Can I Use My RMDs to Transfer Money Into My Roth IRA?

If you're taking a required minimum distribution from an IRA, 401(k) or other tax-deferred account and don't need the money to cover living expenses, where should you stash that unneeded cash?

Investors now need to start taking RMDs at age 73 or, if they were born after 1960, at age 75. Depending on the balances of your accounts, that distribution can be a sizable amount of money, perhaps more than you need to live on. One option is to reinvest that money, and a Roth IRA would seem to be a perfect choice: withdrawals from Roth accounts are tax-free – including all gains on your investments – and you'll never need to take any of those pesky RMDs during your lifetime.

There's just one catch: You can't directly convert your RMDs to a Roth. But for some people, there is a potential workaround. For 2024, you can contribute up to $7,000 plus another $1,000 if you're at least 50 years old – if you have enough earned income.

Get matched with a financial advisor to discuss your own retirement strategy.

What is – and isn't – ‘earned income'

The IRS defines earned income as money you get for working, such as wages, commissions, bonuses, tips and honorariums for speaking, writing or taking part in a conference or convention. Income generated by self-employment also counts. Income that doesn't qualify includes taxable pension payments, interest income, dividends, rental income, alimony and withdrawals from Roth IRAs or other nontaxable retirement accounts, along with annuities, welfare benefits, unemployment compensation, worker’s compensation payments and your Social Security income.

Another restriction on Roth contributions is the income limit. Once your modified adjusted gross income (MAGI) hits $146,000 for a single filer or $230,000 for joint filers, your maximum Roth contribution starts phasing out up to $161,000 (single filers) or $240,000 (joint filers). After that, you're no longer eligible to contribute.

You also need to remember that you need to wait five tax years after your first contribution to any Roth account before you can make withdrawals. Heirs who inherit your Roth will need to withdraw the entire balance within 10 years.

Consider speaking with a financial advisor to develop a tax-efficient retirement strategy.

Other options on RMDs

If you don't qualify to make a Roth contribution, you still have options to eliminate, reduce or delay your RMDs.

Roth conversion: You can convert your IRA to a Roth account, once you've taken your RMD for the year. You'll pay taxes on the amount you convert, so one tactic is to convert the maximum amount available without pushing yourself into a higher tax bracket. Each Roth conversion carries its own five-year rule.

Charitable contribution: You can use a Qualified Charitable Distribution to donate some or all of your RMD to a charity recognized by the IRS and you won't be taxed on the donated amount. To qualify, the money must be transferred directly from your IRA to the charity.

Keep working: Your 401(k) account with your current employer isn't subject to RMDs if you're still on the payroll. One tactic is to roll 401(k)s from previous employers into your current plan so that they won't be subject to RMDs. Once you stop working, however, RMDs are required.

Be careful: The punishment for failing to take an RMD during the required time period is a hefty one – up to 50% of the missed RMD amount.

A financial advisor can help you navigate the particular risks and tradeoffs in your situation.

Pay attention to all your taxes

Structuring your retirement withdrawals to reduce your tax bite means looking at all your sources of income, including retirement accounts, RMDs, Social Security benefits, pensions and taxable investment income. For some people, withdrawing money from an IRA early in retirement can reduce the size of their eventual RMDs. If they also delay collecting their Social Security benefits, their benefit amount to increase by 8% each year until they reach 70 years old. Also, be sure to coordinate taxes, withdrawals and RMDs between spouses, and remember that a younger spouse's RMDs won't need to be taken until they reach age 73 or 75.

Other common retirement tax moves include investing in tax-free bonds, moving to a state with no income tax or estate tax, harvesting tax losses in taxable investment accounts and holding any taxable assets long enough to qualify for lower long-term capital gains tax rates.

To learn more about retirement planning and how to work toward your goals, talk to a financial advisor for free.

Bottom line

How to manage your RMDs – and all the other many tax questions that can arise in retirement – can be complicated. Take the time to estimate your retirement taxes before you start collecting pensions, Social Security and taking withdrawals from retirement accounts.

Tips

• Balancing taxes and retirement income – and figuring out how to minimize taxes in retirement – is a crucial issue. A knowledgeable financial advisor can help you decide how to structure and coordinate these payments over the span of your retirement.

• Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

• Make sure you’re protecting your cash reserves from inflation by securing them in an account that generates a competitive interest rate. Leaving cash in a checking account or low-yield savings account can stifle your purchasing power over time.

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