What RMDs Mean in Retirement

If you own a traditional IRA, SIMPLE IRA, or other tax-deferred retirement account, you must begin taking RMDs at age 73 (75 if born in 1960 or later).

Each year, the IRS specifies a minimum withdrawal amount based on your account value and life expectancy. That withdrawal is taxed as ordinary income, whether or not you need the funds. It must be reported in the associated tax year. Miss an RMD, and the penalties can be very steep.

Roth IRAs Don’t Have RMDs

Unlike traditional accounts, Roth IRAs are not subject to RMDs during the lifetime of the original owner. If you inherited a Roth from a spouse, you may have the option of rolling over the inherited IRA assets into an IRA in your name. In that case, you treat those assets as if they were your own.

This means that funds can continue to grow tax-free within the Roth IRA for as long as you hold the account. For investors focused on tax efficiency and flexibility, the Roth has become an increasingly valuable planning tool.

Why a Roth IRA Conversion Does Not Count as an RMD

An RMD is mandatory. A Roth IRA conversion is elective. The IRS requires you to take your RMD first. Only after satisfying that obligation may you decide to move additional funds to a Roth IRA if it makes sense for you.

If you try to convert the RMD amount, the IRS considers it an excess Roth IRA contribution. The result is a correction process, penalties, and administrative headaches.

The Real Roth Conversion Opportunity

While it’s possible to do Roth conversions after RMDs begin, the most impactful planning window typically happens earlier, in the years between retirement and the start of RMDs.

During this period, many retirees have lower taxable income because W-2 wages have ended, but RMDs haven’t started increasing their adjusted gross income. This creates a unique opportunity to potentially convert IRA assets to Roth at lower marginal tax rates. A well-timed conversion may:

• Reduce the size of future RMDs and lower future taxable income
• Fill lower tax brackets intentionally, maximizing efficiency
• Build more tax-free Roth assets for future withdrawals or heirs
• Reduce total taxable estate size by paying taxes now

Some retirees also take advantage of years with high deductions, such as major medical expenses or charitable giving, which can offset the tax cost of conversions and make them even more attractive.

While conversions after RMDs can still make sense in special circumstances, this pre-RMD planning window is where the greatest long-term tax benefits are often achieved.

Conversion Timing Examples

Post-RMD Conversion:

Margaret, age 74, has an $800,000 IRA and a required minimum distribution of about $30,000. She doesn’t need the income, but she must withdraw it and pay taxes on it this year.

After taking her RMD, Margaret decides to convert an additional $50,000 to a Roth IRA. While this increases her taxable income now, it reduces the size of her traditional IRA. Smaller balances mean smaller future RMDs, which can help her avoid higher tax brackets, minimize future Medicare surcharges, and reduce the tax burden on her heirs.

Margaret accepts more income now to improve her long-term tax efficiency and estate planning outcomes.

Pre-RMD Conversion:

David, age 67, is married, filing jointly, and recently retired with a $1.2 million IRA. He isn’t yet subject to RMDs, and with no earned income, his projected taxable income for the year is just $40,000. To take advantage of this lower bracket, he decides to convert a portion of his traditional IRA to a Roth IRA.

By doing so, David pays less tax on the amount converted than he likely would if he waited to take it as an RMD, reduces his projected first-year RMD, and begins growing a Roth IRA, an asset that’s more tax-efficient to pass on to his heirs.

Using RMD Money for Roth Contributions

While you cannot convert an RMD into a Roth, you may use the after-tax proceeds from your RMD to make a Roth IRA contribution if you are eligible for a Roth. To qualify, you must have earned income that covers the contribution and falls within the Roth IRA contribution rules for your income bracket.

If you are 50 or older, you may be able to make a larger contribution thanks to catch-up provisions. However, many retirees no longer earn income, which makes them ineligible to make a Roth IRA contribution for the year.

When a Conversion Makes Sense

Roth conversions can be valuable both before and after RMDs begin. However, the most flexible and tax-efficient opportunities often arise in the years after retirement but before RMDs start.

It may seem like an expensive choice in the short term since both RMDs and conversions may create taxable income. But for many, the long-term benefits outweigh the cost. A conversion may reduce future RMDs, preserve tax-free growth, and provide heirs with distributions that are not subject to income tax.

A Roth conversion may be worth it if:

• You can pay for the conversion tax without tapping retirement accounts.
• You expect to be in a higher tax bracket later.
• You want to reduce future RMDs.
• You want heirs to receive tax-free Roth assets.
• You want to manage timing to prevent higher brackets or Medicare surcharges.

It’s not the right move for everyone, but in the right situation, it can provide significant long-term benefits.