Can Roth conversions count as RMDs?

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leftcoaster
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Can Roth conversions count as RMDs?

Post by leftcoaster » Sat Jan 20, 2018 8:47 pm

Can someone taking RMDs satisfy the requirement with a Roth conversion if the RMD is not needed for current living expenses?

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FIREchief
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Re: Can Roth conversions count as RMDs?

Post by FIREchief » Sat Jan 20, 2018 8:48 pm

No, they can not.
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celia
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Re: Can Roth conversions count as RMDs?

Post by celia » Sat Jan 20, 2018 9:01 pm

No, but you can convert AFTER you withdraw your RMD each year.

If you don't need the RMD, you can always give it to charity by following Qualified Charitable Donation (QCD) rules, then convert. Neither you nor the charity will have to pay taxes on the QCD.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Can Roth conversions count as RMDs?

Post by OldSport » Sat Jan 20, 2018 9:14 pm

celia wrote:
Sat Jan 20, 2018 9:01 pm
No, but you can convert AFTER you withdraw your RMD each year.

If you don't need the RMD, you can always give it to charity by following Qualified Charitable Donation (QCD) rules, then convert. Neither you nor the charity will have to pay taxes on the QCD.
How do they convert after withdrawing RMD? What is the process?

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Re: Can Roth conversions count as RMDs?

Post by jebmke » Sat Jan 20, 2018 9:15 pm

OldSport wrote:
Sat Jan 20, 2018 9:14 pm
celia wrote:
Sat Jan 20, 2018 9:01 pm
No, but you can convert AFTER you withdraw your RMD each year.

If you don't need the RMD, you can always give it to charity by following Qualified Charitable Donation (QCD) rules, then convert. Neither you nor the charity will have to pay taxes on the QCD.
How do they convert after withdrawing RMD? What is the process?
Same as any conversion. As long as you have met the RMD for the year the conversion of any amount of the remaining balance is fine.
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Re: Can Roth conversions count as RMDs?

Post by Alan S. » Sat Jan 20, 2018 9:23 pm

leftcoaster wrote:
Sat Jan 20, 2018 8:47 pm
Can someone taking RMDs satisfy the requirement with a Roth conversion if the RMD is not needed for current living expenses?
The short answer considering the entire picture is No. The detailed answer is more complicated.

If you execute a conversion as your first TIRA withdrawal in an RMD year, it actually DOES satisfy the RMD requirement if it is equal or more than your RMD. Your RMD has been completed, but your RMD is not eligible for rollover so now you have made an excess Roth IRA regular contribution which must be removed with earnings to avoid annual 6% excise taxes. You can no longer simply recharacterize the conversion and start over since such recharacterizations are no longer allowed. You would have to request a return of the excess Roth regular contribution. This is a reporting intensive way to move your funds into a taxable account, so keep it simple and just move them to taxable directly from the TIRA, not route them through the Roth.

OldSport
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Re: Can Roth conversions count as RMDs?

Post by OldSport » Sat Jan 20, 2018 9:24 pm

How much are RMDs and what are the best options for these? I thought you could convert to Roth if you didn't need the money, since you pay taxes on the withdrawal. It's looking like you can't? That's disappointing.

OldSport
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Re: Can Roth conversions count as RMDs?

Post by OldSport » Sat Jan 20, 2018 9:26 pm

So you cannot roll over a RMD to an after tax nondeductible IRA and convert to Roth? What then are options for the RMD if you don't need all the money, but want to keep the assets invested for future growth/heirs. Is taxable the only option and there's no way to get this in a Roth??

leftcoaster
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Re: Can Roth conversions count as RMDs?

Post by leftcoaster » Sat Jan 20, 2018 9:27 pm

Odd constraint. The conversion is taxable just as the distribution. Oh well

DrGoogle2017
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Re: Can Roth conversions count as RMDs?

Post by DrGoogle2017 » Sat Jan 20, 2018 9:46 pm

OldSport wrote:
Sat Jan 20, 2018 9:24 pm
How much are RMDs and what are the best options for these? I thought you could convert to Roth if you didn't need the money, since you pay taxes on the withdrawal. It's looking like you can't? That's disappointing.
It’s on top of RMDs. So let’s say you have a $1million, you need to take about 4% when you turn 70.5, which is about $40k. You can take an additional amount of X on top of your $40k, let’s say it’s $60k for Roth Conversion, so total withdraw is $100k. So your account will be around $900k left. Provided there is zero return for simplicity’s sake, the next year, you have to take out roughly $36k, instead of $40k. This is why it makes sense to do Roth conversion way before you need to take out RMDs.

