Can I Use My Required Distribution to Fund a Roth IRA?

Q: I am 73 years old and receiving a required minimum distribution (RMD) of approximately $18,000 a year from my individual retirement account. Since I pay income tax on this distribution, can I simply redeposit it in a Roth IRA?

A: The Internal Revenue Service specifically prohibits people from using such annual distributions—which are required once you reach age 70½—as income from which to fund a Roth IRA.

But that’s not the end of the story—if you are still doing paid work.

Unlike the traditional IRA which prohibits contributions by anyone 70½ or older, there’s no age limit on contributions to a Roth. So if you are still earning income from work, you can make a Roth contribution up to the amount you earn or $6,500, whichever is less. That limit includes a $1,000 catch-up provision for taxpayers age 50 or older.

Your required annual distribution is based on both your age and the balance in your non-Roth retirement accounts. There are a variety of online worksheets and calculators that you can use to determine your RMD, including this one from the IRS.

If you don’t need your RMD to cover living expenses, one option is to contribute some or all of your RMD to charity. In what the IRS calls a qualified charitable distribution, you can transfer up to $100,000 directly to qualified charities; that counts toward your annual RMD and eliminates all income tax on that amount. This has the possible benefit of both lowering your income tax bracket and reducing the tax paid on your Social Security benefits.

Another RMD strategy: Direct your IRA custodian to withhold some or all of your RMD to cover any estimated taxes you might owe, says Grafton “Cap” Willey, a managing director at CBIZ Tofias in Providence, R.I. Such a move could eliminate the headache of paying quarterly estimated taxes. It could also avoid any penalties triggered by underpayment of estimated taxes due to a miscalculation or oversight.

If your goal is to get more dollars into a Roth IRA, consider converting some or all of your IRA assets to a Roth. Unlike traditional IRAs, Roths are funded with after-tax dollars. As such, there are no RMDs and qualified withdrawals aren’t subject to income tax. You will owe income tax on the conversion—but that move will then reduce future RMDs and, as such, the tax that they generate.