Do Roth Conversions Satisfy Required Minimum Distributions?

In Seven Steps to Creating Passive Income through Dividend Investing a couple readers got into a discussion.

It began with this comment:

I’m almost 75 and therefore taking annual RMD’s. One strategy I’m using is to transfer stocks, which are down by the largest percentage, from my regular IRA to my Roth IRA. This should allow them to now grow tax free and also satisfies my RMD for 2020.

There will of course be taxes due on the conversions but the transfers are now worth probably 40% less than a month ago. So I’m betting on only transferring (and paying tax on) $6,000 but later increasing back to $10,000 as the market recovers.

Also, another strategy the author mentioned was buying in pieces to establish a full position. This is an excellent strategy plus with zero commissions it doesn’t cost a fortune in fees.

To which another reader replied:

“and also satisfies my RMD for 2020”

Where did you get the information that a conversion could qualify as an RMD?

See this article.

Or do you still have wage income and are thus taking an RMD and then contributing to a Roth and repurchasing the stocks that are sold in the IRA? if so you can actually contribute $7,000 since you are old enough for catch-up contributions.

To which the original commenter replied:

Vanguard has applied all of these conversions to my 2020 RMD.

And the second reader responded:

I don’t have enough details about exactly what is going on here or exactly how Vanguard is treating this but if we are actually both talking about the same thing then what you describe is not allowed. You can google “can a conversion satisfy rmd” to find multiple articles talking about it.

I would try to get clarification from Vanguard on what they are reporting because a mistake here results in a huge penalty on the order of loss of 50% of the affected funds.

I tucked this conversation away as I wanted to do more research on it.

If you could take RMDs and move them to Roths, that would be awesome!

The planners we’ve seen (especially seminar three and the workshop) seem to think we’re going to take a hammering on future taxes. As such they want everyone to convert to Roths. But the question is always how to do so with the least taxes.

Now if you could take RMDs and move them into Roths (something you wanted to do anyway), that would be a big win-win.

A couple days later I received an email from John Chapman, owner of Chapman Private Client Services. John was the teacher at the retirement workshop we attended.

Here’s what he said:

As the likelihood of higher tax rates increases, many proactive investors are looking to the Roth Conversion as a way to protect their retirement assets. As they do so, one question sometimes arises: Does the amount that you convert to a Roth IRA count towards the Required Minimum Distribution? The short answer is no.

Let me illustrate with an example: Let’s say you want to shift $30,000 from your IRA to your Roth in a given year. Let’s also say that in that same year, you have a Required Minimum Distribution of $20,000. Before you can do any Roth Conversions, you are required to first take your $20,000 RMD. Once received, you can then proceed with your Roth Conversion. Remember, however, that both the conversion and the RMD are taxable events, so be prepared to pay taxes on an additional $50,000 of income. If this is too pricey, you can still do a Roth Conversion, but perhaps at a lower amount.

What typically becomes of the $20,000 RMD, especially if you don’t need it for lifestyle purposes? In many cases, these RMDs get deposited into some sort of taxable account. So, that $20,000 moves from an environment where it only gets taxed once, upon distribution, to an environment where the growth gets taxed each and every year. Doing this only creates more imbalance in your buckets and may lead to increasing your tax liability. So, instead of depositing this into your taxable bucket, contemplate using it to pay taxes on your conversion, fund a Roth IRA, or fund a life insurance program that has long-term care benefits.

For more insight on this topic, read the following Time article.

A few things:

  • “Fund a life insurance program that has long-term care benefits.” He’s killing me…
  • Do you think he’s reading ESI Money and saw the discussion? 😉
  • The link John shared goes to the same article the ESI Money commenter left above.

In the piece John linked to a reader asks:

Can I convert the required minimum distribution from my regular IRA into a new Roth IRA account after paying the income taxes if I am not working? I want to have access to the money in case an emergency comes up.

Here’s a summary of the response:

Sorry, no. According to IRS publication 590-A, the annual required minimum distribution (RMD) from your traditional IRA cannot be converted to a Roth IRA, says Tom Mingone, a financial planner at Capital Management Group of New York.

If you make a mistake and roll over or convert your RMD, it will be treated as an excess contribution, and you’ll pay a penalty of 6% per year for each year it remains in the Roth or traditional IRA. You have until October 15 of the year after the excess contribution to correct it.

What a killjoy the government is. I think they’re on to us. LOL!

Unfortunately, this “great” idea is not so great after all. Since we can’t do it, I’m still left pondering how to address my looming tax bomb (planners’ sentiments, not mine) with so much money tied up in tax-deferred accounts.

But I found an interesting surprise while reading the Money article. It linked to this post which was written by Darrow from Can I Retire Yet. I respect both Darrow and Chris from CIRY so I was interested to see what he had to say.

Some highlights:

Conventional rules of thumb can be inaccurate. You have to run your own numbers and, even then, the accuracy of the answers will be limited by your ability to predict your income far into the future. RMDs and Roth conversions lead to some very complex financial scenarios.

Analyzing my own situation using the best retirement calculators shows only modest levels of RMDs into our 90s, with our current 10% to 15% tax bracket unchanged. In theory, I could generate about 2% to 3% more wealth in the end if I did Roth conversions, as long as I paid the conversion tax from non-IRA assets. If I paid the tax from IRA funds, there would be no value in doing a conversion.

However, that 2% to 3% gain is well within the margin of error for retirement calculations. Who knows if I would ever see it? But, in doing Roth conversions, I would see additional complexity and paperwork in my financial life starting right now. Given that, I’m foregoing Roth conversions for the time being.

Roth conversions are unlikely to save you from high taxation of retirement assets. That’s because the total amount you can convert is limited by the number of years you spend in a lower tax bracket and your “headroom” to the next higher bracket.

I’m not really sure if this made me feel better about the situation or caused more confusion. Haha!

Just joking. I think it has some very valid points, including:

  • Your numbers are what matters. Many advisors pitching their “convert to a Roth to avoid a tax bomb” plan are giving out very general advice to a large audience. They do not know you, your finances, your goals, or anything else about you other than you probably have a large amount in tax deferred accounts (which is not much help at all). And yet they are so firm in their recommendations — which they should not be.
  • There’s not one clear, “right” path. As with most things money-related, it depends on a number of factors. And if a smart guy like Darrow is having trouble sorting through them to find one, “best” option, most others will be stumped as well (including financial planners).
  • Even after a lot of assumptions and calculations, it appears (at least in some situations — and it could be many) that the difference between options is within the margin of error, making both options equal. Who knows, maybe someone in the government worked it out this way. You know, they are on to us! 😉
  • No one knows the future, which throws even more doubt into the mix. Is it likely that tax rates will go up? It seems like a reasonable person would say they will. Has anyone ever made a prediction about the financial future that seemed reasonable and yet didn’t work out that way? It’s almost a daily occurrence.

In the end, I don’t know what the right answer is for us. I’m still working that out.

But thanks to a conversation in the comments here and a timely email, I know I can’t move my RMDs straight into a Roth.

Dang. That would have been so sweet…


Originally posted at

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