Does a Roth Conversion Count as an RMD?

The landscape of retirement planning involves navigating various rules and strategies, with Required Minimum Distributions (RMDs) and Roth conversions being two prominent considerations. Both serve distinct purposes in managing retirement savings, yet their interaction can sometimes lead to confusion. This article aims to clarify whether a Roth conversion fulfills an RMD obligation and explains how these two financial actions work together within the context of retirement planning.

Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are annual withdrawals mandated by the Internal Revenue Service (IRS) from most tax-deferred retirement accounts once the account holder reaches a certain age. These rules are governed by IRS Code Section 401(a)(9), which ensures that taxes are eventually paid on the deferred income. Accounts subject to RMDs include Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s. However, Roth IRAs are exempt from RMDs for the original owner during their lifetime.

The age at which RMDs must begin has changed due to legislative updates. Currently, individuals must start taking RMDs at age 73. The RMD amount is calculated based on the account balance at the end of the previous year and the account holder’s life expectancy, using tables provided by the IRS.

The deadline for taking an RMD is December 31 of each year, though the first RMD can be delayed until April 1 of the year following the year the account holder reaches the RMD age. Failing to take a timely RMD can result in a significant excise tax. This penalty is 25% of the amount not withdrawn, and can be further reduced to 10% if the missed distribution is corrected within a specific timeframe.

Roth Conversions

A Roth conversion involves moving pre-tax money from a traditional retirement account, such as a Traditional IRA or a 401(k), into a Roth IRA. This process effectively changes the tax treatment of the funds from tax-deferred to tax-free in retirement. A primary motivation for undertaking a Roth conversion is to enable future withdrawals, including earnings, to be entirely tax-free, provided certain conditions are met. Additionally, Roth IRAs do not have RMDs for the original owner, offering greater flexibility in managing distributions and providing potential estate planning benefits.

The amount converted from a traditional pre-tax account to a Roth IRA is treated as taxable income in the year the conversion occurs. This means the converted sum is added to the taxpayer’s gross income for that year, which can impact their overall tax liability. It is important to distinguish a Roth conversion from a Roth contribution; contributions involve directly adding after-tax money to a Roth IRA, often subject to income limits, whereas conversions have no income limits.

How RMDs and Roth Conversions Interact

A Roth conversion does not satisfy an RMD obligation. These two financial actions serve different purposes within the retirement system. An RMD is a mandatory withdrawal of funds from a tax-deferred account that must be distributed to the taxpayer and reported as ordinary income. Conversely, a Roth conversion is a transfer of funds from one type of retirement account to another, even though it results in a taxable event.

Consequently, the RMD amount for a given year must be satisfied and distributed as ordinary income before any Roth conversion can take place from the same account for that year.

Considerations When Taking RMDs and Converting

Individuals who need to take an RMD and also wish to perform a Roth conversion in the same tax year must carefully consider the sequencing of these actions. The RMD must always be satisfied first before any funds from the same account can be converted to a Roth IRA. If a conversion is attempted before the RMD is fully withdrawn, the IRS considers the first money taken from the pre-tax account as the RMD, but the RMD is still considered unsatisfied if it was converted, potentially leading to penalties.

Both the RMD amount and the converted amount are added to the taxpayer’s gross income for the year, which can significantly increase their overall tax liability. This combined income can push an individual into a higher tax bracket, impacting other tax-related calculations. The RMD effectively reduces the total amount available for a Roth conversion from that specific account in that year. For instance, if an account has $100,000 and a $5,000 RMD, only the remaining $95,000 can be converted after the RMD is taken.

While RMDs for Traditional IRAs can be aggregated and taken from one or more of an individual’s IRA accounts, RMDs from 401(k)s must be taken from each separate 401(k) plan. For those seeking alternatives to manage RMDs, Qualified Charitable Distributions (QCDs) offer a distinct strategy. Individuals aged 70½ or older can transfer up to $108,000 directly from an IRA to a qualified charity in 2025, which can count towards their RMD and is excluded from taxable income. This differs from a Roth conversion, as QCDs are direct, non-taxable transfers to charity.