Roth Conversions and QCDs: Today’s Q&A Mailbag

Thursday, July 26, 2018
By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

My wife and I could not open Roth IRA accounts in the past because our combined household earned income was always above the allowable exclusion limits.  I recently retired in June of 2017 at the age of 63 and my wife being 10 years younger will continue to work presumably for the next 10 years.

Because I only received a salary for five months in 2017, we were able to fall below the limits to open a Roth IRA in my name.  I funded the full amount of 6,500.00 for the tax year 2017 in a new Roth account.  I am funding this account for tax year 2018 with periodic contributions that will bring me up to the full amount again of 6,500.00.

I have a regular IRA that has grown substantially over the past eight years and I am thinking of converting a large amount to this new Roth account before the end of this year.  I realize I will have to pay taxes on the amount I convert but my taxable income will probably never be as low as it will be this year. 

My question is:  Does the amount converted (not distributed) get added to our 2018 earned income which would then obviously put us back over those allowable exclusion limitations and prohibit me from being able to make these regular contributions during 2018.

Thanks for the help, Tom

Answer:

Hi Tom,

Good news! Modified Adjusted Gross Income (MAGI) for purposes of the Roth IRA contributions limits is AGI with certain adjustments. One of these adjustments is subtracting and income resulting from a conversion of a traditional IRA. This means that any income you have from your conversion would not be included in the MAGI that is used to determine your eligibility to make a Roth IRA contribution for 2018.

Question:

Are QCD’s limited to the lesser of $100K or the RMD amount?

Answer:

If you are age 70 ½ or older you may do a qualified charitable distribution (QCD). With a QCD, you can directly transfer IRA funds tax-free to the charity of your choice. The QCD limit is $100,000 per person per year. It doesn’t matter what your required minimum distribution (RMD) is. If your RMD is less than $100,000, you can still do a QCD of up to $100,000.

 

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