Ask The Hammer – Can I convert my RMD to a Roth IRA?
In this video, Jeffrey Levine - aka The Hammer - discusses required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs), including when to take the RMD and how to do a Roth conversion.
Key Takeaways
- You cannot convert your required minimum distribution (RMD)—it's mandatory to take. However, once you've satisfied your RMD, you can convert any remaining balance in that account to a Roth IRA without limits.
- If you don't need the extra income, convert funds to fill remaining space in your current tax bracket rather than taking distributions to a bank account, since you'll pay the same tax rate either way but Roth growth and future income are tax-free.
- RMD distributions are treated as the first dollars withdrawn from an account each year. You must take your RMD from an account before converting any additional amounts from that same account—this is a commonly missed rule.
- Consider your future tax situation when deciding how much to convert. Factors include expected future income levels, potential future tax rate increases, marital status changes (widowhood would push you into single brackets), and Medicare premium impacts based on Modified Adjusted Gross Income (MAGI).
- Work with a tax or financial planner to project your future tax rate and coordinate RMD timing with conversions, since balancing income taxes, Medicare premiums, and tax bracket optimization requires professional analysis.
Ask The Hammer - Can I convert my RMD to a Roth IRA? In this episode of Ask The Hammer, Jeffrey Levine - aka The Hammer - discusses required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs), including when to take the RMD and how to do a Roth conversion. Watch this episode of "Ask The Hammer - Can I convert my RMD to a Roth IRA?" to learn more and be sure to catch more episodes of Ask The Hammer at this link: https://www.finstream.tv/videos/ask-the-hammer/
Article: Ask Bob: Is It Possible To Convert RMDs Into A Roth IRA?
An RMD cannot be rolled over to a Roth via a conversion. Only money you take above the RMD amount can be converted to a Roth, and, you must pay taxes on amounts converted.
Question
As an IRA owner I withdrew the majority (80%) of my RMD (required minimum distribution) in January 2020 so I’m now past the 60-day rollover limit. I put the money in a high yield savings account with no federal income tax withheld. I really don't need the funds, so can I take these funds and convert them into my Roth IRA without paying income tax for year 2020?
For the balance of my 2020 RMD (20%) I have set up a qualified charitable distribution (QCD) with equal payments starting in January 2020 on a monthly basis. I have made 4 payments so far this year to the charity with no income tax withheld. I can stop making the payments from my RMD and continue making my payments with non-qualified funds. Depending on the answer to my first question, then can I take the balance of the RMD funds for the year and rollover to my Roth account without paying income tax?
Answer
First, here's a quick summary of the challenges posed by the transactions, given today’s tax environment, according to Hunter von Unschuld with Fractal Profile Wealth Management.
- You must have earned income to make a Roth contribution.
- An RMD cannot be rolled over to a Roth via a conversion. Only money you take above the RMD amount can be converted to a Roth, and, you must pay taxes on amounts converted.
- For 2020, RMDs have been suspended. You do not have to take your RMD for 2020.
Von Unschuld recommends consulting with a CPA about specific tax advice for your situation and for handling your qualified charitable distribution.
For his part, James Ferguson III, CFP, managing partner and co-founder of Roan Capital Partners, says many wish the CARES Act was enacted Jan. 1, 2020 rather than March 27, 2020 but pandemics don’t work on perfect calendar year time tables.
So, unfortunately, you cannot take the funds that have been distributed and convert to a Roth IRA in your situation under current guidelines, says Ferguson.
One thing to explore individually would be around the CARES Act and the ability to retroactively treat a withdrawal as a coronavirus-related distribution, he says. The guidelines currently around this qualification are specific. “If you meet the qualifications to retroactively treat this as a coronavirus-related distribution you could be afforded the opportunity to utilize the IRS Notice 2020-23,” he explains. This could enable you to roll over these funds for up to three years to an IRA, then convert the funds to a Roth IRA. The IRS could introduce further guidance in the future on this exact situation, adds Ferguson.
“Regarding what would have been the remaining RMD amount, if not for the CARES Act, Ferguson says, yes, you can convert it to your Roth IRA from the balance in your IRA. “The taxes can be paid from the amount converted or out of pocket. Taxes will have to be paid on this Roth conversion just as any other conversion would require,” he advises.
If, however, you are asking if you can use the provision for the three-year income spread over 2020, 2021 and 2022 for your conversion, Ferguson advises against this. “This type of interpretation under current guidelines seems to go against the intent of the CARES Act and could cause adverse implications,” he says. As always consult your tax advisor on your specific situation.
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