Is a Roth Conversion From an Inherited IRA Possible?

Receiving an Individual Retirement Account (IRA) from a loved one comes with specific regulations that govern how and when the funds must be accessed. Separately, a Roth conversion is a financial strategy where funds from a traditional, pre-tax IRA are moved into a post-tax Roth IRA, requiring the account holder to pay income tax on the converted amount.

The appeal of a Roth IRA is the potential for tax-free withdrawals in retirement. This leads to a question for those who inherit a traditional IRA: can these funds be converted to a Roth IRA? The answer dictates the pathways for managing the assets and their tax consequences.

Conversion Eligibility for Beneficiaries

The ability to convert an inherited traditional IRA to a Roth IRA depends on the beneficiary’s relationship to the original account owner. Federal tax law creates a clear distinction between a surviving spouse and all other individuals, such as children, siblings, or friends, who are designated as non-spouse beneficiaries.

Spousal Beneficiaries

A surviving spouse is the only type of beneficiary who has the option to convert an inherited traditional IRA to a Roth IRA. This capability requires the spouse to first make a specific election to treat the inherited IRA as their own. By doing so, the spouse absorbs the inherited assets into their own retirement savings by retitling the account in their name. Once this step is complete, the funds are governed by the rules applicable to the spouse’s own IRA, including the option to execute a Roth conversion.

Non-Spouse Beneficiaries

For any beneficiary who is not the decedent’s spouse, a conversion of an inherited traditional IRA to a Roth IRA is prohibited. The Internal Revenue Service (IRS) does not permit a non-spouse beneficiary to change the tax-deferred nature of the inherited account. The account must remain titled as an inherited IRA, which prevents non-spouse beneficiaries from initiating a taxable event to create a source of future tax-free income.

The Spousal Conversion Process

For a surviving spouse, the path to converting an inherited IRA is a structured process. After the spouse has formally elected to treat the IRA as their own, the conversion can proceed. The spouse must have a Roth IRA established in their name and then direct the financial institution to move the assets from the traditional IRA to the Roth IRA.

This transfer is a taxable event, with the entire converted amount included in the spouse’s adjusted gross income for that tax year. Any Required Minimum Distributions (RMDs) for the year must be handled prior to the conversion, as RMD amounts themselves cannot be converted.

Alternatives for Non-Spouse Beneficiaries

Since non-spouse beneficiaries are prohibited from converting an inherited IRA, they must follow rules focused on distributing the assets. The main regulation for most is the 10-year rule, established by the SECURE Act of 2019. This rule mandates that the entire balance of the inherited IRA must be withdrawn by the end of the tenth year following the year of the original owner’s death.

The flexibility of the 10-year rule depends on whether the original account owner had started taking their own Required Minimum Distributions (RMDs) before they passed away. This distinction determines whether the beneficiary must take annual withdrawals during the 10-year period.

If the original owner died before their RMDs began, the beneficiary has flexibility. They can take distributions at any time and in any amount they choose, as long as the entire account is emptied by the end of the tenth year. However, if the owner had already started taking RMDs, the beneficiary must also take annual RMDs for years one through nine. The remaining balance must then be withdrawn by the final deadline.

If the inherited account was already a Roth IRA, the situation for a non-spouse beneficiary changes from a tax perspective. While the same 10-year distribution rule applies, all qualified distributions from the inherited Roth IRA are tax-free. This is because the original account owner made contributions with post-tax dollars. The beneficiary must still empty the account within the 10-year timeframe but will not owe any federal income tax on the distributions.