Getting the most out of your retirement savings can be tricky. This is especially true when determining your required minimum distributions (RMD) for your IRA. Sometimes you don't need your RMDs, but the rules of your retirement account force you to take them. You might be wondering, "does a Roth conversion count as an RMD?"
The answer is simple: no. A Roth conversion does not count as an RMD. A Roth conversion doesn't satisfy the RMD requirements of the IRS.
The reason for this is that an RMD and Roth conversion serve different purposes. This also means that they are subject to different rules.
Why Doesn’t a Roth Conversion Count as an RMD?
What does an RMD mean? Required minimum distributions (RMDs) are mandated by the IRS for traditional IRAs and some other retirement plans. Individuals must make withdrawals once they meet the RMD age requirements.
This RMD age requirement started when recipients were 70.5 years old, but the SECURE Act increased the RMD age level. The SECURE Act raised this age to 72, then 73. It will eventually climb to age 75.
These delays in the RMD age requirement are actually a good thing. They can help you with savings. They can help you to plan effectively. The SECURE Act is a piece of legislation that shortened the payout timeline to 10 years.
This means that at the end of that 10-year period, the account balance is exhausted and you could receive a balloon payment. The purpose of having RMDs is to ensure that you withdraw a part of your retirement savings.
It also makes sure that you pay taxes on part of your tax-deferred retirement savings. You can calculate the amount of your RMD by dividing your account balance by your estimated life expectancy.
Roth conversions serve a different purpose than an RMD. Roth conversions are voluntary transactions where you transfer your funds from one of these accounts to a Roth IRA:
- a traditional IRA
- SEP IRA
- SIMPLE IRA
- other eligible retirement accounts
This process will involve paying taxes on the amount converted at your current ordinary income tax rate.
So, if you are still confused if you can use your RMD as a Roth conversion, this should answer your question. These are two separate processes, so you can’t use your RMD as a Roth conversion. You must first take your RMD for the year before you pursue a Roth conversion.
Since they serve two distinctly different purposes, your Roth conversion doesn’t count as an RMD. Your RMD amount is actually not eligible for conversion because the IRS considers it a taxable distribution. A Roth conversion does not count as an RMD because of this. If you fail to take your RMD, it can result in a penalty of the amount you did not withdraw.
Can an RMD Be Converted to a Roth IRA?
There may still be confusion about how RMDs work. Do you find yourself asking, “Can an RMD be converted to a Roth account?” No, your RMD can’t be converted to a Roth IRA.
The IRS mandates that you first take the RMD for the year before you can perform a Roth conversion. The RMD amount is is not eligible for conversion because the IRS considers it a taxable distribution.
When you take an RMD, the IRS subjects it to ordinary income tax rates for the year you make the withdrawal. An RMD ensures that you pay taxes on your tax-deferred retirement savings after a certain age. If you were to attempt to convert an RMD to a Roth IRA, it would essentially allow you to bypass this tax requirement. This is why the IRS doesn’t allow it.
If you are interested in pursuing a Roth conversion, you must satisfy your RMD for the year before you do that. Always remember that a Roth conversion doesn’t count as an RMD. Any amount you want to convert beyond the RMD is then eligible for a Roth conversion. Of course, this assumes that it meets the required criteria for a Roth conversion.
If you don't need to use your RMD from your IRA for living expenses, then you can reinvest them in a Roth IRA. The fund you use to contribute to a Roth IRA can come from any available source. However, you must be careful and adhere to the contribution limits and earned income requirements when making contributions.
For the 2022 tax year, you can contribute up to $7,000 annually to your IRAs if you are 50 or older. This limit increases to $7,500 in 2023. These contribution limits apply to the combined total of contributions made to both traditional and Roth IRAs. If you are under 50, the limits are $1,000 less.
The IRS requires that sufficient earned income should cover your Roth IRA contribution for the year. However, the good news is that the actual source of the contribution doesn't need to be from your paycheck.
Keep in mind that whatever the amount you convert to a Roth IRA, the IRS will treat it as taxable income. It will be taxable for the year in which the conversion occurs. You'll need to pay taxes at your current ordinary income tax rate.
Can I Put My RMD into a Roth IRA?
Yes, but this depends on your circumstances. You can put your RMD in a Roth IRA if you are eligible to make direct contributions to a Roth IRA. This typically means you are below the IRS income limits. One of the main reasons people opt for a Roth IRA conversion is to get away from the RMD requirements.
If you are not eligible to make direct contributions to your Roth IRA, then you can’t put your RMD into a Roth IRA. You must still withdraw your finds one you meet the RMD age requirements. However, you can use a strategy like a Roth conversion ladder. Tactics like this allow you to eventually move all your funds to a Roth IRA over time.
While you must still take your RMDs, you can invest them in other financial instruments like mutual funds or stocks.
Why Are Roth Conversions Beneficial?
Roth conversions are an attractive process because Roth IRAs grow tax-free and qualified withdrawals are also tax-free. Roth IRAs don’t have RMDs, so you can just let your contributions grow tax-free. If you pass away and your heirs inherit your IRA, they won’t have to pay taxes on distributions.
Roth IRAs are important because they can help those who take advantage of Social Security benefits. Social Security benefits are taxable once you hit the income threshold. Roth IRAs won’t take you beyond that threshold. Completing a Roth conversion before you start getting your Social Security benefits can help you save money.
At What Age Does an RMD Stop?
RMDs from retirement accounts stop at the account holder's passing. They don't stop at any specific age. If you're wondering “at what age does RMD stop?” the answer is that they continue for your entire life. The required RMD age is currently 73, because of the SECURE 2.0 Act.
RMDs exist to make sure people withdraw at least some of their tax-deferred savings. This means the government can collect taxes on this money. Without RMDs, you might leave your savings untouched forever, which would delay tax payments. RMDs get a lot of pushback, but they can be helpful in some cases.
They provide a structure for how much you should withdraw each year. This can prevent you from spending your retirement savings too quickly. They also encourage you to use your retirement savings for your retirement, not just keep it forever. Since there is no end RMD age, it prevents hoarding wealth in retirement savings.
However, RMDs can also have drawbacks. They might push you into a higher tax bracket when you meet the RMD age, especially if you have a lot of retirement savings. This could mean a bigger tax bill at a time when you don’t have a salary or consistent generation of income.
Also, once you take the money out, it's no longer growing in your retirement account. This reduces the overall growth of your savings. RMDs also take away some flexibility in how you manage your finances. This is because you have to withdraw money even if you don't need it at that time.
Options for Reinvesting or Converting an RMD You Don’t Need
If you have an RMD and you are looking to do something with it, then you can explore options like a 529 savings plan. However, if you are looking to do it yourself, you need to be aware of consequences.
You need to consider penalties like IRMAA (income-related monthly adjustment amounts). This is a Medicare penalty that higher-income individuals need to pay. The penalty is for Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage).
Consulting with a financial advisor or tax advisor can help you determine what strategies you should take. It would allow you to choose a Roth conversion or explore RMD reinvestment options. You need to have the right strategy for your specific financial situation.
Talk to the Professionals at Asset Preservation Wealth & Tax
A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company; not guaranteed by any bank or the FDIC.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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