Q Dear Rick:
I have a question regarding required minimum distributions that I hope you can help me with. This year I will turn 70½ and I know I have to take a distribution from my account this year. I am familiar with the fact that I can delay my distribution to April 1st, but I don’t want to. My question is what is included in my required minimum distribution? Currently, I have three 401(k) Plans; two from my previous employer, which I just left there, and the third from my current employer. I also have four separate traditional IRAs. My understanding is that I have to take out from my traditional IRAs, but since I am working, I don’t have to take money from my 401(k)s; is that correct? My second question is since I really don’t need the money from my retirement account. Can I take the distribution and put it into a Roth IRA? Also can I continue to contribute to my traditional IRA?
A Dear Eric:
You are correct that when it comes to computing your required minimum distributions, as long as you’re not an owner of the company, you do not have to take from that 401(k) Plan. However, that rule only applies to your current employer; it does not apply to your past 401(k) Plans. Therefore, the two 401(k) Plans from previous employers must be taken into consideration when you compute required minimum distributions.
With regard to ongoing 401(k) contributions, that is not a problem. As long as you’re working for that company, you can continue to make 401(k) contributions. However, since you now are 70½, you can no longer contribute into a traditional IRA. But, that doesn’t mean that if you meet the income requirements you can’t contribute to a Roth IRA. It is also important to recognize that with a Roth IRA, there are no required minimum distributions. You can let Roth IRAs continue to grow tax free for as long as you choose.
It would be nice for people who did not need the required minimum distribution if they could roll that amount into a Roth IRA; unfortunately, it does not work that way. You’re required minimum distribution must come out of the IRA and that money is subject to tax at your ordinary income bracket. However, that does not mean that you cannot convert the remaining balance of your traditional IRA into a Roth IRA. You cannot convert your required minimum distribution amount but you can convert anything above and beyond that.
My rules to determine whether to convert from a traditional IRA into a Roth IRA are the following:
- You must have the money to pay the tax generated by the conversion without touching any of the money that is being converted.
- By converting money it would throw you into a higher tax bracket.
- You can leave the money in the IRA for at least five years.
If you meet those three criteria then a conversion makes sense.
Don’t forget you don’t have to convert your entire traditional IRA at once; you can do it piecemeal. Also, if you do a Roth IRA conversion, you may have to make an estimated tax payment; not only to the IRS, but potentially, the State of Michigan.
One further note, and keep this in mind, for those of you who are working after 70½, even though you are not eligible to put into a traditional IRA as I mentioned earlier, you can contribute into a Roth IRA. In addition, if you meet the income requirement, you can also contribute into your spouse’s Roth IRA. The advantage of the Roth IRA – it has no required minimum distribution and as opposed to growing tax deferred, it grows tax free.