Mechanics of Roth Conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
magua
Posts: 10
Joined: Sun Jul 16, 2023 4:48 pm

Mechanics of Roth Conversion

Post by magua »

This is my first year taking RMD. I do not need the money. I read the Bogleheads wiki on Roth Conversions, but was looking for some clarity.

1) Am I allowed to convert the RMD withdrawn amount to a Roth IRA contribution?
2) Are there any downsides to doing this? (If I do not need the money, it seems like a freebie)
3) If I already took the RMD, can I still put that amount into a Roth in the same year? Or does it need to be part of the same transaction?

Thanks!
User avatar
CAsage
Posts: 3759
Joined: Sun Mar 27, 2016 6:25 pm

Re: Mechanics of Roth Conversion

Post by CAsage »

You cannot do a Roth conversion on an RMD (the Feds want that money taxed, not sheltered again). One cannot contribute to a Roth unless you have earned income that year, and subject to $$ limits. Good thought, but no.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
User avatar
Clever_Username
Posts: 2042
Joined: Sun Jul 15, 2012 12:24 am
Location: California

Re: Mechanics of Roth Conversion

Post by Clever_Username »

Is it possible (I do not know -- and I'm far from RMDs) to take the RMD that you don't need, calculate how much additional income would produce a tax bill of about that amount, and convert that much of the tax-deferred into Roth? If so, would this lower future RMDs?

(I do not know much about how RMDs work, and I'm over three decades from where they begin under current rules, so please do not take me for an expert in this area)
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
tibbitts
Posts: 24382
Joined: Tue Feb 27, 2007 5:50 pm

Re: Mechanics of Roth Conversion

Post by tibbitts »

magua wrote: Sun Jun 09, 2024 2:35 pm This is my first year taking RMD. I do not need the money. I read the Bogleheads wiki on Roth Conversions, but was looking for some clarity.

1) Am I allowed to convert the RMD withdrawn amount to a Roth IRA contribution?
2) Are there any downsides to doing this? (If I do not need the money, it seems like a freebie)
3) If I already took the RMD, can I still put that amount into a Roth in the same year? Or does it need to be part of the same transaction?

Thanks!
You can convert the same or any amount into a Roth (assuming you have enough deferred balance), but the amount will have to be in addition to the RMD amount. So it may be impractical in terms of tax rates. That's why the "rush" to convert post-employment, but before (first SS, and then) RMDs.
tibbitts
Posts: 24382
Joined: Tue Feb 27, 2007 5:50 pm

Re: Mechanics of Roth Conversion

Post by tibbitts »

Clever_Username wrote: Sun Jun 09, 2024 2:43 pm Is it possible (I do not know -- and I'm far from RMDs) to take the RMD that you don't need, calculate how much additional income would produce a tax bill of about that amount, and convert that much of the tax-deferred into Roth? If so, would this lower future RMDs?

(I do not know much about how RMDs work, and I'm over three decades from where they begin under current rules, so please do not take me for an expert in this area)
I don't understand but you seem to be making the process too complicated. You have to take the RMD and pay tax on it; that's before you can even consider conversions. Further conversions above your RMD would indeed lower future RMDs.
User avatar
Clever_Username
Posts: 2042
Joined: Sun Jul 15, 2012 12:24 am
Location: California

Re: Mechanics of Roth Conversion

Post by Clever_Username »

tibbitts wrote: Sun Jun 09, 2024 2:47 pm
Clever_Username wrote: Sun Jun 09, 2024 2:43 pm Is it possible (I do not know -- and I'm far from RMDs) to take the RMD that you don't need, calculate how much additional income would produce a tax bill of about that amount, and convert that much of the tax-deferred into Roth? If so, would this lower future RMDs?

(I do not know much about how RMDs work, and I'm over three decades from where they begin under current rules, so please do not take me for an expert in this area)
I don't understand but you seem to be making the process too complicated. You have to take the RMD and pay tax on it; that's before you can even consider conversions. Further conversions above your RMD would indeed lower future RMDs.
Thank you. This, as well as your response right above this one, answered my question.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
User avatar
jeffyscott
Posts: 13828
Joined: Tue Feb 27, 2007 8:12 am

Re: Mechanics of Roth Conversion

Post by jeffyscott »

tibbitts wrote: Sun Jun 09, 2024 2:47 pm
Clever_Username wrote: Sun Jun 09, 2024 2:43 pm Is it possible (I do not know -- and I'm far from RMDs) to take the RMD that you don't need, calculate how much additional income would produce a tax bill of about that amount, and convert that much of the tax-deferred into Roth? If so, would this lower future RMDs?

