As the likelihood of higher tax rates increases, many proactive investors are looking to the Roth Conversion as a way to protect their retirement assets. As they do so, one question sometimes arises: Does the amount that you convert to a Roth IRA count towards the Required Minimum Distribution? The short answer is no.
Let me illustrate with an example: Let’s say you want to shift $30,000 from your IRA to your Roth in a given year. Let’s also say that in that same year, you have a Required Minimum Distribution of $20,000. Before you can do any Roth Conversions, you are required to first take your $20,000 RMD. Once received, you can then proceed with your Roth Conversion. Remember, however, that both the conversion and the RMD are taxable events, so be prepared to pay taxes on an additional $50,000 of income. If this is too pricey, you can still do a Roth Conversion, but perhaps at a lower amount.
What typically becomes of the $20,000 RMD, especially if you don’t need it for lifestyle purposes? In many cases, these RMDs get deposited into some sort of taxable account. So, that $20,000 moves from an environment where it only gets taxed once, upon distribution, to an environment where the growth gets taxed each and every year. Doing this only creates more imbalance in your buckets and may lead to increasing your tax liability. So, instead of depositing this into your taxable bucket, contemplate using it to pay taxes on your conversion, fund a Roth IRA, or fund a life insurance program that has long-term care benefits.
For more insight on this topic, read the following Time article:
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. PTM Wealth Management, LLC, Attleboro Wealth Management, LLC, Divorce On Your Terms, Inc., Your Terms Mediation, and Wealth & Advisory Associates, LLC are not affiliated with Kestra IS or Kestra AS. The above links are provided for your information only. As they are provided by third parties, Kestra Investment Services (Kestra IS) does not endorse, nor accept any responsibility for the content. Kestra IS does not independently verify this information, nor do we guarantee its accuracy or completeness.
Kestra IS and Kestra AS do not provide tax or legal advice. This website is published for residents of the United States only. Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact our Compliance Department at 737-443-2582.