The Dangers of Rolling Over RMDs to Other Retirement Accounts

Some retirees continue to make a key mistake with required minimum distributions (RMDs), and that could cost them a lot of money.

Retirees who don’t need the RMD to pay living expenses sometimes move the money to a Roth IRA, treating it as a conversion of the RMD to a Roth IRA. Others try to roll over the money to a different IRA or qualified retirement plan.

Neither action is allowed.

When a person must take RMDs, the first distribution from a traditional IRA during the year is considered to be the RMD, until the RMD amount has been distributed.

The RMD amount must be distributed from the traditional IRA and included in gross income. Only after the RMD is satisfied can any additional amounts left in the traditional IRA be converted to a Roth IRA.

It is possible to take the RMD and then contribute that amount to a Roth IRA (or a traditional IRA), after including the RMD in gross income.

But you must meet the IRA contribution requirements, because you’ll be making a regular IRA contribution and not doing a rollover.

There’s no age limit for making contributions to either a Roth or traditional IRA.

To make a valid contribution, you must have earned income for the year equal to or exceeding the amount you contribute to the IRA. Employment and self-employment income are types of earned income. Investment income, Social Security benefits, annuities, pensions and other passive income aren’t earned income.

In addition, taxpayers with modified adjusted gross incomes (MAGI) above certain levels can’t make Roth IRA contributions or can contribute only a reduced amount.

For single taxpayers, in 2024 the maximum Roth IRA contribution begins to be reduced when MAGI is $146,000 and is phased out when MAGI reaches $161,000. For married couples filing jointly, the contribution limit begins to be reduced when MAGI reaches $230,000 and is $0 when MAGI hits $240,000. The MAGI limits are indexed for inflation each year.

If you don’t meet those two tests, you’ll be making an “excess contribution” to the IRA and will owe a penalty for each year the excess amount stays in the IRA.