When you take Required Minimum Distributions (RMDs), you might not need the money. When that happens, you might prefer to keep the funds in tax-protected accounts, and converting the RMD to Roth might seem like an ideal solution.
Unfortunately, you’re not allowed to convert those RMDs to Roth. But there might be other ways to reach a similar goal. That said, in some cases, there’s not much you can do besides pay the taxes and save or invest an unwanted RMD.
You Can’t Avoid an RMD by Converting
IRS rules do not allow you to directly convert an RMD. The money must be distributed from your pre-tax account, and it’s typically treated as ordinary income (unless you do a QCD—see below).
When an RMD is due from an account, the first money out of that account is considered to be the RMD. Unfortunately, RMDs cannot be rolled over or converted.
But You Can Still Convert (After)
While you might not be able to convert the RMD itself, you can still convert money from pre-tax accounts to Roth-type money. Doing so would require you to satisfy the RMD first, and then you could subsequently convert additional funds.
This might not accomplish exactly what you want for this year. But it could help you manage taxes and RMDs in future years. With a large conversion (or perhaps a series of conversions over several years), you might be able to bring future RMDs down to acceptable levels.
Keep in mind that both the RMD and the conversion may be taxable. Raising your income can put you into high tax brackets, and high income could also affect how much you pay for Medicare (via IRMAA surcharges). Still, if you can strategically convert and minimize the number of years you pay IRMAA, for instance, it might be worth considering.
As just one example, you might use your RMD to cover the taxes due from subsequent conversions. That way, you avoid building up more than you want in cash, and you can reduce your pre-tax balances.
Can You Contribute to Roth?
You might be able to effectively convert your RMD to Roth—assuming you’re allowed to contribute to a Roth IRA. For most people taking RMDs, this isn’t an option.
To contribute to a Roth IRA, you need qualifying income, which typically comes from work (wages or self employment, for example). Your income must also be low enough to be eligible for Roth IRA contributions. Note that if you have the option for Roth 401(k) contributions through your job, income limits don’t apply
You might also be able to delay RMDs if you’re still in your working years. If you happen to have an active 401(k) plan, you may be able to roll your pre-tax IRA money into the 401(k) plan. Then, you may be able to postpone RMDs under the “still working” exception, but check with the IRS for complete details.
Other Options
There may be other ways to deal with an unwanted RMD. Just a few examples are below.
- Skip the taxes with a QCD: It may be possible to avoid taxation on your RMD with a Qualified Charitable Distribution. You must meet specific criteria and complete the transaction following strict rules.
- Postpone a portion of RMDs with a QLAC: A qualified longevity annuity contract might allow you to set aside a portion of your savings and postpone RMDs on that portion of money. You’ll eventually have to take bigger distributions, but you might (or might not) benefit from temporary relief.
- Reinvest the money: If you have no other options and you don’t need to spend the money, putting the funds into savings or another investment vehicle might be worth exploring.
Other solutions may exist, so consider alternatives.
Remember that tax rules are complicated and they change regularly, so it’s critical to triple-check all of the information above before making any decisions. Speak with a professional tax advisor, financial planner, and attorney as you explore your options. This is not individualized advice, and you need more information before making a decision.