If you take a minimum required distribution from an IRA, 401(k), or other tax-deferred account and you don’t need the money to cover living expenses, where should you hide that unnecessary money?
Investors must now begin taking RMDs at age 73 or, if born after 1960, at age 75. Depending on your account balances, this distribution could represent a significant amount of money, perhaps more than you need to live on. One option is to reinvest that money, and a Roth IRA seems like a perfect choice: Withdrawals from Roth accounts are tax-free – including any gains on your investments – and you’ll never need to take any of those damn RMDs during this time. your life.
There’s just one problem: You can’t directly convert your RMDs to Roth. But for some people, there is a possible solution. For 2024, you can contribute up to $7,000 plus an additional $1,000 if you’re at least 50 years old – if you have enough. earned income.
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What is – and is not – ‘earned income’
The IRS defines earned income as money you receive from working, such as wages, commissions, bonuses, tips, and honoraria for speaking, writing, or participating in a conference or convention. Income generated from self-employment also counts. Income that does not qualify includes taxable pension payments, interest income, dividends, rental income, alimony, and withdrawals from Roth IRAs or other tax-free retirement accounts, as well as pensions, social benefits, unemployment benefits, work accident benefits and your Social Security income.
Another restriction on Roth contributions is the income limit. Once your modified adjusted gross income (MAGI) reaches $146,000 for single filers or $230,000 for joint filers, your maximum Roth contribution begins to phase out up to $161,000 (single filers) or $240,000 ( joint filers). After that, you are no longer eligible to contribute.
You should also remember that you must wait five tax years after your first contribution to a Roth account before you can make withdrawals. Heirs who inherit your Roth will have to withdraw the entire balance within 10 years.
Consider speak with a financial advisor develop a tax-efficient retirement strategy.
Other options on RMDs
If you are not eligible to make a Roth contribution, you still have the option to eliminate, reduce, or delay your RMDs.
Roth conversion: You can convert your IRA to a Roth account, once you have taken your RMD for the year. You’ll pay taxes on the amount you convert, so one tactic is to convert the maximum amount available without pushing yourself into a higher tax bracket. Each Roth conversion has its own five-year rule.
Charitable contribution: You can use a Qualified charitable distribution to donate part or all of your RMDs to an IRS-recognized charity and you will not be taxed on the donated amount. To qualify, the money must be transferred directly from your IRA to the charity.
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