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Empty inherited IRA, pay taxes, and put in Roth?

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  • Empty inherited IRA, pay taxes, and put in Roth?

    I've come across conflicting thoughts on this, and wanted to see what other WCIs think...

    My wife inherited part of an IRA from her grandmother (current value ~$8600), and we've been taking RMDs for the last two years. As a non-spouse beneficiary, I know she can't directly convert this to a Roth, but I'm wondering if it might make sense to take the entire distribution now, pay taxes, and then max out our Roth contributions. Taking the lump sum won't bump us into the next tax bracket, and I finish residency in 2019 so our salary/tax bracket will jump next year.

  • #2
    Given the size of the account, I think I would go with your plan instead of trickling it out over your wife's lifetime. As for what you do with the proceeds? Roth is good, paying off high-interest student loan or CC debt is even better.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      I agree with you on the Roth strategy. You could pay down student loans, but you can always refinance those to a lower rate which makes the Roth the more attractive option.


      • #4
        Here are some other benefits and brings up a suggestion for others with inherited retirement accounts.

        Generally you should only take the RMD from an inherited retirement account. However, there are two very good reasons for withdrawing more if your financial plan and savings rate does not otherwise allow you to maximize your other tax-advantaged accounts.

        1. The SCOTUS ruled that inherited retirement accounts should not be considered retirement accounts for asset protection purposes. ERISA qualified accounts receive no ERISA anti-alienation protection and no accounts receive any federal bankruptcy protection. Very few states have extended their protection to inherited retirement accounts.

        2. If you are a non-spouse beneficiary the RMD divisor. It is based on your age. That will not change when left to a new beneficiary and your spouse can not assume ownership. However if you effectively move those assets to your owned retirement accounts. Your spouse can assume ownership and your non-spouse beneficiaries can use their ages for the RMD divisor.

        Note: If you make equal traditional -> traditional withdrawals/contributions this will be a wash tax wise. If you go traditional -> Roth it will be taxable.


        • #5
          Such a small amount, and you're still in residency, just cash it out.  Make life simpler.


          • #6
            Close er out.