Does a Roth Conversion Count as an RMD?

Retirement planning involves understanding how Required Minimum Distributions (RMDs) interact with Roth conversions. These two financial actions have distinct purposes and rules, leading to common questions about their interplay and tax implications.

Required Minimum Distributions Explained

Required Minimum Distributions (RMDs) are mandatory annual withdrawals from most employer-sponsored retirement plans and traditional Individual Retirement Accounts (IRAs). The purpose of RMDs is to ensure that taxes are paid on pre-tax retirement savings that have grown tax-deferred over many years. Account holders of traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b) plans are generally subject to RMDs once they reach a specific age.

Currently, individuals typically must begin taking RMDs from these accounts in the year they reach age 73. While the first RMD can be delayed until April 1 of the year following the year the account holder turns 73, subsequent RMDs must be taken by December 31 of each year. Failing to withdraw the full RMD amount by the deadline can result in an excise tax. The penalty is 25% of the amount not distributed.

Roth Conversions Explained

A Roth conversion involves moving funds from a pre-tax retirement account, such as a traditional IRA or a 401(k), into a Roth IRA. This action transforms tax-deferred assets into tax-free assets for future withdrawals in retirement. The amount converted is generally added to the individual’s taxable income in the year the conversion occurs.

Individuals consider Roth conversions for tax-free growth and withdrawals in retirement, and because the original Roth IRA owner is not subject to RMDs.

Roth Conversions and RMDs The Key Interaction

A Roth conversion does not count as a Required Minimum Distribution. These are two distinct financial transactions with different purposes and tax treatments. An RMD is a mandatory withdrawal that must leave the retirement account system, at which point it becomes taxable income.

In contrast, a Roth conversion is a transfer of assets from one type of retirement account to another, where the funds remain within the retirement system. The Internal Revenue Service (IRS) mandates that an RMD is a taxable distribution and, as such, cannot be converted into a Roth IRA.

Sequencing Your Actions

When an individual is subject to a Required Minimum Distribution and also considers performing a Roth conversion in the same tax year, the order of these actions is important. The RMD must be taken first, before any Roth conversion is initiated for that year. This rule applies even if an individual has multiple traditional IRA accounts; the total aggregated RMD across all IRAs must be satisfied first.

After the RMD has been fully satisfied and processed, any remaining funds in the traditional retirement account can then be considered for a Roth conversion. Failing to take the RMD before a conversion can lead to the converted amount being considered an excess contribution in the Roth IRA, potentially resulting in penalties.