Many retirees are making a costly mistake with their required minimum distributions (RMDs) by attempting to move the money to a Roth IRA or a different IRA or retirement plan, actions which are not allowed. According to IRS rules, the first distribution from a traditional IRA during the year is considered to be the RMD until the full RMD amount has been distributed. The RMD amount must be distributed from the traditional IRA and included in gross income before any additional amounts can be converted to a Roth IRA. It is possible to contribute the RMD amount to a Roth IRA after including it in gross income, but only if you meet the IRA contribution requirements.
There is no age limit for making contributions to a Roth or traditional IRA, but you must have earned income for the year at least equal to the amount you contribute. Earned income includes employment and self-employment income, while investment and passive income do not count. Taxpayers with modified adjusted gross incomes (MAGI) above certain levels may not be able to make Roth IRA contributions or may be limited in the amount they can contribute. In 2024, the maximum Roth IRA contribution amount begins to be reduced for single taxpayers with MAGI over $146,000 and is eliminated when MAGI reaches $161,000. For married couples filing jointly, the contribution limit begins to be reduced at $230,000 MAGI and is $0 at $240,000 MAGI. These MAGI limits are adjusted for inflation annually.
If individuals do not meet the contribution requirements, they risk making an “excess contribution” to the IRA and will owe a penalty for each year the excess amount remains in the IRA. It is important for retirees to understand and follow IRS rules regarding RMDs, contributions to IRAs, and MAGI limits to avoid penalties and potentially losing out on valuable retirement savings. By properly managing their RMDs and IRA contributions, retirees can maximize their retirement income and avoid unnecessary costs.
Experts recommend consulting with a financial advisor or tax professional to ensure compliance with IRS rules and to develop a retirement plan that meets individual financial goals. By working with a professional, retirees can address any confusion or questions they have about RMDs, IRA contributions, or MAGI limits, and make informed decisions about their retirement savings. With proper guidance and understanding of the rules, retirees can protect their assets and make the most of their retirement years without facing penalties or unnecessary costs.
Retirees should be cautious of attempting to move RMD funds to a Roth IRA or another IRA or retirement plan without understanding the IRS rules governing these transactions. By adhering to the guidelines set by the IRS, retirees can avoid costly mistakes and ensure that their retirement savings are managed effectively. With proper planning and advice from financial professionals, retirees can navigate the complexities of RMDs, IRA contributions, and MAGI limits to secure their financial future and enjoy a comfortable retirement. It is essential for retirees to stay informed and seek professional advice to make the most of their retirement savings and avoid unnecessary expenses.
