RMDs First, Then Roth Conversions: A New Rule to Know

A Surprising Twist to Roth IRA Planning

You might have heard that the SECURE Act 2.0 brought some significant changes to retirement planning. One of the lesser-known but impactful changes is the new rule regarding Required Minimum Distributions (RMDs) and Roth IRA conversions.

Roth IRA conversions have been a popular strategy to eliminate Required Minimum Distributions (RMDs) and enjoy tax-free growth and withdrawals in retirement. This provides greater flexibility in managing retirement savings and your tax bill. But before doing a Roth conversion, it's essential to understand the new rules and impact on your retirement plan.

The New Rule: RMDs Take Precedence

The bottom line: You must satisfy your total aggregated IRA RMD before initiating any Roth IRA conversion.

This means that if you have multiple Individual Retirement Accounts (IRAs), you need to calculate the RMD for each one and then add them together. The total sum is the minimum amount you must withdraw before converting any portion of your IRAs to Roth IRAs. 

Why Does This Matter?

Historically, you could satisfy the RMD for a specific IRA and then convert any remaining balance within that same IRA to a Roth IRA. However, the new rule requires you to fulfill your total aggregated IRA RMD across all your IRAs before converting to a Roth IRA.

A Real-world Example

Let's say you have three IRAs with the following RMDs:

• IRA 1: $5,000
• IRA 2: $10,000
• IRA 3: $15,000

Your total aggregated IRA RMD is $30,000. You cannot convert any portion of any of your IRAs to a Roth IRA until you've withdrawn at least $30,000.

Key Takeaway

In summary, the shift from a more flexible approach to a requirement that aggregates RMDs across all IRAs before conversion to a Roth IRA represents a significant change in retirement account management. It emphasizes the importance of comprehensive planning and compliance with IRS regulations to optimize retirement savings and minimize your tax liability.

By understanding the sequencing of RMDs and Roth conversions, you can maximize your retirement savings and minimize paying taxes. Avoid potential tax penalties and compliance issues by working with a financial advisor to understand the implications of this new rule and plan your retirement strategy accordingly.