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Re: Can Roth conversions count as RMDs?

Post by The Wizard » Sat Jan 20, 2018 9:50 pm

OldSport wrote:
Sat Jan 20, 2018 9:26 pm
So you cannot roll over a RMD to an after tax nondeductible IRA and convert to Roth? What then are options for the RMD if you don't need all the money, but want to keep the assets invested for future growth/heirs. Is taxable the only option and there's no way to get this in a Roth??
You get money into your Roth IRA by doing conversions prior to your age 70.5 year.
Or, in that year or later take your entire RMD first and put the proceeds in your checking account. Then do Roth conversions on the remaining tax deferred amount until New Year's Eve.

This is pretty basic stuff...
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spammagnet
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Re: Can Roth conversions count as RMDs?

Post by spammagnet » Sat Jan 20, 2018 10:50 pm

celia wrote:
Sat Jan 20, 2018 9:01 pm
If you don't need the RMD, you can always give it to charity by following Qualified Charitable Donation (QCD) rules, then convert. Neither you nor the charity will have to pay taxes on the QCD.
Did that change in any way with the new tax law?

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GerryL
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Re: Can Roth conversions count as RMDs?

Post by GerryL » Sat Jan 20, 2018 10:59 pm

OldSport wrote:
Sat Jan 20, 2018 9:26 pm
So you cannot roll over a RMD to an after tax nondeductible IRA and convert to Roth? What then are options for the RMD if you don't need all the money, but want to keep the assets invested for future growth/heirs. Is taxable the only option and there's no way to get this in a Roth??
RMDs are intended to get money that has been tax-deferred for years out of tax-advantaged accounts so the government can finally collect taxes on it. RMDs cannot be put back into tax-advantaged accounts, even after those taxes have been paid.

OldSport
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Re: Can Roth conversions count as RMDs?

Post by OldSport » Sat Jan 20, 2018 11:15 pm

GerryL wrote:
Sat Jan 20, 2018 10:59 pm
OldSport wrote:
Sat Jan 20, 2018 9:26 pm
So you cannot roll over a RMD to an after tax nondeductible IRA and convert to Roth? What then are options for the RMD if you don't need all the money, but want to keep the assets invested for future growth/heirs. Is taxable the only option and there's no way to get this in a Roth??
RMDs are intended to get money that has been tax-deferred for years out of tax-advantaged accounts so the government can finally collect taxes on it. RMDs cannot be put back into tax-advantaged accounts, even after those taxes have been paid.
OK. I get this. If someone retires at 59.5, can they take distributions from 401k, roll over to TIRA, convert to Roth, thus reducing 401k by the time RMDs are required?

Is 70 the oldest someone can contribute or convert anything to a Roth?

sport
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Re: Can Roth conversions count as RMDs?

Post by sport » Sat Jan 20, 2018 11:20 pm

spammagnet wrote:
Sat Jan 20, 2018 10:50 pm
celia wrote:
Sat Jan 20, 2018 9:01 pm
If you don't need the RMD, you can always give it to charity by following Qualified Charitable Donation (QCD) rules, then convert. Neither you nor the charity will have to pay taxes on the QCD.
Did that change in any way with the new tax law?
No. The rules for QCDs remain the same.

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FIREchief
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Re: Can Roth conversions count as RMDs?

Post by FIREchief » Sat Jan 20, 2018 11:45 pm

OldSport wrote:
Sat Jan 20, 2018 11:15 pm
GerryL wrote:
Sat Jan 20, 2018 10:59 pm
OldSport wrote:
Sat Jan 20, 2018 9:26 pm
So you cannot roll over a RMD to an after tax nondeductible IRA and convert to Roth? What then are options for the RMD if you don't need all the money, but want to keep the assets invested for future growth/heirs. Is taxable the only option and there's no way to get this in a Roth??
RMDs are intended to get money that has been tax-deferred for years out of tax-advantaged accounts so the government can finally collect taxes on it. RMDs cannot be put back into tax-advantaged accounts, even after those taxes have been paid.
OK. I get this. If someone retires at 59.5, can they take distributions from 401k, roll over to TIRA, convert to Roth, thus reducing 401k by the time RMDs are required?
Yes. Whether or not they can roll the 401k over incrementally is up to the terms of their 401k plan.
Is 70 the oldest someone can contribute or convert anything to a Roth?
No. Those older than 70 can Roth convert funds remaining in their tIRA beyond the RMD for the year. I believe that if somebody is still working, they also can contribute to a Roth (I really don't know, because I FIREd long before 70). :sharebeer

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The Wizard
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Re: Can Roth conversions count as RMDs?