(I do not know much about how RMDs work, and I'm over three decades from where they begin under current rules, so please do not take me for an expert in this area)
I don't understand but you seem to be making the process too complicated. You have to take the RMD and pay tax on it; that's before you can even consider conversions. Further conversions above your RMD would indeed lower future RMDs.
I'm guessing the idea behind this is, if you don't need the money use it to pay taxes to reduce the amount in taxable as well as in the IRA. So you convert enough such that taxes on the conversion plus taxes on the RMD are equal to the RMD, thus adding nothing to taxable.

Whether or not it makes financial sense is still going depend on marginal tax rate on the conversion vs. the marginal tax rate on future RMDs and probably future tax rates on withdrawals by heirs.
EricGold
Posts: 653
Joined: Sat Mar 16, 2024 4:19 pm

Re: Mechanics of Roth Conversion

Post by EricGold »

CAsage wrote: Sun Jun 09, 2024 2:37 pm You cannot do a Roth conversion on an RMD (the Feds want that money taxed, not sheltered again). One cannot contribute to a Roth unless you have earned income that year, and subject to $$ limits. Good thought, but no.
This is exactly right, I only Bold conversions Vs contributions for those new to the topic.
BirdFood
Posts: 493
Joined: Sat Mar 23, 2024 12:15 pm

Re: Mechanics of Roth Conversion

Post by BirdFood »

CAsage wrote: Sun Jun 09, 2024 2:37 pm You cannot do a Roth conversion on an RMD (the Feds want that money taxed, not sheltered again).
Oh, interesting. I would have thought that it WAS taxed by being converted, but the government wants it to live a taxable existence going forward?
FactualFran
Posts: 2901
Joined: Sat Feb 21, 2015 1:29 pm

Re: Mechanics of Roth Conversion

Post by FactualFran »

As other have indicated, doing a Roth conversion of a RMD is not allowed. However, if you are eligible to make a regular contribution to a Roth IRA, it does not matter that by tracking the detailed movements of cash, the cash came from a RMD. You need to have enough compensation that is eligible to contribute to an IRA.
rossington
Posts: 1923
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Mechanics of Roth Conversion

Post by rossington »

BirdFood wrote: Sun Jun 09, 2024 3:22 pm
CAsage wrote: Sun Jun 09, 2024 2:37 pm You cannot do a Roth conversion on an RMD (the Feds want that money taxed, not sheltered again).
Oh, interesting. I would have thought that it WAS taxed by being converted, but the government wants it to live a taxable existence going forward?
Hi BirdFood,
You can't transfer the RMD back into a tax sheltered account.
RMD's and Roth conversions are two different things.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
User avatar
CAsage
Posts: 3759
Joined: Sun Mar 27, 2016 6:25 pm

Re: Mechanics of Roth Conversion

Post by CAsage »

BirdFood wrote: Sun Jun 09, 2024 3:22 pm
CAsage wrote: Sun Jun 09, 2024 2:37 pm You cannot do a Roth conversion on an RMD (the Feds want that money taxed, not sheltered again).
Oh, interesting. I would have thought that it WAS taxed by being converted, but the government wants it to live a taxable existence going forward?
Both - the RMD is fully taxable, and you are subject to other restrictions on sheltering money. Note that money is fungible; whether it comes from an RMD or your pocket isn't key here. There are rules on RMD (i.e. pay taxes, no conversion) and separate rules on new money added to Roth, IRA, or 401K. Hence the many posts on doing Roth conversions before RMD's hit.... I will note, it's perfectly fine to take that RMD money and add it to your brokerage account - no one forces you to spend it!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
EricGold
Posts: 653
Joined: Sat Mar 16, 2024 4:19 pm

Re: Mechanics of Roth Conversion

Post by EricGold »

