DQOTD: Why Can't I Do A Roth Conversion With An RMD?

[Midpack]

I'm 5 years from RMDs, but I assumed I could put the RMD $ (that we don't want or need) into my Roth IRA. I'm going to pay income taxes on the RMD $ just like on a TIRA distribution going to a Roth conversion, so I don't understand the rationale for Congress (not the IRS) disallowing same. Anyone know why?

I understand I can convert $ above and beyond my RMD amount from my TIRA, but not the RMD amount...

 

[braumeister]

Well, you can. As long as you also have the same amount of earned income.

 

[pb4uski]

Congressional intent is that these two different types of IRAs allow individuals to save money for retirement.

They are not designed or intended to facilitate tax-free intergenerational wealth transfer. It's as simple as that.

 

[Midpack]

Congressional intent is that these two different types of IRAs allow individuals to save money for retirement.

They are not designed or intended to facilitate tax-free intergenerational wealth transfer. It's as simple as that.

I guess I understand that. It's just hard to grapple with being forced to accumulate money in taxable accounts that we won't spend AFTER we've paid taxes on the distribution. Just wondering if I was missing something to preserve our funds. Yes, fortunate first world problems to be sure...

 

[JBTX]

I get what you are saying but they have always been required minimum distributions. A Roth conversion is not a distribution. So the law would have to be changed to required distributions and/or conversions which could get complicated.

 

[braumeister]

I guess I understand that. It's just hard to grapple with being forced to accumulate money in taxable accounts that we won't spend AFTER we've paid taxes on the distribution. Yes, fortunate first world problems to be sure...

They really don't care whether you spend it, save it, invest it, or give it away; they just want you to pay tax on it.

I agree with your grumbling, and looking back I wish we hadn't put quite so much into TIRAs, but it seemed like the best idea at the time.

 

[JBTX]

I guess I understand that. It's just hard to grapple with being forced to accumulate money in taxable accounts that we won't spend AFTER we've paid taxes on the distribution. Yes, fortunate first world problems to be sure...

If you won’t spend it put it in low or no dividend distribution securities and it will almost be no different than if in Roth as you will get a step up in basis upon your death.

 

[NW-Bound]

They really don't care whether you spend it, save it, invest it, or give it away; they just want you to pay tax on it.

I agree with your grumbling, and looking back I wish we hadn't put quite so much into TIRAs, but it seemed like the best idea at the time.

Not I.

Our IRA (roll-over 401k) accounts are 7 figures now, and although we maxed out the contribution each year when working it was only $10K/year.

Nice, nice gain given by the market god.

And now, I have the capital to use to generate more cash by writing OTM options.

Of course it would be a lot nicer to have that money in Roth, but $1 before tax is better than $0.

 

[Time2]

looking back I wish we hadn't put quite so much into TIRAs, but it seemed like the best idea at the time.

I resemble that remark.
SEPs and IRAs, for way to many years and worse, at lower tax brackets.

 

[audreyh1]

I always figured the ability to do Roth conversions was a pretty big gift, especially when they removed any income restrictions in 2010.

 

[Midpack]

I always figured the ability to do Roth conversions was a pretty big gift, especially when they removed any income restrictions in 2010.

That’s a good point. Roth conversions will help us reduce lifetime taxes, I should just be grateful for that.

 

[pb4uski]

I guess I understand that. It's just hard to grapple with being forced to accumulate money in taxable accounts that we won't spend AFTER we've paid taxes on the distribution. Just wondering if I was missing something to preserve our funds. Yes, fortunate first world problems to be sure...

Yeah, obviously in retrospect we worked for longer than we needed to.

You can always invest your RMDs in muni bonds.

 

[pb4uski]

I resemble that remark.
SEPs and IRAs, for way to many years and worse, at lower tax brackets.

Yup, you ended up being much more financially successful than you thought you would be when you saved that money when you were in a low tax bracket expecting that you would be in an even lower tax bracket when you were retired. Congratulations [emoji322]

 

[plex]

Kind of has been answered already, but to put it more simply, the RMD money is not in an IRA/retirement account anymore. So, there is no way to put the genie pack in the bottle so that you can do a conversion.

