Can You Convert an Inherited IRA to a Roth IRA?

Not unless you're inheriting the IRA from your deceased spouse

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If you've just inherited a traditional IRA and you're savvy about retirement savings options, you might be wondering whether you can convert the inherited IRA into a Roth IRA. After all, Roth IRAs come with a lot of advantages, such as tax-free income later in life and more control over when you make withdrawals.

The short answer is: You can't. Unless you're inheriting the IRA from your deceased spouse, you aren't able to convert an inherited IRA into a Roth IRA. But that doesn't mean you're out of options. Read on to learn what they are, or how you can convert the IRA if you are a spouse.

Key Takeaways

  • Roth IRAs offer several advantages, like tax-free income later on and more control over when you make withdrawals.
  • Unless you're inheriting the IRA from a spouse, you won't be able to convert an inherited IRA into a Roth IRA.
  • Depending on how you inherited the IRA and your situation, you may need to empty the inherited IRA within five to 10 years or make regular, even withdrawals.

Can You Convert an Inherited IRA to a Roth IRA?

If you're inheriting an IRA from someone who was not your spouse, you generally won't be able to convert it into a Roth IRA. Depending on whether the person specifically designated you as a beneficiary, and barring a few exceptions, such as if you're disabled or a minor, you'll generally need to empty the inherited IRA account within five to 10 years.

What if I'm Inheriting My Spouse's IRA?

If you're inheriting the IRA from a spouse, however, the rules are different. In this case, the IRS offers two options. You can keep the inherited IRA in your spouse's name, with yourself listed as the beneficiary, which requires you to take required minimum distributions (RMDs) that you will owe taxes on.

Alternatively, the IRS allows you to treat the inherited IRA as your own by listing yourself as the account owner, then you can do anything with it that you'd normally be allowed to do—including converting it into a Roth IRA.

How To Convert Your Late Spouse’s IRA to a Roth

The rules for converting an inherited IRA from your spouse into your own Roth IRA are basically the same as any other Roth IRA conversion, with a few differences. Here's how it will work:

  1. Make sure you can handle the tax impact: You'll owe taxes on the amount you're converting. Make sure you know how much this will add to your tax bill, and that you can afford this upfront. Alternatively, you can do the Roth conversion over several years to spread out the tax impact.
  2. Make sure you have a Roth IRA: You'll need to have a Roth IRA in which to park the money. If you don't already have one open, do that before you get started.
  3. Get a copy of your spouse's death certificate: You'll need a way to prove that your spouse has passed away, so you can take over the account. A death certificate for your spouse will work.
  4. Contact your spouse's investment company: Get a hold of the investment firm that manages your spouse's IRA to see what requirements it has. For example, you may need to sign a spousal claim form for IRAs.
  5. Initiate the Roth conversion: You have two options for converting your spouse's inherited IRA into your own Roth IRA. You can do a direct IRA transfer between your spouse's account and yours, or you can do an indirect transfer, where you'll be given a check that you have to deposit into your own Roth IRA.
  6. Pay the taxes: At the end of the year, you'll pay the taxes owed on the Roth conversion when you file your tax return.

Alternatives to Converting an Inherited IRA to a Roth IRA

If you inherited an IRA from someone who was not your spouse, your options depend on a few things, like whether the person who passed away specifically listed you as the beneficiary. You'll fall into one of these three camps, with the following options:

  • You were specifically designated as the beneficiary: In this case, you'll need to empty the IRA account that you inherited within 10 years.
  • You're a designated beneficiary, and you meet certain conditions: If you're a disabled person or chronically ill, close in age to the person who passed (10 years difference or less), or a minor, you can take even distributions from the inherited IRA over your remaining life expectancy.
  • You inherited the IRA without being specifically named as a beneficiary: If a court decides you should inherit the IRA, your options depend on the original account owner. If the person who died already had started taking RMDs, you'll get distributions according to their schedule. If not, you'll need to empty the account within five years.

As you can see, you might be required to immediately start withdrawing the money from an IRA someone bequeathed to you, instead of when you retire. If you did that from your own IRA, you'd face a 10% early withdrawal penalty, but because this is a special case, that penalty is waived for inherited IRAs.

If you're required to make withdrawals from your inherited IRA based on your situation, make sure you do this. If you don't take them, you'll pay a penalty of 50% of the amount you were supposed to withdraw.

However, you will need to include any withdrawals in your taxable income for that year and pay income taxes on it. So if you're inheriting a large amount and you're on a time limit, you can spread out the distributions to limit the tax impact. For example, if you inherit $1,000,000 as a designated beneficiary, you can withdraw $100,000 per year to limit having to pay taxes on 1 million dollars' worth of income at once.

Once you withdraw the money, you can do whatever you want with it—even move it into your own Roth IRA with normal contributions, as long as you qualify. You'll still end up with more money in your Roth IRA; it just won't be as efficient as converting the inherited IRA on its own.

Frequently Asked Questions (FAQs)

When is the best time to start an IRA conversion to a Roth?

Your situation and your goals determine when it's best to convert to a Roth IRA. If you're close to  applying for Social Security and Medicare (two years out or less), it's best to wait until after you start receiving those benefits so the conversion doesn't affect these premiums and taxes. If you're not earning much but your income will increase later, it's best to convert now, so you won't have to pay as much in taxes on the Roth conversion.

When do you pay taxes on a Roth IRA conversion?

You'll pay taxes on your Roth IRA conversion when you file your taxes for that year. For example, if you do a Roth IRA conversion in January of 2023, you won't pay the taxes until you file your return some time between Jan. 1 and April 15, 2024.

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