Inheriting a retirement account can be a great opportunity to boost your financial journey towards financial freedom. Converting some of the funds from an inherited IRA into a Roth account can help minimize taxes on retirement income. When inheriting an IRA from someone other than a spouse, there are strategies that can help transfer some or all of the assets into a Roth account, allowing for tax-free growth and withdrawals in the future.
If the inherited IRA is from a deceased spouse, the IRS allows the account to be treated as your own, enabling you to move the funds into an account in your name. This opens up the option to do Roth conversions and transfer some or all of the funds. The process may involve working with the investment company to complete the necessary paperwork to open a new IRA in your name, followed by following the standard guidelines for a Roth conversion tax-planning strategy.
There are alternative ways to get inherited IRA assets into a Roth account for non-spouse beneficiaries. Required minimum distributions from the inherited IRA can be used to top off Roth contributions for the year if maximum contributions are not already being made. Additionally, mega-backdoor Roth contributions may be an option if the workplace 401(k) allows for them. These strategies can help maximize the benefits of converting inherited IRA funds into a Roth account.
When considering a Roth conversion, spreading the conversions over several tax years can be beneficial, especially if the inherited IRA is large. Some optimal times for a conversion include low-income tax years, the period between retirement and needing to take RMDs on personal accounts, when expecting to be in higher tax brackets in the future, or before moving to a state with higher taxes. Working with a financial planner can help develop a strategy to make the most of the inheritance and pay the fewest taxes over a lifetime.
Overall, the younger you are, the more advantageous Roth conversions can be. Inheriting a substantial IRA or 401(k) presents an opportunity to work with a financial planner to create a strategy that aligns with your financial goals and supports long-term financial freedom. By taking steps to convert inherited IRA funds into a Roth account strategically, you can optimize tax benefits and set yourself up for a secure financial future.
