Roth Conversion of Inherited IRA

No. See Publication 590.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

No one can convert an inherited IRA to a Roth. (A spouse will have the opportunity to take the IRA as her own, and once that's done, it's not designated 'inherited,' it's treated the same as her other IRA money.

Remember, the 5 year old has a kiddie tax. The RMD for the 5 year old has a divisor of 77.7 or 1.287%. On $25K, we're talking an RMD of $322, less than 1/3 of the $1000 Kiddie level before even the 10% rate applies. But, since the Kiddie tax applies to a dependent student up to age 23, and in 18 years, and we know the market will grow 20%+ per year till then (minor joke) the parents should simply take $1000 (assuming no other income for the child) each year and move it into the child's name outside the IRA.

This strategy would probably stay ahead of the RMD pushing Jr into the Kiddie rate of 10%.

When my daughter turned 11 and started baby sitting, I opened a Roth IRA for her. The babysitting income justified the deposits, and we used that custodial money to fund it, a bit each year. To be clear, a child needs earned income to open an IRA, but the actual dollars don't require a paper trail, you can tell your child, "I know you work hard and I am not asking you to save that money for retirement, but, in return for your keeping contemporaneous notes on that income, date, customer, hours worked, I will match it 100%." When the child turns 18 or 21, s/he will have their own IRA funded with the Inherited IRA withdrawals, justified by their own income earned as a teen.

The strategy you pose is good, but for the scenario I stated, not because they can convert anything. It's the $1K/$1K Kiddie tax that makes it desirable.

Thanks. I knew there was some kind of kiddie tax but didn't know if it would apply here.

I just spoke to the kid's father today and he said he'd just as soon not have money in the kid's name. So we'll probably plan to leave the IRA's to the children and give the father of the 5-year old (as you can probably guess, a grandchild) an additional sum from the estate which the father can invest. I think the father currently has a Roth IRA in his name that is designated as the child's "college fund" and since the father doesn't otherwise fund his IRA and will be over 59 1/2 when the child starts college, that's a perfect strategy for this money.

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When my daughter turned 11 and started baby sitting, I opened a Roth IRA for her. The babysitting income justified the deposits, and we used that custodial money to fund it, a bit each year. To be clear, a child needs earned income to open an IRA, but the actual dollars don't require a paper trail, you can tell your child, "I know you work hard and I am not asking you to save that money for retirement, but, in return for your keeping contemporaneous notes on that income, date, customer, hours worked, I will match it 100%." When the child turns 18 or 21, s/he will have their own IRA funded with the Inherited IRA withdrawals, justified by their own income earned as a teen.

=============Note that there are many custodians who will not administer an IRA for a minor. An IRA is a contract and in general, minors cannot enter into contracts. Whether a parent can establish an IRA for a minor is probably a question of state law.

I happen to use Schwab, and they offer a Custodial Roth. The inherited IRA would need a similar guardian/parent responsible for the account.