Many retirees make a costly mistake with their required minimum distributions (RMDs). When retirees do not need the RMD funds for living expenses, some attempt to move the money to a Roth IRA by treating it as a conversion. Others try to rollover the money to a different IRA or qualified retirement plan. However, neither of these actions are allowed by the IRS.
When a retiree is required to take RMDs, the first distribution from a traditional IRA during the year is considered to be the RMD until the full amount has been distributed. The RMD must be distributed from the traditional IRA and included in gross income. Only after the RMD has been satisfied can any additional amounts left in the traditional IRA be converted to a Roth IRA. It is possible to take the RMD and then contribute that amount to a Roth IRA (or a traditional IRA) after including the RMD in gross income.
There is no age limit for making contributions to either a Roth or traditional IRA, but individuals must meet the IRA contribution requirements to make a regular contribution, not a rollover. To make a contribution, one must have earned income for the year that is equal to or greater than the amount being contributed to the IRA. Only employment and self-employment income qualify as earned income; investment income and other passive income do not count.
Taxpayers with modified adjusted gross incomes (MAGI) above certain levels may not be able to make Roth IRA contributions or may only be able to contribute a reduced amount. For single taxpayers, the maximum Roth IRA contribution amount begins to be reduced when MAGI reaches $146,000 and is eliminated at $161,000. For married couples filing jointly, the contribution limit starts to be reduced at $230,000 and is $0 at $240,000. These MAGI limits are adjusted for inflation each year.
If an individual does not meet the earned income requirements and the MAGI limits, they will be making an “excess contribution” to the IRA and will owe a penalty for each year that the excess amount remains in the account. It is important for retirees to understand the rules and regulations surrounding RMDs, IRA contributions, and Roth conversions to avoid costly mistakes and penalties in their retirement years. It is advisable to consult with a financial advisor to ensure compliance with IRS guidelines and maximize retirement savings benefits.
