Personal Finance
Can You Move An RMD Into A Roth IRA? What To Know Before Making A Move
You may have options for RMD funds. Take a free quiz to find vetted fiduciary advisors who may be able to help.
If you have an IRA, 401(k) or other tax-deferred account, you’ll be required to start drawing down those balances once you turn 73 in the form of required minimum distributions (RMDs).
Depending on your account balance(s), that distribution may be a sizable amount of money. Perhaps more than you need to live on. So what should you do with it?
You actually may have a few options, but before pursuing any of them, it may be a good idea to speak with a financial advisor.
Consulting a fiduciary financial advisor can be a great first step to factoring RMDs, and the potential tax repercussions, into your retirement plan. That's why SmartAsset created a free tool to help match you with up to three financial advisors.
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A 2023 Northwestern Mutual study found that 66% of U.S. adults admit their financial planning needs improvement. However, only 37% of Americans work with a financial advisor.²
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What Can Be Done With Excess RMD Funds?
One option could be to reinvest that money and put it into a Roth IRA.
Here’s why: Withdrawals from Roth accounts are tax-free – including all gains on your investments – and you won’t need to take RMDs during your lifetime.
There’s just one catch: You can’t directly convert your RMDs to a Roth. But for some people, there may be a potential workaround.
Per 2024’s Roth limits, once you receive a distribution, you may contribute up to $7,000, plus another $1,000 if you’re at least 50 years old – depending on your earned income.
A fiduciary financial advisor could help you determine if this is a smart investment strategy for you. Click here to take SmartAsset’s quick, free quiz to get matched with vetted fiduciary financial advisors who serve your area.
What Counts as ‘Earned Income’
The IRS defines earned income as money you get for working, including the following:
- Wages
- Commissions
- Bonuses
- Tips
- Honorariums for speaking, writing or taking part in a conference or convention
- Self-employment income
Income that doesn’t qualify includes:
- Taxable pension payments
- Interest income
- Dividends
- Rental income
- Alimony
- Withdrawals from Roth IRAs or other non-taxable retirement accounts
- Annuity income
- Welfare benefits
- Unemployment compensation
- Worker’s compensation payments
- Social Security income
Roth contributions also have an income limit restriction. 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’ll need to wait five tax years after your first contribution to any Roth account before you can make withdrawals. Heirs who may inherit your Roth will need to withdraw the entire balance within 10 years.
This is another area in which speaking with a financial advisor could be helpful.
3 Other Options for RMD Funds
If you don’t qualify to make a Roth contribution, you may still have options to potentially eliminate, reduce or delay your RMDs.
1. Convert Your IRA to a Roth Account
You could consider converting 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 could be to convert the maximum amount available without pushing yourself into a higher tax bracket.
Remember: Each Roth conversion carries its own five-year rule.
2. Make a Charitable Contribution
You may be able to use a Qualified Charitable Distribution (QCD) to donate some or all of your RMD to a charity recognized by the IRS and avoid being taxed on the donated amount.
Important: To qualify, the money must be transferred directly from your IRA to the charity.
3. Keep Working
Your 401(k) account with your current employer isn’t subject to RMDs if you’re still on the payroll.
One tactic could be to roll 401(k)s from previous employers into your current plan so they won’t be subject to RMDs. However, once you stop working RMDs will begin.
Be careful: The punishment for failing to take an RMD during the required time period can be hefty – up to 50% of the missed RMD amount.
It could be a good idea to speak with a financial advisor about the particular risks and tradeoffs for your unique situation.
Pay Attention to All Your Taxes
Structuring your retirement withdrawals to reduce tax impacts may mean 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 could potentially reduce the size of eventual RMDs. Furthermore, delaying the collection of Social Security benefits can potentially increase benefit amounts by 8% each year until age 70.
For married couples, it could also be important to coordinate taxes, withdrawals and RMDs between spouses. The younger spouse’s RMDs won’t need to be taken until they reach age 73 or 75 (if born after 1960).
Other common retirement tax moves may 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.
How to Get Help Planning for RMDs
Managing your RMDs and their potential tax implications can be complicated. It can be important to take the time to estimate your retirement taxes before you start collecting pensions, Social Security and taking withdrawals from retirement accounts.
If you're unsure about handling your RMDs, that’s where a fiduciary financial advisor can be invaluable.
Fiduciaries may be able to help you understand your options when it comes to planning for RMDs and minimizing your tax liability. Additionally, any conflicts of interest must be disclosed, and fiduciaries are obligated to work in your best interest.
Finding a fiduciary shouldn't be that hard. Thankfully, now it isn't.
SmartAsset’s free matching quiz can match you with vetted fiduciary financial advisors who serve your area. From there, you can compare and decide which advisor to work with. All advisors on the matching platform have been vetted through our proprietary due diligence process.
The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). Past performance is not a guarantee of future results. There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
SmartAsset.com is not intended to provide legal advice, tax advice, accounting advice or financial advice (Other than referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation.
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Sources:
1. "Journal of Retirement Study Winter" (2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.
2. “Planning and Progress”, Northwestern Mutual (2022)
