Can You Convert an Inherited IRA?

Can you convert an inherited IRA

As the rules surrounding an IRA inheritance can be complex, consulting with a financial advisor may help clarify what options exist to you.

Dependent upon how the original account owner died, non-spouse beneficiaries may be forced to withdraw all their inheritance within 10 years or face a significant income tax bill. To ease this burden, consider switching over to a Roth IRA as soon as possible.

What is an IRA?

IRAs are tax-advantaged accounts that allow individuals to save for retirement with tax advantages and the flexibility of withdrawing funds when necessary.

When someone dies, their IRA assets can be distributed among their beneficiaries. There are various options available depending on how closely related heirs were to the deceased and whether or not the account is traditional or Roth; ultimately the best solution depends on an individual’s tax situation and goals – therefore consulting with a tax professional before making this decision is vital.

If non-spouse beneficiaries inherit an IRA, they must deplete it within 10 years or face steep withdrawal taxes. One way to potentially mitigate tax costs would be converting an inherited IRA into a Roth, which allows funds to grow tax free for decades – so be sure to speak to a tax advisor before making decisions regarding an inheritance of this nature.

What is an IRA rollover?

An IRA rollover refers to the process of moving money from one retirement account to another. You can do it directly or indirectly; with indirect rolling over, your employer plan administrator sends you a check that must be deposited into your new IRA within 60 days or the IRS will tax its distribution as distribution income.

Indirect rollovers generally use pre-tax dollars, and if you withdraw these funds before age 59 1/2 they are subject to income taxes and an early withdrawal penalty of 10% (with certain exceptions such as higher education expenses or home purchases). Direct rollovers must also be reported to the IRS via an IRS Form 5498 provided by your new account provider.

For direct rollovers, your new IRA provider typically provides clear instructions on how to complete and submit the transaction. This way, it is less likely that you mishandle or misplace paperwork for tax time.

Can I convert an IRA?

If you inherit an IRA, there are a few different strategies you could pursue when dealing with it. Either withdraw the funds from their original account and pay taxes or rollover them into either your own traditional or Roth IRA (depending on their type) or into another employer-sponsored retirement plan like 401(k).

Non-spouse beneficiaries who inherit an IRA typically must empty it within 10 years after its original owner dies if it’s traditional and five years if Roth, but you could spread out withdrawals over your lifetime by employing a staggered conversion strategy in lower income years.

Rules regarding Individual Retirement Accounts (IRAs) differ depending on your entity type – trusts, estates or nonqualified organizations – making it crucial to consult with a tax advisor regarding your specific situation. Also keep in mind that it is prohibited to combine accounts owned by one individual; thus if you inherit multiple inherited IRAs then they must be separated to avoid penalties.

How do I convert an IRA?

Beneficiaries who receive an IRA should carefully consider their options when inheriting it. Spouses have the option of taking ownership and treating it like it had always been theirs, while non-spouse beneficiaries typically transfer assets into an inherited IRA account and liquidate within 10 years – usually by taking withdrawals over either their life expectancy or that of the deceased owner’s.

However, while your first instinct may be to accept a lump sum distribution from an estate, doing so could push heirs into higher tax brackets and limit future growth from deferred income taxes. Therefore, it can often make more sense to transfer the funds into a Roth IRA – although beneficiaries must compare their individual tax rate against that of the original owner before taking any steps themselves and consult with a financial professional regarding these inherited IRAs as the rules surrounding them can often be complex and ever-evolving.


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