Can I Rollover an Inherited IRA to a Roth IRA?
Inheriting an Individual Retirement Account (IRA) can be a significant financial windfall, but it also comes with a set of rules and regulations that you need to understand. One common question that arises is whether you can rollover an inherited IRA to a Roth IRA. The answer is not straightforward and depends on several factors, including the type of inherited IRA, your relationship with the deceased account holder, and the tax implications involved.
Understanding Inherited IRAs
When you inherit an IRA, it becomes an inherited IRA. The rules governing these accounts differ from traditional IRAs, as the inherited funds are subject to different distribution requirements. Generally, inherited IRAs are divided into two categories: non-spousal inherited IRAs and spousal inherited IRAs.
Non-Spousal Inherited IRAs
If you inherit an IRA from someone other than your spouse, it is considered a non-spousal inherited IRA. In this case, you have several options, including taking a lump-sum distribution, rolling over the funds to a traditional IRA, or transferring the funds to a Roth IRA.
Rollover to a Roth IRA
Can you rollover an inherited IRA to a Roth IRA? The answer is yes, but with some caveats. To rollover an inherited IRA to a Roth IRA, you must first take a distribution of the funds from the inherited IRA. This distribution will be taxed as ordinary income in the year it is received. Once you have the funds in hand, you can then roll them over to a Roth IRA.
Considerations and Tax Implications
Before deciding to rollover an inherited IRA to a Roth IRA, there are several factors to consider:
1. Tax Brackets: If rolling over the inherited IRA to a Roth IRA would push you into a higher tax bracket, it may not be the best option.
2. Required Minimum Distributions (RMDs): If you choose to roll over the inherited IRA to a Roth IRA, you must continue taking RMDs from the inherited IRA according to the applicable rules.
3. Contribution Limits: You can only contribute to a Roth IRA if your income is below certain limits. If you exceed these limits, you may not be able to rollover the inherited IRA to a Roth IRA.
Conclusion
In conclusion, you can rollover an inherited IRA to a Roth IRA, but it is essential to understand the tax implications and consider your financial situation before making a decision. Consulting with a financial advisor or tax professional can help you determine the best course of action for your specific circumstances.
