If you don’t need your required minimum distributions (RMDs) from your traditional IRA for living expenses, can it be reinvested in a Roth IRA? Yes, it can–assuming you are eligible for a Roth based on your income.
This is because the money to fund your IRA can come from any pool of cash you have available. However, you still need to pay attention to the contribution limits and earned income requirements.
How Required Minimum Distributions Work
With a traditional IRA, contributions or deposits are made with pretax dollars, meaning you get a tax deduction for that contribution in the tax year you made it. In return, you pay income tax on the distribution amounts when you withdraw the money in retirement. At age 72, you must begin taking annual required minimum distributions (RMDs), calculated based on the total amount saved in all of your traditional IRAs.
Conversely, Roth IRA contributions are made with after-tax dollars. So, while you don’t get an upfront tax break, you get to withdraw the money tax-free in retirement. Also, there are no RMDs with Roths during the owner’s lifetime, making them ideal wealth-transfer vehicles.
RMDs were temporarily waived for the 2020 tax year under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020.
Investing an RMD into a Roth IRA
For the 2021 and 2022 tax years, the annual contribution limit is $7,000 if you’re 50 or older. That limit is the total for all your IRAs, including traditional and Roth IRAs.
The Internal Revenue Service (IRS) requires that you have enough earned income to cover your Roth IRA contribution for the year–but the actual source of your contribution need not be directly from your paycheck. So, if your RMD was less than $7,000, you could deposit all of the money into your Roth IRA. However, if you contributed $4,000 to another IRA in the same year, you could place just $3,000 of your RMD into a Roth IRA.
There are also Roth IRA contribution rules based on your income and tax-filing status. If your modified adjusted gross income (MAGI) is in the Roth IRA phase-out range, you can make a reduced contribution. You can’t contribute at all if your MAGI exceeds the upper limit for your filing status. Here’s a rundown for the 2021 and 2022 tax years:
Married filing jointly or qualifying widow(er)
Less than $198,000
Less than $204,000
$6,000 ($7,000 if age 50+)
$198,000 to $207,999
$204,000 to $213,999
A reduced amount
$208,000 and above
$214,000 and above
Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the year)
Less than $125,000
Less than $129,000
$6,000 ($7,000 if age 50+)
$125,000 to $139,999
$129,000 to $143,999
Begin to phase out
$140,000 and above
$144,000 and above
Ineligible for direct Roth IRA
Married filing separately (and you lived with your spouse at any time during the year)
Less than $10,000
Less than $10,000
A reduced amount
$10,000 and above
Avoiding Required Minimum Distributions
There is the option to convert your traditional IRA into a Roth IRA–a move called a Roth IRA conversion. Since Roth IRAs don’t have required minimum distributions, you will no longer be required to take annual withdrawals once the funds are in the Roth.
Remember, Roths don’t have an upfront tax deduction for the initial contributions, but qualified withdrawals in retirement are tax-free, and there are no RMDs during the owner’s lifetime.
However, the Roth IRA conversion is a taxable event–and the tax bill could be substantial. Since you received a tax deduction on the contributions into your traditional IRA, you need to pay those deferred taxes on the converted funds.
It’s a good idea to check with a tax professional to determine whether a conversion would make financial sense for you, as there are other factors to consider besides the RMD issue. For example, converting money from a traditional IRA to a Roth could also push you into a higher tax bracket, meaning your marginal tax rate could be higher for that year.
If you decide to convert to a Roth IRA, remember to take an RMD from the traditional IRA one last time for the year of the conversion. That’s necessary because the traditional IRA still existed during that year.
What Is the Deadline for Contributing to a Roth IRA?
The deadline for contributing to a Roth or traditional IRA is generally the same as the income tax filing deadline. You have until April 18, 2022 (April 19 in Maine and Massachusetts), to make a 2021 IRA contribution. If you want to make a prior-year IRA contribution, specify the year to ensure your IRA provider applies the contribution to the intended year.
How Much Can I Contribute to a Roth IRA?
The IRA contribution limit for the 2021 and 2022 tax years is $6,000–$7,000 if you’re at least 50 years old. To contribute to a Roth IRA, you must have enough earned income for the year to cover the contribution, and your modified adjusted gross income must not exceed limits set by the IRS.
Should I Convert My Traditional IRA into a Roth IRA?
Maybe. A Roth IRA conversion can make financial sense if you expect to be in a higher tax bracket in retirement than you are now, and you want to get the taxes over with. A Roth conversion may also be a good idea if you want to avoid required minimum distributions, allowing the account to continue growing tax-free for your heirs. The best time to do a Roth IRA conversion is when your income is unusually low and/or your Roth has lost considerable value due to a market downturn.
The Bottom Line
Roth IRAs have no RMD during the account owner’s lifetime. So, if you don’t need the money, you can leave your Roth alone to continue growing tax-free for your heirs. Traditional IRAs don’t have the same flexibility, and you must start taking those RMDs at age 72–whether you want the money or not.
Still, as long as you have enough earned income for the year to cover the contribution–and you don’t exceed the income limits–you can deposit your traditional IRA’s RMD into your Roth. This can be a smart way to boost your Roth IRA while following the RMD rules for your traditional IRA.