Ask the Expert: Explaining Roth IRA conversions
In a recent column, you made this suggestion: “After taking your required minimum distributions (RMDs), convert some of the remaining traditional IRA balance into Roth IRAs.”
It’s my understanding that people can only do a conversion if they earned the converted amount during the year. You were responding to a person who wrote that he was entering his 80s, so probably he is not working. Is there a way to do a Roth conversion without earned income? Can an IRA beneficiary take RMDs and convert them?
No. Neither an owner nor a beneficiary can convert their RMDs into a Roth IRA. But after taking an RMD from a traditional IRA, the IRA owner can convert all or part of the remaining traditional IRA balance into a Roth IRA. No earned income is required.
When you contribute to a Roth IRA, you must have earned income, the contribution can’t exceed your earned income and you can’t contribute to a Roth IRA if your total income exceeds an annual limit. The maximum IRA contribution is $7,000 if you’re under 50, and $8,000 if you’re 50 or older. No Roth contributions are allowed if you’re a single taxpayer with $161,000 or more of modified adjusted gross income (MAGI), or married filing jointly with MAGI of $240,000 or more.
But Roth conversions aren’t the same as Roth contributions.
When you do a conversion, you’re moving money from an existing traditional IRA into a Roth IRA, and paying income taxes on the amount you convert. You don’t need to have earned income. There’s no limit on the amount you can convert. And there’s no income ceiling above which Roth conversions aren’t permitted.
The bottom line:
Roth IRA conversions are different from Roth contributions, and are subject to different rules.
More information:
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