CAsage wrote: Sun Jun 09, 2024 3:57 pm I will note, it's perfectly fine to take that RMD money and add it to your brokerage account - no one forces you to spend it!
This is an important point. Depending mostly on the amounts involved, an RMD to ROTH may be no different than an RMD to taxable
BirdFood
Posts: 493
Joined: Sat Mar 23, 2024 12:15 pm

Re: Mechanics of Roth Conversion

Post by BirdFood »

CAsage wrote: Sun Jun 09, 2024 3:57 pm
BirdFood wrote: Sun Jun 09, 2024 3:22 pm
CAsage wrote: Sun Jun 09, 2024 2:37 pm You cannot do a Roth conversion on an RMD (the Feds want that money taxed, not sheltered again).
Oh, interesting. I would have thought that it WAS taxed by being converted, but the government wants it to live a taxable existence going forward?
Both - the RMD is fully taxable, and you are subject to other restrictions on sheltering money. Note that money is fungible; whether it comes from an RMD or your pocket isn't key here. There are rules on RMD (i.e. pay taxes, no conversion) and separate rules on new money added to Roth, IRA, or 401K. Hence the many posts on doing Roth conversions before RMD's hit.... I will note, it's perfectly fine to take that RMD money and add it to your brokerage account - no one forces you to spend it!
Yep, yep. I just hadn't made the conscious distinction between the government wanting to make up for the one-shot taxes that it never got on that money when it was first earned, and the government wanting that money OUT of all tax-advantaged places permanently.
Topic Author
magua
Posts: 10
Joined: Sun Jul 16, 2023 4:48 pm

Re: Mechanics of Roth Conversion

Post by magua »

Thank you for the information.

I now understand that I can't do a Roth conversion on the RMD amount. If I only have investment income, (no earned income) can I do a Roth conversion on amounts above the RMD amount? I find the IRS information to be very confusing on this topic.
User avatar
Duckie
Posts: 9825
Joined: Thu Mar 08, 2007 1:55 pm

Re: Mechanics of Roth Conversion

Post by Duckie »

magua wrote: Sun Jun 09, 2024 5:55 pm I now understand that I can't do a Roth conversion on the RMD amount. If I only have investment income, (no earned income) can I do a Roth conversion on amounts above the RMD amount?
Yes. Once you have satisfied the RMD you may convert an additional amount from your tax-sheltered account to a Roth IRA.
User avatar
FiveK
Posts: 16174
Joined: Sun Mar 16, 2014 2:43 pm

Re: Mechanics of Roth Conversion

Post by FiveK »

magua wrote: Sun Jun 09, 2024 2:35 pm This is my first year taking RMD. I do not need the money. I read the Bogleheads wiki on Roth Conversions, but was looking for some clarity.
Thanks for that observation. Wiki updated to clarify that RMDs may not be converted to Roth.
VanGar+Goyle
Posts: 628
Joined: Sat May 29, 2021 1:31 pm

Re: Mechanics of Roth Conversion

Post by VanGar+Goyle »

magua wrote: Sun Jun 09, 2024 2:35 pm 1) Am I allowed to convert the RMD withdrawn amount to a Roth IRA contribution?
2) Are there any downsides to doing this? (If I do not need the money, it seems like a freebie)
3) If I already took the RMD, can I still put that amount into a Roth in the same year? Or does it need to be part of the same transaction?
A suggested order is to do any QCD Qualified Charitable Distribution first,
then RMD Required Minimum Distribution, and then any other distribution.
Once the money is out of your retirement account, it could be used for other purposes, like spending on expenses, investing, paying taxes, or contributing to a Roth account, subject to other restrictions.
User avatar
celia
Posts: 17014
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Mechanics of Roth Conversion

Post by celia »

Clever_Username wrote: Sun Jun 09, 2024 2:43 pm Is it possible (I do not know -- and I'm far from RMDs) to take the RMD that you don't need, calculate how much additional income would produce a tax bill of about that amount, and convert that much of the tax-deferred into Roth? If so, would this lower future RMDs?
The first withdrawal(s) of the year are RMDs by definition (once you reach RMD age). You can give the RMD (or part of it) to charities if you wish and those dollars won't be taxed. After the RMD has been satisfied, then you can convert.

