Are You Taking Your RMDs?
My name is Angel Pinkerton. With over 25 years in the financial services industry, I have helped many individuals build and meet their financial goals. For the last six years, I’ve worked closely with David Holland to advise Holland Financial’s clients. Recently, I had a gentleman ask a question that has come up multiple times. “Can I take my RMD and put it into a ROTH IRA?”
What is an RMD? The RMD is the required minimum distribution that must be taken from a retirement account by April 1st of the year following the year a person turns 70½. (In subsequent years, the RMD must be taken by December 31st.) The requirement to take this distribution applies to all employer-sponsored retirement plans (profit-sharing plans, 401[k] plans, 403[b] plans, and 457[b] plans) and to traditional IRAs and IRA-based plans. It is the account owner’s responsibility to take the distribution before the deadline – if the RMD is not taken, there could be significant penalties. The amount that the IRS requires is calculated by dividing the previous year’s December 31st IRA balance by the person’s appropriate life expectancy factor. (RMDs are not required to be taken from ROTH IRAs during the owner’s lifetime.)
What to do with your RMD? Many individuals use RMDs to supplement their income during their retirement years. Others choose to reinvest the funds once the distribution is made. Unfortunately, the Internal Revenue Service does not allow an individual to deposit or roll over an RMD into another retirement account, including a ROTH IRA. However, a contribution to a ROTH IRA can be made if a person is over 70½. To be eligible, the person must have earned income for the year in which the contribution is made. In addition, the individual’s adjusted gross income cannot exceed the annual limits set forth in IRS Publication 590 (≥$132,000 for a single head of household in 2016).
Can an RMD be converted to a ROTH IRA? The current tax law does not allow conversion of an RMD to a ROTH IRA; however, it is possible to convert all or a portion of the funds left over after taking the RMD, into a ROTH IRA. Keep in mind that you will have to pay taxes on the entire amount converted in the year the action took place. It’s confusing; I know! If you have questions, David and I would be happy to help clarify your options; please call our office for a complimentary consultation.