Pros and Cons of Converting Your Inherited IRA Into a Roth IRA

Not everyone's allowed to convert a traditional IRA (individual retirement account) into a Roth IRA. That option is available only when the inheritor is the deceased person's spouse, according to The Nest.

Account holders may realize tax-related advantages from converting an inherited traditional IRA into a Roth IRA money may be invested in stocks, bonds, mutual funds, certificates of deposits or money market accounts, according to Money Crashers.

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Here are some pros and cons of converting an inherited IRA into a Roth IRA:

Pros

1. Roth IRA withdrawals are tax-free when you follow the rules, which enables older, wealthier taxpayers to leave assets to their heirs without having to pay taxes on them.

2. Roth IRA earnings are not subject to income tax as long as you have held the account for at least five years and are at least 59 and a half-years-old.

3. No penalty is assessed for withdrawing Roth IRA contributions at any time, meaning that in a pinch they can provide some quick cash, reports Bankrate.

4. It's often better to convert to a Roth IRA sooner rather than later. According to The Nest, the amount you convert from the inherited IRA to a Roth IRA counts as taxable income, which makes it a good idea to convert from a traditional IRA to a Roth IRA when you're in a lower income tax bracket, as opposed to the future when distributions might push you into a higher bracket.

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Cons

1. All the money you transfer from the traditional IRA to the Roth IRA gets added to your ordinary income for the current tax year. This can increase your marginal federal and state tax brackets and subject your income this year to a higher level of taxation, reports Financial Memo.

2. Converting in the year of your spouse's death may be a bad idea. If you bring in a large amount of other income in the year your spouses dies, it may be best to wait a year or two — until you're in a lower tax bracket — to convert the account to a Roth IRA, according to The Nest.

3. A key potential disadvantage of converting a Roth IRA is rate shifting. This means paying conversion tax at a higher rate than you would have paid if you left the money in your traditional IRA and withdrew it later.

4. The Roth IRA makes it easier to get your hands on the money before age 59 and a half. According to Fairmark.com, "This can be a disadvantage if it encourages you to withdraw funds you should have left untouched until retirement."

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