Don’t Roll Over RMDs To Other Retirement Accounts

Some retirees continue to make a key mistake with required minimum distributions, and that could cost them a lot of money.

When a retiree doesn’t need the RMD to pay living expenses, some move the money to a Roth IRA, treating it as a conversion of the RMD to a Roth IRA. Others try to rollover the money to a different IRA or qualified retirement plan.

Neither action is allowed.

When a person has to take RMDs, the first distribution from a traditional IRA during the year is considered to be the RMD until the RMD amount has been distributed.

The RMD amount has to be distributed from the traditional IRA and included in gross income. Only after the RMD is satisfied can any additional amounts left in the traditional IRA be converted to a Roth IRA.

It’s possible to take the RMD and then contribute that amount to a Roth IRA (or a traditional IRA), after including the RMD in gross income.

There’s no age limit for making contributions to either a Roth or traditional IRA.

But you must meet the IRA contribution requirements, because you’ll be making a regular IRA contribution not a rollover.

To make a contribution, you must have earned income for the year at least equal to the amount you contribute to the IRA. Only employment and self-employment income is earned income. Investment income and other passive income don’t count as earned income.

In addition, taxpayers with modified adjusted gross incomes (MAGI) above certain levels can’t make Roth IRA contributions or can contribute only a reduced amount.

For single taxpayers, in 2024 the maximum Roth IRA contribution amount begins to be reduced when MAGI is $146,000 and is eliminated when MAGI reaches $161,000. For married couples filing jointly, the contribution limit begins to be reduced when MAGI reaches $230,000 and is $0 when MAGI hits $240,000. The MAGI limits are indexed for inflation each year.

If you don’t meet those two tests, you’ll be making an “excess contribution” to the IRA and will owe a penalty for each year the excess amount stays in the IRA.