Can I deposit my required minimum distribution into a Roth IRA?
Can I deposit my required minimum distribution into a Roth IRA? Ed Slott answers your questions about individual retirement accounts, required minimum distributions, and more.
Can I invest my required minimum distribution (RMD) in a Roth IRA?
Once you turn 72, your individual retirement accounts (IRAs) are subject to required minimum distributions (RMDs). You will have to withdraw those funds, whether you want to or not. However, those RMDs cannot be rolled over to a Roth IRA.
It would be logical to think that it could be done since taxes are paid on RMDs. So why not move those funds into a Roth account? However, the law is clear: RMD conversions are prohibited. The law also clearly states that the RMD must be withdrawn prior to any conversion. Once you withdraw your annual RMD, you can convert any portion of your IRA account balance during the year.
But there is another option that you can take advantage of. Since you already have to withdraw annual RMDs, why not use those funds to pay the tax for converting any portion of the remaining balance in your traditional IRAs to a Roth IRA? This way you can mitigate or eliminate the detrimental effect of RMDs in future years.
Unfortunately, your friend’s problem is very common. Some
A friend of mine forgot that he has an inherited IRA. When his parents passed away about 18 years ago, he became the beneficiary of the IRA at age 60. The company apparently continued to reinvest distributions into the growth fund. If my friend withdraws his money from the account now, will he have to pay big penalties to the IRS?
Can I deposit my required minimum distribution into a Roth IRA?
Ed Slott answers your questions about individual retirement accounts, required minimum distributions, and more.
Can I invest my required minimum distribution (RMD) in a Roth IRA?
Confused about IRAs, 401(k), Roth accounts, taxes, or other retirement savings issues? Ed has the answers. Email your questions to IRAHelp@aarp.org.
Once you turn 72, your individual retirement accounts (IRAs) are subject to required minimum distributions (RMDs). You will have to withdraw those funds, whether you want to or not. However, those RMDs cannot be rolled over to a Roth IRA.
It would be logical to think that it could be done since taxes are paid on RMDs. So why not move those funds into a Roth account? However, the law is clear: RMD conversions are prohibited. The law also clearly states that the RMD must be withdrawn prior to any conversion. Once you withdraw your annual RMD, you can convert any portion of your IRA account balance during the year.
But there is another option that you can take advantage of. Since you already have to withdraw annual RMDs, why not use those funds to pay the tax for converting any portion of the remaining balance in your traditional IRAs to a Roth IRA? This way you can mitigate or eliminate the detrimental effect of RMDs in future years.
Q: A friend of mine forgot that he has an inherited IRA. When his parents passed away about 18 years ago, he became the beneficiary of the IRA at age 60. The company apparently continued to reinvest distributions into the growth fund. If my friend withdraws his money from the account now, will he have to pay big penalties to the IRS?
Unfortunately, your friend’s problem is very common. Some beneficiaries forget about legacy IRAs and are often unaware of the required minimum distribution rules. These rules apply equally to legacy IRAs, and failure to withdraw RMDs will result in a penalty equal to 50% of the amount required to be withdrawn. Based on the information revealed in your question, it appears that RMDs were not retired for many years.
It is possible to obtain a waiver of fines for missed RMDs. To apply to the Internal Revenue Service (IRS) for this exemption, you must distribute the missed RMDs and file IRS Form 5329 for each year of noncompliance. A waiver of the fines may then be requested. The good news is that the IRS has generally been willing to approve these exemptions. Your friend should consult a well-informed tax advisor to help him with these procedures, and especially to calculate the RMDs that, after so many years of non-compliance, will now have to be withdrawn in a single year in order to request exemption from the 50% fine for each of the years in question.
