Using a Traditional IRA RMD to add to a Roth IRA | Ed Slott and Company, LLC

Using a Traditional IRA RMD to add to a Roth IRA

I am retired from the US Government and have a Thrift Savings Account traditional IRA. Being self-employed I also have a SEP that I'm contributing to each year.
I will turn 72 in a few years. When I take my annual RMD from the TSP and SEP, is there any restriction on using those funds to add to my Roth IRA? Since I'm paying tax on any IRA withdrawals, including the RMDs, it seems I should be able to use those funds (after tax) for anything I want - a vacation, gifts for the grandkids, a new automobile, or contributing to my Roth IRA. Any problems here?
Thanks,
John

  • Yes, there is a problem. An RMD is never eligible to be rolled over, and a conversion is a rollover, and the first distribution in an RMD year is deemed to apply to the RMD. Therefore, as of 1/1 of your first RMD year, if you want to convert some amount in that year you must first complete your RMD for a given account before you can convert additional amounts from that account. The net result is that your taxable income will include the sum of both the RMD and the additional conversion. 
  • Because of the above rules, you will usually be in a lower tax bracket before your RMDs begin and also before pensions or SS benefits are started. If there are a few years after your earnings end and before this other income is paid to you, those are the prime years to convert. You can extend those prime years by deferring SS benefits to age 70. If you are married these rules apply separately to your spouse, so if each spouse was eligible for 3 retirement benefits ( a total of 6), conversions should be done before as many of these benefits are paid as possible. Underlying this advice, a conversion is beneficial if you can convert at a lower rate, or sometimes at the same tax rate as your marginal rate will be in total retirement. It is not beneficial if you pay a higher rate for the conversion.
  • If you are still working at 72, you can still contribute to retirement plans, but for the SEP IRA you will have to start RMDs at 72 whether you are still self employed or not. 
  • If you wish to do an QCDs to reduce the taxable income from your IRA RMD, you should generally do them first, so that all your QCDs are done before your RMD is completed. In this case, the order should be QCD, then rest of RMD, and any conversion last.

Since you'll still have some net earnings left over after making your SEP contribution, you *can* make a regular Roth IRA contribution regardless of the fact that you received RMDs from your tax-deferred accounts, provided that your modified AGI for the purpose of making a Roth IRA contribution is not too high for your filing status.

 

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