Reinvesting Your Required Minimum Distribution

Friday, January 17, 2014

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

You have inherited an IRA or you have turned age 70 ½ and now have to take required distributions (RMDs). But you don’t need(a relative term of course) the money and you would rather not pay the tax on money you don’t need. So what can you do?

Many people ask if they can “reinvest” their RMD. Can they put it back into an IRA or, even better, into a Roth IRA?

The answer is “No.” 

There was a tax deduction given for the funds that went into an IRA in the first place and the government wants its tax back. That is why we have required distributions in the first place.

In addition, there are requirements to be met before you can make a contribution to an IRA or a Roth IRA. First of all, the maximum you can contribute for 2014 is $5,500 (for those age 50 or older this year, you can contribute an additional $1,000). You also have to have “compensation,” which is generally earned income (the safe harbor is W-2 income). That eliminates most people who are over age 70 ½. Individuals cannot make traditional IRA contributions beginning in the year they turn 70 ½, so that eliminates those over 70 ½ who do have earned income. The age limitation does not apply to Roth IRAs, but there are income limits for making Roth IRA contributions.

For those who have to take RMDs from inherited IRAs, once the funds are in your bank account you can use them to make contributions to your own IRA or Roth IRA. Again, you have to meet the requirements for making contributions to either type of account. You can also use those funds to pay the taxes on conversions of IRA funds to Roth IRA accounts. You can only convert your own IRAs, those where you make contributions or rolled over money from one of your own company retirement plans. You cannot convert an inherited IRA to an inherited Roth IRA.

You can find more information on the IRA and Roth IRA contribution rules in IRS Publication 590, which is available on their website at www.IRS.gov. Click on the button for Forms and Publications.
 

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