29 Oct Can I convert an inherited IRA to a Roth IRA?

Q. May I convert a non-spousal inherited IRA to a Roth account? I elected to use the stretch option for a traditional IRA I inherited from my father in 2010. I would now like to withdraw the remaining funds, pay the taxes, and convert the funds to a Roth account.
— Planning

A. Nope.

You cannot convert a non-spousal, inherited IRA to a Roth account.

The only time that you can do this is if you were the spouse of the IRA owner, said Jeanne Kane, a financial planner with JFL Total Wealth Management in Boonton.

“That’s because if you’re the spouse, you can assume the IRA you inherit from your spouse as your own,” she said. “You can convert your own IRA.”
Non-spouse options when you inherited an IRA are to take a lump sum distribution or open an inherited IRA, she said. Inherited IRAs can’t be converted into Roth IRAs.

If you had been able to do a Roth conversion, you’d pay taxes on the amount of money converted today and never pay taxes on the amount converted, or its growth, ever again, Kane said.

“We recommend that anyone doing a Roth conversion pay taxes from outside the IRA, otherwise you reduce your pot of money that’s going to grow tax free,” she said.

In 2010, when you opened an inherited IRA and chose the “stretch” option, you set up a stream of distributions over the course of your lifetime, she said. You must take out a minimum distribution each year, but you can always take out more.

Kane said you should pay attention to your tax bracket if you want to take the remaining balance out of the inherited IRA.

“If the balance is large, it could bump you into a higher tax bracket,” she said. “The money that you take out of the inherited IRA is considered taxable income and taxed at ordinary income tax rates.”

If you get bumped into a higher bracket, you’ll owe more in taxes than you would if you continued to systematically take your annual required distributions, she said.

“You could end up paying twice as much or more in taxes if you decide to take out the balance, she said. “It’s important to do the math before pulling the money out.”

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This story was originally published on Oct. 29, 2020.

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