Can You Convert a Beneficiary IRA to a Roth IRA?

An inherited IRA, also known as a beneficiary IRA, is a retirement account that passes to an individual upon the original owner’s death. A common question for beneficiaries is whether this inherited account can be converted into a Roth IRA, which offers the potential for tax-free growth and withdrawals. The ability to convert an inherited traditional IRA to a Roth IRA depends entirely on the beneficiary’s relationship with the deceased account owner, a distinction that determines the available options and their tax consequences.

Understanding Your Beneficiary Type

The Internal Revenue Service (IRS) creates a clear distinction between a surviving spouse and all other individuals. This classification dictates the strategic choices you can make with the inherited funds, so identifying your category is the first step. A spousal beneficiary is the individual who was legally married to the IRA owner at the time of their death. This status grants the unique ability to treat the inherited IRA as their own, which is the primary option for those considering a Roth conversion.

Any beneficiary who is not the surviving spouse falls into the non-spouse category, which includes children, grandchildren, siblings, or unmarried partners. The rules for non-spouse beneficiaries are more restrictive regarding conversions. This primary distinction between a spouse and a non-spouse is the most important factor for determining conversion eligibility.

Conversion Rules for a Surviving Spouse

A surviving spouse has a level of flexibility with an inherited IRA not extended to other beneficiaries. The ability to convert hinges on the spouse’s decision to first assume ownership of the inherited account. The most direct route is to treat the inherited IRA as their own by retitling the account into the surviving spouse’s name or by executing a trustee-to-trustee transfer into the spouse’s existing traditional IRA. Once this is done, the funds are no longer considered inherited for conversion purposes, making a Roth conversion permissible.

After the IRA is legally treated as the spouse’s own, the conversion follows standard procedures where the spouse directs the custodian to move assets to a Roth IRA. This movement of funds is a taxable event. The simplest method is a direct conversion, where assets move from one custodian to another without the spouse taking possession of the money, which avoids potential pitfalls like the 60-day rollover rule and the one-rollover-per-year limitation.

A spouse can also choose to keep the IRA titled as an inherited IRA. If this path is chosen, the account cannot be converted to a Roth IRA. This choice permanently closes the door on a conversion for those specific assets.

Distribution Rules for a Non-Spouse Beneficiary

The options for a non-spouse beneficiary are significantly more constrained. A non-spouse beneficiary is explicitly prohibited from converting an inherited traditional IRA into a Roth IRA. The account must remain titled as a beneficiary IRA, for example, “(Deceased’s Name) IRA for the benefit of (Beneficiary’s Name),” and be managed according to rules for non-spouses. For most non-spouse beneficiaries, the SECURE Act requires the entire balance of the inherited IRA to be withdrawn by the end of the tenth year following the year of the original owner’s death.

While a direct conversion is forbidden, a non-spouse beneficiary can take a taxable distribution from the inherited IRA. After paying income tax, they can use the cash to contribute to their own Roth IRA, provided they have earned income and meet IRS contribution limits. This is not a conversion; it is a distribution followed by a separate contribution subject to annual maximums.

Taxation of Inherited IRAs and Conversions

The tax treatment of an inherited IRA depends on the type of account and the actions you take as a beneficiary. Any distribution from a traditional inherited IRA is considered taxable income. The amount you withdraw is added to your income for that year and taxed at your ordinary income tax rates. If the deceased had a Roth IRA, qualified distributions from the inherited Roth IRA are tax-free, assuming the original account was open for at least five years.

For a surviving spouse who converts an inherited traditional IRA, the value of the assets moved into the Roth IRA is added to their gross income for that year. This can result in a substantial one-time tax bill and potentially push the spouse into a higher tax bracket. The pro-rata rule also applies if the original IRA contained both pre-tax and after-tax contributions. When a conversion happens, the withdrawal consists of a proportional amount of taxable and non-taxable money.

The Roth IRA 5-year rule is another consideration for spousal conversions. A separate 5-year clock applies to each conversion, and if converted funds are withdrawn within five years, a 10% early withdrawal penalty may apply if the account owner is under age 59 ½.