Can an Inherited IRA be converted to a Self-Directed IRA?

Question: I have an inherited IRA that I received this year and would like to convert into a self directed Roth IRA. I have not taken any distributions at this point. Is this doable? Thanks in advance.

Answer: Thank you for your inquiry.  You can indeed change an inherited IRA into a self-directed IRA with which you can invest in real estate, notes, options, oil and gas, private company stock, and a whole lot more.  What you cannot do is convert an inherited traditional IRA into an inherited Roth IRA.  The only way you could convert the IRA is if you inherited it from a spouse and you elect to treat it as your own, then convert it to a Roth IRA.  Also, please remember that you cannot add to an inherited IRA, so you will need to take that into account when deciding on your investment strategy.

You must also take Required Minimum Distributions (RMDs) from the account regardless of your age, but fortunately there is no penalty for taking the distributions, only taxes if it is a pre-tax account such as a traditional IRA.  If you fail to take an RMD you will be penalized 50% of what you should have taken from the account.  I only mention this because you mentioned that you have not taken any distributions from the account yet.  You generally must begin taking distributions in the year following the date of death of the original account owner.  In some cases you may elect to take no distributions until the 5th year after the date of death, at which point all of the money in the IRA must be removed.

Please let me know if we can assist you with a self-directed IRA.  Our company website is www.QuestIRA.com, and our toll free number is 800-320-5950.  Have a wonderful holiday season, and a happy, healthy, and prosperous 2013!

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