Post by The Wizard » Sun Jan 21, 2018 1:59 am

FIREchief wrote:
Sat Jan 20, 2018 11:45 pm

Is 70 the oldest someone can contribute or convert anything to a Roth?

No. Those older than 70 can Roth convert funds remaining in their tIRA beyond the RMD for the year. I believe that if somebody is still working, they also can contribute to a Roth (I really don't know, because I FIREd long before 70). :sharebeer
Correct on conversions.

For contributions directly to your Roth IRA, you need Earned Income of at least the amount contributed, up to $6500.
But if your MAGI is too high for a direct Roth contrib, then you are out of luck, since old people are not permitted to do backdoor Roth contributions...
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FIREchief
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Re: Can Roth conversions count as RMDs?

Post by FIREchief » Sun Jan 21, 2018 2:53 am

The Wizard wrote:
Sun Jan 21, 2018 1:59 am
FIREchief wrote:
Sat Jan 20, 2018 11:45 pm

Is 70 the oldest someone can contribute or convert anything to a Roth?

No. Those older than 70 can Roth convert funds remaining in their tIRA beyond the RMD for the year. I believe that if somebody is still working, they also can contribute to a Roth (I really don't know, because I FIREd long before 70). :sharebeer
Correct on conversions.

For contributions directly to your Roth IRA, you need Earned Income of at least the amount contributed, up to $6500.
But if your MAGI is too high for a direct Roth contrib, then you are out of luck, since old people are not permitted to do backdoor Roth contributions...
Yep, that's why I qualified my comment with "if somebody is still working."
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adam123
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Re: Can Roth conversions count as RMDs?

Post by adam123 » Sun Jan 21, 2018 3:26 am

Isn't the theory on this that generally the best time to try and do conversions is after 59.5 and up to 70.5 (i.e. after withdrawal without penalty and before RMD), so long as the amounts withdrawn (to be converted) are such that they do not take you to an unacceptably higher income tax bracket?

As I understand this theory, the benefits are that: (1) you can convert during this lifestage without having to first take any RMDs, because the conversion happens before 70.5 - i.e. you don't have to worry about first withdrawing RMDs before conversion because RMDs are not an issue; (2) By effectively converting before 70.5, you also lower your TIRA account balance such that your RMDs will be lower when they are later required at 70.5, with those funds already growing in a Roth (albeit having paid income tax on the conversion); (3) the tax on the conversion may be in a lower income tax bracket because your income during retirement (presumably, but not always) is lower than in working years - and also lower, because no RMDs are yet required.

I suppose that by converting earlier, you deny yourself the longer benefit of pre-tax growth, but you also lessen the blow of RMDs by allowing yourself more opportunities for tax advantaged growth - by having converted funds that would have been slated for RMDs into a Roth in advance of 70.5.

Am I wrong on this? If correct, are there any resources anyone knows on how to calculate the sweet spot on how much to convert between 59.5-70.5?

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Re: Can Roth conversions count as RMDs?

Post by kaneohe » Sun Jan 21, 2018 9:31 am

adam123 wrote:
Sun Jan 21, 2018 3:26 am
Isn't the theory on this that generally the best time to try and do conversions is after 59.5 and up to 70.5 (i.e. after withdrawal without penalty and before RMD), so long as the amounts withdrawn (to be converted) are such that they do not take you to an unacceptably higher income tax bracket?

..................................................
I think generally this is correct. However you might want to soften the 59.5 condition..........you can withdraw and convert anytime w/o penalty provided you pay the taxes from outside the TIRA so that all TIRA funds w/d go into the Roth.

The Wizard
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Re: Can Roth conversions count as RMDs?

