Contributed by: Kelsey Arvai, CFP®, MBA
Contributed by: Nick Errer and Ryan O'Neal
Required Minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your Traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after December 31st, 2022, or 75 if you were born after 1960).
Account owners in a workplace retirement plan (for example, a 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire unless they own 5% of the business sponsoring the plan.
These amounts vary depending on the value of your account and your life expectancy factor. The amount of your Required Minimum Distribution (RMD) is calculated by dividing the value of your account value at the previous year's end by a life expectancy factor, as determined by the Internal Revenue Service (IRS). If the sole beneficiary of your IRA is your spouse and your spouse is ten years younger than you, use the life expectancy table from Table II (Joint Life and Last Survivor Expectancy).
For the 2024 tax year, the annual contribution limit to an IRA is $8,000 if you're 50 and older. The limit is the total of all your IRAs – traditional and Roth. (The limits are $1,000 less for anyone under age 50). The IRS requires you to have enough earned income to cover your Roth IRA contributions for the year – but the actual source of your contribution need not be directly from a paycheck. The IRS defines Earned income as any income from wages, salaries, tips, and other taxable employee pay, including self-employment income. However, the IRS does not regulate the pool of money from which the contribution comes. This means you can take your RMD from a Traditional IRA, pay the taxes, and reinvest into your Roth IRA. The only catch is that you would need enough earned income to cover the contribution, but not too much, so you are over the contribution threshold.
The Roth IRA contribution rules are based on your income and tax-filing status. If your modified adjusted gross income (MAGI) is in the Roth IRA phase-out range, you can make a reduced contribution. You can't contribute if your MAGI exceeds the upper limits for your filing status. If your RMD was $8,000 or less, you could deposit all the money into your Roth IRA; however, if you contributed $4,000 to another IRA in the same year, you could just place $4,000 of your RMD into a Roth IRA.
Just because you can, doesn't mean you should…
It is important to remember that no method is perfect for every individual and there are important factors you should consider before reinvesting RMD income into a Roth IRA. Any contribution to a Roth IRA must be held in the account for a five-year period to avoid a 10% early withdrawal penalty. Additionally, converting RMDs to a Roth IRA is not the only reinvestment vehicle you have. Other options include Roth Conversions, 529 Contributions, and Qualified Charitable Distributions. Talk to a financial advisor today to find a solution that works best for you. Reach out to us here or call us at 248-948-7900.
Sources:
Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.