Q. My father passed away with about a half million each in his 401(k) and IRAs. Can we convert these to a Roth? J.D.T, Saratoga, N.Y.
A. Yes and no. Under the Pension Protection Act of 2006 (the PPA), assets in a company retirement plan like a 401(k) can be converted into a Roth IRA by the account owner, a spousal beneficiary of the account or a nonspousal beneficiary. But the PPA doesn’t allow such so-called Roth conversion contributions for nonspousal beneficiaries of a traditional IRA.
For a nonspousal 401(k) plan beneficiary, a Roth conversion contribution can only be accomplished via a direct trustee-to-trustee transfer from the qualified plan into a new receiving Roth IRA set up specifically to receive the conversion contribution. The funds cannot pass through the beneficiary’s hands. The nonspousal beneficiary must report the taxable portion of the conversion contribution as gross income.
Warning: Because the receiving Roth IRA is treated as an inherited IRA for required minimum distribution (RMD) purposes, it can only contain funds from the deceased qualified plan participant’s account. It cannot contain funds from any other sources, (e.g., annual contributions or amounts rolled over or transferred from other accounts).
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