Inherited IRA

[Guest LAD]

Daughter (53 years old) inherits ($14,000) IRA from father.

Would converting to a Roth IRA eliminate the need to begin mandatory distributions? If not, would it still make sense, or should she just open a new Roth IRA, take the distributions and contribute them to the Roth?

Thanks

[BPickerCPA]

An inherited account cannot be converted to a Roth. It makes no sense to take a distribution to make a Roth contribution.

[John G]

Barry,

If the daughter is currently not funding an IRA due to lack of funds, it would seem to me that taking a forced distribution and redepositing the funds into a Roth has the advantage of sheltering the income that might be derived from the distributed funds and defering to a future date taking the principle. Since the daughter is 53, there could be many years before she may need the funds. Am I missing something?

[BPickerCPA]

John,

The amount of the mandatory distribution is quite small, on a $14,000 account balance. Once the distribution is taken, and taxed, the individual can use the funds to fund a traditional IRA, a Roth IRA, or anything else that they chose to do (within the limits of the law).

It would make sense, in my opinion, to take a distribution larger than mandatory, for the sole purpose of funding an IRA.

[Appleby]

Just a reminder of what may seem obvious to some of us:

Many of my customer’s with clients in this or similar situations- submit instructions to process a distribution from the traditional–inherited IRA and use the same assets to make a contribution to the Roth IRA. In many instances, the assets in the traditional IRA are illiquid (e.g. limited partnerships, private placements) or made up of other non-cash items.

These must be liquidated prior to the transaction being requested/processed, as contributions to IRAs must be made in cash.

[BPickerCPA]

Appleby,

As an aside, while the contributions must be in cash, distributions can be made in kind. I have seen many people who are not using the money to contribute to IRAs, who liquidate investments because they believe they need to distribute cash. In many cases, they then use the funds to buy stocks in their regular account, thus incurring double commissions.

[Appleby]

You’re absolutely correct- I too have seen that on many occasions.

[Guest LAD]

Thanks for all the feedback. Father had already begun mandatory distributions, so the daughter should use her (new IRS) life expectancy to minimize the distribution and make it a stretch IRA. Yes?

Thanks again