Can I Invest My Traditional IRA's RMD in a Roth IRA?

image

If you don’t need your required minimum distributions (RMDs) from your traditional IRA for living expenses, can it be reinvested in a Roth IRA? Yes, it can—assuming you are eligible for a Roth based on your income.

This is because the money to fund your IRA can come from any pool of cash you have available. However, you still need to pay attention to the contribution limits and earned income requirements.

Key Takeaways

  • If you don’t need all the money from your IRA’s required minimum distributions, you may be able to invest it in a Roth IRA.
  • For the 2021 and 2022 tax years, you can contribute a combined total of $6,000 ($7,000 if you’re 50 or older) to your IRAs.
  • You must have earned enough compensation for the year to cover the Roth contribution.
  • You must be eligible for a Roth IRA in the first place, based on the income limits set by the Internal Revenue Service (IRS).

How Required Minimum Distributions Work

With a traditional IRA, contributions or deposits are made with pretax dollars, meaning you get a tax deduction for that contribution in the tax year you made it. In return, you pay income tax on the distribution amounts when you withdraw the money in retirement. At age 72, you must begin taking annual required minimum distributions (RMDs), calculated based on the total amount saved in all of your traditional IRAs.

Conversely, Roth IRA contributions are made with after-tax dollars. So, while you don’t get an upfront tax break, you get to withdraw the money tax-free in retirement. Also, there are no RMDs with Roths during the owner’s lifetime, making them ideal wealth-transfer vehicles.

Investing an RMD into a Roth IRA

For the 2021 and 2022 tax years, the annual contribution limit is $7,000 if you’re 50 or older. That limit is the total for all your IRAs, including traditional and Roth IRAs.

The Internal Revenue Service (IRS) requires that you have enough earned income to cover your Roth IRA contribution for the year—but the actual source of your contribution need not be directly from your paycheck. So, if your RMD was less than $7,000, you could deposit all of the money into your Roth IRA. However, if you contributed $4,000 to another IRA in the same year, you could place just $3,000 of your RMD into a Roth IRA.

There are also Roth IRA contribution rules 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 at all if your MAGI exceeds the upper limit for your filing status. Here’s a rundown for the 2021 and 2022 tax years:

Roth IRA Income Limits
 Filing Status 2021 MAGI 2022 MAGI Contribution Limit
Married filing jointly or qualifying widow(er) Less than $198,000 Less than $204,000 $6,000 ($7,000 if age 50+)
  $198,000 to $207,999 $204,000 to $213,999 A reduced amount
  $208,000 and above $214,000 and above Zero
Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the year) Less than $125,000 Less than $129,000 $6,000 ($7,000 if age 50+)
  $125,000 to $139,999 $129,000 to $143,999 Begin to phase out
  $140,000 and above $144,000 and above Ineligible for direct Roth IRA
Married filing separately (and you lived with your spouse at any time during the year) Less than $10,000 Less than $10,000 A reduced amount
  $10,000 and above $10,000 Zero

Avoiding Required Minimum Distributions

There is the option to convert your traditional IRA into a Roth IRA—a move called a Roth IRA conversion. Since Roth IRAs don’t have required minimum distributions, you will no longer be required to take annual withdrawals once the funds are in the Roth.

Remember, Roths don’t have an upfront tax deduction for the initial contributions, but qualified withdrawals in retirement are tax-free, and there are no RMDs during the owner’s lifetime.

However, the Roth IRA conversion is a taxable event—and the tax bill could be substantial. Since you received a tax deduction on the contributions into your traditional IRA, you need to pay those deferred taxes on the converted funds.

It’s a good idea to check with a tax professional to determine whether a conversion would make financial sense for you, as there are other factors to consider besides the RMD issue. For example, converting money from a traditional IRA to a Roth could also push you into a higher tax bracket, meaning your marginal tax rate could be higher for that year.

If you decide to convert to a Roth IRA, remember to take an RMD from the traditional IRA one last time for the year of the conversion. That’s necessary because the traditional IRA still existed during that year.

What Is the Deadline for Contributing to a Roth IRA?

The deadline for contributing to a Roth or traditional IRA is generally the same as the income tax filing deadline. You have until April 18, 2022 (April 19 in Maine and Massachusetts), to make a 2021 IRA contribution. If you want to make a prior-year IRA contribution, specify the year to ensure your IRA provider applies the contribution to the intended year. 

How Much Can I Contribute to a Roth IRA?

