

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