I Do Not Need My IRA RMD. Can I Put It in a Roth IRA?

If you don’t need your required minimum distributions (RMDs) from your traditional IRA for living expenses, it can be reinvested in a Roth IRA? Yes—assuming that you are eligible for a Roth based on your income.

This is because the money to fund your individual retirement account (IRA) can come from any pool of cash that you have available. However, you still need to pay attention to the contribution limits and earned income requirements.

How Required Minimum Distributions (RMDs) Work

Traditional IRA contributions are made with pretax dollars; in return, taxpayers are allowed to claim a deduction for the tax year in which the IRA contribution was made. On the other end, IRA distributions are taxable as income and may be subject to an IRS penalty if withdrawn early.

Alternatively, Roth IRA contributions are made with after-tax dollars. So, while you don’t get an up-front tax break, you can withdraw the money tax-free in retirement.

At age 72, traditional IRA holders must begin taking annual RMDs, which are calculated based on the total amount saved in all of your traditional IRAs. However, there are no RMD mandates for Roth IRAs during the owner’s lifetime, making them ideal wealth-transfer vehicles.

Investing an RMD Into a Roth IRA

For the 2021 and 2022 tax years, the annual contribution limit is $7,000 if you’re 50 or older. That limit is the total for all of your IRAs—traditional and Roth.

The Internal Revenue Service (IRS) requires that you have enough earned income to cover your Roth IRA contribution for the year—but the actual source of your contribution need not be directly from your paycheck.

If your RMD was less than $7,000, you could deposit all of the money into your Roth IRA. However, if you contributed $4,000 to another IRA in the same year, you could place just $3,000 of your RMD into a Roth IRA.

There are also Roth IRA contribution rules based on your income and tax-filing status. If your modified adjusted gross income (MAGI) is in the Roth IRA phaseout range, then you can make a reduced contribution. You can’t contribute at all if your MAGI exceeds the upper limit for your filing status. Here’s a rundown for the 2021 and 2022 tax years:

Avoiding RMDs

There is the option to convert your traditional IRA into a Roth IRA—a move called a Roth IRA conversion. Since Roth IRAs don’t have RMDs, you will no longer be required to take annual withdrawals once the funds are in the Roth.

However, the Roth IRA conversion is a taxable event—and the tax bill could be substantial. Since you received a tax deduction on the contributions into your traditional IRA, you need to pay those deferred taxes on the converted funds.

It’s a good idea to check with a tax professional to determine whether a conversion would make financial sense for you, as there are other factors to consider besides the RMD issue. For example, converting money from a traditional IRA to a Roth could also push you into a higher tax bracket, meaning that your marginal tax rate could be higher for that year.

If you decide to convert to a Roth IRA, remember to take an RMD from the traditional IRA one last time for the year of the conversion. That’s necessary because the traditional IRA still existed during that year.

Tax Consequences for Converting RMDs

An RMD can be used in many ways, such as for discretionary spending or to supplement retirement income.

RMDs can be reinvested, except in most retirement accounts like traditional and Roth IRAs. How funds are taxed depends on the type of investment vehicle.

For example, profits from the sale of stock are taxed as capital gains. Owners of mutual funds typically pay taxes on earnings and dividends while holding the funds. Then, when mutual fund shares are sold, the earnings are taxed as capital gains.

Another popular option is to invest the RMD into a 529 savings plan, which provides money for education costs, such as apprenticeships, education expenses for students in primary, secondary, and postsecondary institutions, and student loan repayments. In a 529 plan, the funds accumulate on a tax-deferred basis, and qualifying events allow funds to be withdrawn tax-free.

Qualified Charitable Distribution

IRA holders can satisfy RMD mandates by taking qualified charitable distributions (QCDs)—which are nontaxable withdrawals from qualified plans made directly to charities. QCDs up to $100,000 count toward the RMD amount.

To qualify as a QCD, the account holder must be at least 70½ years old, and the distribution must be made from the eligible account by Dec. 31 (no later than April 1 of the year following the first RMD year). Also, the distribution must be paid directly to the eligible charity.

Caution: Not all charities qualify. For instance, the charity cannot be a private foundation, a donor-led charity, or a charity where the donated funds directly support the donor. The charity also cannot be a supporting organization—a charity that supports other charities.

QCDs that exceed the RMD will not count toward future RMDs. Although reportable, the distribution is not subject to taxation and is not deductible. If a withdrawal is taken and the funds are later contributed to a charity, then the distribution is taxable as income. The funds must be withdrawn as a QCD.

The Bottom Line

Roth IRAs have no RMDs during the account owner’s lifetime. So, if you don’t need the money, you can leave your Roth alone to continue growing tax-free for your heirs. Traditional IRAs don’t have the same flexibility, and you must start taking those RMDs at age 72—whether you want the money or not.

Still, as long as you have enough earned income for the year to cover the contribution and you don’t exceed the income limits, you can deposit your traditional IRA’s RMDs into your Roth. This can be a smart way to boost your Roth IRA while following the RMD rules for your traditional IRA.