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Do Roth Conversions Satisfy Required Minimum Distributions?

Do Roth Conversions Satisfy Required Minimum Distributions?

Roth ConversionAs the likelihood of higher tax rates increases, many proactive investors are looking to the Roth Conversion as a way to protect their retirement assets and plan for retirement. 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.

Here is 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:
http://time.com/money/3835309/retirement-required-minimum-distribution-roth/

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The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. State registration is not an endorsement of the firm by the Commission and does not mean that the adviser has attained a specific level of skill or ability. All investment strategies have the potential for profit or loss. Changes in investment strategies, economic conditions, contributions or withdrawals may significantly alter a portfolio’s performance.
There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. Past performance is no guarantee of future success. None of the content should be viewed as an offer to buy or sell, or as a solicitation of an offer to buy or sell the securities discussed.
Information on this website does not involve the rendering of personalized investment advice but is limited to the dissemination of general information on products and services.