RMD from a rollover IRA into a Roth
I’m soon to need to take required minimum distributions from a rollover IRA, and they should be greater than I’ll need for living expenses. Can I somehow combine the RMD withdrawal with a conversion into a Roth? Somewhat related is another conundrum: I must take the RMDs and pay income tax on that, but the assets in the rollover (mostly bonds) are not what I’d like to sell, so I may be faced with having to sell stocks in my brokerage account for living expenses. I seem to be getting hit with somewhat duplicative expenses. Is there some way to keep from paying tax on both the RMD withdrawals and the stock sales?
Permalink Submitted by mk foss on Mon, 2009-06-22 17:25
It is possible to take your RMD in kind – the assets distributed could then be sold with little gain or loss. I’m not sure this helps if you want to keep the bonds that the IRA is invested in but it’s one thing to consider.
Permalink Submitted by Clyde Wolf on Tue, 2009-06-23 00:29
Hamsmith3,
Usually it is not best to let the tax tail wag the dog.
Do any of your stocks have a loss? Sell your losing stocks. If you think the stocks will be winners, you can repurchase them 31 days after the sell date. Then claim up to $3,000 of the loss against your other income.
Make a ROTH Conversion in 2009 if you qualify. You will need to pay tax on the conversion amount, but this can help to reduce future RMDs. Convert an amount each year that will fill your tax bracket.
As part of your RMD, make a charitable distribution from your Rollover IRA. This will count toward your RMD and can eliminate the tax. Giving more than your RMD amount will help to reduce the value of future RMDs. You were going to give anyway. I believe the Charitable Distribution is only valid through 2009. Someone will tell us otherwise if it goes beyond the end of 2009.
Permalink Submitted by Hampden Smith on Tue, 2009-06-23 01:27
I’ve asked this question in many places, and cwolf’s reply is the first one that has provided information I find helpful. Thank you very much.
Permalink Submitted by Alan Spross on Tue, 2009-06-23 01:40
Note that the RMD requirement for 2009 has been waived. Therefore, you could convert to a Roth IRA this year if your modified AGI is not over 100,000 and there would be no RMD to be taxed.
Next year the options get more confusing. The RMD waiver only applies to 2009, but there is always a chance that Congress might extend it. If RMDs are a requirement in 2010, the RMD must be taken before doing a conversion and no part of that RMD can be converted. However, for conversions done in 2010, the income is split 50-50 between 2011 and 2012 unless you opt out of that split. If you want to convert incremental amounts every year, you would probably opt out of the two year deferral in 2010 in order to use some of your 2010 tax bracket for conversions.
If you do not want to sell certain bonds or other investments, you can take distributions of them in kind to either your taxable account for RMDs OR you can convert them to a Roth and they continue to produce income, only now in a Roth IRA which will be tax free as soon as your 5 years have passed from the year of your first Roth contribution.
The QCD ends in 2009, but it too could be extended by Congress. If extended, it could cover RMDs for any year it applies. That would eliminate your RMD from taxation.
Bottom line is that there are many options, and you need to stay tuned for current changes in retirement tax provisions especially since Congress often acts very late in the year on these issues.