Converting to an Inherited Roth IRA

Wednesday, September 30, 2015

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

A question we are frequently asked is, “can I convert my inherited retirement plan funds to an inherited Roth IRA?” The answer is no – and yes.

Can you convert an inherited IRA to an inherited Roth IRA? No. The tax code prohibits a non-spouse beneficiary from doing a rollover and a Roth conversion is treated as a rollover for income tax purposes. So, there is no Roth IRA conversion for inherited IRAs.

But, can you convert an inherited employer plan such as a 401(k) to an inherited Roth IRA? Yes. In this case, the tax code makes an exception to the non-spouse rollover rule. It allows a non-spouse employer plan beneficiary to do a direct rollover to an inherited IRA account, including an inherited Roth IRA account. The beneficiary must be a designated beneficiary – one who is named on the beneficiary form, not a beneficiary who inherits through the estate. If both the direct rollover and the first RMD are completed by December 31 of the year after the death of the plan participant, then the beneficiary can use the stretch options available in the inherited IRA or inherited Roth IRA account.

Should you do a Roth conversion of inherited employer plan assets? There are many factors to consider. Among them are the questions of how you will pay the income tax on the conversion, and how the inclusion of the converted amount in income will affect your tax return. You will want to also consider the fact that you will have required distributions on the inherited Roth account.

A Roth conversion can be recharacterized (reversed) up to October 15 of the year after the conversion. This will remove the income tax due on the conversion. The converted employer plan assets in the inherited Roth IRA will have to go to an inherited IRA; they cannot go back to the employer plan. Once they are in an inherited IRA, they cannot be reconverted to an inherited Roth IRA.
 

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