Remember, if you're already over 72, you will have to take an RMD for the current tax year before you can convert to a Roth IRA—that is, Roth conversions do not satisfy the RMD requirement, although you can use all or part of the RMD to pay the taxes due from the conversion.
Yes. Your required minimum distributions are based on your traditional IRA balance at the end of the previous year. When you convert traditional IRA money to a Roth, that money is removed from future RMD calculations (Roth IRAs are not subject to RMDs for the original owner).
The rules say that if you have an RMD for a year, you must satisfy it before doing a conversion. RMDs can be aggregated and taken from one of your IRAs. Therefore, you could satisfy your RMD from the IRA that is being converted by taking it from another IRA prior to doing the conversion.
Fidelity reports any Roth IRA conversion amounts as distributions on Form 1099-R and contributions to the Roth IRA(s) for the tax year on Form 5498. You may also review the IRS Form 1040 instructions or consult with your tax advisor.
Additionally, you cannot convert required minimum distributions (RMDs) to a Roth IRA. As such, if you want to do a Roth conversion after age 72, make sure you take out all your RMDs from that IRA before you do a conversion.
An RMD cannot be rolled over to a Roth via a conversion. Only money you take above the RMD amount can be converted to a Roth, and, you must pay taxes on amounts converted.
Bottom Line. If you want to do a Roth IRA conversion without losing money to income taxes, you should first try to do it by rolling your existing IRA accounts into your employer 401(k) plan, then converting non-deductible IRA contributions going forward.
A Roth individual retirement account (Roth IRA) conversion lets you turn a traditional IRA into a Roth IRA. Roth IRA conversions are also known as backdoor Roth IRAs. There's no up-front tax break with a Roth IRA, but contributions and earnings grow tax free.
Converting a Traditional IRA to a Roth in Retirement
There's no age limit or income requirement to be able to convert a traditional IRA to a Roth. You must pay taxes on the amount converted, although part of the conversion will be tax-free if you have made nondeductible contributions to your traditional IRA.
Internal Revenue Service (IRS) income limits determine one's eligibility for a Roth IRA. RMDs must be withdrawn before converting a traditional IRA to a Roth IRA. RMD funds can be reinvested into different types of accounts, such as mutual funds, stocks, and 529 education savings plans.
If you're approaching retirement or need your IRA money to live on, it's unwise to convert to a Roth. Because you are paying taxes on your funds, converting to a Roth costs money. It takes a certain number of years before the money you pay upfront is justified by the tax savings.
Because the IRS views Roth conversions through IRA Rollover rules, before you convert anything, you must first satisfy your RMD, withdrawing those funds and keeping them out of retirement accounts.
If they take their RMD as a qualified charitable distribution, it won't trigger higher taxes or higher future Medicare premiums. To do so, you direct the administrator of your tax-deferred account to make a donation directly to the charity, and it won't show up as taxable income.
Delaying retirement, converting to a Roth IRA, limiting the number of initial distributions, and making a QCD are four strategies that can help reduce the tax exposure that comes with RMDs.
Early in retirement—when your earned income drops but before RMDs kick in—can be an especially good time to implement this strategy. One issue to be mindful of is making Roth conversions when you are close (within two years) to filing for Medicare and Social Security.
The Roth IRA five-year rule says you cannot withdraw earnings tax free until it's been at least five years since you first contributed to a Roth IRA account. 1 This rule applies to everyone who contributes to a Roth IRA, whether they're 59½ or 105 years old.
A "backdoor Roth IRA" is a type of conversion that allows people with high incomes to fund a Roth despite IRS income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed funds into a Roth IRA and you're done.
The government only allows you to contribute $6,000 directly to a Roth IRA in 2021 and 2022 or $7,000 if you're 50 or older, but there is no limit on how much you can convert from tax-deferred savings to your Roth IRA in a single year.
Is there a deadline to convert? Yes, the deadline is December 31 of the current year. A conversion of after-tax amounts is not included in gross income. Any before-tax portion converted will be included in your gross income for the conversion tax year.
So when you make a withdrawal, you don't have to pay taxes on that money as long as you follow the rules. A Roth IRA must be vested before you can make withdrawals. You have to wait five tax years after your first IRA contribution to take money out.
On April 5, you could convert your traditional IRA to a Roth IRA. However, the conversion can't be reported on your 2021 taxes. Because IRA conversions are only reported during the calendar year, you should report it in 2022.
The year you do a Roth conversion, your taxable income will rise, which could cause a portion of your Social Security benefit to be taxed or push you into a situation where more of your benefit is taxed.
You may not need a Backdoor Roth Conversion if you are able to meet your savings goals with the maximum retirement limit through your workplace retirement account and are not expecting a need for additional savings for your retirement plan.
The main advantage of a backdoor Roth IRA—as with Roth IRAs in general—is that you pay taxes up front on your converted pretax funds and everything after that is tax free.