IRA

Can RMDs Be Converted to a Roth IRA?

December 2, 2013

Often, we blog about tax deferral strategies for clients in the higher income-tax brackets. Not this time.

Toward the end of each year, a client probably has a good idea of what his or her adjusted gross income (AGI) and tax liability will be. Consequently, this can be the optimal time to consider and execute tax management strategies.

Often, we blog about tax deferral strategies for clients in the higher income-tax brackets. Not this time. This post is about something, of which you'll want to be aware, regarding Roth IRA conversions. Because amounts converted are included in income, paying tax on this income at a relatively low rate may make good sense. Your clients who are in the lower income-tax brackets are likely to be retired; they may even be taking required minimum distributions (RMDs).


Taxpayers Taking RMDs BEWARE! 

Roth IRA conversions are executed via a rollover, trustee-to-trustee transfer, or same trustee transfer (aka internal Roth IRA conversion). Regardless of the conversion method used, the conversion is treated as a rollover.

It is important to understand that not all qualified assets can be rolled over; only eligible rollover distributions (ERDs)* can be rolled. And, since RMDs are not included in the definition of ERDs they cannot be rolled and therefore cannot be converted to a Roth IRA.

So, if clients are required to take minimum distributions, be sure that at least the RMD for the year is distributed because it cannot be converted. Converted amounts are included in income (the RMD is also)**, so you’ll want to be sure that the tax liability is included in your planning.

Of course, this post doesn't cover everything you'll need to know about RMDs, ERDs, or Roth IRA conversions. For more information, feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.

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