Post by The Wizard » Sun Jan 21, 2018 9:45 am

adam123 wrote:
Sun Jan 21, 2018 3:26 am
Isn't the theory on this that generally the best time to try and do conversions is after 59.5 and up to 70.5 (i.e. after withdrawal without penalty and before RMD), so long as the amounts withdrawn (to be converted) are such that they do not take you to an unacceptably higher income tax bracket?
More generally, the best time is after you retire or at least downsize significantly from previous full-time work.
And from then up until New Year's Eve just prior to the year you turn 70.5.

Do Roth conversions incur a penalty if done prior to age 59.5?
I have no personal knowledge on this...

Edit: apparently no penalty prior to age 59.5 so long as you avoid certain "traps"...
https://www.irahelp.com/slottreport/rot ... nalty-trap
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quantAndHold
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Re: Can Roth conversions count as RMDs?

Post by quantAndHold » Sun Jan 21, 2018 10:03 am

Random things nobody has said...

You can also contribute to your 70+ y/o spouse’s Roth IRA if you are working.

I-Orp makes suggestions for “optimal” Roth conversions, if you want a number. I-Orp’s suggestions tend to be pretty high. Other suggestions tend to be focused on “filling up” tax brackets.

I read an article several years ago where someone was taking their RMD, then using the after tax part of the RMD to pay the tax on a Roth conversion. So you can do that if you have to take RMD’s.

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Re: Can Roth conversions count as RMDs?

Post by radiowave » Sun Jan 21, 2018 10:21 am

If you only had a small amount of space to do either a Roth IRA conversion at 12% tax or sell funds in taxable at 0% LTCG, which would be the priority?
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Re: Can Roth conversions count as RMDs?

Post by technovelist » Sun Jan 21, 2018 11:02 am

radiowave wrote:
Sun Jan 21, 2018 10:21 am
If you only had a small amount of space to do either a Roth IRA conversion at 12% tax or sell funds in taxable at 0% LTCG, which would be the priority?
If you plan properly it might be possible to avoid taxes entirely in later years. Given that possibility, 0% is better than 12%, so I would do the latter.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Can Roth conversions count as RMDs?

Post by ralph124cf » Sun Jan 21, 2018 11:18 am

radiowave wrote:
Sun Jan 21, 2018 10:21 am
If you only had a small amount of space to do either a Roth IRA conversion at 12% tax or sell funds in taxable at 0% LTCG, which would be the priority?
When you die, your taxable gets a step-up in basis, and so becomes tax free to your heirs. I would do the ROTH at 12% until I had my goal percentage in ROTH. I'm shooting for financial assets 30% taxable, 30% ROTH, and 40% pre-tax.

Ralph

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Re: Can Roth conversions count as RMDs?

Post by DrGoogle2017 » Sun Jan 21, 2018 1:46 pm

I suppose that by converting earlier, you deny yourself the longer benefit of pre-tax growth, but you also lessen the blow of RMDs by allowing yourself more opportunities for tax advantaged growth - by having converted funds that would have been slated for RMDs into a Roth in advance of 70.5.
I disagree about the denying part. I rather see it as giving your investment a long period of growing and compounding for years, without Uncle Sam taking a bite of that investment eventually. That’s the sweet spot.
I’ve been thinking about this for a while. I may convert more than the 12% tax bracket. I’m not even thinking of my heirs even. This is my money and I plan to spend it. But assume I will live another 25-30 years, or maybe even longer, it’s going to be amazing.

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Re: Can Roth conversions count as RMDs?

Post by Epsilon Delta » Sun Jan 21, 2018 1:55 pm

radiowave wrote:
Sun Jan 21, 2018 10:21 am
If you only had a small amount of space to do either a Roth IRA conversion at 12% tax or sell funds in taxable at 0% LTCG, which would be the priority?
It depends in part on if/when you are going to need to sell the assets to spend, and how much you want to sell the assets to take profits / diversify / get out of a bubble. If your projected holding period is "forever" do the Roth. If the holding period is "sell now" probably take the LTCG.

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Re: Can Roth conversions count as RMDs?

Post by Alan S. » Sun Jan 21, 2018 4:51 pm

And of course the obvious: If you expect the shares to drop or are overly concentrated in them, now you are talking about lost principal. Harvest the gain. This is also true for older investors hoping to avoid CGs via the death basis adjustment.

Preventing loss of principal always trumps letting the tax tail wag the dog.

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