Converting an Inherited IRA

As soon as a person inherits an IRA, they have several choices available to them. Before making any decisions or taking action of their own accord, it’s wise to consult a fiduciary financial professional as each situation varies greatly.

Kane noted that in cases where a deceased account owner was married, their surviving spouse can continue following the same distribution rules of their IRA as before; otherwise non-spousal beneficiaries must either take out an inheritance lump sum payment or open an inherited IRA account in their name.

What are my options?

Deciding how to handle an inherited IRA can be complicated and could impact your tax situation; that’s why it’s advisable to consult with an advisor or tax professional when making this decision.

If you are married, an IRA in both of your names could allow for tax deferment until retirement and avoid early withdrawal penalties under age 59 1/2. This way, both accounts could benefit.

Non-spouse beneficiaries have more limited options when it comes to receiving benefits; you can either take a lump-sum distribution or open an inherited IRA and start taking distributions based on the original owner’s life expectancy.

The latter option can help smooth out sudden spikes in income by spreading it over 10 years; however, you will miss out on decades of tax-advantaged compound growth potential. Depending on your goals and lifestyle choices, this might be beneficial; just don’t rush into it blindly!

Can I convert my IRA to a Roth IRA?

Passed-down IRAs can be complex. Non-spouse heirs must deplete funds within 10 years and withdrawals will be taxed according to normal income tax rates; to circumvent this, some may opt to convert an inherited IRA into a Roth.

This option works best if you are over age 59 1/2 and don’t plan to withdraw any funds before age 59 1/2 from either an inherited IRA or non-inherited IRA. That way, the 10% early withdrawal penalty wouldn’t apply as often – saving yourself both tax dollars and hassle!

Converting an inherited IRA into a Roth IRA follows a similar procedure to that of rolling over another type of retirement account and is accomplished using what’s known as a trustee-to-trustee transfer. You will need to contact both financial institutions involved and ascertain what paperwork needs to be submitted prior to moving forward; for added peace of mind it would be prudent to consult an experienced financial professional first.

Can I convert my IRA to a traditional IRA?

As inheriting an IRA can be a complex and potentially taxing experience, you should always seek advice from an independent financial professional before making decisions regarding it. Furthermore, taking professional advice when considering the 10-year rule can be especially crucial.

Non-spouse beneficiaries typically must withdraw the entire balance of an inherited IRA within 10 years; however, spouses can treat theirs as their own and create an inherited IRA account to roll over assets.

Spouses have the option to receive distributions either as a lump sum payment or through trustee-to-trustee transfer of funds, though if this latter route is chosen it should take place within 60 days or it will be taxed as income.

As 2019 arrives, it is wise to review the rules surrounding inherited IRAs to ensure you’re making the most of your retirement savings options. If you have questions about any aspect of this topic or how it applies specifically to your circumstances, get in touch with an experienced MissionSquare advisor now for guidance and advice.

Can I convert my IRA to a SEP IRA?

SEP IRAs provide tax-deferred retirement accounts to small business owners. Employee contributions are deducted from income for tax purposes and contribution limits are typically higher than traditional IRAs.

Your IRA can be converted to a SEP IRA as long as its plan accepts rollovers from other tax-deferred accounts such as traditional, SIMPLE, and Roth IRAs. Unfortunately, conversion from an IRA into a Roth would count as moving from pretax savings into after tax savings and would therefore be taxed accordingly.

If you are the beneficiary of a deceased SEP IRA owner, under normal circumstances it must be empty within 10 years. There may be exceptions if disabled or chronically ill persons qualify, or if the original owner was near in age (10 years difference or less). Under those conditions, distributions may be made over your life expectancy period. It’s essential that these options be discussed with your IRA custodian and reviewed with regard to distribution rules from an inherited IRA account on the IRS website for comprehensive rules regarding distributions from an inherited SEP IRA account.

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