You can use the other IRA money, or have earned income, and fill the IRA up to your annual maximum and use that to convert.

Personally, conversions are the most dependable way I can generate enough MAGI each year, and allow big ticket purchases to more easily be made after the 5-year rule, so I like them too.

 

[Telly]

If you won’t spend it put it in low or no dividend distribution securities and it will almost be no different than if in Roth as you will get a step up in basis upon your death.

Add low to no capital gains, too.

 

[RobbieB]

I guess I understand that. It's just hard to grapple with being forced to accumulate money in taxable accounts that we won't spend AFTER we've paid taxes on the distribution. Just wondering if I was missing something to preserve our funds. Yes, fortunate first world problems to be sure...

You didn't know about the RMD's when you signed up?

 

[RunningBum]

Those who think they deferred income at a lower rate than they'll pay when taking RMDs might not be remembering what tax rates used to be.

https://taxfoundation.org/historical-income-tax-rates-brackets/

A lot more was deductible then, but rates were still pretty high for many. I don't believe I'll ever be paying at a higher marginal rate after ER than when I deferred. Some might, but as consolation maybe it set a lifetime habit of saving and LBYM.

 

[CardsFan]

Those who think they deferred income at a lower rate than they'll pay when taking RMDs might not be remembering what tax rates used to be.

https://taxfoundation.org/historical-income-tax-rates-brackets/

A lot more was deductible then, but rates were still pretty high for many. I don't believe I'll ever be paying at a higher marginal rate after ER than when I deferred. Some might, but as consolation maybe it set a lifetime habit of saving and LBYM.

Yep.
Virtually all of my tIRA/401k money went in at 25% tax rate or higher. So, no regrets.

And don't forget about the "free money" many of us got (employer match). I would guess at least 20% of my 401k money fell into this category.

 

[copyright1997reloaded]

Those who think they deferred income at a lower rate than they'll pay when taking RMDs might not be remembering what tax rates used to be.

https://taxfoundation.org/historical-income-tax-rates-brackets/

A lot more was deductible then, but rates were still pretty high for many. I don't believe I'll ever be paying at a higher marginal rate after ER than when I deferred. Some might, but as consolation maybe it set a lifetime habit of saving and LBYM.

Personally, I liked the rates in 1873.

 

[pb4uski]

Those who think they deferred income at a lower rate than they'll pay when taking RMDs might not be remembering what tax rates used to be.

https://taxfoundation.org/historical-income-tax-rates-brackets/

A lot more was deductible then, but rates were still pretty high for many. I don't believe I'll ever be paying at a higher marginal rate after ER than when I deferred. Some might, but as consolation maybe it set a lifetime habit of saving and LBYM.

Good info. I recall alot of my deferrals were 28% and many were at 31%, so I'm very happy to mangage income to pay ~9% now... and even when I am subject to RMDs at 22%/25% it is still good savings.

 

[Midpack]

My professional career began in 1977, glad I socked away all I could all along, and made much less when I started than as the career progressed.

 

[RetMD21]

I'm 5 years from RMDs, but I assumed I could put the RMD $ (that we don't want or need) into my Roth IRA. I'm going to pay income taxes on the RMD $ just like on a TIRA distribution going to a Roth conversion, so I don't understand the rationale for Congress (not the IRS) disallowing same.

I was disappointed to find this out too. I have zero dividend stocks and low dividend funds which help. I am 6 years out. I have taken an amount about half of my projected RMD as a Roth conversion this year to smooth income a little.

 

[Accidental Retiree]

We will earmark part of the RMD to cover income taxes when DH takes distributions.

That makes us feel a bit better.

 

[youbet]

I guess I understand that. It's just hard to grapple with being forced to accumulate money in taxable accounts that we won't spend AFTER we've paid taxes on the distribution. Just wondering if I was missing something to preserve our funds. Yes, fortunate first world problems to be sure...

As you've stated, when you take your RMD, it counts as ordinary income and is taxed as such. But that's the end of the taxation. If/when you pull those dollars out of a brokerage account later, it's tax free. You would only pay taxes on any earnings that those dollars generated. There's no double taxation. (Once was enough!!)