Can You Do a Roth Conversion From an Inherited IRA?

An inherited Individual Retirement Arrangement, or IRA, is a retirement account that a beneficiary receives after the original account owner passes away. The rules governing these accounts depend heavily on the beneficiary’s relationship to the deceased. Separately, a Roth conversion is the process of moving funds from a traditional, pre-tax retirement account to a post-tax Roth IRA. This action requires the account owner to pay ordinary income tax on the amount converted in the year the conversion takes place.

Conversion Eligibility for Beneficiaries

The ability to convert an inherited traditional IRA to a Roth IRA depends entirely on the beneficiary’s relationship to the original owner. Only a surviving spouse can perform a conversion. This distinction is based on the principle of ownership, as spouses are the only beneficiaries permitted to treat the retirement assets as their own.

Spousal Beneficiaries

A surviving spouse can convert inherited traditional IRA funds to a Roth IRA, but not directly from the inherited account. The spouse must first elect to treat the inherited IRA as their own. This process involves rolling the assets from the deceased’s IRA into a new or existing traditional IRA in the spouse’s name.

This action removes the “inherited” designation and gives the spouse full ownership rights. Once the funds are legally titled in the spouse’s name, they are no longer subject to the rules for inherited IRAs. The assets can then be converted to a Roth IRA following standard procedures.

Non-Spousal Beneficiaries

Any beneficiary who is not the deceased’s spouse, such as a child or other relative, is prohibited from converting an inherited traditional IRA to a Roth IRA. The reason for this restriction is the ownership structure of the account. A non-spousal inherited IRA must remain titled in the name of the deceased owner for the benefit of the beneficiary, often designated as “John Doe IRA FBO (For Benefit Of) Jane Smith.” Because the beneficiary never assumes direct ownership, they cannot perform actions reserved for an account owner, including a Roth conversion.

An exception exists for inherited workplace retirement plans, such as a 401(k) or 403(b). A non-spousal beneficiary of one of these plans is permitted to roll the funds directly into an inherited Roth IRA. This transaction is a taxable event, and the beneficiary must pay income tax on the converted amount in the year of the rollover.

The Roth Conversion Process for Spouses

For a surviving spouse, the conversion process involves a distinct sequence of actions to ensure the assets are handled correctly.

Treating the IRA as Your Own

The first step is for the surviving spouse to formally treat the inherited IRA as their own. This is done by instructing the IRA custodian to move the assets from the inherited IRA into a traditional IRA in the spouse’s name. The funds can be rolled into an existing traditional IRA or a new one. A direct trustee-to-trustee transfer is the most common method, moving funds between accounts without the spouse taking possession.

Executing the Conversion

Once the funds are in the spouse’s own traditional IRA, the conversion can be executed. The spouse instructs the custodian to move a designated amount from the traditional IRA to a new or existing Roth IRA. This transfer is the action that triggers the tax liability for the conversion.

Tax Reporting and Implications

The amount converted is added to the spouse’s gross income for that tax year and taxed at their ordinary income tax rates. The financial custodian reports this transaction to the spouse and the IRS by issuing Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.”

To complete the reporting, the spouse must file Form 8606, “Nondeductible IRAs,” with their federal income tax return. Part II of this form is used to report the amount converted from a traditional IRA to a Roth IRA and calculate the taxable portion. Filing this form is also necessary to track the basis in the Roth IRA, ensuring the funds are not taxed again upon withdrawal.

Required Actions for Non-Spousal Beneficiaries

Since non-spousal beneficiaries cannot convert an inherited IRA, they must follow mandatory withdrawal rules. The framework for these distributions was established by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

The 10-Year Rule

For most non-spousal beneficiaries who inherited an IRA from someone who passed away in 2020 or later, the SECURE Act implemented a 10-year rule. This rule requires the entire balance of the inherited IRA to be withdrawn by the end of the 10th year following the year of the original owner’s death. For example, if the owner died in 2025, the beneficiary must empty the account by December 31, 2035.

The application of the 10-year window depends on when the original owner passed away relative to their Required Minimum Distribution (RMD) beginning date. If the owner died before their RMDs began, the beneficiary can wait until the tenth year to withdraw the entire balance. However, if the owner died after their RMDs had started, the beneficiary must take annual RMDs for years one through nine and withdraw the remaining balance in year ten.

Taxation of Withdrawals

Each withdrawal a non-spousal beneficiary takes from a traditional inherited IRA is included in their ordinary income for that year and taxed at their personal rate. The IRA custodian reports these distributions on Form 1099-R. The 10% early withdrawal penalty does not apply to distributions from an inherited IRA, regardless of the beneficiary’s age.

Exceptions to the 10-Year Rule

The SECURE Act created a category of “Eligible Designated Beneficiaries” (EDBs) who are exempt from the 10-year rule. EDBs include minor children of the account owner, individuals who are disabled or chronically ill, and beneficiaries not more than 10 years younger than the deceased. These individuals can take distributions over their own life expectancy, often called a “stretch” IRA.

For a minor child of the owner, distributions are taken over the child’s life expectancy until they reach age 21. At that point, the 10-year rule is triggered, and the account must be emptied by the time the beneficiary turns 31.