All the withdrawals, except for QCDs (Qualified Charitable Distributions) will be taxed as ordinary income. If any of the withdrawals were withheld for taxes, since money is fungible, it can be thought of as paying the taxes on the taxable withdrawals (whether they were RMDs going to taxable, going to the IRS, being converted, or other taxable income).

tibbitts wrote: Sun Jun 09, 2024 2:47 pm You have to take the RMD and pay tax on it; that's before you can even consider conversions. Further conversions above your RMD would indeed lower future RMDs.
Future RMDs can be higher, lower, or about the same each year (at least for a few years). RMDs are based on 1) your age for the current year and 2) the end of the previous year's IRA balance. The percentage to withdraw increases each year as you age, so that can make the RMD increase each year. That is in addition to the balance in the account at the end of the year. If the account grows more than what is withdrawn, of course the balance will also grow.

Those with large IRAs (over $500K if Single, $1 M if MFJ) should consider converting a lot more than their RMD if they want their balance to decrease.
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.
User avatar
celia
Posts: 17014
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Mechanics of Roth Conversion

Post by celia »

CAsage wrote: Sun Jun 09, 2024 3:57 pm I will note, it's perfectly fine to take that RMD money and add it to your brokerage account - no one forces you to spend it!
"Brokerage accounts" have nothing to do with this. They are just accounts that allow you to buy (and sell) more than just mutual funds. You can also buy/sell individual stocks, bonds, ETFs, CDs, crypto, and other kinds of assets.

A brokerage account can be titled as a tax-deferred account (like an IRA or 401K), a Roth account, a taxable account (like your individual name or joint names, or a trust name), a 529 account, or other types of accounts. The important thing here is that the RMD must be moved to a taxable account or be given to charity! Withholding for taxes is just a shortcut for moving the money to taxable then immediately sending it to the tax authorities.

EricGold wrote: Sun Jun 09, 2024 4:08 pm This is an important point. Depending mostly on the amounts involved, an RMD to ROTH may be no different than an RMD to taxable
Well, the taxes would be the same either way. But you can't convert an RMD.
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.
tibbitts
Posts: 24382
Joined: Tue Feb 27, 2007 5:50 pm

Re: Mechanics of Roth Conversion

Post by tibbitts »

celia wrote: Mon Jun 10, 2024 3:56 am
tibbitts wrote: Sun Jun 09, 2024 2:47 pm You have to take the RMD and pay tax on it; that's before you can even consider conversions. Further conversions above your RMD would indeed lower future RMDs.
Future RMDs can be higher, lower, or about the same each year (at least for a few years). RMDs are based on 1) your age for the current year and 2) the end of the previous year's IRA balance. The percentage to withdraw increases each year as you age, so that can make the RMD increase each year. That is in addition to the balance in the account at the end of the year. If the account grows more than what is withdrawn, of course the balance will also grow.

Those with large IRAs (over $500K if Single, $1 M if MFJ) should consider converting a lot more than their RMD if they want their balance to decrease.
I should have been clearer: with a conversion in addition to taking RMDs, future RMDs will always be lower relative to what they would have been without the conversion.
User avatar
jeffyscott
Posts: 13828
Joined: Tue Feb 27, 2007 8:12 am

Re: Mechanics of Roth Conversion

Post by jeffyscott »

celia wrote: Mon Jun 10, 2024 4:37 am
EricGold wrote: Sun Jun 09, 2024 4:08 pm This is an important point. Depending mostly on the amounts involved, an RMD to ROTH may be no different than an RMD to taxable
Well, the taxes would be the same either way. But you can't convert an RMD.
The taxes at the time the money is moved are the same. There are added future taxes on any dividends or (realized) gains in taxable and, perhaps, what was meant is that those added taxes might not be that significant? So the fact that the RMD can not go to Roth might not be all that significant, depending on the tax bracket (which depends on income, including RMDs).

One US stock fund that I have in taxable has an annual tax cost of 0.08% for me, in our current tax brackets. If sold, any gains would be taxed at about 4%, if held until death that 4% in state income tax is avoided.
Post Reply