The IRA contribution limit for the 2021 and 2022 tax years is $6,000—$7,000 if you’re at least 50 years old. To contribute to a Roth IRA, you must have enough earned income for the year to cover the contribution, and your modified adjusted gross income must not exceed limits set by the IRS.

Should I Convert My Traditional IRA into a Roth IRA?

Maybe. A Roth IRA conversion can make financial sense if you expect to be in a higher tax bracket in retirement than you are now, and you want to get the taxes over with. A Roth conversion may also be a good idea if you want to avoid required minimum distributions, allowing the account to continue growing tax-free for your heirs. The best time to do a Roth IRA conversion is when your income is unusually low and/or your Roth has lost considerable value due to a market downturn.

The Bottom Line

Roth IRAs have no RMD during the account owner’s lifetime. So, if you don’t need the money, you can leave your Roth alone to continue growing tax-free for your heirs. Traditional IRAs don’t have the same flexibility, and you must start taking those RMDs at age 72—whether you want the money or not.

Still, as long as you have enough earned income for the year to cover the contribution—and you don’t exceed the income limits—you can deposit your traditional IRA’s RMD into your Roth. This can be a smart way to boost your Roth IRA while following the RMD rules for your traditional IRA.

Trending Ideas

Featured Stocks On The Move

Daily Rundown

Top 3 Stocks in Leading Sectors
  • 3 Electric Power Stocks To Buy Now

    Featured Content Hawaiian Electric Industries, Inc. (HE) Hawaiian Electric Industries, Inc. is a holding company that provides electric utility services and financial services in Hawaii. Through its subsidiaries, it supplies... Read More

  • 3 Bank Stocks To Buy Now

    Featured Content Comerica Incorporated (CMA) Comerica Incorporated is a financial services company headquartered in Dallas, Texas, offering a range of banking products and services, including commercial and retail banking, wealth... Read More

  • 3 Machinery Stocks To Buy Now

    Featured Content Alta Equipment Group Inc. (ALTG) Alta Equipment Group Inc. is an integrated equipment dealership platform in the United States, operating through three segments: Material Handling, Construction Equipment, and... Read More

  • 3 Silver Stocks To Buy Now

    Featured Content Gatos Silver, Inc. (GATO) Gatos Silver, Inc. is a precious metals mining company primarily focused on silver and zinc production. Its flagship Cerro Los Gatos mine in Mexico... Read More

  • 3 Metal Production Stocks To Buy Now

    Featured Content Century Aluminum Company (CENX) Century Aluminum Company is a primary aluminum producer, with operations that include the production of high-purity, low-carbon aluminum used in automotive, aerospace, and industrial... Read More

  • 3 Medical Drug Stocks To Buy Now

    Featured Content Teva Pharmaceutical Industries Limited (TEVA) Teva Pharmaceutical Industries Limited is a global pharmaceutical company specializing in generic and specialty medicines. The company provides a wide range of treatments... Read More

  • 3 Paper Product Stocks To Buy Now

    Featured Content AptarGroup Inc. (ATR) AptarGroup Inc. is a global leader in providing innovative dispensing and packaging solutions, serving diverse industries like beauty, personal care, and pharmaceuticals. They focus on... Read More

  • 3 Restaurant Stocks To Buy Now

    Featured Content Brinker International, Inc. (EAT) Brinker International, Inc. operates well-known restaurant brands such as Chili’s Grill & Bar and Maggiano’s Little Italy. The company is a leader in the... Read More

  • 3 Investment Brokerage Stocks To Buy Now

    Featured Content Robinhood Markets, Inc. (HOOD) Robinhood Markets, Inc. is a financial services company known for its commission-free trading platform, which allows users to trade stocks, options, cryptocurrencies, and ETFs.... Read More

  • 3 Shipping Stocks To Buy Now

    Featured Content ZIM Integrated Shipping Services Ltd. (ZIM) ZIM Integrated Shipping Services Ltd. is a global container shipping company that provides cargo transportation services worldwide. The company operates a modern... Read More

  • 3 Mining Stocks To Buy Now

    Featured Content Perpetua Resources Corp. (PPTA) Perpetua Resources Corp. is a mining company focused on the exploration and redevelopment of the Stibnite Gold Project in Idaho, which is one of... Read More

  • 3 Airline Stocks To Buy Now

    Featured Content General Electric Company (GE) General Electric Company is a global industrial conglomerate with operations spanning sectors such as aviation, healthcare, power, and renewable energy. GE is known for... Read More