Can required minimum distributions from a 401(k) be transferred to a Roth IRA?
I will be 70.5 years old this April. I have $110,000 In my 401(k). I’m debt free with an AGI of $80,000. I have a 1.5 year emergency fund and two annuities valued at $350,000 (both have a five-year surrender period remaining). Since I will be taking RMDs this year, I was wondering if I could transfer the 401(k) RMDs to a Roth IRA and if it would provide any tax benefits in the future over a brokerage account? I assume I still include the amount as income even if I move it to a Roth? I plan to use a portion of the annuity RMDs as a qualified charitable contribution to offset my AGI some. Other than this, I’m not sure what other options are available to reduce my tax burden.
Your question left out a critical piece of information, which is whether or not you are still working. If you are still employed at the company where you hold your 401(k) then you do not have to take a required minimum distribution until April 1 following the year when you stop working. In that case you can easily convert (not transfer; that is the wrong word) as much of your 401(k) into a Roth IRA as you wish each calendar year. The best approach is usually to do this gradually so your conversion doesn't put you into a higher tax bracket; use up the full amount which remains in your current bracket especially when your marginal federal tax rate is 24% or less.
However, if you have already left the company which holds your 401(k) then you must begin taking required minimum distributions. Such distributions can never be converted into Roth IRAs which would violate federal law. However, once you have taken your required minimum distributions, you can convert as much of your remaining 401(k) as you wish into a Roth IRA each year. This will also reduce your total balance in your 401(k) which will make your future required minimum distributions smaller.
That’s why I always encourage pre-retirees to plan ahead, 5- or 7-year prior to their first RMD; otherwise, there’s not much wiggle room to reduce your tax burden.
Based on your description, your AGI is $80k. If you’re filing as single, you will have the problem with the Medicare premium surcharge sooner enough. Above $85k, your Medicare part B will increase to $189.60/mo. vs. the standard $135/mo., so will be your part D premium.
You asked about conversion. Because of you turn in 70 ½ in April, your RMD literally starts this year. Even though you can delay to April 1, 2020, you’re not off the hook. Assuming your RMD for 2019 is $4,015 ($110k/27.4), you need to withdraw that amount first before you can convert the rest of $105,985 to Roth. However, when you do, that entire amount plus your regular AGI of $80k would push you to the 4th tier, the second highest tier for the Medicare part B premium at $433.40/mo.
Since you’re charitable, you can directly transfer your RMD as the QCD to the charity, and then work with your tax advisor (EA, CPA, etc.) to see a systematic Roth conversion feasible.
Does that sound like a plan? Best!
The IRS specifically forbids the transfer of RMDs to a Roth acount. If you meet the other requirements of a Roth deposit, you can separately make an annual contribution to a Roth IRA. The advantages of this after 5 years is that the funds not only grow tax free, but your future withdrawals would be tax-free.
I must suggest that you consult with a fee-only financial advisor to better understand a number of issues. With the limited information you have provided, I have more questions than you do. Here are some things to discuss with the advisor who will be able to get a more thorough understanding of your situation.
If you are working for an employer and do not own more than 5% of the company, you may continue to contribute to your 401(k) and RMDs are not required for as long as you continue to work. If, however, you are self-employed and have an Individual or Solo 401(k) and own more than 5% of the business, then you may not continue to contribute. On the other hand, if you are self-employed, you may continue to make tax deductible contributions to a SEP IRA after age 70.5 even though you will also be required to take RMDs from this same account. There is usually an opportunity to contribute more than the RMD, thereby resulting in a double tax advantage: reducing taxable earnings and avoiding taxes on the RMD. You would need to rollover the Solo 401(k) funds to a SEP IRA, then continue to contribute to the SEP.
With regards to the annuities, it sounds like they are also IRA funds subject to RMDs.This may be in direct conflict with the surrender period and also eliminate or diminish any living benefit riders you may have on them. These contracts need to be reviewed closely in order to provide advice on them. As an alternative to taking RMDs from the annuities you might consider rolling over funds from your 401(k), even while you continue to work and contribute to it, IF your employer's plan allows "in service" rollovers. Once you have money in an IRA that is not an annuity, you may take the annuity RMDs from the rollover IRA. The rule is that IRA RMDs need not be taken from any specific IRA and may be taken from any IRA you have.
For as long as you continue to have qualifying income, you may contribute to a Roth IRA. The amount contributed must be from earnings furing the year for which the contribution is made. That eliminates the concept of transfering RMD funds to a Roth IRA. You also seem to compare a Roth IRA to a brokerage account. However, you would need a brokerage to custody the Roth IRA. Perhaps you meant a non-retirement individual brokerage account. In which case, there are always tax advantages to a Roth IRA because no taxes will be due on the returns, be they interest, dividends or appreciated growth.
Again, this is complicated and you need to review these issues with an advisor who can clarify some of the unknowns. I wish you well.