Conversion from traditional IRA to Roth IRA

Hi Pros,

Thank you for your time.

I have had a question about the conversion from traditional IRA to Roth IRA.

One of my clients has 200K in her traditional IRA, which is mostly nondeductible. Unfortunately, her husband passed away two years ago, and an amount of 1 million was moved from her husband’s 401k account to a new traditional IRA account called an inherited IRA account for her.

Now she wants to convert some of her traditional IRA to a Roth IRA. Should the conversion be based on pro-rata of both her traditional account and the inherited IRA account, or can the taxpayer only use her own account as the denominator for the conversion? 200k or 1.2 million for the denominator?

Thank you again.
Mu

The basis of and distributions from the inherited IRA are tracked separately from her other consolidated IRA balances, so the answer is no, not pro-rata across both.

This is from memory, if you want cites start with the pub and work backward from there.

I think when the TP received her husband's 401(k) and it was placed in an "inherited IRA account", that is not the same as being HER IRA account. When the spouse inherits an IRA, they can elect to treat it as their own, or treat it as an inherited IRA. The rules are different. Not sure how the quirk of the inherited 401(k) between those steps affects those rules, but it probably does.

You didn't ask, but if the spouse didn't elect to treat the inherited IRA that came from her husbands 401(k) as her own, then I don't know if she is allowed to convert it to a Roth IRA. Since you say it is titled as an inherited IRA, then it sounds like she didn't make that election.

Thanx for adding that; in my first response I was totally ignoring the fact it was a spousal beneficiary.

I am not sure about inherited, but ALL IRAs are in the same pot and basis prorated based on all. Cannot pick what you want..

Inherited IRAs are not in the same pot for many things, such as when calculating RMD. And inherited IRAs are not eligible for regular rollovers, but trustee-to-trustee transfers are ok. So it makes sense that they would be separate for the Roth rollover calculation as well. I haven't done that research, just pointing out to OP that he should explore that...unless someone already knows the answer.