Required Minimum Distributions and Inherited IRAs: Today’s Slott Report Mailbag

Thursday, September 08, 2022

By Sarah Brenner, JD
IRA Analyst
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Question:

By law I must withdraw a certain percentage from my retirement accounts to meet the required RMD. And I will have to pay income taxes on that amount. The percentage amount I must withdraw is based on the value of the account as of December 31, 2021 at which time the market was very high. My stocks and mutual fund investments are now worth a lot less than they were in December 2021…at least 30% less! This means I will have to sell a lot more of my investments (and reduce my retirement nest egg) in order to meet the RMD percentage of value.

I know that if all my investments were in a Roth IRA, I would not have this problem. However, I cannot be alone in this and wonder if the feds have any plans to give some relief to us seniors?

Barbara

Answer:

Hi Barbara,

The volatile markets have left many retirement account owners in the same situation as you. Required minimum distributions (RMDs) for 2022 are calculated based on the December 31, 2021 balance. Many account owners have seen their accounts decline in value since then. Unfortunately, this time around there have been no signs that Congress will be providing any relief.

One possible strategy that may help is to take your RMD in kind. This is allowed. You can simply transfer the stock from your IRA to a non-retirement brokerage account. Your RMD will be taxable but in the future the stock may rebound, and you could reap the benefits outside your retirement account.

You mention Roth IRAs. Now, when account values are low, is a good time to consider converting. Turbulent markets are likely to be with us for a while. Converting funds to a Roth IRA would eliminate the worry of future RMDs for you.

Question:

I inherited an IRA from my father. I am interested in converting this IRA to a Roth IRA. How do I go about getting this done?

Thank you for your help.

Barry

Answer:

Hi Barry,

Unfortunately, you are not allowed to convert the IRA you inherited from your father to a Roth IRA. The rules do not allow nonspouse IRA beneficiaries to convert. This is a strange quirk in the tax code because nonspouse beneficiaries of employer plans are permitted to convert. Congress may change this rule some day but for now we are stuck with it.

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