Inherited IRA and Roth Conversion Pro-Rata Rule

Reader Cheri asked in my previous post The Backdoor Roth IRA: A Complete How-To:

I am curious how an inherited IRA would factor into a conversion, if at all?

That’s a great question. The IRS Form 8606 says

Enter the value of all your traditional, SEP, and SIMPLE IRAs as of December 31, … …

That’s the pro-rata rule. When you convert a traditional IRA to a Roth IRA, it’s deemed to have come from all your traditional, SEP, and SIMPLE IRAs proportionally when you calculate how much of the conversion is taxable. So the question comes down to:

Is an inherited IRA yours?

Because I don’t have an inherited IRA, I never paid attention to inherited IRAs. I consulted The IRA Owner’s Manual by Jim Blankenship, CFP, EA. I also emailed Mr. Blankenship and he confirmed my understanding.

The short answer is no, an inherited IRA isn’t yours unless you are the spouse of the deceased AND you made it yours through some action or inaction.

If you are not the spouse of the deceased, an inherited IRA is never yours. You can’t even make it yours. An inherited IRA is titled as “[Original Owner], deceased, IRA, FBO [Your Name].” It makes it clear that you are not the owner, but just a beneficiary.

If you are the spouse of the deceased, you can make an inherited IRA yours if:

  • you re-title it to your own name; or
  • you make a contribution to it; or
  • you don’t take the required minimum distribution from it

If you are the spouse of the deceased but you don’t do any of the above, the inherited IRA is still not yours.

Therefore when it comes to converting your own traditional IRA to Roth, an inherited IRA that isn’t yours is not included in the calculation for the percentage converted (the “pro-rata rule”). If you made the inherited IRA yours, then it will be included in the calculation.

What if you want to convert the inherited IRA to Roth as well?

If you are not the spouse, you can’t convert an inherited IRA to Roth. The law doesn’t allow it. You have to keep it separate as an inherited IRA and draw it down with required minimum distributions.

If you are the spouse, you will have to first make the inherited IRA you own IRA before you convert it to Roth. The easiest way to make it your own would be re-titling the inherited IRA to your own name.

More on inherited IRAs from The IRA Owner’s Manual by Jim Blankenship, CFP, EA:

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Comments

  1. Andy says

    TFB – you mention inherited IRAs and converting to a Roth, but you don’t seem to mention – in a direct manner – that an individual cannot convert an inherited IRA to a Roth. I believe that to be true (at least for a non spouse), and if so it needs to be stated clearly. I didn’t see a clear statement of that fact in the links at Jim Blankenship’s site either.

    I realize the article isn’t specifically about converting, but it mentions what you CAN do with an inherited IRA, just not what you CANNOT do with an inherited IRA.

  2. Harry Sit says

    @Andy – Thank you for the note. This post concerns converting your own IRAs to Roth while having an inherited IRA. The conclusion is that the inherited IRA isn’t part of the calculation unless you made the inherited IRA your own (only the spouse can do that).

    As to the inherited IRA itself, if you can’t or don’t make it your own (again, only the spouse can), you can’t convert it to Roth. It has to be drawn down with Required Minimum Distributions. This is in Jim Blankenship’s The IRA Owner’s Manual, although you can’t easily tell from the article title.

    Roth Conversions for Inherited Retirement Plans

    I added this piece to the post.

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