IRS Allows Roth Conversions for Inherited Retirement Plans
In an unexpected announcement (Notice 2008-30), the IRS has stated that it will allow non-spouse beneficiaries of qualified plans (such as a 401(k), 403(b) or employer pension plan) to convert those funds directly to a Roth IRA.
However, at least for the time being, beneficiaries of an IRA do not have this option. Another issue is that the employer’s plan must allow rollovers to a Roth, since they are not required to do so.
In most cases I recommend that employer plans such as 401(k)s be rolled over to IRAs when eligible, since IRAs generally offer better investment options and more liberal distribution rules. In North Carolina IRAs are protected from creditors, at least for the original account owner, but this may not be true in all states. Also, some states (not NC) offer Medicaid eligibility protection for qualified plans but not for IRAs.
The $100,000 income limitation for Roth conversions will disappear in 2010, and the tax due for the conversion can be paid in 2011 and 2012 (by including 50% of the income for the conversion in taxable income for each year).