(MARCH 4, 2024, Roseland, NJ) — There is a good deal of confusion surrounding Required Minimum Distributions (RMDs) and Roth IRAs.
To clear this up, Leo Chubinishvili, CFP, at the wealth management firm of Access Wealth in Roseland, NJ, explains:
· RMDs are amounts the federal government requires an individual to withdraw annually from traditional IRAs and employer-sponsored retirement plans after reaching 72 (73 if you reach age 72 after December 31st, 2022). The RMD amount is determined by the account balance as of the previous year’s December 31st value and the account holder’s life expectancy based on the IRS life expectancy table.
· Roth IRAs, in contrast, do not require RMDs. Contributions to Roth IRAs are made with after-tax dollars, and both contributions and earnings can be withdrawn tax-free in retirement, subject to certain conditions.
· IRS rules mandate that RMDs must first be satisfied before any amounts can be converted to a Roth IRA. Attempting to convert RMDs directly can result in a 6% excise tax penalty per year while the excess remains in the account on the amount that was supposed to be withdrawn as an RMD.
“Once you fulfill your RMD obligations, you can convert additional funds from your traditional IRA to a Roth IRA,” he says. “This strategy involves paying income tax on the amount converted, but can be beneficial if you expect your tax rate to be higher in the future or you wish to leave tax-free assets to your heirs.”
To minimize taxes, he says, this may mean making additional withdrawals from your traditional IRA or conversions to a Roth IRA in years when your income is lower.
“Timing your Roth conversions in these years can reduce the overall tax impact and efficiency across your retirement years. It is also possible to convert assets in kind as opposed to cash. So, if there is market downturn where the value of a stock drops, and the taxable value of the investment goes down, Roth conversion could be beneficial if you plan on keeping that investment longer term.”
For example, say you own $100k of a stock that drops 30% and is now valued at $70k. By converting the stock position from a Traditional IRA into ROTH IRA, you now pay tax on the $70k conversion. As a Roth IRA, it’s now tax-free, allowing you to take advantage of the potential stock recovery and long-term growth tax free.
