Can required minimum distributions from a traditional IRA be put into a Roth IRA?
That is an interesting approach for retirees whose required minimum distributions (RMDs) amount to more than the money they need immediately for living expenses. Readers have asked about changing retirement investments in the past, and this is another take on that question. Though the tax benefit of doing what you propose is limited and you probably won't be able to put the full amount of your RMDs into a Roth IRA, there is an extent to which this strategy could be feasible.
Even a partial deposit to your Roth IRA could provide you with some tax benefits, as well as help with retirement budgeting.
Tax benefits of putting RMD proceeds into a Roth IRA
First, some bad news. You won't avoid paying income tax on the portion of your RMDs you are able to contribute to a Roth IRA. Income taxes are deferred on traditional IRAs, but RMDs are designed to force you to start paying some taxes on that money in retirement.
You won't be able to balance the tax consequences of RMDs with a contribution to a Roth IRA simply because Roth contributions are not tax-deductible. However, Roth IRAs do allow investments to grow without further taxation. This can be a tax benefit of putting money in a Roth IRA even once you've reached retirement, especially if you plan on remaining actively invested.
One of the trickiest aspects of retirement planning is budgeting to make your retirement savings last over the remainder of your life, because you don't know how long you are going to live. Be aware of the best states for retirement to evaluate whether or not a move could be beneficial.
In particular, if you end up living an unusually long life, RMDs can confuse retirement budgeting because they may significantly deplete your retirement plan well before the end of your life. For this reason, retirees who want to protect against running out of money should not necessarily spend the entire amount of their RMDs. Contributing a portion of your RMDs to a Roth IRA could encourage you to hold some money back for longer-term retirement needs.
Limitations on contributing RMD proceeds to a Roth IRA
So, there is at least a partial benefit to contributing RMD proceeds to a Roth IRA, as well as a retirement budgeting benefit. Unfortunately though, there are limits to the extent you can pursue this strategy.
First of all, annual IRA contribution amounts are capped. The standard maximum contribution for 2019 is $6,000, but there is an additional $1,000 catch-up contribution allowed for people who are 50 or over, which would apply if you are old enough to be receiving RMDs.
A second limitation is that contributions to an IRA cannot exceed your taxable compensation for the year. So, you must still be working enough to earn at least $7,000 a year in order to take full advantage of the maximum IRA contribution.
While the approach of continuing to contribute to a Roth IRA in retirement is limited, your question is insightful because retirement can last enough years to merit a long-term planning approach to tax and budget strategy.
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